Transcript and Opening Thoughts - Phoenix Center for Advanced Legal

2005 Phoenix Center Educational Retreat
October 6-8 • Phoenix Arizona
Welcome and Opening
Thoughts
Lawrence J. Spiwak
Thomas M. Koutsky
Outline
Spiwak:
 Telecom Background
 New Network Platforms
 Internet Applications
Koutsky:
 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
Central Office B:
Incumbent’s
Switch
Customer B
Customer A
Central Office A:
Incumbent’s
Switch
Traditional Origination And Termination
of a Inter-Network Local Call
Central Office B:
Incumbent’s
Switch
Competitor’s
Switch
Market
Power for
Local
Termination
Customer B
Customer A
Central Office A:
Incumbent’s
Switch
How IP Alters Origination And Termination
of a Inter-Network Local Call
Central Office B:
Incumbent’s
Switch
Managed IP
Cloud
Customer B
Customer A
Central Office A:
Incumbent’s
Switch
New Network
Platforms
The Telecommunications Landscape -- circa 2001
Local
Access
Technology
Incumbent
Telecoms
Operator
Examples of
Major
Endogenous
Entry Costs
“Carrier of
last resort”
obligations;
Stringent
price,
conduct and
structural
regulation
Interconnection;
Build-out
requirements
Building Access;
Local government
“user” fees;
USO Obligations;
Lack of regulatory
harmonization
among various
jurisdictions
Loops;
Collocation;
Provisioning;
LoopConditioning;
Recalcitrant
incumbent
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 multichannel video
programming
Technical
advantages
and
limitations
CLEC
Data LEC
or
“PCLEC”
Cable MSO
Mobile
Satellite
Programming;
Franchise
certification
authority
Spectrum;
Interconnection;
Tower siting;
Tech. standards
• GSM
• TDMA
• CDMA
• 3G
Spectrum;
Interconnection;
Tower siting;
Tech. standards;
Int’l approval for
each country in
which it seeks to
do business
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
data
OK for voice;
OK for
“broadband”;
Can be either
mobile or fixed
RESIDENTIAL CONSUMER
Source: Naftel & Spiwak, THE TELECOMS TRADE WAR (HART 2001).
The Telecommunications Landscape – circa 2005
Local
Access
Technology
Examples of
Major
Endogenous
Entry Costs
Technical
advantages
and
limitations
Wi-Fi?
Wi-Max?
Incumbent
Telecoms
Operator
Increasing
deregulation
xDSL
Fiber
Depends:
Traditional
PSTN is
Excellent for
voice;
Good for
“broadband”
(xDSL);
But…
Fiber is great
for everything
Mobile
3G/EVDO
Cable MSO
Vertical
Ownership of
Programming
Local
Franchise
Rules, “Level
Playing Field”
Laws
Excellent for
multi-channel
programming;
Excellent for
“broadband”;
Great for VoIP
Spectrum;
Interconnection;
Tower siting;
Tech. standards
• GSM
• CDMA
• 3G
Excellent for
voice;
Improving for
data;
Poor for video;
But very
advantageous
because it is
MOBILE
RESIDENTIAL CONSUMER
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-inbilling, 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-inbilling), privacy, network outage reporting for VoIP and
broadband Internet access services
 CC Docket No. 02-33
http://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. 04-36
http://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. 02-33
http://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 competition
WC Docket 04-233
http://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 Subsidies
Universal Service Subsidies (thousands $)
$8,000
$7,000
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
$0
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
Subsidies are “Pay-as-You-Go” and require ever-higher “taxes”
Universal Service Assessment Rates
14%
12%
10%
8%
6%
4%
2%
0%
2000
2001
2002
2003
2004
2005
2006
est
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
TDS
Centurytel
Verizon
BellSouth
Alltel
Fairpoint
Citizens
Sprint
Quest
Alascom
SBC
2004 USF Support
(millions)
$ 564
349
236
156
167
144
114
77
51
33
18
EBITDA- Most Recent
Quarter (millions)
$ 1,040
1,250
31,750
8,890
3,360
123
1,150
8,480
3,870
108
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 pending
CC 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
Qwest
SBC
$5,124,373,000
$4,027,873,000
$10,427,052,000
$2,148,397,000
$1,872,002,000
$5,077,206,000
$436,581,000
$358,095,000
$866,879,000
$607,490,000
$494,512,000
$1,197,119,000
$1,931,905,000
$1,303,264,000
$3,285,848,000
Cable Competition
Since 1997, cable prices have increased faster than inflation
and substantially more than telephone and wireless
160
140
120
100
80
60
1997
1998
Cable
1999
2000
CPI
2001
2002
Telephone
2003
2004
Wireless
1997 = 100
Sources: 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 Virginia
While 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.