IP: 10 Myths of Telecom Policy

[David Farber <dave () farber net>]

> X-Sender: msp04629 () pop isd net (Unverified)
> Date: Sun, 2 Dec 2001 16:00:47 -0600
> To: David Farber <farber () linc cis upenn edu>
> From: Clark Johnson <clark () fcomm net>
> Subject: 10 Myths of Telecom Policy
>
> Dave-
>
> First, how is your son, Joe, doling?
>
> And, second, this might be of interest to IPers.
>
>
>         7.0  10 US Telecom Policy Myths
>
>         By iSudser Daniel Berninger, dan () pulver com
>
>         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 
> vehicle/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.
>
>         Please send thoughts/comments/feedback to: Daniel Berninger - 
> dan () pulver com.

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