Local resellers of AT&T ILEC services have sued AT&T over the treatment of promotions offered by AT&T ILECs to new retail customers. Budget Prepay v. AT&T, Inc., Civ. Action No. 3:09CV1494-P (U.S.N.D. Texas – Dallas). The resellers contend that AT&T must give its wholesale customers, like them, the full value of any promotions that AT&T provides to new AT&T retail customers. For example, if Southwestern Bell offers new retail customers a $100 credit to sign up for new local telephone service in Texas, the resellers argue that Southwestern Bell is required to give wholesale customers the same $100 promotion for each new local customer they put on AT&T’s network. AT&T rejects this claim and contends that it may give its wholesale customers a lesser promotional amount than its retail customers. This argument has festered for over two years and now has escalated into millions of dollars in dispute. Recently, it has bubbled over into federal district court lawsuits in Texas and North Carolina. CGM, Inc. v. BellSouth, Civ. Action No. 3:09-CV-377 (W.D.N.C) (Full disclosure, the author is counsel to the reseller in the North Carolina case.)
Wholesale prices for local resellers are set by the State public utility commissions following FCC guidelines. The approach mandated by law is a “costs avoided” analysis that starts with the retail price and then applies discounts for wholesale customers based on costs that the ILEC avoids in serving wholesale customers rather than retail customers. This reduction in price is expressed as a percentage discount from the retail price, and in most states falls in a 15-20 percent range. Thus, in a typical state, if the monthly cost of local telephone service from BellSouth is $40, the wholesale discount might be 20 percent, resulting in a wholesale price of $32. For the past two years, AT&T has taken the position that any promotions given to resellers should first be discounted by an amount equal to the percentage discount applicable to wholesale pricing in general. For example, in a state with a 20 percent wholesale discount, a retail promotion of $50 would result in a discounted promotional payment to resellers of only $40. It is this $10 difference that is in dispute in most cases.
The disputes have been pending for more than two years, but were recently given impetus by a new AT&T policy. In Accessible Letters published in July and August, AT&T announced a new formula for calculating the promotional amounts to be paid to resellers starting September 1. (“Accessible Letters” are public announcements by which AT&T states new policies it intends to apply to wholesale arrangements.) The new formula itself is extremely complex, but the bottom line is that the typical wholesale promotional amount will stop being approximately 80 percent of the retail amount – and instead drop to about 15 percent.
There are several moving parts to the formula, but the key components in this change are the introduction of a “redemption rate” (the number of customers eligible for the promotion compared to those that actually take advantage of it) and a “retention rate” (the average length of time that the acquired customers stay on the service, and thus the period for amortization of the expense of the promotional amount). For example, if you project a “redemption rate” of 30 percent, the $50 is reduced to $15. Then if you amortize it over 12 months, it is further reduced to $1.25 per month. A few more calculations that reduce it even more lead AT&T to conclude that the present value of a revenue stream of this sort to the resale CLECs is a one time payment of about $4. (Remember, the figures used here are hypothetical and chosen for simplicity of illustration.)
If you apply this math to the illustrative figures above, using a $50 promotion, a $40 retail rate and a $32 wholesale rate, you get the following. In Month 1 the AT&T retail customer receives free service and has a $10 credit left over, while the wholesale customer must pay $28. In Month 2, the retail customer pays $30 and the wholesale customer pays $32. In Month 3, the retail customer finally pays the full $40 and the wholesale customer pays $32. Total for the first three months of service: retail customer pays $70 and the wholesale customer pays $92. Not surprisingly, this September 1 revision in the formula created a new sense of urgency about the dispute and prompted the resellers to file suit against AT&T.
The resellers contend, among other things, that this issue has already been resolved by the courts two years ago. In a ruling by the U.S. Court of Appeals called Sanford v. BellSouth, the resellers argue that the appellate court concluded that the Telecom Act and FCC precedents prohibit BellSouth from treating promotions differently as between retail customers and resellers unless the disparate treatment was first approved by the FCC or a state PUC. The Court reached this conclusion on the basis of an FCC statement that any variance of this sort between resale and wholesale customers is presumed to be unlawful. The FCC also had adopted a rule which says that such practice must first be approved by a regulatory body. Taken together, the Court ruled that BellSouth is required to give the full promotions to wholesalers as well as its retail customers, according to the reseller argument. Since there has been no FCC or PUC approval of any different treatment for promotions given to wholesale customers vs retail customers, the resellers contend that AT&T is wrong in both its past practices and its new policy. (As of this writing, AT&T has not responded to the reseller arguments.)
The resellers have asked the courts for expedited treatment of their cases in light of the amount of money and the competitive implications involved. In the Texas case, the court is considering a request for a temporary restraining order or preliminary injunction in connection with the new September 1 change in calculation.