Significantly positive 0 percent. Moderately positive 8 percent. Neutral 8 percent. Moderately negative 42 percent. Significantly negative 0 percent

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1 Select Q&A, J. Pultz, R. Cowles, D. Neil Research Note 1 May 2003 U.S. Telecom Regulatory Crisis: Client Survey Results U.S. telecommunications regulations pose problems for many network and telecom managers. We present survey results of participants in a recent Gartner teleconference on this topic and evaluate the critical issues they face. Core Topic Enterprise Networking: Network Service Providers and Services Key Issue How will public policy changes affect the evolution of network services and network service providers? Gartner has launched the network and telecommunications manager program, which is designed to bring the full resources of Gartner to bear on the critical issues facing network and telecom managers. One of the benefits of the program is that these managers can openly discuss problems and potential solutions. On 21 and 22 April 2003, Gartner conducted a number of teleconferences for program members about the U.S. regulatory crisis. We present the key questions posed to the teleconference participants, their responses (noted by percents) and our evaluation of the "crisis." Only a small number of enterprises participated in the poll. Therefore, we advise you to use the information as an indicator, rather than a statistically valid sample, of enterprises' opinions. How does the current telecom regulatory situation affect your enterprise? Significantly positive 0 percent Moderately positive 8 percent Neutral 8 percent Moderately negative 42 percent Significantly negative 0 percent Not sure 42 percent Gartner: There is an impasse in U.S. regulations today. Nearly every decision is mired in litigation. Even the Federal Communications Commission (FCC) has become stalemated; the FCC's March 2003 three to two vote on line sharing and unbundled network elements (UNE) was highly contentious; FCC Chairman Michael K. Powell called the ruling of his own Gartner Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

2 Commission "abysmal." Regulation has had a positive influence on pricing, largely due to the unleashing of competition. U.S. telecom prices are down, on average, by 80 percent since the passage of the Telecom Act of However, the telecom industry is in severe economic distress. Investment in new technologies is languishing, in part because the regulatory environment creates uncertainty and does not offer incentives for spending, especially in the right directions. As long as this regulatory process continues, the effects on enterprises will worsen: Competition will decrease. Network access rates will rise in some cases, by more than 20 percent. Network investment will diminish, which will slow broadband and new service introductions and make the network less efficient. The current legal battles will continue, forestalling recovery and financial stability of network service providers. Do you believe you can have a substantive impact on current regulatory proceedings? Yes 54 percent No 38 percent Not sure 8 percent Gartner: Most of the debate on regulations has taken place among the network service providers; yet, U.S. regulations are geared to protect and help consumers and enterprises. Although there are various consumer groups that are very vocal, enterprises are under-represented. The views of enterprises are not being made loudly and clearly. From the poll results, enterprises appear almost equally divided on whether they can affect regulations. In reality, enterprises can have a profound impact on regulations. Enterprises have to use their weight to move regulations in the right direction. Join forces with other industry representatives to complain, criticize, "nag" and protest to the FCC and political leaders in Washington, D.C. about the poor, confused state of regulations. Force change. Force a new regulatory vision focused on taking the United States into the next stage of the Information Age. From your viewpoint, has the Telecom Act of 1996 been a success or failure? Success 11 percent 1 May

