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Federal Communications Commission
Office of Plans and Policy
1919 M Street NW
Washington, DC 20554
OPP Working Paper Series
29 Digital Tornado:
The Internet and
Telecommunications
Policy
March 1997
Note: The graphics associated with this document are not included in this WordPerfect version. An electronic copy
of this document that includes all of the associated graphics is available via the Internet at...
http://www.fcc.gov/Bureaus/OPP/working_papers/oppwp29.pdf
Kevin Werbach*
*The analysis and conclusions of this Working Paper are those of the author, and do not necessarily represent the
views of other Commission staff, individual FCC Commissioners, or the Commission.
The FCC Office of Plans and Policy's Working Paper Series presents staff analysis and
research in various states. These papers are intended to stimulate discussion and critical comment
within the FCC, as well as outside the agency, on issues in telecommunications policy. Titles
may include preliminary work and progress reports, as well as completed research. The analyses
and conclusions in the Working Paper Series are those of the authors and do not necessarily
reflect the view of other members of the Office of Plans and Policy, other Commission Staff, or
the Commission itself. Given the preliminary character of some titles, it is advisable to check
with authors before quoting or referencing these working papers in other publications.
This document is available on the FCC's World Wide Web site at .
Copies may also be purchased from International Transcription Services, Inc., 1919 M Street,
NW, Room 246, Washington, DC 20554, (202) 857-3800. Copies are also available from the
National Technical Information Service, 5285 Fort Royal Road, Springfield, VA 22161 (703)
487-4650.
Digital Tornado: The Internet and
Telecommunications Policy
Kevin Werbach*
Counsel for New Technology Policy
Office of Plans and Policy
Federal Communications Commission
Washington, DC 20554
March 1997
OPP Working Paper No. 29
* Many people at the FCC provided advice, comments, and other assistance in the development of
this working paper. In particular, I would like to thank Robert Pepper, Elliot Maxwell, Greg
Rosston, Richard Metzger, David Sieradzki, and Karen Rose for reviewing earlier drafts, and
Chairman Reed Hundt for his leadership on Internet issues. The analysis and coclusions of this
paper do not necessarily represent the view of other FCC staff or the Commission. CONTENTS
Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . i
A. Background . . . . . . . . . . . . . . . . . . . . . . i
B. Summary of Contents. . . . . . . . . . . . . . . . . iii
C. The Government Role. . . . . . . . . . . . . . . . . . v
I. Introduction -- The Endless Spiral of Connectivity. . . . . 1
A. How the Internet is Unique . . . . . . . . . . . . . . 1
B. The Feedback Loop. . . . . . . . . . . . . . . . . . . 3
C. Threats to the Continued Spiral. . . . . . . . . . . . 7
D. How Government Should Act. . . . . . . . . . . . . . . 8
II. What is the Internet? . . . . . . . . . . . . . . . . . . .10
A. General Description. . . . . . . . . . . . . . . . . .10
B. An Extremely Brief History of the Net. . . . . . . . .13
C. How the Internet Works . . . . . . . . . . . . . . . .17
1. Basic Characteristics . . . . . . . . . . . . . .17
2. Addressing. . . . . . . . . . . . . . . . . . . .18
3. Services Provided Over the Internet . . . . . . .19
4. Governance and Management . . . . . . . . . . . .20
D. Development of the Internet Market . . . . . . . . . .21
1. The Internet Today. . . . . . . . . . . . . . . .21
2. Internet Trends . . . . . . . . . . . . . . . . .22
III. Category Difficulties . . . . . . . . . . . . . . . . . . .26
A. FCC Authority Generally . . . . . . . . . . . . . . .26
B. Telephony. . . . . . . . . . . . . . . . . . . . . . .30
1. Legal Framework . . . . . . . . . . . . . . . . 30
a. Carrier Obligations.. . . . . . . . . . . . . . .30
b. Basic vs. Enhanced Services . . . . . . . . . . .31
2. Implications. . . . . . . . . . . . . . . . . . .33
a. Section 251 Interconnection Obligations . . . . .33
b. Section 254 Universal Service Obligations . . . .35
c. Internet Telephony. . . . . . . . . . . . . . . .36
C. Broadcasting and Cable . . . . . . . . . . . . . . . .41
D. Relationship to Content. . . . . . . . . . . . . . . .43
E. Administrative Issues . . . . . . . . . . . . . . . .45
F. Toward a Rational Approach . . . . . . . . . . . . . .46
IV. Pricing and Usage 48
A. Current Pricing Structure . . . . . . . . . . . . . .48
B. Network Economics . . . . . . . . . . . . . . . . . .52
C. Implications for Local Exchange Carriers . . . . . . .54
1. Pricing Issues. . . . . . . . . . . . . . . . . .56
2. Switch Congestion . . . . . . . . . . . . . . . .58
3. Responses to Switch Congestion. . . . . . . . . .61
a. Pricing Changes . . . . . . . . . . . . . . . . .62
b. Technical Solutions . . . . . . . . . . . . . . .66
4. State Tariffing Issues. . . . . . . . . . . . . .71
5. Competitive Dynamics. . . . . . . . . . . . . . .71
V. Availability of Bandwidth . . . . . . . . . . . . . . . . .73
A. Deployment and Pricing of High-Speed Access Technologies . .74
B. The ISDN Case Study. . . . . . . . . . . . . . . . . .76
C. Universal Service and Advanced Access Technologies . .78
VI. Conclusion. . . . . . . . . . . . . . . . . . . . . . . . .82
A. The Internet and Competition in Telecommunications . .82
B. The Right Side of History. . . . . . . . . . . . . . .84
Appendix A: Internet Architecture Diagram
DIAGRAMS
Figure 1 The Internet Spiral4
Figure 2 Conceptual Overview of the Internet11
Figure 3 NSFNET Architecture14
Figure 4 Internet Growth Projections.23
Figure 5 What is the Correct Analogy?27
Figure 6 Internet vs. Conventional Telephony37
Figure 7 Current Dial-Up Internet Access Pricing49
Figure 8 Typical Dial-Up Internet Architecture.55
Figure 9 LEC Internet Usage Studies .59
Figure 10 Some Solutions to Switch Congestion68
Figure 11 Major End-User Internet Access Technologies75
Internet ArchitectureAppendix A
Executive Summary
A. Background
The Internet, from its roots a quarter-century ago as a military and academic research
tool, has become a global resource for millions of people. As it continues to grow, the
Internet will generate tremendous benefits for the economy and society. At the same time,
the Internet poses significant and difficult questions for policy makers. This working paper
examines some of these emerging issues at the intersection of technology, law, economics,
and public policy.
The United States federal government has long been involved in the development of the
Internet. Through research grants, and by virtue of its status as the largest institutional user
of computer services in the country, the federal government played a central role in bringing
what we now call the Internet into being. Just as important, the federal government has
consistently acted to keep the Internet free of unnecessary regulation and government
influence. As the Internet has matured and has grown to support a wide variety of
commercial activity, the federal government has transitioned important technical and
management functions to the private sector. In the area of telecommunications policy, the
Federal Communications Commission (FCC) has explicitly refused to regulate most online
information services under the rules that apply to telephone companies.
Limited government intervention is a major reason why the Internet has grown so
rapidly in the United States. The federal government's efforts to avoid burdening the Internet
with regulation should be looked upon as a major success, and should be continued. The
Telecommunications Act of 1996 (1996 Act) adopts such a position. The 1996 Act states that
it is the policy of the United States "to preserve the vibrant and competitive free market that
presently exists for the Internet and other interactive computer services, unfettered by Federal
or State regulation," and the FCC has a responsibility to implement that statute. The draft
"Framework for Global Electronic Commerce" developed by the White House with the
involvement of more than a dozen federal agencies, similarly emphasizes the need to avoid
unnecessary government interference with the Internet.
This working paper addresses three overlapping telecommunications policy areas that
relate to the Internet: law, economics, and public policy. Legal questions arise from the
difficulty in applying existing regulatory classifications to Internet-based services. Economic
questions arise from the effects of Internet usage on the telecommunications infrastructure,
and the effects of the telecommunications infrastructure on the Internet. Public policy
questions arise from the need to maximize the public benefits that the Internet brings to
society.
The Internet is a fluid, complex entity. It was designed to route around obstacles, such
as failures at central points of the network, and it may respond in unexpected ways to
pressures placed on it. It has developed largely without any central plan, especially in the
past several years as the U.S. government has reduced its management role. It overcomes any
boundaries that can be drawn, whether rooted in size, geography, or law. Because the
Internet represents an ever-growing interconnected network, no one entity can control or
speak for the entire system. The technology of the Internet allows new types of services to
be layered on top of existing protocols, often without the involvement or even the knowledge
of network providers that transmit those services. Numerous users can share physical
facilities, and the mix of traffic through any point changes constantly through the actions of a
distributed network of thousands of routers.
The chaotic nature of the Internet may be troubling for governments, which tend to
value stability and certainty. However, the uncertainty of the Internet is a strength, not a
weakness. With decentralization comes flexibility, and with flexibility comes dynamism.
Order may emerge from the complex interactions of many uncoordinated entities, without the
need for cumbersome and rigid centralized hierarchies. Because it is not tied to traditional
models or regulatory environments, the Internet holds the potential to dramatically change the
communications landscape. The Internet creates new forms of competition, valuable services
for end users, and benefits to the economy. Government policy approaches toward the
Internet should therefore start from two basic principles: avoid unnecessary regulation, and
question the applicability of traditional rules.
Beyond these overarching themes, some more specific policy goals can be identified.
For the FCC in particular, these include the following.
Promote competition in voice, video, and interactive services.
In passing the 1996 Act, Congress expressed its intent to implement a "pro-competitive
deregulatory national communications policy." The Internet provides both a space for
innovative new services, as well as potential competition for existing communications
technologies. The FCC's role will be to ensure that the playing field is level, and that
efficiency and market forces drive competition.
Facilitate network investment and technological innovation.
The Internet encourages the deployment of new technologies that will benefit consumers
and produce jobs. The Commission should not attempt to pick winners, but should
allow the marketplace to decide whether specific technologies become successful. By
eliminating regulatory roadblocks and other disincentives to investment, the FCC should
encourage both incumbents and new entrants to develop innovative solutions that
transcend the capabilities of the existing network.
Allow all citizens to benefit from advanced technologies.
The communications revolution should benefit all Americans. In an age of new and
exciting forms of interactive communications, the FCC should ensure that entities such
as schools and libraries are not left behind. However, the mechanisms used to achieve
this goal should be consistent with the FCC's broader policies of competition and
deregulation.
B. Summary of Contents
This working paper reviews some of the major Internet-related issues that have already
come before the Commission, as well as those that may come before the FCC in the near
future.
This paper is not intended to be a comprehensive overview of every Internet topic that
has implications for the FCC. I have focused on issues where I believe the Internet raises the
most immediate questions for telecommunications policy, and especially those that have
already been raised in FCC proceedings. Beyond those discussed in this paper, there are
several other topics of great importance to the development of the Internet that may have
implications for the FCC. These include: Internet governance (such as the allocation of
domain names), intellectual property, network reliability, privacy, spectrum policy, standards,
and security. By omitting these issues, I do not suggest that they are of less importance to
the government or the private sector. The underlying policy recommendations of this paper
are applicable to all Internet issues that come before a government agency such as the FCC,
although specific subjects may require individualized consideration.
