Negotiating Strategies

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This is the second of three entries analyzing telecommunications services agreements.  The first entry—Overview—highlighted the structure and basic components of telecommunications services agreements.  This entry—Revenue Assurance—focuses on the carriers’ interest and mechanisms for locking-in projected revenues.  The third entry—Risk Mitigation—will take a closer look at the carriers’ views on damages, termination rights and customer indemnities.

Revenue Assurance

Fundamentally, standard Wireless and Wireline services agreements are drafted to ensure that customers spend the minimum amounts that they committed to spend.  After agreement on services and rates, negotiations inevitably shift to minimum revenue commitments.  Notions that the quality of services delivered or the support provided should impact this revenue stream are clearly lacking in carrier agreements and negotiating strategies.  It often seems that carriers are far more focused on revenue assurance, perhaps for internal revenue projections ultimately shared with stock analysts, than revenue growth.

Volume-Based Pricing—Yes and No.   Broadly speaking, pricing for Wireless and Wireline services are volume-based.  A study conducted by a leading consultant several years ago of publicly available data confirmed this point, but also disclosed substantial variability in rates for similar commitment levels.  Another theory, largely rejected by experienced customers and consultants, is that the larger the percentage commitment for a customer’s projected spend level, the more aggressive the pricing.

Taxes, Surcharges and All Other Costs the Carriers Can Imagine.  Wireline and Wireless services are subject to an endless stream of taxes and surcharges imposed by the FCC, state agencies and state governments.  The largest surcharge is the Federal Universal Service Charge which the carriers have been permitted by the FCC to recover from their customers.  The current FUSF charge is 17.9% for interstate Wireline services; the so-called “safe harbor” percentages for Wireless service are noticeably less.

Unlike taxes imposed incident to the sale of goods to consumers, principally sales taxes, the carriers’ standard practice is to recover all surcharges and taxes imposed on them by state and local governments, from property taxes to gross receipts taxes, excluding only taxes on earned income.  These costs are typically recovered through one or more separate line items on customers’ bills.  The carriers also recover a range of  costs incurred in the operation of their businesses, such as regulatory compliance costs.

Thus, while rates may nominally be “fixed” under many services agreements, the recovery of taxes, surcharges and other variable costs is now approximating 20% of the net charges for Wireline services and because of the endless stream of state taxes, growing at a healthy clip for Wireless services.   The rising levels and litany of taxes and surcharges drive customers to renegotiate rates and re-procure services. They must do so to minimize substantial increases in expenditures for telecommunications services.


Continue Reading Ins and Outs of Telecommunications Services Agreements: Part 2–Revenue Assurance

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Picture 16.pngThis is the first of three entries analyzing telecommunications services agreements.  This entry—Overview—highlights the structure and basic components of telecommunications services agreements.  The second entry—Revenue Assurance—will focus on the carriers’ interest of locking-in projected revenues. The third entry—Risk Mitigation—will take a closer look at the carriers’views on damages, termination rights and customer indemnities.

Overview

Wireline and Wireless services agreements include general terms and conditions, typically set out in a “Master Agreement.” Negotiated service-specific rates or, for Wireless services, plans and pooling arrangements are set out in attachments or schedules.  Wireless and Wireline services are generally procured separately, having  separate agreements, although one carrier opts for a single master agreement covering both service categories.  The benefits of consolidation are limited, in our view, if the customer’s total spend does not result in improved overall pricing or other tangible benefits. 

Wireline Agreements.  Customers and carriers typically negotiate an overall minimum revenue commitment that may be an annual or term commitment.  Customer expenditures for most services typically “contribute” to satisfying the minimum commitment with the possible exception of local exchange services which, in many cases, are still subject to tariffs.  Tariffs take precedence over contracts.  Whether local services “contribute” to the overall commitment is a point of negotiation.  A more recent twist is the offer of a major credit based on an actual expenditures over a given period, typically a year.

In addition to domestic services, Wireline agreements may include international and “rest of world” services.  The latter denotes services that do not originate or terminate in the United States.  International services originate or terminate in the United States.  The services in these agreements include dedicated internet access services, voice and data services, such as MPLS, high capacity access services and managed services—carrier monitoring of customer premises equipment—typically routers and sometimes PBXs—enabling more rapid identification of service/equipment troubles and resolution Firewall and other security services are offered, as well. 

Wireless Agreements.  Wireless agreements tend to be domestic-focused with options for business customers whose employees travel internationally.  Various volume-based incentives and disincentives are common in these agreements.  The carriers continue to push for “preferred provider” status. 

Minimum line commitments exist to recover the cost of discounted handsets.  As a practical matter, each carrier offers its own portfolio of handsets, tablets and wireless cards, in part, to ensure these devices have “backward compatibility” over its respective spectrum bands.  Thus, carrier assertions that customers must look exclusively to handset manufacturers in connection with equipment issues strain credibility.  The devices generally are not portable to other carriers’ networks.  Adverse customer impacts of IP litigation among handset technology owners is an emerging issue.

Another feature of Wireless deals is the availability of corporate liable and individual liable service arrangements.  Under the latter, individual employees enter into individual agreements with the carriers, assuming responsibility for paying for their own services and handsets, but at the discounted rates negotiated in the enterprise’s agreement with the carrier.  Individually liable arrangements are part of the growing IT management challenges triggered by employees using their own remote devices to access corporate networks and data resources, often referred to as the Bring Your Own Device (“BYOD”) trend. 


