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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

Following President Obama’s State of the Union address on February 12, the White House released its much-anticipated cybersecurity executive order, Improving Critical Infrastructure Cybersecurity.  The EO was an opportunity for the Administration to address widely acknowledged cyber threats to domestic critical infrastructure and to clarify Executive Branch authority to respond fully to cyber-attacks by terrorist organizations or foreign powers, including recent intrusions into the computer networks of the New York Times, the Wall Street Journal, and the Washington Post.

During his address, the President recognized growing cybersecurity concerns, noting that “America must also face the rapidly growing threat from cyber-attacks” and called on Congress to pass legislation to protect the nation’s critical infrastructure from cyber-attacks, recognizing that the Executive Order can only direct federal agencies to act.

The EO includes four components to address cyber risks for critical infrastructure:

1.     Information Sharing. Designing a process for government agencies to share real time classified and unclassified cyber threat information with targeted critical infrastructure entities.

2.     Risk Assessment. Identifying the critical infrastructure entities currently facing the greatest cyber risks and attacks on which would create a severe impact on national security, economic security or public health and safety.

3.     Cybersecurity Framework. NIST (National Institute of Standards and Technology) will develop a “Cybersecurity Framework” to collect cybersecurity best practices and standards of conduct in one place and issue a preliminary framework within 240 days.

4.     Voluntary Incentive Program. DHS will design a program to encourage the critical infrastructure community to voluntarily adopt the Cybersecurity Framework through the use of a benefits and incentives program.

Getting right down to business, NIST released a Request for Information (RFI) on February 26 seeking information to help “identify, refine, and guide the many interrelated considerations, challenges, and efforts needed to develop the framework.”

While the EO provides guidance on the Administration’s cybersecurity policy, it can’t take the place of legislation to address industry concerns, such as liability protection, regulatory-use protections, and avenues for private-to-private and private-to-government information sharing. The EO has renewed the debate on Capitol Hill over comprehensive cybersecurity legislation. The  “Cyber Intelligence Sharing and Protection Act,” or “CISPA” has been reintroduced in the House and the Senate Commerce and Homeland Security Committee announced they will hold a joint hearing on March 7 to discuss implementation of the EO and potential legislation.

One thing is clear, 2013 is shaping up to be a big year for cybersecurity developments and legislation.

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Based on developments in 2012 and continuing this year, it is clear that the major carriers will have the necessary spectrum to offer more robust wireless broadband services for years to come.  In addition to spectrum acquisitions, the FCC adopted decisions facilitating mobile broadband operations on spectrum originally allocated to the Mobile Satellite Service (“MSS”) and, in other cases, initially authorized for narrowband voice communications or largely undeveloped because of adjacent channel interference concerns.

The willingness of the carriers to expend billions of dollars for spectrum and FCC decisions “repurposing spectrum” constitute a significant “doubling-down” on the future of wireless broadband.  The downside is that an essential resource for prospective competitors is increasingly concentrated in the hands of the major wireless carriers.

Major Wireless Carriers Move Aggressively to Enhance Broadband Spectrum Holdings.   As AT&T was acknowledging that DoJ and the FCC would not allow it to acquire T -Mobile at the end of 2011, spectrum deal-making began in earnest.

  • Verizon Wireless announced its agreement with SpectrumCo and Cox Communications to acquire the cable companies’ substantial AWS spectrum holdings.  Even though final approval was not granted until August, this transaction triggered a series of significant spectrum deals.
  • On the heels of Verizon Wireless/SpectrumCo/Cox, AT&T initiated a series of transactions to acquire 700 MHz A and B Block licenses and, later in the year, entered into transactions to acquire multiple Wireless Communications Service (WCS) licenses in the 2.3 GHz band.
  • T-Mobile and MetroPCS sought FCC approval to their proposed transaction that will consolidate operations, customers and spectrum holdings and enable deployment of “a network capable of supporting at least 20 x 20 MHz LTE deployments in many areas.”
  • Relying on an anticipated cash infusion resulting from Softbank’s proposal to acquire control of Sprint, the nation’s 3rd largest wireless carrier offered to acquire all of Clearwire’s equity interests that it did not already possess in order to control Clearwire’s spectrum at 2.5 GHz.  Dish Network Corporation (“DISH”) countered with its own offer for the Clearwire’s stock and asked the FCC to “stop the clock” on the FCC’s consideration of the Softbank/Sprint/Clearwire transactions.

The pending transactions are subject to the FCC’s current “case-by-case analysis” for assessing spectrum holdings in transactions and auctions.  While the FCC has initiated a proceeding reassessing current policies for determining criteria for limiting spectrum holdings, this proceeding will not be resolved until the 2nd Quarter of 2013, at the earliest.  In view of the closed and pending transactions noted above, the impact of new spectrum holding policies likely will be limited to future spectrum auctions.

