What’s in a Name?
Posted: 05/2000
Stacking the Deck
Stakes Grow Higher in Advanced Services Contest
By Kim Sunderland
When entering a gambling town, it’s easy to allow the bright neon lights to suck you into the excitement and overwhelm you with the opportunities–the shows, unrelenting action, money, sex appeal, hype, constant motion and changing players.
The adrenaline rush of playing the hard-core game of poker is worth the stress. Who knows who will have the best hand tonight?
But let’s face it, whenever you totally are pumped up, some air has to be released. Inevitably, a slow leak begins to deflate you, or an agonizing pop explodes your vision suddenly when your hand comes up short.
Expectations aren’t met. The bright lights fizzle or burn out. The sex loses its appeal. The money gets tighter or dries
up completely.
Following this, you place more pressure on yourself to work harder, because the game continues, with or without you.
Smaller telecom competitors know this game all too well. They have their business strategies mapped out to meet the rushing wave of convergence. They hold their cards tight to their chest, hoping no one sneaks a peek. They light their cigars, take long pulls off their longnecks and move with the flow.
Undeniably in this highly profitable game of telecom, the dealer never changes. It holds the deck. It makes decisions on how the game advances, and inevitably, who gets to play.
The dealer, of course, is the FCC
(www.fcc.gov).
Currently, resellers aren’t enthralled with the hand the FCC has dealt them regarding advanced services–the pop-ularly dubbed broadband services that include high-speed Internet access.
Like any other telecommunications provider, resellers want in on the bundled package. They covet provisioning whatever customers need, especially advanced services.
But receiving an invitation to play is tough, leaving many resale executives watching over everyone else’s shoulders. Yet, while many resellers are interested in advanced services for the future, none has taken the plunge, Washington sources say. Resellers claim the reason for this is the FCC hasn’t been dealing a fair game.
The Winning Hand
The long, drawn-out advanced services resale game has spilled over from 1998-99 leaving players worn-out, torn up and tired. Yet, they play on. They drool at the prospect of raking in tall stacks of chips won from the successful deployment of services such as DSL.
This high-stakes game began in August 1998. That was when the FCC raised many advanced services issues in its order and notice of proposed rulemaking (NPRM) addressing deployment of wireline services offering advanced telecom capability.
For instance, the commission proposed an option under which ILECs could establish separate affiliates to provide advanced services that wouldn’t be subject to certain interconnection provisions of the Telecommunications Act of 1996. The FCC’s NPRM sought comment on issues such as whether the Telecom Act’s resale rules applied to advanced services.
In March 1999, the FCC released its advanced services order and a further NPRM, which adopted measures to enable competitive providers of advanced services to deploy new technologies on a faster, more cost-effective basis to consumers. Specifically, the order (Common Carrier Docket No. 98-147) allowed competitors to access space, or collocate, in the incumbent telephone company’s CO. The FCC attempted to strengthen the collocation requirements and to reduce the costs and delays associated with collocation, according to a FCC staffer.
It was at this time the Telecommunications Resellers Association
(www.tra.org) proposed the FCC speed deployment of advanced services by increasing the number of providers offering them. This could be done, TRA suggested, if the FCC required ILECs to supply advanced services to competing carriers at wholesale rates.
The ILECs claimed they had no legal obligation to provide advanced services to competitors at wholesale rates. They predicted such services would be supplied predominantly on a wholesale basis as input components of retail Internet services.
By that point, all the players had pretty much shown their cards.
Reiterating Its Case
In April 1999, resellers said wholesale access to high-speed services specifically would benefit small carriers and ISPs. In a white paper filed with the FCC, TRA backed up that statement, and again pushed its case that ILECs have a legal obligation to offer advanced services at wholesale rates.
The TRA report asserts that competitive carriers and small ISPs that offer high-speed connections would have a huge competitive advantage over those that did not. For most companies, however, the investment required to offer high-speed services using their own facilities is too steep.
“In order to compete in tomorrow’s marketplace, telecommunications carriers must be able to offer customers high-speed voice and data services,” TRA’s president Ernest B. Kelly III said at the time. “But most competitive carriers cannot afford, at least not at first, to provide such services over their own facilities. The most feasible way to offer advanced services is through resale. And that means being able to purchase these services from incumbent phone companies at wholesale rates.”
