Wholesale Telecommunication Contracts Emma McCormack & Ian Walden (2006-07) Outline of topics Some examples of telecoms contracts Wholesale fixed network agreements Capacity agreements Co-location agreements Wholesale mobile network agreements International roaming agreements National roaming agreements MVNO agreements 2004 Baker & McKenzie 2 1
A few examples of telecoms agreements Access agreements Roaming (mobile/wlans) Wholesale broadband, LLU Wholesale line rental MVNOs Services VPNs Internet access Airtime Telephony Phone cards Colocation Colocating in an exchange Telehousing Capacity agreements Bandwidth Fibre stands IRUs Interconnection agreements Fixed/mobile MMS message agreements MNP routing agreements Traffic trading Peering & transit agreements I/C 2004 Baker & McKenzie 3 Wholesale fixed network agreements What makes up a network? Case study 1: Capacity agreements: Asset sales IRUs Leases Case study 2: Co-location agreements 2004 Baker & McKenzie 4 2
What makes up a network? Duct Cable Fibres dark & lit Capacity / wavelengths 2004 Baker & McKenzie 5 What makes up a network? Cable POPs e.g. telehouses 2004 Baker & McKenzie 6 3
Case study 1: Capacity Agreements Options for operators: Buy the network or the network elements needed Obtain IRUs Lease network elements or capacity 2004 Baker & McKenzie 7 Option 1 - Buy Is a duct and the cable and fibres inside a fixture or a chattel (and why does it matter)? Fixture means Anything which has become so attached to the land as to form, in law, part of the land Chattel means any moveable possession 4
Option 1 - Buy Tests to apply: Degree of annexation test Anything substantially fixed or connected with the land or a building on it Purpose of annexation test Was the chattel annexed to effect a permanent improvement to the land? What was the objective intention at the time the object was affixed? 2004 Baker & McKenzie 9 Some decided cases Fixtures - Panelling secured to wall - Conservatory on brick foundations - Machinery nailed or screwed to the floor - Wooden bungalow resting on the ground - Bricks forming part of the house Chattels - Tapestries fixed wooden frames screwed onto walls - Barn resting on the ground - Machinery standing by its own weight - Bricks waiting to be laid - Greenhouse resting on the ground 2004 Baker & McKenzie 10 5
Option 1 - Buy What about fibre can you buy/sell individual strands? No? Yes? Not moveable Incorporated into the cable Separate identity Separate use Separate ownership Courts are likely to uphold the commercial reality 2004 Baker & McKenzie 11 Option 1 - Buy Assuming that there is a chattel capable of transferring Contract issues: Specify when title will transfer Sale of Goods Act 1979, s. 17 title passes when parties intend Define the asset being bought e.g. network diagrams, terminology Warranties (express, implied) and indemnities 2004 Baker & McKenzie 12 6
Option 1 - Buy Contract issues continued.. Specify access rights Wayleaves Easements Trench share agreements (but the buyer may still needs Code powers ) Specify repair responsibilities / operation and maintenance ( O&M ) arrangements 2004 Baker & McKenzie 13 Option 2 - IRUs IRU = indefeasible right of use Title stays with supplier but buyer obtains an exclusive right to use duct / cable / fibre for a long term e.g. 7-25 years, often for a one-off up front fee Buyer can sell part or all of his rights by granting an IRU downstream Akin to property ownership? 2004 Baker & McKenzie 14 7
Option 2 - IRUs Supplier Provides O&M, usually for an annual fee Provides co-location and access for a separate fee Must maintain rights of way Legal issues Accounting treatment Position of the buyer on the insolvency of the seller Some contract issues 2004 Baker & McKenzie 15 Option 2 - IRUs Accounting treatment US Financial Accounting Standards Board IRUs treated as leases over the life of the agreement, NOT as asset sales Buyer must recognise revenue over life of the IRU, whereas with an asset sale they would have been able to recognise it up-front Some attempts to get around by trying to deem the transaction a sale: hollow swaps Qwest, Cable & Wireless, Global Crossing. Very legally dubious! 2004 Baker & McKenzie 16 8
Option 2 - IRUs Insolvency of the seller Not an issue if the business is sold as a going concern In the case of liquidation, IRU could be terminated and in this case the buyer would be an unsecured creditor Generally a technical rather than practical risk because a liquidator will usually honour the IRU to keep getting O&M fees need to advise clients of the risks 2004 Baker & McKenzie 17 Option 2 - IRUs Minimising the insolvency risk Pay over the term Obtain security from the supplier Buy the duct /cable / fibre instead Declaration of trust 2004 Baker & McKenzie 18 9