Because this paper is about the role of the FCC, it focuses almost entirely on the United
States. The FCC's decisions depend on the specific legal and economic structures that govern
the communications industry in this country. Likewise, the United States experiences more
acutely many of the challenges the Internet generates, because this country has by far the
largest percentage of the Internet's infrastructure and traffic. The Internet, however, is a
global network. The essential characteristics that make the Internet so valuable, and also so
difficult to understand in the context of traditional telecommunications policy, are relevant
worldwide. Some Internet issues may best be addressed in international fora, and this paper
does not suggest that all the issues described should be resolved by the United States
government alone.
With these caveats in mind, the paper seeks to develop a consistent public policy
approach for issues involving the Internet and telecommunications policy.
Section I provides a framework for understanding the dynamism of the Internet, and the
fundamental forces that propel it. This section propounds the notion of the Internet as
feedback loop, a constantly expanding spiral that creates the conditions for its further growth.
The Internet spiral is driven by four factors. First, "deep convergence," which represents the
impact of digital technology in breaking down barriers between different services and
networks. Second, the interaction of Moore's Law (progressively higher computing power at
a given cost) with Metcalfe's Law (progressively more value to being connected to a
network), combined with increasing network bandwidth, leads to plummeting costs and
soaring performance for the Internet's underlying facilities. Third, through "the magnetism of
money and minds," the market rewards innovation by attracting both the people and the
financing necessary for further innovation. Fourth, unfettered competition pressures
companies to take advantage of market opportunities and to utilize more efficient
technologies.
Envisioning the Internet as a feedback loop leads to three recommendations for
government policy. First, government should seek scalability, not just stability. Government
policy should be forward-looking, recognizing that the Internet will continue to grow and
evolve, and should not attempt to impose on the Internet the familiar limitations of traditional
communications technologies. Second, government should swim with the current. In other
words, government should harness the tremendous potential of the Internet to help achieve
public policy goals. The challenge is to meet the exploding demand for bandwidth, not to
restrain it. Third, government should promote the Network, not networks. Rather than
focusing on individual companies or industries, government should create a climate that
maximizes social welfare.
Section II identifies the salient characteristics of the Internet. To understand how the
Internet affects and is affected by regulatory decisions, it is important to understand how
services are provided over the Internet, and to distinguish the Internet from other
communications technologies. This section also provides a brief history of the Internet, to
place the analysis of the current Internet in a proper context.
Section III examines whether existing FCC regulatory and statutory requirements should
apply to services provided over the Internet. The Commission has not yet confronted most of
these legal questions directly, although it has expressed reservations about applying traditional
rules to the Internet. However, the continued growth of the Internet and the development of
new, hybrid services make it likely that the FCC will need to resolve some of these issues.
The FCC's current division between "basic" and "enhanced" services, and the statutory
definitions of entities such as "telecommunications carriers" and "broadcasters," provide only
limited guidance. The paper recommends that government exercise caution in imposing pre-
existing statutory and regulatory classifications on Internet-based services. The FCC should
begin by identifying Internet services that clearly lie outside the scope of traditional
regulatory requirements, so as to minimize market uncertainty while it confronts the more
difficult categorization issues.
Section IV looks at the economics of Internet usage. The growth of the Internet
pressures not only the current regulatory regime, but also the physical networks that carry
Internet traffic. The FCC oversees the most of the underlying communications facilities upon
which the Internet depends, including the public switched telephone network. FCC decisions
on the pricing of traditional telecommunications services significantly impact the Internet,
even as the growth in Internet usage itself affects the voice network. The debate in this
context should focus on the future of the network. The FCC should strive to give companies
market-efficient incentives to build high-capacity, high-performance networks that are
optimized for data transport. This approach will allow the operation of the market and
technological development to resolve difficulties such as congestion and limited bandwidth.
Section V considers the extent to which users can take advantage of the Internet. The
FCC has for decades promoted "universal service" in telecommunications, and the emergence
of the Internet requires a reassessment of how that responsibility should be interpreted today.
The value of the Internet largely depends on the level of bandwidth that can be delivered to
end users. Many different technologies are being developed to permit higher-speed
connections than are currently affordable for most consumers. In addition, certain institutions,
such as schools and libraries, as well as users who would otherwise be unable to access the
Internet, should be able to benefit from the Global Information Infrastructure.
Section VI concludes by linking the Internet-specific issues with the FCC's overarching
efforts to facilitate competition in all communications markets. Competition is a theme that
runs throughout this paper. The technological shifts associated with the Internet dovetail with
the communications industry's transition from regulated monopolies to a world of overlapping
competitive firms. In the end, successfully opening the communications sector to competition
will likely be the greatest contribution that government can make to the development of the
Internet.
C. The Government Role
This working paper is intended to explore issues and to facilitate discussion, not to
propose specific government actions. Many proponents of the Internet's development are
wary of any government actions directed toward the Internet. Government, however, has
been intimately involved with the Internet since the network's beginnings. Government
decisions -- such as the FCC's directive that Internet service providers not be subject to
interstate access charges, and the widespread requirement by state regulators that local calls
be available at flat monthly rates -- continue to shape Internet development. Moreover, policy
decisions are best made with knowledge and comprehension of their potential implications.
The goal of this paper, therefore, is to promote greater understanding, on the part of
both government and the private sector, of the unique policy issues the Internet raises for the
FCC and similar agencies. The discussion of a topic is not a suggestion that government
regulation in that area is necessary or desirable. On the contrary, a fundamental position of
this paper is that government should work to avoid unnecessary interference with the
Internet's development.
Government may influence the evolution of the Internet in many ways, including
directly regulating, participating in technical standards development, providing funding,
restricting anti-competitive behavior by dominant firms, facilitating industry cooperation
otherwise prohibited by antitrust laws, promoting new technologies, encouraging cooperation
between private parties, representing the United States in international intergovernmental
bodies, and large-scale purchasing of services. The FCC and other government entities may
also play a useful role simply by raising the profile of issues and stimulating debate. A better
understanding of the relationship between the Internet and telecommunications policy will
facilitate intelligent decision-making about when and to what extent any of these government
actions are appropriate. I.Introduction: The Endless Spiral of Connectivity
Government officials, pundits, and market researchers often compare the Internet to
established communications technologies such as telephony and broadcasting. These efforts
are understandable. "Traditional" technologies have well-defined usage characteristics, growth
patterns, and market behavior. Moreover, the Internet physically "piggybacks" on other
networks, in particular the wireline telephone infrastructure.
Drawing analogies between the Internet and traditional media makes it easier to decide
whether existing bodies of law or regulation apply to new Internet-based services. Thus, for
example, the debate over the constitutionality of the Communications Decency Act (CDA),
which seeks to restrict the transmission of indecent material over the Internet, has often boiled
down to a conflict of analogies. Opponents of the CDA have compared the Internet to a
telephone network, while supporters often describe the Internet as similar to broadcasting.
Because telephone carriers are generally not legally responsible for the content routed over
their networks, but broadcasters may be subject to fines for transmitting inappropriate
material, the choice of analogy can predetermine the legal outcome.
Although such analogies are appealing, most break down upon closer analysis of the
unique characteristics of the Internet. The Internet is substitutable for all existing media. In
other words, the Internet potentially poses a competitive threat for every provider of
telephony, broadcasting, and data communications services. At the same time, Internet-related
businesses are substantial customers of existing telephony, broadcasting, and data companies.
The Internet creates alternate distribution channels for pre-existing content, but more
importantly, it permits delivery of new and hybrid forms of content. The Internet is one of
many applications that utilize the existing telephone network. However, from another
perspective, the telephone, broadcasting, and cable networks are simply nodes of the larger
network that is the Internet.
Thus, the Internet is fundamentally different from other communications technologies.
In most cases, simply mapping the rules that apply to other services onto the Internet will
produce outcomes that are confusing, perverse, or worse. Any attempt to understand the
relationship between the Internet and telecommunications policy must therefore begin with the
distinguishing aspects of the Internet.
A. How the Internet is Unique
The distinctiveness of the Internet derives in large part from its technical architecture,
which is described in greater detail in Section II. The Internet functions as a series of layers,
as increasingly complex and specific components are superimposed on but independent from
other components. The technical protocols that form the foundation of the Internet are open
and flexible, so that virtually any form of network can connect to and share data with other
networks through the Internet. As a result, the services provided through the Internet (such as
the World Wide Web) are decoupled from the underlying infrastructure to a much greater
extent than with other media. Moreover, new services (such as Internet telephony) can be
introduced without necessitating changes in transmission protocols, or in the thousands of
routers spread throughout the network.
The architecture of the Internet also breaks down traditional geographic notions, such as
the discrete locations of senders and receivers. The Internet uses a connectionless, "adaptive"
routing system, which means that a dedicated end-to-end channel need not be established for
each communication. Instead, traffic is split into "packets" that are routed dynamically
between multiple points based on the most efficient route at any given moment. Many
different communications can share the same physical facilities simultaneously. In addition,
any "host" computer connected directly to the Internet can communicate with any other host.
A further distinguishing characteristic of the Internet is its fractal nature. Fractals are
derived from the branch of mathematics known as chaos or complexity theory. Fractals
exhibit "self-similarity"; in other words, a roughly similar pattern emerges at any chosen level
of detail. Internet traffic patterns most clearly demonstrate the Internet's fractal tendencies.
For traditional communications networks (including the telephone network), engineers have
over many years developed sophisticated statistical models to predict aggregate usage
patterns. Researchers have shown that usage of the Internet follows not the traditional
"poisson" pattern, but rather a fractal distribution. In other words, the frequency of Internet
connections, the distribution between short and long calls, and the pattern of data transmitted
through a point in the network tend to look similarly chaotic regardless of the time scale.
The fractal nature of the Internet confounds regulatory and economic models established
for other technologies. However, as chaos theorists have shown, fractals have valuable
attributes. In a fractal entity, order emerges from below rather than being dictated from
above. The fact that the Internet does not have an easily-identifiable hierarchy or any clear
organizational structure does not mean that all behavior is random. Many small,
uncoordinated interactions may produce an aggregate whole that is remarkably persistent and
adaptable.
Finally, the Internet has thus far not been regulated to the same extent as other media.
The Communications Act of 1934 (Communications Act), which created the Federal
Communications Commission to oversee telephony and radio broadcasting, is more than sixty
years old. By contrast, Internet service providers, and other companies in the Internet
industry, have never been required to gain regulatory approval for their actions.
B. The Feedback Loop
If the Internet is not like any other established communications technology, what then is
it? On one level, the Internet is whatever anyone wants it to be. It is plastic, decentralized,
and constantly evolving network. Any simple concept to describe the Internet will necessarily
be incomplete and misleading. Such templates are useful, however, to promote greater
understanding of aspects of the Internet that may not otherwise be obvious.
For purposes of this paper, I believe it is valuable to understand the Internet as a
feedback loop. A feedback loop occurs when the output of a system is directed back into the
system as an input. Because the system constantly produces fuel for its own further
expansion, a feedback loop can generate explosive growth. As the system expands, it
produces more of the conditions that allow it to expand further. All networks are feedback
loops, because they increase in value as more people are connected. The Internet, however,
is driven by a particularly powerful set of self-reinforcing conditions.
FIGURE 1 -- THE INTERNET SPIRAL Figure 1 describes some of the interrelated factors that build upon each other to foster
the growth of the Internet. Some "supply" factors (such as the availability of higher-capacity
networks) permit an expansion of demand (for example, by allowing bandwidth-intensive
services such as high-resolution video transmission). Like a digital tornado, the vortex
continues, as the new level of demand creates the need for additional capacity, and so forth.
The Internet feedback loop is a fundamentally positive force, because it means that more and
more services will be available at lower and lower prices. So long as effective self-correcting
mechanisms exist, the Internet will overcome obstacles to its future growth.
