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AT&T Demands Control Over Its Customers' Deployment of SIP Trunking

AT&T is making a concerted effort to control its ILEC customers' migration to SIP trunking, which AT&T and everyone else in the industry agrees is now the most cost-effective way for enterprises to buy local (and sometimes LD) voice services. There is no legitimate business or technical justification for this--AT&T is just trying to protect a legacy business and extract extra profits from captive customers.

This article briefly explains SIP trunking and the advantages that are leading enterprises to move from traditional voice services to the new platform. It also describes how and why AT&T is trying to control when its customers make that move and discusses what AT&T's efforts tell us about the state of telecom competition and the credibility of AT&T's public embrace of moving from legacy voice to IP-based networks. Finally, it offers concrete suggestions for enterprise customers who do not want to give AT&T the power to increase their costs or control the timing and direction of their telecom strategy.

What SIP Trunking is and How it Threatens AT&T
SIP trunking isn't really trunking, and there is no such thing as a SIP trunk in the physical sense. SIP--Session Initiation Protocol--is a protocol for establishing, modifying and terminating telephone calls, video connections and other communication sessions over IP-based networks. It's basically a way to do business-grade VoIP.

Legacy Plain Old Telephone Service ("POTS") offered over the public switched telephone network ("PSTN") uses physical circuits (individual copper pairs or dedicated T1s) to connect a customer to its service provider. When a user implements SIP trunking, its voice calls ride its dedicated Internet or MPLS access connections. Internal ("on-net") calls are routed directly to their destinations over the Customer's wide area network, and external calls enter the public network through SIP-based connections to the PSTN installed at customer data centers or within a carrier's IP-based network. In the process, users shed cost because adding the capacity required to carry voice calls to a broadband pipe is a lot cheaper than buying a slew of PBX trunks or thousands of Centrex lines, and when you route internal calls over your MPLS network they become basically free.

SIP trunking is a big deal. It has been around for at least 4-5 years, but in the last 18 months it has taken off in a classic example of the "hockey stick" adoption profile common with new technology. As of mid-2011, we rarely see a major voice services RFP that doesn't contemplate migration to SIP trunking. There are two reasons for this. First, while local POTS prices have been flat for decades, migrating to SIP promises immediate savings--typically 25-35%--and SIP moves, adds and changes are very cheap because they are software-based. Second, call quality and features have advanced to the point where a SIP trunk and an IP-capable switch can do everything that a PBX or Centrex can, at a far lower cost.

As a result, everyone now agrees that SIP is the platform of choice for voice communications. "Everyone" includes AT&T, which calls SIP "the way of the future" and says that it

"kicks the benefits of IP networks and VoIP up a notch. With voice and data converged on one network, you can maximize unused capacity, help curb equipment costs and simplify management. You can quickly allocate bandwidth to adapt voice services to changing business demands--and do so without the time and expense associated with adding expensive transport lines."

AT&T has also confirmed that SIP "can reduce access costs, improve bandwidth utilization and bring down operational expenses." Enterprises using SIP "can save a significant amount of money by converging their voice and data networks, particularly if they’re covering multiple locations."

But the kind words can't hide the reality that SIP trunking is a threat to AT&T and other incumbent local exchange carriers (ILECs) because it cannibalizes local service revenues. It also nullifies their territorial advantages in local services, creating an opening for smaller carriers with good MPLS networks such as Sprint, Qwest, XO, tw telecom and Level 3. According to AT&T, land-based PSTN service revenues (for all carriers) fell from $180 billion in 2000 to $130 billion in 2007. This figure is probably close to $100 billion today, but even that isn't peanuts--and a lot of it goes to AT&T.

Although Verizon faces the same threat, it does not resist SIP trunking. Indeed, Verizon has pretty much embraced the technology--perhaps reasoning that if the local wireline business is going to be lunch, VZ itself should cannibalize it rather than let some other vendor devour its business. This strategy recognizes and leverages the principle that if you own the IP connection, you own the relationship. Regardless of its reasons, VZ's SIP offering is straightforward in terms of structure, capability and pricing.

