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In Washington, the phone wars rage and the Net seeks cover

August 25, 1998
Web posted at: 12:25 PM EDT

by Elizabeth Wasserman

(IDG) -- Despite two decades of fitful deregulation efforts, Washington still sets the agenda for the telecommunications industry and it can't keep up. In fact, the legislative and regulatory docket is overflowing now that Congress and the Federal Communications Commission have to wrestle not only with the same old telephone problems but with a host of new Internet problems, as well.

Congress this year has dallied with laws designed to regulate online gambling, online pornography and unsolicited e-mail. But it hasn't taken on the larger issues raised by the Telecommunications Act of 1996, which has mostly failed to deliver on its promise of greater competition.

Legislators and FCC regulators face a moving target. The act has unleashed a wave of giant mergers, and Internet technologies are upsetting the economics of traditional phone service in ways that no one anticipated.

"The debate in 1995, when they originally did the act, was all about local telephone service vs. long distance," notes Larry Clinton, associate VP for the U.S. Telephone Association. "Now it's about Internet vs. telephony. This is the market responding to reality, and the public policy is 100 miles behind."

The regional Bell operating companies, formed after the breakup of the Bell System monopoly, argue that the FCC is hung up on regulating the telephone companies of old and is not spurring competition to bring high-speed data lines to American homes. GTE and six Bells petitioned the FCC to allow them to offer data services in a deregulated environment. The commission this month gave them a big chunk of what they wanted: They could offer the high-speed data services known as DSL without being required to lease their own DSL facilities to competitors, but they'd have to do it through separate subsidiaries. The ruling was the biggest win for the Baby Bells since the Telecom Act, and FCC Chairman William Kennard says it is likely to be the first of several moves to spur deployment of broadband communications services to American homes.

The Baby Bells have not opened their local markets sufficiently to convince regulators to let them compete for long-distance customers. But the rapid pace of mergers and acquisitions has created diversified conglomerates that may be able to morph across different markets. AT&T, for example, may be able to enter local markets with cable giant TCI. Bell Atlantic may be able to get into long-distance by acquiring GTE. And foremost on every company's agenda is capturing data-service customers as Internet telephony begins to erode the traditional telephone markets.

Net-based telephony employs Internet Protocol, or IP the standard that carries e-mail and other traffic over the Net. Whereas traditional circuit-switched telephone networks require that a connection be maintained between the caller and the receiver throughout a conversation, IP networks break data into tiny packets and send them over numerous shorter-term connections. Not only does IP save money, it also makes such services as videoconferencing and messaging easier.

Prices for Net telephony are even lower because they now avoid regulatory surcharges that raise the prices of traditional analog service. Under federal law, traditional long-distance carriers pay access fees to the local phone companies on each end of a telephone call. These individual charges range from 2 1/2 to 3 cents per minute. If the FCC imposes such fees on Internet telephony, it is likely to stifle its growth.

Aside from access fees, traditional telephone companies contribute to a universal service fund, which subsidizes service to rural and poor Americans. In April, the Clinton administration intervened to urge the FCC not to levy these fees on newcomers like Internet telephony players. "While legitimate issues have been raised regarding the obligations of new players to contribute to universal service," writes Larry Irving, head of the Commerce Department's National Telecommunications and Information Administration, in a letter to FCC Chairman William Kennard, "any proposal to regulate Internet telephony as a 'telecommunication service' would raise contentious issues, resolution of which would have international, as well as domestic, repercussions."

There are really two big issues, according to Stuart N. Brotman, a telecommunications consultant in Lexington, Mass. "To what extent are regulators going to get their noses under the tent of the Internet, in terms of getting more involved directly or indirectly? And, in the tax area, will the Internet tax moratorium be only a temporary fence? I think it's the instinct of regulators to try to get as much under their umbrella at once as possible. But whether or not the FCC is going to have the power to regulate the Internet is a battle that I don't think has begun yet."

It seems that the government can't decide whether to treat the Internet with the heavy-handed policies associated with telecommunications or with the hands-off approach used on the software industry. The confusion is appropriate, because the Internet hovers between both worlds.

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This tension was evident when some observers of the Justice Department's battle with Microsoft called for the operating system itself to be treated as a piece of infrastructure akin to the phone network; it's the kind of headache regulators have encountered as the lines between communications and computing start to blur.

Some members of Congress question whether the FCC has kept up with the times. Rep. W.J. "Billy" Tauzin (R-La.) says that he plans to assemble a special task force this fall in the House Commerce Committee's telecommunications subcommittee, which he chairs, to examine the FCC. The FCC was formed in the 1930s to protect consumers from monopolies in communications. But the Telecom Act of 1996 broke down the barriers to create competition, he says. "In the end, we said communications services were going to merge, and we were going to have an open marketplace," Tauzin says. "We forgot to deal with the agency created on the old model. We have an agency that still functions to regulate monopolies. They don't understand their new mission."

Others, however, give Kennard and some of the new commission members high marks for recognizing that the act did not go far enough to create competition in local markets, and for allowing companies to enter high-speed data services markets through subsidiaries thus breaking the virtual stalemate caused by the act. But many struggles lie ahead as the commission and other government entities try to figure out where telephone service ends and the Internet begins.

The Internet has dodged many bullets this year from regulators and tax authorities alike, but the victories are only temporary. Loopholes and time limits in legislation and policy statements have left the door open to future levies and restrictions by lawmakers and regulators. While it seems the Net will remain tax- and regulation-free for now, the future Net is not likely to remain so unencumbered, despite pledges from the White House and other nations that an unregulated and tax-free Internet is in the best interest of the world economy.

Milestones in recent Internet legislation (and how they may come back to haunt us)

  • The House approved a three-year Internet tax moratorium this summer; the Senate approved one for six years. But a compromise to resolve the differences between the bills may succumb to pressure from state and local governments and reduce the time period of the moratorium to two years.

  • The FCC reported to Congress in April that it would be premature to impose fees on Net telephony companies. But the commissioners left the door open, saying that Net telephony companies seem to be no different from traditional telephone carriers, which are subject to various fees and regulations.

  • The "e-rate" program for providing discounted Net services and telecommunications connections to schools and libraries was scaled back last month under pressure from long-distance phone companies and Congress. Despite the FCC's decision to cut funding for the program from a possible $2.25 billion to $1.3 billion, this is not expected to be the last word. Certain members of Congress want to abolish e-rate; schools and libraries are waging their own campaign to save the subsidies.

  • Vice President Al Gore last month called on Congress to consider legislation to protect children's online privacy. The administration, reacting to the lackluster initiative displayed by industry until recently, is expected to keep up the pressure through the fall, when a European Union directive will limit the transfer of data that identifies people directly among member nations.

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