FC: Wired magazine article on 1997 dispute over per-minute phone fees

[Declan McCullagh <declan () well com>]

[I am off to Key West. I will be mostly offline. Here's something I wrote 
that ran in the June 1997 issue of Wired Magazine. It may be relevant given 
the House vote this week: 
http://www.zdnet.com/zdnn/stories/news/0,4586,2570469,00.html --Declan]

********

http://www.wired.com/wired/5.06/netizen_pr.html

  W I R E D
  Archive | 5.06 - Jun 1997 | Netizen

   Telco Terrorism
   By Declan McCullagh (declan () wired com)

   If the Baby Bells get their way, you'll pay by the minute and through
   the nose for the privilege of logging on. But the Net has an unlikely
   defender: the FCC.

   Bell Atlantic's chief lobbyist, is a busy man - so busy, he says, that
   he can find time to talk only between meetings in a Nynex boardroom in
   Washington, DC. He waves expansively at the juice bar and grins, "Take
   whatever you like. It's all paid for by Nynex." A moment later, Young
   denounces Internet users for precisely the same attitude. "There's no
   longer a free lunch," he complains. "Internet welfare has to stop."
   It's a catchy sound bite - honed through countless repetitions over
   the last year - and Young has spent a lot of time testing it out on
   Washington regulators. He says that flat-rate Internet pricing is
   clogging phone lines, jamming telephone switches, and, most important,
   costing his employer hundreds of millions of dollars a year. Last
   summer, Bell Atlantic teamed up with a few other Baby Bells to try to
   persuade the Federal Communications Commission to levy
   minute-by-minute access charges on Internet service providers - hefty
   fees that could double or triple the average monthly bill. For the
   telcos, securing permission to begin collecting access fees would be
   like hitting the jackpot; a charge of merely 3 cents a minute would
   bring in nearly US$6 billion in new revenue each year.

   But some important members of the high tech community worry that it
   could also trigger the death of the Net. Three-cents-a-minute access
   fees would boost a service provider's costs by more than $100 a month
   for each subscriber who logs on for two hours a day. In an era when
   $19.95-per month flat-rate pricing reigns supreme, the thought of
   shelling out per minute access charges to local phone companies has
   the online industry scared shitless. CompuServe, for example,
   estimates that its phone costs would zoom from $36 million to $367
   million. The online and high tech industries have counterattacked,
   arguing that while more than 18 million Americans creep through
   cyberspace using modems that sip bandwidth through twisted-pair
   straws, the telcos want more money yet refuse to improve service by
   bringing high-speed data connections to the local loop.

   The stage has been set for a showdown between a telephone industry
   regulated since its birth and a new economy that has prospered with
   surprisingly little government interference. The tug-of-war pits
   buttoned-down monopolies against a rough-and-tumble collection of
   Silicon Valley bigwigs. Faced with potential disaster, the high tech
   coalition has had no choice but to learn the art of war as it is waged
   within the confines of the FCC's arcane rulemaking process.

   This strange form of bureaucratized combat - which operates under the
   guise of public policy - has plenty of precedents in the annals of
   American capitalism. But in this particular fight, an unusual third
   set of combatants has been dragged into the struggle: grassroots
   Internet users. Speaking with a mixture of awe and bewilderment, FCC
   attorney James Casserly says, "In the past, we've never seen anything
   like this."

   A case of congestion

   It's not that the telcos' anxieties are entirely unfounded: real
   problems loom on the horizon. America's local-loop architecture - in
   which modems use analog phone lines for digital communications - is
   vulnerable to network congestion, and flat-rate pricing for phone and
   Internet service seems destined to exacerbate the problem. This is
   largely because telephone networks are designed around the assumption
   that roughly one in every eight subscribers will try to use the phone
   simultaneously - which, in turn, means that if just 12 percent of an
   area's customers are online at once, nobody else can use the phone. In
   other words, America's telecommunications infrastructure, was designed
   to facilitate occasional analog calls, not continuous digital
   connections. The telcos are standing at a crossroads, stuck with a
   network that was designed for voice traffic but that now groans under
   the weight of data calls. The Baby Bells understand this, and they say
   they want to go digital. Which raises the questions: How will they do
   it, when will they do it, and, more important, who will pay?

   Both sides agree that the solution lies in new technology. Currently,
   most phone calls travel along an analog phone line to a digital switch
   that connects to an analog outgoing line. Find a way to bypass the
   analog connections with end-to-end digital networks, and the
   congestion problem disappears. Here's why: To transmit data, analog
   circuit-switched networks require a continuous open channel, which
   must be maintained even when it's not in use. But a digital
   packet-switched network, such as the Internet, breaks the data into
   small chunks that are sent as needed asynchronously and reassembled by
   the receiver.

   Right now, the telcos have no financial incentive to promote speedier,
   more efficient technologies - and when they've tried, they've blown it
   through a combination of high prices and notoriously bad customer
   service and support. Take ISDN, a digital technology that has been
   ready-to-arrive for 25 years but never quite did. "The problem isn't
   technology," according to James Love, an economist at the Ralph
   Nader-sponsored Consumer Project on Technology. "It's monopoly pricing
   by the telcos."