Understanding the underpinnings of the Internet feedback loop is necessary to craft
policies that facilitate, and do not hinder, its continuation. There are four primary factors that
support the growth of the Internet:
Digitalization and "Deep Convergence"
As described above, the Internet exhibits characteristics of several media that had
previously been distinct. Networks carry three types of information -- voice, video, and data
-- and those categories are further subdivided into areas such as pre-recorded vs. live or real-
time presentation, and still vs. moving images. Historically, these different forms of
information have used different delivery vehicles. The telephone network delivered voice,
private corporate networks delivered data, and broadcast networks delivered video. Each
service was tightly coupled to a specific form of infrastructure -- the telephone network used
copper wires to reach subscribers, broadcast television used the airwaves, cable television
used coaxial cable, and so forth.
"Convergence" means that those lines are blurring. However, convergence is often
understood in a shallow manner, as simply the opportunity for owners of one type of delivery
system to compete with another type of delivery system, or as the opportunity for content
owners to deliver their content using different technologies. In reality, convergence is
something far more fundamental. "Deep convergence" is driven by a powerful technological
trend -- digitalization. Digitalization means that all of the formerly distinct content types are
reduced to a stream of binary ones and zeroes, which can be carried by any delivery
platform. In practical terms, this means not only that specific boundaries -- between a
telephone network and a cable system, for example -- are blurred, but also that the very
exercise of drawing any such boundaries must be fundamentally reconsidered or abandoned.
Digitalization has been occurring for decades. The long-distance telephone network in
the United States is now almost entirely comprised of digital switches and fiber optic
transmission links. These digital facilities, however, have been optimized to transport a single
service -- voice. The Internet, by contrast, can transmit any form of data. Internet protocols
are sufficiently flexible to overcome the boundaries between voice and other services.
Innovators can develop new services and immediately load them onto the existing Internet
infrastructure. Convergence creates new markets, and new efficiencies, because particular
services are no longer locked into specific forms of infrastructure.
Moore's Law and Metcalfe's Law
As George Gilder has most clearly articulated, the two technological "laws" that most
impact the growth of the Internet are Moore's Law and Metcalfe's Law. Moore's Law
holds that the maximum processing power of a microchip, at a given price, doubles roughly
every eighteen months. In other words, computers become faster at an explosive rate, or
conversely, the price of a given level of computing power decreases at that same dramatic
rate. Metcalfe's Law says that the value of a network is equivalent to the square of the
number of nodes. In other words, as networks grow, the utility of being connected to the
network not only grows, but does so exponentially.
Moore's Law and Metcalfe's Law intersect on the Internet. Both the computers through
which users access the Internet, and the routers that transmit data within the Internet, are
subject to the price/performance curve described by Moore's Law. At the same time,
advances in data transmission technology have expanded the capacity of the Internet's
backbone networks. As the bandwidth available through the network continues to grow,
Moore's Law states that the price of obtaining a given level of bandwidth continues to drop,
while Metcalfe's Law dictates that the value of a connection increases exponentially. The
ratio of the cost of Internet access to the value it provides plummets over time. And as it
plummets, connectivity and higher-bandwidth connections become that much more important,
generating more usage and more capital to upgrade the network.
The Magnetism of Money and Minds
Moore's Law and Metcalfe's Law describe the technological forces that push the growth
of the Internet, but there are also business forces that exert a powerful influence. In a
capitalist economy, the "invisible hand" of the market dynamically redirects capital where it is
most highly valued, without any direct outside intervention. Companies that demonstrate
superior potential for generating future revenues more easily attract investment, and for public
companies, see their stock prices rise. Other companies in the same industry sector often see
increases in their stock prices as well, as investors seek to repeat the pattern of the first
company and to capitalize on economic trends.
As money flows into a "hot" sector, so do talented people seeking to obtain some of that
money by founding or working at a company in that sector. The presence of so many top
minds further attracts capital, reflecting a synergistic process I call "the magnetism of money
and minds." This trend promotes the availability of financing to spur the future growth of the
Internet.
Competition
Competition enables both the dynamic allocation of capital and talent, as well as the
constant innovation in technology that leads to deep convergence and falling prices. In a
competitive market, companies must constantly invest and innovate, or risk losing out to
competitors. Intel CEO Andy Grove has observed that in the computer industry there are
only two kinds of companies: the quick and the dead. Even those companies with strong
positions must always look over their shoulder, because customer loyalty vanishes in the face
of superior alternatives.
The benefits of competition are evident in the computer industry, where companies must
constantly improve their products to remain successful. Competition in the Internet context
means that many different providers of hardware, software, and services vie for customers. In
a competitive market, providers that can offer superior service or prices are more likely to
succeed. Technological innovations that lower costs or allow new service options will be
valuable to providers and consumers alike.
C. Threats to the Continued Spiral
If the Internet truly operates like a feedback loop, why is government intervention
necessary?
There are many ways the Internet spiral could be derailed. Any of the underlying
drivers of Internet growth could be undermined. Moving toward proprietary standards or
closed networks would reduce the degree to which new services could leverage the existing
infrastructure. The absence of competition in the Internet service provider market, or the
telecommunications infrastructure market, could reduce incentives for innovation. Excessive
or misguided government intervention could distort the operation of the marketplace, and lead
companies to expend valuable resources manipulating the regulatory process.
Insufficient government involvement may also, however, have negative consequences.
Some issues may require a degree of central coordination, even if only to establish the initial
terms of a distributed, locally-controlled system. A "tragedy of the commons" situation may
arise when all players find it in their own self-interest to consume limited common resources.
The end result, in the absence of collective action, may be an outcome that no one favors. In
addition, the failure of the federal government to identify Internet-related areas that should not
be subject to regulation leaves open opportunities for state, local, or international bodies to
regulate excessively and/or inconsistently.
D. How Government Should Act
The novel aspects of the Internet require government policies that are sensitive to both
the challenges and the opportunities of cyberspace. Three principles should guide such
government decision-making:
Scalability, not just Stability
Rather than seeking to restrain the growth of the Internet, government should encourage
it. As long as the underpinnings of the network support further expansion, and self-correcting
mechanisms can operate freely, the Internet should be able to overcome obstacles to further
development. Additional capital and innovation will be drawn to any challenge due to the
prospect of high returns. In addition, a focus on scalability directs the attention of policy
makers to the future of the network, rather than its current configuration. Given the rapid rate
at which the Internet is changing, such a forward-looking perspective is essential. The
"growth" of the Internet means more than an increase in the number of users. It also means
that the network will evolve and change, becoming an ever more ubiquitous part of society.
Nevertheless, stability remains important. The Internet must achieve a sufficient level of
reliability to gain the trust of consumers and businesses. However, even such stability
requires an architecture that is built to scale upward. Otherwise, periods of calm will
inevitably be followed by crashes as the Internet continues to grow.
Swim with the Current
The economic and technological pressures that drive the growth of the Internet should
not be obstacles for government. Rather, government should identify ways to use those
pressures to support the goals that government hopes to achieve. In telecommunications, this
means using the pricing signals of the market to create incentives for efficiency. In a
competitive market, prices are based on costs, and the firm that can provide a service for the
lowest cost is likely to succeed. Such competitive pressures operate far more effectively, with
lower administrative costs, than direct government mandates.
Similarly, government should look for mechanisms that use the Internet itself to rectify
problems and create opportunities for future growth. For example, new access technologies
may reduce network congestion, as long as companies have proper incentives to deploy those
technologies. Filtering systems may address concerns about inappropriate content.
Competition from Internet services may pressure monopolies or outdated regulatory structures.
Government agencies should also use the Internet themselves to receive and disseminate
information to the public.
The Network, not networks
The Internet is a network, but so are AT&T, TCI, and NBC. The FCC's goal should
not be to foster the development of any one of those networks individually, but to maximize
the public benefits that flow from the Network that encompasses all of those networks and
many more. With the growth of competition and the elimination of traditional regulatory,
technological, and economic boundaries, networks are more likely than ever to be
interdependent, and a policy that benefits one network may have a detrimental effect on
others. For example, a mandate that Internet service providers be entitled to connect to the
telephone network for free might stimulate Internet use, but telephone companies might be
forced to increase their rates or offer lower quality service to recover the increased cost of
supporting such connections.
Although government should support the growth of the Internet, this support need not
involve explicit subsidies that are not independently justified as a matter of public policy and
economics. Instead, government should create a truly level playing field, where competition
is maximized and regulation minimized.
II. WHAT IS THE INTERNET?
Although the Internet has been the subject of tremendous media, corporate, and public
interest in recent years, most people have only a vague notion of how the Internet actually
works. It is often easier to identify what the Internet is not than to explain in non-technical
terms what the Internet is. This uncertainty presents a significant challenge for policy-
makers, and especially for governmental entities such as the FCC that must clearly define the
scope of their actions.
A. General Description
The Internet is an interconnected global computer network of tens of thousands of
packet-switched networks using the Internet protocol (IP).
The Internet is a network of networks. For purposes of understanding how the Internet
works, three basic types of entities can be identified: end users, Internet service providers, and
backbone providers. Figure 2 shows the general relationships between these entities; a more
detailed Internet architecture diagram is provided as Appendix A. End users access and send
information either through individual connections or through organizations such as universities
and businesses. End users in this context include both those who use the Internet primarily to
receive information, and content creators who use the FIGURE 2- CONCEPTUAL OVERVIEW OF THE INTERNET Internet to distribute information to other end users. Internet service providers (ISPs), such
as Netcom, PSI, and America Online, connect those end users to Internet backbone
networks. Backbone providers, such as MCI, UUNet, and Sprint, route traffic between
ISPs, and interconnect with other backbone providers.
This tripartite division highlights the different functionalities involved in providing
Internet connectivity. The actual architecture of the Internet is far more complex. Backbone
providers typically also serve as ISPs; for example, MCI offers dial-up and dedicated Internet
access to end users, but also connects other ISPs to its nationwide backbone. End users such
as large businesses may connect directly to backbone networks, or to access points where
backbone networks exchange traffic. ISPs and backbone providers typically have multiple
points of interconnection, and the inter-relationships between these providers are changing
over time. It is important to remember that the Internet has no "center" and that individual
transmissions may be routed through multiple different providers due to a number of factors.
End users may access the Internet though several different types of connections, and
unlike the voice network, divisions between "local service" providers and "long-distance"
providers are not always clear. Most residential and small business users have dial-up
connections, which use analog modems to send data over the plain old telephone service
(POTS) lines of local exchange carriers (LECs) to ISPs. Larger users often have dedicated
connections using high-speed ISDN, frame relay or T-1 lines, between a local area network at
the customer's premises and the Internet. Although the vast majority of Internet access today
originates over telephone lines, other types of communications companies, such as cable
companies, terrestrial wireless, and satellite providers, are also beginning to enter the Internet
access market.
At present, there is no generally-applicable federal statutory definition of the Internet.
The 1996 Act, in the limited context of offensive material transmitted interactive computer
networks, defined the Internet as "the international computer network of both Federal and
non-Federal interoperable packet switched data networks."
B. An Extremely Brief History of the Net
The roots of the current Internet can be traced to ARPANET, a network developed in
the late 1960s with funding from the Advanced Research Projects Administration (ARPA) of
the United States Department of Defense. ARPANET linked together computers at major
universities and defense contractors, allowing researchers at those institutions to exchange
data. As ARPANET grew during the 1970s and early 1980s, several similar networks were
established, primarily between universities. The TCP/IP protocol was adopted as a standard
to allow these networks, comprised of many different types of computers, to interconnect.
