Negotiating Strategies

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2016 looks to be the year the Federal Communications Commission (FCC) will place its biggest bet on the value of spectrum and begin to see whether two novel approaches to spectrum management are hits or misses.

Later this year, the FCC will conduct its Broadcast Incentive Auction, whereby it will seek to transition a large amount of wireless spectrum from television broadcasters to wireless providers.  In a nutshell, the objective of the Incentive Auction is to incent TV broadcasters to sell their spectrum back to the FCC, which in turn will auction the spectrum to wireless carriers.  It’s a “never-been-done-before” type of endeavor with a big upside.   But it could also be an embarrassment if it doesn’t go as planned leaving one FCC Commissioner to state, he is “praying it is not a failure.”  The FCC’s willingness to go out on a limb shows the Commission sees a bigger risk in not addressing the Country’s increasing demand for spectrum by continuing to maintain the status quo.

The Broadcast Incentive Auction isn’t the only spectrum policy innovation that will play out this year. The FCC’s plan to implement a Citizen’s Broadband Radio Service (CBRS) in the 3.55-3.7 GHz band has garnered less attention from the press, but, if it works, it could prove valuable to multiple segments of the wireless industry.

Under its new CBRS rules, the Commission will largely turn management of the 150 MHz of spectrum at 3.55-3.7 GHz over to one or more yet-to-be-named third party database managers.  Those database managers would be responsible for dynamic assignment of operating parameters to users and licensees in real-time.  The band would be a mix of Federal incumbents, auctioned license winners, and unlicensed secondary users.

For their part, wireless carriers view the CBRS as providing access to a very large amount of spectrum that could be used for small cell and in-building coverage.  CBRS compatible chips in wireless devices would enable carriers to offload very high capacity applications from their wide area LTE networks in certain areas.  In theory, the dynamic channel assignment would allow more intensive use of the band than otherwise achievable through the conventional approach of exclusive licensing.

One criticism of the CBRS is that it replaces what had been a successful spectrum allocation at 3.65-3.7 GHz.  This band, which was allocated only less than ten years ago, was used by hundreds of licensees including wireless Internet Services Providers, electric utilities, oil and gas companies, and other industrial users for high-bandwidth services. It remains to be seen to what extent the CBRS will be suitable for these users.  One potential hurdle – if accessing the dynamic spectrum database requires critical infrastructure companies to connect sensitive control systems to the Internet, expect many of those entities to take their wireless applications to other bands due to cybersecurity concerns.

The CBRS is an experiment in spectrum policy.  As one Commissioner states, “Will it work? […] We will see.

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This is our closing entry on sustainable telecommunications agreements, highlighting basic points associated with “Legal Terms and Conditions,” referencing prior entries for more detailed explanation.  In the near future, we will supplement these six (6) entries with several dealing with Wireless services, including M2M services.

Dispute Resolution.  Customers’ standard practices on dispute resolution procedures (arbitration or adjudication (with or without mediation)) should apply to disputes under telecom agreements.  Carriers’ standard approach for resolving disputes, procedure and venues, such as adjudication in courts located in New York City, are often non-starters.  We previously highlighted the pros and cons for arbitrating disputes arising under these agreements.  The AAA commercial arbitration rules were recently updated, effective October 1, 2013.  Some carriers prefer the arbitration procedures established for consumers (to avoid class action litigation).

Termination Rights.  Limited termination rights are artifacts of the pre-Internet era when private lines (connecting discrete points) were the only “data” service, and e-commerce was conducted solely at inbound call centers.  The carriers’ position that terminations be limited to the “affected service” is a non-starter, as customers increasingly rely on any-to-any services such as MPLS and VPLS.

Service issues at major locations impact enterprise-wide communications and operations and should be addressed from the perspective of adverse customer impact.  As previously noted, without sufficient time to migrate to a replacement carrier/services, a termination right can easily become “a cure worse than the disease.”

In addition, chronic billing issues deprive customers of an essential element of the agreement: agreed upon pricing (savings) for the entire agreement, not just a particular service.  Thus, the agreement should be reviewed carefully to ensure that chronic billing issues are not excluded from the termination provision.

