Last month, the House passed Cyber Intelligence Sharing and Protection Act (CISPA).  It is essentially the same bill passed in last year’s House that was reintroduced in February following the White House’s release of the EO.  CISPA creates a voluntary process for private sector entities to provide the government with cyber threat information.  Many telecom and technology entities support the bill’s broad liability protections for private entities sharing threat data with the government and consider it a powerful tool for the private sector to improve the security of their networks.

Privacy groups, however, have criticized CISPA claiming the bill including inadequate consumer privacy protections and the White House stated it would veto the bill.  Some have claimed the bill flies in the face of constitutional protections against search and seizure and creates an avenue for the government to receive personal information without a warrant.  The House Intelligence Committee attempted to dispel the mounting privacy concerns by adding five amendment including measures that direct all cyber threat information from private sector entities to agencies within DHS and DOJ to handle it confidentially and limits the use of all information to cybersecurity and national security interests. The added amendments did little to satisfy the privacy concerns. 

Having passed in the House, CISPA now faces the Senate but is unlikely to ever reach a vote.  Senator Rockefeller, Chairman of the Senate Commerce Committee, announced that while passage of CISPA was “important” the privacy protections were “insufficient”.  The Senate Commerce Committee is instead working to gain bipartisan agreement on a bill that can pass in both the House and Senate, but the Commerce Committee has not yet to release a draft cybersecurity bill. 

The debate over privacy considerations raises the question of  the importance of personally identifiable information in connection with the collection and distribution of information associated with cyber threat activity.  One perspective may be that, if it were easy to disassociate the personally identifiable information from the balance of the cyber threat activity data, it is likely CISPA would have resolved the privacy concerns.  Regardless of the reasoning, one thing is certain: CISPA may have passed in the House, but the debate over cybersecurity legislation is far from over.

But, as FCC Chairman Genachowski notes, that’s the issue.  Customers should be allowed to unlock their handsets (particularly smartphones and tablets) after the commitment periods expire without their carriers’ permission. He urges Congress to pass legislation to override the ruling of the Copyright Office and indicated the FCC will look into the matter.

One question the FCC should address is what decisions have been issued (or not issued) since 1992 when the FCC allowed the bundling of handsets with wireless service, as an exception to the rule against the bundling of CPE and services, that enables wireless carriers not only dictate which handsets can be used on their networks, but how these handsets can be used after the minimum commitment periods have expired. The practice was well-entrenched prior to the October 2012 decision by the Copyright Office.

The disparate treatment on the bundling of CPE with wireless and wireline services, respectively, is striking, notwithstanding the apparent consumer preference for subsidized wireless handsets. Imagine if Cisco routers could only be acquired from AT&T and that AT&T could prohibit customers from using routers with Level 3 service after the customer’s services agreement with AT&T expired? With the increasing concentration within the commercial wireless industry, it is clearly time for policy makers to set limits on carrier-determined bundling of handsets and wireless services. Exclusive arrangements between wireless carriers and equipment suppliers with respect to particular models should be limited. 

On the other hand, the competitive benefits of unbundling and consumer-determined unlocking are muted to a noticeable degree because the handsets offered by the major wireless carriers transmit on carrier-specific frequency bands. While some interoperability issues may be addressable, such as the FCC’s ongoing assessment of interoperability in the 700 MHz band, current technology and the preferred form and function of handsets limits the number of frequency bands on which handsets can transmit. Moreover, each carrier wants to offer handsets having backward compatibility with its respective wireless technologies and licensed frequency bands.   

Consumer-determined unlocking and handset portability may have the greatest impact in driving the MVNO and prepaid wireless service markets in the United States.  While there seems to be an almost unquenchable demand for the latest and greatest handsets, more durable hardware, longer battery life (or low cost replacements), and robust software upgrades may well extend the useful lives of smartphones and tablets well beyond the standard two-year replacement cycle.

MVNOs with access to facilities-based carriers’ services and networks—assuming resale of wireless services (data and voice) remains viable—are well-positioned to offer attractively priced, contract-free wireless services with which customers can use their unlocked handsets for the (enhanced) useful lives of these devices.

