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The broad acceptance of Multi-Protocol Label Switching (“MPLS”) service by enterprise customers warrants a “fresh look” in negotiating three important aspects of Wireline services agreements.  The discussion on service provider transitions applies to Wireless services agreements, as well.

1.  Addressing Chronic Service Issues.  The principal benefits of MPLS service are “any-to-any” connectivity, scalability and ease in adding or deleting sites.  Readily available CPE supports voice-over-MPLS.  These benefits are maximized when MPLS is offered by a single carrier, although multi-national firms may maintain region-specific MPLS networks and some large enterprises maintain several MPLS networks (each provided by a different carrier) for redundancy purposes.

A glaring weakness in carriers’ standard services agreements is the failure to address reasonably the risk of chronic service problems in an MPLS environment.  The carriers’ standard (and antiquated) “partial discontinuance” clauses are limited to problems associated with services to a single customer location; potentially relevant for high volume call centers utilizing inbound toll free services, but not an MPLS network.  Even though Service Level Agreements (“SLAs”), such as mean time to repair and site availability are customer-oriented, the metrics remain largely site-specific.

If  MPLS service to priority customer locations (data centers or corporate offices) are subject to chronic outages, the enterprise’s businesses and processes will be impacted severely and adversely.  The standard carrier insurance policy (to be purchased by the customer) of redundant ports, access and routers is not the answer.  The burden should not be shifted to the customer to insure that the carrier delivers the agreed-upon level of service.  In light of the limitations on potential damages demanded by carriers and the risks associated with chronic service issues, a tailored remedy or escalating remedial responses are warranted to more equitably address the risks borne by MPLS customers.

Continue Reading Three Critical Considerations for Enterprises When Procuring MPLS Services

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The FCC’s USF/ICC Reform proceeding continues to generate a steady stream of ex parte meetings between FCC staff and interested parties.  This is understandable.  The redistribution of  $4 to $5 billion annually in Universal Service Fund/Connect American Fund (“USF/CAF”) support (“Support”) and major changes in intercarrier carrier compensation (“ICC”) are at stake.

On August 3, 2011, the FCC released a Public Notice requesting comment on a number of matters, including three in-depth “plans” proposed by (1) State Members of the Federal-State Universal Service Joint Board (“State Plan”), (2) the proposals put forward by the Rural Associations (“RLEC Plan”), and (3) the “America’s Broadband Connectivity Plan” filed on July 29, 2011, by six Price Cap Local Exchange Carriers (the “Price Cap LECs”), including Verizon and AT&T (“ABC Plan”).  Comments on issues raised in the Public Notice are currently due on August 24, 2011.

The Joint Letter.  As the ABC Plan was filed, the six Price Cap LECs and the Rural Associations submitted a “Joint Letter” that reflects a series of compromises on major USF and ICC reform proposals; sets separate tracks for ICC/USF reform implementation for Price Cap LECs and Rural Rate of Return Carriers (“RLECs”), respectively; and emphasizes that the proposals in the Joint Letter should be viewed by the FCC as an integrated package. The Public Notice also elicits input on the Joint Letter.

USF Reform.  The prominent compromises in the Joint Letter include agreement that VoIP services that originate or terminate on the PSTN shall be subject to originating and terminating access charges; a reduction in the RLECs regulated interstate rate of return to 10% for purposes of calculating CAF/USF support (“Support”); a “budget” of $4.5 billion per year for Support beginning in 2012 and ending in 2017, plus $300M annually for the new Mobility Fund.  Support for RLECs would be $2.0B per year, including potential increases of $50M per year to compensate for access restructuring, to promote broadband buildout and to recover existing investment in broadband-capable plant. The Price Cap LECs would receive $2.2B annually in Support.  If needed, AT&T and Verizon would forego Support in their service areas for two years to meet all other Support and ICC restructuring obligations.  In the fifth year, the FCC would reassess the program.

ICC Reform.  The access restructuring proposal consists of two paths toward a uniform ICC rate of $0.0007.  For the Price Cap LECs, the reductions would be phased in over 5-years; for RLECs the phase-in period would extend for 8 years.  These glide paths are subject to the caveat that  “[t]o the extent . . . sufficient funding is not expected for any reason to be available to provide the necessary levels of high-cost support and/or intercarrier compensation restructuring for carriers in any given year, any and all reductions in intercarrier compensation rates shall be deferred until such sufficient funding is confirmed to be available.”

