voip, wifi and the local exchange carrier a regulatory update and financial analysis charles curtis...

VoIP, WiFi and the Local VoIP, WiFi and the Local Exchange CarrierExchange Carrier

A regulatory update and financial analysisA regulatory update and financial analysis

Charles CurtisCharles CurtisNovember 13, 2003November 13, 2003

Confidential & Confidential & ProprietaryProprietary

DISCUSSION OUTLINEDISCUSSION OUTLINE

• New Technologies and Enhanced ServicesNew Technologies and Enhanced Services– VoIPVoIP– WiFiWiFi

• Square Peg/Round Hole - Enhanced Services Square Peg/Round Hole - Enhanced Services versus Regulated Servicesversus Regulated Services

• What is the defensive strategy?What is the defensive strategy?• What is the offensive strategy?What is the offensive strategy?• Regulatory ConsiderationsRegulatory Considerations• ConclusionConclusion• QuestionsQuestions


VoIP – Voice over Internet VoIP – Voice over Internet ProtocolProtocol

• Provides internet service that emulates basic local Provides internet service that emulates basic local and long distance service.and long distance service.

• Provisioned over broadband internet connectionProvisioned over broadband internet connection– Cable ModemCable Modem– DSLDSL– Other Hi-Cap (wireless LAN or WiFi)Other Hi-Cap (wireless LAN or WiFi)

• Prices are relatively affordable for both subscriber Prices are relatively affordable for both subscriber and providerand provider

• Trade-off between QoS with traditional servicesTrade-off between QoS with traditional services– Customers seem willing to accept trade-offCustomers seem willing to accept trade-off


VoIP - ContinuedVoIP - Continued

Cisco ATA 186 – List price between $110-150Cisco ATA 186 – List price between $110-150Can handle a primary and secondary lineCan handle a primary and secondary lineAlso provides dial tone to normal phonesAlso provides dial tone to normal phonesPlugs into either Cable Modem or DSL Modem Plugs into either Cable Modem or DSL Modem via Ethernetvia Ethernet


VoIP to PSTN CallVoIP to PSTN Call

Cisco ATA Modem

Customer PremisesCustomer Premises

InternetInternet

Gateway switchGateway switch

POTS LinePOTS LineConfidential & Confidential & ProprietaryProprietary

VoIP ProvidersVoIP Providers

• VonageVonage– Mainly parasitic offering over incumbent ISP Mainly parasitic offering over incumbent ISP

providerprovider• $34.99 Unlimited Local and LD$34.99 Unlimited Local and LD• $24.99 Unlimited Local and Intrastate LD$24.99 Unlimited Local and Intrastate LD• Competitive International LD and free Vertical ServicesCompetitive International LD and free Vertical Services• Issue new number, port existing numberIssue new number, port existing number

– Depends on availability of NPA-NXX’s in the regionDepends on availability of NPA-NXX’s in the region

– Geography is transparent - $4.99 for ‘virtual phone Geography is transparent - $4.99 for ‘virtual phone number’number’

• Terms and conditions – “Do not refer to service as Terms and conditions – “Do not refer to service as telephone service”telephone service”..


VoIP Providers - ContinuedVoIP Providers - Continued

• City of Coldwater, MI, DeltaThree, 8x8 (Wisconsin City of Coldwater, MI, DeltaThree, 8x8 (Wisconsin case)case)

• Upstarts practically everydayUpstarts practically everyday– First cost is substantially lower than equivalent traditional First cost is substantially lower than equivalent traditional

voice networkvoice network• Parasitically offered over existing broadbandParasitically offered over existing broadband• Rich IP interactive billing and account platforms that are basic Rich IP interactive billing and account platforms that are basic

part of servicepart of service

• Substitute for traditional phone serviceSubstitute for traditional phone service– Loss of access linesLoss of access lines– Loss of minutesLoss of minutes– If using landline broadband, keep DSL or Hi-Cap lines If using landline broadband, keep DSL or Hi-Cap lines

purchased by ISP, affiliate or deregulated operationpurchased by ISP, affiliate or deregulated operation


VoIP NumbersVoIP Numbers

• VoIP will account for 75% of VoIP will account for 75% of international telecommunications by international telecommunications by 2007 (Frost & Sullivan)2007 (Frost & Sullivan)

• $16.5 Billion market by 2006 (Allied $16.5 Billion market by 2006 (Allied Business Intelligence)Business Intelligence)

• Retail VoIP MOU exceeded 15 billion in Retail VoIP MOU exceeded 15 billion in 2001 (Frost & Sullivan)2001 (Frost & Sullivan)