AT&T has been a lot more Bell-headed. Notwithstanding articles like those quoted above, it seems to have been dragged kicking and screaming into the SIP world. Last December, TC2’s David Rohde blogged that, "AT&T is the classic battleship that doesn’t turn on a dime, and it prefers that its customers don’t do so either.... [It] has legacy voice business to harvest and wind down in an orderly manner ."

So AT&T was (and is) behind, though it is hardly out of contention. AT&T was not first-to-market with frame relay or MPLS either, but over time still ended up dominating the markets for those services. Apparently, however, mere neglect has not been enough to stem the advancing tide of enterprise SIP deployments.

AT&T Seizes a Veto over its Customers’ Ability to Deploy SIP
AT&T can't just tell its customers when, how, and at what price they can change services, any more than tobacco companies can just tell their customers to inhale two packs a day. But like cigarette makers, it has effective (albeit indirect) ways to "incent" users to buy the products it wants to sell.

In this case, AT&T's weapon of choice is local service leverage. Most Fortune 500 companies have a presence in the 23 states (including 8 of the 10 most populous) in which AT&T owns the dominant ILEC--California and Nevada (the old PacBell), the South except for Virginia (BellSouth), the Midwest (Ameritech), the Southwest (SBC) and Connecticut (SNET). To get local telephone service in those states, a company can either buy at list prices or enter into an agreement under which it commits to buy certain volumes/types of services for several years in return for discounts of 15-25%. Sometimes these are stand-alone agreements; sometimes they are attachments to master agreements with AT&T.

There are few alternatives to buying PBX trunks and related services from AT&T in those states--or at least there weren't until SIP trunking came along--and companies are addicted to the savings that can only be achieved through an ILEC agreement of this kind. That gives AT&T a way to seize control over when, whether and how its customers deploy SIP. All AT&T has to do is condition local service discounts on the inclusion of language in the relevant agreements that penalizes or prevents migration to SIP trunking without its consent.

And that is exactly what AT&T is doing.

AT&T designs contracts like Microsoft designs software, following the rule that you should never do something one way when you can do it three ways. Here are AT&T's three ways of preventing a customer from deploying SIP trunking until AT&T agrees, at prices that meet the carrier's "needs".

First, for decades AT&T did not seek a minimum term or commitment on individual circuits except when they require a substantial up-front investment (the old Bell System's "special construction"). A few years ago the carrier began to seek such terms on almost all dedicated circuits by demanding minimum payment periods (MPPs), which are essentially circuit-by-circuit "take or pay" agreements. Typically they were a year for all but the biggest pipes.

The rationale for MPPs (and the related minimum revenue period or MRP) is that they provide a way for AT&T to ensure that it will recover installation costs and to earn a reasonable return. Accordingly, ILEC agreements routinely provided that MPPs would begin to run when a circuit was first installed and would not restart when/if an agreement was extended or renewed (because at that point the up-front costs had already been recovered). Since PBX trunks and the like usually remain in place for many years, over time the MPPs became a non-issue except for newly-installed circuits.

Now, however, AT&T not only demands that MPPs restart when an ILEC agreement is renewed, it wants to lengthen the MPPs to the term of the agreement on most or all dedicated circuits. For example, if, two years into the current agreement a customer wishes to terminate a PBX trunk that has been in place for a decade (over the course of a succession of agreements), the customer would still owe the full MPP charges for the remainder of the term (or beyond).

Second, AT&T had historically allowed enterprise customers to terminate services without paying early termination charges ("ETCs") when the customer was "upgrading" to new AT&T services. So long as the commitment (in dollars and time) associated with the new services was larger than the remainder of the commitment on the old services at the time of the upgrade, AT&T would waive the ETCs, including the charges incurred when a circuit is pulled out before the expiration of its MPP. Recently, however, AT&T has insisted on language in ILEC deals that restricts a customer's right to avoid ETCs when migrating to SIP, even if AT&T is providing the new service and the customer is willing to enter into a new commitment of equal or greater size and duration. Now, AT&T will waive ETCs for upgrades only when AT&T "solely determines" that the new services "are a substitute" for the existing services.

