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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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This is BeyondTelecomLawBlog’s first annual Telecom Legal/Policy Projections for the New Year. While multiple policy and legislative initiatives were launched in 2010 and 2011, we expect the courts, the FCC and Congress to define the scope of these initiatives in 2012.

Net Neutrality Order Heading for Reversal in Court of Appeals.  Assuming the D.C. Circuit Court of Appeals rejects the FCC’s motion to hold in abeyance review of the Net Neutrality Order, this Order likely will be overturned in 2012. Despite legitimate concerns regarding potential abuses by facilities-based ISPs, the FCC is challenged to argue that the Communications Act empowers it to regulate these ISPs as comprehensively as Title II of the Act authorizes regulation of telecommunications carriers and telecommunications services. The D.C. Circuit rejected a far less expansive assertion of Commission authority over Internet traffic management practices in the agency’s Comcast-BitTorrent decision.

USF Order Likely to Survive Despite Judicial Challenges.  Thirteen petitions for review of the FCC’s USF Order filed in eight circuit courts of appeals are now consolidated in the 10th Circuit. The migration to “bill and keep” is subject to Petitions for Review and Petitions for Reconsideration filed with the FCC. Wireline carriers (except AT&T and Verizon) are concerned with the adverse revenue impact of “bill and keep” for non-access Wireless-to-Wireline traffic. While petitioners may prevail on some issues, the FCC’s major restructuring of the USF program likely will survive.

Pressure Building for USF Contribution Reform.  The USF Contribution Factor for the 1st Quarter of 2012 is set at the unprecedented level of 17.9%, driving more data traffic to Internet-based VPNs, accelerating the demise of POTS and undermining growth in Wireless and Wireline services. This should prompt the FCC to revisit its rules governing USF contributions, perhaps migrating to a “numbers-based” approach or assessing a percentage of retail Internet access service revenues attributable to the telecommunications component embedded in this service. This latter makes sense as broadband Internet access service will now be supported by USF.

It May Be Lights Out for LightSquared.  The FCC will rule on LightSquared’s proposal to operate a mobile broadband service on MSS spectrum. While the FCC is unabashedly committed to rolling out Wireless broadband, the interference concerns of government and industry GPS users likely will prove insurmountable.

Congress Likely Will Allocate the D-Block to Public Safety and Authorize Incentive Auctions of TV Broadcast Spectrum.  Though ultimately stripped from the House payroll tax legislation, provisions allocating the 700 MHz D-Block to Public Safety and granting the FCC authority to conduct incentive auctions of licensed TV broadcast spectrum, elicited an extensive response from FCC Chairman Genachowski. Inasmuch as auction revenues offset Federal budget shortfalls and the House and Senate Commerce Committees largely agree on the D-Block, legislation incorporating these proposals likely will pass in 2012.

FCC to Address 700 MHz Handset Interoperability; No Indication on Handset Exclusivity Reform.  In authorizing the assignment of Qualcomm’s 700 MHz licenses to AT&T, the FCC committed to initiating a proceeding on the interoperability of Wireless (broadband) devices operating on frequencies in the 700 MHz band. Smaller wireless carriers have secured licenses to operate on the Lower 700 MHz band frequencies in some rural and urban areas, but not nationally. Without interoperability at least with AT&T (Verizon’s C-Block 700 License is in the Upper 700 MHz band), these carriers may be forced to sell or surrender their 700 MHz spectrum.

Another overarching issue is whether the FCC will review exclusivity arrangements between device manufacturers and the major Wireless carriers. Handset exclusivity was the single claim Judge Huvelle allowed Sprint to pursue in connection with its antitrust suit against the AT&T-T-Mobile merger. Longstanding agency indifference toward this issue contrasts sharply with the FCC’s interest in making Wireless broadband available throughout the country. As demonstrated by the iPhone, advanced devices drive Wireless broadband service adoption. 

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The news has not been good for wireless start-up LightSquared as recent reports suggest it is running out of cash as key Federal agencies and departments maintain the company has not demonstrated that its proposed Wireless service will not interfere with critical GPS applications.

