Calling for a regulatory overhaul, bit by bit

A Wall Street Journal story last month began this way: "It's a mad, mad, mad telecommunications world." The article described how cable operator Cox Communications is now the largest telephone provider in the Omaha area and how Cablevision has signed up 115,000 phone customers in New York. And how SBC Communications already has grabbed more than 120,000 subscribers for the satellite TV service it launched last spring with EchoStar Communications. And how Verizon Communications is offering cable television service in a small Texas town over its new fiber-optic network.

Cable operators providing voice telephony. Telephone companies providing television. Satellite TV companies snatching customers from the cable firms. Not to mention electric utilities plotting to provide broadband service over their power lines that reach virtually every home and business in America. And like a fast-approaching tsunami, new voice over Internet Protocol, or VoIP, offerings announced weekly, if not daily, by both small start-ups and the major telephone and cable providers. Some analysts predict that the number of VoIP subscribers will approach 20 million by 2007.

Thanks to the digital revolution, it is a mad, mad, mad telecommunications world, indeed!

Not surprisingly, there is an emerging consensus among policymakers that the radical changes in technology and in the marketplace mean that it is time for a substantial revision of our nation's communications laws. The new competitive environment demands a new deregulatory communications policy to replace the existing paradigm with its built-in regulatory bias.

The policy framework embodied in our existing communications laws is often called "stovepipe" regulation. This is because there are distinct technology-based and functionally driven regulations that apply in a disparate fashion, depending on whether different services are classified as telecommunications, information services, cable, satellite or broadcast. Imagine each distinct service classification as a vertical stovepipe.

Everybody knows the old saw: "A bit is a bit is a bit." The reality is that we now inhabit an increasingly digital world in which it is impossible to distinguish bits carrying "voice" (telecommunications) from bits carrying "data" (information services) or "video" (cable or broadcasting).

In an environment in which technological change enables companies regulated under one "stovepipe" to invade the turf of companies regulated under another, it's time to tear down the existing regulatory paradigm and replace it with a new model attuned to today's marketplace realities.

But what should that be?

For several months, MCI has been advocating a substitute framework that it seeks to have incorporated into the rewrite of our communications laws. Labeled the "network layers model," MCI's approach calls on policymakers to "adopt a comprehensive legal and regulatory framework founded on the Internet's horizontal network layers."

It identifies four layers--content, application, logical and physical--that it claims comprise the Internet's architecture and urges that public policy be formulated to respect the integrity of the distinct layers for purposes of determining whether they should be regulated.

MCI suggests that the two lower layers, the physical and logical, should be targeted for discrete regulation based on its claim that significant market power resides in these layers. The physical layer roughly corresponds to the network facilities of the cable, telephone, satellite, wireless and other types of companies that transport information, while the logical layer roughly corresponds to the software codes and protocols, such as TCP/IP, that interface with the physical layer below and the application and content layers above.

MCI calls its layers model "a horizontal leap forward." Quite apart from disputing its characterization of the market power possessed by physical and logical layer providers, I beg to differ even more fundamentally.

What we need is a new market-oriented regulatory model, not a replacement regime based on another set of techno-functional definitions. Turning stovepipes on their side is not a leap forward but is rather an invitation to stultify the continued evolution of our physical networks and the service applications that may be integrated into such networks.

In an earlier column on the regulation of VoIP services, I called the distinctions underpinning stovepipe regulation metaphysical in the sense that the existing definitions rest upon transcendent and highly abstruse techno-functional constructs.

Wouldn't the same be true of a regulatory paradigm based on a technical model, in which the lines between various so-called Internet layers are not universally recognized and, in any event, inevitably will shift over time? MCI itself acknowledges that although "there are obvious commonalities among them, different layers models have been proposed by a number of commentators."

Rather than adopt new techno-functional regulatory constructs that would be virtually impossible to articulate in laws and would likely become quickly outdated, policymakers should adopt an antitrust-like approach that looks at whether communications services, however labeled for marketing purposes, are offered in workably competitive markets.

Based on what we already know about the competitiveness of 21st century communications markets, when Congress turns to revising our communications laws it should incorporate a strong presumption that the economic regulation that characterizes today's networks is unnecessary. Before imposing regulation, regulators would be required to overcome the built-in deregulatory presumption of competitiveness by clear and convincing evidence.

Such a market-oriented paradigm--not an approach that merely replaces vertical stovepipes with horizontal ones--would be a true leap forward.