Limitations on Damages.  The standard exclusion of consequential, special and incidental damages should apply to each party.  Customers should secure the same cap on damages as the carriers, however that number is calculated.  The preferred approach for termination of the entire agreement or partial discontinuances for cause should provide for damages equal to the difference between the replacement service and the discontinued service.  In addition, the agreed upon commitment level should be reduced in proportion to the lost revenue attributable to any partial termination.

Indemnities.  Our basic position is that indemnities should be limited (for both customer and carriers).  A 2012 entry outlined our reservations over carriers demanding a series of new indemnities.  The indemnities that customers should demand are those associated with data security breaches arising under data center and cloud computing services offered by the carriers, particularly those breaches that trigger reporting and notification obligations, fines, or penalties under either state laws or industry-specific data security requirements.

Precedence Clauses and URL Provisions.  Telecommunications services agreements can include a number of attachments and schedules, as well as multiple on-line documents (“service guides”), the provisions of which are incorporated into the services agreements.  The standard “precedence clause” does not adequately address the ability of carriers to “add” new provisions to their online terms and conditions and, in turn, the agreement.  Thus, a more comprehensive approach is warranted in drafting the precedence clause to insulate the agreement from these changes.

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For years, the carriers have rejected commitments related to the security of customers’ voice and data communications traversing their networks.  This entry focuses on how this position undermines the carriers’ interests in offering or partnering in the provision of data center and cloud computing services in which carriers must compete with established players or tech-savvy start-ups that understand data security is central to the value of these non-transport offerings.

Carriers’ Longstanding Positions on Customer Data.  The carriers have systematically rejected responsibility for customer data in connection with their transport services, maintaining customers can address these concerns by encrypting their communications. In regard to toll fraud, the carriers’ persistent position is that toll fraud is the customer’s problem.  On customer proprietary network information, the carriers strive to extract the customer’s consent allowing the carrier to share CPNI with affiliates and agents and require the customer to affirmatively revoke the consent after contract signing, contrary to the spirit and intent of 47 USC § 222. The confidentiality provision in carrier agreements exists principally to limit disclosure of the terms and conditions in the agreement.

The Challenge for Carriers in Non-Transport Services.  This aversion to reasonable commitments regarding the integrity of customer communications is a challenge for carriers looking to upsell firewall, intrusion detection and other network security offerings and data center and cloud computing services for which customer data and network security are paramount concerns.  The carriers’ longstanding position on customer data security is not responsive in the current legal environment in which enterprises find themselves.  Companies must comply with state laws and foreign directives on data privacy and breach notification obligations, industry-specific laws and regulations, such as the HIPPA Privacy, Security and Breach Notification rules, and industry-specific standards, such as the Payment Card Industry standards (collectively referred to as “Data Privacy Laws and Standards”).

The value proposition for data center services requires providers to assume control and responsibility for the integrity and security of their data center operations.  Specific provisions obligating the site operator to deploy fire suppression technologies, electrical power back-up systems, physically diverse paths for connectivity to and from the facility, temperature controls and physical security are standard provisions.  If the operation of the data center implicates customers’ obligations under Data Privacy Laws and Standards, the customer reasonably expects the data center provider to indemnify the customer for the costs, expenses and fines triggered by the services providers’ actions.  Similarly, customers reasonably expect that their data reside in designated data centers and not re-located or transferred to physical facilities in other areas that trigger additional obligations under Data Privacy Laws and Standards.

These and related considerations over the loss of trade secrets and proprietary information are even more compelling in connection with cloud computing services.  Customers reasonably expect that providers of network security services and data center and cloud computing services will conduct SOC 2 and SOC 3 reviews and even share the results of the service organization’s SOC 3 audits.

The major so-called “public cloud providers” may well resist provisions on data privacy and security, maintaining their offerings are highly standardized and available only under standard terms and conditions.  On the other hand, other cloud services providers including those partnering with the major carriers are among those expected to respond in a reasonable fashion to the data security interests of enterprise customers.  Telecommunications carriers would be well-served to abandon their intransience regarding customer expectations on data security and integrity if they expect to compete in the rapidly growing markets for these services.

