TCS Daily


Will the FCC Let VOIP Flourish?

By Kevin Werbach - July 27, 2004 12:00 AM

The 1996 Telecommunications Act was hailed as a dramatic update to the musty sixty-year Communications Act. With the worlds of communications and computing rapidly converging through a great digital migration, the World Wide Web taking off, and new technologies promising to transform the very meaning of telecom, such a rewrite was certainly necessary.

It's hard not to conclude that the 1996 Act as been a failure. New technologies such as VOIP are indeed poised to revolutionize communications. The promised local phone competition, however, has largely failed to materialize.

The central thrust of the 1996 Act was to complete the 1984 breakup of the old monopoly AT&T, opening up local markets to competition while freeing the Baby Bell incumbents to compete in other markets such as long-distance and video. Eight years in, the industry is still fighting in courts over regulatory arcana, with no end in sight. Local competition, such as it is, has developed largely on the basis of the unbundled network element platform (UNE-P) rules adopted by the FCC and state regulators. Thanks to a series of court and FCC decisions, however, UNE-P may well disappear by the end of this year.

Where did the authors of the 1996 Act go wrong? Contrary to the line the Bells are promoting, the flaw in the Act wasn't its requirement that incumbents open their networks. Simply eliminating rules designed to address market power, without addressing the reality of that market power, produces nothing more than unregulated monopolies. That was true in 1996, and it's true today.

At the heart of the 1996 Act was a simple deal. New entrants would gain entry to the formerly closed local phone market, and the Bells would gain new freedoms in return. That deal just hasn't worked. Whichever side one blames, one fact cannot be denied. The industry and the FCC have spent far more time engaged in litigation than anyone predicted, and as a result, they have spent far less time tackling the core economic imbalances in the telecom industry. The rise of VOIP puts this situation into even sharper relief.

From the beginning, the FCC described the implementation of the 1996 Act as a trilogy. Interconnection, which is where virtually all of the activity has focused, was just the first volume. Thanks to the endless spiral of Bell-initiated litigation over the FCC's unbundling rules, the other two volumes, universal service and access charge reform, have received short shrift. Interconnection and unbundling terms are critical to competition, but they are not sufficient if billions of dollars in hidden subsidies continue to flow through legacy regulatory mechanisms. Both universal service and access charges serve legitimate purposes, but those purposes can be achieved in much more efficient ways. And they can be achieved without the artificial cross-subsidies that constrain competition and innovation.

VOIP is a good example. Instead of focusing on the benefits VOIP creates for users, the FCC is forced to concentrate on whether VOIP might upset the apple cart of access charges. This has led it down the path of distinguishing "good" and "bad" VOIP. The latter is typified by AT&T's VOIP backbone transport, upon which the FCC imposed access charges. How far we have come from the visions articulated in 1996, which presupposed that market forces rather than regulators would determine the path of emerging technologies.

The FCC should move true universal service and access charge reform to the front burner. The reality is that, as VOIP and other technological changes transform the telecom industry, they make legacy regulatory structures designed for the world of the 1950s obsolete. The core public policy bases for those structures -- making communications capabilities available and affordable for all Americans, and compensating network operators for use of their networks -- remain valid. In a world where the Internet makes connectivity both increasingly cheap and increasingly powerful, however, competition can achieve many of those goals. If, that is, competition is allowed to flourish.

This is exactly what the large Congressional majorities that passed the 1996 Act thought they were voting for. Whether the Act remains in force, is revised, or is scrapped entirely, it's still what we should strive for.


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