Continue Reading Impacts of Broadband Spectrum Concentration on Enterprise Customers In 2013 and Beyond

On January 2, 2013, President Obama signed the National Defense Authorization Act for Fiscal Year 2013, which, in relevant part, authorizes the Administration to ease export restrictions on satellites and related products.  Our entry of November 30, 2012, addressed the efforts underway to ease export controls on a variety of sensitive technologies and products, emphasizing that restrictions on satellite exports could not be eased without new legislation.  Section 1261 of the new law removed the legislative mandate that satellite exports be controlled under the International Traffic in Arms Regulations (“ITAR”).  The Administration is now in a position to propose rules that would shift jurisdiction over satellite product exports to the more flexible Export Administration Regulations (“EAR”).

The new legislation did, however, impose a few notable restrictions.  They include a prohibition on exporting satellites and related products to China, North Korea or state sponsors of terrorism.  The president may waive this prohibition under certain conditions.  The legislation also establishes a presumption of denial for any application to export satellites or related products to a country subject to an arms embargo.

The Administration has been moving quickly in proposing rules to shift jurisdiction over the export of a wide variety of products from the ITAR to the EAR. We will likely see a comparable proposal for satellite exports in the not-too-distant future.

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In affirming the FCC’s Data Roaming Order, the D.C. Circuit rebuffed Verizon’s efforts to squash any obligation to enter into roaming agreements with competing wireless carriers. In Cellco Partnership v. FCC, No. 11-1135 (D.C. Cir. Dec. 4, 2012) (“Cellco”), the court found that the Commission had ample authority under Title III to adopt its data roaming rules.

Cellco expands the Commission’s authority under Title III to regulate wireless carriers as these carriers transition to all-IP, data-only services providers. Despite Verizon Wireless’s opposing view, the Data Roaming Order aligns the United States with the rest of the world as data roaming is seen as an impetus for growth in the mobile data services market.

Cellco re-affirms the Chevron deference accorded to the Commission not only in selecting among reasonable policy options, but in determining the agency’s jurisdiction subject to the Supreme Court’s decision in City of Arlington v. FCC.  Chevron deference encourages interested parties to participate in Commission proceedings, although the challenge of securing Commission action in a timely manner remains.

Assuming 2nd tier wireless carriers, such as regional and specialized carriers, secure access to sophisticated smart phones and tablets, data roaming arrangements will support these carriers’ efforts to offer compelling service offerings and maintain sustainable businesses.  The caveat is that the Data Roaming Order obligates the major wireless carriers to offer these arrangements on “commercially reasonable terms and conditions,” consistent with the principles governing private carrier arrangements, as opposed to Title II-based “just and reasonable” terms and conditions.  As a result, the FCC has limited authority to influence the terms and conditions of data roaming arrangements.

Cellco ensures the relevance of the FCC’s spectrum holdings proceeding. Limitations on spectrum holdings, however structured, have modest relevance and impact if only 3 or 4 potential services providers are in the market.

Congress wins, as well. TV Broadcast license incentive auctions may now elicit something approaching the optimistic bids Congress assumed. Smaller wireless carriers will have an opportunity to offer data services beyond the limited footprints of local television broadcast channels, particularly those of TV stations located in 2nd tier and 3rd tier markets.

The United States prohibits the export of a broad range of telecom equipment, systems and technologies if the exporter does not first obtain a government license.  Controlled telecom products can be as diverse as parts and components, network equipment, encryption technology and satellites.  Failure to comply with export control restrictions can result in a fine of $250,000 or more per violation, loss of export privileges and even jail.  For years, exporters of telecom products relevant to the military have usually been subject to the onerous International Traffic in Arms Regulations (“ITAR”), rather than the less restrictive Export Administration Regulations (“EAR”).  The U.S. government, however, has launched a comprehensive export control reform effort that could benefit companies looking to export military or satellite hardware and technologies.

Most recently, the Commerce and State Departments (the respective agencies overseeing the EAR and ITAR) have proposed revisions to the export controls covering many electronic products.  A wide variety of electronic products are considered to be military in nature and controlled under the ITAR – even if they were originally intended for general commercial use.  Additional background on the scope of electronic products covered by the ITAR and the liberalizing impact of the proposed rules is set out in a recent Client Alert.  For the telecommunications sector, applicable requirements for radar systems and communications systems presently subject to the ITAR would be simplified and clarified, thereby eliminating many restrictions and ambiguity as to which set of export control regulations applies.

