©2000 Morgan, Lewis & Bockius LLP

Wired Buildings: Extending the Last Mile of Internet Access to Commercial Tenants

By Robert D. Lane, Jr. and Ajay Raju August, 2000

CONTENTS:

I. Demand for Digital Bandwidth 1

II. New High-Speed Internet Access Technologies 2

A. Digital Subscriber Line Technology Using Copper Wires 3

B. Optical Fiber Technology 4

C. Wireless Broadband 4

1. MMDS (Multichannel Multipoint Distribution Services) 5

2. ISM (Industrial Scientific Medical) 5

3. LMDS (Local Multipoint Distribution System) 5

4. Millimeter Wave 6

5. Satellite Technology 6

6. Laser-based Broadband Technology 6

III. Contractual Arrangements with Building Owners 7

A. Revenue-Sharing Arrangements 7

B. Exclusivity 8

1. Advantages and Disadvantages of Exclusivity 8

2. Exclusivity versus Open-Access 8

3. Clearing the Open-Access Hurdle 9

C. Legal Status of Inside Wiring 10

1. Definition of Inside Wiring 10

2. Control Over Inside Wiring 11

D. Breach of Network Security and Service Interruptions 12

E. Practice Suggestions 13

1. BLEC’s Contractual Priorities 14

2. Building Owner’s Contractual Priorities 15

IV. Future Outlook 15

Wired Buildings: Extending ����the Last Mile���� of Internet Access to Commercial Tenants

By Robert D. Lane, Jr. and Ajay Raju August, 2000 I. Demand for Digital Bandwidth

During the past five years, demand for high-speed Internet access and data-intensive broadband communications has grown exponentially in the business world. Prior to 1995, businesses used the Internet primarily to send e-mail and small text-based information files.1/ Since then, information sharing in the form of animated graphics, audio and low-rate video, along with text-based information and e-mail, have become an integral part of modern commerce for most large businesses in the United States.2/ For these large companies, the Internet has become an enormous marketplace where cheap and universal access to virtually every kind of information imaginable lurks just around the corner.

Many small and medium-sized businesses clustered in office buildings, however, have not reaped the benefits of the recent bandwidth explosion because their buildings do not have a high-speed access network in place. Unlike large businesses, which have the resources and requirements to lease dedicated, high-speed T-1 lines3/ from the telephone company, small and medium-sized businesses cannot afford to implement their own broadband solutions. In most office buildings, small and medium-sized businesses use slow dial-up modems,4/ using existing copper wire infrastructure, to connect computers to the Information Superhighway.5/ The dial-up 1/ Kwok, Timothy, 1998. ATM: The New Paradigm for Internet, Intranet, and Residential Broadband Services and Applications. Upper Saddle River, NJ: Prentice Hall PTR.

2/ Id.

3/ A T-1 line is a high-speed, high-capacity network link used on the Internet. A T-1 line wide area network connection operates at 1.544 mega bits per second.

4/ A modem is a device that converts digital data into analog data, allowing computers to communicate over analog telephone lines. Dial-up access means connecting to another computer or network using a modem over a regular telephone line.

5/ Information Superhighway is a phrase coined by Vice President Al Gore to describe all of the new ways to communicate electronically.

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connections, which operate no faster than 56 kbps (kilobits per second)6/, cannot take advantage of the gigabit per second processing speeds of today�s computers and multi-gigabits per second transmission rates of fiber-optic networks.7/ The gap between these office buildings and the nearest �on-ramp� to the high-speed networks is referred to as the �last mile.�8/ The difference between using a high-speed broadband network to close the last mile gap and the century-old copper infrastructure is like the difference between using a common garden hose and a high-pressure fire hose.

II. New High-Speed Internet Access Technologies

Capitalizing on the pent-up demand for digital bandwidth by small and medium-sized businesses, broadband access providers are racing to partner with building owners to provide customized, bandwidth-intensive last mile communications services to tenants. These companies, known in the industry as building local exchange carriers or BLECs, are fiercely competing with each other to offer innovative voice and data services through �always-on� connection to the Internet at speeds many times faster than the standard dial-up service. The various high-speed Internet access technologies currently offered by these BLECs fit into three broad categories: twisted-pair copper telephone wires, optical fiber, and wireless broadband. Cost and availability of each varies from market to market, and the sections below briefly describe each technology. Before beginning, however, a bit of basic background vocabulary will be useful to the average reader. For starters, bandwidth means capacity to transmit data in bits per second.9/ Traditionally, communication channels were called bands.10/ Technologists refer to the existing voice networks, which transmit information at rates below 1.5 Mbps (mega bits per second)11/, as narrowband.12/ Anything faster than 1.5 Mbps is referred to as broadband.13/ 6/ KBPS is an acronym for kilobits per second, i.e., thousands of bits per second, used to describe the speed of a network connection. Today�s fastest modem operates at 56 kbps over an analog telephone line.

