Entries in FCC (59)

Monday
Dec192011

January – April 2011: USF NPRM, AT&T/T-Mobile Merger Dominate Headlines

A Veritable "Spring Awakening" of Blockbuster Agendas

Looking back over the year, there were so many exciting telecom regulatory decisions, actions and mishaps that I just had to do a “2011: Regulatory Year in Review” series, in part to keep it light before the holidays and in part to help predict what might be on the “hot list” next year. 2011 kicked off with the FCC’s controversial late-December approval of the Net Neutrality rules still stinging for many telecom providers, and 2011 is ending on a similar controversial note with the Stop Online Piracy Act debate in Congress (which, ironically, is almost the direct antithesis of Net Neutrality). But in between these groundbreaking Internet policy and legislation bookends, there was definitely no shortage of drama in all areas of telecom regulation.

January 2011: The stage was set for the year-long flurry of merger, joint-venture and consolidation activity with the FCC’s Jan. 18 approval of the massive Comcast-NBC Universal deal. According to the FCC’s Memorandum Opinion and Order, “The proposed transaction would combine, in a single joint venture, the broadcast, cable programming, online content, movie studio, and other businesses of NBCU with some of Comcast’s cable programming and online content businesses.” For those of you who were a little uneasy about a vertical and horizontal (depending on who you talk to) merger of this magnitude, the FCC imposed a variety of conditions including the “voluntary commitment” that Comcast provide broadband for $9.95 to low income consumers—we’ll see this pop up again towards the end of the year. Commissioner Michael Copps dissented, claiming the merger “confers too much power in one company’s hands;” and “The potential for walled gardens, toll booths, content prioritization, access fees to reach end users, and a stake in the heart of independent content production is now very real.”

Also in January, Verizon and MetroPCS jumped the gun on Net Neutrality appeals… but they fired before locking in a target that could actually be appealed. Eager parties had to hold tight for 10 more months before the rules were finally published in the Federal Register.  (The ILEC Advisor: Verizon Appeals FCC’s Net Neutrality Rules, MetroPCS Joins Verizon in Suing FCC Over Net Neutrality Rules)

February 2011: I clearly recall at around this time last year expressing frustration (putting it nicely) that the USF/ICC Reform NPRM was pushed back when Net Neutrality took center stage. Well, we didn’t have to wait very long in 2011 for the 350-plus page NPRM that set in motion an entire year’s worth of anxiety and insomnia for the RLEC industry. Once the NPRM was released, the FCC pressed forward with the reforms at lightning speed (well, for the FCC anyway), and it almost seems surreal that we are now ending the year still trying to make sense of all changes to USF and ICC. Anyway, FCC Chairman Julius Genachowski demanded that USF/ICC reforms conform to four guiding principles: modernized to support broadband networks, fiscal accountability, accountability, and market-driven incentive-based policies. When the NPRM was revealed, Genachowski made sure to emphasis how the current USF/ICC system is fraught with waste, fraud and abuse; and he arguably made RLECs seem like Public Enemy #1. The FCC essentially insisted that the industry develop a consensus proposal in response to the NPRM, but as we will see, that didn’t work out so well… (The ILEC Advisor: Wireless Excess Highlights Needs for Universal Service Reform).  

Not ten days later, we got another zinger- the NTIA’s National Broadband Map was released. RLECs scurried to check the data and make sure speeds and coverage were accurately portrayed in their service areas, only to find… A LOT of mistakes. My initial response to the map was “For $200m, why couldn’t they get it right?” JSICA’s Richelle Elberg wrote that the map was “disappointing, buggy, and the data incomplete;” and “it was a year in the making, it cost an awful lot of money, and it doesn’t seem to be fully baked just yet.” The biggest disappointment was that wireless providers like Verizon seemed to blanket extremely rural areas with 3-6 Mbps broadband, even though I know from experience in at least one such area that this is not an accurate representation—you see, it only takes one household in a census block to be served at that level for the entire block to be reported “served” on the map. Unfortunately, this is only one of the problems with the map, and nearly a year later it hasn’t improved much. (The ILEC Advisor: National Broadband Map Not All it’s Cracked Up to Be).