   There are even better technical solutions than ISDN, such as xDSL,
   about which the telcos appear ambivalent at best. They shouldn't be.
   The xDSL family of digital-subscriber-line technologies could provide
   a way out of the regulatory staredown between the telcos and the Net,
   supercharging ordinary copper wires to carry data at Ethernet speeds
   without clogging the voice network.

   Studying the studies

   For now, however, both sides are pumping most of their energy into
   spinning the argument. Last June and July, Bell Atlantic, U S West,
   PacBell, and Nynex launched the opening salvo in the access-fee battle
   by passing along a few studies to the FCC. The Bell Atlantic report
   noted that Net surfers use their phone lines to make longer calls,
   with an average length of 18 minutes, compared with 5 minutes for a
   typical voice call. Meanwhile, Bell Atlantic said it spends $75 to
   service and maintain each local loop that runs into an ISP line -
   lines that generate revenues of only $17 per month. That piddling 17
   bucks, the telcos claim, barely covers the cost of keeping a dial tone
   humming, and isn't nearly enough to pay for the expensive upgrades
   needed to handle circuit-gobbling Internet providers. If more money
   isn't spent to upgrade the network, the scaremongers warn, traffic
   jams caused by gluttonous Internauts could become a public menace. The
   report concluded that "service interruptions of even a temporary
   length could affect public safety services such as 911 service, with
   unthinkable consequences." The telcos' solution: the FCC must let them
   levy per-minute access charges to raise the hundreds of millions of
   dollars a year needed to keep the phone system from crashing.

   To battle the phone companies' analytical onslaught, Intel, Compaq,
   IBM, America Online, CompuServe, and a handful of trade associations
   formed the Internet Access Coalition in the autumn of 1996 to craft a
   counterstudy to rebut the telcos' claims. Delivered to the FCC in
   January 1997, the coalition report, titled "The Effect of Internet Use
   on the Nation's Telephone Network," blasted telco assumptions and
   pointed out their hypocrisy: the Baby Bells whine that flat-rate
   Internet services are congesting phone lines even as many of them are
   peddling flat-rate Internet access themselves. Some have actually
   given it away - in California, PacBell offered five months of free
   Internet service and waived installation charges for customers who
   ordered a second phone line. How can a cash-strapped phone company
   afford this? Since many homes are already wired for two lines,
   second-line service has become a source of easy profits for the
   telcos. In 1995, for example, second lines generated six times the
   revenues the Baby Bells now say they need to upgrade their networks.

   The coalition's debunking was thorough. Even if data calls average 20
   minutes - so what? One such call eats up fewer phone company resources
   than 20 individual one-minute voice calls. Moreover, the
   much-publicized "clogged network" numbers came from areas with
   exceptionally heavy modem use - regions that are hardly representative
   of the network as a whole. In other words, the telcos gave the FCC
   anecdotal, worst-case estimates of network-congestion difficulties and
   presented them as commonplace, or perhaps even dangerous.

   The phone companies reacted to the IAC study by retreating from their
   initial position. No longer will you hear their lobbyists talk of
   3-cents-a minute access surcharges; since early this year the fallback
   stance has been to seek some charge - any charge! - as long as it's
   collected through a metered pricing scheme. "It doesn't have to be a
   large charge," Bell Atlantic's Ed Young now says. "It can be something
   of the magnitude of a penny a minute, or even less. But it has to be
   something."

   The friendly FCC?

   The Baby Bells might have assumed they had allies in the four FCC
   commissioners. The agency's history is replete with precedents in
   which decisions have shielded venerable industries from competition by
   upstarts. The commission delayed the introduction of FM radio to
   protect AM stations. It stalled cable television to benefit
   broadcasters. No wonder, then, that many Internet users took for
   granted that it would happily sacrifice the Net to spare the telcos.

   But, surprisingly, the FCC has often gone out of its way to protect
   the Net from telco onslaughts. A 1980 directive dubbed "Computer II"
   said the commission would regulate only "basic" telephone services,
   not providers of "enhanced services." That marked the Net's first
   reprieve, as the "enhanced service provider" category includes
   everything from voicemail services to alarm-monitoring firms to
   Internet providers.

   In 1984 Ma Bell splintered, and the FCC decided to tack an "access
   charge" of roughly 5 cents a minute onto every long distance call to
   compensate local phone companies for completing the local-loop
   connection. The Net's second reprieve came when commissioners ruled
   that enhanced service providers wouldn't be obliged to pay similar
   access charges because of the "severe rate impacts" that would result.

   Finally, in 1987, the telcos trotted out many of the hardship claims
   they still use today, saying that voice users were subsidizing the
   clunky online services of the time, and demanding that the FCC impose
   per-minute access charges on them. The nascent high tech community
   responded to the affront quickly. Irate BBS sysops buried the agency
   in faxes (a novelty at the time), while firms such as IBM, Digital,
   and CompuServe persuaded a few members of Congress to intervene. In
   the end, the commissioners ruled for the Net and against the telcos,
   saying that it was inappropriate to assess per-minute charges on the
   fledgling online industry.