The applicable export controls on satellites and other space-related equipment, however, remain complicated.  These items fall within Category XV on the ITAR’s U.S. Munitions List (“USML”).  The Administration’s efforts to limit the restrictions on exports of space-related hardware and technologies on the USML are constrained by legislation.  There is substantial interest within industry to transfer jurisdiction over space-related technologies to the Commerce Department and the less restrictive EAR.  The EAR would require a license for fewer exports and, where applicable, licensing procedures would be more transparent.  Two bills pending in Congress, H.R. 4310 (Section 1241)  and S. 3211, would authorize the shift to the EAR.

President Obama’s reelection increases the likelihood that telecom export control reform will remain a focal point as the 113th Congress convenes in January.  Stay tuned.

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Despite an energetic reboot earlier this year, the FCC’s most recent effort to reform the rules and policies for funding the Universal Service Fund—USF contribution reform—has lost momentum.  In its Further Notice, the FCC raised every conceivable issue and policy question and sought comment on each of them.  To no one’s surprise, countless services providers and other stakeholders expressed their positions in detail underscoring the undue complexity of the USF contribution rules.

The FCC’s longstanding position that USF contribution obligations are not “taxes” is a legal subtlety lost on customers to whom all the major carriers pass-through their USF contribution obligations.  The USF burden now falls disproportionately on Wireline customers—consumers, enterprises and state and local governments—that rely on circuit-switched voice and other TDM-based services as the Internet has emerged as the Nation’s primary data communications platform. And, with Wireless and VoIP taking center stage for voice, a shrinking number of users will bear an increasing burden as the USF revenue requirement continues to grow.

As Commissioner McDowell noted earlier this year, the contribution factor is too high and the contribution base needs to be expanded. The current system continues to falter under its own weight. The definitional issues and associated complexity obscure the fact that a contribution factor of 17.4% is intolerable. The rickety revenues approach impedes investment by new services providers that are not backbone ISPs having substantial retail customer bases.  Start-ups are discouraged from being end-to-end services providers and focus unduly on developing business plans to avoid a 17%+ surcharge that is likely to increase over time.  Maximum use of the “intermediate mile” fiber deployments that RUS and NTIA infrastructure grants enabled is being discouraged.

Rather than try to fix the current rules, the FCC’s limited resources should be redirected to developing a more straightforward, sustainable funding mechanism, such as connections or numbers. Obsessive focus on “equity issues” both in the revenues approach and those attributed to the alternatives is misplaced.  The negative consequences of the revenues approach are evident.  The revenues approach was developed prior to the emergence of Wireless and the Internet as the dominant telecommunications platforms.  That was 1997; fifteen years have passed. It’s time to move on.

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Over the weekend, the boards of both Sprint and Softbank agreed to terms under which the Japanese wireless carrier would acquire a 70% equity interest in Sprint, providing substantial cash infusion into Sprint.  In light Deutsche Telekom’s controlling interest in T-Mobile and Vodafone’s longstanding ownership interest in Verizon Wireless and that Sprint is often regarded as a distant 3rd to AT&T and Verizon Wireless in the domestic Wireless market, the real question is not whether this transaction will be approved, but when.

The merits of the proposed transaction likely will be assessed for months, if not years.  The proposed deal is consistent with the trend of global companies owning Wireless companies in multiple countries. We expect that the parties will submit one or more transfer of control applications with the FCC within a month.  The proposed deal likely will receive the full attention of the FCC’s Transaction Team.  The extent of DoJ or FTC review of the transaction will be determined in the near future, as well.

One reference point for the criteria the FCC will use in assessing the Softbank’s investment in Sprint is the FCC’s Foreign Ownership Guidelines.  More importantly, the proposed transaction should benefit from the less restrictive approaches to assessing foreign investment in domestic Wireless ventures set out in the agency’s Foreign Ownership Review  proceeding.   Therein, the FCC recommended a series of reforms to minimize burdens on foreign investment in domestic Wireless entities and streamline agency decision making under Section 310 (b)(4) of the Communications Act, consistent with “national security, law enforcement, foreign policy, and trade policy considerations.”  The proposed transaction also benefits from the FCC’s recent decision to facilitate non-controlling investments by foreign entities in U.S. Wireless carriers.

Again, it is difficult to see the transaction being rejected or made subject to onerous conditions, although some parties may raise questions regarding the aggregate spectrum holdings of Sprint and Clearwire in which Sprint is a major stockholder.

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Rather than emulate the public cloud computing business models of Amazon or Google, IBM and AT&T have elected to bring their respective strengths together in an enterprise-focused cloud computer offering targeting Fortune 1000 customers, allocating responsibility for cloud infrastructure and computing to IBM and networking/transport to AT&T.

The companies’ are highlighting the enhanced security functions that AT&T will provide.   John Riberio notes that AT&T and IBM  emphasize that “customers will be able to shift information or applications between their own data centers in private clouds and the new cloud service, without the data leaving the security protections of the virtual private network”  Rachel King explains that the service, which will be offered next year, “combines AT&T’s virtual private networking with IBM SmartCloud Enterprise+, an Infrastructure-as-a-Service, designed for mission-critical, enterprise workloads.”