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The Public Notice reflects the FCC’s commitment to making an informed decision.  While many parties do not support elements of the Joint Letter, its submission reflects emerging areas of consensus on highly contentious issues, providing important reference points as the FCC staff crafts its decision.

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One trend in recent months is an increase in class action lawsuits and government investigations following a major data breach that compromises personal information.  This serves to remind companies not only of the repercussions of a data breach, but also the importance of taking stock in the data they collect and share and integrating privacy and data security into their business practices.  As companies outsource activities to third parties and move to cloud-based services, it is particularly important to build privacy and data security considerations into contracts with service providers.

While the nature of the business and type and sensitivity of the information that is collected and shared with service providers will dictate the specific requirements to be imposed, it is important to contractually require providers to implement and maintain appropriate administrative, physical, and technical safeguards, share information regarding their security practices with the company, and notify the company of any incidents that do or could affect the security of personal information.  It is also important to review the provider’s privacy and data security programs, policies, training materials, and data breach response procedures.  Further, access to and use of sensitive information should be limited to individuals with a need for the information to perform the services.

Compliance with the various federal and state laws and industry standards (such as the Payment Card Industry Data Security Standards) is another key consideration.  The global privacy landscape is quite different from the U.S. legal framework, so companies must also be mindful of international laws as they outsource activities to other jurisdictions.

In short, privacy and data security should be considered at every step as companies expand their activities and outsource functions to third parties.

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For over a decade, enterprise customers, 2nd tier interexchange carriers (“IXCs”), and many Wireless carriers have argued that special access rates are inflated, priced far above “just and reasonable” levels as required by Title II of the Communications Act. Unlike various broadband and spectrum initiatives, special access reform has garnered modest media attention and is not a “Top 10 item” on the FCC’s “Broadband Agenda” (actually, its No. 39). On the other hand, the FCC’s priorities beyond the AT&T-T-Mobile merger and USF/ICC reform can change quickly.

Special Access Services. Special access services are dedicated Wireline services (physical circuits, not virtual services) that connect a customer’s premise to its Wireline interexchange carrier’s network and are purchased in high volumes by Wireless carriers for connecting cell sites to mobile switching centers.   DS1 and DS3 are the most common special access services. Rates for special access services are itemized in services agreements between IXCs and enterprise customers.  Large enterprise customers have hundreds and, sometimes, several thousand locations, each having its own special access circuit linking the sites to the “corporate network.”   These customers include retailers, financial institutions, state governments and the Federal government.  Wireless carriers have thousands of cell sites.  Special access services are also extensively used by educational and healthcare facilities as “last mile” connectivity to their Internet access providers.

Special Access Providers. The principal providers of special access services are the regulated local affiliates of AT&T, Verizon, and CenturyLink (now that it owns Qwest) and other incumbent local exchange carriers subject to FCC price cap regulation (‘the price cap LECs”).  AT&T, Verizon, CenturyLink and all other IXCs acquire special access services principally from the price cap LECs. While there is some competition for special access services in urban areas, the extent of competition is limited.  In recent years, AT&T and Verizon have managed to fend off efforts to lower special access rates, vigorously maintaining that special access services are priced competitively.  According to Verizon’s recent 10-K Report, special access service is its only wholesale service generating substantial revenues and demonstrating strong demand—5% annual growth rates in recent years.

Advocates for Lower Rates. Sprint, the Ad Hoc Telecommunications Users Committee, smaller IXCs and numerous Wireless carriers are among the members of the most recent informal coalition Nochokepoints.org advocating reform of special access pricing.  Prior to becoming AT&T’s merger partner, T-Mobile was part of this coalition.

Apart from the obvious benefit of lower rates for a ubiquitous service used throughout our economy,  Wireless carriers—other than AT&T and Verizon—would secure needed cost savings, supporting their efforts to build out 4G networks.  Smaller IXCs, such as Level 3 and tw telecom, could compete more effectively for business from the largest enterprise customers.  In addition, the competitive advantage of AT&T, Verizon and Century Link (special access is a revenue source for these mega-carriers, not solely an essential cost ) over other IXCs would be mitigated to some extent.   Up to several $ Billion annually are at stake.