One matter that should be addressed this year is the appeal of the FCC’s Open Internet Order currently pending before the D.C. Circuit.  Because this is such a prominent matter, we believe the non-prevailing parties likely will petition the Supreme Court for review.

FCC Taking a Fresh Look at Special Access Services.  In an earlier entry, we highlighted the FCC’s reassessment of the interstate special access services market.  Subsequently, the FCC released a Report and Order and Further Notice of Proposed Rulemaking, setting out a comprehensive data request to  price cap ILECs and other services providers to determine the extent of competition among providers of special access services, principally, DS-1, DS-3 and Ethernet special access services.  Ethernet service broadly is undergoing rapid growth.  The FCC is taking a direct approach to determine whether special access rates are competitively priced.

We propose to perform a one-time, multi-faceted market analysis of the special access market designed to determine where and when special access prices are just and reasonable, and whether our current special access regulations help or hinder this desired outcome. We do not propose to conduct a simple market share or market concentration analysis.  Rather, we will use the data we are collecting in this Report and Order to identify measures of actual and potential competition that are good predictors of competitive behavior, for example, by demonstrating that prices tend to decline with increases in the intensity of various competition measures, holding other things constant.  In undertaking that analysis we will consider evidence as to what leads firms, including competitive providers, to undertake infrastructure investments.

Clearly, a fresh look at the special access services market (data for years 2010 and 2012 are being requested) is warranted. 

Two points merit further note.  First, the FCC is seeking comment on whether Internet access service is a competitive alternative to special access services.  Hopefully, the FCC will conclude the services are not substitutes.  Internet access service is not an “access service,” rather it is part and parcel of an end-to-end best efforts shared transport and information access and retrieval service.  Special access is basic transport between defined physical locations.  Second, the FCC is requesting comment on the “Petition to Reverse Forbearance Determinations,” filed late last year by an enterprise customer group, Sprint and several interexchange carriers that requests the FCC to reverse decisions issued prior to 2010 in which the FCC elected to forbear from (i) imposing certain Computer Inquiry requirements on the price cap ILECs, and (ii) regulating non-TDM based special access services offered by price cap ILECs, particularly Ethernet services.

Elevated USF Contribution Factors Will Accelerate Migration to IP Technology.  The USF contribution factor for the 1^st Quarter 2013 is 16.1%, all too close to the 17%+ levels that prevailed throughout most of 2012.  We previously highlighted the dynamics of declining USF-assessable services and the principal alternatives for implementing a more sustainable contribution scheme.

Enterprise customers, as well as SMBs, buying TDM-based wireline voice and data services bear the full brunt of today’s elevated USF assessments (via carrier USF recovery pass-through charges).  Consistent with the migration to IP services, enterprise customers are compelled to explore strategies to minimize the USF burden.  Two ideas come to mind: (1) migrate voice as well as data traffic to Multiprotocol Label Switching (“MPLS”); and/or (2) where feasible, migrate data traffic to high speed Internet access service.

The manner in which services providers assess USF on MPLS revenues varies considerably.  MPLS services providers have sought a declaratory ruling that would impose a uniform, relatively modest USF contribution burden on MPLS revenues.  Moreover, as intra-corporate voice traffic is shifted to MPLS, a customer’s overall USF costs should decline as expenditures for standalone voice services decline.   

Subject to reliability and security considerations, migrating some portion of enterprise data traffic (alternatively, converting as many locations as feasible) to Internet access service yields several economic benefits.  Internet service is the least cost data communication option for a given capacity or data rate and, as an information service, is not subject to USF revenue contribution obligations at this time. 

AT&T Seeks a “Regulatory-Lite” Path to Deregulated, All-IP Networks. The National Broadband Plan viewed the transition to all-IP networks as a critical step to nationwide broadband deployment.  Local wireline networks have lagged in this transition.  In its “Petition to Launch A Proceeding Concerning the TDM-to-IP Transition” filed on November 7, 2012, AT&T requests the FCC grant local exchange carriers the option to conduct “trial runs of the transition to next-generation services, including the retirement of .  .  . [TDM] facilities and offerings and their replacement with IP-based alternatives.” AT&T is looking to eliminate regulations it believes impede this transition or extend legacy telecom regulation to the all-IP services environment. On the same date, AT&T announced “Project Velocity IP”, a series of multi-billion dollar investments intended to deliver broadband (either wireline or wireless) to all customers served by its legacy local telephone networks. 

