Due to the sensitive nature of the information contained herein, please refrain from circulating to third parties or otherwise publicizing the contents of this Advisory.
This confidential and privileged Advisory is directed to all firm clients that offer wireless services including resellers (i.e., MVNOs). Providers of prepaid PIN-based wireless “top-up” / recharge services are also advised to review this Advisory closely.
A recent FCC Enforcement Bureau action:
- Clarifies and reinforces the Section 214 licensing requirements applicable to wireless carriers,
- Confirms the applicability of certain Title II regulatory reporting duties, and
- Contains signals that may prompt the Universal Service Administrative Company (“USAC”) to impose onerous, “face value” prepaid calling card revenue reporting obligations on providers of prepaid, PIN-accessible wireless top-up / recharge services.
Page Plus Notice of Apparent Liability and its Immediate Implications.
As detailed in our firm’s December 10th Client Advisory, on December 6, 2013 the Federal Communications Commission (“FCC”) issued a Notice of Apparent Liability for Forfeiture (“NAL”) against Start Wireless Group, Inc., d/b/a Page Plus Cellular (“Page Plus”) for violating 47 C.F.R. § 43.61(a), which requires all providers of international telecommunications services (both wireless and wireline) to file annual International Traffic Reports (“ITRs”) with the FCC. The Notice followed a 2012 NAL, finding Page Plus apparently liable for violating Section 214 of the Communications Act and Section 63.18 of the FCC’s rules, for failing to obtain Section 214 authority prior to offering international telecommunications services.
Both NALs are important to clients providing wireless services for three reasons. First, it clarifies and reinforces the applicability of Section 214 licensing requirements to resellers of wireless services offering international call origination and termination services. As confirmed in the 2012 NAL, wireless providers that offer international origination and/or termination must secure Section 214 authority to provide international services. Second, the NAL demonstrates the potential consequences for any provider of international telecommunications services failing to file ITRs, pursuant to FCC Rule 43.61(a). The recent NAL confirms that wireless providers must file ITRs and comply with all other Title II requirements applicable to international service providers. Failure to do so can result in stiff monetary penalties. And third, it appears the FCC’s Enforcement Bureau (“EB”) may have also concluded that prepaid international “top-up” / wireless recharge services accessible via PINs (personal identification numbers) are the regulatory equivalent of “prepaid calling card services.” This regulatory classification could subject revenue derived from such “top-up” services to the same Universal Service Fund (“USF”) contribution burdens befalling traditional prepaid calling card offerings, including “face value” revenue reporting in Form 499.
Potentially Significant Impact on Federal Universal Service Fund Contribution Obligations of Wireless Top-Up / Recharge Providers.
Based on publicly-available information, it appears that the EB found Page Plus’ prepaid, “PIN-based” wireless top-up / recharge service to be the offering of a “prepaid calling card service.” First, the NAL specifically references Page Plus’s website, and Page Plus appears not to offer any physical prepaid calling cards through the site. Instead, Page Plus appears to offer only its core prepaid wireless phones and associated service plans, and a prepaid wireless “top-up” or “recharge” service that allows users to re-fill their prepaid wireless accounts with additional minutes of use (domestic and international) by purchasing downloadable “PINs.” Second, the NAL identifies Verizon Wireless as Page Plus’ supplier, further suggesting that the “prepaid” service that the EB evaluated was a wireless service. As such, the Page Plus NAL would appear to confirm that the FCC considers all prepaid, PIN-accessible communications services (whether wireless or wireline services) to be subject to the same regulatory standards imposed on providers of physical prepaid calling cards. The FCC likely draws its support from Line 411 of the Form 499-A Instructions which define “prepaid card” services to include PIN-based services.
If revenue from a prepaid wireless top-up / recharge service constitutes “prepaid calling card” revenue, then the reporting rules applicable to traditional prepaid calling card services would apply to such prepaid wireless services.
First, this would include the obligation to report revenues from sales of these top-up/recharge services at “face value” (i.e. with no deductions for discounts applicable to services sold through distributors).
Second, wireless-top up/recharge providers could not take advantage of geographic allocation methodologies available to jurisdictionalize other wireless services. For USF reporting purposes, it is currently a common industry practice to report prepaid “wireless top-up” revenue in Line 409 or 410, where companies are given the opportunity to take advantage of the “Wireless Safe Harbor” or “Traffic Study” approaches to geographic revenue allocation. Prepaid calling card revenues, however, are reported on Line 411, and filers cannot utilize such revenue allocation methodologies for these revenues. Instead, prepaid calling card revenue may only be geographically allocated based on the filer’s “books and records,” supported by actual traffic reports.
The NAL may also impact the authority of the states’ regulatory oversight of prepaid service providers. Several states have exercised authority over prepaid wireless providers on the assumption that such providers are regulated as wireless service providers, not prepaid calling card providers. The FCC’s NAL could send signals to State Public Utility Commissions that may, over time, increase enforcement of existing rules in order to establish their jurisdiction over prepaid wireless top-up / recharge services.
Clients providing wireless services are advised to comply with applicable FCC requirements confirmed in the recent and January 2012 Page Plus NALs as follows:
- All providers of prepaid international telecommunications services (including PIN-based services) mustobtain 214 Licenses from the FCC before providing telecommunications services. This includes all resellers, and is not dependent on ownership of underlying facilities. Ignorance of FCC licensing requirements is not considered a defense to a charge of non-compliance, even if the “rule” may not be obvious to the casual observer.
- All 214 Licensees, including providers of prepaid international telecommunications services, must file the ITR annually with the FCC. While this is only the second time in FCC history the ITR filing obligation has been enforced through a public enforcement proceeding, the NAL could signal the FCC’s intent to increase its enforcement of the ITR reporting requirement going forward.
We emphasize that USAC has taken no public action to date in response to the FCC’s signals in the recent Page Plus NAL. However, in order to equip clients to adequately prepare for and respond to any such action, we advise clients providing prepaid services, notably wireless service providers and sellers of PIN-accessible, prepaid wireless top-up / recharge services, to promptly contact either the attorney responsible for their account with the firm or Jonathan S. Marashlian at email@example.com. To determine the specific impact of the NAL, prior FCC decisions, and USAC’s current practices and help management make prudent decisions in response thereto, it will be necessary to evaluate the unique facts and circumstances associated with your business.
One final note from our organization: We have been stating for years that the FCC is hostile to the prepaid telecommunications industry. In spite of significant efforts by the industry to clean up its practices over the past several years, it is clear the FCC’s opinion of the prepaid industry remains unchanged. FCC policies continue to treat prepaid service providers in a discriminatory and antagonistic manner. Until the industry finds a common voice that is able to restore reason and sanity to the FCC’s rules and policies that affect the prepaid industry, we expect the hostility to continue.
In 2009, our firm established the Ad Hoc Coalition of International Telecommunications Companies (www.telecomcoalition.com) to raise awareness of FCC and USAC hostility towards providers of international telecommunications services, including prepaid carriers. With the necessary support and backing, the Coalition is prepared to begin the process of changing the “hearts and minds” at the FCC. Until the negative perception of the industry is expunged, we caution all providers of prepaid communications services to be diligent and conservative in their approach to regulatory compliance matters.