 Background

LightSquared started 2011 by celebrating the FCC’s decision to grant the company a waiver to use its L-Band Mobile Satellite Service spectrum for a next-generation terrestrial wireless broadband network.  Absent a waiver, LightSquared would only be permitted to use terrestrial base station transmitters to provide a service that was ancillary to a mobile satellite offering — for example, to fill in dead spots in satellite coverage caused by large buildings in urban areas.  The FCC’s strong interest in deploying Wireless broadband services drove the favorable FCC decision.

LightSquared seemed poised to become a major player in the Wireless broadband market after Sprint Nextel signed on as a partner and Airspan announced that it would use LightSquared’s spectrum for utility smart grid applications.

GPS Interference Concerns Persist

The celebration proved premature.  LightSquared’s L-Band spectrum is adjacent to the spectrum band relied on by millions of GPS devices, most of which have been engineered to be extremely sensitive in order to accurately receive and decode a geolocation signal sent from satellites circling thousands of miles above the Earth.  As a result, even though LightSquared does not actually transmit in the GPS spectrum band, its terrestrial network signal may appear millions of times stronger to a GPS device than an intended satellite transmission — potentially overwhelming GPS reception.

The FCC waiver was conditioned on LightSquared’s ability to show that its proposed network would not cause interference to GPS receivers.

Unfortunately, testing conducted over the summer of 2011 resulted in significant GPS interference prompting LightSquared to revise its deployment plans and causing the FCC to request additional testing and information about the system.

Boomberg is reporting that the leaked preliminary results of recent government testing show that LightSquared has not solved interference concerns and its proposed network could cause interference to “75%” of GPS devices.  In particular, the FAA found that LightSquared’s signals interfered with certain flight safety systems.  Potentially most damaging is the report’s conclusion that “No additional testing is required to confirm harmful interference exists,” indicating that LightSquared may be reaching the end of its rope.

For its part, LightSquared reacted strongly to the leaked results.  In a Press Statement from Martin Harriman, Executive Vice President of Ecosystem Development and Satellite Business, the company characterized the leaked government testing as “illegal”, called for “a full investigation” into the leak, and questioned the motives of those who discussed the information with the press.

LightSquared’s outrage over alleged leaks still pales when compared to the barrage of critical filings submitted to the FCC this year from diverse industries that rely heavily on GPS, such as electric utilities and agricultural equipment manufacturers.  Of course, the FCC will have the final say and indications are the Commission intends to act on the testing results sometime next year.

As reported recently in Business Insider, however, LightSquared is apparently staring at a looming cash flow problem, calling into question whether the company can survive long enough to see the FCC process through to a successful conclusion.

In response to the mounting opposition, LightSquared is adopting a more aggressive tactic against GPS interests.  On December 20, 2011, LightSquared filed a Petition with the FCC requesting a declaratory ruling that GPS users and manufacturers lack standing to complain about interference from LightSquared’s operations; GPS receivers have no right to adjacent band interference protection;  and GPS manufacturers should bear the costs of ensuring that adjacent band signals do not interfere with GPS devices.

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In late November, AT&T and T-Mobile withdrew their application for FCC’s consent to their proposed merger because of an anticipated adverse decision signaled by FCC Chairman Genachowski, opting to focus their efforts on the Department of Justice’s antitrust case.  The carriers’ apparent assumption was that the FCC would surely grant a re-filed application consistent with the court’s favorable ruling.

As it initiated the process, AT&T believed its strategy of orchestrating apparent support from every imaginable interest group, conducting a relentless media campaign, leveraging its influence in Congress, and playing to the FCC’s intense interest in broadband deployment would overcome any concerns over market concentration in the increasingly important Wireless market.  AT&T is beginning to grasp that critical decision makers do not share its insular belief of inevitable success.

On December 9, 2011, as reported by Grant Gross, U.S. District Judge Ellen Segal Huvelle responded empathetically to DoJ’s request to stay the litigation or dismiss the lawsuit without prejudice until such time as AT&T and T-Mobile re-file their application with the FCC.  DoJ maintains that the carriers’ withdrawal of their application from the FCC, there is no active deal warranting the court’s deliberations.  Judge Huvelle reportedly has directed DoJ to file a motion in support of its position next Tuesday and scheduled a hearing for December 15, 2012.