March 2011: Early in the year, there were a lot of rumors swirling that T-Mobile might be up for grabs—possibly by Sprint, which seemed like a long shot—would Sprint really want to repeat the technology incompatibility mess it had with its Nextel merger (The Deal Advisor: Sprint and T-Mobile in Talks (Again))? The telecom world shuddered on Sunday evening of March 20 when AT&T announced its intentions to abolish T-Mobile from the wireless market for a cool $39b—I was walking home from dinner and getting ready for the NTCA Legislative Conference when I got the news, and it is not an exaggeration to say that I nearly fell over. Anyway, there’s nothing like talks of ol’ Ma Bell reclaiming its monopoly to incite gut reactions from everyone—and I mean everyone. When the FCC comment cycle began, tens of thousands of consumers chimed in with very colorful opinions, one even likening the merger to rape (a comment that has literally haunted me all year…and don’t even get me started on the bizarre “interest groups” like the International Rice Festival who wrote in with questionable favor of the merger). Although many analysts initially assumed that the deal would fly through, JSICA was skeptical from the get-go, warning that the antitrust and FCC reviews would be harsh—and we were right. (The ILEC Advisor: AT&T to Acquire T-Mobile for $39b, Sprint Says it Will Vigorously Oppose AT&T Buy of T-Mobile, What’s Really Behind AT&T’s Acquisition of T-Mobile).

April 2011: USF/ICC Reform started heating up in April, with the first round of comments in response to the NPRM due on April 1 (ICC) and April 18 (USF), and two corresponding public FCC workshops held on April 6 and 27. On the ICC front, rural carriers were fairly unified in insisting that the FCC immediately adopt rules to curb arbitrage and classify VoIP as functionally equivalent to PSTN traffic. One highlight from the April 6 ICC workshop was when the panelist from AT&T (of course), asked sarcastically, “Does Iowa really need 200 small carriers?” The RLEC panelists expressed concern that ICC uncertainty contributes to low valuations for RLECs looking to sell or consolidate, which is contrary to the FCC hopes that the little guys will just consolidate once and for all.

The Rural Associations (NTCA, OPASTCO, WTA, NECA and state associations) released the RLEC Plan for USF/ICC reform, which many expected would be adopted by the FCC in the final rules—maybe not entirely, but at least in some capacity. The RLEC Plan focused on careful, “surgical” transitions for rural carriers to ensure reasonable cost recovery as well as continued broadband deployment, but without back-peddling the tremendous progress that rural carriers have made as a result of the original USF/ICC regime. Hundreds of other rural telecom stakeholders weighed in on the NPRM, many calling for Rate-of-Return stability, keeping the High-Cost Fund (now Connect America Fund) uncapped, and ensuring sufficient and predictable cost recovery. (The ILEC Advisor: Universal Service Reform – Their Two Cents: Nebraska Rural Independent Companies, Universal Service Reform – Their Two Cents: CoBank).

Finally, April also brought a sensible, well-received FCC Order on data roaming that “requires facilities-based providers of commercial mobile data services to offer data roaming arrangements to other such providers on commercially reasonable terms and conditions, subject to certain limitations.”  Naturally, Verizon argued that the FCC overstepped its authority, but overall this Order signaled an important step forward for the FCC’s realization that voice and data are well on the road to becoming one and the same. Smaller rural wireless carriers applauded the decision, arguing that it will help reduce barriers to competition with the large wireless carriers. (The ILEC Advisor: FCC Adopts Order on Automatic Data Roaming).

As the mercury started rising in DC, so did the tension in the USF/ICC Reform proceeding. Stay tuned for more “2011: The Regulatory Year in Review” posts throughout the week!

Sunday
Dec182011

The PSTN: Sunset, Transition, Rebirth, or Just Leave it Alone?

