Welcome and Opening Thoughts

Lawrence J. Spiwak

Thomas M. Koutsky

2005 Phoenix Center Educational Retreat

October 6-8 • Phoenix Arizona

Outline

Spiwak: Telecom Background New Network Platforms Internet ApplicationsKoutsky: Implications for public policy The public policy agenda

The Changing Nature of

Telecommunications

What is IP?IP (“Internet Protocol”) is next generation of

technology that lets people manage their network efficiently

IP is an application that runs over facilities – it is not the network itself Based on Binary Code and Packets

What does it do? Allows various networks to “talk” to one another (i.e., the

“Internet”) Creates demand for alternative distribution platforms by

turning “single” use networks into “multi” use networks E.g., cable networks can now provide voice; XDSL can

provide video IP allows promise of “convergence” to become a

reality – but only matters if networks are present

Traditional Origination And Termination of a Intra-Network Local Call

Customer A

Central Office A: Incumbent’s

Switch

Customer B

Central Office B: Incumbent’s

Switch

Traditional Origination And Termination of a Inter-Network Local Call

Customer A

Central Office A: Incumbent’s

Switch

Central Office B: Incumbent’s

Switch

Competitor’s Switch Market

Power for Local

Termination

Customer B

How IP Alters Origination And Termination of a Inter-Network Local Call

Customer A

Central Office A: Incumbent’s

Switch

Central Office B: Incumbent’s

Switch

Managed IP Cloud

Customer B

New NetworkPlatforms

CLECIncumbentTelecomsOperator

Data LECor

“PCLEC”Cable MSO Mobile Satellite

Interconnection;Build-out requirementsBuilding Access;Local government “user” fees;USO Obligations;Lack of regulatoryharmonization among various jurisdictions

Loops;Collocation;Provisioning;Loop-Conditioning;Recalcitrantincumbent

“Carrier of last resort” obligations;Stringent price, conduct and structural regulation

Spectrum;Interconnection;Tower siting;Tech. standards• GSM• TDMA• CDMA• 3G

Programming;Franchise certification authority

Local Access Technology

Examples of Major Endogenous Entry Costs

Spectrum;Interconnection;Tower siting;Tech. standards;Int’l approval for each country in which it seeks to do business

Technical advantages and limitations

Excellent for voice;Good for “broadband” (xDSL);Poor for multi-channel video programming

Ability to build state-of-the-art network; thus, has potential to be excellent for voice, video and/or “broadband” depending on business conditions

Good for “broadband”;Poor for voice;Poor for multi-channel video programming

Excellent for multi-channel programming;Excellent for “broadband”;Poor for voice

Excellent for voice;OK for data;Poor for video;But very advantageous because it is MOBILE

Excellent for video;Excellent for dataOK for voice;OK for “broadband”;Can be either mobile or fixed

RESIDENTIAL CONSUMER

The Telecommunications Landscape -- circa 2001 The Telecommunications Landscape -- circa 2001

Source: Naftel & Spiwak, THE TELECOMS TRADE WAR (HART 2001).

IncumbentTelecomsOperator

Cable MSOMobile

3G/EVDO

Increasing deregulation

xDSL

Fiber

Spectrum;Interconnection;Tower siting;Tech. standards• GSM• CDMA• 3G

Vertical Ownership of Programming

Local Franchise Rules, “Level Playing Field” Laws

Local Access Technology

Examples of Major Endogenous Entry Costs

Technical advantages and limitations

Depends:Traditional PSTN isExcellent for voice;Good for “broadband” (xDSL);But…Fiber is great for everything

Excellent for multi-channel programming;Excellent for “broadband”;Great for VoIP

Excellent for voice;Improving for data;Poor for video;But very advantageous because it is MOBILE

RESIDENTIAL CONSUMER

The Telecommunications Landscape – circa 2005The Telecommunications Landscape – circa 2005

Wi-Fi?Wi-Max?

BPL?

New Network Platforms: DSL Runs over traditional copper plant Both voice circuit and datastream

Dedicate all bandwidth for business class DSL

Widespread deployment Some firms are now deploying

video via DSL (box is “in the network” rather than CPE)

New Platforms: Cable

Great bandwidth Widespread deployment Value proposition for providing video

was always higher than for voice With advances in VoIP, can now deliver

“triple threat” of video, data and voice Marginal cost of deploying VoIP is

minimal

New Platforms: WiFi/WiMax Shows potential, but since it uses a shared medium or

common resource, bandwidth must be limited Turns traditional investment model on its head

Costs just as much to wire a residence as it does a business

But customers may only value if “free” or inexpensive!