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Wireline services providers should meet four basic service obligations:  provision services and circuits in a timely manner; meet or exceed service level commitments; timely and accurately bill for services; and, meet reasonable customer care expectations.  The services providers’ standard agreements do not always reasonably define these carrier obligations or address the consequences of failing to meet these obligations.

Provisioning.  Customers are focused on timely provisioning of services when either transitioning to a successor carrier or ordering additional services, looking to their carrier/ISP to manage access circuit provisioning.  Depending on the service and services provider, provisioning SLAs may be offered.

For significant MPLS or VPLS network migrations, an enterprise must maintain connectivity and minimize the period during which it pays both the successor and incumbent carriers for two versions of essentially the same service.  A major risk typically not addressed in provisioning SLAs is associated with the delay in provisioning very high capacity access connections.  If these installations are delayed for a significant period, as lower capacity DS-1 or Ethernet connections are provisioned, the duration and cost of operating two networks can extend well beyond the period reasonably considered in the business case supporting the decision to migrate to a successor carrier.

This financial risk can be mitigated by a credit schedule that obligates the successor carrier to issue credits for its services for the period that dual network operations must be maintained beyond a certain date.  Alternatively, assuming the high capacity access circuits are not installed by this date, billing for installed successor network access connections and ports should abate until all access services to major customer locations are provisioned and tested.  Terminating the successor carrier for cause (at some point) is an option, but at this juncture in the procurement cycle the customer has little negotiating leverage with the incumbent or any other carrier.

Service Level Agreements.  Service reliability and availability are customers’ continuing priorities.  Carriers offer a range of service-specific SLAs.  Some are lodged in carrier service guides; others provided as attachments to agreements.  In evaluating SLAs, certain considerations are paramount.  Credits are the standard remedy for SLA exceedances and are typically capped by the cost of service (to a particular location).  Except in managed environments, customers must call in the trouble ticket to trigger the carrier’s obligation to remedy the trouble.

The point at which SLA metrics, such as mean time to repair (MTTR), jitter/latency and availability, are measured is another basic consideration in assessing SLAs.  These points may be at the services provider’s network edge (its closest point of presence (POP) or data center) or at customer edge locations (the demarcation point at or its router or switch within the customer’s premises).  Another consideration is whether the SLA’s conditions and exceptions effectively negate the value of the SLA.

While negotiating custom SLAs with carriers can be a futile task, higher thresholds for a given metric, such as availability, are usually obtainable.  Carriers offer a menu of options, each at an incremental price or charge, to deliver a higher service level.  The options include multiple customer routers, managed router services, diverse access arrangements to a common or multiple carrier POPs or data centers.

For non-chronic service issues, credits are a reasonable remedy.  Carriers overreach, in our view, when adding language to the effect that credits are the customer’s sole remedy for SLA exceedances.  Also, at some point, credits are inadequate; chronic service troubles at a major customer location seriously can impact a customer’s business and operations.  This is particularly true for “any-to-any” services such as MPLS and VPLS and for high speed Internet access service for e-commerce sites.

While the concept of “chronic” may vary from customer to customer, customers should negotiate escalating remedies concluding with termination in order to address chronic service problems.  Escalations include root cause analyses, re-provisioning, or SLA upgrade measures (access diversity, carrier POP or switch diversity, or implementation of managed services) at no additional charge.  If the troubles continue, termination is the customer’s last option.  (We discuss termination rights and damages caps in a subsequent entry).

Continue Reading Sustainable Wireline Agreements–Substantive Carrier Obligations

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The 2nd entry explained the sources of customer leverage.  This and the remaining entries offer insights into exercising this leverage to achieve balanced, sustainable agreements.  This entry focuses on the major pricing considerations in wireline services agreements.

Sustainable Agreements.  From the customer’s perspective, a sustainable agreement provides market pricing throughout the term, supports growth in bandwidth requirements and network expansion, allows the customer to add services or to migrate to new services at nominal costs, obligates the carrier to address/resolve instances of subpar service, and provides a workable process for resolving disputes, particularly billing disputes.