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Almost every domestic telecommunications carrier (Wireline and Wireless) are actively engaged in an FCC proceeding reassessing the Universal Service Fund (“USF”) program and the current intercarrier compensation (“ICC”) framework (“the NPRM”).  The breadth of issues and range of opinions approximate those being expressed in the contentious debate in Washington on the Federal debt.

In the NPRM, the FCC proposes to shift USF payments from certain recipients and current USF programs to fund the initial phase of the Connect America Fund (“CAF”) that would support broadband service, as opposed to voice services, as initially proposed in the National Broadband Plan.  Under the interim CAF program, the reallocated USF funds would be targeted for broadband deployment in unserved areas.  Long-term, CAF would become the principal, if not exclusive, USF program.

USF Reform.  The FCC has proposed a series of changes in existing USF programs for the purpose of shifting some monies historically paid to the RBOCs, major Wireless carriers, other mid-size incumbent local exchange carriers such as Frontier, and small, privately-owned or cooperatively-owned rural local exchange carriers (“RLECs”).  Some proposals such as those intended to limit “traffic pumping” and “phantom traffic” and certain investments by RLECs have received broad support.  Another proposal to limit subsidies paid to “competitive eligible telecommunications carriers,” principally wireless carriers serving rural areas, is also widely supported.

The “saved” monies would then be made available through a “reverse auction” under which entities would “bid” for CAF payments to construct qualified broadband networks in unserved areas. The low bidder would receive the CAF payment.  The definition of “unserved areas” and the nature of qualifying broadband networks, i.e., minimum uplink and downlink speeds, are also being debated.

Other proposals that would impact the RLECs are more challenging or draconian, depending on one’s perspective, such as a national cap on per line support.  Coming out of “left field,” House Republicans suggested this past week that USF funds could be used for deficit reduction.

Continue Reading FCC and Industry Take A Hard Look at Universal Service and Intercarrier Compensation

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Online hacking, lost or stolen laptops, and improper disposal are just some of the ways that personal information that a company collects from customers and employees can get into the wrong hands and be used to commit identity theft.  There are a variety of laws that dictate how companies must respond to a data breach, and the latest Ponemon Institute U.S. Cost of a Data Breach report shows that costs relating to data breaches continue to rise.

While a company’s practices will vary depending on the type of information that is collected and the nature and scope of a breach, below are some steps companies can take before a breach occurs and after they experience a breach to help facilitate a timely response and mitigate the impact:

Before a Breach Occurs:

  • Take stock of the information that you collect, store, and share.
  • Assess the security measures in place and identify risks.
  • Create company awareness.
  • Review service providers’ policies, practices, and contracts.
  • Understand the applicable laws.
  • Adopt a written data breach response plan.
  • Determine available remedies in the event of a breach.
  • Identify law enforcement and agency contacts.

After a Breach Occurs:

  • Act promptly!
  • Investigate the nature and scope of the breach.
  • Identify the type of information accessed or acquired.
  • Determine which laws are triggered.
  • Assess who must or should be notified, when, and how.
  • Decide what remedies will be offered.
  • Document responsive actions taken.
  • Anticipate regulatory investigations and/or litigation after a major breach.

Given the variety of ways that personal information is collected, stored, used, and shared, the prevalence of data breaches, and an increase in agency enforcement and litigation relating to companies’ privacy and data security practices, it is critical to have a plan in place before a breach occurs, then conduct a thorough investigation and promptly respond if and when you experience a breach.

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The FCC’s recently released Fifteenth Report on Wireless Competition  reflects positive change at the agency.  Under Chairman Julius Genachowski, the FCC is increasingly looking to more economic analyses of markets and competition and declining to endorse the conclusions of the major services providers that Wireless is competitive or simply restate the merits of longstanding policies. This is particularly important as consumers, small businesses, major enterprises and state governments are increasingly dependent on Wireless services.

The Fifteenth Report declines to conclude that Wireless services are subject to effective competition, emphasizing that Wireless competition in less populated areas of the United States remains a major concern.  Accordingly, the document poses a challenge to approval of the AT&T-T-Mobile merger.  The report’s charts and analyses enable instant snapshots of how various metrics of Wireless competition would be impacted negatively in the event the merger is approved.

