What do pizza delivery and information services have in common? Lessons from recent judicial and regulatory struggles with convergence.

• Author: Frieden, Rob

Congressionally crafted definitions of cable, (1) information (2) and telecommunications (3) service used by the Federal Communications Commission ("FCC") to make key policy and regulatory decisions no longer provide clear direction in light of technological and marketplace convergence. (4) The FCC cannot make bright line, either/or distinctions between services, and because vastly different regulatory burdens apply based on which classification the Commission picks, marketplace competition can become distorted. (5) Often operators in the Information, Communications and Entertainment ("ICE") marketplace can secure a competitive advantage by successfully qualifying for classification that triggers less regulatory burdens. (6) Such regulatory arbitrage tilts the competitive playing field when competitors offering functionally equivalent services bear higher or lower regulatory burdens based on which service classification they receive. (7)

Ironically, the FCC has facilitated such arbitrage in its response to the perceived need for creating greater incentives for investment in next generation networks (8) and a Congressional mandate to promote "advanced telecommunications capability." (9) The Commission now chooses to ignore or subordinate the telecommunications element of a convergent broadband service, such as Internet access, and to emphasize the largely unregulated information service that rides on the telecommunications link. (10)

Technological convergence has outpaced the ability of both Congress and the FCC to anticipate and respond to changed circumstances. (11) In the absence of a rewrite of the Communications Act of 1934, (12) last substantially amended in 1996, (13) the FCC must apply a limited number of mutually exclusive service definitions to new services that frustrate compartmentalization. Converged ICE services may incorporate two or more regulatory classifications depending on how service providers and end users configure services. Increasingly software and other applications, riding on top of basic digital bitstream transmission, (14) can generate services that integrate previously discrete telecommunications, information and cable services. Similarly, ICE ventures seek to achieve economies of scale and scope through vertical integration that combines basic transmission of digital bits with software and other value adding enhancements. (15)

Additionally, the apparent duty to shoehorn all services into one category (16) has forced the FCC to make decisions that reclassify a service. (17) For example, the FCC recently reclassified telephone company provided "Digital Subscriber Link" ("DSL") service as an information service, (18) despite having previously identified it as a telecommunications service. (19) By ignoring or subordinating the telecommunications component in DSL, the Commission assumes it lawfully can reclassify it as an information service like cable modem service, with necessary telecommunications bit transport considered an integrated and subordinate component. (20)

Having static and limited regulatory classifications to work with has also forced the FCC to acknowledge inconsistency in how it applies the same Congressionally crafted service definitions. (21) For example, the FCC has already deemed some types of Internet-mediated telephone services as fitting within the information service classification. (22) Other more sophisticated and versatile forms of Internet telephony, commonly referred as Voice over the Internet Protocol ("VoIP"), may also fit within this category, (23) even though the FCC may impose specific public safety and public interest obligations under Title I authority. Notwithstanding existing and likely future information service designations for VoIP, the FCC recently acknowledged that for purposes of cooperation with law enforcement agencies as mandated by federal law, VoIP operators provide telecommunications services and must cooperate with law enforcement officials seeking wiretaps. (24)

Adding to the confusion, the Supreme Court in National Cable & Telecommunications Association v. Brand X Internet Services, (25) showed significant confusion in understanding converging telecommunications and information processing technologies. (26) The Court had to determine whether cable television companies providing access to the Internet offer an information service, subject to quite limited regulation, or a telecommunications service, subject to possibly more government oversight. (27) Both the majority opinion and a dissenting opinion used curious analogies involving packaged services in automobile manufacturing, pet stores, and pizzerias, as a way to conceptualize converging telecommunications and information processing services. (28)

The use of simplistic but competing analogies within Supreme Court opinions demonstrates how experts in the law struggle to conceptualize information processing even as they appear to have little sense of how most consumers will soon access ICE services and what kinds of traditional consumer safeguards remain essential. The Brand X case will provide the legal foundation for the FCC to abandon most regulations of both telephone and cable television companies, based on the Supreme Court's endorsement of limited regulation for information service markets. (29)

How the FCC and the Supreme Court have responded to ICE convergence provides a key case study for assessing the consequences of having to apply congressionally crafted definitions that no longer provide the foundation for different regulatory treatment. This article will identify problems in the Communications Act of 1934 (30) and suggest how a revised law might promote full and fair competition with limited governmental interference. This article will consider the viability of antitrust scrutiny in lieu of ex ante service specific regulation, and initiatives in the European Union that rely on structural safeguards that the FCC first used, but later abandoned. Additionally, this article will recommend that legislatures and regulators combine greater granularity and specificity in service definitions with more timely, certain and calibrated assessment of market dominance and market failure.

FINDING SIMILARITY IN PIZZA DELIVERY AND INFORMATION SERVICES

In Brand X, a majority of the Supreme Court endorsed the FCC's information service classification for cable modem service. (31) Using the Chevron (32) standard, which supports deferral to administrative agency decision-making that reasonably interprets and implements statutory language, (33) the Court cleared the way for the FCC to create a lightly regulated information service "safe harbor" for both cable modem and DSL high speed broadband access services.

A majority of the Court agreed that the FCC could reasonably have concluded that cable modems solely provide an information service, despite the use of telecommunications to link subscribers with content. (34) Accordingly, the Court reversed the Ninth Circuit Court of Appeal's prior determination that a separate and identifiable telecommunications service element existed on grounds that the Chevron precedent supported the FCC's statutory construction: "A court's prior judicial construction of a statute trumps an agency construction otherwise entitled to Chevron deference only if the prior court decision holds that its construction follows from unambiguous terms of the statue and thus leaves no room for agency discretion." (35)

The Court concluded that the Communications Act of 1934, (36) as amended by the Telecommunications Act of 1996, (37) contained ambiguities as to whether cable companies offered telecommunication services in conjunction with their cable modem service. (38)

The majority used several analogies to support the view that the FCC could lawfully ignore or subordinate the telecommunications function. (39) The majority's analogies provided examples in which a venture offers a number of services, many of which can be combined into a consolidated package, and others that are made available, but that are not essential. (40) In the former, the majority noted that car dealers sell cars and not a collection of integrated components, such as an engine and chassis. (41) The majority also rejected Justice Scalia's analogies by noting that customers can pick up pizzas rather than have them delivered, and similarly can purchase dog leashes at pet stores without also having to purchase a dog. (42)

Because ambiguity exists as to the functional integration or separateness of telecommunications, the Court majority gladly deferred to the FCC. (43) The Court noted that the nature and scope of integration between telecommunications and information processing "turns not on the language of the [Communications] Act, but on the factual particulars of how Internet technology works and how it is provided, questions Chevron leaves to the Commission to resolve in the first instance." (44) While engaging in the use of "warring analogies," (45) the majority appears content on deferring to the FCC's technical expertise in determining how best to implement Congressional intent.

In a dissenting opinion, Justice Scalia did not agree with the majority opinion that the FCC could lawfully and practically treat the telecommunications link as not separable from the predominate information processing services provided. (46) He disputed the FCC's view that cable television companies do not provide a telecommunications service when linking subscribers physically apart from the content they access. (47) Justice Scalia used pizzerias and pizza delivery for his primary analogy and asserted that one could not ignore the fact that pizza baking and pizza delivery constitute two separate elements of the pizza business. (48) He concluded, "[i]t is therefore inevitable that customers will regard the competing cable-modem service as giving them both computing functionality and the physical pipe by which...