10 US Telecom Policy Myths

Everyone agrees on two things. Investment in the tech sector, in telecom in particular, has mostly collapsed. And the policymakers in Washington, DC do not always understand the ways of technology - in particular, the Internet.

Few see the connection. Some do.

For all the technology changes in telecom driven by the emergence of the Internet, telecom policy has not changed much. The Internet emerged as an unregulated adjunct to the telephone network, but now everyone assumes the days of unregulation are nearly over. Everyone also assumes government regulations will cripple the Internet. Hence the challenge.

The information technology companies that drove the commercial Internet have only themselves to blame. They hoped their absence in Washington, DC, the absence of disasters, and the growing importance of tech to the economy might protect the Internet from ill-advised government regulation.

It seems like time for Plan B.

The information technology sector needs to reverse its aversion to public policy debates. Realizing the promise of the Internet depends on it. Heck, world peace depends on it.

Sixty or so bills that alter the way the US government interacts with the Internet are currently under consideration in Congress (see www.cybertelecom.org). The bills reflect a number of myths about the Internet, telecom, and public policy.

10 US public policy myths about the Internet:

1. Policy is independent of technology.
The first line of defense to protect the policy status quo usually includes claiming the emergence of the Internet does not change anything as policy should be independent of technology. Public policy inevitability requires making distinctions that require carefully worded definitions (i.e. drawing "lines"). The definitions require assumptions about technology that can become obsolete as technology changes. Regulations attempt to impact a commercial value chain toward some public interest goal, and technology defines the value chain. A statement of goals and principals can attempt to remain independent of technology, but the goals will tend to get shaped by cost factors driven by technology. For example, the debate about including Internet access in the definition of Universal Service must consider the feasibility with respect to cost.

2. The Internet is a PSTN overlay network.
The collection of data networks that make up the Internet have only a very modest connection to the PSTN. "PSTN" stands for public switched telephone network or that part of the network addressed by telephone numbers. Home users frequently access the Internet by dialing telephone numbers, but none of the Internet hosts with permanent IP addresses depend on telephone numbers for connectivity. The links may share conduits. The equipment may get housed in the same buildings or share maintenance staff, but the PSTN infrastructure is entirely separate from Internet infrastructure.

3. The Internet will replace the PSTN
The Internet is to the PSTN as highways are to railroads. The emergence of highways empowered people to control many more aspects of their transportation needs with much greater flexibility. The Internet accomplishes the same thing for communications in removing the need for central control. Railroads tracks and the PSTN links support a single type of vehicle/service. Highways and the Internet allow all verhicle/service types to commingle. Highways overshadowed railroads, but railroads did not become obsolete even though government recognized the public interest associated with investments in highways. Automobiles and highways gave rise to an entirely separate industry and provided the basis for new types of commerce, but railroads remain the most effective solution for some transportation needs. The PSTN will increasingly leverage IP infrastructure to obtain the aggregation advantages analogous to using trucks and railroad to transport products. However, the end user control features that make highways and the Internet interesting also limit reliability.

4. The Internet will prosper if government just stays out of the way and lets the free market work its magic.
If this were true, the Telecom Act of 1996 would not have unleashed investment in the Internet. For better or worse, government actions have preceded all significant industry changes. The government made the Internet possible by forcing AT&T to allow researchers to attach modems to the PSTN. The information technology sector itself owes its existence to government. The 1956 Consent Decree between the Department of Justice and IBM opened the information processing market IBM dominated. Getting the commercial markets to work requires a significant amount of government intervention, but government can get in trouble trying to micromanage technology. The Communications Act of 1934 unfortunately represents this model in attempting to manage the communications business rather than facilitate a market. Government intervention created the current state of affairs, it will take enlightened government action to allow the Internet to prosper.

5. The Communication Act of 1934 applies to all types of communications.
The FCC interprets the Communication Act of 1934 to authorize regulation of all types of communication from smoke signals to PSTN and the Internet. The FCC has maintained a policy of unregulation with regard to the Internet, but nothing in the Communication Act prevents regulating the Internet. In fact, the Communication Act of 1934 is irreconcilable with the Internet. The implementation provisions of the Act assume transport defines service (i.e. broadcast means television and copper means telephone.) Once you know the type of transport, you know the type of service and vice versa. The Internet makes transport and service independent of each other. Companies building networks don't need to know anything about services. Companies developing applications don't need to know anything about the network. Attempts to reassert a link between service and transport destroy the fundamental innovation of the Internet. Incorporating the Internet in the regulatory framework established by the Communication Act of 1934 inevitability requires a fiction about the difference between voice and other types of data.

