Moderator: Welcome to today's Law Week Viewpoint discussion with Hank Levine, Colleen Boothby and David Rohde. Hank, Colleen and David, thank you for joining us. Government surcharges are proliferating on telephone bills. One of the largest is the federal universal service fund. What is the source of that charge and should consumers expect that surcharge to grow over time?

Hank Levine and Colleen Boothby: The universal service charge is a creation of the FCC that raises money for high-cost phone companies and the so-called E-rate, which subsidizes Internet access for schools and libraries. The fund has grown astronomically since it was created, mainly due to the subsidy for high-cost phone companies. States have jumped on the bandwagon with surcharges for things like E911 facilities. Consumers should expect these charges to grow like topsy, with the federal charge closing in on 10 to 12 percent over the next couple of years.

The FCC recently slowed the growth of the federal charge by prohibiting long distance carriers from marking up the charge they pay before they pass it through to consumers. Before then, carriers had turned the universal service charge into a tidy little profit center for themselves while hiding behind the label "government surcharge."

Moderator: Is it true that a bankrupt carrier can terminate a customer's contract and discontinue service on 30 days notice? How can a customer with a complex data network that would take six to nine months to move protect itself against that possibility?

Hank Levine and Colleen Boothby: Basically, yes. The 30 days isn't actually written in stone but it's more or less the standard. And this creates a big problem for large business users who need much longer to move things like data networks.

The best way to protect yourself is to make sure that networks that will take a long time to move aren't with bankrupt carriers, and make sure you have a deal (even if it's a small one) with an alternative provider to make the lead time as short as possible if you need to move.

With respect to WorldCom, efforts are under way to persuade the company (or the bankruptcy court) to lengthen the migration period, but there's no official word yet.

Chicago, Ill.: Will the dissolution of key players and other rollups mean that my company will be paying more for telecom services? And what are the odds that the government will go back to regulating telecom, particularly if the remaining players behave like an oligopoly?

Hank Levine and Colleen Boothby: Generally speaking, the carriers will tend to contract but not dissolve when they go through bankruptcy or a similar crisis. So to the extent basic voice and data services survive in a carrier bankruptcy, eventually prices will go down further than they have. Right now, while certain carriers are in severe trouble, the other carriers are trying to take advantage of the situation to hold the line on prices.

The market would have to get a lot worse, meaning a lot less competitive, for the government to step and go back to regulating prices directly. Of course, that may ultimately happen!

Syracuse, N.Y.: What, if anything, can the federal government do to promote more widespread broadband deployment? How does the 1996 Act shape the future of broadband services?

Hank Levine and Colleen Boothby: The Bell companies are busy telling Congress and the FCC that the government can promote broadband deployment by de-regulating them. Their competitors (at least, the ones who aren't dropping like flies) are just as busy telling Congress and the FCC that de-regulation will crush the competition that's struggling to emerge.

As a factual matter, the latest figures for broadband deployment say it's already deployed to 80 percent of the lines out there. That's why we tend to agree with those industry observers who think the main stumbling block to deployment is that the Bell companies (and, in residential neighborhoods, the cable companies) are simply charging too much, which depresses demand.

For business users, of course, cable is irrelevant -- it's simply not available where business users are located. That means the Bell companies' solution -- their de-regulation -- is not terribly attractive because business users would have no competitive alternatives.

Harrisburg, Pa.: Do you have any suggestions on how sales taxes should be applied to bundled telecommunications services that are sold at one price yet consist of subsets of items that are taxed at different rates?

Hank Levine and Colleen Boothby: Bundling services/equipment that are subject to different taxes or taxed at different rates is a long-standing problem. It's one reason, for example, why shipping charges are broken out on bills. The thing being shipped may be taxed, but not the shipping, and if you bundled them the whole thing would be taxed, and the consumer would pay more.

In the e-business world the problem is just getting bigger. There has been a sales tax moratorium on Internet sales, but there's no guarantee that it will stay in place. A bunch of states recently came up with a common statement/policy that they hope will lead to uniform tax practices (and, not incidentally, increase their tax receipts). We'll see.

In the telecom world, providers have a choice. They can bundle everything into one charge and then make an educated guess about what taxes to pay (at what rate) on the bundle, or they can break charges out and assess the right taxes at the right rates on each component. Neither of those is easy or, frankly, workable. As we often say to clients facing these kinds of dilemmas, stay tuned.