As reported by Bloomberg’s Tom Schoenberg and Sara Forden, with apparent equal measures of candor and arrogance, AT&T’s trial counsel responded to DoJ’s position by advising Judge Huvelle “[w]ithout a speedy court case, the deal is dead….It’s either a trial on our timetable, or there’s no trial at all.”  While AT&T may still prevail, it is so very refreshing that the FCC and DoJ, respectively, have taken a hard look and decided to stand up to AT&T.  Judge Huvelle should reject AT&T’s latest demand that the DoJ’s lawsuit be conducted “on [AT&T’s] timetable” or not at all.

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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 the FCC’s rules, AT&T may not be in a position to withdraw its application.  On its Public Policy blog, AT&T contests this assertion, maintaining it withdrew the application prior to the FCC’s vote on the hearing designation order consistent with [Section 1.934(a)(1) of] the Commission’s rules.  An FCC clarification may be forthcoming.

AT&T and Deutsche Telekom elected to focus on the DoJ antitrust lawsuit, minimizing the consequences of an adverse FCC order and, apparently, believing the FCC will grant a revised application after a favorable court decision or approved settlement. An article by Bloomberg’s Scott Moritz in and Serena Saitto projects that AT&T is preparing a much more aggressive settlement offer in terms of divesting T-Mobile spectrum and customers.

In my view, the proposed merger, with or without spectrum and customer divestitures, remains adverse to the interests of enterprise customers.  AT&T and Verizon Wireless dominate the enterprise Wireless market.  Substantial acquisitions of spectrum or customers or both by AT&T—from a current competitor—will only raise the competitive challenges facing other Wireless carriers, individually or collectively, to compete against the two major carriers in this market segment.

The same is true for the consumer postpaid market in which sales of sophisticated smart phones and tablets are bundled with service.  In light of the FCC’s tolerance of exclusive handset arrangements between Wireless carriers and handset manufacturers, any further concentration of spectrum and customers in AT&T undermines competition in this market segment.

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Do you know whether and how your websites use “cookies” or other technologies to collect information from users and/or target advertising?  Do you know what information is being collected and how it is being used?  The Federal Trade Commission has endorsed an online “Do Not Track” mechanism, and recent inquiries, investigations, and lawsuits relating to the use of cookies and other technologies online have put the issue in the spotlight:

  • Sen. Jay Rockefeller, who introduced a “Do Not Track” bill earlier this year, plans to hold a hearing on Facebook’s use of cookies following a USA TODAY report.  Rockefeller sent letters to Visa and MasterCard last month about their information collection practices.
  • Reps. Ed Markey and Joe Barton, who introduced a “Do Not Track Kids Act” earlier this year, have also made inquiries to Facebook about its information collection practices.
  • The FTC is reportedly close to reaching a settlement with Facebook over allegedly deceptive privacy practices.
  • Earlier this month, the FTC entered into a consent agreement with the online advertiser ScanScout regarding claims that consumers could opt-out of targeted ads by changing their browser settings to remove or block cookies, when in fact it that was not possible with flash cookies.
  • Several private lawsuits were brought in 2010 and 2011 relating to the use of tracking technologies on websites, which alleged violations of various federal and state laws.

It may be some time before a comprehensive federal privacy law is adopted, but we can expect that the FTC will continue to exercise its authority over unfair and deceptive practices and plaintiffs will continue to pursue privacy-related lawsuits.  With this evolving landscape, it is important for a company’s review of its privacy policies and information collection practices to encompass not only personal information, but also information that has historically been deemed “non personal” in nature (e.g., pages viewed, referring websites, and the like).

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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 disputes under services agreements under mandatory arbitration clauses.