3 Failure 67 percent Not Sure 22 percent Gartner: Although the Telecom Act was a product of extensive lobbying by the cable companies, the long-distance carriers, and the regional Bell operating companies (RBOCs), it stimulated the process of further opening telecom markets to competition. The real problems began when the FCC issued its 700-plus page ruling implementing the Telecom Act. Instead of relying on negotiations among the carriers on how they would connect with each other in the new competitive environment (with the states acting as arbitrators where agreements could not be met) as prescribed by the Telecom Act, the FCC chose to specify all those detailed rates, terms and conditions. The result: litigation. It's not surprising that nearly 90 percent of the participants do not view the Telecom Act as being successful. Enterprises have been excluded from the intense debates that have taken place in the telecom marketplace and only see the outcomes: a slowdown in broadband deployment, competitors leaving the market, and service rates beginning to rise. Do we need a new law? The answer is a resounding No. There are too many laws already. The country needs a vision, a broadband vision to take us to the next stage of the Information Age. Enterprises should press their regulators to take new, fresh approaches to resolve today's litigation impasse. From your viewpoint, is UNE/UNE-P pricing fair? Fair 25 percent Unfair 50 percent Not Sure 25 percent Gartner: The "trench warfare" surrounding the pricing of wholesale UNEs and the rebundling of UNEs or UNE-platform (UNE-P) at further discounted rates is one of the unintended consequences of the FCC's rules implementing the Telecom Act of This intense debate has been made at the FCC, with state regulators and in the courts, including the U.S. Supreme Court. Incumbent carriers, primarily the RBOCs, maintain that UNE-P prices are below cost and, therefore, are reluctant to invest in network upgrades and new services if they are required by law to "give it away" to competitors at heavily discounted rates. They argue that they take the risk while the competitors reap the benefits. The competitors (led by AT&T and MCI) and many regulators maintain that copper-based access facilities had been paid for by the rate-payers a long time ago, and that the high cost to deploy 1 May

4 competitive access facilities inhibits local competition. Other arguments made by competitive carriers are that the RBOCs make a high profit margin on their services and, therefore, can well afford some competitive losses. Others argue that the wholesale/retail concept worked well in the long-distance marketplace and will work equally well in the local-exchange carrier market as well. Another faction maintains that opening up the local loop is the quid-pro-quo for the RBOCs receiving longdistance relief. Enterprises on our teleconference have mixed opinions as to whether UNE/UNE-P pricing is fair. Surprisingly, in a recent vote on UNE/UNE-P at the FCC, the commissioners demonstrated that they are equally unsure. Gartner, as a neutral third party, has studied this issue and many other regulatory issues because regulation has such a huge impact on the telecom industry. Gartner has developed a study methodology that permits examining the true economic impact of UNE-P on individual carriers and the U.S. fixed telecom industry. Our findings demonstrate that continued application of the current UNE-P policies will negatively impact the telecom market through higher prices and lower service quality, despite easing competitive entry. Gartner strongly recommends that the FCC take immediate action on two fronts: Take advantage of Gartner's study methodology (soon to be released) to open a proceeding to formally investigate UNE- P pricing policies Develop a future-looking regulatory framework that will be more flexible and responsive to changing market needs Do you believe that telecom regulations in the United States will get better or worse? U.S. telecom regulations will improve 17 percent U.S. telecom regulations will get worse 33 percent U.S. telecom regulations will stay the same 50 percent Gartner: Telecom regulations need major changes to respond and meet the demands and requirements of the 21st century. Without regulatory change, items such as broadband access will continue to languish. Many enterprises are hoping that the regulations will improve to better meet their requirements. But there is a lot of concern that improvements will not happen because of partisan politics and telecom regulations not being high on the political agenda. 1 May

5 Acronym Key FCC RBOC UNE UNE-P Federal Communications Commission Regional Bell operating company Unbundled network elements UNE-platform Eighty-three percent of those polled in the Gartner teleconference believe that the situation will not improve; this is a pessimistic, but realistic, view. Efforts to improve U.S. regulations will be dominated by time-consuming and expensive litigation from all parties. Without a major overhaul of the U.S. telecom regulations, the United States will fall behind the rest of the world in adoption of state-of-the-art networking. Enterprises should take this view into consideration in their strategic plans. More importantly, enterprises can make a difference. Make your interests known. Public policymakers welcome your input. The Technology Network (TechNet), Wall Street Telecommunications Association and CompTel are examples of organizations that enterprises should contact. Gartner can help you shape your positions. 1 May