For all of its strengths, the Fifteenth Report fails to connect “several of the dots” of the FCC’s  Wireless policy that adversely affects Wireless service and competition in rural areas.   For almost eighteen years, the FCC has assigned spectrum for commercial Wireless service principally though spectrum auctions.  The revenue generation objective underlying spectrum auctions has reinforced the concentration of desired spectrum resources among major Wireless services providers.

Over time, the licenses for spectrum suitable for commercial Wireless voice and broadband have been auctioned for increasingly large geographic areas.  The licenses extend across expansive Regional Economic Area Groupings (“REAGs”)  or the entire country.  Only the largest carriers or consortia with the deepest pockets have the resources to bid for these licenses, as in the recent AWS-1 and 700 MHz auctions.

While the fiscal imperative underlying spectrum auctions overwhelms the possibility for more enlightened approaches of spectrum licensing for commercial services, the FCC still could promote more aggressive deployment of Wireless broadband services in rural areas, over and above the proposals in the FCC’s Intercarrier Compensation/Universal Service Reform proceeding.  Foremost, the FCC should enhance the likelihood that auctioned spectrum will be utilized in less densely populated areas of the United States.  The change in approach should be based on a policy of “use it, lease it or lose it.”  This policy would dovetail with the FCC’s recent decisions promoting wireless roaming arrangements.

Spectrum auction winners should be compelled to build out networks throughout their licensed areas during the term of their ten-year licenses.  FCC construction requirements are based largely on population coverage tests.  While the FCC has begun to address these concerns with its construction requirements for the 700 MHz band, more is needed.  The reality is that while the most densely populated areas may be served, rural and underdeveloped areas of area-wide licenses are either underserved or not served.

Under a focused “use it, lease it, or lose it” policy, auction winners would be compelled to either (1) build out networks throughout their licensed territories, (2) lease or partition the un-served or underserved portions of these area-wide licenses to rural-focused services providers (who would benefit from the technology ecosystem driven by the major carriers in building out urban areas), or (3) surrender the un-served or underserved geography of their licenses to the FCC.

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It is common practice for major wireless carriers to include an arbitration clause in their standard agreements for enterprise customers.  Unlike the consumer context, there has never been a question about the legality of such clauses. However, the efficacy, and scope of arbitration as the agreed upon procedure for dispute resolution , should always be reviewed in the context of the deal being made.

The first question is whether to agree to an arbitration clause at all; a process of weighing the pluses and minuses.  According to the American Arbitration Association, probably the leading organization in the United States providing arbitration services:  “Arbitration is a time-tested, cost-effective alternative to litigation. Arbitration is the submission of a dispute to one or more impartial persons for a final and binding decision, known as an ‘award.’ Awards are made in writing and are generally final and binding on the parties in the case.”  However, cost-effective does not mean cheap.  First, discovery in an arbitration can be almost as extensive as in court litigation and therefore, as expensive.  The scope of discovery is up to the parties and the arbitrator so one does not know up front how extensive it might be.  Second, the expense of litigation can, at times, induce parties to resolve a conflict they otherwise might.  Thus, one needs to consider whether making litigation type resolution less expensive might, in fact, lead to, more, rather than less, conflict.

Second, arbitration is not necessarily fast.  AAA arbitration can take a year or more depending on the complexity of the case and the actions of the parties.  Again, the possibility of delay can, at times, induce a resolution that might not otherwise come if the matter can be “litigated” quickly.

On the other hand, one undisputed and major benefit of arbitration is confidentiality.  The fact of arbitration, as well as all of the information related to the specific case, can be kept confidential.  In contrast, the fact of litigation as well as court filings and ultimately the facts developed at trial are generally available to the public.  On the other hand, one undisputed disadvantage of arbitration is the loss of appellate review.  Decisions of an arbitrator are not reviewable except in very limited circumstances.  Thus, any mistake or error that an arbitrator may commit generally cannot be reversed.

How one weighs these plus and minuses depends on the nature of the contract being negotiated, the personalities of the parties involved and, ultimately, what is at stake if a breach of the contract occurs.

We will deal with additional issues related to arbitration clauses in future posts.

