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Following the Department of Justice’s conditional approval of the spectrum transaction, including the so-called “Commercial Agreements,” under which Verizon Wireless acquires the AWS-1 licenses of by Comcast, Time Warner Cable and Bright House networks via Spectrum Co and those of Cox Communications, the FCC granted its consent to these license assignments and related applications calling for (i) the assignment of certain AWS-1 licenses from Verizon Wireless to T-Mobile, and (ii) the exchange of certain licenses between Verizon Wireless and Leap Wireless, imposing two conditions on Verizon Wireless: (1)  an aggressive buildout schedule; and (2) it will enter data roaming agreements with other Wireless providers.

Public Interest Benefits. The FCC summarized the public interest benefits of the spectrum transactions as follows:

We find that the proposed transfer of spectrum from SpectrumCo, Cox, Leap, and T-Mobile to Verizon Wireless would have some important public interest benefits. Most importantly, the transfers from SpectrumCo, Cox, and Leap would result in utilization of currently fallow spectrum to meet the rapidly growing public demand for mobile broadband capacity, and help the United States continue to lead the world in 4G deployment and development.  Given that the current licensees are not utilizing the spectrum for any purpose and appear unlikely to do so in the future, this will provide significant public interest benefits. In addition, we find that the record supports a public interest benefit in the intra-market transfers of equal amounts of spectrum between Verizon Wireless and T-Mobile, as the rationalization of spectrum holdings would enable more efficient deployment and use of the spectrum.

The Commission’s assessment of the benefits is more than reasonable, even though it may encourage speculation in spectrum auctions:  If the business case to buildout a network appears uneconomic, an auction winner may still realize a windfall by flipping the spectrum.

Accelerated Buildout. The Commission gave due consideration to arguments raised by several parties that Verizon Wireless is “warehousing” spectrum, questioning Verizon Wireless’s ability to use and its actual need for the AWS-1 spectrum.  The FCC imposed on Verizon Wireless 3-year and 7-year signal coverage and service obligations of 30 percent and 70 percent, respectively, of the total population in the Economic Areas or portions of the EAs covered by the AWS-1 licenses being assigned to it.

Data Roaming Obligation.  The FCC recognized the interests of other wireless services carriers that “have experienced difficulty in the past negotiating broadband data roaming arrangements with providers offering the broadest coverage and the transfer of AWS-1 spectrum to Verizon Wireless necessarily means that the spectrum will not be developed by other providers that might have greater incentives to provide voluntary roaming arrangements.” Accordingly, the Commission hedged its bets on the pending appeal of its Data Roaming Order.   The FCC  required that “[i]n the event the current data roaming rule is not available to requesting providers” Verizon Wireless must offer roaming arrangements for commercial mobile data services on any of its spectrum in the areas where it is acquiring AWS-1 spectrum .  .  . to other commercial mobile data service providers on commercially reasonable terms and conditions .  .   . .”

While this obligation runs for five (5) years, limiting Verizon Wireless’s roaming agreement obligation only “in areas where it is acquiring AWS-1 spectrum” may leave coverage gaps that could prove problematic if the Data Roaming Order is not affirmed.

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In theory, the basic direction of domestic telecommunications policy is set by Congress and implemented through rulemaking proceedings, principally before the FCC.  The reality is that Congress moves at a glacial pace in enacting telecommunications legislation and the FCC often struggles with vexing issues such as whether the special access market is competitive and how to implement USF contribution reform.

Over the last decade, the focus of Wireless regulation has shifted dramatically to auctions and auctioned spectrum swaps and sales.  Auctions are common ground for Congress in search of revenues, the FCC in promoting broadband and the carriers in expanding the capacity of their networks.  Auctions and acquiring spectrum from auction winners are now embedded in the telecommunications marketplace.

Wave of  Spectrum Consolidation

We are currently in the midst of a massive wave of spectrum consolidation.  The recent  catalysts are the two agreements between Verizon Wireless and the major cable operators under which the Wireless carrier would acquire the cable operators’ AWS spectrum acquired in Auction 66.  In order to mitigate FCC and DoJ resistance, Verizon Wireless offered the now standard concession of assigning other spectrum to other carriers, in this case a substantial block of AWS spectrum to T-Mobile, conditioned on approval of its acquisition of the cable operators’ spectrum.  The FCC duly inquired into the relationship of the two proposed transactions.

Not to be outdone, AT&T recently filed multiple applications with the FCC to secure the assignment of licenses in both the Upper and Lower 700 MHz bands and has recently announced an agreement to acquire a company called NextWave whose principal asset is Wireless Communications Service spectrum at 2.3 GHz.

