The Federal Communications Commission (FCC) received lots of attention in the past month for its controversial vote on net neutrality. This month the beleaguered agency is set to vote on something less likely to make headlines, but more likely to impact consumers: A transition in the administration of the nation’s telephone numbers.
Since 1997, Virginia-based Neustar has run the system on which consumers and businesses rely to keep their number when switching phone companies; phone companies rely on the same system to accurately deliver calls and texts. The FCC is considering whether to award the contract for this service to Telcordia, a subsidiary of Ericsson, the Swedish telecom equipment giant (hereinafter, “Ericsson”). The transition of this system and database is a massive undertaking.
{mosads}Large-scale information-technology (IT) transitions that involve the coordination and the transfer of accumulated knowledge tend to be rocky. Consider United Airline’s attempt to combine its passenger reservation system with Continental’s in 2012. Despite careful planning, testing, and multiple dry runs, only 26 percemnt of United’s flights left on time in the days following transition. Correcting all the errors took over a year and led to significant embarrassment for management who had guaranteed a seamless handover.
Will the transition of the nation’s telephone database from Neustar to Ericsson create another IT fiasco, this time with telecom consumers caught in the middle? Let’s hope not. But even if the cutover goes swimmingly, phone companies and their customers should brace for disruptions with significant costs.
Today, U.S. mobile customers can port their phone number faster than anywhere else on earth. This heightened efficiency has lowered the costs of switching from one carrier to another, which has generated billions in savings for U.S. wireless consumers through heightened competition. But this kind of performance is no accident. With almost 20 years of experience, Neustar developed the technology and expertise to cut porting times from hours to minutes to seconds.
Given enough time, it’s possible that Ericsson can reproduce the system and performance that Neustar has. The problem is in that pesky transition from one IT system to the next, compounded by the size and scale of the massive U.S. numbering system. Two years from now, the efficiency of the nation’s numbering system may be back to where it is now. But what happens in the interim?
To answer this question, I led a team of experts familiar with the project to model a conservative scenario, in which all of the bugs associated with the transition were worked out within one year. The bulk of issues in a project like this arise for two reasons: (1) the errors in the conversion of a massive number database from one administrator to another; and (2) early-stage operations errors by the new administrator arising due to inexperience. These errors are not hypothetical: Alcatel-Lucent studied the very real problems of telephony-database migrations in 2007.
Based on the massive size of U.S. telephone number database and the number of transactions processed, even with error rates of less than one percent, the model predicts that approximately 12 million customers could experience missed calls or disruptions when changing providers—at a total cost to phone companies of roughly $1.1 billion—some of which will almost certainly be passed onto consumers in the form of higher bills.
It could even be worse. Our estimates were based on a presumption that any new administrator used a portion of Neustar’s technology. In the fall of 2014, however, Ericsson announced that it was committed to building a platform entirely from scratch, significantly increasing the chance of a mishap. Even Ericsson’s own technical expert has acknowledged that this approach can lead to higher risk and error rates.
So why take a gamble when things are going so smoothly? Price appears to be driving the FCC’s upcoming decision on whether to change administrators. But as our analysis showed, the costs and consumer disruptions of an IT transition on this scale have a good chance of overwhelming any potential savings from a low-cost bid.
This is not to say that incumbents should be permitted to maintain their contracts for life at non-competitive rates. Smart auction designers can figure out how to wean the excess profits through a competitive bidding process that accounts for the incumbency advantage. But ignoring these transition costs entirely for the sake of pursuing the low-cost bid makes little sense from the perspective of consumers. Recent history of major IT transitions like the United-Continental merger reminds us of what can go wrong.
Singer is a principal at Economists Incorporated and a senior fellow at the Progressive Policy Institute. He advises many companies in the telecommunications industry, including Neustar.