In many respects, AT&T is looking for deregulation (classifying most, if not all, IP services as information services, not extending carrier interconnection obligations to IP services, etc.) and preemption of state regulation, including carrier of last resort (“COLR”) obligations.  A more conservative proposal for regulatory flexibility to support the migration to all-IP networks for local exchange carriers was offered by the National Telecommunications Communications Association.  The two petitions diverge on multiple points, including interconnection obligations of ILECs with regard to IP traffic.

Not surprisingly, most competitors to AT&T (for local and interexchange services) opposed multiple aspects of its proposal. The adverse impact of a rapid migration to an all-IP network on the Nation’s air traffic control network was highlighted by Harris Corporation.  Verizon offered vigorous support for AT&T’s petition.  A large corporate user group opposed AT&T’s deregulatory proposals, arguing that AT&T and other price cap ILECs remain dominant in the local exchange and access services markets. Sprint supported the more measured suggestions offered by NTCA.

A more dispassionate view supporting the transition is offered by Steven Cherry in his interview with David Berninger.  In this regard, the FCC recently exercised its forbearance authority regarding several legacy reporting issues raised in 2012 by USTelecom.

Judicial Review of the FCC’s Open Internet Order. From most perspectives, the FCC’s Open Internet Order is reasonable and warranted.  All persons should have ready access to lawful Internet content; entrepreneurs, retailers and manufacturers should be permitted to engage in e-commerce without concerns over preferential access or surcharges; and, providers of lawful content should have non-discriminatory access to the Internet, subject to reasonable network management rules. While the major facilities-based ISPs largely adhere to these concepts, the FCC’s underlying concerns and those of many stakeholders relate to the potential for substantial abuse by these ISPs.  In light of the breadth and nature of the rules adopted in the Order—an initial impression of the FCC’s decision was that it had fashioned a new “Title II.5, Broadband Competition” for the Communications Act, it was no surprise that Verizon and MetroPCS appealed this decision, maintaining the FCC lacks the statutory authority to adopt these rules.

Thus, the question is whether the D.C. Circuit and, potentially, the Supreme Court will affirm the FCC’s authority to adopt this order.  While the matter is now fully briefed, the D.C. Circuit has yet to set the date for oral argument. The recent D.C. Circuit decisions Cellco Partnership v. FCC (affirming the data roaming rules) and American Electric Power v. FCC (affirming substantially revised pole attachment rules) underscore the primacy of judicial deference to agency decision making under Chevron v. NRDC, suggesting the FCC may prevail in this instance, as well.  

During his address, the President recognized growing cybersecurity concerns, noting that “America must also face the rapidly growing threat from cyber-attacks” and called on Congress to pass legislation to protect the nation’s critical infrastructure from cyber-attacks, recognizing that the Executive Order can only direct federal agencies to act.

The EO includes four components to address cyber risks for critical infrastructure:

1.     Information Sharing. Designing a process for government agencies to share real time classified and unclassified cyber threat information with targeted critical infrastructure entities.

2.     Risk Assessment. Identifying the critical infrastructure entities currently facing the greatest cyber risks and attacks on which would create a severe impact on national security, economic security or public health and safety.

3.     Cybersecurity Framework. NIST (National Institute of Standards and Technology) will develop a “Cybersecurity Framework” to collect cybersecurity best practices and standards of conduct in one place and issue a preliminary framework within 240 days.

4.     Voluntary Incentive Program. DHS will design a program to encourage the critical infrastructure community to voluntarily adopt the Cybersecurity Framework through the use of a benefits and incentives program.

Getting right down to business, NIST released a Request for Information (RFI) on February 26 seeking information to help “identify, refine, and guide the many interrelated considerations, challenges, and efforts needed to develop the framework.”

