TCS Daily

Paradigm Shift or Ancien Regime?

By Duane D. Freese - February 2, 2004 12:00 AM

"It's probably the most significant paradigm shift in the entire history of modern communications, since the invention of the telephone," Federal Communications Chairman Michael Powell said at the World Economic Forum in Davos, Switzerland.

Powell was talking about Voice over Internet Protocol, the digital application that allows the delivery of voice calls over the Internet. From heavy recent coverage, "It's" the latest telecom rage on the heels of cell phones and WiFi.

Viewed from a numerical perspective, one might wonder why. VoIP isn't new. It has been around for nine years, since February 1995 when Vocaltec Inc. introduced its Internet Phone software. And it still has only about 400,000 subscribers, compared with about 113,000,000 households with regular switched telephone service. A market share of less than 0.4 percent is hardly earthshaking.

Yet, Powell could be right.

The hesitations and dropped data that in the past made Internet voice communications like having a conversation with Porky Pig, have been eliminated. Improvements in high speed networks and in software integration of data are creating the kind of quality of service that only dedicated lines used to offer -- and at a fraction of the cost. Costs for providing an international connection are now a tenth what they were a decade ago; national long distance charges have dropped by 20 to 30 percent. And because digitized voice can be delivered in a multitude of forms and through a variety of devices, including not only computers, but cell phones, pdas and even regular phone lines, the "paradigm shift Powell mentioned as far back as April of 1998 may actually happen -- if regulations don't confuse the marketplace.

It was back then, in a separate statement delivered to Congress from the Federal-State Joint Board on Universal Service, that the new commissioner outlined the kind of paradigm shift he saw the Internet creating:

"Basic [telephone] voice service was (and largely still is) distributed on networks constructed and optimized for that service, and the brains of that network resides within the central switches, signaling systems and databases of the intelligent network owned by the operator, usually a Bell Operating Company. The Internet and the Internet Protocol represent a dramatic paradigm shift in network architecture. A variety of services can be overlaid on an IP network and the intelligence of those services rests not centrally, but at the edges of the network - in the case of the Internet, in the computers owned by the millions of users and information service providers throughout the world. Anyone with the right computer and software can offer and distribute new and innovative goods and services."

Powell clearly saw then that Internet communications could have a dramatic impact on all communications and the nation's economy, but only if Internet innovators weren't saddled with the same regulatory burdens and access charges placed upon regular wireline telecom providers.

He questioned the claims then of the circuit switched local telcos about the need to create a "level playing field" by saddling the Internet with rules and taxes meant to govern monopolies.

It was over the objections of local phone companies that Congress exempted Internet companies back in the 1980s from paying five cents a minute local access charges assessed long distance companies for originating or completing calls. In the mid 1990s, the FCC and Congress had to slap down another bid by the Bells to assess three cent per minute access charges on Internet Service Providers and Enhanced Service Providers, debunking Bell claims that Internet traffic was congesting their systems. Some $30 billion in investment by ISPs, it turned out, was actually expanding the viability of the local networks.

"[W]e do have a duty to maintain a sufficient base of funds to support universal service," he told Congress, "... [H]owever, we also must not throw the net out farther than is necessary, because unnecessarily expanding the scope or size of the contribution base for universal service would distort and inhibit competition and would put significant pressure on consumer prices for services subject to the government levy."

Powell was on solid ground in 1998 when he questioned the claims that "competitive neutrality" required Internet Service Providers with their own facilties or "phone-to-phone Internet telephony providers" be saddled with universal service charges.

Indeed, today, local telephone companies would like Powell to either eat those words or forget about them. SBC has taken direct aim at AT&T (a sponsor of Tech Central Station) for pursuing phone-to-phone Internet communication. AT&T now pays $8 billion a year in access charges to subsidize local telcos with which it competes for both long distance and local service. It has petitioned the FCC for a declaratory ruling to exempt those calls for which it uses the common Internet backbone it has helped build to provide VoIP long distance service to the 35 percent of homes without computers or special devices.

SBC scoffs at AT&T being freed from its "access charges" saying AT&T is engaging in "regulatory arbitrage."

But if the FCC rejects the AT&T petition for phone to phone VoIP while allowing computer to phone VoIP, it would be engaged in a kind of class arbitrage. After all, what families don't have computers? Mostly those that are poor or lower middle class. Shouldn't they gain some advantage from the information superhighway, too?

Finally, for a communications paradigm shift to happen requires backbone -- high speed backbone. And a decision against one that has invested heavily in such Internet backbone would deprive it of a just reward for doing so, while rewarding those who do nothing with fat fees they no longer earn or deserve.

As AT&T spokeswoman Claudia Jones pointed out, "The Bells have no incentive to upgrade their networks if it means, by upgrading, they are not going to collect billions of dollars in access charges. And, just because the Bells don't upgrade the endpoints, we shouldn't be penalized by having to pay inflated access charges."

Powell in Davos declared, "If you're going to say to me that Voice over IP is something that needs regulation, then you're going to have to explain to me why e-mail isn't also, or steaming video or instant messaging is not also.

"This is one area where we as regulators wait for real demonstrable evidence of harm before accepting an invitation to intervene," Powell concluded.

Indeed, if the FCC gives in to the Bells and rural telcos on access charges for any flavor of VoIP, it will be engaged not in a paradigm shift but support for tired old phone monopolies' ancien regime.


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