Posted 12/2000
Policy Forum
Defining 'Advanced Services'
'Unbundling' the Interpretations, Some Probabilities Can Be Discerned
By Goli Ameri and Ali Kafel
The market has been confused in the past year by a Federal Communications Commission (www.fcc.gov) ruling (see "Advanced Services Unbundling" story) and a federal appeals court order finding fault with the commission's interpretations on "necessary" unbundled network elements. Their final interpretations could have dramatic effects on ILEC and CLEC business plans.
Since the FCC's ultimate goal is for the market, not the government, to regulate the industry, it regularly issues broad, ambiguous rulings and orders. The ambiguity generates impassioned and contradictory responses from vendors and service providers with the idea that the result will be a law promoting competition and, ultimately, benefiting consumers.
The UNE Remand Order
In response to AT&T Corp. et al. vs. Iowa Utilities Board et al., the U.S. Supreme Court (www.supremecourtus.gov) directed the FCC in January 1999 to reevaluate the unbundling obligations described in Section 251 (C)(6) of the Telecommuni- cations Act of 1996. Specifically, the court ordered the FCC to determine whether a specific network element was "necessary" for a competitor to provide service, and if the absence of the particular network element would impair the service provider's ability to provide that service.
Consequently, in September 1999, the FCC released its Third Report and Order and Fourth Notice of Proposed Rulemaking, known as the UNE Remand Order. It stated that a proprietary network element is "necessary" if "taking into consideration the availability of alternative elements outside the incumbent's network (including self-provisioning by a requesting carrier or acquiring an alternative from a third-party supplier), lack of access to that element would, as a practical, economic and operational matter, preclude a requesting carrier from providing the services it seeks to offer."
In the UNE Remand Order, the FCC also reinstated its loop unbundling rules and expanded its definition of a loop to include "all features, functions, and capabilities of the transmission facilities, including dark fiber facilities and attached electronics [excluding DSLAMs] and xDSL-capable loops."
Most importantly, the commission also ruled that ILECs are not obligated to offer competitors advanced services equipment (used in the provision of high-speed data services) as unbundled network elements or offer any high-speed data service network elements for resale at wholesale rates.
Advanced service equipment includes all types of packet and data switches (excluding circuit switches), such as ATM, frame relay and multifunction switches, and, especially, DSLAMs.
Although the ruling appears self-explanatory at first glance, it has created a great deal of confusion in the industry and given victim status to DSLAMs, which have become symbols of industry discord.
"The FCC hedged on [the DSLAM] issue," says Lynda Starr, vice president of U.S. carrier research at Probe Research Inc. (www.proberesearch.com). "First they excluded the DSLAMs from unbundling, but then they said if the competitor is not able to install their own equipment, then the [ILECs] have to unbundle the DSLAMs."
Jason Oxman, senior government affairs counsel at Covad Communications Inc. (www.covad.com), says the only circumstance under which ILECs are required to unbundle their DSLAMs is if the competitive provider does not have sufficient space to collocate its own DSLAM in a remote terminal. Other industry sources claim that ILECs are required to offer unbundled access to all DSLAMs that are in their remote terminals, unless they allow requesting carriers to collocate their own DSLAMs in ILEC remote terminals with the same terms and conditions of their own DSLAMs.
The Association for Local Telecommunications Services (ALTS, www.alts.org) maintains, however, that DSLAMs in remote terminals are not clearly identified network elements, and the FCC is still grappling with whether those DSLAMs must specifically be made available to requesting carriers.
To the extent that the DSLAM is part of the broadband loop transmission pass, ALTS asserts that the ILEC has to make the functionality of that loop available to requesting carriers, regardless of whether the DSLAM is or isn't an unbundled network element. To ALTS, a broadband loop could be a pure circuit that starts at the end-user premises, rides along copper to a remote field terminal, runs through a line card on a DSLAM, feeds into a fiber feeder plant to the central office, and finally cross-connects over to the CLEC's collocation space.