WiFiWiFi

• Stands for Wireless FidelityStands for Wireless Fidelity– Unlicensed spectrum in the 2.4GHz rangeUnlicensed spectrum in the 2.4GHz range

• Large array of radio, antenna and software Large array of radio, antenna and software platform providersplatform providers

• Types of servicesTypes of services– HotspotHotspot

• Starbuck’s, Airports, HotelsStarbuck’s, Airports, Hotels

– TransportTransport• Line of site for either backhaul traffic or loop Line of site for either backhaul traffic or loop

connectivityconnectivity

– Corporate WAN/LANCorporate WAN/LAN


WiFi - ContinuedWiFi - Continued

• WiFi is growing at remarkable rateWiFi is growing at remarkable rate

• Potential for total bypass, combined Potential for total bypass, combined with VoIPwith VoIP– Offer voice and data with:Offer voice and data with:

• Hotspot proprietorsHotspot proprietors• Residential and business subscribersResidential and business subscribers

– Incumbent would loose even the DSL or Hi-Cap lineIncumbent would loose even the DSL or Hi-Cap line

• Replace special access for backhaul functionsReplace special access for backhaul functions


VoIP to PSTN Call utilizing WiFiVoIP to PSTN Call utilizing WiFi

Cisco ATA Modem

Customer Premises

InternetInternet

Gateway switchGateway switch

POTS LinePOTS Line

Replace loopReplace loop

Replace Replace backhaulbackhaul


Square Peg – Round HoleSquare Peg – Round Hole

• ISP is considered an enhanced service, as ISP is considered an enhanced service, as defined in Part 64defined in Part 64– “…“…shall refer to services, offered over common shall refer to services, offered over common

carrier transmission facilities used in interstate carrier transmission facilities used in interstate communications, which employ computer communications, which employ computer processing applications that act on the format, processing applications that act on the format, content, code, protocol or similar aspects of the content, code, protocol or similar aspects of the subscriber’s transmitted information; provide the subscriber’s transmitted information; provide the subscriber additional, different, or restructured subscriber additional, different, or restructured information; or involve subscriber interaction with information; or involve subscriber interaction with stored information. stored information. Enhanced services are not Enhanced services are not regulated under Title II of the Actregulated under Title II of the Act.” Part 64.702(a).” Part 64.702(a)



• Vonage vs. Minnesota PUCVonage vs. Minnesota PUC– Told Vonage they were telecommunications Told Vonage they were telecommunications

provider, not information service providerprovider, not information service provider• Regulated under Title II of the ActRegulated under Title II of the Act• Get ETC status from PUCGet ETC status from PUC• Pay E-911 and other regulatory feesPay E-911 and other regulatory fees

– Multi-State Tax Commission complaintsMulti-State Tax Commission complaints

– ““Duck” theoryDuck” theory

– Reversed by Minnesota Federal District CourtReversed by Minnesota Federal District Court• Injunction against MPUC: information serviceInjunction against MPUC: information service



• Wisconsin PSC Letter to Vonage, 8x8 Wisconsin PSC Letter to Vonage, 8x8 and DeltaThree:and DeltaThree:– ““What are you guys selling?”What are you guys selling?”

• DeltaThree: “No subs in Wisconsin”DeltaThree: “No subs in Wisconsin”• Vonage: “We don’t sell telecom service”Vonage: “We don’t sell telecom service”• 8x8: TBD8x8: TBD

– RBOCS plead with FCC to do somethingRBOCS plead with FCC to do something• Powell commits to addressing VoIP this fallPowell commits to addressing VoIP this fall



• What is VoIP?What is VoIP?– It is an enhanced service or information service, as defined It is an enhanced service or information service, as defined

in Part 64. It resides as a port identity over the ISP’s in Part 64. It resides as a port identity over the ISP’s network, at least until it hits the PSTN gateway.network, at least until it hits the PSTN gateway.

– It is a telecommunications service. It emulates basic and It is a telecommunications service. It emulates basic and long distance service and can substitute itself for traditional long distance service and can substitute itself for traditional phone servicephone service

– It’s both an enhanced service and a telecommunications It’s both an enhanced service and a telecommunications serviceservice

• Is it regulated under Title II (common carrier service)?Is it regulated under Title II (common carrier service)?– ETC Status, FUSC, E-911, TRS, Reg. FeeETC Status, FUSC, E-911, TRS, Reg. Fee– Contributes to fundsContributes to funds

• Is it deregulated from Title II (enhanced service)?Is it deregulated from Title II (enhanced service)?– No licensing, fees or contributions.No licensing, fees or contributions.– Drains fundsDrains funds


Defensive StrategiesDefensive Strategies

• Is broadband ISP services available in your study Is broadband ISP services available in your study area?area?– Your own DSL?Your own DSL?– An affiliate or non-affiliated CATV entity?An affiliate or non-affiliated CATV entity?– Wireless?Wireless?

