Welcome and Opening Thoughts

1. 2005 Phoenix Center Educational Retreat October 6-8 • Phoenix Arizona Welcome and Opening Thoughts Lawrence J. Spiwak Thomas M. Koutsky

2. Outline Spiwak: • Telecom Background • New Network Platforms • Internet Applications Koutsky: • Implications for public policy • The public policy agenda

3. The Changing Nature of Telecommunications

4. 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

5. 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

6. Competitor’s Switch Market Power for Local Termination Traditional Origination And Termination of a Inter-Network Local Call Central Office B: Incumbent’s Switch Customer B Customer A Central Office A: Incumbent’s Switch

7. Managed IP Cloud How IP Alters Origination And Termination of a Inter-Network Local Call Central Office B: Incumbent’s Switch Customer B Customer A Central Office A: Incumbent’s Switch

8. New NetworkPlatforms

9. The Telecommunications Landscape -- circa 2001 Incumbent Telecoms Operator CLEC Data LEC or “PCLEC” Cable MSO Mobile Satellite Local Access Technology “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; Loop- Conditioning; Recalcitrant incumbent 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 Examples of Major Endogenous Entry Costs 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 data OK for voice; OK for “broadband”; Can be either mobile or fixed Technical advantages and limitations RESIDENTIAL CONSUMER Source: Naftel & Spiwak, THE TELECOMS TRADE WAR (HART 2001).

10. The Telecommunications Landscape – circa 2005 Wi-Fi? Wi-Max? Incumbent Telecoms Operator Cable MSO Mobile 3G/EVDO BPL? Local Access Technology Increasing deregulation xDSL Fiber Vertical Ownership of Programming Local Franchise Rules, “Level Playing Field” Laws • Spectrum; • Interconnection; • Tower siting; • Tech. standards • GSM • CDMA • 3G Examples of Major Endogenous Entry Costs Depends: Traditional PSTN is Excellent 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 Technical advantages and limitations RESIDENTIAL CONSUMER

11. 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)

12. 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

13. 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

14. 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

15. 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…

16. Internet Applications

17. 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

18. 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

19. 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

20. 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.

21. Public Policy Implications

22. 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?

23. 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)

24. 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…

25. 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.

26. …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)

27. Areas of Policy Activity • Broadband Networks • VoIP Applications • Local Competition • Universal Service and Intercarrier Compensation • Intramodal Mergers • Cable • Broadcast • Katrina Impact • Wireless and International

28. 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. 02-33 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

29. 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.

30. 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

31. 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

32. Universal Service Subsidies Sources: FCC Universal Service Monitoring Reports and USAC Quarterly Reports

33. Escalating Assessments Subsidies are “Pay-as-You-Go” and require ever-higher “taxes” Sources: FCC Universal Service Monitoring Reports and USAC Quarterly Reports

34. 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

35. 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

36. Cable Competition Since 1997, cable prices have increased faster than inflation and substantially more than telephone and wireless 1997 = 100 Sources: FCC CMRS Competition and Cable Industry Rate Report

37. Cable cuts in presence of wireline competition

38. 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

39. 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.

40. 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

41. 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

42. 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

43. 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

44. 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

45. 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.