Intercarrier Compensation Reform: What s the Bottom Line Impact? Monday, April 16, Intercarrier Compensation Business

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1 Intercarrier Compensation Reform: What s the Bottom Line Impact? Monday, April 16, :30-3:15 3:15 p.m. Intercarrier Compensation Business

2 PLEASE SILENCE YOUR CELL PHONES THANK YOU! Intercarrier Compensation Business

3 Moderator: Carey Roesel, Vice President and Consultant, Technologies Management Inc. (TMI) Speakers: Michael Beach, President and Co Founder, HighTide Partners Paul Florack, Vice President Product Management, Transaction Network Services, Inc. James Lister, Attorney/Shareholder, Birch Horton Bittner and Cherot, P.C. Intercarrier Compensation Business

4 FCC Access Reform Managing the Change Michael Beach HighTidePartners Partners, LLC March 2012

5 FCC Access Reform Impact Overview FCC Order: Defined transition for Terminating Switched Access and Reciprocal Compensation over a 9 step, 9 year glide path to Bill and Keep. Reconsideration and Appeals continued uncertainty. Further Notice: Transition for originating access, terminating tandem elements and 8YY access to Bill and Keep. State Regulatory Action. Carrier business decisions. 5

6 FCC Access Reform Overall Switched Access Changes 6

7 FCC Access Reform Impact by Segment 7

8 FCC Access Reform Total Access Costs for Model Carrier December 2011 Total Spend: $4,894,000,000 8

9 FCC Access Reform Access Changes, 2011 to 2020 Dec 2011 Total: $4.8 B 1 July 2013 Total: $4.3 B 1 July 2020 Total: $3.4B 9

10 FCC Access Reform Real Customer Impacts Affected By: o Product Mix: Long Distance, Local, Mobile, VoIP. o Scope of Operations: Regional vs. national, urban vs. rural, interstate vs. intrastate traffic mix. o Market Pressure: LECs, CLECs, and Mobile Providers may have some opportunity to raise retail rates, but risk losing line share. Margin pressures on certain products and changing priorities from competitors, vendors and customers. Pressures for IP enabled Voice/Data/Video capability. Broadband requirements and opportunities. 10

11 FCC Access Reform Product Implications o Transport and Termination: Access component evaporates over time. o Domestic Least Cost Routing: Cost differences between carriers narrows with greater emphasis on low cost network operators. o Retail Local and Long Distance Service: Residential services may havepricing opportunity, businessserviceshavepass services through benefit. o Toll Free (800): Could be at a significant disadvantage if originating access stays high during the transition. o VoIP: Providers struggle with added cost in the short term and likely must attract customers with more than just pricing. 11

12 FCC Access Reform Business Process Focus o Audit: Focus shifts from usage to fixed audit over long transition with moving targets. o Revenue Assurance: Pi Priority i is greatly enhanced, Revenue is King. o Arbitrage: Relief from traffic pumping, but continued vigilance to find potential ti next generation arbitrage traffic patterns. o Network Optimization: The new cost differentiator between providers but with a new cost paradigm. Push to IP networks. o Billing and Collections: New temporary VoIP access charges. IP traffic data handling a must do for all carriers. Increased collections challenges. Tariff and Contract resources. 12

13 FCC AccessReform Action Plan o Understand the financial impacts and timeframes; quantify your individual company impacts. o Strategic evaluation of business impacts and opportunities in 3 year, 5 year and 10 year windows. o Determine necessary changes in Business Operations and Processes that maximize margin and avoid transition risks. ik o Modify impact analysis and adjust pricing and products as the business transforms. o Support customer initiatives and remain flexible! 13

14 Intercarrier Compensation Reform: Next Steps for Operators Paul Florack Transaction Network Services, Inc. Intercarrier Compensation Business

15 Implications of the Order Impacts to state tariffs implemented as part of unbundling switched access SS7MSUcharges Greater impetus to migrate to IP lower operating costs, offer high bandwidth services Legacy database and routing systems will not allow operators to maximize efficiency of this new network and new regulatory rules Accelerate new revenues from non user paid sources Access charges are one form of non user paid Revenue that will be reduced over time as a result of the Order Find Other Sources!

