Policy Forum - Advanced Services Unbundling

Posted 12/2000

Policy Forum

Advanced Services Unbundling
FCC Nixes It, but Incumbents' Affiliates Could Provide Competitors Some Access
By Joe Whitehouse

Ruling 99-238, which the FCC (www.fcc.gov) passed last year in an attempt to clarify 1996 Telecommunications Act rules, exempts Bell companies' packet-based switching elements from unbundling obligations. While that decision essentially removed the likelihood of the FCC issuing a blanket order requiring the RBOCs to set up separate affiliates for the provision of advanced services, the issue of such affiliates remains a top priority for the FCC, which in some cases is pushing the Bells to set up subsidiaries through which to offer broadband services as a condition of merger or in-region long-distance approvals. And early next year, the FCC will issue a follow-up decision to 99-238 that will begin to lay out a blueprint showing how competitors will get access to next-generation networks.

"99-238 was the missing piece. The FCC's action was very far-reaching," says Jonathan Askin, general counsel for ALTS (www.alts.org). "Now, the single most important issue going forward is, 'How does a competitor gain access to an ILEC's next-generation architecture? Whether it is copper or fiber, how can a competitor interconnect?'"

Clarify Unbundling Obligations

The Telecom Act required ILECs to unbundle seven network elements to facilitate competition. That includes loops, network interface devices, local circuit switching, dedicated and shared transport, signaling and call-related databases, OSSs, and access to operator and directory assistance services. However, a Supreme Court ruling forced the FCC to revisit the Telecom Act and clarify the unbundling obligations of ILECs. In its review, the FCC decided not to require the unbundling of packet switching equipment.

The RBOCs, of course, were generally supportive of this decision because it protected their own investments in broadband technologies. For example, before 99-238, immediately upon deploying a next-gen packet-switching network, an RBOC would be required to open the network up to all its competitors. The RBOCs' logical business position was that if this was the end result of a lot of time, effort and expense to install a next-gen network, why not just build everything with copper? In sum, why make a huge investment on new technology for zero competitive advantage? It is cheaper, less labor intensive and, although it is not next-gen technology, it works.

The FCC believed that the solution to this impasse was to allow ILECs to shield their new technologies, such as packet-based networks, from unbundling. The FCC hoped this would promote more investment in, and deployment of, next-gen networks, resulting in better services and more options for consumers. But even though the FCC didn't require the Bells to create separate units to offer advanced broadband services to competitors--or require unbundling of broadband elements--the commission has made the creation of these advanced services affiliates a condition of other Bell activities.

Market Entry Opportunity

While advanced services affiliates are an opportunity for RBOCs to enter the data communications market without having to unbundle their network elements, the affiliates are also required to ensure that all competitors looking to provide advanced services through the RBOC's network receive the same treatment as the RBOC itself. Setting up advanced services affiliates was a condition of the SBC-Ameritech and Bell Atlantic-GTE merger approvals, and was also integral to Bell Atlantic's recent approval to provide long-distance service in New York. "The FCC recognizes that the advanced services market is still relatively new, and hopes to implement enough market opening policies early on so that extensive future regulation is not necessary," says Courtney Quinn, an analyst at the Yankee Group (www.yankeegroup.com). While SBC Communications Inc. (www.sbc.com) and Verizon Communications (www.verizon.com) are presently the only RBOCs to have set up advanced services affiliates, Quinn expects that the other RBOCs will ultimately have to do the same as they look to enter the long-distance market.

One RBOC trend developing is establishing an advanced services affiliate and then investing in or partnering with a CLEC to grow the business. For example, SBC initiated the $6 billion Project Pronto in 1999, becoming one of the first to recognize and capitalize on the importance of 99-238. In addition, SBC invested $150 million in Covad Communications Co. (www.covad.com) and guaranteed the data CLEC $600,000 worth of resale revenue. In return, Covad agreed to be SBC's in-region and out-of-region DSL provider.

Verizon's response to some of the FCC's decisions has been equally far-reaching. In September Verizon invested $150 million in NorthPoint Communications Inc. (www.northpoint.net) as a pre-merger agreement to provide combined DSL operations. Verizon has also launched an aggressive re-branding campaign to position itself as a "telecommunications innovator" rather than as the "phone company."

Technology Response to 99-238

The RBOC technical response to 99-238 is still being played out. If recent deployments are any indication of the future, we can expect more fiber pushed out to the last mile and a continued increase of ATM technology deployed at the regional core CO. This type of deployment makes sense for the RBOCs.

Their new technologies are protected from unbundling, and getting fiber as close to the consumer as possible will allow them to have more control over the value-added services that can be sold. This will be particularly useful when the advanced services affiliates are up and running because these subsidiaries will be good service creation environments.

Finally, expanding ATM deployment at the CO is a tried-and-true method of switching packets quickly and safely. More importantly, ATM is something RBOCs are very familiar with. Rather than having to make extensive changes to their networks, they can expand on the existing ATM infrastructure already in place to take advantage of optical advances. This is already under way. For example, last fall, one of the initiatives announced by Qwest Communications International Inc. (www.qwest.com) to promote more access for competitors was to allow collocation of ATM switches in every CO where there is space and power available.

"RBOCs could shield packet plants from unbundling, but they'd still have to wholesale the services of the network and the customer loop. This combination has led to the RBOC decision to deploy an ATM-based network with fiber remotes very close to the user," writes Tom Nolle, president of consulting firm CIMI Corp. (www.cimicorp.com). "Such a network devalues the wholesale loop by shortening it and reducing the concentration of customers at any point of access (from 10,000 or more in a CO to about 700 in a remote). It devalues wholesale service by making sure that the 'service' of the network doesn't have a large retail market, which ATM doesn't."

New Revenue Models

Over the next few years, ILECs will continue to receive less and less revenue from traditional services. This change and 99-238 will help create significant changes in RBOCs' revenue models and network deployments. First, ILECs will deploy a greater amount of ATM-based access networks. These networks will deliver the high-speed Internet and other services needed by businesses and homes. Second, RBOCs will stick to their wholesale role while advanced services affiliates take on more of the retail side of the business. Third, new service creation is an area of potentially staggering revenue growth. CLECs tend to be more innovative, more nimble, so there will be more partnerships with RBOCs and strategic investments from RBOCs into CLECs. This latter point will be particularly true for RBOCs when it makes good business sense to operate a piece of the business through an existing CLEC rather than spending deployment dollars. Fourth, ATM at the core and fiber to the edge will be the predominant network architecture for RBOCs in the foreseeable future.

Joe Whitehouse is director of product management at Équipe Communications Corp. (www.equipecom.com). He can be reached at joew@equipecom.com and (978) 635-1999.

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