Kelly also said small ISPs would have a difficult time negotiating the same favorable rates for high-speed services as their giant rivals, such as America Online Inc.
(www.aol.com). But if competitive carriers and small ISPs could partner high-speed services with Internet access, it would help level the playing field.
“These partnerships only will work, however, if competitive carriers can buy advanced services at wholesale rates,” Kelly said.
(www.sbc.com) and Ameritech Corp. (www.ameritech.com). Resellers called the conditions a “back door” effort by SBC, Ameritech and the other BOCs to eliminate the Telecom Act’s open-access requirements by insisting the merged entity provide advanced services through a separate affiliate.
In other words, the affiliate wouldn’t have to make its services available to competitors at wholesale rates or through UNEs. TRA called this “the most troubling” of the 30 some conditions placed on the proposed SBC-Ameritech merger. The association explained that rather than giving competitive carriers and small ISPs greater access to advanced services, the separate affiliate condition would limit their availability.
“It erects a 50-foot brick wall between small telecom carriers and the services they absolutely must have to battle the big guys,” Kelly said. Such a subsidiary would be used to shield these services from competitors, he added.
TRA got angrier in July and called the condition excluding SBC-Ameritech’s advanced services from core provisions of the Telecom Act illegal and contrary to the public interest. In another FCC filing, TRA argued the resale and unbundling obligations for telecommunications services are fundamental provisions of the act and “SBC-Ameritech cannot escape these obligations simply by offering advanced services through a separate affiliate.”
TRA pointed out that Congress fully anticipated this ploy by including provisions in the Telecom Act that impose the same open-access obligations on an RBOC’s “successor” and severely limiting the FCC’s authority to create exemptions. In other words, Congress tried to ensure the FCC “cannot do indirectly what it is prohibited from doing directly,” TRA said in its filing.
Kelly explained that by giving competitors additional but limited access to SBC-Ameritech’s traditional telephone services while denying them access to advanced services, “we could end up with less competition over time than if no conditions were imposed at all.”
Heading Into the Fall
Last September, the FCC issued a new UNEs list that focused on advanced services and switching elements. The commission ruled ILECs must provide access to basic network elements, but aren’t required to offer competitors access to new high-speed data networking systems. The commission ruled that incumbents needed to offer only local loop access and other basic components to competitors. For small carriers, the order was considered a tremendous boost to their ability to compete with the ILECs in most U.S. markets.
Chart: The Long Mile to Advanced Services Resale
A month later, the commission approved the SBC-Ameritech merger, placing the 30 conditions on the deal. Included was a condition that the merged company must form a separate subsidiary to provide advanced services.
Regarding resale specifically, a condition was set that Multi-State Interconnection and Resale Agreements would be offered to telecom carriers that cover multiple SBC and/or Ameritech states. The FCC said this would “prevent unnecessary negotiation costs and delays from being imposed on competitors.”
Resellers called the ruling an about-face from the FCC’s UNEs decision.
“This is the same old story about the FCC not giving full treatment to resale,” TRA’s vice president of industry relations, Steve Trotman, says. “They tossed them a bone and then yanked it away by giving the incumbents a loophole.
“Our major concern right now is that although the FCC ruled that advanced services are subject to resale, they then turned around and offered SBC in their merger conditions a way to get out from under that by way of a separate affiliate,” Trotman explains.
To add insult to injury for resellers, Bell Atlantic Corp.
(www.bell-atl.com) requested a separate affiliate in its FCC filing to merge with GTE Corp.
(www.gte.com). Such a separate affiliate ends up exempting advanced services from resale obligations of statutory discounts because the separate affiliate will provide advanced services, Trotman says.
The direct effect on resellers is that the lack of statutory discounts diminishes the resellable services.
“The issue is who rules the equipment,” TRA’s director of advanced services, Leonard Yanoff says.
For example, “if the separate affiliate owns the DSLAMs in the COs, where normally a reseller would be able to effectively resell a circuit, then there’s nothing for the reseller to resell,” he explains.