In the mid-1980s, the National Science Foundation (NSF) funded the establishment of
NSFNET, a TCP/IP network that initially connected six NSF-funded national supercomputing
centers at a data rate of 56 kilobits per second (kbps). NSF subsequently awarded a contract
to a partnership of Merit (one of the existing research networks), IBM, MCI, and the State of
Michigan to upgrade NSFNET to T-1 speed (1.544 megabits per second (Mbps)), and to
interconnect several additional research networks. The new NSFNET "backbone," completed
in 1988, initially connected thirteen regional networks. As shown in Figure 3, individual
sites such as universities could connect to one of these regional networks, which then
connected to NSFNET, so that the entire network was linked together in a hierarchical
structure. Connections to the federally-subsidized NSFNET were generally free for the
regional networks, but the regional networks generally charged smaller networks a flat
monthly fee for their connections.
FIGURE 3 -- NSFNET ARCHITECTURE
The military portion of ARPANET was integrated into the Defense Data Network in the
early 1980s, and the civilian ARPANET was taken out of service in 1990, but by that time
NSFNET had supplanted ARPANET as a national backbone for an "Internet" of worldwide
interconnected networks. In the late 1980s and early 1990s, NSFNET usage grew
dramatically, jumping from 85 million packets in January 1988 to 37 billion packets in
September 1993. The capacity of the NSFNET backbone was upgraded to handle this
additional demand, eventually reaching T-3 (45 Mbps) speed.
In 1992, the NSF announced its intention to phase out federal support for the Internet
backbone, and encouraged commercial entities to set up private backbones. Alternative
backbones had already begun to develop because NSFNET's "acceptable use" policy, rooted
in its academic and military background, ostensibly did not allow for the transport of
commercial data. In the 1990s, the Internet has expanded decisively beyond universities and
scientific sites to include businesses and individual users connecting through commercial ISPs
and consumer online services.
Federal support for the NSFNET backbone ended on April 30, 1995. The NSF has,
however, continued to provide funding to facilitate the transition of the Internet to a privately-
operated network. The NSF supported the development of three priority Network Access
Points (NAPs), in Northern California, Chicago, and New York, at which backbone providers
could exchange traffic with each other, as well as a "routing arbiter" to facilitate traffic
routing at these NAPs. The NSF funded the vBNS (Very High-Speed Backbone Network
Service), a non-commercial research-oriented backbone operating at 155 megabits per second.
The NSF provides transitional funding to the regional research and educational networks, as
these networks are now required to pay commercial backbone providers rather than receiving
free interconnection to NSFNET. Finally, the NSF also remains involved in certain Internet
management functions, through activities such as its cooperative agreement with SAIC
Network Solutions Inc. to manage aspects of Internet domain name registration.
Since the termination of federal funding for the NSFNET backbone, the Internet has
continued to evolve. Many of the largest private backbone providers have negotiated bilateral
"peering" arrangements to exchange traffic with each other, in addition to multilateral
exchange points such as the NAPs. Several new companies have built nationwide backbones.
Despite this increase in capacity, usage has increased even faster, leading to concerns about
congestion. The research and education community, with the support of the White House and
several federal agencies, recently announced the "Internet II" or "next-generation Internet"
initiative to establish a new high-speed Internet backbone dedicated to non-commercial uses.
Another important trend in recent years has been the growth of "intranets" and other
corporate applications. Intranets are internal corporate networks that use the TCP/IP protocol
of the Internet. These networks are either completely separate from the public Internet, or are
connected through "firewalls" that allow corporate users to access the Internet but prevent
outside users from accessing information on the corporate network. Corporate users are often
ignored in discussions about the number of households with Internet access. However, these
users represent a substantial portion of Internet traffic. In addition, intranets generate a
tremendous amount of revenue, because companies tend to be willing to pay more than
individual users in order to receive a level of service that they value.
Perhaps surprisingly, the Internet s growth rate has actually been quite stable for some
time, with the number of hosts roughly doubling every year. The rate appears to have
accelerated in recent years only because the numbers have gotten so large, and the Internet
has entered into popular consciousness.
C. How the Internet Works
1. Basic Characteristics
Just as hundreds of millions of people who make telephone calls every day have little
conception of how their voice travels almost instantaneously to a distant location, most
Internet users have only a vague understanding of how the Internet operates. The fundamental
operational characteristics of the Internet are that it is a distributed, interoperable, packet-
switched network.
A distributed network has no one central repository of information or control, but is
comprised of an interconnected web of "host" computers, each of which can be accessed from
virtually any point on the network. Thus, an Internet user can obtain information from a host
computer in another state or another country just as easily as obtaining information from
across the street, and there is hierarchy through which the information must flow or be
monitored. Instead, routers throughout the network regulate the flow of data at each
connection point. By contrast, in a centralized network, all users connect to single location.
The distributed nature of the Internet gives it robust survivability characteristics, because there
is no one point of failure for the network, but it makes measurement and governance difficult.
An interoperable network uses open protocols so that many different types of networks
and facilities can be transparently linked together, and allows multiple services to be provided
to different users over the same network. The Internet can run over virtually any type of
facility that can transmit data, including copper and fiber optic circuits of telephone
companies, coaxial cable of cable companies, and various types of wireless connections. The
Internet also interconnects users of thousands of different local and regional networks, using
many different types of computers. The interoperability of the Internet is made possible by
the TCP/IP protocol, which defines a common structure for Internet data and for the routing
of that data through the network.
A packet-switched network means that data transmitted over the network is split up into
small chunks, or "packets." Unlike "circuit-switched" networks such as the public switched
telephone network (PSTN), a packet-switched network is "connectionless." In other words,
a dedicated end-to-end transmission path does (or circuit) not need to be opened for each
transmission. Rather, each router calculates the best routing for a packet at a particular
moment in time, given current traffic patterns, and sends the packet to the next router. Thus,
even two packets from the same message may not travel the same physical path through the
network. This mechanism is referred to as "dynamic routing." When packets arrive at the
destination point, they must be reassembled, and packets that do not arrive for whatever
reason must generally be re-sent. This system allows network resources to be used more
efficiently, as many different communications can be routed simultaneously over the same
transmission facilities. On the other hand, the inability of the sending computer under such a
"best effort" routing system to ensure that sufficient bandwidth will be available between the
two points creates difficulties for services that require constant transmission rates, such as
streaming video and voice applications.
2. Addressing
When an end user sends information over the Internet, the data is first broken up into
packets. Each of these packets includes a header which indicates the point from which the
data originates and the point to which it is being sent, as well as other information. TCP/IP
defines locations on the Internet through the use of "IP numbers." IP numbers include four
address blocks consisting of numbers between 0 and 256, separated by periods (e.g.
165.135.0.254). Internet users generally do not need to specify the IP number of the
destination site, because IP numbers can be represented by alphanumeric "domain names"
such as "fcc.gov" or "ibm.com." "Domain name servers" throughout the network contain
tables that cross reference these domain names with their underlying IP numbers. Thus, for
example, when an Internet user sends email to someone at "microsoft.com," the network will
convert the destination into its corresponding IP number and use that for routing purposes.
Some top-level domains (such as ".uk" for Britain) are country-specific; others (such as
".com") are "generic" and have no geographical designation. The domain name system was
originally run by the United States Department of Defense, through private contractors. In
1993, responsibility for non-governmental registration of generic domains was transferred to
the NSF. The NSF established a cooperative agreement with Network Solutions Inc. (NSI),
under which NSI handles registration under these domains. NSI currently charges $50 per
year to register a domain name; a portion of this money goes to NSI to recover their
administrative costs, and a portion goes into an "Internet intellectual infrastructure fund." The
cooperative agreement is scheduled to end in mid-1998. Country-specific domains outside the
United States are generally handled by registration entities within those countries.
The existing registration process for generic top-level domains has generated substantial
controversy. Some parties have objected to what they consider to be NSI's monopoly control
over a valuable resource, especially since an entity in the United States is responsible for
assigning addresses with international ramifications. There have been several lawsuits raising
intellectual property questions, as domain names may overlap with existing trademark rights
throughout the world. Several proposals have been made to expand the space of generic top-
level domains. The International Ad Hoc Committee (IAHC), comprised of representatives
from the Internet Society, International Telecommunications Union (ITU), the World
Intellectual Property Organization (WIPO), and other groups, has issued a wide-ranging
proposal to restructure generic top-level domain name system. However, the authority and
ability of the IAHC to implement such changes remains unclear.
3. Services Provided Over the Internet
The actual services provided to end users through the Internet are defined not through
the routing mechanisms of TCP/IP, but depend instead on higher-level application protocols,
such as hypertext transport protocol (HTTP); file transfer protocol (FTP); network news
transport protocol (NNTP), and simple mail transfer protocol (SMTP). Because these
protocols are not embedded in the Internet itself, a new application-layer protocol can be
operated over the Internet through as little as one server computer that transmits the data in
the proper format, and one client computer that can receive and interpret the data. The utility
of a service to users, however, increases as the number of servers that provide that service
increases.
By the late 1980s, the primary Internet services included electronic mail or "email,"
Telnet, FTP, and Usenet news. Email, which is probably the most widely-used Internet
service, allows users to send text-based messages to each other using a common addressing
system. Telnet allows Internet users to "log into" other proprietary networks, such as library
card catalogs, through the Internet, and to retrieve data as though they were directly accessing
those networks. FTP allows users to "download" files from a remote host computer onto their
own system. Usenet "newsgroups" enable users to post and review messages on specific
topics.
Despite the continued popularity of some of these services, in particular news and email,
the service that has catalyzed the recent explosion in Internet usage is the World Wide Web.
The Web has two primary features that make it a powerful, "full service" method of accessing
information through the Internet. First, Web clients, or "browsers," can combine text and
graphical material, and can incorporate all of the other major Internet services such as FTP,
email, and news into one standard interface. Second, the Web incorporates a "hypertext"
system that allows individual Web "pages" to provide direct "links" to other Web pages, files,
and other types of information. Thus, full-scale user interfaces and complex services such as
online shopping, continuously-updated news information, and interactive games can be
provided through the Internet over a non-proprietary system. The Web thus forms the
foundation for virtually all of the new Internet-based services that are now being developed.
4. Governance and Management
There is no one entity or organization that governs the Internet. Each facilities-based
network provider that is interconnected with the global Internet controls operational aspects of
their own network. With the demise of the NSFNET backbone, no one can even be sure
about the exact amount of traffic that passes across the Internet, because each backbone
provider can only account for their own traffic and there is no central mechanism for these
providers to aggregate their data. Nonetheless, the Internet could not function as a pure
anarchy. Certain functions, such as domain name routing and the definition of the TCP/IP
protocol, must be coordinated, or traffic would never be able to pass seamlessly between
different networks. With tens of thousands of different networks involved, it would be
impossible to ensure technical compatibility if each network had to coordinate such issues
with all others.
These coordinating functions have traditionally been performed not by government
agencies, but by an array of quasi-governmental, intergovernmental, and non-governmental
bodies. The United States government, in many cases, has handed over responsibilities to
these bodies through contractual or other arrangements. In other cases, entities have simply
emerged to address areas of need.
The broadest of these organizations is the Internet Society (ISOC), a non-profit
professional society founded in 1992. ISOC organizes working groups and conferences, and
coordinates some of the efforts of other Internet administrative bodies. Internet standards and
protocols are developed primarily by the Internet Engineering Task Force (IETF), an open
international body mostly comprised of volunteers. The work of the IETF is coordinated by
the Internet Engineering Steering Group (IESG), and the Internet Architecture Board (IAB),
which are affiliated with ISOC. The Internet Assigned Numbers Authority (IANA) handles
Internet addressing matters under a contract between the Department of Defense and the
Information Sciences Institute at the University of Southern California.