As widely reported, the Verizon Wireless/cable company transactions will move forward.  On August 16, 2012, the Department of Justice announced its acceptance of the transaction, imposing conditions on the joint marketing arrangement.  On the same day, FCC Chairman Genachowski issued a press release outlining the key elements of the FCC’s yet-to-be adopted decision approving the transaction and the related spectrum transaction with T-Mobile.  Accordingly, it is difficult to foresee any scenario in which the FCC would decline to approve AT&T’s proposed transactions.

Closer Regulation of Wireless Carriers’ Business?

As spectrum is concentrated in the major carriers, Wireless carrier business practices may face closer scrutiny.  One condition to the FCC’s approval, announced in the Chairman’s press release, is that Verizon Wireless will “enhance its roaming obligations.”  This could be another example of how challenging policy objectives are often achieved through merger conditions.  The details of this “enhancement” should prove interesting inasmuch as Verizon Wireless appealed the FCC’s 2011 Data Roaming Order for which oral argument is currently scheduled for September 20, 2012.

After almost eight months of dialogue and, possibly, to remove a stumbling block to approval of its AWS spectrum acquisition, Verizon Wireless recently agreed to a Consent Decree—that included a $1.25 Million “Voluntary Contribution” to the US Treasury—to resolve allegations it had violated the FCC’s rules in requesting its Application Store Operator to filter (make inaccessible) eleven tethering Applications that customers could use to tether Verizon Wireless smartphones without paying Verizon Wireless’s monthly tethering fee[,]” which according to the Consent Decree, the Application Store Operator filtered.

The FCC alleged Verizon Wireless violated Section 27.16 of its FCC rules that provides the “C-Block licensee shall not deny, limit or restrict the ability of their customers to use the devices and Applications of their choice on the licensee’s C-Block network, with certain exceptions.”  The C-Block is the 22 MHz (a pair of 11 MHz blocks derived from the “Upper 700 MHz Band”) nationwide license that Verizon Wireless acquired at auction several years ago.  J. R. Raphael provides a spirited response to the carrier’s efforts to downplay the alleged violation.

While this Consent Decree likely will temper the behavior of all Wireless carriers for some time, it begs the question of why this rule—adopted in the FCC’s 2007 700 MHz Band Second Report and Order — has not been extended to all Wireless carriers or all Wireless broadband spectrum allocations.  When presented with the opportunity, the FCC expressly declined to do so in its 2010 Net Neutrality Order.  Presumably, this hands-off approach will change in the future.

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With Universal Service Fund outlays approximating $9.0 Billion annually, a contribution factor well above 15% and a declining revenue base, the FCC’s Further Notice of Proposed Rulemaking (“Further Notice”) on USF contribution reform elicited unusually candid responses from services providers and other parties in Comments filed in early July.

Overview

Wireless and Wireline carriers expressed concerns with the Universal Service Administrative Company (“USAC”), principally for making unilateral (i) changes to the revenue reporting forms—FCC Forms 499-A and 499-Q without opportunity for public comment, and (ii) service/revenue classification decisions at odds with underlying FCC policies.  This frustration extended to the FCC’s Wireline Competition Bureau for declining to provide guidance, formal or otherwise, on service/revenue classification questions and allowing appeals of USAC contribution decisions to languish for years.  The carriers proposed reforms to address these concerns. The FCC proposal that the contribution factor be adjusted annually was well-received.

As noted by Sprint, the proceeding presents two basic questions (1) how to expand the base of assessable revenues, and (2) how should the current end-user revenue approach be reformed, strongly advocating transitioning to a different approach, preferably connections.  The complexity and challenges of end-user revenues were discussed at length by several parties, including AT&T.

Points of Interest for Enterprise Customers

Revenues-Based Approach Reforms—Proposals to Expand the Base.   The questions of whether and, if so, how to assess high speed Internet access service elicited more comments than any other issue. Almost all parties opposed assessing revenues attributed to the entire cost of this information service, but the proposal to assess the “telecommunications component” of high speed Internet access service and other information services was widely supported by, among others, AT&T, Sprint and rural Wireline carrier associations.  Verizon and the National Cable Television Association were notable dissenters.  Most parties opposed assessing texting revenues.