16 Significant Cost Changes LCR and Arbitrage strategies will change gradually from Competitive Access Rates to Bill and Keep. Termination rates will be complex and hard to manage. The IntraState rates will eventually mirror InterState Access rates, so Jurisdictional routing will no longer be relevant. VoIP traffic will be required to pay ICC during transition. CLECs must accommodate PVU (Percent VOIP Usage) g) to accurately bill. CLEC Revenue Impact Loss of Revenue: Mobile Terminating Access Increase in Revenue: VOIP Access

17 Why Reform was Needed Law of Diminishing Returns Adding more and more use of IP, while holding the Legacy PhoneSystem constant, yields less and less benefit. Traffic Revenues Simply put, the current inter related USF (universal services fund) and ICC (inter carrier compensation) system is unsustainable. FCC Chairman Julius Genachowski Legacy services era Network Network Costs transformation Inter carrier Settlement Costs Revenue Leakage All IP services era Time Up to 50% of operational costs 3% to 5% of total revenue Improve profitability thru modernization of Legacy System

18 The Telecom Service Provider s Challenge Need to meet user traffic demand at profitable level which is driving convergence to All IP Network Bandwidth demand continues to grow User Paid Revenues Traffic Non user Paid Revenue New Revenue Models Average revenue per user declining Total Cost of Ownership Efficient network and operations

19 Intelligent Routing Architecture To Optimize the Network Legacy Reference Architecture Distributed Directory Reference Architecture 800SMS NPAC 800SMS NANPA NPAC LCR LIDB SCP 8XX SCP LNP SCP Federated Routing & Subscriber Data Central Registry (Service Bureau) NANPA (LERG) To Peered Networks SSP Route Server SSP Subscriber Data Routing Policies Routing Policies & Subscriber Data

20 Inter connect Agreements and Peering How Intelligent Routing can Help Managementof traffic exchange through Peering or ICAs will be more critical than ever. Business Analytics will become an importanttool tool in managing costs and ROI. Data mining, complex reporting, statistics, and other quantification metrics will be necessary to manage the Carrier business and to comply with constant changes. Due to these significant changes, disputes will arise. Data metrics will be paramount in order to reconcile disputes and/or Access traffic charges.

21 Intelligent Routing Use Cases Reduce Revenue Leakage & Opportunity Cost Empowering carriers to scale peering and reduce occurrence of data defects Loss Making Traffic Detection Inter Carrier Cost Reduction Empowering int l wholesalers to optimize bilaterals and detect instances of cherry picking Empowering mobile operators to avoid cost of ICSMS/MMS Hub vendor Portal lto Mobile Cost Empowering portals to send directly to mobile Reduction network, avoiding cost of man in the middle VoIP Carrier Access Cost Empowering VoIP service providers ( resellers ) Reduction to institute reciprocal agreements Fraud Prevention Empowering fraud managers with identifying information used to assess risk

22 Example Non User Paid Revenue Strategies Telecom privacy laws require consumer opt in 83% of online users refuse to give information considered unnecessary or too personal in nature. walled garden Non us ser Paid Reven nue 3% of Online Sales $4.6B Are consumers willing to share mobile location to protect against online fraud? Yes 58% No 21% Don t know 21% Bank 37%; Credit card company 21% Low fraud prevention Market Acceptance Risk marketing (net neutrality) (privacy) Medium High

23 Telco Data for Identity Verification Identity theft losses exceeded $37B in % of identity theft crimes involve telecom and the Internet 90% of loss absorbed by businesses & financial institutions After SSN, telco attributes are the most common data elements to verify consumer identity Industry lacks authoritative source Early implementations using data sourced by AT&T, Verizon, CenturyLink are well received Open Identity Exchange (OIX) finalizing trust framework that supports use of telco data without violating CPNI rules Enterprises will pay operators for access to telco data Enterprises will pay operators for access to telco data elements name, TN, address, prepaid indicator, etc.

24 James H. Lister Attorney/Shareholder Birch, Horton, Bittner and Cherot, P.C Connecticut Avenue, NW, Suite 1200 Washington, D.C Disclaimer: This presentation is not intended to reflect the views of Birch Horton Bittner and Cherot, P.C. or its clients, is not legal advice, and is not intended to account for the particular situation of any recipient of the presentation. The presentation includes predictions as to how rapidlyevolving rules may change and not just analysis of current rules.

