Policing the pipelines

With the Telecommunications Act of 1996, Congress made the Federal Communications Commission the lone traffic cop overseeing the race to build high-speed bandwidth.

But with the three-year anniversary of the deregulation law around the corner, stakeholders are divided about the FCC's actions so far.

Despite the surge of cross-industry megamergers since the act was passed, local phone companies say the FCC is a roadblock to the widespread construction of fatter pipes for data transmission--a key link in the growing convergence of personal computing, entertainment, and communications.

To the contrary, newcomer bandwidth firms, such as those offering digital subscriber lines (DSL), say they wouldn't be in business if it weren't for the FCC's strides to eliminate barriers and to loosen the Baby Bells' grip on the local loop, the last mile of phone service that reaches into the home.

Both sides do agree that Congress had tremendous foresight to pass the act, which aims to foster competition in the entrenched telecommunications industry by lifting old regulations that prohibited companies from entering new markets. Nonetheless, lawmakers never could have predicted the worldwide explosion in Internet usage and the slew of businesses that have emerged to deliver online access faster, better, and cheaper than the nascent offerings of 1996.

Under chairman Reed Hundt, the FCC began putting Congress's plan into motion to cut the red tape for industries that functioned in stark contrast to one another and were regulated accordingly. Today, however, voice, data, and broadcast services are being morphed into one "pipe." This conduit will deliver to the masses the next generation of interactive digital content through TVs, PCs, handheld devices, and other products that are merging into one box.

This convergence is promising for the high-tech and online industries but has made carrying out the telco deregulation a Sisyphean task for the FCC--and data services weren't even the original focal point of the historic legislation.

When Hundt left the agency last summer, his trusted colleague William Kennard was appointed chairman and has since tinkered with parts of Hundt's Internet agenda. For one thing, Kennard bowed to political pressure and cut millions from a federal Net access subsidy program for schools and libraries.

In addition, Kennard has had to deal with a lawsuit filed by SBC Communications and other local phone companies over the FCC's authority to control entry into the long distance business. The Supreme Court has decided to hear the case.

The FCC has tried to stay on schedule, kick-starting two other controversial bandwidth regulation proceedings that should be finalized by February.

One plan would allow the Bells to keep a lock on their technology investments if, in return, they set up high-speed data service subsidiaries that would have to compete alongside everyone else in the market. If the local carriers refuse, they will have to unbundle their services, giving up monopoly power under the telco act.

The agency also issued rules that would lower the cost for data providers to store and set up packet-switching equipment for local phone company facilities. Right now, for example, DSL providers face different fees in every state to "colocate," which they say creates a huge cost barrier for them to enter new areas of service.

The Bells are staunchly fighting both proposals. "The FCC wants to require [local phone] companies to create a separate data subsidiary in order to avoid regulation, but they would need a separate set of officers, marketing team, and equipment. It's not very cost effective to do it that way when other companies can offer one-stop shopping," said Bill McClosky, a spokesman for BellSouth, which provides phone, wireless, cable, and Net services to about 33 million customers worldwide.

"We would like to invest in more bandwidth, but we can't see it until it is something more than throwing money down a rat hole," he added.

The FCC argues that, with less regulation, the subsidiaries would be able to sell retail services at any price they chose and would not have to share their parent companies' new technologies with competitors at wholesale costs.

But if the Baby Bells don't want to play along or lag in upgrading the local loop--which many say bogs down data transmission despite faster PC chips and modems--then someone else will come along and do it, the agency argues.

"The [Bells] were monopolies for 120 years and they have never had to be nimble, entrepreneurial competitors," said an FCC official who asked not to be named. "You can't legislate culture. It takes time, and we're not psychiatrists. If the [Bells] don't do it, the cable industry will come along and do it and eat their lunch."

Even though the FCC says it ultimately wants to "let the market decide" the future of bandwidth, the agency is being dragged into squabbles over cable Net access too.

America Online has petitioned the FCC to require cable operators to give ISPs better prices and access to their networks. At the same time, online service providers want to make sure the FCC continues to take a hands-off approach to their industry.

Service providers want the FCC "to open the cable plant to competition, assuring that every existing ISP can offer a high-speed flavor for their service," said AOL senior vice president and general counsel George Vrandenberg. He quickly added: "We would like to see, over time, lesser degrees of regulation in broadband area."

Like many other regulatory debates, broadband players want to work the FCC to their advantage. No one is calling for the agency to back off entirely, especially because such a move would make life easier for competitors.

"Our company was founded on the basis of the Telecommunications Act of 1996," said Tom Koutsky, director of market entry and regulatory affairs for DSL company Covad Communication, who was formerly of the FCC Office of General Counsel.

"There is not a shortage of competitive carriers that want to provide these advance services, it's that only a few have been able to burst through the barriers by local phone companies," he added. "We think everything the FCC has done to date has encouraged the build out of services like ours."

The FCC colocation proposal would directly affect Covad. The company had to pay New Hampshire $16,000 to set up its switching equipment, Koutsky said, but the cost is more than $300,000 in New Jersey for the same couple of feet in space.

Local phone companies, for one, are complaining to sympathetic members of Congress that the FCC--not them--is the real bottleneck to faster Net access, Bells' entry into long distance service, and the converging frontier.

"The FCC is hindering the rollout of high-speed bandwidth by proposing that [telcos] have to set up separate data subsidiaries," said Charles Eldering, who is president of Telecom Partners and an adjunct fellow at the Progress & Freedom Foundation, which is highly critical of the agency.

"This will automatically increase [local telcos] barriers to entry to a point at which, we believe, they will seriously question going forward with data services," he added. "With an economy that has a growing dependence on electronic commerce, that could be very detrimental to the United States. What may need to occur is for Congress to readdress the method in which we want to move forward on broadband deployment."

Some politicians are in fact coming down hard on the FCC, promising an in-depth probe of its activities next year.

"The commission takes the view that it wants to micromanage the development of competition. This is very visible in the recent [data subsidiary] decision here," Rep. Billy Tauzin (R-Louisiana) said during a recent meeting with the press. Tauzin, who chairs the House subcommittee on telecommunications, has stopped just short of calling for abolishment of the FCC.

"The FCC, deep in its inner bowels, has an understanding that the day competition really comes in any of these areas they are less relevant," he added.

Supporters of the FCC say the bandwidth market would not be diverse and that consumers would suffer without a regulatory agency.

"Enforcement of the Telecom Act is key to having competition, which is the only way bandwidth will be rolled out," said Mark Uncapher, vice president of the Information Technology Association of America.

"The telecommunications industry is looking for promises from the FCC that they will make money," he added. "So Bell operating companies may be missing the boat because they are trying to get deregulation instead of focusing on the fact that they are facing increased competition--everywhere."  

Go to: From Bells to bits