September 1999

First, Do No Harm

BY LAURENCE J. FROMM

Many factors contribute to the Internet’s success in the domestic market, including a risk-taking culture, a thriving venture capital industry, and a market and system for new public offerings. The Internet is built on the vast telecommunications infrastructure. Open access of the telecommunication infrastructure has facilitated rapid penetration and innovation of the Internet.

FCC Chairman William Kennard, in a recent speech, noted the importance of a competitive and deregulatory environment to enable the Internet to blossom. In a recently released report, The FCC and the Unregulation of the Internet, Jason Oxman from the FCC argues that a favorable public policy has allowed the Internet to flourish:

• The FCC has long fostered a policy of universal access. Local carriers offer below-cost basic telephone service to all consumers. Universal service is funded via explicit and implicit subsidies from other telecommunication services. For example, long-distance carriers pay an access charge to local carriers at both origination and termination points. Hence, long-distance service is priced above true economic cost to fund universal service. In addition to social benefits, universal service helped lay the foundation of the vast telecommunication infrastructure upon which the Internet is built.
• The FCC has encouraged new telecommunications service competition. Microwave Communica-tions, Inc., (now MCI) was allowed to offer inter-city private service in 1969. Competitive access providers began offering service in competition with local exchange carriers in the 1980s. Competition led to relatively inexpensive telecommunication services, which enabled data services to flourish on top of the telecommunications infrastructure.
• In Computer Inquiry I, released in 1971, the FCC concluded that public interest would not be served by regulation of data processing services, and refrained from such regulation. The separation of data processing services from telecommunication services laid the groundwork for later development of the Internet.
• In Computer Inquiry II, the FCC built upon the data/voice distinction by reiterating its commitment to regulate only common carrier basic transmission service while continuing to exempt enhanced services from common carrier regulation. In 1983, the Commission ruled that enhanced service providers are exempt from paying access charges that common carriers of basic transmission services (e.g., long-distance carriers) pay. This ruling allows ISPs to offer flat-rate billing, which has greatly contributed to the explosion of Internet use in the United States. In many other countries, either consumers or ISPs must pay a per-minute charge for the local dial-up connection to the ISP, retarding Internet growth. In the United States, 6,000 ISPs serve 80 million Americans, and generate $15 billion in revenue. In all of Europe, ISP revenue is just $4 billion.
• In the Carterfone ruling, subsequently codified in Part 68 of the FCC’s rules in 1975, the FCC permitted consumers to connect equipment from any source to the public network if such equipment fits within technical parameters. Prior to this ruling, only equipment from the AT&T monopoly could connect to the public network. Competitive equipment manufacturers were therefore able to innovate and deploy an incredible variety of voice and data equipment for use in the public network.
• In April 1998, the FCC reaffirmed the long-standing determination that basic services and enhanced services are different, and left enhanced services unregulated.

Some may view recognizing the FCC for not regulating as many industries as it could as akin to congratulating a child for not swiping a cookie. Nevertheless, governments have been swiping cookies all over the globe, and the phenomenal growth of the Internet in the United States is due in part to the relatively benign regulatory environment.

PERSISTANT REGULATORY THREAT
Nevertheless, as start-up IP telephony service providers plan to go public, their prospectuses are sprinkled with regulatory threats among the usual risk factors. What are the sources of the threats?

FCC
The FCC left room in its April 1998 report to address IP telephony in a complaint proceeding. US West has petitioned the FCC for a declaratory ruling that providers of interstate IP telephony must pay federal access charges.

Moreover, the FCC considered including IP telephony in its recent rule implementing Section 255 of the Telecom Act, which mandates that the Commission regulate telecommunication services, customer premise equipment, and supporting equipment to ensure accessibility to the disabled. In its final deliberations, the Commission decided instead to address the regulation of IP telephony in a notice of inquiry that will accompany the rule. The FCC does seem open to voluntary industry efforts to meet certain accessibility standards as a way to forestall formal regulation.

Finally, the FBI has begun to express interest in IP telephony as it relates to provisions for law enforcement, including authorized wire tapping.

The States
US West also petitioned the public utilities commissions of Nebraska and Colorado for similar rulings concerning payment of access charges for intrastate Internet telephony calls.

The RBOCs
In September of 1998, BellSouth and US West advised IP telephony service providers that the RBOCs would impose access charges on IP telephony traffic. It is not yet clear whether or when they will actually impose such charges.

IN THIS CORNER…
The Voice Over Net Coalition, a non-profit group of industry participants, represents the interests of IP telephony advocates in all these regulatory matters. The VON Coalition has focused on the harm that premature and unnecessary regulation can do to the nascent IP telephony and related industries. This message has received some acceptance from Washington, the FCC, and the states. It is slightly comforting that at least some at the FCC take positions that appreciate the importance of NOT regulating.

In his report, Oxman of the FCC provides three prescriptions for regulation of new industries:

1. Do not automatically impose legacy regulations on new technologies.
2. When Internet-based services replace traditional legacy services, begin to deregulate the old instead of regulate the new.
3. Maintain a watchful eye to ensure that anti-competitive behavior does not develop, and be careful that any regulatory responses are the minimum necessary and outweigh the costs of regulation.

In his speech, Kennard proposed a high-tech Hippocratic oath for the FCC to follow. I think the IP telephony industry will whole-heartedly agree: First, do no harm.

This is Laurence J. Fromm’s last column in this space. Industry Insight will return next month with a new author. We would like to thank Larry for his commitment to educating the industry on voice/data convergence issues, and we look forward to future contributed articles from him in the coming year.