Regulatory News - Competitive Covenants

Posted: 11/2000

Competitive Covenants:
Are BOCs Promising Too Much Too
Soon?
By Kim Sunderland

A class-action lawsuit filed against SBC Communications Inc. (www.sbc.com)
alleges the BOC purposely slowed Internet access speeds to preserve bandwidth,
while it pulled in thousands of DSL customers through its Project Pronto.

The ILEC denies the charges.

In New York, Verizon Communications (www.verizon.com)
received a thumbs up this fall from state regulators who say the incumbent is
operating at commercial volumes and processing competitor orders in a more
timely fashion. It took the better part of the year for Verizon to get there,
however. It was last December that Verizon received FCC (www.fcc.gov)
approval to offer in-region long-distance service in the state.

In the BellSouth Corp. (www.bellsouth. com)
territory, the battle is to determine whether the incumbent is ready to offer
in-region, long-distance service in some of its states. The Bell company swears
it is.

But are the BOCs’ promises of fast DSL and bundled services too much too
early?

"The pressure is mounting" on the BOCs to perform up to their
promises, says Lawrence J. Spiwak, president and chairman of the Phoenix Center
for Advanced Legal and Economic Public Policy Studies (www.
phoenix-center.org) a Washington-based think tank.

"Is this strategic anticompetitive conduct [by the incumbents] against
their rivals? Yes," Spiwak says. "But on the other hand, they’re
trying to get their networks upgraded, and that takes time. They need time to
roll out their new services."

In Houston, some SBC DSL users aren’t willing to give extra time. They want
what they say SBC promised, and they want it now.

Joining in a class-action lawsuit filed in a Texas district court are several
dozen Houston DSL users. They seek unspecified damages and claim Southwestern
Bell (www.swbell. com) and affiliated SBC
companies are slowing down their Internet access speeds.

At issue is the high-speed DSLs that allow web users to connect to the
Internet quicker than using standard modem lines. According to the lawsuit, SBC
guarantees a minimum connection rate of 384kbps.

"However, according to the plaintiffs, SBC has intentionally lowered the
access rate to e-mail and newsgroups by two-thirds of the promised
rate–128kbps–without notifying customers or giving any discount for the
inferior service," says Geoffrey Berg, an associate attorney with Berg
& Androphy (www. bafirm.com) the firm
handling the case for the DSL users.

Berg says that if the case goes to trial, his firm will show that SBC is
capping access speeds "in order to preserve bandwidth space and avoid
upgrading their systems."

In Internet message board postings, Southwestern Bell technical support
people have admitted there’s a cap on speeds, the lawsuit says.

By withholding bandwidth, the DSL users claim that SBC is able to resell it.
In fact, the Internet users don’t believe that SBC owns enough bandwidth to
deliver on its promises, according to the lawsuit.

The promises in question emerged when SBC began to operate its $6 billion
Project Pronto, a large-scale effort to roll out DSL as fast as possible to as
many customers as possible.

The massive DSL project, which suffered some installation problems this
summer, is on track to sign up 1 million customers by year’s end, SBC says.

The DSL service is slated to be available to a total of approximately 77
million SBC customers by 2002.

Defendants Speak

SBC contends that its DSL service delivers at the guaranteed speeds when a
customer’s computer and the SBC CO are geographically close together. That means
to receive SBC DSL service today, the phone line running from a customer’s home
or business to a DSL-equipped CO must be no longer than 12,000 feet, or 2.2
miles, and must meet certain transmission criteria, according to SBC spokesman
Selim Bingol.

Beyond that point, many factors can impact the rate at which data are
transferred online, including Internet congestion, server or router speeds,
protocol overheads, etc., he says.

"Many of the Bell companies appear to be offering a consumer-grade
Internet service that is oversubscribed," says Jonathan Atkin, senior
analyst of broadband services with Dain Rauscher Wessels (www.
dainrauscherwessels.com) an investment banking and brokerage services firm.

"Thus, what may nominally be, say, 384kbps or 512kbps bandwidth to the
end user, effectively becomes far less throughput when one considers congestion
in the metro-area backhaul legs," Atkin says.

