Broadband Cable Association of Pennsylvania

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April 8, 2014

Residents and business owners in Carbon Hill, Ala., got a surprise in letters from AT&T Inc. in February. The company said the town, where signs welcome visitors to "the city with a future," could usher in one of the biggest technological changes since Alexander Graham Bell's first telephone. If regulators approve, AT&T customers would eventually have to switch to wireless or high-speed service. New customers wouldn't be allowed to sign up for traditional, landline-based service at all. AT&T's top executive in Alabama, Fred McCallum, wrote that the proposed changes are an "exciting opportunity for our customers and for our company." But Carbon Hill City Clerk Janice Pendley says some people in the former mining town are apprehensive. "Some of them like their landline, and they like it just the way it is," she says.

For the past decade, AT&T and Verizon Communications Inc. have been burying fiber-optic cable and upgrading antennas in hopes of replacing the carriers' century-old phone networks with technology built solely for the Internet age. Resulting improvements in Internet speed and wireless coverage have fueled soaring mobile-phone use, the surging popularity of streaming video and Internet-based calling services like Skype. Nearly 40% of U.S. households now have no landline phone, and there are more wireless devices than people. "Revolution is all around us," says Federal Communications Commission Chairman Thomas E. Wheeler. An all-Internet protocol network could lead to better products, lower prices and "massive benefits" for consumers, he says.

The new technology also is far less regulated. As a result, smaller companies like EarthLink Holdings Corp. and TW Telecom Inc., that sell service to customers who often get it at regulated rates over a "last mile" of copper wires built by AT&T or Verizon, complain that the shift could cut off that access. Sprint Corp. fears AT&T might charge too much when Sprint customers try to reach AT&T customers by "interconnecting" with AT&T's network. "By changing some widget in the network, these guys are saying they can throw the rule book in the trash," says Chris Murray, who oversees government affairs at EarthLink, based in Atlanta. "It's creating a whole level of uncertainty not only for EarthLink but also for the businesses that rely on us."

AT&T and Verizon say competitors still will be able to get last-mile access, though those carriers will have to negotiate commercial agreements rather than use the prices set by regulators. AT&T says no one will lose old-fashioned phone service until the carrier proves it can provide those customers with "an alternative." The revolution is about to get a nudge from the federal government. In January, the FCC decided to allow carriers to launch "experiments" aimed at weaning people off old, circuit-switched phone networks. In response, AT&T is seeking approval to launch a series of changes that would start with not letting new customers in Carbon Hill and a section of Delray Beach, Fla., sign up for traditional, landline-based service. AT&T wants new and existing customers to eventually use broadband service, mobile phones or a conventional phone that connects to a router-like box. The box plugs into an electrical outlet and zaps signals to a cellphone tower.

Approval of the first step in AT&T's plans could happen as soon as June. The entire overhaul in Carbon Hill and Delray Beach could take several years, with each step subject to regulatory scrutiny. The FCC says it won't allow carriers to escape their obligation to provide universal service, or easy access to the communications system. The agency plans to improve complaint-tracking procedures to monitor customer reaction. FCC commissioners said in a Jan. 30 order that the "lives of millions of Americans could be improved by the direct and spillover effects of the technology transitions, including innovations that cannot even be imagined today." A go-ahead would encourage other carriers to seek approval for their own experiments and AT&T to expand its changeover efforts elsewhere. Verizon says it will seek permission to shut off its old network but won't say when.

AT&T wants to go ahead even though the carrier is unsure how it would provide broadband service to about 4% of residential customers in Carbon Hill because they are too far away from the center of the sparsely populated area. In Delray Beach, there is a different challenge: About half of the people are at least 65 years old, the age group slowest to embrace new phones, according to the FCC. It also isn't clear how AT&T plans to work around the reliance on old-fashioned telecom technology by 911 emergency-response systems, burglar alarms, pacemakers and even systems used by air-traffic controllers. The FCC says it will make sure that "consumers and the enduring values established by Congress are not adversely affected." Verizon, based in New York, has spent more than $23 billion in the last decade to build out its fiber-based FiOS service, which now has more than six million residential customers in a dozen states. AT&T plans to convert its entire 22-state network to Internet protocol technology by 2020. The Dallas company is spending $6 billion over three years on its wire-based network, replacing portions of it with fiber.

The two carriers, with a total of more than 250 million customers, aren't shy about their ultimate goal: turning off their old networks forever. They say keeping the old technology going costs them billions of dollars a year, even as more customers abandon it, some wooed away by cable providers Comcast Corp. and Time Warner Cable Inc. AT&T says it has sometimes been forced to scrounge on eBay for spare parts. "In some ways, what we're trying to do is build a jetliner while it's flying from New York to California," says Larry Irving, co-chairman of the Internet Innovation Alliance, a broadband advocacy group funded partly by AT&T. The nation's transition to an all-Internet protocol network "will be tougher" than the switch to digital television from analog, he predicts.

AT&T says the transition will create faster, cheaper networks that speed creation of improved high-definition voice and video calling. Circuit-switched phone networks require separate, point-to-point connections for each call. Because Internet protocol systems zap traffic in small packets, AT&T could reduce the number of places where it hands off traffic to other carriers to a handful from thousands now. The changes also would help AT&T, Verizon and other carriers climb out from under the burden of regulations that don't apply to competitors in the cable industry, which barreled into the phone business long ago. Comcast and Time Warner had combined revenue of more than $85 billion in 2013, about one-third smaller than Verizon.