While the EO provides guidance on the Administration’s cybersecurity policy, it can’t take the place of legislation to address industry concerns, such as liability protection, regulatory-use protections, and avenues for private-to-private and private-to-government information sharing. The EO has renewed the debate on Capitol Hill over comprehensive cybersecurity legislation. The  “Cyber Intelligence Sharing and Protection Act,” or “CISPA” has been reintroduced in the House and the Senate Commerce and Homeland Security Committee announced they will hold a joint hearing on March 7 to discuss implementation of the EO and potential legislation.

One thing is clear, 2013 is shaping up to be a big year for cybersecurity developments and legislation.

The willingness of the carriers to expend billions of dollars for spectrum and FCC decisions “repurposing spectrum” constitute a significant “doubling-down” on the future of wireless broadband.  The downside is that an essential resource for prospective competitors is increasingly concentrated in the hands of the major wireless carriers.  

Major Wireless Carriers Move Aggressively to Enhance Broadband Spectrum Holdings.   As AT&T was acknowledging that DoJ and the FCC would not allow it to acquire T -Mobile at the end of 2011, spectrum deal-making began in earnest. 

• Verizon Wireless announced its agreement with SpectrumCo and Cox Communications to acquire the cable companies’ substantial AWS spectrum holdings.  Even though final approval was not granted until August, this transaction triggered a series of significant spectrum deals.

• On the heels of Verizon Wireless/SpectrumCo/Cox, AT&T initiated a series of transactions to acquire 700 MHz A and B Block licenses and, later in the year, entered into transactions to acquire multiple Wireless Communications Service (WCS) licenses in the 2.3 GHz band.

• T-Mobile and MetroPCS sought FCC approval to their proposed transaction that will consolidate operations, customers and spectrum holdings and enable deployment of “a network capable of supporting at least 20 x 20 MHz LTE deployments in many areas.”

• Relying on an anticipated cash infusion resulting from Softbank’s proposal to acquire control of Sprint, the nation’s 3^rd largest wireless carrier offered to acquire all of Clearwire’s equity interests that it did not already possess in order to control Clearwire’s spectrum at 2.5 GHz.  Dish Network Corporation (“DISH”) countered with its own offer for the Clearwire’s stock and asked the FCC to “stop the clock” on the FCC’s consideration of the Softbank/Sprint/Clearwire transactions.

• This month, AT&T agreed to acquire Atlantic Network’s wireless spectrum and customers, and AT&T and Verizon Wireless announced a transaction in which AT&T will acquire certain Verizon Wireless 700 MHz A-Block and B-Block licenses.  Verizon Wireless is building its nationwide LTE network on the 700 MHz C-Block spectrum it acquired at auction several years ago.

The pending transactions are subject to the FCC’s current “case-by-case analysis” for assessing spectrum holdings in transactions and auctions.  While the FCC has initiated a proceeding reassessing current policies for determining criteria for limiting spectrum holdings, this proceeding will not be resolved until the 2^nd Quarter of 2013, at the earliest.  In view of the closed and pending transactions noted above, the impact of new spectrum holding policies likely will be limited to future spectrum auctions.

Repurposing Spectrum for Wireless Broadband.  In order to provide additional spectrum for wireless broadband, the FCC adopted three significant decisions in 2012 modifying its rules to permit the broadband operations in the currently licensed spectrum.   

• Sprint effectively secured an 800 MHz broadband allocation as the FCC granted Sprint’s request to aggregate its contiguous 25 kHz channels at 800 MHz to support LTE and CDMA operations.  

• The FCC resolved the longstanding uncertainty on the use of the WCS 2.3 GHz band for terrestrial operations, prohibiting the use of portables and mobiles in the C and D Blocks directly adjacent to the satellite radio allocation and making the 20 MHz in the paired A and B blocks available for terrestrial mobile broadband operations. This action assured the viability of AT&T’s acquisition of 2.3 GHz WCS licenses.

• The FCC resolved its MSS/AWS-4 spectrum proceeding, authorizing standalone terrestrial broadband services in the 2 GHz MSS spectrum band (2000-2020 MHz and 2180-2200 MHz) and providing DISH with terrestrial authority for its licenses in this band, subject to low power and OOBE restrictions—which DISH had opposed—to protect adjacent channel operations in the upper band of the H-Block allocation (1915-1920 MHz  and 1995-2000 MHz) the licenses for which will be auctioned in the near future. 

