Get Ready for the Collapse of Traditional Access Charges

Posted: 1/2004

Get Ready for the Collapse of Traditional Access Charges
By Allen Long

Over the last two decades, changes
in the telecommunications industry have strained the traditional access charge
structure to the breaking point. This structure is likely to collapse during the
next two years, and savvy service providers should prepare now for this event.

In the 1980s, local phone companies began charging
long-distance carriers for access to customers via their local lines. Today, a
variety of factors is putting pressure on the traditional access charge
structure. Consider the following:

• Local and long-distance phone companies have become total
  telecom providers, offering local and long-distance services that are not
  distance-sensitive.
• The FCC doesnt want to subject DSL, cable modem and
  VoIP services to traditional access charges because its priority is to stimulate
  growth of broadband services.
• Some state public utility commissions view VoIP services
  as telephone services (instead of information services, which are exempt from
  access charges). They say VoIP service providers must be certified as phone
  companies, provide emergency 911 services and pay traditional access charges.
• Some VoIP service providers advertise themselves as phone
  companies but claim they provide unregulated information services.
• VoIP service providers have asked the FCC to preempt state
  regulation of their services so they will be exempt from paying access charges.

In March 2002, the FCC ruled cable modem service is an
information service; therefore, cable television companies are not required to
open their networks to other industry service providers. However, the 9th U.S. Circuit Court recently overturned this
decision, meaning cable television companies must open their broadband networks
to other industry service providers while local phone companies are exempt from
this requirement.

The FCC also indicates it intends to treat wireless and
wireline broadband service offerings as information services, thereby exempting
them from regulation and access-charge payment obligations.

If the FCC, state PUCs and U.S. federal courts continue to
deal with the access issues mentioned above in a piecemeal fashion, uncertainty
about access charges and network interconnection is likely to continue for
years. Investors dont like uncertainty, so the growth of broadband services
may suffer.

Recognizing the need for a comprehensive resolution of access
issues, the FCC, in April 2001, opened an intercarrier compensation docket and
began encouraging various telecom service providers to develop a comprehensive
access solution. The timing is right for local, long-distance and other service
providers to use this docket to forge a global access solution that can be
adopted by the FCC. Under this scenario, traditional access charges could be
replaced by a new global access solution within the next two years.

Regardless of which solution emerges, local phone companies
are likely to experience a reduction in access charges, which currently provide
a significant portion of their revenue. For instance, the FCC reports total
access revenue in 2001 comprised nearly 20 percent of telecom-related revenue
earned by RBOCs. The reverse side of this coin is long-distance carriers are
likely to experience a decrease in access charges, which comprise a significant
portion of their costs. For example, access charges accounted for about 36
percent of AT&Ts total operating expenses for the quarter ending Sept.
30, 2003. During this time, AT&T paid nearly $3 billion in access charges.

WHAT SHOULD PROVIDERS DO?

Local Phone Companies. Here are
strategic questions local phone companies should ask themselves about how to
best address the revenue and profit shortfalls theyre likely to experience:

• How can we increase revenue and retention by better
  targeting and serving high-value customers?
• What are the most profitable, high-demand services we
  should be developing? For which new services could we charge a premium? What can
  we do to differentiate these services in a significant way? Are any alliances
  required?
• What are our opportunities to generate additional revenue
  from existing products and services via improved marketing?
• How can we optimally position our brand and services
  relative to competitors for acquiring and retaining high-value customers?
• What improvements can we make to sales and customer
  service processes to improve customer acquisition and retention?
• How might we further lower our costs?
• What opportunities do we have to gain access to new
  customers, new products and services, new revenue, and new sources of
  differentiation via acquisitions and strategic alliances?

With long-distance carriers weaker than ever, local companies
could consider an acquisition strategy, particularly if it allows the carrier to
offer sophisticated global voice and data services to Fortune 500 companies.
This kind of decision should be matched to the companys strategic vision.

Local carriers also should explore investments that will lower
network costs or improve network capabilities. They should ask themselves
whether they could make these investments to accelerate the transition from
circuit-switched networks to lower-cost IP networks.

Long-Distance Carriers. Although the
FCC likely will place some pressure on long-distance carriers to pass some
interstate access charge reductions on to their customers via lower prices,
long-distance carriers still are likely to experience financial benefits from
access charge reductions. Here are some strategic questions long-distance
carriers should ask themselves about how to best use these financial benefits:

• Since local and long-distance services are blending into a
  single, any-distance service, what investments can we make to enhance our local
  service capabilities?
• Since long distance is the most commoditized telecom
  service, what investments can we make to bundle it with high-growth services,
  such as wireless and broadband?
• Because there is significant customer dissatisfaction with
  the quality of wireless services and a resultant high degree of customer churn,
  how realistic is it that consumers would buy wireless services bundled with
  long-distance and/or local service that we provide?
• The intensity of competition has made us among the most
  sophisticated telecom players in terms of marketing. How can we make investments
  to maintain or further this competitive advantage?
• We have enjoyed a reputation of being more savvy at data
  services than local phone companies. How can we make investments to use this
  advantageous position?
• Along similar lines, how can we best use our global
  networks to compete against local phone companies? What investments may be
  required?

Commoditization has placed long-distance carriers in a weak
position vs. other telecom service providers. Long-distance carriers could use
the financial benefits from reduced access charges to dress themselves up for
sale to local telephone companies.

By addressing the relevant questions posed to the local phone
companies, long-distance companies should eye investments that will increase
revenue and profits and/or lower costs.

Telecom service providers that do the best job of quickly
addressing these questions and determining their customer, financial and
competitive positioning implications will be the winners in the pending
restructured accesscharge environment.

PHONE+ invites you to air your views.
Call us at +1 480 990 1101 or e-mail [email protected]