The rules that the two giant phone carriers live by fill five volumes on a shelf in the office of Robert Quinn, AT&T's senior vice president for federal regulatory matters. "We're not saying we're moving to a regulation-free zone," he says. The purpose of the cut-the-cord experiments is to determine which regulations are needed, he adds. David Young, vice president for federal regulatory affairs at Verizon, says smaller rivals that rely on larger companies' networks have "had a decade to plan for this." In the early 2000s, the FCC decided to regulate broadband Internet service with a lighter touch. The agency also freed companies from rules requiring them to sell space on their Internet protocol-based, fiber-optic networks to other companies at regulated rates. The move hurt broadband resellers but gave AT&T and Verizon incentives to build faster Internet connections.

Smaller phone and Internet service providers say it isn't fair for AT&T and Verizon to escape oversight by shifting to a different type of network. Those rivals depend on access to the giant carriers' networks-and fear it could be threatened as chunks of the traditional phone network are shut down. That could lead to fewer phone and Internet-service choices-and higher costs for businesses and consumers, the smaller companies say. Skeptics note that the U.S. telecom industry is more concentrated than at any time since the 1984 breakup of AT&T into one long-distance company and seven regional carriers. Consolidation since then has left AT&T and Verizon with about two-thirds of all wireless subscribers.

The all-Internet protocol "transition holds many promises for consumers, but losing access to affordable voice and broadband services cannot be part of that bargain," wrote Angie Kronenberg, general counsel of Comptel, in a letter to the FCC last month on behalf of the small-carrier trade group, several companies and public-interest groups. AARP said it believes AT&T's plan has "numerous problems." The technology might not be reliable enough or fail when calling 911 in an emergency, the advocacy group for seniors told regulators in its comment letter. The FCC is reviewing hundreds of comments received in response to AT&T's request. EarthLink piggybacks on the "incumbents as little as economically possible" and has laid nearly 30,000 miles of fiber-optic cables throughout the U.S. to help it reach more than a million customers, says Rolla Huff, a former EarthLink chief executive. Still, the company needs access to the connections built by AT&T and Verizon into buildings.

Telecom carriers such as Windstream Holdings Inc., in Little Rock, Ark., and sellers of broadband data services like EarthLink and XO Communications LLC, of Herndon, Va., have had the right to buy last-mile access at regulated prices since the last major overhaul of federal telecom laws in 1996. Helping such carriers was the price Congress exacted for allowing regional companies, created after the 1984 breakup of AT&T, to enter the long-distance market. Interconnection rules go all the way back to 1913, when AT&T promised the Justice Department that the company would connect with smaller networks in return for keeping its growing monopoly. Before then, customers of different phone carriers couldn't call each other.

For years, carriers reached interconnection agreements based on a set of regulated prices. The government is allowed to step in if negotiations break down. AT&T and Verizon say the rules don't apply to Internet protocol networks. Instead, those carriers should hammer out interconnection agreements at the negotiating table, the two giants say. Market forces will keep prices under control, AT&T and Verizon say. Both companies say the practice has worked well in deals to carry wireless traffic. Verizon's six Internet protocol interconnection agreements include one with Comcast, which uses the technology for home phone service sold by the nation's largest cable provider. Charles McKee, Sprint's vice president for government affairs, says the rules shouldn't change just because technology is. "It's not as if this is a whole new network. It's just an upgrade to the network," he says.

AT&T and Verizon are allowed to build new networks on top of their old ones. But in some of the places where that has happened, rivals don't like how the giants responded. In Illinois, AT&T and Sprint have been unable to agree on terms to interconnect calls made with the new technology, leading to a costly workaround. Sprint converts its Internet protocol traffic to old-fashioned, circuit-switched traffic so the carrier can swap the calls with AT&T under a regulated agreement. AT&T then takes the circuit-switched traffic and converts it back to Internet protocol to deliver it to AT&T customers. AT&T has said it has "no duty" to connect its Internet protocol traffic with Sprint's.

Illinois regulators haven't sided with either company in the dispute. The FCC has said interconnection is important but hasn't said whether it should be hammered out in regulated or negotiated agreements. Since 1993, TW Telecom has laid more than 30,000 miles of fiber-optic lines, but the seller of phone and Internet services still needs a last-mile connection for about a third of its customers. If the other carrier's network is using older technology, then the prices TW Telecom pays are generally set by regulators.

TW Telecom approached Verizon in 2012 to seek last-mile access to a Tampa, Fla., building being converted into a bank from a restaurant. Verizon had installed only FiOS at the building. Verizon said no, telling TW Telecom to build its own connection or pay Verizon thousands of dollars to do the job. TW Telecom declined to pay and lost the customer's business. "When it happens, it's devastating," says Kristie Ince, who oversees regulatory policy at TW Telecom. Similar snarls have cost the company at least six customers since then. Other carriers say they have had similar clashes. Mr. Wheeler, a former telecom-industry lobbyist and venture capitalist who became the FCC's chairman in November, says he believes the "values" tied to older phone networks should be transferred to whatever comes next. He hasn't specified which old rules should survive. Wall Street Journal

Pennsylvania's candidates for governor are facing a deadline for making public the last three months of their campaign fundraising and spending. The campaign finance reports due Tuesday are expected to provide insights into how much the candidates have spent on TV advertising. The last reports made public covered transactions through the end of 2013 and showed the candidates in the race at that time took in a collective $34 million. York businessman Tom Wolf was the top fundraiser, having contributed $10 million from his own bank account to push his total to more than $13 million. He's competing for the Democratic nomination against state Treasurer Rob McCord, U.S. Rep. Allyson Schwartz and former state environmental protection chief Katie McGinty. Republican Gov. Tom Corbett had raised nearly $7 million. Associated Press

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