The Agreement Should Have a “Flat Pricing Structure.”  There are two elements to a “flat pricing structure.”  The first is fixed rates for the term, as opposed to percentage discounts of standard rates.  The latter are typically set out in the carriers’ on line pricing schedules or guides that carriers can change from time to time at their discretion.  The second is what we call “consistent pricing” in which the net rates are in effect beginning the 1st month and extending throughout the term.  By contrast, the carriers opt to issue credits (“performance credits,” “incentive credits,” etc.), effectively deferring the projected net rates or “savings” until late in the term of an agreement.

This use of these credits complicates pricing reviews and forces customers to rev-up the procurement process to establish “a credible threat of loss” to obtain/maintain competitive rates.  Deferred credits also obligate customers to pay higher monthly taxes, regulatory surcharges, and carrier administrative charges all of which are based on the billed rate for the services provided. Collectively, these assessments can approximate 10% to 20% of monthly charges.  Deferred credits require the customer to “carry” the inflated assessments for non-discounted rates until the credit is issued months later.

Pricing Reviews.  The markets for wireline services and associated managed services are reasonably dynamic.  While only carriers offer transport services, multiple entities offer managed services.  Changes in market pricing occur episodically. Customers want to capture these downward changes at reasonable intervals, typically on an annual basis.  This is the purpose of pricing review clauses.

The challenge in negotiating these provisions is, as Rick Sigel noted during our briefings this past spring, that these provisions must have “some teeth,” and not a mere promise from the carrier to meet and talk.  For example, if the enterprise or its consultant reasonably establishes that prices have moved downwards, typically beyond some nominal amount, and the service provider declines to make an appropriate adjustment, there should be a consequence. The commitment level should be reduced or the term of agreement abbreviated.

Minimum Commitments.  A focal point of almost every negotiation is the customer’s minimum expenditure commitment, which reflects an agreed upon percentage of projected cumulative expenditures.  The minimum commitment imposes a “take or pay” obligation on the customers. Carriers often push to add incentive credits (an expenditure threshold must be exceeded to earn the credit) and service-specific commitments.  The latter are intended to increase the cost of migrating portable services, such as high speed Internet access services, to another carrier.  In lieu of a service-specific commitment, the carrier may impose a term-length minimum service retention period.

On occasion, no-commitment, volume pricing tiers is offered.  While the carriers largely dismiss this idea, zero commitment agreements should be more prevalent, particularly for deals having substantial MPLS expenditures.  The value of MPLS’ “any-to-any connectivity” and the resources required in establishing these enterprise-wide networks negates the likelihood of customer migrations, absent serious service issues.

While many consultants prefer “term” commitments over “annual” commitments, the author puts greater weight on the commitment level (percentage of projected spend) as opposed to whether it is a term or annual commitment.  A relatively modest minimum commitment provides customers with a measure of flexibility to migrate traffic to other carriers, providing a de facto “self-help” remedy if substantial service, pricing or support issues arise.  Consultants prefer the term commitment, according to Dick Sigel, because it often allows the customer to renegotiate rates earlier during a three-year deal.

Customers typically seek a “business downturn” clause which is intended to provide the customer an opportunity to negotiate relief from the shortfall payment obligations for not satisfying its minimum commitment due to substantial business downturns, major sales or divestitures.  Workouts include extensions of the contract term or increased rates to meet or approximate the revenue shortfall.

Another longstanding provision is a technology migration clause.  This provision is intended to minimize the impacts (minimum commitment shortfalls, typically) of migrating to a different service/technology to meet existing requirements at a lower price or to meet requirements that are not met in an optimal fashion by the incumbent’s portfolio of services.  This provision addresses two different scenarios.  The first is when another carrier offers a new, innovative service not offered by the incumbent.  The second arises when the customer elects to migrate from one technology to another, such as shifting from MPLS to an Internet-based VPN arrangement.  In both cases, the incumbent carrier is looking at a reduction in revenues. Accordingly, carriers typically offer a promise to talk in these circumstances.

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Thumbnail image for Picture 16.pngTelecommunications services procurements are predictable recurring events.  The standard terms for wireline and wireless agreements are three and two years, respectively, often with one or two 1-year renewal terms. Enterprises may either engage in the process proactively or let the carriers’ dictate the rules of the game.  From any number of perspectives, proactive engagement is far preferable.