“Sunset the Phrase ‘Sunset the PSTN’”

The first thing you should probably know about the FCC’s second “The PSTN in Transition” workshop, held on December 14, is that it was long—I’m talking 8 hours of economic, technical, legal and regulatory perspectives, debates, statistics and countless questions along the way. More importantly, it was extremely engaging and interesting. I was glued to my computer the entire day, opting not to sit in the FCC Open Meeting room in a suit with a short-lived laptop battery for 8 hours. Keeping this in mind, it was quite challenging to narrow down the key take-aways from the day, but there were certainly several important underlying themes as well as particular questions that rural providers might want to think about, including:

  • Regulatory lag is a notorious problem, so would an FCC mandate for a PSTN sunset cause more harm than good considering how far along we are in the transition already?
  • Are we assuming that IP is the end-all-be-all for communications networks, and we won’t possibly evolve beyond IP in the next decade or so?
  • What minimum speed, capacity, and quality of broadband will be good enough for a ubiquitous, non-discriminatory, affordable IP network? What basic services and applications should it support—Facebook? Over-the-top video?
  • What are the consequences for locking-in a particular technology, or “picking winners and losers?”
  • How will we manage the conversion to IP and the coexistence of technologies during the transition?
  • Should the end-date for the PSTN be targeted toward the early adopters or the hold-outs?
  • Does there need to be a “termination fund” to support the transition? If so, how on earth will that be funded? How would you convince Congress—and taxpayers—to support a fund that essentially kills the network that the very same taxpayers (as well as the industry) have spent billions of dollars building? Personally, I think this could be the greatest challenge.

Now that you have some food for thought, let’s look at some stand-out points by specific speakers.

In the first panel, “Impact of the Transition on the Technology and Economics of the PSTN,” Richard Shockey (SIP Forum) and Joe Gillan (Gillan Associations) both expressed frustration with the term “sunset the PSTN.” Shockey noted that the term is confusing, and should instead be a “renewal of our communications systems.” He also added, “We are not taking away grandma’s phone.” Gillan recommended that we “sunset the phrase ‘sunset the PSTN,’” and rather think of it like a “rebirth.” Dale Hatfield (University of Colorado) and William Lehr (MIT) continued the theme of the first workshop by stating that the definition of the PSTN in this context is really unclear. Hatfield asked if the PSTN was a service, a network, a regulatory construct, or a social contract; and he recommended creating multi-stakeholder groups to rely on the industry as much as possible to come up with solutions. He also warned against picking technology winners or losers.  

The third panel, “Implementing the Transition to New Networks,” brought thought-provoking comments from participants from Verizon, Comcast, Carnegie Mellon and XO Communications. David Young (Verizon) pointed out that even if companies, technologies and markets are in transition, regulations and laws do not usually transition very rapidly or easily. Marvin Subu (Carnegie Mellon) argued that transitions take time, for example the IPv4 to IPv6 transition will likely take decades. Therefore, it is important to manage technical aspects like conversion and coexistence, but also let market forces determine the pace of the transition. Young later added that some remnants of the PSTN will likely hang around for a long time, but there is no real reason to pick an artificial date to kill them—they will probably just go away on their own once they become too costly to maintain.

There was a very creative and apropos analogy in the fourth panel, “Expectations, Emerging Technologies and the Public Good.” Kevin Werbach (University of Pennsylvania – Wharton) applied transitioning the PSTN (“the death of an old friend") to the Kübler-Ross Five Stages of Grief, broken down as follows:

  1. Denial: We can’t plan for things we don’t anticipate. Werbach recommended that the FCC initiate a proceeding to identify conflicts, opportunities, ambiguities, and what should be preserved.
  2. Anger: Werbach predicted that there would be indeed losers in the process, and some “will throw themselves across the tracks.” Objections should be addressed sooner, rather than later.
  3. Bargaining: Werbach warned that “those who can game the regulatory process will do just that.” It is important to know upfront what should be mandatory and what is up for negotiation.
  4. Depression: Knowing something is going to happen doesn’t necessarily mean it will happen. We should have “energy and enthusiasm” and a “bias for action.”
  5. Acceptance: Werbach recommended developing a common visulaization for ending the PSTN, which will help the goals become more tangible.

The final panel, on economic issues, brought a forceful perspective from Lee McNight (Syracuse University)—he recommended a rapid “graceful exit,” from PSTN regulations as soon as 2015. He argued that creative destruction is driving the transition, and there is no point in delaying the obvious. Regarding the PSTN, McNight provided a short eulogy: “It’s been a nice run. It’s over…Thanks for the memories. It’s been nice. Let’s have a big party.”

