Let's not Repeat Telecom 96

by Ted Wallingford

Related link: http://www.fcc.gov/telecom.html

For years, observers of the American telecom system were yelling for true competition in local phone service. Ever since the AT&T breakup in 1983, the local phone service industry was dominated by incumbent local exchange carriers—the companies that were the heirs of the AT&T network. But all that changed in the mid 1990’s.

The Telecommunications Act of 1996 made it possible for Mom and Pop to own a local phone company. A flurry of startup ventures launched, competing with the incumbent phone companies in each local market. Suddenly, everybody who was in the networking business was also in the phone business. Guys whose offices consisted of a Volvo and a cell phone were taking orders for phone lines from the country club parking lot. The problem was, these startups didn’t own their own local service networks, and the government was, in effect, forcing the incumbents to procure service for these new competitors at a discount rate.

In a nutshell, the big local company did all the work while the competitor collected the revenue. A nuance of the dot-com bubble, the Clintonian era when anybody could make money doing anything, or doing nothing.
The dot-com melt-down resulted in a profit crunch for the big phone companies like SBC and Verizon. But even worse, the newcomers, like XO, ATX, and others, were lulled into thinking that they could compete on a national scale while building an ambitious network to contend with Ma Bell’s. But they couldn’t provide the customer service and uptime that the incumbent carriers were famous for. Since the newcomers were really just re-selling Ma Bell’s service, customers were often confused about who to call when there was a problem with their phone lines. An XO customer would call SBC’s service department, who would tell him to call XO’s. But, when called, XO would just send the customer back to SBC… and the problem would remain unresolved.

As a result, customers went back to Ma Bell in droves. Almost all of the big competitive carriers have made a few visits to the bankruptcy judge. And few telephone customers would argue that their service has never really improved.

“Out of all the other phone companies, we [ATX] were the only one who didn’t go chapter 11, so we finally said, back in January, let’s do it. All our competitors are doing it and coming out clean,” an ATX sales representative recently said. Surely, these outcomes weren’t the intent of the well-meaning politicians that designed the Act. Instead, what they got was a whole lot of lawsuit fodder and bankrupt operations looking for a bail-out.

Thankfully, part of the 1996 telecom act may soon become historical baggage, thanks to Voice over IP. Consider the glut of new VoIP-based telephone service providers: companies like 8x8 Networks, Vonage, and VoicePulse. They didn’t have to spend millions of dollars building fiber networks to compete with Ma Bell at such a high cost that it put them into chapter 11. No, quite the contrary: Vonage and Packet8 are competing quite handily with Ma Bell today.

It’s important that this remain the case. Without a health telecom industry, everybody suffers. The prescient lawmaker understands that regulation can do a lot of damage to a technology that’s still evolving, and never more so than with VoIP. The Telecom Act of 1996 over-regulated Ma Bell to the point of forcing it to purvey its competitors’ services. This amounted to a government-sanctioned venture against it, just like the venture against AT&T and the venture against Microsoft. Which of these ventures produced an outcome that improved the situation? Like many government-sanctioned business ideas, T-com 96 was a failure at spurring competition. Local service pricing didn’t really drop, and real consumer choice never became a reality, though T-com 96 did catalyze number portability. Ironically, this feature made today’s little VoIP industry even more successful than it could’ve been without it.

Gross legislative miscalculation could really screw up the fledgeling VoIP industry. America has too much at stake in the technology; it has a real opportunity to lead the world: American voice brands like AT&T are the most well-recognized on earth. The three biggest providers of VoIP equipment in the world, Cisco, Nortel, and Avaya, are American firms. The network that carries VoIP at the least cost—the Internet—is an essentially American invention. The innovation geeks of America want the government—federal, state and local—to keep its hands off of VoIP altogether.

Yet regulation supporters say there are benefits to regulating VoIP. One of them is a stated mandate of the FCC for the public telephone system: an old utopian idea known as “universal access” that guarantees a low-cost national network that is accessible by all citizens. Another is stability: though oil’s price fluctuates from day to day, there are no price controls on it. Just the same, the telephone system, whose price fluctuations are comparatively negligible, is regulated quite heavily in the name of stability. The fact that VoIP providers operate above these regulations is what the innovation geeks are calling its “freedom factor”. Yet, many telecommunication experts defend the telecom tariff system, citing the lack of central price control as a potential source of instability.

“There needs to be standards applied to all VoIP suppliers for commonality of transmission and, with the cost and magnitude of its use increasing exponentially, basic tariffs need established to control costs,” said Richard Shoemaker, a telecom consultant in Cleveland, OH. This exposes the regulation reality of a post-1996 telecom landscape: private operators justify regulations as a reason to keep their costs under control. Kind of like a high-tech minimum wage, if you will.

But the state PUCOs have an entirely different view on regulations: they provide a framework for fees that support public services such as 911 and universal access. So, the fewer telephone service providers they collect fees from, the more their budgets must shrink. The purpose of VoIP service providers is to make money by delivering an application using another network (the Internet), and not deliver the network itself. That’s the PUCO’s job. When the Minnesota PUCO ordered Vonage to collect regulatory fees to support 911 dispatching like those the state would collect from a traditional telephone company, it began to chip away at VoIP’s freedom factor.

Last spring, Senator John Sununu (R-NH) introduced an act that would treat VoIP service providers as interstate exchange carriers, allowing them to be regulated by the FCC. This act was drafted largely in response to a constituency of VoIP startups and technical interests: people who want VoIP left alone; people who probably want the current fee-ridden public network to die a quick death. But the big telecom industry has a powerful lobby, and it has significant interests at stake: billions in market cap and revenue, tens of thousands of employees, the experience of having worked within the rules of T-com 96 for 8 years, and the prospect of doing VoIP themselves. When you consider what the incumbent phone companies could bring to the VoIP table—good customer service, decades of experience, an existing regulatory compliance infrastructure, and a built-in 911 dispatch system—Sununu’s act doesn’t recognize these advantages.

The real questions are: Is independent VoIP service from Vonage or 8x8 still viable if FCC centralization doesn’t become the law of the land? How will the big regulated phone companies handle VoIP services if VoIP is exempted from tariffs? Will the public interest require VoIP service providers to deliver 911 services?

All of these questions, and more, must be answered—when the 109th Congress convenes next winter. Learning a lesson from the ill fallout of the Telecommunications Act of 1996, voice policy-makers should be a little further-sighted than they were during the dot-com bubble. This means taking great strides in understanding why VoIP is so appealing, and then catering to that appeal with open-minded, permissive, and lightweight public policy.

Should VoIP telephone service providers be regulated like SBC and Verizon?


2004-09-21 11:07:56
You sure you don't mean Baby Bell?
Are you sure you don't mean Baby Bell in the places you say Ma Bell?

"Baby Bell" is the term used to describe the regional carriers that arose from the AT&T breakup (Bellsouth, SBC, Verizon, etc.) Ma Bell is/was AT&T, and Ma Bell has had genuine and successful competition for two decades; MCI and Sprint being the most notable, and now even the Baby Bells are jumping on board.

It is the Baby Bell competitors who have largely failed.

2004-09-21 13:10:59
No, I mean Ma Bell
Sure, Bells. I use Ma Bell to refer to them collectively. But in the sense that MCI and Sprint are competitors for local service--they really aren't. That's the whole problem with Telecom 96. VoIP allows them to be, and that's the point of the piece--VoIP needs to be protected from legislation and the powerful lobby of incumbent LECs--the "Ma Bell" lobby, who don't stand to lose anything if VoIP is highly regulated.