This is the second entry in a series on procuring telecommunications services. This entry focuses on the sources of customer leverage in negotiations with services providers.  

The content is tilted toward wireline procurements, but the major distinctions of wireless procurements are highlighted at the end. 

Establishing the Opportunity or the Threat of Loss

This past spring Rick Sigel of Silver Lining Telecom and I conducted several briefings on best practices in telecommunications services procurements.  Rick noted that enterprise customers possess two sources of leverage: (1) the ability to direct new business to a services provider or, for the incumbent carrier(s), establishing a credible threat of loss of business; and (2) conducting an organized, even-handed procurement.  The latter establishes the credible threat of loss.

The first leverage point is intuitive, but often overlooked.  Carrier account teams want new business from customers—organic growth from an existing customer, more data services, or replacing the incumbent carrier’s services.  If there is little change in current business and no threat of loss, contract renewal negotiations with the incumbent can drag-on interminably.  By contrast, if substantial new business is at hand, carrier account teams engage their product managers, offer managers and in-house counsel to get the deal done.

In order to make the internal business case, the hard and soft costs associated with a procurement should be quantified.  Hard costs include costs of services from both incumbent and successor carriers during some part of the transition process, new CPE or CPE modifications, and costs of consultants and outside counsel.  Soft costs include internal resources required to undertake the procurement and support the transition.

Be Prepared and Committed to the Procurement Process 

Timing.  The process must be initiated well prior to expiration of the customer’s existing contract to elicit serious responses.  Carriers know that customers (1) require substantial time and must devote limited internal resources to migrate services to successor carriers, and (2) want to avoid/minimize the sharp increase in pricing that occurs at contract expiration as the incumbent carrier’s rack rates come into effect.  Potential successor carriers will not participate or tender pro forma responses, if the RFP is constructed haphazardly or issued too close to current contract expiration.

Accurate Demand Sets and Thorough RFPs.  There is nothing virtual about demand sets and RFPs.  Services providers need to know customer locations, usage profiles/details for voice and wireless, number of users, bandwidth requirements (port sizes)—existing and proposed—to assess the opportunity, develop cost models, formulate proposed pricing and otherwise complete the responses to the RFPs.  The RFP should be structured to elicit a thorough and helpful response, and accommodate “apples to apples” comparisons of all bidders’ responses.  

Qualified Bidders.  Rick Sigel also noted that a customer should qualify the bidders to whom it wishes to issue an RFP.  Past experience, the carrier’s footprint, service offerings, and, its financial position are among the factors to consider in developing a bidder’s list.  Technology Companies may have more potentially qualified bidders because they typically do not maintain as many locations as other enterprise customers and their priority service tends to be high speed dedicated Internet access which is offered by almost all Tier 1 to Tier 3 carriers.  A related consideration is whether to structure the procurement to award business to a primary and secondary carrier.

Knowledgeable Consultants.  Most companies, except for some of the very largest enterprises, benefit by retaining experienced procurement consultants.  Few enterprises have staff experienced in developing demand sets and structuring RFPs relevant to telecommunications procurements.  Even if inclined to employ these individuals, enterprise staff are not regularly involved in procurements and challenged in determining current pricing trends and carrier strategies.

Current competitive pricing is not publicly available, except for some government contracts. While subject to strict confidentiality obligations, consultants are in a position to advise whether a customer’s current rates or carriers’ proposed rates are “at or near current market rates.” 

Continue Reading Wireline and Wireless Procurements–Sources of Leverage

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This is the first in a series of entries on wireline and wireless procurements, from the perspective and for the benefit of today’s enterprise customers.  This entry highlights the distinctions between wireless and wireline procurements.  In subsequent entries, we identify the sources of customer leverage and explain the merits of negotiating the best possible agreements; review priority business and legal terms and conditions, including positioning the customer for its next procurement; and, conclude with an entry on customer-oriented remedies.