Should we celebrate the swift demise of the PSTN or allow it to gradually shrivel to insignificance, and then yank out the cord to the respirator? Will the PSTN end with a whimper or a bang? I’m not sure these workshops helped answer the fundamental questions of when, why and how this needs to happen, but they certainly provided plenty of fodder for the coming months while the industry and regulators try to figure out the path forward.

If you have 8 hours to spare, it is well worth the time to watch the full workshop, available here.

Thursday
Dec152011

The PSTN is Already in Transition… What is the PSTN, Anyway? 

Panelists Discuss Challenges for Public Safety, Disabled Individuals and Rural Networks

The FCC held two informative public workshops on December 6 and 14 to help itself and the industry better understand the recommendation that the PSTN ultimately be transitioned to an all-IP network. The FCC gathered around 50 experts to share insight on the transition from the perspective of ILECs, RLECs, mobile and fixed wireless, cable, consumer electronics, numbering, public safety, disability services, consumer protection, home security, VoIP, economics, engineering, academia, backhaul, and many more. If you think this sounds complicated with so many stakeholders—it was. But, it is necessary to understand how transitioning the PSTN will impact all of these industry sectors, because each one is deeply involved.

The first workshop, on December 6, included four sessions. The first two covered public safety and disability access issues, the third discussed rural network challenges, and the final session was focused on edge device functionality. This workshop set the stage for some of the broader, high-level issues that carriers and consumers will face if the PSTN is transitioned at a specific date—2018 was the popular target initially. Many of the panelists stated what their respective companies or organizations provide, what their customers or constituents need in terms of communications, and how their customers or constituents would be impacted if access to the PSTN vanished.

The public safety panelists seemed to agree that although many public safety networks are already transitioning to IP, many are still deeply entrenched on the PSTN. Allan Sadowski (North Carolina State Highway Patrol) explained that public safety is not necessarily about having the newest communication technology, it is about first response. Networks and communications equipment must be extremely reliable in every possible emergency situation, and public safety entities also face budget constraints as well as technical staff constraints. Challenges aside, the public safety panelists seemed excited about and interested in dynamic IP communications technologies that will benefit the public safety community. Brian Fontes (National Emergency Number Association) added that he approves of the 2018 PSTN sunset, but 911 services must continue to be available and reliable.

The disability services panelists were generally more concerned about how transitioning the PSTN to all-IP would impact their constituents—individuals who are blind, hearing impaired, physically challenged, elderly, etc., who might not willing or capable of adopting new technologies by a specific date.  Jenifer Simpson (Coalition of Organizations for Accessible Technology) explained that there are 15 million people who rely on disability communications services, and “most don’t know what the PSTN is.” There seemed to be some fear that the individuals in the disability community would be left behind in a PSTN-to-IP transition without proper consumer education coupled with easily available and affordable IP technologies. However, it was also acknowledged that there will be numerous new technologies for disability communications that are much better than today’s PSTN technology.

The third panel, “Technical Capacity, Capabilities and Challenges Facing Rural Networks” included representatives from ViaSat, Rural Cellular Association, Wireless Internet Service Providers Association, Vantage Point Solutions, Midcontinent Communications and OPASTCO; and it was moderated by Commissioner Anne Boyle from the Nebraska Public Service Commission. Although the panelists covered a wide range of rural communications perspectives, a few did not dig very deep into the issue at hand—transitioning the PSTN to IP networks. Rather, some focused more on promoting their respective services. Steven Berry (Rural Cellular Association) discussed the importance of ensuring basic interconnection “regardless of technology.” Berry added that “The PSTN as we know it is probably going away;” and “The future is coming faster than we otherwise may think.” He is also concerned about how such a transition would impact competition, because “some may view this as an opportunity…to essentially eliminate competition.”

Larry Thompson (Vantage Point Solutions) provided some interesting input about the engineering challenges and opportunities for small rural providers. He asserted that the transition will not work if narrowband POTS service is still the only option in some areas, and broadband IP networks must be completely deployed end-to-end. Tom Simmons from northern midwest rural cable provider Midcontinent also added that broadband adoption is “a big part of the equation,” especially in very rural areas that have a high population of low-income and Native American households.