Option 3 - Leases Similar rights to IRUs Usually shorter term (e.g. up to 7 years) Full service - one payment usually gets you use, co-location and O&M Common in Short term use of fibres Capacity/bandwidth 2004 Baker & McKenzie 19 Options 2 &3 key contractual issues Service levels ( SLAs ) SLAs are guaranteed service levels, usually set out in a contract schedule Services credits / rebates if SLAs not met credits for exceeding service levels a bit dubious! Force majeure clause if it is too broad the supplier can avoid too much liability for failures in service levels Are services credits the customer s sole financial remedy? subject to any limitation of liability? 2004 Baker & McKenzie 20 10
Options 2 &3 key contractual issues Upgrades / options to obtain further time Fault management / disaster recovery Lawyer s job includes making sure that the technical schedules work too Do they actually specify what is being leased/ purchased/subject to the IRU? How would a judge interpret the SLAs? 2004 Baker & McKenzie 21 Case Study 2: Co-location agreements Agreements to allow operators to locate their equipment in a particular building, e.g.: at telehouses e.g. Redbus at telephone exchanges e.g. to house equipment to provide services over the unbundled local loop Agreements need to provide for. power, fire suppressants, alarm monitoring, security, access rights for the customer, 3 rd party equipment providers, disaster recovery, insurance 2004 Baker & McKenzie 22 11
Wholesale mobile agreements Market is characterised by a range of arrangements with subtle differences: International and national roaming e.g. 3 and O2 Facility sharing e.g. Orange and Vodafone MVNOs e.g. Virgin mobile Independent re-sellers (branded / unbranded) e.g. Carphone Warehouse 2004 Baker & McKenzie 23 International roaming GSM Association Standard international roaming agreement (STIRA) Responsibility for payment with roaming subscriber s home network Inter-Operator Tariffs ( IOTs ) disassociates wholesale from retail Used by over 200 operators Notified under EC Treaty competition rules 1997 Benefits conferred in using a standard agreement considered by the European Commission to outweigh anti-competitive disadvantages 2004 Baker & McKenzie 24 12
International roaming Key issues in STIRA Charges Authentication of roaming subscribers Fraud Data privacy Governing law law of the home operator, away operator or a third country? Dispute resolution No branding issues arise (c.f. national roaming and MNVOs) 2004 Baker & McKenzie 25 National roaming For example: Established operators provide GSM roaming services to new 3G entrants (e.g. 3 s customers roaming on O2 in the UK) GSM operators with incomplete network coverage may have roaming arrangements with another GSM operator (former One.tel / Optus arrangement in Australia) Originally temporary arrangements during rollout But cost-saving approach 2004 Baker & McKenzie 26 13
National roaming Common for a regulatory requirement to be imposed for established operators to provide roaming to new 3G entrants In the UK Former PTO licence condition 71 Imposed on Vodafone and O2 only To provide roaming on their GSM network to the new 3G entrant ( 3 ) on reasonable terms Commenced when new entrant achieved 20% coverage, was to expire Dec 2009 Ofcom has proposed not to impose an access-related condition Condition continues in operation under transitional provisions No decision made 3 awarded contract to Orange 2004 Baker & McKenzie 27 National roaming Key contract issues Branding Make sure roaming customers get equal treatment to the customers of the roamed network Handling of service failures 2004 Baker & McKenzie 28 14
MVNOs A range of arrangements Reselling wholesale minutes purchased from infrastructure owner Set tariffs, billing, SIM cards, subscriber databases. Distinct service offering to end consumers Benefits Leverage consumer recognition into a new market e.g. Tesco MNOs sell excess network capacity Niche / innovative service offerings e.g. BT Mobile Target markets that wouldn t otherwise be reached 2004 Baker & McKenzie 29 MVNOs Key contractual issues: What is being provided exactly? What will the MVNO provide themselves? Charges (T-Mobile / Virgin) Branding Customer ownership Service levels Exclusivity / minimum commitment Service levels 2004 Baker & McKenzie 30 15