Introduction.  The customer base and demand sets for enterprise wireline services are undergoing a major transition.  E-commerce site operators, social networks and cloud computing entities (“Technology Companies”) have joined the Fortune 1000, state governments and the Federal government as major enterprise services customers.  Technology Companies tend to have noticeably fewer sites, but far higher bandwidth requirements.  High speed Internet access service, not circuit-switched voice, is the ubiquitous wireline service.  MPLS has displaced frame relay.    Customers are demanding  increased bandwidth  for all data services.

Commercial wireless service providers offer “one-size fits all” voice and data services for residential and business customers. The latest smart phones and tablets are offered to residential and business customers without distinction.  On the other hand, non-standard pricing plans and device refresh cycles are offered to business customers. The continued growth of wireless services, particularly the continuing demand for ever higher data rates, suggests undifferentiated services currently meet customer requirements.    The exception is M2M services. These offerings are geared to business customers.  M2M traffic can be routed to customer’s data services, as opposed to the public Internet—a selling point for many businesses.

Wireline and wireless services providers are similar in one major respect:  carriers’ facilities-based services footprints can and do vary widely.  Many companies obtain service from at least one other wireless and wireline carrier, respectively, in addition to their primary carriers.

The major carriers—AT&T and Verizon—market, provision and support wireline and wireless services through distinct organizations.  These providers do not bundle wireline and wireless offerings and have different contract templates for these respective offerings.  Sprint largely follows this practice.  The standard term for wireless agreements is two years, three years for wireline agreements.

Wireline Service Procurements.  Wireline carriers offer an expansive menu of data rates for high speed Internet access services, MPLS and VPLS offerings, high capacity private line Ethernet and TDM services, and multiple voice options (IP and circuit switched).  Wireline carriers consider and often respond to requests for special construction.  Wireline service account teams aggressively market managed services, such as network management, data center/colocation, firewall, and conferencing services, as well as voice and data transport services.  An experienced consultant recently noted  “[c]arriers are aggressively pursuing managed services business because margins are higher than traditional transport services and because the carriers are eager to move up the value chain and provide services that penetrate further into their customers’ premises.”

Wireline carriers offer domestic, international and rest-of-world services.  Many multinational enterprises often look to a primary MPLS carrier to connect the entities’ principal locations throughout the developed and developing regions of the world. Despite the substantial bundling of services, very little, if any, wireline CPE intended for enterprise customers is subsidized by wireline carriers and [mandatory] bundling of CPE with wireline services—enterprise or not—is rare.

Enterprise agreements typically include SLAs with multiple metrics for MPLS, VPLS, and private line offerings and a more limited set of SLAs for high speed Internet access services.  These metrics include site-specific availability and mean-time-to-repair, and latency. Wireline SLAs vary by services provider and region (US and Canada, Mexico, EMEA, South America, and Asia PAC).

Continue Reading Wireline and Wireless Services Procurements: An Introduction

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Several matters before the FCC could have substantial dollar and technology impacts for enterprise customers.  The FCC’s special access services and USF contribution reform proceedings could significantly affect pricing for enterprise services, beginning sometime in 2014.  A more open-ended proceeding focuses on whether the FCC will move aggressively in granting AT&T’s wish list included in its proposal to convert its local telephone networks to all-IP platforms.

One matter that should be addressed this year is the appeal of the FCC’s Open Internet Order currently pending before the D.C. Circuit.  Because this is such a prominent matter, we believe the non-prevailing parties likely will petition the Supreme Court for review.

FCC Taking a Fresh Look at Special Access Services.  In an earlier entry, we highlighted the FCC’s reassessment of the interstate special access services market.  Subsequently, the FCC released a Report and Order and Further Notice of Proposed Rulemaking, setting out a comprehensive data request to  price cap ILECs and other services providers to determine the extent of competition among providers of special access services, principally, DS-1, DS-3 and Ethernet special access services.  Ethernet service broadly is undergoing rapid growth.  The FCC is taking a direct approach to determine whether special access rates are competitively priced.

We propose to perform a one-time, multi-faceted market analysis of the special access market designed to determine where and when special access prices are just and reasonable, and whether our current special access regulations help or hinder this desired outcome. We do not propose to conduct a simple market share or market concentration analysis.  Rather, we will use the data we are collecting in this Report and Order to identify measures of actual and potential competition that are good predictors of competitive behavior, for example, by demonstrating that prices tend to decline with increases in the intensity of various competition measures, holding other things constant.  In undertaking that analysis we will consider evidence as to what leads firms, including competitive providers, to undertake infrastructure investments.