7/ Nettleton, Ray, May 1, 2000. Broadband Wireless Access: The First Mile, Telecommunications International.

8/ Id.

9/ A bit is the smallest unit of data retrievable through the yes/no digital signals stored in a computer�s memory. BPS is an acronym for bits per second. See, Newton, Harry. Newton�s Telecom Dictionary, Sixteenth Edition, Expanded and Updated, February 2000.

10/ Id.

11/ MBPS is an acronym for megabits per second, i.e., millions of bits per second, used to describe the speed of a network connection. Many local area networks operate at speeds of 10 mbps or more. As mentioned earlier, a T-1 line wide area network connection operates at 1.544 mbps.

12/ Newton�s Telecom Dictionary, supra at note 9.

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A. Digital Subscriber Line Technology Using Copper Wires

Digital Subscriber Line (DSL) technology deploys broadband services by

increasing the availability of bandwidth on a building�s existing copper wire network.14/ DSL services use existing telephone lines to provide continuous, �always-on� connection to the Internet without causing busy signals if users are on the Internet.15/ This multiple use of the copper wire is made possible by taking advantage of the unused frequency bands on the copper wire.16/ While the voice traffic passes on the copper wire using audio frequencies, DSL utilizes digital signal processing technology to transfer bandwidth-intensive information on the copper wire at rates ranging from 1 to 3 Mbps.17/ Technologists predict that, in the not too distant future, certain types of DSL services will reach speeds of 5 to 15 Mbps, which are currently needed to achieve television-quality transmission.18/

Because DSL utilizes existing telephone lines, BLECs and/or the telephone companies can deploy DSL service quickly and without costly installation of higher-grade cable, although poor quality of existing building wires can impede performance. Additionally, critics have noted that DSL simply infuses a temporary breath of life to the outdated century-old copper infrastructure.19/ Further capital and technological investments in existing copper wires may be as short-sighted as temporarily patching a leaky roof and then praying for sunshine. A complete replacement of the old copper infrastructure may be the sensible, long term solution.

13/ Id.

14/ Kaplan, Mark, May 2000. Voice over SDSL: Effectively Combining Voice and Data, Telecommunications International.

15/ Goralski, Walter. 1998. ADSL and DSL Technologies. New York: McGraw-Hill.

16/ Id.

17/ Gwynne, Jeff, June, 2000. The Optical Last Mile: Market Share�s Final Battleground, Telecommunications International.

18/ Behagel, Denis and Pradat, Philippe, May, 2000. Developing the Local Loop, Telecommunications International.

19/ Gwynne, Jeff, June, 2000. The Optical Last Mile: Market Share�s Final Battleground, Telecommunications International.

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B. Optical Fiber Technology

Fiber-optic communications is based on the principle that light in a glass medium can carry information more quickly over longer distances, than electrical signals can carry in a copper or coaxial medium.20/ Whereas transmission over copper wires utilizes frequencies in the megahertz range, transmission over fiber utilizes frequencies a million times higher.21/ This difference permits transmission of data over fiber lines at speeds as high as 10 gbps (gigabits per second).22/ According to the International Engineering Consortium, at this speed the entire fifteen-volume set of Encyclopedia Britannica can be transmitted in well under one second.

Fiber-optic broadband connections are available through a number of sources and offer virtually unlimited bandwidth to the user willing to pay for it.23/ For businesses, the cost of accessing fiber-optic connections is governed by the distance from the business to the fiber-optic network.24/ In highly urbanized areas, several companies typically maintain fiber-optic lines or networks. As a result, fiber access in urban areas is more widely available and priced competitively. In less densely populated areas, however, fiber-optic connection is generally cost-prohibitive, and perhaps unavailable.

C. Wireless Broadband

Wireless broadband includes a number of different technologies that range from

fixed-point radio/microwave25/ to satellite26/ to laser. Currently, the business market is dominated by radio/microwave services that offer Internet connectivity at speeds greater than 1.5 Mbps.27/ Broadband providers are aggressively constructing wireless networks in different markets 20/ Newton, Harry. Newton�s Telecom Dictionary, Sixteenth Edition, Expanded and Updated, February 2000.

21/ Id.

22/ Id. GBPS is an acronym for gigabits per second, i.e., billions of bits per second, used to describe the speed of a network connection.

23/ Id.

24/ Id.

25/ Microwave is a wireless technology that uses the high frequency band of the radio spectrum to transmit analog and digital information. Microwave systems can have bandwidth up to 300 times greater than broadcast TV networks and several times greater than cable TV networks. See, Communityguide Glossary of the AT&T Learning Network.

26/ Satellite is a wireless communication device that orbits Earth and relays video, voice, paging, data, or fax

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messages from originating ground stations to other ground stations, which then forward the messages to recipients. Id.