Jonathan Askin, ALTS general counsel, takes the DSLAM issue one step further, in fact, throwing in other types of packet switching equipment that should perhaps be included on the loop.
"If there is no way for a CLEC to get its end users' signals at its core location space, then the incumbent is still obligated to route [the signal] through their DSLAM and conceivably through their packet switch in order to get the customer signals to the CLEC," he says.
But ALTS isn't necessarily lobbying for every CLEC to gain access to new broadband technology from DSLAMs to other types of packet switches unless there is no alternative.
"What is essential is that we be guaranteed access to the functionality of each of the existing unbundled network elements," Askin says. "The loop with its full features and functionalities must be made available to requesting carriers, regardless of whether or not there is advanced services equipment or electronics on that loop." This equipment includes products such as multiplexing equipment and DSLAMs.
Collocation Ruling
In a decision called GTE vs. FCC1, the U.S. Court of Appeals for the District of Columbia Circuit ordered the FCC in the spring of 2000 to revisit certain questions related to collocation and to determine the types of equipment necessary for collocation.
One of the questions to be revisited concerns the FCC's interpretation of the word "necessary" as it pertains to collocatable equipment. GTE (now Verizon Communications, www.verizon.com) appealed the FCC order mainly because of the inclusion of multifunction switches as necessary collocatable equipment. The court found fault with the way the FCC interpreted "necessary", but did not find fault with the collocation provisioning rules the commission implemented in its March 1999 ruling.
The FCC had interpreted the term "necessary" very broadly, in order to support its policy of ensuring that competitive LECs can collocate multifunctional equipment so they can offer more services at lower costs.
Responding to the court's order, the FCC released a Further Notice of Proposed Rule-Making in summer 2000 seeking comments from the industry on how incumbents should make access to remote terminals and next generation network architecture available to CLECs, and what should be included as collocated equipment. Those comments were due by October 12, and the FCC is expected to issue a ruling early next year.
The UNE Remand Order and the federal appeals court order could dramatically affect CLEC and ILEC business plans and their equipment deployment costs. One of the first and most important reasons for unbundling network elements was to help CLECs enter new markets with lower up-front costs and lower risks. Consequently, the UNE Remand Order regarding ILEC exemption in unbundling advanced services network elements could have a dramatic impact on the business plans of nonfacilities-based CLECs. The appeals court order on collocation could in turn seriously affect facilities-based provider business models.
"Just the fact that there's an issue about how these claims are going to be resolved makes it difficult for the CLECs to plan exactly how their networks are going to be implemented," says Frank McEvoy, a senior research analyst at U.S. Bancorp Piper Jaffray Inc. (www.piperjaffray.com).
A carrier entering a new market has several options for providing services, ranging from building its own network to leasing facilities from ILECs (loops, switching, support and other elements) to reselling ILEC services. The decision usually is based on expected revenues and capital outlays. CLECs study expected traffic volume, interconnection agreement feasibility, ease of collocation arrangements, and other technical factors.
Impact on Resellers
Nonfacilities-based CLECs are usually resellers that purchase services from ILECs at wholesale prices and market the packages to their own customers. This business model not only allows the service provider to accelerate market entry, but also saves on initial capital outlays.
Although the Association of Communications Enterprises (ASCENT, www.ascent.org) indicates that margins on the resale model are too low because of the prevailing 15 percent to 25 percent discount range, Starr says a study by Probe in August reveals that this business model has proven successful, especially in terms of the economic viability of CLECs.
In measuring the industry's financial health, Probe studied the revenue vs. assets ratio and discovered that since some of the new carriers are receiving limited revenue per line, the CLECs with minimum hard assets have performed better in terms of staying power. Although the smart-build strategy still holds, Probe found that CLECs could last longer without investing in building their networks.
The FCC ruling on the exemption of ILECs from the unbundling of the broadband infrastructure will therefore affect resellers the most, since they depend on the ILECs' network and infrastructure. It is important to understand, however, that the FCC is focused on promoting competition and most likely would not implement a ruling that would take the industry back to its monopoly days. The commission does not intend to deny reseller access to advanced services UNEs; it intends rather that the remanded order will eventually amend the pricing rules. ILECs are not obligated to unbundle their advanced services network elements at wholesale or discounted prices--and as a result, the CLECs would still be able to have access and, for example, resell the DSL services of the ILECs.