Clearly, a fresh look at the special access services market (data for years 2010 and 2012 are being requested) is warranted.

Two points merit further note.  First, the FCC is seeking comment on whether Internet access service is a competitive alternative to special access services.  Hopefully, the FCC will conclude the services are not substitutes.  Internet access service is not an “access service,” rather it is part and parcel of an end-to-end best efforts shared transport and information access and retrieval service.  Special access is basic transport between defined physical locations.  Second, the FCC is requesting comment on the “Petition to Reverse Forbearance Determinations,” filed late last year by an enterprise customer group, Sprint and several interexchange carriers that requests the FCC to reverse decisions issued prior to 2010 in which the FCC elected to forbear from (i) imposing certain Computer Inquiry requirements on the price cap ILECs, and (ii) regulating non-TDM based special access services offered by price cap ILECs, particularly Ethernet services.

Continue Reading Telecom Policy Projections for 2013 and 2014–Wireline Services and Enterprise Customers

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The reasons for the stunning success of Internet-based firms such as Facebook, Living Social, Groupon and countless others are multi-faceted. The intuition, smarts and hard work of the founders are undoubtedly the principal reasons. Other entrepreneurs will envision and implement new businesses that will become stunning successes; many will not be as fortunate.

In the many parts of the United States, Internet-based businesses have access to essential Internet infrastructure at reasonable rates. Companies that are not longstanding, nationwide retailers or multi-national corporations can establish an Internet presence with relative ease in terms of out-of-pocket expenditures and access to essential services and technologies. Entrepreneurs offering interesting or innovative on-line experiences, products or services can contract with web hosting, high speed Internet access service, data center and/or cloud computing, and content delivery network services providers and establish a sophisticated, on-line presence in a matter of months. Consultants that can assess scale enhancements due to rising traffic on web sites may not be as easy to identify.

High speed Internet access service, the essential “utility service” for e-commerce, is available from multiple providers in many metropolitan areas and high technology corridors such as Washington, DC and nearby Northern Virginia. Internet-based companies are not tied to Verizon or AT&T for connectivity; they don’t need the national or multi-national footprints that are major selling points for the major carriers. Multiple second and third tier, facilities-based services providers continue to extend their networks to more customer locations.

Second and third tier Internet Access services providers often do not demand the strict “take-or-pay” obligations imposed by the major carriers. These services providers are not locked into nationwide, volume-based pricing structures and, just as the major carriers, offer a “best efforts” high speed Internet access service. In this competitive environment it is not surprising that at least one major carrier has taken steps to minimize the ease with which its customers can migrate their high speed Internet access service requirements to more aggressive competitors.

Internet-based entrepreneurs achieve global presence and scale by acquiring content delivery network services. E-commerce site operators do not have to enter into the highly structured, multi-year enterprise services agreements of the major carriers. Rather, they can purchase content delivery network services from entities such as Akamai to ensure a predictable and reliable on-line presence in their geographic areas of interest and to accommodate episodic or seasonal peak demand periods.

This robust Internet eco-system bodes well for continued U.S. leadership in e-commerce and on-line content.

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This is the third of three entries analyzing telecommunications services agreements. The first—Overview—highlighted the structure and basic components of telecommunications services agreements. The second—Revenue Assurance—focused on the carriers’ interest and mechanisms for locking-in projected revenues. This third entry—Risk Mitigation—looks at damage caps, termination rights and indemnity obligations in carriers’ standard agreements.

Customers Bear the Risks. In terms of substance and process, the carriers’ standard agreements are as one-sided as ever. Mutuality is limited to the standard disclaimer of consequential, special and incidental damages. The artificially low cap on damages is often limited to the carrier. This cap is laughable in light of the potential adverse impact of poor service on customers’ businesses and operations. As to process, customers may raise billing issues, but the standard billing dispute resolution provision typically provides that the carrier’s determination is final. Whether the parties agree to resolve disputes by litigation, arbitration or another form of ADR, all disputes should be subject to the agreed-upon process.   

