More surcharges? Carriers could get bolder as MPLS migration runs its course

Frame relay users are becoming a diminishing breed, even at AT&T. In a little-noticed statistic buried in its fourth quarter earnings report, AT&T said that two-thirds of its frame relay customers have migrated to IP-based services.

And that could have implications for the types of services -- even IP services -- that begin to generate the ever-rising USF surcharge pass-along where they never have before.

Let's see why that is. First, AT&T put a rather distinctive spin on the frame relay news. Here's how they reported it: "Two-thirds of AT&T's frame customers have made the transition to IP-based solutions, which allow them to easily add managed services such as network security, hosting and IP conferencing on top of their infrastructures."

That's an interesting way of putting it, especially when you consider that AT&T's primary platform for ex-frame users over the last few years has been the AVPN un-managed MPLS service. I'm particularly amused by the part about "easily" adding managed services, where AT&T cites the kinds of managed services that happen to add to AT&T's revenues.

Funny, I thought that users would like to "easily" add to their IP and MPLS services such rigorous VoIP networking services as SIP trunking. You know, the kind of additional service that would subtract from some other part of AT&T's revenue set, like local telephony infrastructure. But clearly, AT&T is looking for a way to make IP and MPLS mean "more money," not less.

And that's where the USF surcharge issue starts to intrude. One thing that the furious competition between AT&T and Verizon for national and global MPLS deals has kept at bay is the threat of USF pass-throughs on interstate MPLS revenues. But once the competitive bidding is out of the way, we could see these moves begin to creep in.

In addition, all of the interexchange carriers have to be on pins and needles about recovering USF charges on MPLS because of steadily increasing pressure from the FCC about counting MPLS elements in their contribution base. That's happening as the legacy revenue base of traditional telecom services generating the surcharge continues to contract -- the very issue that is forcing the contribution factor percentage ever-higher.

Remember how the shift from a non-surcharged to a surcharged service comes about. It's a continuum, not a single discrete event, because whether carriers pay the surcharge to the fund, and then pass it along to you, are two separate questions with several inputs each.

As LB3's regulatory lawyers have pointed out, even before USF on MPLS ever became an issue, the carriers could have reported interstate MPLS revenues, based on their own judgment that if frame relay was basic telecommunications, so was MPLS. Then, early last year, the FCC suggested MPLS as a service to be reported by adding it to its examples of the type of basic telecommunications" revenue carriers needed to include on their 2008 reporting forms.

Now the FCC appears to be something close to demanding MPLS revenues both now and in the past because it needs 14.1% of the money -- whoops, 15.3% as of April 1! -- especially as MPLS has become the flagship data networking service for enterprises.

Plus, consider this: AT&T recently placed a note in its Service Guide that its Ultravailable Network Service will start generating the USF pass-through on April 1. One of my LB3 colleagues labels this a form of "self-confessing" the applicability of the revenues of a relatively specialized service (in this case, high-capacity wavelength technology) to the Universal Service regime. It's circumstantial, but it's an example of how AT&T (and potentially others) may become quicker to add other, more widely deployed services to the universal service revenue base than they have in the past.

Thus, once the bulk of frame/ATM users have chosen their MPLS carriers and signed up for multiyear contracts, both AT&T and Verizon could lose their inhibition about tacking on USF for the MPLS ports and Class of Service charges. In competitive bidding, such a move will have the effect of raising the price of these elements by 15.3%. That's something neither carrier has been willing to do when worried about losing a deal to the other mega-carrier. But when that fear is gone, the surcharge pass-along could be on its way.

Before assessing how to deal with all this, there's one final input -- the effect of the FCC's newly released National Broadband Plan that appears to redraw universal service around the ambitious (and expensive) notion of universal broadband access. I'll take that up next!