6. The US's Universal Service Program makes telecommunications affordable in high cost and low income areas.
The metrics for telephone penetration in high cost and low income areas show automobiles, televisions, and VCR's reach more people. Telephone penetration drops below 80% in some low income areas. During a period where the price for local telephone service increased every year, market forces succeed in bringing computers from the realm of prohibitively expensive military research devices to something children have in their room and use for instant messaging. Telecom applications of the Internet have already significantly reduced the cost of international calling. Ongoing innovations leveraging the Internet, low-cost premise equipment, and creative pricing models promise to make communication much more affordable in the next 10 years than the Universal Service Program accomplished in 30 years. To the extent the regulatory complexities of universal service discourage innovation, the Universal Service Program hurts the cause of high cost and low income areas. The subsidy model designed for explicit redistribution of wealth applied by the Communication Act (i.e. socialism) was discredited in the last century.

7. All we need is a level playing field
Government exists to serve voters. The challenge of US public policy is not creating a level playing field between business entities, but finding market-based approaches that promise the most benefits for consumers. This may require favoring one industry segment over another depending on the history of the situation.

8. Bell companies just need the right incentives to begin rolling out broadband and other new services.
In other words, the Bell companies want to be able to charge enough to make a profit on investments in broadband and new services. In other words, it would help to have monopoly pricing power. Deploying new services requires losing money for a period of time. The Bell companies naturally don't relish the idea given profit margins associated with the old services and the prospects of new services cannibalizing those old services. Verizon, SBC, and Bell South will collectively have $20 billion dollars of profit this year. It makes no sense for a monopoly to pursue network upgrades required for new services, R&D, and marketing as they just reduce profits. The track record of Bell company reluctance to deploy new services arises from a rational decision to profit rather than invest. Incentives designed to attract Bell company investment can only mean less competition and higher prices for consumers.

9. The Telecom Act of 1996 empowers the FCC to address local loop anti-trust issues, or it would with greater enforcement efforts and, perhaps, the authority to assess larger fines.
The Telecom Act of 1996 is written as a series of amendments to the Communication Act of 1934. The Communication Act of 1934 serves anti-anti-trust purposes in that it created a monopoly in telecommunications. It defies reason to use it in the opposite way, and the track record shows no amount of tinkering can make the Act suitable for anti-trust purposes. The FCC existed for 60 years as a manager of a telecom monopoly. Over the years, the monopoly accumulated far greater resources than the FCC. The FCC's annual $230 million dollar budget seems unlikely to keep the Bell companies from doing whatever is necessary to protect their $20 billion dollars of profit. The Bell companies get increasingly adept in using an offensive legal strategy, a myriad of small acts, red tape, and predatory pricing keep competition under control. The impossibility of the FCC managing the Bell monopolies does not change with larger fines. The Bell companies have consolidated their monopolies since the 1996 Act. They control 10% more of the local access lines than AT&T did prior to divestiture in 1983. The courts have recently ruled the Bells are immune from anti-trust laws for activities covered by the Telecommunication Act of 1996. Further revisions to the Telecom Act offer little promise as Bells have significant influence with key leaders in Congress.

10. Governments have the same authority to regulate the Internet as they did traditional telecommunications
The Internet with a capital "I" is a global phenomena. At this point, global government does not exist. Local governing authorities can create local "Berlin walls" to maintain central control, but enterprise and economic gains simply move elsewhere. Governments might rightly consider the impact of the Internet on consumer protection, crime, and public interest. The challenge requires going back to basics and assessing what policy goals the Internet threatens, rather than simply looking for a way to capture the Internet within an existing regulatory framework. The 90% decline of most Nasdaq listed telecom stocks accurately reflect a bleak public policy outlook. The $4.6 trillion in wealth lost by Nasdaq share holders between March 2000 and March 2001, represents the difference between optimism about the future of the Internet and pessimism about the prospects for Internet-friendly public policy. Economists point to the inevitable business cycle-driven inventory correction where supply exceeds demand. Old economy partisans maintain the new economy business models never made sense. Neither explanation seems satisfactory as the new economy businesses never had a chance to create demand, and all companies lost funding independent of business model. The public policy threats that frightened the capital markets offer a much better explanation.

Ultimately, the change in investor sentiment comes from a change in "faith" rather than rational considerations. In 1999, investors believed government would make sure the Internet prospered and continue the push toward competition in telecom. In 2001, conventional wisdom does not give the Internet very good odds. It takes a visionary or historian to hold out hope for IP Communications-friendly policy. Visionaries know the Internet juggernaut can't be stopped. Historians can see the slow inevitable progress government has made to reduce the grip of monopoly in telecommunications over the last 70 years.

home