Will regulatory reform drive carriers' network investments?

TRENDS

By KATHLEEN RICHARDS

At a SuperComm plenary panel in June, moderator William Smith, BellSouth's chief technology officer, listed the regulatory impact on investment as one of three challenges for the future. BellSouth isn't alone. Many carriers assert that regulatory issues hinder their network investments. The question is, to what degree?

At the top of the incumbent local-exchange carriers' (ILECs) regulatory wish list is inter-local access and transport area (LATA) relief, which would allow the former RBOCs to sell long-distance services. Under regulations put forth by the Telecommunications Act of 1996, the ILECs must first prove that they have allowed competitors to use their "unbundled" network elements (UNEs) at pricing that the ILECs say barely represents costs.

"Until we get the ability to do the inter-LATA between our states as well as out of our region, we are not going to have the full arsenal that we need to develop some of the innovative services and applications that we would like to develop, not only for the Fortune 500 but on down, for state and local governments, down to the small business and even the consumer," says Herb Cash, vice president of networks at BellSouth (Atlanta). BellSouth is working hard on this issue and has won approval to sell long-distance services in Georgia and Louisiana earlier this year.

"The interfacing with carriers is tough," adds Cash. "A lot of the new protocols, and IP, are not really made for the regulatory environment that we find ourselves in today. And when you get into lambdas and multiple lambdas and how you pass lambdas off to carriers, it really multiplies all the technical problem-solving and systems integration issues."

The mandated UNE pricing is another point of contention. "We think the UNE pricing is wrong," says Cash. "It forces us to sell things at or below cost. There are a lot of the hidden accounting issues. How do you do cost accounting that handles regulated and unregulated services, for example? And that is taking a great deal of our time."

The business and technology issues are not minor, agrees Ken Twist, program director for broadband access at RHK (San Francisco). For example, traditional long-distance provider AT&T is trying to get BellSouth to unbundle some of its high-capacity local loops in Florida. "Close to 70% of BellSouth's customers are served by remote terminals," explains Twist. "A lot of those remote terminals are fiber-fit, so the issue is, how do you unbundle fiber? Do you do it at the PVC [permanent virtual circuit]? Do you unbundle it at the wavelength? Then, once you get to the remote terminal, how do you unbundle a line card? How do you unbundle a port on the line card? The OSS [operational-support-system] infrastructure needed to support that is cost-prohibitive and just doesn't quite make sense." Security and maintenance concerns pose additional problems.

Currently, the Federal Communications Commission is working on several pending proceedings that deal with broadband issues: the Triennial UNE Review Notice, Cable Modem Notice of Inquiry (in March, the FCC ruled that cable-modem service is an interstate information service that falls under its jurisdiction), National Performance Measures Notice of Proposed Rule Making (NPRM), Incumbent LEC Broadband Notice, Wireline Broadband NPRM, and review of Section 251, "Unbundling Obligations of Incumbent Local Exchange Carriers."

Meanwhile, the widely discussed Internet Freedom and Broadband Deployment Act (H.R. 1542), sponsored by Rep. Bill Tauzin (R-LA) and Rep. John Dingell (D-MI), which removes many of the constraints the ILECs face, passed the House in February, but the Senate's version of the bill, the Broadband Deployment and Competition Enhancement Act of 2001 (S.1126), is expected to be voted down.

Private industry is getting into the act as well. TechNet, a group of about 300 senior executives from technology companies and related concerns (venture capital, investment banking, law) working to achieve political and public policy goals related to the "new economy," is proposing the construction of a nationwide broadband communications network offering 100-Mbit/sec per subscriber in the United States. The broadband network's construction is estimated to cost about $30 billion per year for 10 years.

Charles R. Kenmore, a TechNet board member and president and CEO of access platform provider Anda Networks (San Jose, CA), is proposing to several Congressional and public policy representatives the use of 30-year U.S. Treasury long bonds, or "broadband" bonds, to secure carriers' borrowing for the project. The technology used in the project and its implementation will fall to the industry itself to work out, according to the TechNet proposal.

Broadband held hostage?
"Primarily, these regulatory issues are for residential deployments," says RHK's Twist. "The RBOCs feel that they shouldn't have to upgrade their network elements and then turn that over directly to a competitor, primarily AT&T. I think most of the RBOCs are focused on AT&T, because they are the one that can really go out there and force a lot of these unbundling issues."

"With the demise of significant telecom competition-primarily due to questionable business plans, astute ILEC anti-competitive behavior, and withdrawal of capital-we are again in monopoly mode, with last mile broadband deployment suffering the most," says John Mazur, principal analyst, public-network infrastructure/optical-network equipment, at Gartner Dataquest (Stamford, CT). "Last mile broadband is the biggest bandwidth driver for optical networks-Internet traffic increases with available throughput. DSL deployments, which haven't kept pace with ILEC announcements, feed the optical and IP networks."

Many optical equipment vendors are actively lobbying for regulatory relief for carriers, but will the market really change if and when this happens? "Vendors targeting fiber access, and particularly residential access, are not going to see a big uptick in sales if there is relief for the RBOCs," says Twist. "A lot of these incumbents have already targeted their deployments, and they are already in regions that they expect to become profitable, so essentially they will be adding line cards to their footprint. You'll see a little increase perhaps, but you are not going to see anything that will save a lot of these companies from going out of business."

However, Mazur thinks regulatory reform will spur metro technology investments. "In our forecast scenario, we predict, with 0.7 probability, that broadband regulatory reform will occur sometime in 2004," he says. "This would stimulate metro optical Ethernet and wavelength services, etc., to enterprises."

BellSouth's Cash says that for his company, broadband access (1.5 Mbits/sec and up) is growing like crazy. "Like many companies, we are starting to build our MPLS core to get ourselves ready to not only take the traditional data applications from a broadband access standpoint, but to be able to transport data, voice, and video to some extent across our network with quality of service."

Fortune 500 customers use OC-48 or OC-192 Smart Ring products, or Ethernet connections, while small-business and residential customers subscribe to ADSL. BellSouth expects to report 1.1 million ADSL subscribers by the end of the year.

Despite BellSouth's experiences, broadband deployment in the United States is slower than some expected. "Everyone wants broadband relief provided in the form of tax credits, or what have you, to the phone companies in hopes that they'll spend money and build footprint," says Twist. "But the real issue is consumer demand for these broadband services, which is just not at the levels that people had hoped. You can build all you want and cut prices, but until the consumers see value in broadband, more so than they do now, it is still going to be a waste of money at this point."

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