• If yes, look at:If yes, look at:– Re-address vertical service pricingRe-address vertical service pricing– Bundle LD with local and broadband dataBundle LD with local and broadband data– If ISP, look at Acceptable Use PolicyIf ISP, look at Acceptable Use Policy

• Could restrict other providers from selling ISP style services Could restrict other providers from selling ISP style services over your own ISP network, as reselling ISP service limitation.over your own ISP network, as reselling ISP service limitation.

– Restrictions on ‘data only’ DSL without Basic Local Restrictions on ‘data only’ DSL without Basic Local Exchange ServiceExchange Service


Defensive StrategiesDefensive Strategies

• What to watch:What to watch:– Decrease in local revenue and access linesDecrease in local revenue and access lines– Decrease in state access revenue and Decrease in state access revenue and

minutesminutes– Decrease in interstate access Decrease in interstate access

revenue/minutesrevenue/minutes• Increase in NECA TS SettlementIncrease in NECA TS Settlement

– Increase in USF and ICLSIncrease in USF and ICLS


Offensive StrategiesOffensive Strategies

• Offer it within my study area?Offer it within my study area?– Offer over DSL, trade access, local and USF HCL Offer over DSL, trade access, local and USF HCL

revenue for VoIP bundled revenuerevenue for VoIP bundled revenue• Still retain DSL revenue and settlements if offered as Still retain DSL revenue and settlements if offered as

regulatedregulated• Trade off may not be attractive with MLB services Trade off may not be attractive with MLB services

(defensive strategy)(defensive strategy)

– Offer it as merely local loop transport alternativeOffer it as merely local loop transport alternative• Internet is always IP but IP isn’t always internetInternet is always IP but IP isn’t always internet

– Savings in electronic costsSavings in electronic costs– Careful about account interaction over the web. Careful about account interaction over the web.

Remember Part 64 definition of ‘enhanced services’. Remember Part 64 definition of ‘enhanced services’. Regulations are fickle with this new technology.Regulations are fickle with this new technology.


Regulatory ConsiderationsRegulatory Considerations

• If VoIP remains an ‘information service’If VoIP remains an ‘information service’– USF distribution requirement will rapidly increase USF distribution requirement will rapidly increase

as users convert over to VoIPas users convert over to VoIP– USF contributions will decrease for the same USF contributions will decrease for the same

reasonreason– Access rates should start to increase as demand Access rates should start to increase as demand

goes down and costs remain embeddedgoes down and costs remain embedded– Funding for E911, TRS, e-rate, etc., will all feel Funding for E911, TRS, e-rate, etc., will all feel

negative impact as contributions decrease from negative impact as contributions decrease from VoIP conversionsVoIP conversions

– As the above continues, adds more competitive As the above continues, adds more competitive pressure causing more rapid VoIP conversionspressure causing more rapid VoIP conversions

– Telecom Public Policy becomes a wastelandTelecom Public Policy becomes a wasteland



• If VoIP is reclassified as a If VoIP is reclassified as a telecommunications servicetelecommunications service– Regulatory contributions sustainable but Regulatory contributions sustainable but

could still decreasecould still decrease• Competitive pressure VoIP has on EUCL and Competitive pressure VoIP has on EUCL and

interstate LD revenue may be reflected in lower interstate LD revenue may be reflected in lower revenue baserevenue base

– Fund distributions reflect embedded costsFund distributions reflect embedded costs• Contribution factors may continue to climb, if Contribution factors may continue to climb, if

revenue base decreasesrevenue base decreases



• If VoIP is reclassified as a telecommunications If VoIP is reclassified as a telecommunications serviceservice– Access minutes measuredAccess minutes measured

• RADIUS, SQL database records, converted to EMIRADIUS, SQL database records, converted to EMI• MOU audit complex and difficult due to nature of ISP trafficMOU audit complex and difficult due to nature of ISP traffic

– Identify by incoming and outgoing IP port number?Identify by incoming and outgoing IP port number?

