TCS Daily

The FCC's Muffled Voice

By Kevin Werbach - May 18, 2004 12:00 AM

Beware regulators promising clarity. The Federal Communications Commission's rejection of AT&T's voice over IP (VoIP) petition is supposed to end confusion in the telecom industry. It will do exactly the opposite.

VoIP is the future of communications. Some 200,000 Americans, and 3 million Japanese, already subscribe to services that route phone calls over Internet protocol data networks. And that's just the tip of the iceberg. Every industry player, from the hulking Baby Bells to the smallest Silicon Valley startup, is transitioning from the circuit-switched technology developed in Alexander Graham Bell's day to the packet-switched protocols of the Internet. VoIP is more efficient, more flexible, allows for greater innovation, and, perhaps most important, offers a way out of the morass of regulation encircling the trillion-dollar global telecom sector.

The FCC declared that AT&T must pay "access charges" to local phone companies when it carries calls over its VoIP backbone. AT&T has reportedly refused to pay somewhere in the neighborhood of $100 million on the grounds that VoIP is an unregulated information service, which the FCC excluded from the access charge regime. Whatever the merits of AT&T's position, the FCC's action makes a bad situation worse. Money that could have been invested in new services and competition will now go to lawyers and lobbyists. And now the FCC has muddied the waters for the comprehensive VoIP proceeding it launched just last month.

The FCC says AT&T's offering looks just like traditional phone service. Yet other VoIP services don't appear all that different. In some cases, the distinction comes down to the shape of the jacks on otherwise-identical phones: an Ethernet port means an unregulated data service, while an analog phone port means a regulated telecommunications service. That's crazy. The whole point of VoIP is that features and equipment are no longer hard-wired into the network. They can be changed, and they will be. Only now, companies like AT&T and others will spend their energy manipulating their offerings to meet the demands of regulators rather than their customers.

The real issue is those inflated access charges, which grew out of the old Ma Bell's policy of subsidizing local affiliates with artificially high rates for "long lines." Why this system remains in place beyond the twentieth anniversary of the AT&T divestiture is a good question. Why the FCC feels the need to preserve it is a better one.

Thanks in part to VoIP, telecom industry representatives are deep into negotiations to unwind the $60 billion spent annually in inefficient "intercarrier compensation" payments. In one stroke, the FCC removed the pressure for reform. Worse, after announcing its decision in the name of clarity, the FCC refused to answer the $100 million question of retroactivity. It passed the buck to the courts, ensuring further delay and uncertainty.

There's an even more ominous implication of the FCC's action. Since the early 1980s, regulators have steadfastly avoided the temptation to impose legacy obligations, taxes, and fees on emerging computer and Internet technologies. We have a vibrant, competitive Internet industry today because the FCC laudably refused to become a Federal Computer Commission.

The AT&T decision, however, sets a dangerous precedent of regulating Internet applications based on the specifics of their functionality and equipment. It will be cited as precedent by anyone seeking to justify more expansive Internet regulation to raise revenue, choke off competition, or limit individual freedom.

The FCC is rightfully concerned that the rise of VOIP sows confusion and allows for regulatory gamesmanship. Instead of putting its energy into fixing a broken system, though, the Commission has decided to put its fingers into the dike of the leaky access charge reservoir. It's only going to worsen the inevitable flood.

Kevin Werbach is the founder of the Supernova Group, a technology analysis and consulting firm. He served as Counsel for New Technology at the FCC during the Clinton Administration.


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