27/ Newton�s Telecom Dictionary, supra at note 20.

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throughout the country, thus, dramatically expanding the wireless options available to both urban and rural end-users. Some of the wireless options currently available in the market are briefly described below:

1. MMDS (Multichannel Multipoint Distribution Service)

MMDS technology operates at frequencies of 2.1 to 2.7 Gigahertz of the

electro-magnetic spectrum.28/ Signals sent using MMDS can travel from point to point up to 40 miles before needing to be boosted.29/ Sprint is the leading provider of MMDS technology and currently offers Internet access at a rate of about 2 Mbps.

2. ISM (Industrial Scientific Medical) ISM technology operates at frequencies of 2.4 to 5.8 Gigahertz of the

electro-magnetic spectrum.30/ Signals sent through using ISM technology can travel from point to point from 5 to 25 miles before needing to be boosted.31/ This technology is utilized to supplement MMDS within a local service area. ISM provides access to the Internet at similar rates to that of MMDS.

3. LMDS (Local Multipoint Distribution System)

LMDS technology operates at frequencies of 28 to 31 Gigahertz of the electro-magnetic spectrum.32/ Signals using LMDS technology can travel from point to point up to 3 miles before needing to be boosted.33/ Carriers using LMDS are building wireless rings offering service in urban areas. Competitors include NextLink Communications, WinStar Communications, Advanced Radio Telecom Corp. and Teligent. LMDS provides access to the Internet at rates up to 11 Mbps.

28/ Id.

29/ Id.

30/ Id.

31/ Id.

32/ Id.

33/ Id.

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4. Millimeter Wave

Millimeter Wave technology operates at frequencies of 28 to 38 Gigahertz of the electro-magnetic spectrum.34/ Signals using Millimeter Wave technology can travel from point to point from 1 to 3 miles before needing to be boosted.35/ Competitors include NextLink Communications, WinStar Communications, Advanced Radio Telecom Corp. and Teligent. Millimeter Wave provides access to the Internet at rates up to 11 Mbps.

5. Satellite Technology Satellite Internet access is currently limited by the fact that signals can

only be beamed down to the user, but cannot be transmitted back from the user to the satellite.36/ Nevertheless, by using a separate analog Internet Service Provider connection over a telephone line to send signals upstream, users can gain the benefit of high-speed downstream transmissions via satellite broadband.37/ For users who require bandwidth primarily for the purposes of receiving data from the Internet, satellite technology offers an excellent and affordable solution. Two-way satellite communication networks are currently under development by both Spaceway (Hughes) and Teledesic and should be offering service by 2003-2005.

6. Laser-based Broadband Technology

Laser-based broadband technology is currently under development by Lucent and TeraBeam Networks. Laser has the advantage of being able to transmit data at even higher speeds than LMDS and Millimeter Wave technology, and can be used to access remote areas, although, laser performance can be impaired by harsh weather or heavy fog. Because laser broadband is not currently available on a widespread basis, it is difficult to evaluate its advantages or disadvantages thoroughly. III. Contractual Arrangements with Building Owners

BLECs are racing to forge contractual ties with building owners to gain (i) the right to install and operate their customized in-building broadband networks, and (ii) the right to offer

34/ Id.

35/ Id.

36/ Id.

37/ Id.

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broadband services to building tenants.38/ Prior to installing its network within a building, however, a BLEC must first evaluate whether the demand for broadband services among the tenants coupled with the BLEC�s potential customer penetration rate within a particular building are greater than the cost of deployment and continued provision of broadband services.

A broadband provider with successful customer penetration rates within a building makes it difficult and, in some cases, impossible for other competitors to solicit customers and provide services within that building. The first BLEC within a building, therefore, has a clear advantage over its competitors. As the �first-mover,� it has the first opportunity to solicit tenants as customers and, consequently, to deter other BLECs from installing their in-building infrastructures. To minimize the risk of expending a great deal of capital before realizing any revenue from tenant subscriptions, the competitors of the first-mover must determine (i) whether the remaining tenants still demand broadband service and (ii) whether the actual cost of broadband deployment, which may include possible construction costs to accommodate their network architecture around the first-mover�s broadband network, would be cost prohibitive. A. Revenue-Sharing Arrangements

Eliminating the bandwidth bottleneck created by the century-old copper

infrastructure is creating business opportunities not only for the BLECs but also for the building owners. Typically, BLECs install and operate their communications infrastructure within a building at zero capital investment by the building owner. Upon construction of the broadband network, a BLEC converts the building into a �Smart Building,� which, in most cities, has become the latest marketing tool utilized by building owners to attract new tenants or retain pre-existing tenants at higher rental rates.

