Heeding the blast of Schumpeter's trumpet

He famously called this relentless process Creative Destruction--and it is an essential characteristic of free markets.

Services and applications using voice over Internet Protocol capabilities, commonly called VoIP or Internet telephony, are gaining momentum, as cable operators, wireline telephone companies and wireless providers install Internet Protocol throughout their broadband networks.

What's also clear is that VoIP's accelerating proliferation will push existing regulatory paradigms to the breaking point--sooner rather than later.

In other words, all of the brouhaha about VoIP is a blast from Schumpeter's trumpet, warning that old regulatory regimes are about to be destroyed.

Here are four suggestions for creatively replacing old ideas with new ones:

• Regulatory classifications based on existing distinctions should give way to a technology-neutral deregulatory regime. In the early 1980s, the Federal Communications Commission adopted a classification scheme to distinguish between the then-nascent online information services, employing computer processing applications. They were to act on the "form, content or protocol" of the subscriber's transmitted information and "telecommunications" services that offered pure transmission capacity.

This regulatory dichotomy, later embraced by the Telecommunications Act of 1996, was serviceable enough early on in a circuit-switched analog world. At the time, "telecommunications," which was regulated, meant "voice," while "information services," which were not regulated, meant "data." The two were easily distinguishable.

In a digital world in which a byte is a byte--where the essence of IP technology is the integrated transmission of voice, data and video information--the old regulatory distinctions no longer make sense. With wireline, cable, wireless and satellite operators (and possibly others as well) competing in the broadband marketplace, we need a regime that treats all providers, regardless of the technology used, in a similar deregulatory fashion.

• State authority to regulate communications should give way to federal primacy. In an IP environment, the traditional split in regulatory authority between the FCC and the states is no longer workable. This jurisdictional arrangement has been dependent on the ability to determine the originating and terminating points of subscriber calls, with calls originating and terminating in the same state subject to that state's regulations.

With VoIP services, it is generally impossible to determine a call's origin and termination points, because the IP facilities that are used to carry the call can be located anywhere in the world. Vonage, for example, offers "virtual phone numbers" that allow subscribers to choose their own area codes.

• The existing universal service regime should be replaced with a more limited, rational system. Historically, the government's policy has been to promote the widespread availability of telephone service by directing subsidies to high-cost areas from low-cost ones, to residential customers from businesses and to low-income persons from all other subscribers.

In the old monopoly environment, this sloshing around of subsidies didn't matter much, because there were no competitive implications and no questions concerning which service providers must contribute the subsidies. Yet today, competition is flourishing, and telephone subscribership averages 95 percent across the United States. The "universal service" program continues to be supported primarily by contributions from companies that provide services classified as regulated telecommunications.

Contribution mandates are also tied to whether calls are classified as interstate or state.

Because neither the existing regulatory distinctions nor the division of federal/state authority can survive in a world of IP networks, a restructuring of the universal service system is in order. Policymakers should use the opportunity to craft a new program that's focused more narrowly on supporting those low-income users truly in need.

• The FCC's typical mode of developing regulations in open-ended rulemaking proceedings should give way to the use of more common law-like approaches.

With new services evolving in ways that even the most well-intentioned regulator cannot anticipate, the FCC should move away from its usual practice of initiating broad, open-ended rulemaking proceedings to develop new policies. In the rulemaking proceeding just opened--to develop regulations for VoIP--rather than laying out with specificity a clear deregulatory path, the agency asked 114 open-ended questions.

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These unfocused rulemakings encourage the various parties to stake out the most extreme positions. History shows that they not only are difficult to bring to a timely conclusion but lead to regulatory overreaching. In the VoIP rulemaking notice, the FCC itself conceded that "development and deployment of these services is in its early stages" and that "these services are fast-changing and likely to evolve in ways that we cannot anticipate."

Having acknowledged that the environment is quickly evolving, the commission would do well to employ procedural vehicles, such as individualized adjudications, that allow the agency to address narrowly presented issues in a more modest, case-by-case fashion.

That VoIP noise we hear is simply Schumpeter's trumpet sounding a warning note. Old regulatory paradigms are doomed to destruction, and the challenge to policymakers will be to fashion new regulatory approaches that actually suit the realities of the digital age.