Alexandria, Va.: I am currently a Comcast Digital Cable customer. My subscription allows me access to Video on Demand (VOD) and HBO on Demand (HOD), a digitized library of progrmas, specials, movies, etc. ... It's basically like Pay-Per-View, only the viewer is in total control -- you can start the movie whenever you want, stop, rewind, fast-forward etc. ... It's pretty cool. However, the selection is very limited. It seems the potential for this technology is endless. Is the programming so limited due to technological limitations or is the law that will allow this technology to develop lagging behind the times?

Hank Levine and Colleen Boothby: There is an amazing matrix of charges within the cable industry and the entertainment industry generally among system providers, programmers, producers and others. Given that, there is a tremendous bar to be hurdled before the cable industry -- or really, the entire communications industry in general -- invests in new technology capabilities and the bandwidth required to support it. Remember, the bandwidth you take up is not just between your home and the cable head-end -- all providers in the cable and telecom industry tend not to invest in "lighting" further trunks to the backbone networks until they see the demand that will support it. In today's capital-constrained financing environment, it's a real chicken-and-egg situation.

But I'm with you -- the programming should not ultimately be limited in this way and innovative providers should be able to work it out.

Washington, D.C.: What do you foresee in the near future for the telecom industry? Is recovery on the horizon? What will it look like, if yes?

Hank Levine and Colleen Boothby: In fact, we may see even more telecom bankruptcies. But whether we do or not, the interesting thing is that many large carriers are already taking the kinds of steps you associate with companies going into Chapter 11, in the very effort to save themsleves from having to go to bankruptcy court. Two big carriers have cut back their capital expenditures by three-quarters in the past year. Their chronic problem is that there is a tremendous amount of telecom debt that matures in the second half of 2003 and all of 2004.

So no, a big recovery is not just around the corner. The big change will come when carriers figure out how to grow their revenues to help pay off the debt, such as advanced Internet services that people generally get right now through specialized hardware and software they buy themselves. Right now they're still cutting back.

Silver Spring, Md.: Am I powerless to do anything about my phone bill, which I consider excessive? Thanks.

Hank Levine and Colleen Boothby: You're not Superman, but you're not quite powerless, either. Buying phone service is like an away game -- with Verizon (in your case) as the home team.

There are a couple of potentially simple fixes. For example, if you have two lines you should only be getting unlimited local service on one of them, and use that one for outbound local calls. Make sure you are not paying 25 or 30 cents per minute for long distance -- there are plenty of plans for ordinary folks that are 10 cents per minute or less.

If you are willing to be a little more "creative" you have other alternatives. You could "go all wireless," meaning pulling out your Verizon phone and using your AT&T Wireless or Sprint PCS or Verizon wireless plan for everything. For folks with lots of long distance minutes, for example, the right plan can save a lot of money. Another possibility is a competitive local exchange carrier (or "CLEC", pronounced "Sealeck"). A lot of these are stumbling or have disappeared, but AT&T and WorldCom (with its "Neighborhood by MCI" plan) are in this space (as geeks like to say), and going with one of them could save you a few bucks or more.

And if you have two lines because one is your Internet line, get DSL -- that will cost more than one line (though not necessarily as much as two) and it will increase your Internet speed.

Hope that helps.

Vienna, Va.: How does the U.S. telecom industry compare to the industry in Europe and Japan? Is the level of applied technology about the same? Are costs comparable?

Hank Levine and Colleen Boothby: In Europe, if anything the main carriers are in even worse financial shape than the U.S. carriers. Nobody in the world has more debt than France Telecom, for example. On the other hand, France Telecom has the name of a sovereign country in its title, so it will ultimately be saved by government debt guarantees and other methods. The Asian carriers are in relatively better shape but prices remain extremely high in most of the region.

Traditionally, the level of technology overseas has, to grossly oversimplify, been five to 10 years behind North America. However, in certain areas, such as advanced wireless in Europe and broadband rollouts in Asia, they have moved ahead of the U.S. in recent years, largely due to resource-draining regulatory fights and defensive lobbying moves by U.S. incumbents. One nice story is that costs have come way down to call Europe. If your carrier charges you more than 10 or 15 cents a minute to call Western Europe, get a new plan or a new carrier. Private line connectivity charges have also come well down.

Right now, carriers are trying to figure out how to get global connectivity from one source to all places around the world, including China. It's very hard to find one carrier to do it all, and multinational corporations generally have to maintain relations with several carriers to get their networks done. Keep in mind that in a lot of countries, they really haven't de-regulated or even privatized telecom and there is effectively only one government-owned monopoly for telecom services.

Moderator: Some vendors have been aggressively marketing voice over IP as a way for users to get quality voice service at much lower rates than traditional providers charge. Is VoIP a viable substitute for traditional voice service? Is it likely to be regulated by the FCC?