Works best in flat geography in sparsely populated areas with a lot of water towers

Unregulated spectrum is problematic -- the more people who use it, the less reliable it is

Regulated spectrum (2.5 GHz) is a bit better, but reliability/interference still a problem

New Platforms: “3G” Wireless Starting to be introduced into market

Spectrum limitations continue -- broadcast spectrum available after DTV transition will improve quality (but not likely until 2009 at earliest)

Wireless generally a complement to, rather than a substitute for, traditional wireline service

Reliability

Cost

Sprint/Nextel v. SBC/BellSouth/Cingular, and Verizon

Sprint will divest traditional land line business and staking the merged company’s entire strategy on advanced wireless broadband

Bell companies have embraced complementarity of wireless and wireline

New Platforms: Fiber

Fiber to the Home/Fiber to the Node

“The Gold Standard” of broadband deployment

Fiber probably necessary for full-suite of “IPTV”

services

Tremendously expensive to deploy -- to make

deployment profitable, network provider needs to

generate significant revenues

Biggest barrier is local franchise process for video

services

Although not the only barrier one…

Internet Applications

Voice over IP (VoIP) Facilitates enhanced value-added services

(e-mail voice mail, “locate me” services”)

“Death of Distance” Can get local numbers in far away places One number can reach you anywhere in

the world

Different Flavors of VoIP VoIP over the “Public Internet”

E.g., Skype, Free World-Dial-up, various IM “chat” programs, some calling card companies

Some use “telephone numbers,” some do not

Given nature of the Internet, while price may be “free” or extremely cheap, service quality is going to be lousy The Internet is not homogenous; rather it is a “best

efforts” network

Internet was never designed to carry voice

Very inefficient use of packet network

Different Flavors of VoIP “Managed” VoIP:

E.g., AT&T CallVantage, Vonage, cable offerings Generally requires a telephone adaptor at the

customer’s premises “Managed” because the VoIP provider does not

necessarily rely exclusively on the public Internet to transport the traffic – the provider may integrate its own facilities to make sure that “voice packets” are prioritized and reach destination seamlessly

Great quality/enhanced features True, legitimate substitute for POTS

IPTV Allows advanced multi-channel video

programming over DSL and fiber Phenomenal features Barriers to entry

Access to programming Franchising process

Do you need a franchise if Bells are providing IPTV over existing plant?

Other legacy cable regulation PEG channels, must carry, etc.

Public Policy Implications

Issues Raised by Current Regulatory Regime Should VoIP be regulated (if at all)?

Is VoIP more like a telephone or a software program? “Telecommunications Service” Under Section II?

“Information Service” Under Section I?

Do VoIP providers that interconnect with the telephone network

have to pay to complete calls on that network?

Will VoIP providers have to contribute to universal service funds?

Will universal service subsidize VoIP?

If answer is “No,” why subsidize yesterday’s technology?

You Get What You Pay For… Only “telecommunications providers” get mandatory interconnection

rights under current law

If VoIP providers do not pay to access or use the network, do they have a

legitimate claim to use the network or provide customers telephone

numbers?

FCC Actions on VoIP Using IP to manage long-distance traffic does not exempt

long-distance company from access charges AT&T “IP-in-the-Middle” Declaratory Ruling

AT&T Enhanced Calling Card Order

A “pure” computer-to-computer service that does not utilize telephone numbers or connect to the telephone network is an “information service” Free World Dial-Up Order

An “integrated VoIP service” that does connect to the telephone network is regulated at the federal level but is subject to “Title I” regulation Vonage Minnesota Preemption Order

VoIP E911 Order (VoIP E911)

CALEA IP Order (VoIP wiretaps)

VoIP is NOT truly “deregulated”……should it be?

FCC has asserted exclusive federal jurisdiction over IP services on theory that IP services are “inherently interstate”

The FCC has begun to exercise that jurisdiction to secure public safety/social goals – E911, wiretaps

Next steps: consumer protection, truth-in-billing, customer information privacy rules, access charges, universal service contributions…

FCC has broad authority

FCC has significant and broad authority to address many of these issues – but not always

the political will

“the Commission is free within the limits of reasoned interpretation to change course if it adequately justifies the change”

“The questions the Commission resolved . . . involve a ‘subject matter [that] is technical, complex and dynamic. The Commission is in far better position to address those questions than we are.”

NCTA v. Brand X, 545 U.S. ___ (2005), slip op. at 29, 31.