Also, speeds at which people access different websites, including public news
servers, may vary based on the performance characteristics the service provider
or website operator establishes, Bingol says.

Speeds for accessing newsgroup data are maximized at 128kbps in order to
provide a more reliable service for customers using newsgroups, SBC says. Access
to e-mail and to other Internet applications aren’t affected.

SBC also says that only about 1 percent of its DSL subscribers use the
newsgroups.

DSL connection speeds and the speeds that data are accessed from newsgroups
are two different issues and shouldn’t be confused, Bingol notes. Maximizing
newsgroup speeds doesn’t free up bandwidth that would allow SBC to sign up other
DSL customers, but it does help balance the load on the Internet news servers
SBC operates.

Verizon has experienced some of the same growing pains with its DSL service.
Where Verizon has failed with its DSL offerings "is in promising delivery
dates," says Bob Ingalls, president of Verizon’s General Business Group.
"DSL is a lot more complicated to install than dial tone."

For that reason, Verizon has been caught at times in a backlog of DSL orders,
in which it must adjust a delivery date in order to catch up on orders, Ingalls
says.

"The demand is huge," he adds.

Verizon and other incumbents are trying to stay on top of the demand. They
have implemented quality measures to ensure that what gets promised gets
delivered.

"But I’m sure that no one in our company would stand up and say we have
it solved," Ingalls notes. "We don’t. We’re just trying to manage the
load."

DSL availability is the No. 1 issue, with provisioning and maintenance a
close second, he says.

In order to meet self-imposed quality requirements, Verizon sets its own
installation and provision dates for DSL, which largely remains an unregulated
service.

"In the future, though, regulators will get involved if we over-promise
and under- deliver," Ingalls says, adding that the FCC and state regulators
now monitor the statistics that Verizon files on meeting their QoS requirements.

"This is not a free ride where we do whatever we want," he says.

Customers Are Antsy

Problems do crop up in BOC provisioning of new services, and the reasons are
legitimate. But that doesn’t mean customers don’t get angry, which could prompt
regulators to get involved.

For instance, in New York, it’s possible that Verizon underestimated the
volume of competition that its OSS would need to handle, says Dena Alo-Colbeck,
director of public policy for regulatory consultancy Miller Isar (www.millerisar.com).
That may have led to the contentions that the Verizon OSS testing in New York
did not properly test full commercial volumes.

"This is an error that regulators and competitors alike have striven to
correct in subsequent [Section] 271 proceedings," Alo-Colbeck says.

Regarding the SBC lawsuit in Texas, Alo-Colbeck believes "that SBC,
realizing that high-speed Internet services are the profit centers of the
future, may simply be attempting to lock in as much of the Internet market as
possible as soon as possible."

End users are demanding more high-speed data lines than carriers currently
are configured to deliver, explains Judy Reed Smith, CEO of ATLANTIC-ACM Inc. (www.atlantic-acm.com)
a consulting and research firm specializing in telecom. And in trying to satisfy
more customers than their network allows, she thinks SBC has its "over-full
hand caught in the cookie jar."

"Traditionally, incumbent carriers would dial down to save their
networks," Reed Smith says. "It’s possible that SBC has dialed down to
protect their routers. They appear to be choking on their over-delivery."

In an ATLANTIC-ACM study released this summer, the firm reported that DSL
service remains far from the QoS that customers expect. And the average scores
for all wholesale DSL providers fall below average in the areas of
responsiveness of customer service, according to the report.

"In this do-or-die market, what will really distinguish the top-notch
DSL providers from the rest of the pack is the extent to which they are able to
remain focused on the customer’s needs," Reed Smith says.

Therein could be part of the solution for the BOCs’ delivery problems. But
their setbacks could mount before they’re adequately fixed.

"This is a cultural issue. We don’t have an incumbent with a culture of
customer service," says Spiwak.

Meanwhile, Berg says that the class-action lawsuit continues to attract more
plaintiffs. As of late September, 30 people had joined the suit.