Hank Levine and Colleen Boothby: Outside of enterprise networks, VoIP isn't yet ready for prime time for reasons having to do with the performance of public Internet facilities. Within enterprise networks (meaning business end-user networks where the customer uses dedicated transmission lines and its own equipment to establish the network) VoIP can make sense in theory, but it's been largely confined to international or other high-cost services where the lower operating cost compensates for some loss in service quality. Among the factors that have delayed the widespread adoption of VoIP are the low cost of conventional service (who needs a substitute when I can call California for 3 cents per minute?) and the upfront cost of equipment or additional bandwidth.

The FCC (and the European Union and some other governmental bodies) have been reluctant to regulate VoIP up to now. In part, this is because VoIP doesn't pose a threat to the calling volumes and revenues of traditional circuit-switched providers. Yet. And in part, this is because the service and the underlying technology is still developing at such a rapid pace that today's regulation could be outmoded before it even takes effect.

Moderator: We are told that a major problem in telecommunications is that Internet usage didn't grow as fast as expected and most of the newly built capacity is being wasted. Yet it seems the Internet is more pervasive than ever before -- for example, travel agents are struggling because so many people buy airline and hotel reservations online. Why can't telephone companies and even specialized Internet service providers seem to make money from the Internet?

Hank Levine and Colleen Boothby: The carriers may have laid too much fiber, but there's an equally important problem. Many companies really are using the Internet for their business and consumer applications, but they need security. The carriers have offered Internet transport in the form of specialized services like virtual private networks and advanced Web hosting, and if corporate buyers went to the carriers for these lucrative services, the carriers would make money. But by and large the buyers don't go this way. They buy their own advanced Internet services in the form of specialized hardware and software and only get cheap Internet access links from the carriers.

If corporate buyers need more help, companies often turn to outsourcing specialists like EDS, IBM and CSC as often as to telecom carriers and ISPs.

New York, N.Y.: In regards to the recent approvals and existing filings to allow the ILECs (Incumbent Local Exchange Carriers aka Verizon, SBC, Bell South and Qwest) into the long distance arena, is there a downside for the ILECs? With an eroding base of local phone service, won't adding the revenue from long distance diminish the impact of losing local? Also, is there any silver lining to the CLECs operating in a given state once an ILEC has approval in that state?

Hank Levine and Colleen Boothby: Yes and no. The issue is whether new long distance revenues are outweighed by lost local revenue. So far, the ILECs have been getting 30 percent market shares in long distance within a year of entering a market, and have only lost about 10 percent of the local business in markets that CLECs have entered. But there's a catch -- the gains have been almost exclusively in the residential and small business market, while the losses have been mostly among higher margin business users. Also, getting into long distance is easier than getting into local, so the numbers may get more balanced over time (if the CLECs survive). Right now it looks like local entry except on a resale basis requires much more capital than the market is willing to provide.

There is no silver lining for a CLEC once the ILECs enter long distance, except perhaps that the ILECs can no longer beat the drum (or dead horse) that the CLECs can offer everything, but the ILECs can only offer local service.

Moderator: At one point Wall Street was almost throwing money at alternative phone companies, and it seemed like almost overnight the flow of capital to these companies essentially stopped. Are there any strong telecom start-ups left, and do they have access to capital, or is all hope lost?

Hank Levine and Colleen Boothby: This is a live-by-the-sword, die-by-the-sword situation. Too many CLECs got funding for the wrong reason. They told the financial markets, hey, there's this great new law (the Telecom Act of '96), and it lets us compete, and we'll make a ton of money together. The problem is that it's hard to run a phone company. It has a lot of moving parts, overall the margins are low, and it requires executional excellence. Some CLECs have or had better customer service than the Bells, but some were hilariously incompetent.

When all kinds of legal uncertainty stoked by the Bells came up in 1999, 2000 and 2001, both good and bad CLECs suffered as the market turned on them. Right now CLECs may survive if they specialize in one market or region, they have one clear thing they sell, or they specialize in bonding with the Bell companies' back-office systems. Otherwise, the market looks very tough for them.

Hank Levine and Colleen Boothby: We enjoyed this. Thanks very much for the interesting and provocative questions. As lawyers who specialize in representing buyers of telecom services (rather than carriers), it's always nice to hear what folks are interested in.

A special thanks to David Rohde of TechCaliber (our consulting affiliate), who sat in and authored many of the responses on the state of the industry.

If you'd like further information or have more questions, you can reach us through www.lb3law.com.

Moderator: Our thanks to Hank Levine, Colleen Boothby, David Rohde, Levine, Blaszak, Block & Boothby, LLP, and all who participated.