The pricing, however, would no doubt be the dominant factor in the economic viability of the service for reseller CLECs. Resellers claim they need a 42 percent retail service discount to break even. It is highly unlikely that ILECs will be generous in pricing their advanced services offerings, since the tariff will no longer be subject to UNE pricing or to the Telecom Act arbitration proceedings.
The CLECs can therefore exert far greater independence in shaping their business models when they own their own networks. Although resale is a viable short-term alternative, a smart-build strategy should be every CLEC's long-term goal. Nevertheless, this scenario is a daunting one in today's tight capital markets.
Building a network is highly capital-intensive, and recent disappointing news from CLECs such as GST Telecommunications Inc. (www.gstcorp.com), ICG Communications Inc. (www.icgcomm.com) and Prism Communication Services Inc. (www.prismcsi.net , a subsidiary of Comdico Inc., www.comdisco.com) does not engender a flush capital market. In moving toward a facilities-based model, CLECs should therefore look for equipment that gives them the greatest efficiency and economy. McEvoy and Oxman say multiservice switches incorporating numerous functionalities such as Class 5, routing and multiplexing, narrow and broadband aggregation capabilities, and integrated testing mechanisms will give CLECs the most value for their money. These switches save on real estate, and can support multiple services such as voice, data and broadband access, providing CLECs with a scalable modular platform at the lowest cost.
Not Sweating It
Facilities-based providers purchase their own equipment (including circuit switches), which they collocate at an ILEC CO, and lease the local loop. Other types of facilities-based providers combine portions of both the reseller and facilities-based models, leasing the local loop and switching port, but deploying other types of equipment. According to ALTS, there were more than 375 CLECs in 1999, 333 of which own or control and operate some of their own facilities.
Facilities-based CLECs will not be affected by the FCC ruling on exemptions from unbundling advanced services, since the majority deploy their own packet switching equipment in COs.
"When the FCC came out with that decision last year, most of the advanced services CLECs were probably happy," Askin says. "[They] were out there deploying many more DSLAMs and many more packet switches than the ILECs, so as long as they could collocate that equipment everything was OK."
Oxman says that Covad, being a facilities-based provider, actually agreed with the ILECs' stance on not being obligated to unbundle their DSLAMs.
Indeed, the CLECs' lack of concern about the advanced services ruling is evident in their actual and stated capital expenditure figures. McEvoy says CLEC spending is slated to increase by more than 30 percent in 2000. Robert W. Baird & Co. (www.rwbaird.com), a Northwestern Mutual Company, says CLECs are expected to spend $10.9 billion in 2000 and more than $14 billion in 2001. Both companies say these estimates may be conservative, since advance capital expenditure reports are generally misleading because the spending level accelerates significantly every year in response to growing bandwidth demand.
"The FCC said very clearly and in no uncertain terms that a CLEC was allowed to collocate this type of equipment in a central office," ALTS said at the time of the UNE Remand. "Now there's a little uncertainty about that because of the DC circuit court ruling."
In GTE vs. FCC, the appeals court agreed with the ILECs that the FCC had not adequately explained whether multifunctional switches were "necessary" equipment for collocation in the CO.
The FCC has traditionally excluded switching equipment from COs since 1996. The purpose of this was to exclude the deployment of circuit switches, since the FCC was concerned that one circuit switch collocated in a CO would foreclose that CO to other CLECs. The ILECs are taking this ruling a step further, claiming that all equipment with integrated switching functionalities, including ATM, multiplexing and DSLAM-type functionalities, should be considered switches, and should not be allowed in a CO.
The CLECs want the FCC to rule that collocating switching equipment is "necessary" as long as it fulfills one of the statutory purposes for which collocation is permitted: UNE access or interconnection. CLECs maintain that ATM switches, for example, are used for interconnection and for UNE access, and should be permitted in a CO. CLECs and DLECs want the FCC to officially separate these products from traditional circuit switching equipment.