John McHugh (OPASTCO) argued that it is not really important to set a “date certain” to end the PSTN because the transition of technology is natural and “occurs on an orderly fashion.” He described how many rural carriers already have softswitches and extensive fiber networks, over 90% of OPASTCO’s members provide broadband, and RLECs “have gone above and beyond the call of duty to provide their customers with the latest technologies.” McHugh noted that some challenges in the transition include public safety, ensuring all consumer devices are IP-enabled, and converting the customers who simply don’t want broadband. He also added that it is financially and strategically challenging for RLECs to build broadband to everyone and then the consumer decides to get VoIP service from a 3rd party instead of the traditional telephone company.

The final panel focused on transitioning edge functionalities and consumer devices.  One question that was asked repeatedly throughout both workshops—and was never fully answered—was “What is the definition of the PSTN?” Brian Daly (AT&T) insisted that this is a fundamental question that must be addressed before the transition can occur. Once this is determined, we can look at all of the other aspects on the user end, like devices. Daly explained that many alarm systems, ATM machines, faxes, credit card transactions, pay phones, and other devices still rely on the PSTN and will continue to do so for many years, even if their numbers are low. Harold Feld (Public Knowledge) argued, “There will always be surprises” and “you have to design any transition mechanism to handle surprises,” such as the wireless microphone debacle in the digital TV transition.

Overall, this first workshop was a good introduction to the myriad issues at hand, and an insightful look at where certain industry sectors stand on the debate over whether or not the PSTN should be transitioned at a specific date. At an industry workshop I attended back in July, I got the impression that most of the participants were in favor of sunsetting the PSTN in 2018. However, I got a slightly different impression from both of the FCC’s workshops (the second workshop will be recapped tomorrow). The bottom line is that there needs to be a specific definition of the PSTN before the PSTN can be killed, and the longer this fundamental question goes unanswered, the longer the transition will take. On the other hand, if the transition to IP is indeed well underway already, do we really need a specific end date? What do you think? How do you define the PSTN?

You can watch this FCC workshop here.

Tuesday
Dec132011

Introducing ICC Reform: RM, ARC, and Eligible Recovery

FCC Drops Heavy Hints about its Preference for RLEC Consolidation (In Switching, at Least)

ICC reform: it’s perplexing, frustrating and complicated! If only that was all that needed to be said on this daunting topic…The FCC’s new rules for access revenue recovery are supposedly designed to “eliminate the uncertainty carriers face under the existing ICC system, allowing them to make investment decisions based on a full understanding of their revenues from ICC for the next several years.” Whether this desired outcome will ring true for RLECs, however, remains to be seen. For now, JSI Capital Advisors is here to help you try to understand the new rules (as we try to understand them ourselves).

Adding to the complexity, there are different rules for price cap and rate-of-return carriers—this article will only address rate-of-return carriers. Overall, it is important to add three new terms to your telecom vocabulary: Recovery Mechanism (RM), Access Recovery Charge (ARC), and Eligible Recovery.  Understand what these terms mean, and how they will impact your companies, and you will be well on the way to understanding this bristly, convoluted web of changes we call ICC reform.

The Recovery Mechanism (RM) – Two Roads Lead to Access Recovery for ILECs

The RM is the overall framework “to facilitate incumbent LECs gradual transition away from ICC revenues.” In addition to reducing access rates to an end-state of $0 with bill-and-keep, the RM component of ICC reform gradually decreases the amount of access recovery that carriers may receive—and it sounds like the FCC eventually wants to eliminate the RM altogether. ILECs—but not CLECs—have two ways to mostly recover lost ICC revenues: by charging a limited fee to end-users (called the Access Recovery Charge, detailed below), and through CAF support (for RLECs, coming out of their $2b slice of the CAF pie). Note that CLECs can only recover access revenue by increasing end-user rates, which may create some challenges for RLECs with substantial CLEC operations.

The FCC argues that the RM will help eliminate uncertainty and allow ILECs “to make investment decisions based on a full understanding of their revenues from ICC for the next several years.” Driving the sweeping rule changes are some industry trends that both price cap and RoR carriers know all too well: declining demand for voice service and the related decline in minutes of use (MOU). Under the current system, access rates remain steady even though the market forces dictate otherwise. As a result, opportunities for arbitrage arise and incentives are distorted.

