Out of the Telechasm
The Wall Street Journal
Tuesday, April 18, 2006
Ten years after Congress declared it was "deregulating" the
telecom industry, our Representatives and Senators are at it
again. Both Houses of Congress are drawing up legislation to
address some of the absurdities that resulted from the last
effort at reform. We'd like to report this as a hopeful sign.
But this is Congress, and aside from one noble if likely doomed
effort, the prospects don't look bright.
In the past decade, our various "telecommunications" industries
have converged, but the regulatory system remains fragmented and
heavy-handed. Cable-TV providers operate under one set of
rules, "landline" telephone companies fall under a different
regime and wireless operators under yet another. Each of these
are increasingly competing directly with each other, but our
laws don't recognize this fact. Senator Jim DeMint (R., S.C.)
has drafted legislation to sweep away these conflicting and
nonsensical regulatory regimes and treat telecom the way it
ought to be treated -- like any other competitive industry.
His proposal, alas, may never see the light of day. Alaska's
Ted Stevens, Chairman of the Senate Commerce Committee, has his
own ideas and plans to present a bill in the coming weeks. In
the House, Joe Barton (R., Texas) has passed out of subcommittee
a bill that deals with a couple of narrow issues -- so-called
Net neutrality and cable franchising -- but avoids a wholesale
This being an election year, the Members are likely to use all
of this mostly as a way to soak campaign contributions from all
the competing lobbies. But in the real world the time is ripe
for revisiting 1996; our current rules make less sense and
impose a higher economic cost every day. The Federal
Communications Commission has taken some positive steps, but
these days is more concerned with Janet Jackson's wardrobe
malfunctions than in jumpstarting innovation.
Last year's Brand X
decision by the Supreme Court is a good example both of what
the FCC has done right and the limits of what it can do. The
Court decided that the FCC was within its rights to declare
cable-modem Internet access an "information service" rather than
a "telecommunications service," and so exempt cable-modem
providers from a raft of regulations. The FCC helpfully
followed up by granting DSL service (the phone companies'
version of cable-modem) the same exemption.
But the real question is why so much should hinge on FCC
hair-splitting about "information" and "telecommunications" --
which are two sides of the same coin. The very existence of
this sort of distinction was always arbitrary, and its
capriciousness only increases with time. One result is that
phone companies are regulated one way when they offer voice
service the old-fashioned way and another when they use
Voice-Over-Internet-Protocol (VOIP) technology.
To consumers, these products blend together. But behind the
scenes, each one lives in its own regulatory hell. VOIP phone
calling has become popular and can be much cheaper than paying
the phone company by the minute. But a good chunk of the
savings comes from all the taxes and fees that VOIP customers
don't pay the government, because the FCC says VOIP is different
from traditional land-line service -- it's "information."
Likewise, cable companies are now offering a so-called triple
play -- phone, cable-TV and voice service bundled at a
discount. Customers need only call one number to be put on hold
when they have a problem, and they only get one bill. The phone
companies are installing fiber-optic cables to homes to offer
the same bundle. That's right -- the same bundle. Even
mobile-phone operators are getting into video and broadband
But at the moment the Bells can't offer TV in your city without
a "franchise" -- a license typically issued by the municipal
government. Local franchising dates back to the days when cable
companies had to tear up roads or string lines on utility poles
to bring service into the home.
Because those rights-of-way were usually controlled by local
governments, franchising was a way of making sure that towns had
a say in how it was done. But local governments' legitimate
interests extend only to those roads and rights-of-way, not to
what is transmitted over the network after it is laid down. So
the requirement that phone companies seek TV franchises from
thousands of local authorities is a purely artificial roadblock
to the competition that the federal government supposedly
Mr. Barton's House bill would remedy this by creating a national
franchise that would, theoretically, require only rubber-stamp
approval from the federal government. As a band-aid, this is
better than the status quo. But his bill also threatens to
introduce a whole new wave of regulatory requirements by
codifying "Net neutrality" rules in law.
Last year the FCC published a non-binding set of Net neutrality
"principles" laying out what consumers are "entitled" to --
basically, choices about the content they see, the devices they
use and the networks they connect to. However, giving the FCC
the power to enforce these rules against Web sites and network
owners alike would open a Pandora's box of intrusive regulation
The far better solution would be to start from scratch, a la Mr.
DeMint's Senate bill. It says, in effect, that telecom
companies should be regulated on the basis of fair competition
standards used everywhere else in the economy. Rather than
trying to legislate competitive outcomes, as the 1996
Telecommunications Act did, Congress could allow open-field
running save for anyone who violates antitrust rules.
For years, regulators and "consumer advocates" have argued that
telecom is "too important" to be left to market forces.
Something like the opposite is closer to the truth. In a
digital age, telecom is too important for policy to hinge on
arbitrary distinctions between "information" and
"telecommunications," or to be held hostage to thousands of
rent-seeking municipal agencies. It's time for a rethink, and
the more fundamental, the better.