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Whether hitting a baseball, landing a triple axel on the ice, or striking a header in soccer, timing is essential.  In telecommunications services procurements, timing is a critical consideration even for the largest corporate and government customers looking to realize a measure of bargaining leverage in today’s environment.   While the proposed AT&T and T-Mobile combination raises concerns of a virtual duopoly in Wireless services, many would argue the market for Wireline services for large businesses and state governments is already a duopoly.

At the expiration of multi-year services agreements, inclusive of any rate-stabilized transition periods, a customer’s rates revert to the carrier’s standard, non-discounted rates that are prohibitively expensive. Relatedly, migrating from one services provider to another is always a resource-intensive and time-consuming process for major enterprises and state governments, particularly for Wireline services.  If the RFP process for securing a new agreement is not initiated in a timely manner, the odds for securing a better deal decline dramatically. The  customer typically finds itself in a defensive position, scrambling to negotiate an extension or new agreement with the incumbent carrier just to avoid these rate increases.

The timely release of an RFP maximizes the likelihood of receiving competitive bids because (prospective bidders will see) the customer likely will have sufficient time to (i) evaluate responses to its RFP and select its services provider(s), (ii) negotiate balanced agreements, and (3) transition from the incumbent’s services to those of one or more successors.  If the RFP is released too close to the existing agreement’s expiration,  potential successor carriers either will not bid aggressively or decline to bid altogether.

For Wireline services, the RFP should be released 12-14 months prior to expiration of the current agreement.  On the other hand, for Wireless services, the timing for the RFP has two elements:  (1) the expiration date of the agreement, including any rate stabilized transition periods, and (2) the line-specific commitment periods keyed to minimum period of use for the discounted handsets.

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Achieving cost savings and efficiencies are a constant concern for IT/Telecom staffs.  While cloud computing (“one to many”)  is a relatively new option, more established IT outsourcing arrangements (“one to one”) continue to be offered by entities such as HP.  In evaluating the outsourcing option, one question that sometimes arises is whether Wireline services should be part of the outsourcing deal.

What’s the Value Proposition?   From a service delivery perspective, the IT outsourcer is a “simple reseller” of telecommunications services. The carriers determine what services are offered, operate and maintain their networks, and set SLAs. Other than enhanced route diversity at its data centers, the IT outsourcer cannot improve nor enhance the quality of these services. When Wireline services are secured through the IT outsourcer, the enterprise still bears the disruption and costs of carrier transitions.  Even if not transitioning services,  the enterprise and the IT outsourcer must complete a detailed circuit and service inventory for the carrier to “transfer” the circuits and services to the outsourcer’s agreement with the carrier.

Are the Cost Savings Substantial?  Securing voice and data services from the IT outsourcer may provide cost savings if the IT outsourcer (i) maintains substantially lower rates from the carriers for the term of the outsourcing deal, and (ii) qualifies for the “systems integrator exemption” to the FCC’s Universal Service Fund (“USF”) program.  The potential financial benefit of this exemption is substantial:  for example, the 2nd Quarter 2011 USF contribution factor is 14.9%.  Our experience has been that IT outsourcers’ rates for Wireline services, while initially favorable, do not remain competitive for the duration of the outsourcing agreement.

The IT outsourcer must also recover staffing costs for (i) reviewing/auditing the carriers’ bills, (ii) billing the enterprise for these services,  (iii) placing orders for moves, adds, changes and deletes (“MACDs”) and, generally, (iv) acting as intermediary between the enterprise and the carrier. Yet, enterprise staff typically write checks,  review and audit bills, and initiate or approve requests for MACDs.

Does it Otherwise Make Sense?  The economics of IT outsourcing agreements often dictate contracts having terms longer than five years. To “refresh” both pricing and technology for Wireline services, enterprises should be in a position to issue an RFP for Wireline services every three years. IT outsourcing agreements tend to be more complex; the services and functions are often customized; and negotiations more time consuming.  By contrast, the rates, service descriptions and SLAs in Wireline services agreements are expressed in standard formats.

Weighing All  the Factors.  If the savings offered by IT outsourcers for Wireline services are not substantial and sustainable, neither the value proposition nor the projected benefits support adding Wireline services to IT outsourcing agreements.