Assessment.  These spectrum transactions and repurposing decisions underscore the FCC’s commitment to broadband and services providers’ belief that customers will continue to pay premium rates for wireless broadband service. Google, Samsung, Apple, countless apps developers and other technology companies should benefit handsomely.  With the concentration in spectrum holdings, market entry challenges for new, facilities-based competitors may well be insurmountable, even if TV incentive auctions free spectrum for additional wireless broadband auctions. 

Assuming the major carriers make the investments and utilize the spectrum, these carriers may be more inclined to enter into arrangements with MVNOs who, in turn, may develop targeted offerings for defined classes of customers.  One downside is that current FCC policy and LTE technology do not suggest that facilities-based carriers will offer differentiated wireless broadband service offerings to enterprise customers for the foreseeable future, with the possible exception of M2M services.

The risks and open questions for the FCC are what to do if the major wireless carriers don’t match spectrum acquisition expenditures with new network investments or don’t deploy broadband facilities in rural communities. In order to maximize spectrum utilization, the FCC could exercise its broad authority under Title III, as outlined in the D.C. Circuit’s recent decision affirming the Data Roaming Order, and adopt more aggressive buildout requirements for the wireless broadband  licenses held by the major carriers, thereby incenting them to enter into mutually beneficial long-term (1) spectrum leases, or (2) spectrum and infrastructure sharing arrangements with rural-based services providers—who would make the infrastructure investments—to deliver wireless broadband to rural communities.   

These buildout requirements could very well enhance spectrum utilization and promote best available technologies for enterprise, SMB and residential customers located in rural areas. Rural-based services providers could benefit more fully from the wireless ecosystem in which device manufacturers and wireless infrastructure technology companies will be gearing development efforts and production to meet the major carriers’ respective multi-band frequency and transmission technology profiles. 

The new legislation did, however, impose a few notable restrictions.  They include a prohibition on exporting satellites and related products to China, North Korea or state sponsors of terrorism.  The president may waive this prohibition under certain conditions.  The legislation also establishes a presumption of denial for any application to export satellites or related products to a country subject to an arms embargo.

The Administration has been moving quickly in proposing rules to shift jurisdiction over the export of a wide variety of products from the ITAR to the EAR. We will likely see a comparable proposal for satellite exports in the not-too-distant future.

Cellco expands the Commission’s authority under Title III to regulate wireless carriers as these carriers transition to all-IP, data-only services providers. Despite Verizon Wireless’s opposing view, the Data Roaming Order aligns the United States with the rest of the world as data roaming is seen as an impetus for growth in the mobile data services market.

Cellco re-affirms the Chevron deference accorded to the Commission not only in selecting among reasonable policy options, but in determining the agency’s jurisdiction subject to the Supreme Court’s decision in City of Arlington v. FCC.  Chevron deference encourages interested parties to participate in Commission proceedings, although the challenge of securing Commission action in a timely manner remains. 

Assuming 2^nd tier wireless carriers, such as regional and specialized carriers, secure access to sophisticated smart phones and tablets, data roaming arrangements will support these carriers’ efforts to offer compelling service offerings and maintain sustainable businesses.  The caveat is that the Data Roaming Order obligates the major wireless carriers to offer these arrangements on “commercially reasonable terms and conditions,” consistent with the principles governing private carrier arrangements, as opposed to Title II-based “just and reasonable” terms and conditions.  As a result, the FCC has limited authority to influence the terms and conditions of data roaming arrangements. 

Cellco ensures the relevance of the FCC’s spectrum holdings proceeding. Limitations on spectrum holdings, however structured, have modest relevance and impact if only 3 or 4 potential services providers are in the market.

Congress wins, as well. TV Broadcast license incentive auctions may now elicit something approaching the optimistic bids Congress assumed. Smaller wireless carriers will have an opportunity to offer data services beyond the limited footprints of local television broadcast channels, particularly those of TV stations located in 2^nd tier and 3^rd tier markets.    