Third, historically AT&T has agreed to waive shortfall charges resulting from an enterprise customer's migration from one AT&T service to another, less expensive AT&T service. That's especially important in ILEC agreements because AT&T insists that they carry high commitments--often, 90% or more of the expected spend. Now, AT&T is refusing to waive ILEC shortfall charges if the new, cost-saving service is SIP. It does this either through language saying that a waiver of shortfall charges is only applicable if a service migration is "wholly inclusive of services defined as Contributory within this Pricing Schedule," or by excluding from the waiver clause substitutions or upgrades "from a service provided by an AT&T ILEC Affiliate to a service provided by an AT&T non-ILEC Affiliate." Traditional local service is provided by AT&T ILECs; SIP trunking is provided by AT&T Corp., their non-ILEC sibling.

Why is AT&T Doing This?
We can start by dismissing AT&T's standard explanations. AT&T isn't doing this to ensure that it recovers investments--these are not services that involve new construction of any kind (much less special construction), and when it pushes for the "restart MPPs" language discussed above, AT&T is thumbing its nose at the relevance of investment recovery.

Nor is AT&T doing this out of an inability to offer SIP trunking, or out of concerns about the product--AT&T has SIP offerings and, as the quotations above indicate, it has joined the rest of the industry in proclaiming SIP trunking the future of voice communications. As you’ll see from the lengthy quote below, it's been saying the same thing to the FCC.

Nor is fear of losing customers to competitors an issue--the ETC and waiver clauses AT&T is striving to weaken have always applied only when a customer moves from one AT&T product to another.

AT&T's true motivation is, as David Rohde eloquently observed, "harvesting" its legacy business by extracting as much revenue as possible for the use of old technology by captive customers and demanding a hefty premium and lengthy commitments as a condition for allowing customers to implement SIP trunking.

AT&T has hinted at another concern--that it will be vulnerable to accusations of unlawful discrimination (even, somehow, in states in which its services have been totally deregulated) if it allows a customer to avoid ETCs and shortfall charges when the customer migrates from AT&T legacy service to AT&T SIP trunking but refuses to grant such a waiver when the customer wants to migrate from AT&T legacy service to a competitor's SIP trunking.

If this were a real concern there would be several ways to address it. One is a "wrap-around" clause--language in the MSA or an interstate SOA/Pricing Attachment that provides a credit to the customer equal to any shortfall charges or ETCs incurred under an ILEC agreement/addendum when a customer moves from AT&T legacy services to AT&T SIP trunking. Another is to move major commitments from the ILEC attachment to another attachment, and condition favorable ILEC pricing on a substantial overall agreement. But to date, AT&T has been rejecting any and all such approaches. That's because this isn't about regulatory or legal concerns--it's about protecting an endangered revenue stream.

Does it Matter?
Yes. It's not simply that AT&T's conduct is heavy-handed and unjustified. It's that what AT&T is doing flies in the face of the carrier’s pronouncements on the state of the market and its widely proclaimed commitment to innovation.

Less than 20 months ago, AT&T filed a pleading with the FCC in which it called for phasing out the legacy PSTN and POTS service:

"Due to technological advances, changes in consumer preference, and market forces, the question is when, not if, POTS service and the PSTN over which it is provided will become obsolete. In the meantime, however, the high costs associated with the maintenance and operation of the legacy network are diverting valuable resources...that could be used to expand broadband access and to improve the quality of broadband service.... [O]ne of the most important steps the Commission can take to facilitate an orderly transition to an all-broadband communications infrastructure is to eliminate the regulatory requirements that prolong the life of POTS and the PSTN."

Now AT&T is insisting on contract clauses giving it the right to force customers to stay on the technology it has asked to abandon. The hypocrisy actually goes deeper, because in the same contracts that force customers to stay on technology that is a "relic of a by-gone era," AT&T reserves for itself the right to discontinue (without liability) any service it wants to discontinue.