Continue Reading Ins and Outs of Telecommunications Services Agreements: Part 1-Overview

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Last week, AT&T bowed to reality as it and Deutsche Telekom withdrew their transfer of control application from the FCC, reportedly as FCC Chairman Genachowski announced his recommendation that the Commission adopt an order designating the application for hearing.  Cecilia Kang reports on the applicants’ surprising move.

Harold Feld of Public Knowledge maintains that under

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If you want any dispute arising from a services contract to be quickly resolved, you probably need to include a mandatory arbitration clause in the contract.  Why?  Because the delays in resolving civil cases in court continue to grow. This situation further supports our standard recommendation that enterprise customers should seriously consider seeking to resolve

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AT&T and Verizon capture the lion’s share of enterprise Wireline services business in the United States.  This year, Level 3 acquired Global Crossing and CenturyTel acquired Qwest (now “CenturyLink”).  These two companies could drive the return of the competitive environment of the mid-to-late 1990s that, unfortunately, collapsed in the wake of the WorldCom accounting fraud.

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Beware of the Tipping Point.  Telecommunications services procurements do not always yield the targeted results.  This typically arises when a non-incumbent carrier concludes the incumbent is going to retain the business.  This can and does occur when the customer signals—intentionally or not—that  the RFP process is just a formality.

It can also arise in connection

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In an earlier entry, we outlined the importance of counsel understanding the critical elements of the business deal in order “to provide relevant advice” to enterprise customers negotiating telecommunications services agreements. This entry focuses on carriers’ standard services agreements (“Carrier Agreements”), highlighting how these agreements remain highly problematic.

 1.  Above All, Carrier Agreements Are Drafted to Maintain Projected Revenue Streams

Minimum revenue commitments and early termination liability provisions are standard in Carrier Agreements, vestiges of the 20th Century when interexchange (Wireline) services were offered under tariff.  Regulators either required or tolerated revenue shortfall protection for discounted rates.  Today, the economic justification for early termination liability is tenuous, at best, as (1) the services are no longer regulated and the carriers vigorously maintain the markets for their services are competitive;  (2) carriers’ costs consist largely of fixed, sunk network investments; and (3), from the customers’ perspective, the logistics and transaction costs in migrating enterprise- wide data services to successor carriers negates the option of readily switching carriers to optimize rates.

Billing for telecommunications services have been the carriers’ Achilles Heel for decades. A cottage industry of telecom expense management firms thrive because of challenged carrier billing systems.  Despite this reality, standard billing dispute clauses call for payment of disputed amounts after the carrier reaches its conclusion regarding the dispute.

Unrealistically low caps on direct damages is another 20th Century vestige.  While problematic, the more significant concern is that Carrier Agreements do not provide meaningful resolution procedures for chronic service issues, as discussed in an earlier entry.  Site-specific or network-based Service Level Agreements are not adequate as the impact of chronic service issues on the enterprise go far beyond generally accepted notions of direct damages.


Continue Reading The Persistent One-Sidedness of Carrier Agreements

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The American Arbitration Association (“AAA”), at the request of the Cellular Telecommunications Industry Association (CTIA) established a special arbitration program for the wireless industry and its customers.  The program has its own set of Rules and its own Panel of arbitrators.  This program is designed to address any dispute relating to the provision of cellular and broadband PCS services although any arbitration agreement can elect to employ the rules.  Any AAA arbitration arising within the wireless industry is handled under this program by default, unless other rules are stipulated by contract.

The Wireless Industry Arbitration rules are essentially the same as those for ordinary commercial disputes.  There are three tracks.  The Regular Track is for cases involving claims between $75,000 and $500,000 dollars.  Smaller claims are handled on using the Expedited Procedure and larger claims are handled on the Large/Complex Case Track.

In the Expedited Procedure, the AAA appoints a single arbitrator.  There is a presumption that the matter will be “tried” on the papers and there is a 45-day “time standard” for case completion.  In the Regular Track, there is presumptively one arbitrator and any discovery is at the discretion of the arbitrator.  Cases on the Large/Complex Track, are subject to mandatory pre-arbitration mediation and/or early neutral evaluation according to AAA.  Also, there is a presumption that there will be three arbitrators and the presumption that there will be discovery.  Finally, the parties can agree to an appellate type review of the initial award.  The Large/Complex case rules can be applied to claims that are smaller than $500,000 or that have no undetermined or nonmonetary claims at the request of any party.

As part of the program, AAA maintains a special panel of arbitrators known as the Telecommunications Panel.  The Telecommunications Panel includes many individuals who are engaged directly in the telecommunications industry.  According to AAA, attorney members of the Panel typically devote at least half of their practice to telecommunications matters.

Of course, any of the Rules can be altered by contract between the parties.


Continue Reading Should You Arbitrate Under the Wireless Industry Arbitration Rules?

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When carriers routinely reject risk-balancing contract provisions based on “the business case,” deliver standard agreements that effectively eliminate the possibility of damages no matter how bad their services in a given instance, or demand iron-clad “preferred provider” clauses, the only conclusion is that the carriers do not perceive significant competition. While aggressive carrier positions are

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Most enterprises initiating Wireline and Wireless services procurements retain the services of consultants (“Telecom Consultants”).  Current pricing information for enterprise Wireless and Wireline services is not publicly available.  Competent consultants know trends in service offerings and market pricing.

Who are Telecom Consultants?  Generally speaking, Telecom Consultants are individuals, firms or groups within consulting firms that