But at the time the SBC-Ameritech merger was approved, FCC Chairman William E. Kennard said the commission rejected extreme positions the proponents and opponents advanced.
“These extremes were more alike than different,” Kennard said. “They had in common a failure to move the status quo, to further advance competition in local telecommunications markets.”
According to TRA, the requirement is based on a Telecom Act provision that holds an ILEC subsidiary, which isn’t legally a “successor or assign” of the carrier, exempt from the act’s resale and UNE obligations.
The merger condition presumes the SBC-Ameritech advanced services affiliate is not the company’s “successor or assign,” and therefore, has no obligation to offer services at wholesale rates or through UNEs, resellers say.
But a separate affiliate is a “successor or assign” of the parent company, which should make them subject to the same competitive rules as all other ILECs, competitors complained in their filing.
In explaining TRA’s decision to file the appeal, Kelly said, “the condition establishes a frightening precedent by giving other ILECs the ability to escape their resale and unbundling obligations simply by establishing a separate affiliate to serve as a front.”
Zoom in to 2000
The advanced services resale game isn’t over by a long shot. In March, the FCC and state regulators launched an inquiry and scheduled field hearings throughout the United States to determine how well and to what extent all advanced services are being deployed. Their report is scheduled to be released sometime during the summer.
Sen. Conrad Burns (R-Mont.), the original sponsor of the Telecom Act’s Section 706 on advanced services, has said repeatedly that advanced telecom capabilities are not being deployed to all Americans in a reasonable and timely manner. Burns has told the FCC to “take deregulatory action to remove barriers to deployment by all carriers.”
In a letter Burns wrote to Kennard last year, the senator stated, “The point is investment in advanced telecommunications capability should be a regulatory free zone” in which all carriers compete on the same terms and conditions with minimal regulation.
Burns is joined by other lawmakers who would like to see the FCC drop the ILEC separate affiliate plan to deliver advanced services.
“I fear that such a requirement will impose such inefficiency that it will limit the deployment of xDSL exclusively to businesses and high-income households,” Burns wrote.
Many other lawmakers, however, support the separate affiliate plan in various broadband proposals, which would offer the BOCs substantial relief.
Telecom attorney Mitchell F.
Brecher, a partner in the Washington offices of Greenberg Traurig (www.gtlaw.com) says a related concern exists.
Brecher ponders a possibility that may emerge in the scheduled FCC advanced services deployment report. What if the study shows advanced services are being deployed in a reasonable and timely fashion, but the FCC, in its determination to increase deployment speed, takes action to permit RBOCs to deploy on an interLATA basis?
To the horror of competitors, such a finding would lend FCC support to the pending broadband bills on the Hill, Brecher notes.
Also, TRA files its opening briefs this month with the appeals court regarding the SBC-Ameritech separate affiliate condition. Reply briefs are due in July, and oral arguments are scheduled for October. A court decision is expected in first quarter 2001.
Meanwhile, TRA is contemplating filing another lawsuit on the FCC, in addition to its appeal of the SBC-Ameritech merger condition.
“Services such as xDSL should be made available to resale carriers at statutory discounts,” says TRA General Counsel Charles C. Hunter. This would allow resellers to compete in the market to provide advanced services without installing facilities or other equipment.
“This is problematic,” Hunter adds. “We want to make sure that even the smallest carriers can compete in the xDSL market.”
Brecher wonders if such action is truly a competitive approach.
“Resale only works when it’s a national economic phenomena, such as when a company buys in bulk,” Brecher explains. “It’s not competition to force a company to make services available at wholesale rates. Enacting rules so that someone can make money is not competition, because they wouldn’t do it on their own.”
Even so, resellers are undeterred about what they want. They see SBC’s $6 billion Project Pronto initiative going like gangbusters, and that is cause for them to fret.
Project Pronto would make broadband services available to 80 percent of its customers during the next three years. It also would accelerate the convergence of SBC’s voice and data backbone systems into a next-generation, packet-switched platform.
“Project Pronto is SBC’s full court press to deploy advanced services through its separate affiliate,” Trotman says. “And it stacks up the cards against resellers.”
Kim Sunderland is Washington Bureau Chief
for PHONE+ magazine.