Consistent with a proposal filed in March of this year, the major Wireline carriers supported the proposal to assess MPLS revenues based on revenue proxies for MPLS access transmission components.  MPLS providers would (1) identify the speed of each access transmission component of their “ MPLS-enabled services” on a customer-by-customer basis; (2) utilize the appropriate MPLS Assessable Revenues Component  (“MARC”)  proxy based on the speed of each access transmission component to determine their USF contribution base; and (3) apply the current USF factor to this contribution base.

IBM filed in support of retaining the so-called systems integrator exemption, noting that it contributes to USF (indirectly) when it purchases telecommunications services that it bundles with its data processing and support services. Among others, BT Americas called upon the FCC to discontinue this exemption.

The proposal to assess USF on all aspects of services bundles comprised of telecommunications services, information services, related offerings, such as data center/collocation and managed services, and CPE elicited largely negative responses.

Transition from End User Revenues Strongly Supported. The larger Wireline and Wireless carriers supported moving to either numbers or connections.  Among others, Comcast supported this transition. The Ad Hoc Telecommunications Users Committee offered the most extensive support for a numbers-based approach, noting that a monthly charge of $1.00 per number would be sufficient to fund USF at current levels for the foreseeable future.  On the other hand, prepaid wireless providers and users of Wireless service for telematics/M2M applications did not share the enthusiasm for change in general or to transitioning to numbers generally.

Moving  Forward. The threshold consideration is the FCC’s timeline for developing a decision on these complex issues.  Interestingly, the FCC denied a request to extend the deadline for filing Reply Comments, suggesting that the FCC staff wants to move the proceeding along.

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Introduction.   In a recent entry, we noted that the FCC had released a Further Notice of Proposed Rulemaking (“Further Notice”), requesting comment on proposals to revise the manner in which it assesses telecommunications carriers (Wireline and Wireless) for Universal Service Fund (“USF”) contributions.  This entry provides a more in-depth look at these proposals; principally, how, if adopted, the proposals could impact enterprise customers.

The FCC has outlined extensive changes to the current, “end-user revenue” approach for determining USF contribution obligations, focusing on currently excluded services and revenue streams.  The Further Notice also proposes two alternative approaches as potential replacements.

What’s at Stake.  The annual revenue requirement for the FCC’s Universal Service Program lies between $8 Billion to $9 Billion.  During the first six months of 2012, the USF contribution factor exceeded 17% of Wireline carriers’ end-user revenues on carriers’ interexchange (interstate and international) services.  For the 3rd quarter, the contribution factor is just below 16%.  USF assessable revenues of Wireless carriers range between 20% to 37.1% of total services charges, excluding texting and data charges.  Reportedly, most Wireless carriers rely on traffic studies to establish what percentage of their traffic is jurisdictionally interstate, rather than rely on 37.1% “safe harbor” set by the FCC.

Carriers recover their USF contributions through surcharges added to customers’ monthly bills.  Depending on the proposals ultimately adopted, business customers could find themselves paying substantially more in USF surcharges.

Why Reform the USF Contribution Rules?  The base of USF assessable revenues is dwindling largely due to the migration to high speed Internet access services (Wireline and Wireless) and IP-based services such as MPLS.  These services are either information services or  do not fall clearly within the statutory definitions of “telecommunications services” or “telecommunications.”  Exclusions and exemptions apply to other revenue streams and/or services.  In addition, the FCC appears to be looking to resolve multiple issues raised in long pending appeals of Universal Service Administrative Company (“USAC”) contribution decisions.

Possible Modifications to the End-User Revenue Approach.  The most significant proposal is to classify the revenues on high speed dedicated Internet access services (residential and business; Wireless and Wireline) and text messaging as USF-assessable; either in their entirety or assessing a set percentage of these revenues.  The FCC also appears intent on clarifying whether MPLS offerings should be subject to USF assessments.

Continue Reading A Closer Look at the FCC’s USF Contribution Reform Proposals

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Late last month, the FCC adopted a Report and Order granting SprintNextel flexibility to channelize its area-wide assignments in the ESMR portion of the 800 MHz band (817-824/862-869 MHz) to accommodate CDMA and LTE technologies. Even though the SprintNextel merger proved a terrible deal for Sprint shareholders, as noted recently by David Goldman, as the licensee of almost all of the ESMR band licenses, Nextel is now delivering a major, albeit belated, dividend: 14 MHz (one 7 MHz pair) of broadband spectrum at no additional cost.

The Report and Order provides SprintNextel with potentially more broadband spectrum below 1 GHz than any other carrier except for Verizon Wireless which paid a staggering sum for the 700 MHz C-Block—20 MHz (one 10 MHz pair) and other 700 MHz broadband licenses Auction 73.  This 800 MHz spectrum may prove particularly valuable in light of the interoperability constraints that 700 MHz band auction winners other than Verizon Wireless are confronting.