Chronic Service Problems—Customer Beware. In light of the standard damages cap, the meaningful remedy for chronic service problems is termination of the service or the agreement. Several carriers undercut this option by limiting the consequences for poor service to credits offered under their Service Level Agreements (“SLAs”). The challenge is negotiating a service impairment threshold for which there is no opportunity for cure. (As a practical matter, a chronic service issue cannot be “cured”). As noted in an earlier entry, site-specific remedies are meaningless for chronic service issues associated with workhorse corporate data services—such as MPLS—in which hundreds, a thousand or more customer locations may be impacted.

While the “termination remedy” imposes its own set of hardships–unplanned procurements and transitions to replacement carriers, customers should preserve this option. This is accomplished by negotiating provisions that provide (i) a reduction in the minimum revenue commitment equal to the value of the discontinued services for the balance of the agreement, and (ii) a reasonable transition period—not less than 90 days; six months is more realistic—to migrate traffic to a replacement provider. In addition, the underperforming provider should be obligated to issue a credit or pay the customer an amount equal to any increased cost for the replacement service.

Why is the Customer Indemnifying the Carrier? Indemnity obligations vary widely, based on the services provider and the services in question. Customer indemnities (for the carrier’s benefit) should be limited because the vast preponderance of the customer’s risks—poor or unavailable service—are not and cannot be reasonably addressed because of the standard disclaimer on consequential, special or incidental damages. Some carriers demand indemnities against claims from customer’s users who suffer serious injury as a result of not reaching the local Public Service Answering Points (“PSAPs”)— when the VoIP/SIP user dials 9 1 1 at a location other than its “primary registered” location. The FCC’s regulations on VoIP and 9 1 1 calling should be sufficient. While some carriers reserve the right to suspend service for violations of the carrier’s Authorized User Policy (“AUP”), demanding an indemnity from customers against claims arising from non-compliance with an AUP is over the top.

One major carrier’s standard agreement disclaims all liability for unauthorized access to customer’s communications. While it may be reasonable for a carrier to disclaim liability for unauthorized access to the customer’s information conveyed over its services, it is quite another to attempt to insulate itself from the misdeeds of its employees and contractors. Sadly, the FCC is not helping customers in terms of reasonable privacy expectations. The FCC’s Enforcement Bureau recently acquiesced, in effect, to Google’s view that Sec. 705(a) of the Communications Act does not bar non-parties to a wireless communication from securing the contents of non-encrypted Wireless communications.  Shortly thereafter, the FCC rushed out guidance on how to encrypt WiFi communications.

Wireless Agreements—It Couldn’t Get Much Worse. Customers face a far steeper challenge in regard to Wireless service. Meaningful SLAs are few and far between. Wireless carrier agreements provide, in effect, that “if a subscriber is within range of an operational cell site having capacity to initiate and maintain the Wireless connection, service may be available.” More favorable “commitments” are sometimes negotiated, but SLAs as to access, availability or quality are feeble to nonexistent. Wireless carriers do address problematic service for business customers—at major corporate locations—through the deployment of distributed antenna systems (“DAS”) or bi-directional amplifiers (“BDAs”). The cost and terms of these arrangements vary widely. Customer self-help remedies for in-building coverage gaps are adamantly opposed by the carriers.

Consumers and business customers access the same networks and procure largely the same handsets and laptop plug-ins. The two-year handset minimum commitment period drives enterprise agreements almost to the same extent as consumer transactions. Only recently has some differentiation between consumer and business Wireless services emerged, such as M2M and, most recently, an integrated LTE-MPLS offering from Verizon Wireless. Unlike data communications supported by Wireline services, wireless carriers clearly intend to control aspects of M2M applications.

As a result of handset IP infringement litigation and the bundled nature of Wireless services and handsets, smartphones and tablets, Wireless agreements should provide practical remedies in the event continued use of infringing devices is banned. Carrier statements that customers look to handset manufacturers for equipment issues are laughable, at best. Each carrier picks the models, specifies the frequencies and may restrict/suppress certain technologies in the Wireless devices it offers for sale for use on its networks.