Most recently, the Commerce and State Departments (the respective agencies overseeing the EAR and ITAR) have proposed revisions to the export controls covering many electronic products.  A wide variety of electronic products are considered to be military in nature and controlled under the ITAR - even if they were originally intended for general commercial use.  Additional background on the scope of electronic products covered by the ITAR and the liberalizing impact of the proposed rules is set out in a recent Client Alert.  For the telecommunications sector, applicable requirements for radar systems and communications systems presently subject to the ITAR would be simplified and clarified, thereby eliminating many restrictions and ambiguity as to which set of export control regulations applies.   

The applicable export controls on satellites and other space-related equipment, however, remain complicated.  These items fall within Category XV on the ITAR’s U.S. Munitions List (“USML”).  The Administration’s efforts to limit the restrictions on exports of space-related hardware and technologies on the USML are constrained by legislation.  There is substantial interest within industry to transfer jurisdiction over space-related technologies to the Commerce Department and the less restrictive EAR.  The EAR would require a license for fewer exports and, where applicable, licensing procedures would be more transparent.  Two bills pending in Congress, H.R. 4310 (Section 1241)  and S. 3211, would authorize the shift to the EAR.

President Obama’s reelection increases the likelihood that telecom export control reform will remain a focal point as the 113th Congress convenes in January.  Stay tuned.

The FCC’s longstanding position that USF contribution obligations are not “taxes” is a legal subtlety lost on customers to whom all the major carriers pass-through their USF contribution obligations.  The USF burden now falls disproportionately on Wireline customers—consumers, enterprises and state and local governments—that rely on circuit-switched voice and other TDM-based services as the Internet has emerged as the Nation’s primary data communications platform. And, with Wireless and VoIP taking center stage for voice, a shrinking number of users will bear an increasing burden as the USF revenue requirement continues to grow.  

As Commissioner McDowell noted earlier this year, the contribution factor is too high and the contribution base needs to be expanded. The current system continues to falter under its own weight. The definitional issues and associated complexity obscure the fact that a contribution factor of 17.4% is intolerable. The rickety revenues approach impedes investment by new services providers that are not backbone ISPs having substantial retail customer bases.  Start-ups are discouraged from being end-to-end services providers and focus unduly on developing business plans to avoid a 17%+ surcharge that is likely to increase over time.  Maximum use of the “intermediate mile” fiber deployments that RUS and NTIA infrastructure grants enabled is being discouraged. 

Rather than try to fix the current rules, the FCC’s limited resources should be redirected to developing a more straightforward, sustainable funding mechanism, such as connections or numbers. Obsessive focus on “equity issues” both in the revenues approach and those attributed to the alternatives is misplaced.  The negative consequences of the revenues approach are evident.  The revenues approach was developed prior to the emergence of Wireless and the Internet as the dominant telecommunications platforms.  That was 1997; fifteen years have passed. It’s time to move on.

The merits of the proposed transaction likely will be assessed for months, if not years.  The proposed deal is consistent with the trend of global companies owning Wireless companies in multiple countries. We expect that the parties will submit one or more transfer of control applications with the FCC within a month.  The proposed deal likely will receive the full attention of the FCC’s Transaction Team.  The extent of DoJ or FTC review of the transaction will be determined in the near future, as well.

One reference point for the criteria the FCC will use in assessing the Softbank’s investment in Sprint is the FCC’s Foreign Ownership Guidelines.  More importantly, the proposed transaction should benefit from the less restrictive approaches to assessing foreign investment in domestic Wireless ventures set out in the agency’s Foreign Ownership Review  proceeding.   Therein, the FCC recommended a series of reforms to minimize burdens on foreign investment in domestic Wireless entities and streamline agency decision making under Section 310 (b)(4) of the Communications Act, consistent with “national security, law enforcement, foreign policy, and trade policy considerations.”  The proposed transaction also benefits from the FCC’s recent decision to facilitate non-controlling investments by foreign entities in U.S. Wireless carriers.  

Again, it is difficult to see the transaction being rejected or made subject to onerous conditions, although some parties may raise questions regarding the aggregate spectrum holdings of Sprint and Clearwire in which Sprint is a major stockholder.