• AMA/Billing standards for IP voice trafficAMA/Billing standards for IP voice traffic

– CALEACALEA• Packet based CALEA standard and implementation. FBI Packet based CALEA standard and implementation. FBI

presented plan to FCC in Julypresented plan to FCC in July• No ISP-based CALEA surveillance hubsNo ISP-based CALEA surveillance hubs• National security threatNational security threat• Onus seems to be put on regulated DSL and Cable provider, Onus seems to be put on regulated DSL and Cable provider,

rather than the ISPrather than the ISP


VoIP REMAINS ENHANCED SERVICE POTS VoIP Difference

FROM SUBSCRIBER (Residential)Basic Local Exchange Service 11.50$ -$ (11.50)$ Vertical Services 9.00$ -$ (9.00)$ DSL Line Charge 32.95$ 57.95$ 25.00$ Long Distance -$ -$ -$ Interstate EUCL 6.50$ -$ (6.50)$ FUSC 3.63$ 5.33$ 1.70$ OUSF 0.09$ -$ (0.09)$ E911 & TRS 0.50$ -$ (0.50)$ Sales Tax 1.35$ -$ (1.35)$ Deregulated ISP Charge 19.95$ 19.95$ -$ Deregulated VoIP Package (breakeven) -$ 45.04$ 45.04$ Total Billed Subscriber 85.47$ 128.27$ 42.80$

FROM IXC's (Access Expense @ 2 cents)Interstate Access (313 mou; T/O of 1.07) 7.83$ (3.24)$ (11.07)$ Intrastate Access (426 mou; T/O of 1.07) 23.00$ (4.41)$ (27.42)$ Total Billed IXC's 30.83$ (7.66)$ (38.49)$

FROM SETTLEMENTSNECA, ICLS, LSS and LTS Settlement 2.85$ 5.86$ 3.00$ USAC HCL Expense Adjustment 12.97$ 5.65$ (7.32)$ Total Settlements 15.82$ 11.51$ (4.31)$

Total Revenue 132.11$ 132.12$ 0.00$


VoIP REMAINS ENHANCED SERVICE POTS VoIP Difference

FROM SUBSCRIBER (MLB-PRI 23 DN's)Basic Local Exchange Service 391.00$ -$ (391.00)$ Centrex Feature Package 287.50$ -$ (287.50)$ DSL Line Charge 32.95$ 57.95$ 25.00$ Long Distance -$ -$ -$ Interstate EUCL 46.00$ -$ (46.00)$ FUSC 23.13$ 21.77$ (1.36)$ ISDN PRI Port Charge 23.51$ -$ (23.51)$ Special Access Channel Term Charge 178.63$ 178.63$ -$ OUSF 2.85$ -$ (2.85)$ E911 & TRS 1.25$ -$ (1.25)$ Sales Tax 36.23$ -$ (36.23)$ Deregulated ISP Charge 32.95$ 32.95$ -$ Deregulated VoIP Package (breakeven) -$ 1,334.68$ 1,334.68$ Total Billed Subscriber 1,055.99$ 1,625.97$ 569.98$

FROM IXC's (Access Expense @ 2 cents)Interstate Access (7,199 mou; T/O of 1.07) 179.98$ (74.60)$ (254.58)$ Intrastate Access (9,798 mou; T/O of 1.07) 529.09$ (101.53)$ (630.63)$ Total Billed IXC's 709.07$ (176.13)$ (885.20)$

FROM SETTLEMENTSNECA, ICLS, LSS and LTS Settlement (5.58)$ 274.32$ 279.90$ USAC HCL Expense Adjustment 64.83$ 100.16$ 35.33$ Total Settlements 59.25$ 374.47$ 315.23$

Total Revenue 1,824.31$ 1,824.31$ 0.00$


VoIP RECLASSIFIED AS TSP POTS VoIP Difference

FROM SUBSCRIBER (Residential)Basic Local Exchange Service 11.50$ 11.50$ -$ Vertical Services 9.00$ 9.00$ -$ DSL Line Charge 32.95$ 32.95$ -$ Long Distance (breakeven) -$ 38.49$ 38.49$ Interstate EUCL 6.50$ 6.50$ -$ FUSC 3.63$ 3.63$ -$ OUSF 0.09$ 0.09$ -$ E911 & TRS 0.50$ 0.50$ -$ Sales Tax 1.35$ 1.35$ -$ Deregulated ISP Charge 19.95$ 19.95$ -$ Deregulated VoIP Package -$ -$ -$ Total Billed Subscriber 85.47$ 123.96$ 38.49$