The legal authority of any of these bodies is unclear. Most of the underlying
architecture of the Internet was developed under the auspices, directly or indirectly, of the
United States government. The government has not, however, defined whether it retains
authority over Internet management functions, or whether these responsibilities have been
delegated to the private sector. The degree to which any existing body can lay claim to
representing "the Internet community" is also unclear. Membership in the existing Internet
governance entities is drawn primarily from the research and technical communities, although
commercial activity is far more important to the Internet today than it was when most of
these groups were established.
D. Development of the Internet Market
1. The Internet Today
As of January 1997 there were over sixteen million host computers on the Internet, more
than ten times the number of hosts in January 1992. Several studies have produced different
estimates of the number of people with Internet access, but the numbers are clearly substantial
and growing. A recent Intelliquest study pegged the number of subscribers in the United
States at 47 million, and Nielsen Media Research concluded that 50.6 million adults in the
United States and Canada accessed the Internet at least once during December 1996 --
compared to 18.7 million in spring 1996. Although the United States is still home to the
largest proportion of Internet users and traffic, more than 175 countries are now connected to
the Internet.
According to a study by Hambrecht & Quist, the Internet market exceeded one billion
dollars in 1995, and is expected to grow to some 23 billion dollars in the year 2000. This
market is comprised of several segments, including network services (such as ISPs); hardware
(such as routers, modems, and computers); software (such as server software and other
applications); enabling services (such as directory and tracking services); expertise (such as
system integrators and business consultants); and content providers (including online
entertainment, information, and shopping). The Internet access or "network services" portion
of the market is of particular interest to the FCC, because it is this aspect of the Internet that
impacts most directly on telecommunications facilities regulated by the Commission. There
are now some 3,000 Internet access providers in the United States, ranging from small start-
ups to established players such as Netcom and AT&T to consumer online services such as
America Online.
2. Internet Trends
Perhaps the most confident prediction that can be made about the Internet is that it will
continue to grow. The Internet roughly doubled in users during 1995, and this trend appears
to be continuing. Figure 4 shows one projection of the growth in residential and business
users over the remainder of the decade. Estimates suggest as many as half a billion people
will use the Internet by the year 2000.
As the Internet grows, methods of accessing the Internet will also expand and fuel
further growth. Today, most users access the Internet through either universities, corporate
sites, dedicated ISPs, or consumer online services. Telephone companies, whose financial
resources and network facilities dwarf those of most existing ISPs, have only just begun to
provide Internet access to businesses and residential customers. Cable companies are also
testing Internet access services over their coaxial cable networks, and satellite providers have
begun to roll out Internet access services. Several different forms of wireless Internet access
are also being deployed. FIGURE 4 -- INTERNET GROWTH PROJECTIONS
At the same time as these new access technologies are being developed, new Internet
clients are also entering the marketplace. Low-cost Internet devices such as WebTV and its
competitors allow users to access Internet services through an ordinary television for a unit
cost of approximately $300, far less than most personal computers. Various other devices,
including "network computers" (NCs) for business users, and Internet-capable video game
stations, promise to reduce the up-front costs of Internet access far below what it is now.
These clients promise to expand greatly the range of potential Internet users. Moreover, as
Internet connectivity becomes embedded into ordinary devices (much as computer chips now
form the brains of everything from automobiles to microwave ovens), the Internet "market"
will expand even more.
Bandwidth will continue to increase to meet this new demand, both within the Internet
backbones and out to individual users. There is a tremendous level of pent-up demand for
bandwidth in the user community today. Most users today are limited to the maximum speed
of analog phone lines, which appears to be close to the 28.8 or 33.6 kbps supported by
current analog modems, but new technologies promise tremendous gains in the bandwidth
available to the home. In addition, the backbone circuits of the Internet are now being
upgraded to OC-12 (622 Mbps) speeds, with far greater speeds on the horizon. With more
bandwidth will come more services, such as full-motion video applications. Virtually every
one of the challenges identified in this paper will become more acute as bandwidth and usage
increase, and as the current limitations of the Internet are overcome. Thus, even though some
of the questions that the Internet poses are of limited practical significance today, policy-
makers should not wait to consider the implications of the Internet.
Throughout the history of the Internet, seemingly insurmountable obstacles have been
overcome. Few people would have expected a network designed for several dozen
educational and research institutions to scale to a commercial, educational, and entertainment
conduit for tens of millions of users, especially with no means of central coordination and
administration. Governments should recognize that the Internet is different from traditional
media such as telephony and broadcasting, although lessons can be learned from experience in
dealing with those technologies. At the same time, the Internet has always been, and will
continue to be influenced by the decisions of large institutions and governments. The
challenge will be to ensure that those decisions reinforce the traditional strengths of the
Internet, and tap into the Internet's own capability for reinvention and problem-solving.
III. CATEGORY DIFFICULTIES
The FCC has never directly exercised regulatory jurisdiction over Internet-based
services. However, the rapid development of the Internet raises the question of whether the
language of the Communications Act of 1934 (as amended by the Telecommunications Act of
1996), or existing FCC regulations, cover particular services offered over the Internet.
Governments act by drawing lines, such as the jurisdictional lines that identify which
governmental entity has authority over some activity, or the service classifications that
differentiate which body of law should be applied in a particular case. Governments
traditionally determine the treatment of new services by drawing analogies to existing
services. For example, the FCC regulates long-distance telephony, but does not regulate dial-
up remote access to corporate data networks. ISPs almost exclusively receive calls from their
subscribers, but so do retailers taking catalog orders or radio stations holding call-in
promotions. Figure 5 shows some how dial-up access to the Internet resembles, but differs
from, other types of connections.
There are reasons to believe that a simple process of drawing analogies to familiar
services will not be appropriate for the Internet. The Internet is simultaneously local,
national, and global, and is almost infinitely plastic in terms of the services it can support.
As a result, it confounds any attempt at classification. Failure to consider such category
difficulties is, however, itself a form of line drawing. As long as some communications
services are subject to regulatory constraints, legal boundaries will be necessary. New
approaches may therefore be necessary to avoid inefficient or burdensome results from
existing legal and regulatory categories.
A. FCC Authority Generally
The Communications Act provides little direct guidance as to whether the Commission
has authority to regulate Internet-based services. Section 223 concerns access by minors to
obscene, harassing, and indecent material over the Internet and other interactive computer
networks, and sections 254, 706, and 714 address mechanisms to promote the availability of
advanced telecommunications services, possibly including Internet access. Section 230 states
a policy goal "to preserve the vibrant and competitive free market that presently exists for the
Internet and other interactive computer services, unfettered by Federal or State regulation."
None of these sections, however, specifically addresses the FCC's jurisdiction. FIGURE 5 -- WHAT IS THE CORRECT ANALOGY?
In fact, nothing in the Act expressly limits the FCC's authority to regulate services and
facilities connected with the Internet, to the extent that they are covered by more general
language in any section of the Act. Although some early versions of the bill that became the
1996 Act contained language prohibiting "economic regulation" or "content or other
regulation" of the Internet by the FCC, such language does not appear in the final version of
the Act. Moreover, it is not clear what such a prohibition would mean even if it were
adopted. The Communications Act directs the FCC to regulate "interstate and foreign
commerce in communication by wire and radio," and the FCC and state public utility
commissions indisputably regulate the rates and conditions under which ISPs purchase
services and facilities from telephone companies. Would a prohibition on FCC "regulation" of
the Internet invalidate limits on the rates LECs can charge to ISPs? Would such language
prevent the FCC from mandating discounted Internet access for schools and libraries? Such
language would likely result in confusion at best.
Given the absence of clear statutory guidance, the Commission must determine whether
or not it has the authority or the obligation to exercise regulatory jurisdiction over specific
Internet-based activities. The Commission may also decide whether to forebear from
regulating certain Internet-based services. Forbearance allows the Commission to decline to
adopt rules that would otherwise be required by statute. Under section 401 of the 1996 Act,
the Commission must forbear if regulation would not be necessary to prevent anticompetitive
practices and to protect consumers, and forbearance would be consistent with the public
interest. Finally, the Commission could consider whether to preempt state regulation of
Internet services that would be inconsistent with achievement of federal goals.
The Commission has struggled with such questions before as new technologies emerged.
For example, prior to the passage of federal legislation in the 1980s, the Communications Act
had no provisions that would directly cover cable television. The Commission concluded
that, because of the competitive implications of cable for the regulated broadcasting industry,
jurisdiction over cable television was "reasonably ancillary" to the Commission s established
authority. Section 303 of the Communications Act of 1934 states broadly that:
the commission from time to time, as public convenience, interest, or necessity
requires shall ... [m]ake such rules and regulations and prescribe such restrictions
and conditions, not inconsistent with law, as may be necessary to carry out the
provisions of this Act....
This language gives the Commission broad authority to use its expertise to address novel
situations. The Internet, however, is not cable television, and the FCC today is moving
rapidly to deregulate existing services rather than to expand the scope of its regulatory ambit.
Nonetheless, it would be difficult to claim that the Internet does not, at some level, involve
interstate communications, or that the Internet will not at some point (if it does not already)
have a significant competitive impact on existing providers of regulated communications
services. Moreover, the only way to wholly exclude the Internet from regulation would be to
develop a precise definition of what is and is not an "Internet" service, now and in the future,
which is exactly what the Internet makes it difficult to do.
The FCC's theoretical jurisdiction over the Internet is quite expansive, because the
Internet relies on communications facilities and services over which the FCC has longstanding
and broad authority. Such a conclusion, however, provides little or no guidance in answering
the question about how the Commission should act towards Internet-based services and
companies. For example, the Commission's existing framework for "enhanced services"
provided through the telephone network, developed in the Computer II proceeding, states that
the FCC has authority to regulate these services, but that regulation would not serve the
public interest.
Those who oppose "regulation of the Internet," generally do not wish to make the
Internet a zone in which all government authority, such as prohibitions on theft and fraud, or
guarantees of property rights, cease to exist. Rather, the debate is about whether new legal
constructs are needed to address Internet-based transactions, and whether existing constructs
meant for different situations should be applied to the Internet. In other words, would a
particular type of service, offered by a particular type of company, be subject to particular
requirements and prohibitions?
The Commission can and should greatly limit the extent to which its actions interfere
with the functioning of the Internet services market. Communications regulation has
traditionally been justified by the presence of dominant firms, by overwhelming public
interest imperatives, or by the inherent invasiveness of broadcast media. Most of these
justifications simply do not exist in the Internet realm.
B. Telephony
1. Legal Framework
a. Carrier Obligations
Title II of the Act generally regulates the activities of two overlapping classes of
entities: communications common carriers and telecommunications service providers. Under
the 1934 Act, common carriers (such as telephone companies) must be certificated and file
tariffs setting forth a schedule of their charges in order to provide service to the public.
Common carriers are prohibited from unreasonably denying requested services, or from
unreasonably discriminating in their terms and conditions of service, and are subject to
various other requirements and fees.
The 1996 Act adds a related category, "telecommunications" service, defined as follows:
The term "telecommunications" mean the transmission, between or among points
specified by the user, of information of the user's choosing, without change in the form
or content of the information as sent and received.
The term "telecommunications carrier" means any provider of telecommunications
services.... A telecommunications carrier shall be treated as a common carrier under this
act only to the extent that it is engaged in providing telecommunications services....
The term "telecommunications service" means the offering of telecommunications for a
fee directly to the public, or to such classes of users as to be effectively available to the
public, regardless of the facilities used.