25 Appeal of Order CASE STATUS: Process of sorting out groups of aligned parties before 10 th Circuit Court of Appeals and what issues they will brief is ongoing. No briefing schedule has been issued [AS OF April 3, 2012]. KEY ARGUMENT: The most promising argument of parties appealing order is that Section 252(d)(2) of the Act assigns state public utility commissions the job of setting exact rates for transport and termination of traffic under Section 251(b)(5), so the FCC action mandating a $0 access / reciprocal comp rate may improperly deprives the state commissions of this authority. The FCC s authority to mandate bill-and-keep ($0 per-minute rate) is highly questionable, at least when traffic flows are not roughly balanced in each direction CRYSTAL BALL PREDICTION: There will be a partial reversal by the 10 th Circuit and the FCC will have to give states public utility commissions some discretion on setting access and recip. comp rates pursuant to FCC devised methodology. This will result in some states in very low but non-zero rates. However, rates will likely reach zero where traffic flows between originating and terminating carriers are roughly balanced. BUSINESS IMPLICATION IF CRYSTAL BALL IS RIGHT: Do not count on per-minute access charges and reciprocal compensation charges going all the way to zero. IXCs should plan on keeping linecostauditcapability (outsourced or in-house). If you are a LEC, there should be some access and/or reciprocal compensation revenues retained over time, albeit at much lower rates. J. Lister Birch Horton Bittner and Cherot, P.C. jlister@dc.bhb.com Page 1

26 Ongoing FCC Inter-carrier Compensation Actions Current Rulemaking: FCC has taken comment on its proposal to ramp-down originating access charges and transport and tandem access charges zero. Current Interpretative Disputes: Current dispute over whether, in context of PTSN-to-VoIP calls, the IXC or VoIP provider acting as IXC may limitit the ILEC who originates i intrastate t t toll calls on the PTSN to charging only interstate rates. [Review any other significant current implementation disputes update April 4] J. Lister Birch Horton Bittner and Cherot, PC jlister@dc.bhb.com Page 2

27 Charging for Access to End Users Business plans that depend on charging other providers for access to the provider s end users will likely become non-viable over time as terminating end office switching and reciprocal compensation charges move to $0 under the order and current proposed rulemaking, or to near- zero if the order is successfully appealed. Providers will generally need to recover greater percentage of revenue from their end users. With very high-volume, plans dependent on charging for access to end users may remain viable for some time, particularly if due to appeal/reconsideration rates end up somewhere >0. FCC has not yet set a ramp-down path for originating access, although itisproposing p to do so. J. Lister Birch Horton Bittner and Cherot, PC jlister@dc.bhb.com Page 3

28 Charging for Transport/Transit Functions Business plans that depend on charging other providers for providing some link or function in the call path (as opposed to access to its own end users) will likely remain more viable over time. This predicts the FCC will not completely adopt its proposal to ramp all tandem/transport per-minute rates down to zero in the long distance context, will continue to allow tandem/transport functions to remain unregulated outside that context, and will allow most dedicated circuit charges to remain. The FCC recognizes that a provider of a service must be able to charge someone. If the provider is an intermediary carrier in the call path and so has no end user to bill, it must bill another provider. Competitive carriers typically serve either the end user or provide intermediary tandem functions, not both. Thus, when serving as intermediary (tandem) provider, they should ultimately be in a better position to impose per-minute charge, if the above predictions are correct. (If the FCC ramps transport/tandem pricing downtoa $0bill-and-keep level, CLEC tandem providers may need to ask the FCC for waivers, as they have no end user to bill.) Large (Price Cap) ILECs will likely be required to provide some tandem and transport functions for $0 rate (bill and keep) where they serve the end user receiving the call. There are two separate regulatory regimes for tandem/transit services, both of which continue On long-distance toll calls transport/tandem services are regulated as discussed above. On local (including intramta wireless) and other calls transit service (although functionally equivalent to transport/tandem service) is not regulated by the FCC. CLEC may not be able to use tariff, but they also aren t subject to FCC rate regulation. J. Lister Birch Horton Bittner and Cherot, PC jlister@dc.bhb.com Page 4