FROM IXC's (Access Expense @ 2 cents)Interstate Access (313 mou; T/O of 1.07) 7.83$ (3.24)$ (11.07)$ Intrastate Access (426 mou; T/O of 1.07) 23.00$ (4.41)$ (27.42)$ Total Billed IXC's 30.83$ (7.66)$ (38.49)$

FROM SETTLEMENTSNECA, ICLS, LSS and LTS Settlement 2.85$ 2.85$ -$ USAC HCL Expense Adjustment 12.97$ 12.97$ -$ Total Settlements 15.82$ 15.82$ -$

Total Revenue 132.11$ 132.12$ 0.00$


VoIP RECLASSIFIED AS TSP POTS VoIP Difference

FROM SUBSCRIBER (MLB-PRI 23 DN's)Basic Local Exchange Service 391.00$ 391.00$ -$ Centrex Feature Package 287.50$ 287.50$ -$ DSL Line Charge 32.95$ 32.95$ -$ Long Distance (breakeven) -$ 885.21$ 885.21$ Interstate EUCL 46.00$ 46.00$ -$ FUSC 23.13$ 23.13$ -$ ISDN PRI Port Charge 23.51$ 23.51$ -$ Special Access Channel Term Charge 178.63$ 178.63$ -$ OUSF 2.85$ 2.85$ -$ E911 & TRS 1.25$ 1.25$ -$ Sales Tax 36.23$ 36.23$ -$ Deregulated ISP Charge 32.95$ 32.95$ -$ Deregulated VoIP Package -$ -$ -$ Total Billed Subscriber 1,055.99$ 1,941.20$ 885.21$

FROM IXC's (Access Expense @ 2 cents)Interstate Access (7,199 mou; T/O of 1.07) 179.98$ (74.60)$ (254.58)$ Intrastate Access (9,798 mou; T/O of 1.07) 529.09$ (101.53)$ (630.63)$ Total Billed IXC's 709.07$ (176.13)$ (885.20)$

FROM SETTLEMENTSNECA, ICLS, LSS and LTS Settlement (5.58)$ (5.58)$ -$ USAC HCL Expense Adjustment 64.83$ 64.83$ -$ Total Settlements 59.25$ 59.25$ -$

Total Revenue 1,824.31$ 1,824.31$ 0.00$


Summary of Comparison as ESP Summary of Comparison as ESP and TSPand TSP

VoIP RATE COMPARISON ESP TSP DifferenceBreakeven Rate Charged by ILEC (1FR) 45.04$ 38.49$ (6.55)$ Vonage Rate (1FR) 34.95$ 34.95$ -$ Difference (1FR) 10.09$ 3.54$

Breakeven Rate Charged By ILEC (MLB) 1,334.68$ 885.21$ (449.47)$ Vonage Rate (MLB) 259.05$ 259.05$ -$ Difference (MLB) 1,075.63$ 626.16$

END USER COST COMPARISON ESP TSP DifferenceSubscriber's Total Costs - POTS (1FR) * 123.76$ Subscriber's Total Costs - VoIP Service (1FR) 128.27$ 123.96$ (4.31)$ Difference 0.20$

Subscriber's Total Costs - POTS (MLB) * 1,936.66$ Subscriber's Total Costs - VoIP Service (MLB) 1,625.97$ 1,941.20$ 315.23$ Difference 4.54$

* Calculate estimated LD for 1FR = (313+426)/1.93x$0.10 = $38.29Calculate estimated LD for MLB = (7,199+9,798)/1.93x$0.10 = $880.67Also includes all fees, taxes and deregulated charges.


ConclusionConclusion

• Current regulations are incapable of resolving these Current regulations are incapable of resolving these issuesissues– ““Just in Time” regulatory reform opportunity has passedJust in Time” regulatory reform opportunity has passed

• Universal service will remain threatened until Universal service will remain threatened until sufficient changes have been madesufficient changes have been made

• LEC’s need to be concerned with both the LEC’s need to be concerned with both the competitive pressures and funding pressures competitive pressures and funding pressures caused by VoIP and especially VoIP combined with caused by VoIP and especially VoIP combined with wirelesswireless

• LEC’s also need to look at surviving through a LEC’s also need to look at surviving through a defensive strategy as well as an offensive defensive strategy as well as an offensive competitive strategycompetitive strategy


QuestionsQuestions

Thank youThank you

Charles CurtisCharles CurtisVice President – Strategic PlanningVice President – Strategic Planning

ACRS 2000ACRS [email protected]@acrsokc.com

voip, wifi and the local exchange carrier a regulatory update and financial analysis charles curtis...

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