To what degree do Internet-based services meet the three-pronged definition of
"telecommunications?" For example, the sender of an email message selects the person to
receive the information and chooses the information to be transmitted, with no alteration
(other than protocol conversion and other administrative overheads of the network) of the
information sent and received. Real-time "Internet relay chat" and "Internet telephony" are
even easier to fit within the statutory definition. If some Internet services fall within the
definition of "telecommunications," however, who are the "carriers" that should be subject to
regulation? Would it be possible to regulate some services and not others, such as Usenet
newsgroups, which do not seem to satisfy the three-pronged test?
Ultimately, such micro-level exercises in statutory interpretation can lead to results that
appear strange or worse. Common sense suggests that Congress did not intend to treat any
company that facilitates the transmission of email as a local telephone company, subject to
the full panoply of public-utility-derived regulation that applies to such companies.
Nonetheless, the language of the statute cannot be ignored.
b. Basic vs. Enhanced Services
Beginning with the Computer II proceeding in the 1970s, the Commission has
distinguished between "basic" and "enhanced" communications services. Basic services are
standard voice transmission offerings, while enhanced services are defined as:
...services, offered over common carrier transmission facilities used in interstate
communications, which employ computer processing applications that act on the format,
content, code, protocol or similar aspects of the subscriber's transmitted information;
provide the subscriber additional, different, or restructured information; or involve
subscriber interaction with stored information.
Specific enhanced services include protocol processing, alarm monitoring, voice messaging,
and electronic publishing, as well as the provision of access to data networks such as
commercial online services and the Internet.
The basic/enhanced framework has two primary purposes. First, it defines a class of
enhanced service providers (ESPs), that use the telephone network but are not subject to
regulation under Title II of the Communications Act. Although the FCC may have
jurisdiction to regulate ESPs, such regulation would be unnecessary and harmful to the
development of the competitive enhanced services industry. Second, it provides a framework
to ensure that when incumbent LECs (in particular the regional Bell Operating Companies
(BOCs)) offer enhanced services, they do not use their control over bottleneck basic services
to disadvantage competing ESPs. The 1996 Act incorporates something similar to the
basic/enhanced dichotomy in its distinction between telecommunications and "information"
services.
The Internet in its current form did not exist at the time the FCC created the
basic/enhanced distinction. However, in Computer II and in subsequent orders, the
Commission has addressed the implications of packet-switching technologies for this
framework. In Computer II, the Commission described basic communications services as
providing "pure transmission capability over a communications path that is virtually
transparent in terms of its interaction with customer-supplied information." The use of
packet switching and error control techniques "that facilitate the economical, reliable
movement of [such] information [do] not alter the nature of the basic service." Thus, for
example, in subsequent decisions the Commission has determined that packet-switched
networks following X.25 protocols, and frame relay service offerings, provide a basic
transport service.
Although some underlying packet-switched transport functions are considered to be basic
services, Internet access has always been treated as an enhanced service. ISPs have never
been subject to regulation by the FCC under Title II of the Communications Act. In addition,
BOCs have been required to file comparable efficient interconnection (CEI) plans when they
themselves offer Internet access, to ensure that they do not disadvantage competing ISPs.
ISPs engage in various information processing functions, such as authentication, email storage
and retrieval, Web page hosting, and domain name server lookups. Many ISPs, especially
online services such as America Online, offer access to local content through databases,
message boards, and chat areas. These functions involve substantial computer processing and
interaction with customer-supplied information, and therefore fall squarely within the
definition of enhanced services.
2. Implications
The legal and regulatory categories described above have significant consequences.
Because of the unique characteristics of the Internet, as described in this paper, such general
frameworks may produce unintended results when applied to Internet-based services.
Discussions of the status of ISPs or specific Internet services should not be based solely on
abstract legal analysis, but rather should take into account the real-world implications of such
decisions.
a. Section 251 Interconnection Obligations
Sections 251 and 252 of the 1996 Act mandate that incumbent LECs take various steps
to open their local networks to competition. Under these sections, incumbent LECs must
make interconnection, unbundled network elements, and wholesale services available to such
new entrants at reasonable rates. However, under the terms of section 251, these services
are available only to "requesting telecommunications carriers." In the Local Competition
Order, which implemented section 251, the Commission concluded that providers fell within
this definition only to the extent that they provided telecommunications directly to the public.
Thus, companies that provide both information and telecommunications services are able to
request interconnection, unbundled network elements, and resale under section 251, but
companies that provide information services only are not. The Commission did not state
more specifically how it would define the two categories for this purpose, although it did
conclude that companies that provided both telecommunications and information services
should be considered telecommunications service providers in this context.
Because, under Section 251(c)(3), LECs must permit purchasers of their unbundled
network elements to combine such elements in order to provide a telecommunications
service, Internet access providers may be able to design their networks more efficiently and
economically by using unbundled elements in this manner. In order to do so, however, such
companies must overcome the "telecommunications carrier" restriction in the Act. One means
of doing so would be to classify themselves as providers of telecommunications service, and
thus be subject to the requirement that they interconnect with all other carriers and
potentially other regulatory provisions governing telecommunications carriers. Some ISPs are
already considering this course.
Alternatively, Internet access providers could enter into an arrangement with a
telecommunications carrier, such as an IXC, which could purchase the unbundled elements
and in effect resell them to the ISP. MFS Worldcom, which provides telecommunications
service but owns a major ISP, UUNet, is already exploring this latter course, purchasing
unbundled loops and using them to offer high-speed ISDN and xDSL Internet access to
corporate customers through UUNet. The FCC's Local Competition order expressly stated
that incumbent LECs could not restrict the services that competitors could provide over
unbundled network elements.
Other possible mechanisms under which Internet access providers could make use of the
unbundling provisions of the 1996 Act would likely require additional action by the FCC to
clarify the legal framework. For example, ISPs could negotiate directly with LECs to lease
network elements they needed to offer high-speed data services, outside of the framework of
section 251. Such arrangements could be embodied in experimental or contract tariffs,
subject to Commission approval. Because section 251 would always be available as a
fallback that the ISPs could use to gain access to similar facilities, as described in the
previous paragraph, the FCC would not need to scrutinize closely the rates LECs charged
under such arrangements. At this time, however, there is no legal basis for LECs and ISPs to
negotiate such agreements outside of section 251.
Another theoretically possible route would be through the Commission's open network
architecture (ONA) process, which was designed prior to the passage of the 1996 Act to give
enhanced service providers access to elements of local networks. However, ONA has been
criticized by many ESPs as being cumbersome an ineffective for achieving true network
unbundling. ONA was also designed facilitate unbundling of software functionality within
LEC switches, rather than physical network elements.
The interconnection provisions of the 1996 Act also require that pricing for "transport
and termination of traffic" between telecommunications carriers be based on reciprocal
compensation. In other words, when a user on one carrier's network makes a local call to a
user on a second carrier's network, the first carrier must pay the second carrier for
terminating that call. Reciprocal compensation arrangements operate on the assumption that
traffic between two networks will be relatively balanced, because on average users receive
about as many calls as they make. In the case of an Internet service provider, this assumption
breaks down. ISPs exclusively receive calls from their subscribers over LEC networks.
Therefore, if an ISP were considered a telecommunications carrier under section 251, LECs
would presumably be required to pay that ISP for terminating traffic on the ISP's network.
This result would represent the opposite of the current flow of funds, in which ISPs pay LECs
for connecting to the LEC network to receive calls.
b. Section 254 Universal Service Obligations
Under section 254, all "telecommunications carriers" that provide "interstate
telecommunications services" must contribute to mechanisms established to preserve and
advance universal service. The Commission may require "any other provider of interstate
telecommunications" to also contribute to such mechanisms, "if the public interest so
requires." Thus, to the extent that, as discussed above, Internet access providers or others are
considered to be both "telecommunications carriers" and providers of "interstate
telecommunications services," the Act requires these entities to participate in whatever federal
universal service funding mechanism the Commission ultimately adopts.
Pursuant to section 254, the Commission convened a federal-state joint board to
recommend an explicit and nondiscriminatory funding mechanism for universal service. In its
recommendations, the joint board concluded that information and enhanced service providers
not be required to contribute to the universal service funding mechanism. The joint board
also concluded that Internet access services provided to schools and libraries should be
entitled to universal service subsidies under section 254(h).
The joint board recommendations, however, leave open several questions. As with the
interconnection rules, the precise definition of "telecommunications" and "information"
services as applied to various types of Internet-based service providers remains unclear. The
decision that information service providers are not required to contribute to universal service
funding, but can receive universal service subsidies under section 254(h) raises issues of
competitive equity when such companies are competing with traditional telecommunications
carriers to provide connectivity to schools and libraries. Finally, although as the joint board
concluded, it would be unreasonable to require ISPs to segregate their revenues between
"content" and "conduit" services, the universal service framework is designed only to
subsidize connections, not proprietary content.
c. Internet Telephony
Several companies now offer software that allows for real-time voice conversations over
the Internet (Internet telephony or "voice on the Net" (VON)). These services work by
converting voices into data which can be compressed and split into packets, which are sent
over the Internet like any other packets and reassembled as audio output on the at the
receiving end. Most Internet telephony software today requires both users to use computers
that are connected to the Internet at the time of the call, but some recently announced services
will allow the receiving party, or even both parties, to use an ordinary POTS telephone.
FIGURE 6 -- INTERNET VS. CONVENTIONAL TELEPHONY
Internet telephony consultant Jeff Pulver estimates that approximately 55,000 - 60,000
people now use Internet telephony products on a weekly basis, although usage has been
increasing rapidly and a much larger number of people have access to Internet telephony
software. Netscape and Microsoft, the manufacturers of the leading Web browser software,
have released versions of their software that incorporate Internet telephony.
The FCC has not attempted to regulate the companies that provide the software and
hardware for Internet telephony, or the access providers that transmit their data, as common
carriers or telecommunications service providers. In March 1996, America's Carriers
Telecommunication Association (ACTA), a trade association primarily comprised of small and
medium-size interexchange carriers, filed a petition with the FCC asking the Commission to
regulate Internet telephony. ACTA argues that providers of software that enables real-time
voice communications over the Internet should be treated as common carriers and subject to
the regulatory requirements of Title II. The Commission has sought comment on ACTA's
request. Other countries are considering similar issues.
The ACTA petition raises the fundamental question of whether a service provided over
the Internet that appears functionally similar to a traditionally-regulated service should be
subject to existing regulatory requirements. The petition argues that VON providers should
be considered as fundamentally analogous to switchless long-distance resellers, and thus
should pay the same rates to LECs for use of local networks to originate and terminate
interstate calls. Under this analysis, shown in Figure 6, the current pricing structure allows
VON providers to charge an effective usage charge of zero, while long-distance carriers must
pass on roughly six cents per minute in access charges for every interstate call.
ACTA's view, however, oversimplifies the comparison between VON and long-distance
voice telephony. There are many differences, beginning with quality of service. Current
Internet telephony products do not provide comparable sound quality to traditional long-
distance service. Most existing systems require both parties to be connected to the Internet
through a personal computer at the time of the call, and the sound quality of Internet
telephony products tends to be appreciably worse than circuit-switched voice telephony. At
this time, Internet telephony is in most cases not a comparable substitute for long-distance
voice service.