In case the FCC does not agree with the CLECs' definition of "necessary," ALTS described the terms in detail in a letter written to the FCC in May 2000:
"The fact that a piece of equipment is capable of performing tasks that are not essential for interconnection or access to unbundled network elements should not be the litmus test of whether the equipment itself is 'necessary' for interconnection or access to unbundled network elements. If that were so, CLECs (and ILEC affiliates) would be prevented from taking advantage of technological advances and would be forced to install outdated inefficient equipment. Because telecommunications equipment is now being manufactured with multifunctionality, ALTS submits that such equipment is 'necessary' under Section 251(c)(6)... As the Commission has recognized, 'modern technology has tended to blur the line between switching equipment and multiplexing equipment.'"
Collocation Vital
Collocation, and especially collocating multifunctional switches, is vital to CLECs. COs are the most viable location for facilities-based providers to access the loop and attach the loop to their network. DSL is a distance-sensitive technology, and DSLAMs, for example, must be placed at the end of copper transmission paths.competitive LECs are unable to rent their own space in many instances, and place their equipment elsewhere, since this strategy only serves to increase the length of the loop and render it useless for service provisioning. The fact remains that Congress allowed unbundled access to local loops, because it is technically and financially infeasible for any competitive operator to build its own network of loops duplicating the ILECs' network.
Although some packet switches may be placed at the CLEC PoPs, other types of equipment must be located at the CO. The vast majority of CLEC and DLEC packet switches are in fact in COs. According to the ALTS State of Competition Report, released in February 2000, CLECs were collocated in 1,430 end offices in 1998, increasing to 5,700 in 1999. Collocations are expected to approach 10,000 in 2000 (very close to the total number of existing COs). Covad, for example, is collocated in approximately 2000 COs.
Collocating at a CO is also far more cost-effective for competitive operators--T1 or T3 lines (from the PoP to the CO) cost approximately $600 to $800 per month, but unbundled loops cost approximately $20 to $40 per month.
Although the FCC will be releasing its decision on the collocation matter early next year, Covad is very confident that the commission will preserve the competitive industry's ability to continue offering the right types of services and to collocate the right types of equipment.
How ILECs Are Affected
The FCC ruling on unbundling advanced services and the collocation court order will affect incumbent LECs by removing the ILECs' obligation to unbundle high-speed Internet access network elements, or offer them at wholesale prices. As far as advanced services are concerned, the CLECs and ILECs are starting from the same position, and the ILECs will have to expend capital to deploy a broadband network. Generally, the ruling will encourage the ILECs to proceed with an accelerated deployment of their broadband networks, and reduce the risk of competitors cherry-picking on their investments. This fits very well into FCC's goal of bolstering universal broadband access, since the ILECs have the largest networks and the largest footprint.
Part of the impetus behind the advanced services ruling was the CLECs' ability to collocate the same type of equipment in ILEC COs. The FCC's idea was that if the CLECs could acquire and collocate the packet switching equipment, there was no need for them to have access at wholesale prices. Since the FCC must now revisit this order, and if for some unlikely reason the commission decides to disallow the CLECs from collocating DSLAMs and packet switches in COs, it's highly likely that the commission would reconsider the ILECs' exemption from unbundling the advanced services too.
Ali Kafel is the vice president of marketing at Telica Inc. (www.telica.com), a provider of intelligent multi-service broadband switches. He can be reached at akafel@telica.com
Goli Ameri is the president of eTinium Inc. (www.etinium.net), a boutique consulting and research company specializing in the converging telecom and Internet markets. She can be reached at gameri@etinium.net.
1 Decision of the United States Court of Appeals for the District of Columbia Circuit in GTE Service Corporation ("GTE"), v. Federal Communications Commission which vacated portions of the FCC's "Collocation Order" released in March of 1999 (First Report and Order in Deployment of Wireline Services Offering Advanced Telecommunications Capability).