   That ruling, which immunized ISPs and online services against access
   charges, is what the telcos now call obsolete. Access charges, paid
   mostly by long distance companies, added up to more than $23 billion
   in 1996. These days, however, long distance companies like MCI and
   AT&AMPT are cajoling the commission to reduce access charges, and the
   FCC seems sympathetic to the idea. This means long distance rates may
   soon be dropping. But it also means the Baby Bells will pull in less
   cash from long distance carriers - a potential shortfall that perhaps
   explains why they are now so hungry to levy access charges on Internet
   providers.

   All this wonk warfare might have gone largely unnoticed on Main Street
   USA, were it not for an FCC Web page that solicited public input on
   the access-charge issue. Only a few comments trickled in during the
   first few weeks after the page was put up in December 1996. But as the
   spring comment deadline grew near, the word got out: the FCC was
   poised to screw the Net. Between February 1 and February 14, hundreds
   of thousands of irate emails flooded isp () fcc gov. In message after
   message, Internet users pleaded, argued, and reasoned with the agency
   not to levy access charges. One message labeled the telcos' demands
   "just another scam so the greedy phone companies can separate even
   more money from consumers."

   This tidal wave of digital bile did not escape the attention of Reed
   Hundt, chair of the FCC. "Imposing today's interstate access charges
   on Internet users is the information-highway equivalent of reacting to
   potholes by making drivers pay for a new toll road," he says. Such
   comments are reassuring, but like any veteran bureaucrat, Hundt seems
   eager to find a middle ground between the telcos and the Net. Thus, he
   has also offered his own solution. Right now, residential phone lines
   are cheap because federal and state agencies have mandated increases
   in the cost of long distance calls and premium services like call
   waiting to subsidize basic dial-tone access for everyone. Hundt has
   suggested removing these subsidies from second phone lines. In the
   absence of local-loop competition, his proposal would potentially
   double the price of a second line. But it would also give the telcos
   less to grumble about.

   Hundt has only one vote on the four-member Federal Communications
   Commission (the fifth spot remains vacant at the time of this
   writing), but other commissioners seem to agree with his position.
   "We're going to walk very carefully so as not to impede progress or
   competition," insists Commissioner Susan Ness. Indeed, when the group
   held a preliminary vote on access charges last December, it ruled that
   Internet providers should not be subject to access charges of around 3
   cents a minute. Since today's system is so screwed up, the agency
   said, "We see no reason to extend this régime to an additional class
   of users, especially given the potentially detrimental effects on the
   growth of the still-evolving information services industry."

   The Net had - once again - found an improbable ally in the FCC. But
   the lovefest may be short-lived. The ruling left the door open for the
   commission to impose access charges of less than 3 cents, and the
   telcos are now asking for a penny a minute.

   Inside the Beltway, the buzz is that the FCC won't impose new access
   fees anytime soon. But no matter what the commissioners decide, the
   losing side is likely to take its grievances to the Senate's Commerce,
   Science, and Transportation Committee, which oversees the agency and
   could overrule its decision. The Commerce Committee's new chair,
   Senator John McCain (R-Arizona), harbors little sympathy for the
   telcos - or their lobbyists. (See "The McCain Mutiny," page 122.)
   After presiding over a recent hearing on universal service, McCain
   began spreading the word that he opposes new access charges. "The
   claims that are being made by the telcos are somewhat exaggerated," he
   says. "I'm persuaded that online access isn't nearly the burden they
   are complaining about." McCain's assessment is not universally shared
   - Alaska's Senator Ted Stevens, a senior Republican on the committee,
   said in March that Internet services should be regulated as telephone
   companies, and forced to pay some form of access charge or universal
   service fee.

   The ad hoc alliance

   All of which means that the peculiar synergy that exists between
   grassroots Internet users and high tech corporations remains as
   important as ever. In the face of the telcos' onslaught, netizens are
   joining ranks with business interests to lobby the government and
   protect the Net. Although the flood of angry email that stuffed the
   FCC's in-box was a chaotic, word-of-mouth effort, it worked wonders -
   and effectively changed the course of the debate in DC. "I think
   people in Washington recognize that the 300,000-message deluge was
   just the tip of the iceberg," says Paul Misener, Intel's chief (and
   only) telecom lobbyist and coordinator of the Internet Access
   Coalition.

   Yet in a very real way, the digital nation had misidentified its foe.
   As a rule, Washington's bureaucrats are not power-crazed
   authoritarians; most are reactive creatures who simply respond to
   demonstrations of influence and power. Bell Atlantic, PacBell, Nynex,
   et alia leaned hard on the FCC for access fees, and the agency reacted
   in its own instinctively bureaucratic way. The high tech community
   responded by forming its own ad hoc coalition to pressure the FCC, and
   thousands of Internet users chimed in to express their collective
   dismay. Of course, the best way to win not just the battle but the war
   may be to remove the commission's power to regulate the Net
   altogether. Still, so far the real threat to netizens has come from
   complacent telcos and their legions of starched-collar lobbyists, not
   the FCC. The distinction is important, because the old rule of thumb
   still holds true: The enemy of our enemy may occasionally prove to be
   our friend.

####


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