The Wall Street Journal announced recently that a “Glut of Criminal Cases Puts the Squeeze on Civil Case.”  The dirty little secret is out of the bag.  Simply put, if you have a case in federal court, you’re at the end of the line behind all of the criminal prosecutions and the other civil litigants who got there first.  According to the Journal, criminal prosecutions in federal court have increased 70% in the past ten year.  Criminal cases have priority over civil cases so as criminal cases increase, judicial time available for civil cases decreases.  Meanwhile, almost 300,000 new civil cases were filed in federal court in 2010.  While the workload has increased, the number of judges is falling because there is a 9.5% vacancy rate.  The end result is that the median time to trial in federal courts in 2010 was almost two years, which means that 50% of the trials took more than two years to begin.  This increasing delay for civil litigation probably is occurring in the state courts as well.

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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.

In some respects, these two companies face greater challenges today as AT&T and Verizon control so much of the market for special access services in addition to having extensive portfolios of voice and data services.  The following are “keys for success” for CenturyTel and Level 3 in pursuing enterprise Wireline customers.

Keys for Success for CenturyTel

  1. Within its local service territories, leverage local services and special access facilities to deliver aggressively priced bundled services.
  2. Focus on enterprise customers having substantial operations in the “Qwest states.”

Keys for Success for Level 3

  1. Leverage its strengthened position as a Tier 1 ISP.  Focus on the most portable enterprise data service: high speed dedicated Internet access services.  This is consistent with its commitment to content delivery service.
  2. Focus on international and rest-of-world services.  As a result of the takeover of Global Crossing, Level 3 has substantial international facilities.

Common Keys for Success

  1. Partner with CLECs and CAPs, including the major cable operators (out-of-region for CenturyLink).  Minimize dependencies on Verizon and AT&T, however challenging.
  2. Commit to VoIP.  The FCC’s USF Order establishes a regime of declining terminating access rates and migration to bill and keep.  Enterprise customers increasingly accept SIP trunking.
  3. Position yourselves as secondary MPLS carriers.  Enterprises are looking for diversity/redundancy at critical locations.
  4. Deliver a positive customer experience.  Strengthen sales, offer management, and provisioning  processes.  When they choose to do so, AT&T and Verizon make very strong impressions in these areas.  Implement best in class billing and “help desk support.”
  5. Adopt more balanced standard services agreements.  The established carriers’ approach creates another hurdle for marketplace acceptance.

Enterprise Customers: Consider the Big Picture

Level 3 and CenturyLink must demonstrate a commitment to enterprise customers.  For the near term, wholesale replacement/displacement of AT&T or Verizon by either Level 3 or CenturyLink is neither likely nor unrealistic.  On the other hand, these carriers warrant consideration for no other reason that continuous reinforcement of a virtual duopoly is not desirable.  Enterprise customers should extend RFPs to these carriers other than as a formality or as straw-man competitors and consider procurement strategies other than the “winner take all” approach.

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While the text of the FCC’s Report and Order and Further Notice of Proposed Rulemaking on universal service and intercarrier compensation reforms (“USF Order” or “the Further Notice,” as applicable) has not been released, the Executive Summary  of the agency’s decision allows us to project the more prominent “winners” and “losers.”

The Winners

Verizon Wireless, AT&T (Mobility), Sprint and SIP-Based Voice Services Providers.   These carriers will benefit as bill-and-keep replaces the current intercarrier compensation (“ICC”) scheme.  These services providers will realize substantial savings as terminating switched access rates decline progressively during the transition to “bill and keep.”  For the largest price cap incumbent local exchange carriers (“Price Cap ILECs”), the transition period is 6 years; for the rural ILECs subject to rate of return regulation (“Rural ILECs”), the transition is 9 years.  For local CMRS traffic terminating on the local ILEC’s network, bill-and-keep becomes the default pricing rule.

Mobile Wireless Broadband Providers.  Wireless competitive eligible telecommunications carriers (“ETCs”) must now support voice and broadband services.  Initially, the new Mobility Fund will provide mobile wireless broadband providers up to $300M in “one-time support” for deployment of 3G/4G services in census blocks in which wireless broadband service is not available.  This funding will be made available through a reverse auction tentatively set for the 3rd quarter of 2012.  Beginning in 2012, up to $500M will be available for annual support to mobile wireless broadband providers.  

Wireless Satellite Broadband and Unlicensed Wireless Broadband.   Taking a new approach,  the USF Order sets aside up to $100M annually for broadband satellite and unlicensed wireless broadband services to be provided to the most remote areas of the nation.  The rules governing the eligibility and service obligations for these providers will be established in the Further Notice.