…but decisions subject to “arbitrary and capricious” Review…

“[W]e must ensure that, in reaching its decision, the agency examined the relevant data and articulated a satisfactory explanation for its action, including a ‘rational connection between the facts found and the choice made.’”Prometheus Radio Project v. FCC, (3rd Cir. 2004)

D.C. Circuit will reverse FCC if its decision “is not supported by substantial evidence, or the agency has made a clear error in judgment.” AT&T v. FCC, 220 F.3d 607, 616 (D.C. Cir. 2000)

Areas of Policy Activity Broadband Networks VoIP Applications Local Competition Universal Service and Intercarrier

Compensation Intramodal Mergers Cable Broadcast Katrina Impact Wireless and International

Broadband Networks DSL Information Service Order and Proposed Rules

Regulatory Parity with Cable Modem Service Proposes federal consumer protection (slamming and truth-in-

billing), privacy, network outage reporting for VoIP and broadband Internet access services

CC Docket No. 02-33http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-05-150A1.doc

CALEA Requirements CC Docket No. 04-255

http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-05-153A1.pdf

Policy Statement on Broadband Internet Access CC Docket No. 02-33

http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-05-151A1.pdf

FCC Policy Statement:To encourage broadband deployment and preserve and promote the open and interconnected nature of the public

Internet, consumers are entitled

To access the lawful Internet content of their choice. To run applications and use services of their choice, subject

to the needs of law enforcement. To connect their choice of legal devices that do not harm

the network. To competition among network providers, application and

service providers, and content providers.

VoIP and E911 E911 requirements for “interconnected VoIP” providers

VoIP 911 calls expected to grow from 370,000 in 2004 to 3.5 million in 2006 FCC: providers must notify subscribers of E911 service limitations by 10/31/05 VoIP providers must be fully E911 compliant by 11/28/05 – but not all “PSAPs”

(run by local governments) will be able to process this information Calls must be routed to over 6,000 PSAPs nationwide Incumbent telephone companies control many of the routers,

databases and trunks used to route these calls FCC terms rules “a necessary and logical follow-up to the Vonage Order” Anomaly: local telephone and wireless companies exempt from tort liability for

911 calls due to 911 Act – but VoIP providers are not, as the FCC determined that it should not preempt state tort law

CC Docket No. 04-36http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-05-116A1.pdf

FCC has proposed rules for consumer protection (slamming and truth-in-billing), privacy, and network outages for VoIP

CC Docket No. 02-33http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-05-150A1.doc

Local Competition

2004 “unbundling” rules currently on appeal

FCC has eliminated unbundling entirely in Omaha MSA by virtue of cable VoIP competitionWC Docket 04-233http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-261122A1.pdf

No unbundling “where intermodal deployment is extensive”

Phoenix Center Policy Paper No. 21, Competition after Unbundling

Universal Service SubsidiesUniversal Service Subsidies (thousands $)

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

1998 1999 2000 2001 2002 2003 2004 2005

High-Cost Support

Low Income

Schools, Libraries and Rural Health Care

Total

Sources: FCC Universal Service Monitoring Reports and USAC Quarterly Reports

Escalating Assessments

Universal Service Assessment Rates

0%

2%

4%

6%

8%

10%

12%

14%

2000 2001 2002 2003 2004 2005 2006est

Subsidies are “Pay-as-You-Go” and require ever-higher “taxes”

Sources: FCC Universal Service Monitoring Reports and USAC Quarterly Reports

Universal Service Fund USF assessment on interstate service likely to increase from 11.2% to

12% in 1Q06, putting additional pressure on contributions into the USF

Shifting to a “telephone number” based system could shore up and expand contribution base

Company 2004 USF Support (millions)

EBITDA- Most Recent Quarter (millions)

TDS $ 564 $ 1,040 Centurytel 349 1,250

Verizon 236 31,750 BellSouth 156 8,890

Alltel 167 3,360 Fairpoint 144 123 Citizens 114 1,150 Sprint 77 8,480 Quest 51 3,870

Alascom 33 108 SBC 18 13,690

Intercarrier Compensation Reform Switched access revenue shrinking

“Bill and Keep” system would make charges explicit by billing consumers directly through increased Subscriber Line Charges, stabilizing access charge revenue on which LECs rely

FCC Chairman Martin and RLECs oppose drastic SLC increases so any reform measure is likely to reduce access charges slightly while modestly increasing the SLC over a longer period of time

FCC intercarrier compensation proceeding still pendingCC Docket No. 01-92

Bell Companies Total Access Charges Special Access Interstate Switched Intrastate Switched Federal/State SLCs

All BOCs $32,674,248,000 $14,401,980,000 $3,027,600,000 $4,212,819,000 $11,031,849,000

BellSouth $5,124,373,000 $2,148,397,000 $436,581,000 $607,490,000 $1,931,905,000Qwest $4,027,873,000 $1,872,002,000 $358,095,000 $494,512,000 $1,303,264,000SBC $10,427,052,000 $5,077,206,000 $866,879,000 $1,197,119,000 $3,285,848,000