In addition to a technology upgrade which represents an important marketing and leasing amenity, building owners negotiate lucrative revenue-sharing arrangements with BLECs. These revenues come in the form of fixed rent, equity participation in the BLEC via stock warrants, or a recurring percentage rent (ranging from 5 to 10 percent of the telecommunications revenues collected by the BLECs from the tenants). Depending on the location and size of the real estate portfolios and the competition among BLECs to provide telecommunications services to such portfolios, building owners have been able to command all of the above-mentioned revenues. Section 5 of the access agreement appended as Exhibit B illustrates a typical revenue-sharing provision.

38/ A sample BLEC-oriented access agreement is appended as Exhibit A, and a sample building owner-oriented access agreement is appended as Exhibit B.

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B. Exclusivity

Ideally, BLECs hope to enter into long-term contracts that offer them exclusive access to build their broadband networks within buildings. Once an exclusive arrangement is established with the building owner, a BLEC can focus on providing telecommunications services to tenants without looking over its shoulder for competitors. As the exclusive provider, it becomes immune to competition that could reduce its market share within the building and, more importantly, gains the opportunity to create a strong brand or name recognition within the captive building marketplace.

1. Advantages and Disadvantages of Exclusivity

From a tenant�s standpoint, an exclusive broadband service provider serves as a one-stop shop for all of a tenant�s technology needs. Indeed, if enough tenants in a building enroll with the exclusive provider, the provider may station support staff on-site to manage the multiple tenant accounts and provide outside technology support. Of course, exclusivity can have drawbacks as well. A building with an exclusive provider runs the risk that the provider will not have an incentive to keep pace with the latest technological innovations in the broadband industry. Also, exclusive arrangements limit tenants� choice of technology providers and may turn away prospective technology-savvy tenants who demand alternatives. Lastly, revenue-sharing arrangements that seemed lucrative at the time the exclusive access deal was negotiated may pale in comparison to revenue-sharing opportunities being offered in the future.

2. Exclusivity versus Open-Access

Even though exclusivity is a feature of numerous broadband access deals

that have been negotiated in office buildings to date, recent regulatory initiatives may soon make it difficult for BLECs to enter into exclusive deals with building owners. The FCC is considering mandatory access regulations that would require building owners to provide open-access to service providers to their buildings on a non-discriminatory basis. If the open-access mandates are adopted, BLECs would have no incentive to offer revenue-sharing programs to building owners. Some state legislatures have already enacted open-access laws, thereby changing the competitive landscape of broadband service arrangements in those states.39/ 39/ Texas and Connecticut have already enacted open-access laws. See, e.g., Tex. Util. Code Ann. Sections 54.259, 54260 (1998). (statute prohibiting building owners from discriminating against a telecommunications carrier �in relation to the installation, terms, conditions, or compensation� when the services of such carrier have been requested by a tenant). Other states including, Illinois, Colorado and California, have been considering similar legislation.

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3. Clearing the Open-Access Hurdle

As a practical matter, most access contracts with building owners within the broadband industry are non-exclusive. Furthermore, anticipating the possibility that exclusivity may not be an option because of the proposed open-access regulations, BLECs are structuring their access deals with building owners in different ways. Today, some BLECs seek a distinct competitive advantage over others by negotiating the exclusive right to develop and host a web portal for the building. A building-specific web portal is a website on the Internet which the BLEC positions as a gateway to other websites on the Internet. Through the building’s web portal, the tenant not only connects to the Internet, but also views advertising that links40/ the web portal to select business-to-business vendors and service providers. By obtaining the right to design and host a customized web portal for the building, a BLEC has the opportunity to market its services to building tenants further and increase its revenue potential. Where an exclusive web portal developer opportunity has been granted to a BLEC, tenants who enroll for the broadband services access the Internet, view advertising and engage in e-commerce activities through a building-specific portal that is maintained by the BLEC. The web portal, therefore, can be a source of big business for the BLEC and the building owner. The BLEC and the building owner, by contract, may agree to share in the potential e-commerce and advertising revenues generated through the building�s web portal.

Another way a BLEC might gain a competitive advantage over other service providers within a building offering non-exclusive contracts is by becoming the building�s exclusive �preferred provider.� The building owner would market the �preferred provider� as the building�s recommended provider of broadband services. In exchange for lucrative revenue-sharing arrangements, building owners provide marketing support to their preferred providers by granting to the preferred provider (i) the right to solicit tenants inside the building, (ii) the right to sponsor marketing events within the building, and (iii) the right to utilize the owner�s name and logo in advertisements and promotional materials. A sample marketing agreement illustrating the exclusive web portal developer and the preferred provider arrangements is appended as Exhibit C.

C. Legal Status of Inside Wiring

40/ Link is an image, icon, or on-screen text (usually colored and underlined) that, when you click on it, leads from one page to another on the World Wide Web.

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