29 Dedicated Circuit Charges Dedicated Circuit charges are less affected by the FCC order. FCC grooming rule effectively allows Large (Price Cap) ILECs to replace some lost per-minute tandem and transport revenue by requiring IXCs and other carriers to purchase direct circuits to Bell end office when traffic volumes exceed certain thresholds. Given grooming rule, CLECs and IXCs may be better off having multiple smaller business units that do not generate sufficient traffic volume to trigger ILEC s right to invoke grooming. CLECs/IXCs with small enough volumes may be able to cancel some circuits to end offices they already pay for, and instead just bring traffic to the Large (Price Cap) ILECs tandem, in order to take advantage of bill and keep. J. Lister Birch Horton Bittner and Cherot, PC jlister@dc.bhb.com Page 5

30 Dividing Line Between Access to End User and Transport/Transit (the Network Edge ) is Key Expansive Network Edge = Smaller Scope of Chargeable Transit Services Between Networks Originating Carrier Network Edge Terminating Carrier Network Edge Bill and Keep Chargeable Transit Service Bill and Keep Narrower Network Edge = Smaller Scope of Chargeable Transit Services Between Networks Oi Originating i Carrier Network kedge Terminating Carrier Network Edge Bill and Keep Chargeable Transit Service Bill and Keep J. Lister Birch Horton Bittner and Cherot, PC jlister@dc.bhb.com Page 6

31 Access Stimulation CLEC (or rate-of-return ILEC) capped at charging very low access stimulation rates (rate charged by price-cap ILEC with lowest rates in state) if both (1) and (2) are true: (1) CLEC makes a net payment to person causing CLEC to be in call path, and (2) CLEC either (a) increases in traffic volume billed IXC over 100% in any 12 month period, for either originating or terminating minutes, or (b) has terminating-to-originating ratio of 3-to-1 or greater. The rule favors those access stimulation business plans where the provider furnishes the stimulating credit to an end user customer who is paying a greater service charge (e.g. basic local service) to the provider. This approach avoids a net payment from provider to customer. For providers who do make a net payment to stimulate traffic, the rules favor access stimulation business models involving originating traffic (e.g. 1-8XX) for two reasons. First, the FCC s order does not ramp-down originating access, just terminating access, although the FCC s current proposed rulemaking would ramp down originating access rates. Second, originating traffic type won t trigger the terminating-to-originating ratio of 3-to-1 that is a criteria for invoking the access stimulation penalties However, 100% year-to-year increase in traffic volume trigger is designed to expose access stimulation plans involving originating traffic, provided the net payment criteria is met. IXCs watching out for access stimulus should keep in mind the argument that a given scheme may be unjust and unreasonable (in violation of the Act) even if it does not constitute access stimulation under the FCC rules. At least one federal district has accepted the argument that an IXC need not purchase access service where the CLEC/ILEC is engaged in a call routing practice that does not add value to the network. J. Lister Birch Horton Bittner and Cherot, P.C. jlister@dc.bhb.com Page 7

32 IXC / ILEC Interconnection Agreements A consequence of FCC declaring that long distance access traffic will be governed under Section 251(b)(5) of the Act, which formerly governed just reciprocal compensation, is that IXCs should now have standing to seek interconnection agreements with ILECs under Sections 251 and 252 for the provision of exchange access services by the ILEC to the IXC. This flexibility would impact service terms other than per minute rates because the FCC rate ramp down schedule will presumably govern rates in any arbitration. IXCs going down this path would want to form a coalition and work together. Other IXCs could elect to opt into the resulting agreements. Disclaimer: This presentation is not intended to reflect the views of Birch Horton Bittner and Cherot, P.C. or its clients, is not legal advice, and is not intended to account for the particular situation of any recipient of the presentation. The presentation includes predictions as to how rapidly evolving rules may change and not just analysis of current rules. J. Lister Birch Horton Bittner and Cherot, P.C. jlister@dc.bhb.com Page 8

33 Speaker Contact Information: Carey Roesel, Michael Beach, Paul Florack, com James Lister, Intercarrier Compensation Business

34 THANK YOU FOR ATTENDING! Intercarrier Compensation Business