The FCC continues by arguing, “Ultimately, consumers bear the burden of the inefficiencies and misaligned incentives of the current ICC system, and they are the ultimate beneficiaries of ICC reform.” ICC reform is about benefiting consumers (even if rates are increased), not keeping carriers whole. The FCC does not think the entire RM burden should be placed on consumers, which is why the RM has two methods for recovery. What is confusing is that the FCC says consumers should not be responsible for the entire RM burden, yet both the ARC and CAF support come directly or indirectly from consumers. The ARC is a new independent end-user fee, and the CAF is collected through the traditional USF contributions methodology. Either way, consumers are paying.

In addition to consumer benefits like lower costs for long distance telephony and innovative new services, the FCC expects that carriers too will benefit from the RM framework: “Carriers will provide existing services more efficiently, make better pricing decisions for those services, and innovate more efficiently. Carriers’ incentives to engage in inefficient arbitrage will also be reduced, and carriers will face lower costs of metering, billing, recovery, and disputes related to intercarrier compensation.” This all sounds pretty great, but it definitely remains to be seen if RLECs and their rural customers will see any of these benefits.

Eligible Recovery – A 5% Annual “Haircut” and Pressure to Consolidate Switching

Determining Eligible Recovery is “the first step in [the] recovery mechanism.” The FCC contends that determining Eligible Recovery will help RLECs know with some certainty “their total ICC and recovery revenues for all transitioned rate elements, for each year of the transition.” The details for calculating Eligible Recovery are explained in the Order (starting on page 313), but essentially RoR carriers start with a “Rate-of-Return Baseline” equal to the carrier’s “2011 interstate switched access revenue requirement, plus FY2011 intrastate switched access revenues and FY2011 net reciprocal compensation revenues.” The baseline will be adjusted “to reflect trends in the status quo absent reform,” such as declining MOU and switching costs. The various access revenue components, illustrated below, have been projected to decline at different rates over the next six years, and the FCC has determined that an overall 5% decrease in baseline support for Eligible Recovery is “appropriately conservative.”  The baseline amount is then recovered by three sources: traditional ICC revenue (which is decreasing in the move to bill-and-keep), the ARC, and the CAF.

It is important to discuss one seemingly passive-aggressive element of Eligible Recovery: the FCC’s apparent desire for RLECs to consolidate switching operations. On one hand, it might be entirely appropriate for some small carriers to share switches. On the other hand, this almost sounds like yet another situation where the FCC is dropping hints that RLECs should consolidate. One could get a feel that they are saying “consolidate switching today, merge tomorrow;” but this section of the Order is certainly open to interpretation. The FCC explains, “Our framework allows rate-of-return carriers to profit from reduced switching costs and increased productivity…For example, small carriers may be able to realize efficiencies through measures such as sharing switches, measures that preexisting regulations, such as the threshold for obtaining LSS, may have deterred.”

The FCC later takes a slightly harsher dig at RoR carriers: “Retaining rate-of-return regulation as historically employed by the Commission risks ‘perpetuat[ing the] isolated, ILEC-as-an-island operation,’ thus increasing the costs subject to recovery to the extent that, for example, each individual incumbent LEC purchases its own facilities, rather than sharing infrastructure with other carriers where efficient.” While it may be true that small carriers could realize efficiencies by sharing facilities, is it the FCC’s place to encourage sharing arrangements or should carriers come to this conclusion based on their unique market forces and cost structures?

Access Recovery Charge – “All End Users Should Contribute…”

The ARC, the direct end-user component of the new ICC recovery regime, is probably what consumers will be most interested in learning about. Some basic “rules of the road” for the six-year RoR ARC include:

  • Residential ARC cannot increase by more than $0.50 per year, and cannot be increased further once a company hits the $30 per month Residential Rate Ceiling—this protects consumers in states with reformed rates, but provides very little wiggle-room for carriers who already charge close to, or above, $30 per month.
  • Multi-line business ARC cannot be increased by more than $1.00 per year, and cannot be increased further once a company hits a $12.20 maximum per-line SLC plus ARC ceiling.
  • The ARC revenue in one year cannot be greater than a carrier’s Eligible Recovery for that year.
  • The ARC cannot be charged to Lifeline customers.
  • ARCs must be allocated to a mix of business and residential customers, to “spread the recovery…among a broader set of customers, minimizing the increase experienced by any one customer.”
  • Carriers do not have to charge the ARC; but if they don’t, the full amount that could be charged will be imputed from Eligible Recovery.