As compared to AT&T’s thwarted takeover of T-Mobile and Verizon Wireless’s ongoing challenge to secure approval to acquire SpectrumCo’s AWS licenses, SprintNextel demonstrated a deft touch in leveraging the FCC ‘s overarching goal of securing additional spectrum for Wireless broadband services, as noted in FCC Chairman Genachowski’s Separate Statement issued with the Report and Order. This is all the more impressive in that Nextel’s cellular-like operations in the EMSR band gave rise to widespread interference to Public Safety operations in adjacent 800 MHz spectrum and the seemingly never ending 800 MHz rebanding effort to mitigate this interference.

Much like the lottery winner in the NBA draft, the ball is in Sprint’s court to use this highly valued spectrum to improve its standing in the Wireless market.

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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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The FCC’s Further Notice of Proposed Rulemaking proposes significant, substantive reforms to the manner in which Universal Service Fund (“USF”) contributions are assessed.

The FNPRM undoubtedly will elicit a blizzard of comments and counterproposals as interested parties assess and respond to the proposed changes. At this juncture, several comments are warranted:

  1. The FCC deserves credit for addressing USF contribution reform. USF compliance has become progressively complex, posing a substantial challenge for new entrants and giving rise to a “mini-tax’ practice for telecom attorneys and accountants. Refreshingly, Commissioner McDowell expressed the widely-held view that the USF contribution base must be broadened and the current, exorbitant contribution factor of 17+% substantially reduced in order for USF to be sustainable.
  2. The FNPRM contemplates an expansion of the base of “assessable services,” such as capturing the “telecommunications” component of high speed Internet access services for business and residential customers and providing clarity for assessing MPLS services. In light of their explosive growth, Wireline and Wireless broadband Internet access services cannot reasonably be excluded from the pool of contributory services.
  3. In addition to proposals to reform the current end-user revenue model, the FNPRM seeks comment on alternative USF assessment mechanisms: one would be based on “connections” and the other, which several stakeholders have advocated in recent years, is a (telephone) “numbers-based” approach. A combination of the two is proposed, as well. The “connections” approach appears unduly complex.
  4. One proposal calls for service providers offering bundles of assessable and non-assessable services, equipment and network management services to contribute to USF based on the cost of the entire bundle or “allocate revenues associated with the bundle consistent with the price it charges for stand-alone offerings of equivalent services or products (with any discounts from bundling assumed to be discounts in non-assessable revenues).” While the FNPRM acknowledges the latter may be unenforceable and an administrative nightmare, the entire proposal is blind to the reality that the major carriers recover their USF contributions from their customers.

Practice Tip—Determine Your USF Burden Baseline.  From a cost management perspective, the FNPRM could shift, rearrange or increase aggregate USF obligations for many enterprise customers. We recommend enterprise customers determine how their carrier(s) currently recover USF surcharges on a service-by-service basis. This breakdown is not routinely provided by carriers and may be overlooked by consultants.

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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.

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The Obama Administration’s consumer data privacy framework released last month will impact companies’ data collection, use, and retention practices, and raises complex legal issues. As explained in a recent article by Keller and Heckman LLP, the notion of codes of conduct developed through a multistakeholder process, to be enforced by the Federal Trade Commission (“FTC”), raises (1) administrative procedure concerns, and (2) questions as to whether self-regulatory initiatives could be hampered. In addition, enforceable codes of conduct and a Consumer Privacy Bill of Rights, which forms the core of the framework, could spur more privacy litigation. Recent lawsuits have involved the use of cookies and other technologies to track users online, companies’ violations of their privacy and data security commitments, and companies’ failures to adequately protect and secure personal information.

As contemplated by the White House framework, the U.S. Department of Commerce National Telecommunications and Information Administration (“NTIA”) has requested comments on enforceable codes of conduct and the multistakeholder process. NTIA seeks comment on the following issues in particular:

  • Transparency of privacy notices for mobile apps;
  • Online services directed to kids and teens; and
  • The use of technologies like browser cookies, local shared objects, and browser cache to collect personal information.

These issues have also been a focus of lawmakers, the FTC, and the states.

The Administration urges Congress to pass legislation that applies the Consumer Privacy Bill of Rights to sectors not subject to existing privacy laws, and calls for a national security breach notification standard. Even in the absence of comprehensive legislation, these developments demonstrate that the U.S. privacy legal landscape continues to rapidly evolve.

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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