However, distinctions in quality and ease of use should not be the sole basis for
regulatory decisions. Cellular telephony typically provides poorer sound quality than wireline
service, but this fact does not affect the classification of cellular as a telecommunications
service. Moreover, service providers are working to improve sound quality and ease of use,
and several providers have begun to deploy "gateways" that allow Internet telephony
conversations to be terminated or even originated on an ordinary telephone. When such
gateways are used, however, the pricing structure changes. Gateway providers must pay for
hardware at points of presence to route voice traffic between the Internet and the voice
network, and must also pay local exchange carriers to terminate or originate calls over voice
lines. Thus, gateway providers plan to charge per-minute rates for their Internet telephony
services, rather than the "free" calling available through current computer-computer Internet
telephony products.
Even these current products, however, do not really provide for "free" calling. Service
providers and users still must pay for their connections to the local phone network, and for
their connections to the Internet. If these services are priced in an inefficient manner, the
issue is not one related to Internet telephony, but is a broader question about the pricing for
Internet access and enhanced services that use local exchange networks. The issue of pricing
for Internet access is discussed in detail in the following section. The fact that some Internet
packets now encode voice rather than data does not alter the fundamental economics and
technical characteristics of network traffic. If anything, a shift toward usage of the Internet
for voice telephony might result in usage patterns that looked more like those of circuit-
switched voice calling. The issue of how exactly Internet telephony affects network usage,
and how pricing affects usage of Internet telephony, is not at all settled. Local calling
throughout virtually all of the United States is priced on a flat-rated basis, yet people do not
tend to stay on the phone all day.
Internet telephony is also technically different from long-distance voice calling. A
circuit-switched voice call uses an entire 56 kbps channel for every call. By contrast, Internet
telephony uses digital compression techniques that can encode voice transmissions in as little
as 4 kbps. Internet telephony is also packet switched, which means that it does not tie up a
call path for the portion of the call carried over the packet-switched Internet. Of course,
when a packet-switched Internet telephony call is originated through a modem over a dial-up
circuit-switched connection to an ISP, the potential efficiency benefits of packet-switched
voice transmission may not be realized. In some cases, the long-distance and international
voice transmission networks, which are in most cases digital today, may actually do a better
job of compression than Internet telephony products. All of these possibilities, however,
reinforce the notion that the cost comparison between Internet and circuit-switched voice
telephony is not obvious, and is highly contingent on network arrangements that are evolving
rapidly.
Finally, as a practical and policy matter, regulation of Internet telephony would be
problematic. It would be virtually impossible, for example, for the FCC to regulate as
carriers those companies that merely sell software to end users, or to require the ISPs
segregate voice and data packets passing through their networks for regulatory purposes.
Rather, VON software could more appropriately be compared to unregulated customer
premises equipment (CPE), like telephone handsets, which facilitate calling but do not
themselves carry calls from one party to another. Moreover, although ACTA claims that
Internet telephony unfairly deprives interexchange carriers of revenues, others argue that these
services provide valuable competition to incumbent carriers. The existing systems of access
charges and international accounting rates, to which long-distance carriers are subject, are
both inefficient artifacts of monopoly regulatory regimes. If circuit-switched long-distance
carriers are paying excessive and inefficient rates as a result, the best answer is to reform
those rates rather than attempting to impose them on other parties.
The FCC should consider whether to exercise its preemption authority in connection
with Internet telephony. ACTA has submitted a petition, similar to its FCC filing, to the
Florida Public Service Commission. In addition, the Nebraska Public Service Commission
staff recently concluded that an Internet telephony gateways service operated by a Nebraska
ISP was required to obtain a license as a telecommunications carrier. If federal rules
governing Internet telephony are problematic, state regulations seem even harder to justify.
As discussed below in section D, there is a good argument that Internet services should be
treated as inherently interstate. The possibility that fifty separate state Commissions could
choose to regulate providers of Internet telephony services within their state (however that
would be defined), already may be exerting a chilling influence on the Internet telephony
market. Netscape, in its comments on the ACTA petition, argued that the Commission
should assert exclusive federal jurisdiction and preempt states from regulating Internet
telephony.
C. Broadcasting and Cable
The provision of real-time, or "streaming" audio and video services over the Internet
raises the question of whether some Internet-based services qualify as "broadcasting" subject
to Title III of the Communications Act. "Broadcasting" is defined in the Act as:
(153)(6) Broadcasting. -- The term "broadcasting" means the dissemination of radio
communications intended to be received by the public, directly or by the intermediary of
relay stations.
"Internet radio" services exist today that transmit continuous, real-time audio over the
Internet. Many other sites now offer a selection of real-time audio clips that users can choose
to listen to, such as news, weather forecasts, and music. Users must access theses sites,
generally through a World Wide Web browser, and must have the proper software and
hardware to receive and play streaming audio. Although analog modem bandwidth is largely
insufficient to support real-time video transmissions over the Internet, such services are
already available for users with higher-bandwidth connections. For example, software known
as CU-See Me has been available for some time that allows real-time video conferencing over
the Internet, and a other products such as VDOLive will allow real time simultaneous video
and audio conferencing. Live video of several events has been broadcast over the MBONE, a
service that allows certain users with high-speed connections to receive real-time video feeds
through the Internet.
The Commission has never considered whether any of the rules that relate to radio and
television broadcasters should also apply to analogous Internet-based services. The vast
majority of Internet traffic today travels over wire facilities, rather than the radio spectrum.
As a policy matter, however, a continuous, live, generally-available music broadcast over the
Internet may appear similar to a traditional radio broadcast, and the same arguments may be
made about streaming video applications. The Commission will need to consider the
underlying policy principles that, in the language of the Act and in FCC decisions, have
formed the basis for regulation of the television and radio broadcast industries. One
significant different may be the fact that radio and television broadcasts are subject to the
inherent scarcity of the usable electromagnetic spectrum, whereas such transmissions over the
Internet are simply a different type of data packets, indistinguishable at any moment from
other types of traffic passing through the network.
Similar issues arise in the context of cable television regulations under Title VI of the
Communications Act. The Act defines "video programming" as "programming provided by,
or generally considered comparable to programming provided by, a television broadcast
station." A "cable service" means "the one-way transmission to subscriber of ... video
programming." A "cable system" is "a facility, consisting of a set of closed transmission
paths ... that is designed to provide cable service," but not "a facility that serves only to
retransmit the signals of one or more television broadcast stations; ... a facility that serves
subscribers without using any public right-of-way; ... [or] a facility of a common carrier" that
does not provide video programming directly to subscribers (except solely to provide
interactive on-demand services) or serve as an open video system under section 653 of the
Act.
To what extent is real-time video transmitted over the Internet "comparable" to
broadcast television? The technology of the current Internet limits video transmission, even
for users with relatively high-speed access, to relatively low-quality images. Most Internet
users today are able to connect to the network at only 14.4 kbps or 28.8 kbps, which supports
only rudimentary video images that can easily be distinguished from broadcast television
images. These limitations are not permanent, however. As compression technology develops
and end-user access speeds increases, Internet video applications will provide service that
increasingly resembles the quality of television broadcast stations. In addition, the number of
entities providing real-time video over the Internet is today relatively small, but is certain to
increase rapidly over time as bandwidth increases. It seems inevitable that, at some point,
consumers will be able to view images that are virtually indistinguishable in quality and
equally varied in selection to those provided by television broadcasters. At what point will
the threshold of "comparability" be crossed?
A determination about whether Internet-based video applications constitute "video
programming" under the Act would not necessarily mean that these services would legally be
treated as cable systems. Section 602(7)(B) of the Act states that facilities that do not use
any public right-of-way are not considered cable systems. The Internet uses public right-of-
way to the extent that it runs over the existing telephone network, and in the future over
existing cable company facilities. The provision of video services over the Internet, however,
generally requires no additional use of public right-of-way beyond that necessary to provide
basic Internet connectivity, or to provide existing telephony or cable services. An additional
definitional issue is the extent to which Internet video services provided by common carriers
such as telephone companies are considered "interactive on-demand services," and therefore
not treated as cable systems, since many Internet-based video concepts require the user to
select a specific "program" to view. An Internet-based video service might be considered an
"open video system," since the Internet itself is an inherently open platform that allows
capacity to be shared among all entities with broadcast capabilities. Finally, certain providers
of Internet-based video services could be classified as "multichannel video programming
distributors" (MVPDs) under 602(11) of the Act. MVPDs are entities that "make[] available
for purchase, by subscribers or customers, multiple channels of video programming."
Policy-makers must consider the policy rationales behind Title VI of the Act, and
whether they apply to Internet-based video delivery systems with the same force. It does
appear, however, that at some point the Internet may have significant competitive effects. A
recent survey suggested that 61% of Internet users watch less television in order to spend
more time online. The FCC's 1995 Cable Competition Report notes the possibility that the
Internet will affect the video marketplace, "perhaps significantly," but concludes that it is too
early to assess the impact of the Internet on this market. At some point, if the Internet
continues to grow and greater bandwidth is widely available to end users, the Internet may
have even more significant competitive effects on the video marketplace. Moreover, with the
deployment of Internet access over cable facilities and digital cable set-top boxes, however,
the Internet may exert an influence over the cable market not only as a competitor, but as a
component of cable service as well.
The fact that the Internet may affect competition in the video marketplace is not itself a
justification for additional regulation. If the Internet enhances competition, it may in fact
justify reducing regulation on all video service providers. Moreover, existing regulations for
broadcasters and cable operators were never designed with Internet services in mind, and
could produce strange results if applied blindly to companies that enable streaming audio or
video transmissions over the Internet.
D. Relationship to Content
The FCC has made no effort to regulate the content of services transmitted over the
Internet. Nonetheless, the Commission does address content-related issues in broadcasting
(such as indecency and educational programming) and to a limited extent in telephony
(principally relating to dial-a-porn services).
The 1996 Act also more directly addresses Internet content with its so-called
"Communications Decency Act" provisions. These provisions criminalize the knowing
transmission using the Internet or other interactive computer services of indecent material to
children under the age of 18. The statute further states that "[i]t is a defense to a
prosecution" to show that a person has "requir[ed] use of a verified credit card, debit account,
adult access code, or adult personal identification number" or otherwise "has taken, in good
faith, reasonable, effective, and appropriate actions under the circumstances to restrict or
prevent access by minors" to indecent material. Although the primary focus of this section
of the Act is on criminal liability, the Act provides that the Commission may describe
additional measures "which are reasonable, effective, and appropriate to restrict access to
prohibited communications." At the same time, however, the Act places substantial limits
on the Commission's authority in this area:
Nothing in this section authorizes the Commission to enforce, or is intended to
provide the Commission with the authority to approve, sanction, or permit, the use
of such measures. The Commission shall have no enforcement authority over the
failure to utilize such measures. The Commission shall not endorse specific
products relating to such measures.
The Commission has not taken any action in response to this section of the Act, and
enforcement of these provisions is currently enjoined by a federal court, pending appeal to the
Supreme Court.
In most cases, the Commission's existing content rules would apply to Internet services
only to the extent that the Commission treated these services as broadcasting. Some activities
now conducted over the Internet would likely be prohibited if transmitted over television or
radio networks. For example, existing rules proscribe broadcasting of advertisements for
cigarettes and gambling services, but such companies have created sites on Web.
The decentralized nature of the Internet may doom any attempt to regulate content in
order to prevent access to undesirable material. Many different kinds of entities and
individual provide services through the Internet, and limited assumptions about providers or
recipients of information may prove unworkable. Creators of online content may have
differing levels of control over how the material they send or make available over interactive
computer networks such as the Internet can be accessed. Finally, the Internet is international
in scope, while the jurisdiction of governments that may seek to regulate Internet content is
limited to a single nation, creating both legal and practical difficulties. If content is hosted on
a server outside the United States, where the information provided is perfectly legal, can U.S.
law be extended to the provider of that content?