The FCC predicts “the average actual increase across all consumers to be approximately $0.10-$0.15 each year, peaking at approximately $0.50 to $0.90 after five or six years, and declining thereafter.” Carriers will need to study the costs vs. benefits of charging an ARC based on their unique competitive environment as well as the threat of reduced Eligible Recovery if the full ARC is not charged.

Still not Enough? Return to CAF.

If Eligible Recovery is not met though the mechanisms described above, carriers will have an opportunity to supplement their support from the CAF. The FCC “anticipates[s] that end user recovery alone will not provide the full recovery permitted by our mechanism for many incumbent LECs, particularly rate-of-return carriers.” Any supplemental CAF disbursements are subject to the same public interest obligations, like deploying 4/1 Mbps broadband upon reasonable request, as regular CAF support.

If this is still not enough, there is always the waiver process—however, carriers have to show serious financial harm and will be subject to a total company cost and earnings review. The FCC attempts to protect itself from carriers invoking the takings clause by insisting that the RM “goes beyond what might be strictly required by the constitutional takings principle underlying historical Communications regulations.” In other words—carriers should take what they get and be happy with it, because things could be worse. Keep in mind that all this ICC recovery is intended to be “truly temporary in nature.”

Well there you have it—ICC in all its anxiety-inducing glory! What do you think about these significant changes?

Monday
Dec052011

The FCC’s Egalitarian Cable Broadband Initiative: What does it Mean for RLECs?

The “Biggest Effort Ever” to Address Broadband Adoption

A wave of $9.95 per month broadband plans initiated by the Comcast-NBCU merger and seconded by a new FCC program announced on November 9, 2011 will potentially sweep millions of low-income families online. Comcast’s “Internet Essentials” program and the FCC’s “Connect 2 Compete” initiative are intended to increase broadband adoption through significantly below-market prices coupled with affordable computers and digital literacy training. This is surely a benefit to the millions of families who cannot afford $40-150 per month DSL, FTTH, 4G or high-speed cable, but is it a competitive threat to small companies?

This all started with a little merger earlier this year between cable goliath Comcast and media behemoth NBC Universal. The high-profile and reasonably controversial merger was approved by the FCC with a variety of “conditions and enforceable commitments,” according to a January 18 Wall Street Journal article. One of Comcast’s “voluntary commitments” is to expand broadband to low-income families at reduced rates. The text of the commitment explains: “Comcast will make available to approximately 2.5 million low income households (i) high-speed Internet access for less than $10 per month; (ii) personal computers, netbooks, or other computer equipment at a purchase price below $150; and (iii) an array of digital-literacy education opportunities.”

Enter Internet Essentials. Since it is a voluntary commitment, Comcast isn’t forced to provide $9.95 per month broadband, but one gets the impression that they had better just do it with a smile on their face lest they face scrutiny from the FCC for noncompliance. However, one also has to wonder if Comcast would be implementing such a program if not for merger commitment.

Internet Essentials basically follows the merger commitment language mentioned above to the letter. Eligible participants can purchase broadband for $9.95 per month plus tax, with no price increase, activation fee or equipment rental fee. Second, these families can purchase a computer for $149.99 plus tax at the time of enrollment. Finally, eligible families can receive free Internet training, “available online, in print and in person,” according to the Internet Essentials website.

Households must meet the following criteria to be eligible for the program: live in a Comcast service area, have at least one child enrolled in the National School Lunch Program, have no current Comcast account (or an active account within the last 90 days), and finally “not have an overdue Comcast bill or unreturned equipment,” which will hopefully not disqualify too many people right off the bat. Internet Essentials began at the start of the 2011-12 school year; and enrollment will be open for the next three full school years. Families who enroll can stay at the $9.95 per month rate “as long as at least one child in their household continues to receive free lunches under the National School Lunch Program.”