The venture makes sense in that each company brings its respective assets and expertise and targets their most important customers. It also beings to address a lingering question associated with cloud computing: how to determine whether the network (Internet access service) or cloud infrastructure or application is impacting service delivery.  In bypassing the Internet for connectivity, the joint venture’s customers will benefit from AT&T’s end-to-end MPLS or other private data service and standard SLAs.  In turn, this will enable the establishment of SLAs that better measure the performance of cloud infrastructure or services.  SLAs for cloud offerings  remain far more important to users than cloud providers.

The emphasis on enhanced security functions from AT&T raises the related question of whether AT&T will temper its standard disclaimer of any responsibility for customers’ data transmitted over its network.  At a minimum, enterprise customers will want to assess the extent to which AT&T’s enhanced security functions are disclaimed or negated under the provisions typically found in AT&T’s services agreements.

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In late August, the FCC adopted a Report and Order suspending new grants of interstate special access pricing flexibility for the “Price Caps ILECs”—principally Verizon, AT&T and CenturyLink (formerly Qwest)—adopted in the agency’s 1999 Pricing Flexibility Order.  The Report and Order is a breath of fresh air in terms of acknowledging that a predictive agency judgment proved incorrect and in terms of being a concise, well-written decision.

The FCC summarizes the pricing flexibility principles established in 1999 as follows:

The Commission developed competitive showings (also referred to as “triggers”) designed to measure the extent to which competitors had made irreversible, sunk investment in collocation and transport facilities. Price cap carriers that demonstrated the competitive showings were met in their serving areas could obtain so-called “pricing flexibility,” namely the ability to offer special access services at unregulated rates through generally available and individually negotiated tariffs (i.e., contract tariffs).

Not only were the competitive triggers poorly crafted, the geographic areas of relief—entire Metropolitan Statistical Areas (“MSAs”)—were too big.  That is, while some collocation arrangements arose in densely developed areas, these competitive facilities were nowhere to be found throughout the balance of MSAs.  The author finds a measure of vindication in this aspect of the Report and Order. On behalf of an enterprise user group and in multiple special access proceedings, we argued these ILECs are the only facilities-based carriers offering special access services.

This decision also provides a cogent summary of the arguments raised by IXCs, Wireless carriers and enterprise customers that special access services are not subject to competition and the rates for these services are inflated, particularly the compelling points and arguments raised by AT&T in 2003, two years prior to being acquired by SBC.

The Primacy of Special Access Services.  These services provide dedicated transmission paths between customers’ premises to IXCs’ POPs.  Special access services also connect customer locations within a local area, function as backhaul circuits for wireless carriers, and connect enterprise locations to ISPs.  The principal services are DS-1s and DS-3s and, increasingly, Ethernet-based services.  Almost all special access services are subject to the FCC’s exclusive jurisdiction.

Typically, IXCs and ISPs acquire special access circuits from ILECs to connect their services to their customer’s premises.  Enterprise customers—businesses and state and Federal governments—may have hundreds or several thousand sites all of which must be connected via special access to their IXCs’ and ISPs’ networks.  As compared to the rates for interexchange services (voice and data) and dedicated high speed Internet access services, the rates for special access services have not declined to any measurable degree over the last decade.

Multiple Issues Associated with Inflated Special Access Service Rates and Pricing Flexibility.  The litany of issues associated with special access pricing issues bears repeating.

  • Foremost, as the ILEC units of AT&T, Verizon and CenturyLink acquired pricing flexibility they often increased the rates for these services.
  • For these three mega-carriers, in-region, special access services are revenue generators, but for competitive ISPs and IXCs acquiring (and paying for) these services constitute  unavoidable costs.
  • While enterprise customers benefit because the revenue generated by in-region special access services may support lower overall rates for all services being acquired from a mega-carrier, the rates for special access services remain inflated.
  • Were special access rates available “at cost” more competitors could offer more services at better rates.

These points highlight a basic consideration often overlooked by policy makers and the Department of Justice (in assessing mergers): Because special access services are used in connection with virtually all non-residential services, the rates for these services directly impact the profitability of all carriers and ISPs.

Underlying Problems Remain.  As positive and as grounded in marketplace dynamics as it is, the Report and Order does not confront the reality that the three mega-carriers have deftly dodged and delayed close scrutiny and reductions in special access rates for well over a decade. The FCC is committing only to collect additional data in 60 days to determine whether a more realistic “market analysis” for assessing special competition can be developed.  There is no indication that the more important issue raised by the Report and Order—the current, generally available rates for special access services offered by these Price Cap ILECs are excessive—will be addressed by the FCC.