In general, the FCC should seek to avoid regulation of Internet content. The legal
rationales for FCC regulation of content in other media -- such as scarcity of transmission
capacity and invasiveness -- do not necessarily apply to the Internet. Moreover, the Internet
provides new mechanisms to solve the very problems it creates. Several companies now
provide filtering software that allows users -- such as parents -- to block access to
inappropriate Internet sites. Government regulation of content raises important constitutional
issues involving freedom of speech, and thus should not be undertaken lightly.
E. Administrative Issues
Unlike the voice network, which has evolved under the federal-state framework of the
Communications Act of 1934, the Internet has no built-in jurisdictional divisions. More
important, because the Internet is a dynamically routed, packet-switched network, only the
origination point of an Internet connection can be identified with clarity. Users generally do
not open Internet connections to "call" a discrete recipient, but access various Internet sites
during the course of a single connection. A voice call originates and terminates at two
discrete points, and therefore calls can readily be assigned into jurisdictional categories such
as local, intraLATA toll, interLATA intrastate, interLATA interstate, intraLATA interstate,
and international. The requirement that users dial ten digits instead of seven for calls outside
their area code provides some indication of the categorization of a particular call. Similarly, a
cable system has a defined boundary, and a broadcast signal, although propagating
indefinitely, must have a defined origination point.
For an Internet connection, by contrast, the user may have no idea where the sites he is
viewing are located. One Internet "call" may connect the user to information both across the
street and on the other side of the world. Furthermore, dynamic routing means that packets
may take different routes across the Internet to reach the same site, so even the location of
the site the user is contacting does not provide sufficient information to identify the routing of
the call for jurisdictional purposes. Internet routers have also not been designed to record
sufficient data about packets to support jurisdictional segregation of traffic.
Any regulatory system that applies different rules to different types of Internet services
would require, however, some method of identifying and/or segregating Internet traffic. For
example, if Internet telephony is subject to Title II of the Communications Act, but basic
Internet data connectivity is not, some system would be required to determine whether or not
Internet access providers are carrying telephony traffic. Internet protocols currently do not
differentiate between different types of packets in a manner that would allow this type of
monitoring, and the overhead of such a system could be considerable. Moreover, the
definition of what constitutes an "Internet phone call" is not obvious, and changing
technology may render any "bright lines" obsolete very rapidly.
Internet connections may be also used for many different purposes. Some uses of the
Internet -- such as voice telephony -- may fall more clearly within a plausible reading of the
Communications Act. However, service providers that carry such services may not even
know what type of data packets are passing through their networks at any given moment.
These characteristics pose difficulties for virtually every type of regulation. For
example, jurisdictional divisions are the basis not only of the regulatory status of companies
themselves, but also the decisions as to which rates regulated telephone companies can charge
to unregulated entities. Federal, state, and local governments use such distinctions as the
basis for deciding whether they have franchising or taxation authority over companies. The
problem is magnified because the Internet is international. Different countries may have
completely different laws governing issues such as acceptable content, intellectual property,
and privacy, and virtually any company that touches the global Internet could arguably be
subject to all of them. Moreover, any domestic regulatory regime must consider the treatment
traffic that originates outside the United States and therefore the jurisdiction of the FCC.
F. Toward a Rational Approach
The primary goal of this paper is to identify issues, not to offer specific policy
recommendations. It is important to remember that, despite the tremendous attention given to
the Internet in the past few years, it remains orders of magnitude smaller in terms of usage
and revenues than the voice telephone network in the United States. Many of the questions
raised here will answer themselves as service providers fine-tune their business models and as
the communications industry evolves. Once competition is sufficiently well-developed,
regulation may become largely unnecessary. At some point, companies will be disciplined
more strongly by market forces than by the dictates of regulators. Nonetheless, some
thoughts about how to address the categorization challenges raised in this section are
appropriate.
So long as some services are regulated, a line-drawing process must take place. When
Internet services are involved, this line drawing will be inherently messy and imprecise.
However, even the premise that Internet services should not be regulated requires a precise
assessment of what constitutes an "Internet" service. With the increasing prevalence of hybrid
services, joint ventures, and alternative technologies, such distinctions will always be difficult.
No matter how sophisticated the regulator, companies in the marketplace will devise clever
means of avoiding regulatory restrictions. No matter how well-intentioned the regulator,
government intervention in the private sector can have unexpected and unfortunate
consequences.
Thus, government should apply blunt instruments that achieve underlying goals, rather
than struggling for an elegant or precise solution that will cover every case. Wherever
possible, market forces should be harnessed to take the place of direct regulatory intervention.
Although new services like Internet telephony and streaming video may create legal
headaches, these developments are positive ones that government should encourage. Such
new technologies are valuable both because of the new options they represent for consumers,
but also because of the potential competitive pressure they may exert on incumbent providers.
The first task of government policy towards these new Internet-based services should
therefore be to identify those areas where regulation is clearly not appropriate. By
distinguishing these "easy cases," government can provide greater certainty to the private
sector that regulation will not be extended to the theoretical boundaries of statutory authority.
For example, when a company such as Vocaltec sells retail software that allows end users to
make voice phone calls through the Internet, and nothing more, it makes little sense to
classify that company as a telecommunications carrier subject to federal and state regulation.
Such software providers merely enable end users to utilize a functionality through the
network, much like companies that sell fax machines. They do not themselves transport
telecommunications traffic. Similarly, an ISP should not be classified as a
telecommunications carrier simply because some of its users choose to use Internet telephony
software to engage in voice calls. By stating that such companies are not subject to the
Communications Act, the FCC could eliminate fear and uncertainty, while still leaving room
to analyze the harder questions.
The next step should be to identify relatively simple and flexible structures that achieve
underlying policy goals. The initial assumption ought to be that new Internet-based services
should not be subject to the regulatory constraints of traditional services. Government policy
should be sensitive to the fact that technology is changing rapidly, and that the Internet
landscape a few years in the future may look very different than it does today. Market forces
may lead to the creation of differentiated classes of service, with users paying higher rates for
higher quality, thus de facto distinguishing between different types of service offerings,
without any intervention by the government.
The analytical process must work in both directions. Government should think not only
about the regulatory treatment of new services, but about the implications of those new
services for the regulatory treatment of existing services. If a competitive imbalance exists
because a new technology is not subject to the same regulatory constraints as a competing
older technology, the answer should be reduced regulation of the older technology. Of
course, such deregulation should be dependent on the existence of sufficient competition to
police the actions of incumbents. The ultimate objective, however, should be less regulation
for all, rather than more regulation for some. IV. PRICING AND USAGE
The FCC does not regulate the prices charged by ISPs or Internet backbone providers.
However, the vast majority of users connect to the Internet over facilities of existing
telecommunications carriers. Those telecommunications carriers are subject to varying levels
of regulation at both the federal and the state level. Thus, regulatory decisions exercise a
profound influence over the economics of the Internet market. Economics will drive the
development of both the Internet and of other communications technologies. Consequently,
the pricing structure for Internet access, and its interrelationship to the public switched
telephone network, are of central importance.
A. Current Internet Access Pricing
To access the Internet, a user must pay an ISP, and any applicable charges to connect to
that ISP. Most ISPs charge a flat, monthly fee, although some assess a per-hour charge above
a certain monthly threshold. The vast majority of users reach their ISPs today through the
telephone network. The phone call to reach an ISP is usually a considered a local call,
because the ISP has established a point of presence (POP) in that local calling area. Local
telephone service for residential users is typically a flat, monthly fee (in contrast to long-
distance service which is typically billed by the minute).
Thus, in the typical scenario for dial-up Internet access, as shown in Figure 7, an
Internet user "sees" a monthly telephone connection charge, a monthly charge from the ISP,
and a usage charge of zero. By contrast, a subscriber making a long-distance telephone call
today sees a monthly local connection charge from a LEC, plus a usage charge from an
interexchange carrier (IXC) for each minute of long-distance calling.
FIGURE 7 -- CURRENT INTERNET ACCESS PRICING
There are three fundamental reasons why most Internet users do not pay usage charges:
(1) residential local service tends to be flat-rated, and ISPs have located their POPs to
maximize the number of subscribers who can reach them with a local call; (2) Internet
backbone providers tend to charge non time-sensitive rates to each other and to ISPs; and (3)
ISPs typically connect to LECs through business lines that have no usage charges for
receiving calls.
Because Internet access is understood to be an enhanced service under FCC rules, ISPs
are treated as end users, rather than carriers, for purposes of the FCC's interstate access
charge rules. This distinction, created when the FCC established the access charge system in
1983, is often referred to as the "ESP exemption." Thus, when ISPs purchase lines from
LECs, the ISPs buy those lines under the same tariffs that any business customer would use --
typically voice grade measured business lines (1MBs) or 23 channel ISDN primary rate
interface (PRI). Although these services generally involve a per-minute usage charge in
addition to a monthly fee, the usage charge is assessed only for outbound calls. ISPs,
however, exclusively use these lines to receive calls from their customers, and thus effectively
pay flat monthly rates.
By contrast, IXCs that interconnect with LECs are considered carriers, and thus are
required to pay interstate access charges for the services they purchase. Most of the access
charges that carriers pay are usage-sensitive in both directions. Thus, IXCs are assessed per-
minute charges for both originating and terminating calls. As the Commission concluded in
the Local Competition Order, the rate levels of access charges appear to significantly exceed
the incremental cost of providing these services. The Commission in December 1996
launched a comprehensive proceeding to reform access charges in a manner consistent with
economic efficiency and the development of local competition.
The FCC's originally explained its decision to treat ESPs as users rather than carriers as
a temporary response to concerns about "rate shocks" if ESPs were immediately forced to pay
access charges. In 1987, the FCC proposed to require ESPs to pay interstate access
charges, on the theory that ESPs used LEC networks in the same manner as IXCs, but this
proposal was withdrawn after intense opposition. In closing the 1987 docket, however, the
FCC explained that "this is not an appropriate time to assess interstate access charges on the
enhanced services industry," implying that it still viewed the treatment of ESPs as a
temporary accommodation. In the FCC rules, however, there is no "exemption" or "waiver;"
only carriers are subject to access charges, and ESPs are defined separately from carriers.
The Access Reform NPRM took up the question of whether enhanced service providers
should be subject to access charges as currently constituted, and tentatively concluded that
they should not. The Commission argued that, given the inefficiencies of the existing
access charge system, "[w]e see no reason to extend this regime to an additional class of
users, especially given the potentially detrimental effects on the growth of the still-evolving
information services industry." At the same time, the Commission issued a Notice of
Inquiry (NOI) seeking comment more broadly on actions relating to Internet and interstate
information service providers.
B. Network Economics
In recent years, there has been extensive academic literature on the economics of the
Internet. Much of the economic debate concerns the implications of various pricing models
for Internet usage. Pricing generates incentives that affect usage patterns, and that also affect
the manner in which service providers construct their networks. The FCC and state
commissions, through their regulatory authority over the rates charged by local phone
companies and other mechanisms, exercise great influence over the pricing of Internet access.
Therefore, the underlying economics of the Internet, and of networks generally, are of great
importance for any discussion of the relationship of the FCC to the Internet.
The value of networks to each user increases as additional users are connected. For
example, electronic mail is a much more useful service when it can reach fifty million people
worldwide than when it can only be used to send messages to a few hundred people on a
single company's network. The same logic applies to the voice telephone network, and is an
important underpinning of the FCC's public policy goal of universal service.
However, this increasing value also can lead to congestion. Network congestion is an
example of the "tragedy of the commons:" each user may find it beneficial to increase his or
her usage, but the sum total of all usage may overwhelm the capacity of the network. With
the number of