The Rural ILECs.   For years, the Rural ILECs were the ‘whipping boys” for USF and ICC reform.   Even though the USF Order adopted numerous reforms relative to these carriers,  the Rural ILECs demonstrated their substantial investment in rural broadband infrastructure and the significant adverse impacts to customers and non-USF funding sources if radical changes to current support levels (particularly on top of ICC reforms) were implemented.  Until 2017, Rural ILECs will receive up to $2B annually in support, approximating current annual USF support.

The Further Notice will review the Rural ILECs’ current 11.25 % authorized rate of return and funding approaches under the Connect America Fund (CAF)—the broadband focused successor to USF.  To mitigate reductions in ICC payments but taking into account ongoing declines in ICC revenues, Rural ILECs will be allowed to recover some lost ICC revenues through a transitional Access Recovery Charge (“ARC”) mechanism, authorizing limited increases in subscriber line charges (“SLCs”) and supplemental funding from the CAF, if justified.

Price Cap ILECs (Principally Verizon, AT&T, CenturyLink, Frontier and Windstream).  The FCC froze USF support at current levels for these carriers, offering them the opportunity to pursue additional one-time funding to deploy broadband infrastructure in unserved areas of their service territories.  As with the Rural ILECs, continued support for these carriers (in rural areas) will reflect historical declines in ICC revenues which may be supplemented through the interim ARC mechanism described above.

Federal Communications Commission.  The FCC made a number of challenging policy decisions to promote broadband development in under- and un-served areas of the nation.  The agency deserves credit for addressing USF and ICC rules and policies in a comprehensive fashion.

Continue Reading Winners and Losers under the FCC’s USF Order

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The FCC has announced it will adopt a Report and Order and Further Notice of Proposed Rulemaking on Thursday October 27, 2011,  approving significant changes to its Universal Service Fund program and its rules on intercarrier compensation.  In this entry, we project several outcomes for this proceeding.

Broadly speaking, we believe the “ABC Plan” offered by the largest Wireline carriers and the “consensus framework” offered jointly with the rural carrier associations submitting the RLEC Plan will influence most strongly the outcome of the proceeding.  Among those entities most likely to be disappointed will be rural wireless carriers that benefited as exempt telecommunications carriers (“ETCs”) and state regulators.

USF Program Funding.   Based on the Notice of Proposed Rulemaking, the FCC appears committed to maintaining the aggregate USF funding at $4.2 Billion annually, subject to modest increases for inflation.  The suggestion of the Rural LECs that high speed interstate access service be subject to USF assessments likely will not be adopted at this time.

Intercarrier Compensation.  The FCC is expected to adopt a series of steps that, over a number of years and with safeguards, will move interstate switched access, reciprocal compensation and (in conjunction with state regulators) intrastate switched access rates toward a uniform termination rate of $0.0007 per minute.  Verizon, AT&T and Sprint likely will reap substantial cost savings for their Wireless and interexchange Wireline businesses.  In addition, we expect the FCC will require interconnected VoIP service providers to pay terminating access rates or reciprocal compensation, if local, to terminate calls on the PSTN.  Rate increases for heavily discounted residential local Wireline services and increases in subscriber line charges (“SLCs”) are contemplated, as well.

USF Reforms.  The proposals to reform (lower) ETC funding levels, curb phantom traffic abuses, address traffic pumping, and limit recovery of certain expenses and capital investments of rate of return carriers likely will be adopted.  An overarching consideration is the extent to which elements of the current High Cost Support program will be supplanted by the broadband- focused “Connect America Fund.”  Another is which subjects will be “punted” to the Further Notice of Proposed Rulemaking for resolution.

Other major issues include the extent of interim support to rate of return carriers—as intercarrier compensation levels are reduced, monies for the proposed mobility fund, funding levels for near term broadband investment, the revised rules for ETC support, and whether the FCC will implement reverse auctions to grant some USF/CAF funds.   

For those interested, information for online access to the FCC’s October 27 Open Meeting is available at http://www.fcc.gov/live.