Cable Competition

60

80

100

120

140

160

1997 1998 1999 2000 2001 2002 2003 2004

Cable CPI Telephone Wireless

Since 1997, cable prices have increased faster than inflation and substantially more than telephone and wireless

1997 = 100Sources: FCC CMRS Competition and Cable Industry Rate Report

Cable cuts in presence of wireline competition

Pending Video Proceedings SBC Request for Declaratory Ruling that IPTV not require local

franchise Copy of filing in CC Docket 04-36: http://gullfoss2.fcc.gov/prod/ecfs/retrieve.cgi?native_or_pdf=pdf&id_document=6518157935

Cable Horizontal and Vertical Ownership Rules FCC required by Section 613 to have a “reasonable limit” on the

number of homes that one cable provider may pass and the number of channels on a cable system that can be occupied by programming in which the provider has an ownership interest

“primary purpose” is “to ensure that the flow of video programming to consumers not be unfairly impeded by cable operators”

FCC rules reversed in 2001

Time Warner Entertainment Co. v. FCC, 240 F.3d 1126 (D.C. Cir. 2001)

Rules still not completed -- FCC issued another notice in May 2005

MM Docket 99-264

http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-05-96A1.pdf

Staff Report: Verizon Franchise Application for Fairfax County VirginiaWhile the state “level playing field” requirement

prohibits the Board from granting a competitive

franchise that is “more favorable or less burdensome”

than an incumbent cable operator’s franchise, the law

does not prohibit the Board from granting a competitive

franchise on terms that are more onerous. In fact some

of the terms and conditions of Verizon’s Proposed

Franchise Agreement are more onerous than those in the

franchise agreements the Board awarded to either or

both of the incumbent cable operators. Most

significantly, the Verizon Proposed Franchise Agreement

commits Verizon to a system design that is substantially

more burdensome than the design requirements to

which the incumbent cable operators are subject.

Broadcast: Ownership Rules

FCC has regulated ownership and control of broadcast stations, but many of the FCC’s 2002 Media Ownership rules reversed and remanded by 3rd Circuit

Prometheus court FCC over-estimated the value of the “Internet” as a

news source

FCC’s rules “all have the same essential flaw: an unjustified assumption that media outlets of the same type make an equal contribution to diversity and competition in local markets”

FCC about to commence this review

Digital TV Transition 108 MHz in 700 MHz band currently occupied by television stations and

is to be “given back” by broadcasters once digital television transition complete

Spectrum ideal for numerous broadband and wireless applications – estimated auction value of $20-29 billion

Potential to use spectrum for public safety – 24 MHz was allocated by Congress and FCC in 1997-98 yet remains in hands of broadcasters

Debates over DTV multicasting and must-carry impact transition

DTV: Primetime by 2009?Legislation needed to complete the process

Current law ties FCC’s hands – it cannot reclaim spectrum if 15% or more television households in the market cannot receive a digital signal

Less than 5% of households are “digital TV ready”

S.1268 (McCain): takes broadcasters off by Jan. 1, 2009; mandates manufacturing of digital tuners into TVs; and appropriates $468M appropriated to the FCC to purchase and distribute analog-to-digital tuners to low-income consumers

FCC now requires that 50% of large TVs have digital tuners and has proposed 100% of all TVs by 12/31/06, but no enforcement mechanism in place

Katrina, Gulf Coast Impact

Renews focus on public safety responsibilities

Underscores lack of nationwide, interoperable emergency response system – current plans for SAFECOM is full interoperability by 2023

Increases already-substantial Congressional pressure for digital television migration in order to recover current (700 MHz) broadcast spectrum, assign portion to public safety agencies, and auction the rest

Pending Legislation Ensign/McCain

No build-out or local franchising for new video networks Deregulates all IP-based services, including interconnection Substantial regulation of video programming availability in

order to assist new video entrants

Barton/Dingell/Upton/Markey Draft Nationwide franchising for “broadband video” service (but

franchise fee and PEG requirements similar to current regime)

VoIP must pay access charges and contribute to USF Attempts to Enshrine “Network Neutrality” Principles

Other pending legislation Dorgan/Smith/Pryor

FCC must broaden USF funding base to create a new fund to support broadband service

Rockefeller/Snowe/Burns Exempts E-rate program from Anti-Deficiency Act

Boucher/Stearns Removes regulation from all “IP enabled services”,

including voice Preempts state regulation of such services

Blackburn/Wynn/Snowe/Rockefeller Provides that if you already have a franchise for voice

and data, then you don’t need to get another franchise to provide video.