Internet Essentials was such a groundbreaking idea that the FCC decided to initiate a copycat program (called Connect 2 Compete) on a wider scale, backed by a venerable army of “Who’s Who in Broadband and Tech.” Connect 2 Compete includes the same three principles as Internet Essentials: $9.95 per month broadband, low cost computer and digital literacy training. Just like Internet Essentials, the program is available for households with at least one child receiving free lunches, no broadband service for the last 90 days, and no outstanding bills or equipment rental fees. Connect 2 Compete will start in the spring on a trial basis and then expand nationwide in fall 2012. The companies involved in Connect 2 Compete include the cable industry and NCTA (providing the broadband service), Microsoft and Redemtech (providing refurbished computers with Windows and MS Office), and Best Buy (providing digital literacy training via the Geek Squad). Other participants include Morgan Stanley (microloans), United Way Worldwide, Boys and Girls Club, Goodwill, Connected Nation, NAACP, and several others who together form “an unprecedented coalition of nonprofit and grassroots organization.” According to FCC Chairman Julius Genachowski, “These commitments total up to $4b in value and can benefit millions of Americans.”

Connect 2 Compete has already been met with praise, skepticism and criticism. Both Internet Essentials and Connect 2 Compete are spearheaded by the cable industry and will therefore primarily only impact low-income consumers in urban areas—not that this is bad, since broadband adoption in low-income urban areas a very serious concern. However, what about low-income households that do not include a child on the school lunch program, like elderly, disabled and single-person homes? Perhaps the FCC will tweak the eligibility requirements to include a broader demographic once the program is underway.

When he announced Connect 2 Compete last month, Genachowski cited America’s shameful 68% broadband adoption rate compared to South Korea and Singapore’s 90% adoption rate. Genachowski emphasized that education, jobs and health care are becoming more and more dependent on broadband, and “Broadband is now a basic requirement to participate in the twenty-fist century economy.” It also appears as though the FCC intends for Connect 2 Compete to be an urban counterpart to the high-cost Connect America Fund, even though Connect 2 Compete is focused on adoption while the Connect America Fund is focused on deployment. Deployment isn’t as much of a problem in urban areas; but adoption is certainly an issue in rural areas just as much as in urban areas, so it will be interesting to see if Connect 2 Compete eventually comes to RLEC territory in some form or another.

At least one non-cable, rural-focused broadband provider is apparently jumping on the $9.95 per month broadband bandwagon. CenturyLink recently announced its like-minded program, Internet Basics, which provides 1.5 Mbps (download; same as Comcast) broadband, $150 netbooks and training for more than 100 communities across the country. The key difference with Internet Basics is that households are eligible if they also qualify for the telephone Lifeline program. According to a November 21 blog post by CenturyLink vp of public policy and federal legislative affairs John F. Jones, “The true potential of adoption programs like CenturyLink’s and the ones envisioned by Chairman Genachowski will be realized at the local market level, where communications providers and their employees work hand-in-hand with community leaders and civic groups to properly identify needs, resources, and opportunities to advance not only broadband availability, but also understand and overcome the barriers to adoption and faced by those not online today.”

For RLECs, these low-income broadband adoption programs are definitely something to watch. Connect 2 Compete might actually have a double meaning, where it could boost the competitive position of cablecos that compete with telcos for low-income consumers. But, will small companies see any financial benefit from offering extremely low-cost broadband? They might if they face significant cable competition and serve large populations of potentially eligible households. Another point to consider is that today’s $9.95 customers just might become tomorrow’s $49.95 customers, especially if they utilize the broadband connection to find a new job or improve the family’s financial situation. A November 10 Wall Street Journal article about Sprint’s perspective on the Lifeline program caught my attention, stating that “In any given period, Sprint has said, more than 50% of its net new customers have come to the carrier via the free service,” called Assurance Wireless.

Economic, market and regulatory forces are definitely putting pressure on broadband providers to offer extremely low-rates coupled with cheap hardware and digital training to low-income Americans. Can we expect a large-scale rural initiative similar to Connect 2 Compete? What are RLECs currently doing to help increase broadband adoption and digital literacy for their low-income customers? Does Connect 2 Compete increase the competitive threat posed by cable companies?