Dialing for dollars: should the FCC regulate Internet telephony?

• Author: Freiden, Robert M.

1. INTRODUCTION

   On March 4, 1996 America's Carriers Telecommunication Association ("ACTA"),(1) a trade group representing primarily medium and small long distance telephone companies, filed a controversial Petition for Declaratory Ruling, Special Relief and Institution of a Rulemaking with the Federal Communications Commission ("FCC").(2) ACTA alleged that providers of Internet telephony software operate as uncertified and unregulated common carriers(3) in contravention of FCC Rules and Regulations. The trade association suggested the need for regulatory parity: the assertion of jurisdiction and the imposition of common carrier regulation by the FCC over Internet telephony software companies because conventional, telephone service providers face such government oversight.(4) ACTA also charged that increasing use of Internet resources for telephony "could result in a significant reduction of the Internet's ability to handle the customary types of Internet traffic."(5)

   Much of the extensive opposition to the ACTA Petition predictably focused on the relief ACTA sought: expanding FCC jurisdiction and regulation to unregulated software enterprises that make it possible to use "the Internet to provide telecommunications services . . . ."(6) Netscape Communications Corporation and other stakeholders in the current controversy have asserted that the FCC cannot subject Internet telephony software providers to common carrier regulation.(7) The basis of this assertion is that their products constitute enhanced services(8) and information services.(9) Others(10) argued that Internet telephony software providers are exempt from the common carrier classification because the definitions of access software(11) access software providers(12) and interactive computer service(13) expressly qualifies such entities for exclusion.(14)

   The ACTA Petition also raises several broader issues largely ignored by the commenting parties:

   * What steps, if any, the FCC should undertake to eliminate regulatory asymmetry, i.e., different and inconsistent regulatory treatment of competing enterprises and services,(15) where to do so it must assert jurisdiction and regulate a previously unregulated industry, as opposed to fostering regulatory symmetry, typically resulting in fewer or eliminated regulations;

   * When should the FCC maintain regulatory asymmetry, despite some legal and economic arguments favoring a single, consistent regulatory regime;

   * To what extent does Internet telephony support or frustrate long-standing efforts to foster universal service;(16) and

   * How should the FCC balance the long-standing objective of achieving universal access to Plain Old Telephone Service ("POTS") with its new and broader mandate to "encourage the provision of new technologies and services to the public"(17) including a "high-speed, switched, broadband telecommunications capability that enables users to originate and receive Pretty Advanced New Services ("PANS"), including high-quality voice, data, graphics, and video telecommunications using any technology."(18)

   This Article will examine the consequences of continued regulation of incumbent common carriers in an environment where certain newcomers can operate free of regulation. Incumbent common carriers argue that a level competitive playing field necessitates either their deregulation, or the regulation of newcomers, such as internet telephony software providers. However, ongoing asymmetrical regulation has compelling justifications, including serving objectives articulated in the Telecommunications Act, promoting competition and innovation, stimulating downward pressure on rates, and promoting universal service.

   This Article concludes that while Internet telephony itself may fall within the new, broader definition of telecommunications service,(19) the enabling software required for such use does not. The FCC can avoid key policy and regulatory issues raised by ACTA, based on a narrow interpretation of the Communications Act, as amended. Because Internet telephony has characteristics which may in the future render it functionally equivalent to conventional telephone service, however, the FCC may soon face challenges more compelling than ACTA's present petition. In support of its universal service objectives, the FCC may have to determine whether Internet telephony is equivalent to common carriage under the Telecommunications Act. This task is further complicated by the potential for significant migration of incumbent carrier traffic and revenues as new Internet telephony options enter the marketplace. Industry and market leaders in telecommunications, information processing, computers and software(20) are currently competing to bundle their products and services with widely used Internet browsers such as Netscape Navigator.(21) This migration may hasten as new Internet telephony products arrive which provide such services via telephones in lieu of costly personal computer configurations.(22)

   The FCC can avoid key policy and regulatory issues raised by the ACTA petition by simply rejecting it in much the same manner as it could reject a petition to regulate Internet radio services as broadcasting.(23) While the Internet currently provides services analogous to telephony and broadcasting, the limited scope and availability of such services, combined with the language of the Communications Act of 1934 ("Communications Act"), clearly does not favor regulation. However, in view of the possibility for near ubiquitous Internet access and the potential for the integration of Internet telephony products, including software with more traditional telecommunications services, these factors may change. This Article provides a starting point for considering whether maintaining inconsistent and asymmetrical regulation of competing services is a viable option in the face of rapidly advancing technologies.

   1. Internet Telephony Technology: The Basics

      Internet telephony uses the digital, packet-switched nature of the Internet, along with its routing and addressing standards, to provide real time audio conferencing.(24) Internet switching and routing technology manages the transmission and processing of text, graphics, data, audio, or video. The Internet's TCP/IP protocols(25) provide a standard for subdividing content into a stream of packets that are routed via any available path between the sender and intended call recipient. Each packet contains a header with destination information so that intermediary routing facilities can determine how and where to send the packets. This header information includes a sequence of digits that correspond to an Internet address, much like the numbering sequence in direct distance dialing via telephone.

      The Internet Protocol addressing scheme makes it possible to route traffic onward in the event of initial failure, by resending packets and routing them via different and possibly circuitous links. This requires software processing to reassemble the packets in proper order. For services that do not require immediate, real-time delivery, e.g., electronic mail, possible delays and time for reassembly present few problems. Messages can be delivered despite outages, blockages and busy conditions. However, Internet telephony requires immediate "real time" delivery of the packets in their proper order. Any delay, loss or improper sequencing of packets will result in distortions or the temporary loss of the audio stream.

      Until now, Internet telephony has lacked the quality, reliability and security to be considered comparable to conventional telephone services. However, after an initial investment, the cost of Internet telephony substantially undercuts the current per-minute rates for conventional services. Unlike conventional telephone service, Internet-mediated telephony requires an intelligent terminal: a personal computer, modem, sound card, speakers, microphone, and software. But users incur few charges, if any, above this initial investment in hardware and software, plus the monthly fees for local telephone or cable modem service.(26) Conventional telephone services use an inexpensive, "dumb" terminal, the telephone handset, but users incur per-minute charges that can exceed $1.00 a minute for many international destinations.

   2. Who's There?

      A key problem faced by FCC decision makers and analysts of the ACTA petition is identifying who provides Internet telephony as opposed to enterprises involved in the design, marketing and software integration with hardware needed by consumers to make an Internet-mediated telephone call. ACTA's petition focused on the software providers, but it could have targeted:

      * Internet Service Providers, like Netcom, PSI, Panix and America On-Line, which link individuals with the networking capabilities of the Internet and which own or lease the transmission facilities needed to transport packets to and from subscribers' terminals;

      * Internet browser developers, like Microsoft and Netscape, which provide the user-friendly link to Internet resources and which bundle Internet telephony software typically as a point and click icon on the browser;

      * Internet telephony hardware manufacturers, like Lucent, IBM and Intel, which develop the computer chips, servers and other devices that make it possible to route telephony packets via the Internet;

      * Most telecommunications ventures, whether regulated or not, that consider the Internet a potential new profit center even if some of the services provided cannibalize existing revenue streams, including local and long distance telephony; or

      * Any venture that uses Internet telephony in conjunction with the sale or marketing of a good or service.

      Internet telephony can occur only through the integration of products and services from different market segments in telecommunications, information processing, computer hardware and software. While the ACTA petition singled out the software component for...