With AT&T's support, the FCC has been pushing a National Broadband Plan to encourage and facilitate the migration of voice traffic off of the PSTN and onto IP networks. The FCC is also working on a sweeping re-write of the regulatory landscape, again supported by AT&T, to "incentivize" the transition to IP networks and eliminate any "perverse incentive" for ILECs to maintain their TDM networks just to collect outdated regulatory fees. SIP trunking is a crucial part of that migration--it's the voice piece. AT&T's contract clauses thus stand directly in the path of accomplishing the transition to IP because they prevent customers from leaving legacy services until AT&T lets them do so, at whatever price it demands.

The SIP-stifling clauses described above also give the lie to AT&T's claim that it faces competition for all of its services, a claim it has trumpeted to eliminate regulation of local service in many states. If the market for business ILEC services were actually competitive, AT&T could not ask for--much less insist on--an effective veto over its customers' deployment of SIP trunking.

Indeed, AT&T's SIP "initiative" is a classic abuse of market power, involving as it does the manifestly differential treatment of services for which there are competitive alternatives and those for which there are not. The clauses restricting SIP trunking never appear in (nationwide) Master Service Agreements. Rather, they appear in AT&T's local service agreements and attachments, which are themselves operative only in the states where AT&T is the incumbent LEC. Moreover, the clauses control the customer's ability to procure competitive services (SIP trunking) by leveraging AT&T's power to secure premium prices and impose onerous terms with respect to non-competitive services (PSTN local service). AT&T has yet to respond to a nationwide or global SIP trunking RFP by proposing one set of terms in the 23 states where it is the incumbent LEC and another set of terms in the 27 states where it isn't, but it effectively achieves that by burying the repellant terms in ILEC agreements/attachments to nationwide deals.

So What’s a Customer to Do?
First, don’t be snookered. Understand the issue and what's at stake. Reject AT&T's language and tell the carrier how disappointed/angry you are that AT&T is seeking to "manage" its customers in this way.

Second, move the locations where you have lots of people and big MPLS access pipes to SIP trunking before re-upping your current ILEC agreement with AT&T. The technology is now mainstream, and implementing SIP trunking does not require new station sets or a PBX forklift upgrade (unless your equipment is a decade old). You'll save money and avoid AT&T's heavy-handed tactics at your largest sites, even though where AT&T is the ILEC your big pipes themselves will continue to be provided by it in most cases, at inflated prices.

Third, consider getting small locations out of the ILEC agreement by cutting a deal with a competing local carrier like Granite, which offers discounts off of the ILEC list prices--and good management/reporting tools--without requiring lengthy terms. Granite isn't everywhere, its own tariffs aren't very user-friendly, some large companies won't deal with it because it only has sales of $1 billion per year, and you won't save as much each month as you would under an AT&T ILEC agreement. But you also won't be prevented from moving to SIP trunking whenever you feel like it. [Full Disclosure: Granite is a client of LB3, though not a large one.]

Finally, join an end user advocacy group and educate the regulators about how the market is really working. While you are doing that, calmly explain to AT&T that if it wants to block the introduction of new technology that saves its customers money, you'll be happy to take some other key services--the ones you can move--to Verizon (or XO, tw telecom, Level 3 or Qwest). Then do it.

Hank Levine ([email protected]) is a partner in the law firm of Levine, Blaszak, Block & Boothby, LLP ("LB3"). LB3 represents enterprise customers in their planning and procurement of telecom and IT services, and Hank has been sitting across from AT&T on behalf of Fortune 100 companies and the equivalent for a quarter of a century.

On August 30, LB3 will host a webinar for enterprise customers on AT&T's SIP trunking "initiative." If you would like an invitation to "Everyone Knows that SIP Trunking is the Way to Go...So Why Won't AT&T Let You Go There?" please contact Dorothy Nederman ([email protected]).

On August 30, LB3 will host a webinar for enterprise customers on AT&T's SIP trunking "initiative." If you would like an invitation to "Everyone Knows that SIP Trunking is the Way to Go...So Why Won't AT&T Let You Go There?" please contact Dorothy Nederman ([email protected]).