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Capitol Comment

    Capitol Comment 247 - Are You Down with OPP and Internet "Unregulation?"

    08/19/1999

    A new study released by the Office of Plans and Policy (OPP) of the Federal Communications Commission (FCC) celebrates the success of a policy of "unregulation" for the Internet.1 "Unregulation," as opposed to deregulation, is the total absence of regulation, not the removal of regulation. This study coincides with the FCC’s recent stance against state attempts to regulate Multiple Service Operators (MSOs), such as cable providers who offer advanced services like Internet access.

    A new study released by the Office of Plans and Policy (OPP) of the Federal Communications Commission (FCC) celebrates the success of a policy of "unregulation" for the Internet.1 "Unregulation," as opposed to deregulation, is the total absence of regulation, not the removal of regulation. This study coincides with the FCC’s recent stance against state attempts to regulate Multiple Service Operators (MSOs), such as cable providers who offer advanced services like Internet access. As we enter a new millennium, and indeed a new era of technology and innovation, policymakers are scrambling to keep pace with changing markets. No one can deny the phenomenal growth of the Internet, but with everyone from Vice President Al Gore to the FCC taking credit for its growth and discovery, it is difficult to determine the best way to make sure the growth continues.

    Evaluating the growth of the Internet and other technology fields is difficult because there are so many industries and regulatory structures interacting within these markets. The FCC’s efforts to keep data and new markets free from regulation, while maintaining existing regulations on telephone services, has put them in a tenuous position. Although data transfer remains unregulated, the telephone wires that transmit the data are heavily regulated. While cable services are subject to strict regulation and price caps, MSOs are not subject to state regulation or open access requirements. This was pointed out recently by Rep. Rick Boucher (D-Va.) who said, "I honestly do not understand" when asked about the FCC's hands-off stance on cable modems in light of the agency's extensive attempts to regulate the entry of some local phone companies into long-distance phone service.

    However, confusion and uncertainty are not limited to the government. Even the players in the Internet debate cannot decide what competition should look like. Some telephone service providers have recently come to the position of complete deregulation. Cable providers argue that the local phone companies should be regulated, but that cable should not. Finally, Internet Service Providers (ISPs) argue that both cable and phone companies need to be regulated. Whether by deregulating themselves, or regulating their competitors, every one of these groups is trying to give themselves the upper hand in these new markets. This industry disagreement over Internet competition is reflected by the variety of bills in Congress that claim to offer Internet freedom.

    The rules governing Internet services and other communications are so confusing that even pro-regulatory rhetoric claims to offer a free-market solution for Internet growth. Rep. Bob Goodlatte (R-Va.) states that: "The principles of free-market competition, minimal government regulation, and open consumer access have guided the growth of the Internet. If this growth is to continue, Congress must ensure that public policy reflects the best interests of consumers." Yet his legislation, H.R. 1686, would actually force the FCC to reverse their stance on "unregulation," and impose new regulations on MSOs. Sen. John McCain (R-Ariz.) has offered legislation, S. 1043, that moves toward a free market. There are no easy answers, but as the technology industries gear up their publicity campaigns, it is important not to lose sight of consumers.

    Proponents of reform can be broken into three basic categories. The first are those, like the ISPs and Rep. Goodlatte, that advocate additional government regulation. Then there are those that advocate the status quo, like cable providers and the FCC. Finally, there are those that support deregulation, like Sen. McCain and the local phone companies.

    For those who wish to extend existing regulations to new technologies, they must justify applying monopoly inspired regulations to a free market, and nationalizing cable infrastructure and investment. While such a policy may help ISPs, it will penalize cable companies, limiting their ability and incentive to deploy technology to consumers. This slower innovation will lead to higher prices and poorer quality products for customers.

    If we maintain the status quo, the cable companies that upgrade their networks to provide high-speed Internet services will not face the unbundling regulations that have long burdened local phone companies making similar investments. This, unwittingly, makes the investments necessary to develop an Internet backbone with cable networks more enticing than traditional telephone networks. Moreover, this may hurt ISPs in the short-run, as they risk not gaining the same open access to new high-speed cable lines that they have with telephone lines. Ultimately, as the Internet backbone matures and the cable companies’ exclusive licensing agreements expire, ISPs will have opportunities to market their services to cable Internet services. Yet, left unchecked, government taxes and open access regulations will continue to plague high-speed telephone access and artificially push consumers to cable Internet access. The status quo represents a Byzantine patchwork of regulations that illogically favor some competitors and punish others. It is difficult to say for certain what effect current regulation has on the market, but, undoubtedly, it stifles innovation and the development of technologies that promise to provide consumers with better and faster products and services.

    The proposal to deregulate the Internet market will create competition for cable Internet connections, which can only help consumers by increasing innovation and lowering prices. However, critics argue that it may initially hurt ISPs who have built their industry around open access to the telephone infrastructure. There is no reason to believe that ISPs will not have the technological understanding or flexibility to compete in a free market.

    We are in a dynamic new era, and it is impossible to predict what the future will hold. However, a majority of Americans agree2 with Commissioner Powell of the FCC that an attempt to regulate emerging markets "could unleash a never-ending regulatory exercise to catch up with change," and as he says "one must ask if that is ultimately futile."

    1OPP Working Papers, http://www.fcc.gov/opp/workingp.html

    2CSE Foundation/Wirthlin Worldwide poll