The State Of Telecommunications And The Challenges Ahead

Telecommunications, unquestionably one of the most important industries to our nation's economic and social well-being, faces a host of challenges that have arisen as the communications landscape has changed in the decade since the passage of the 1996 Telecommunications Act.

The Industry And Regulation A Decade Ago

The Industry

In truth, the telecom industry of 2006 bears scant resemblance to the industry a decade ago. Not only have some old names disappeared and others been taken by new owners, but many of today's significant competitors did not even exist when the 1996 statute was enacted. And moving beyond the identities of the players, the entire structure of the industry has been radically transformed.

In 1996, the telecom industry still was characterized by distinct segments (or "silos"). For example, there was a separate long distance market in which AT&T maintained better than a 50 percent market share. Local telephone service was dominated by GTE and seven Regional Bell Operating Companies (divested from the Bell System 12 years earlier), which enjoyed a legally protected monopoly in many states. The major wireless players were the two original cellular operators in each market, and cellular service was still considered a luxury, with only 34 million subscribers nationwide - about one-sixth the number today. In the cable industry, several large, non-overlapping providers of multichannel video services were operating but with no competitive options, and satellite TV was just getting started. Similarly, the Internet was in its infancy for commercial purposes.

The Regulatory Environment

The central figure in telecom regulation was not Congress or the FCC but, instead, Judge Harold Greene of the U.S. District Court for the District of Columbia. Judge Greene presided with great vigor over the Modified Final Judgment - the consent decree that ended the federal government's antitrust suit against the Bell System. And he maintained a tight rein on the Bells for fear that they would extend their local telephone monopolies into other, potentially more competitive markets.

The 1996 Act

Against this background, Congress passed the Telecommunications Act of 1996, an over 220-page statute that significantly changed the rules governing virtually every corner of the telecom industry. The 1996 Act's purpose was sweeping yet plainly worded: "To provide for a pro-competitive, de-regulatory national policy framework designed to accelerate[the] deployment of advanced services and open all telecommunications markets to competition." To this end, the Act sought to eliminate boundaries between industry segments in an effort to extend competition to previously monopolistic areas, such as local telephone and cable television service. Given the strong opposing lobbying forces, the complexity of the industry (and, indeed, of the Act itself), and the billions of dollars riding on the interpretation of particular statutory provisions, it is not surprising that the legislation spawned controversy and litigation virtually from the moment it was signed into law. Indeed, for telecom and appellate lawyers, it might be said that the 1996 Act is "the gift that keeps on giving." Yet as the court battles raged -and even as they continue to do so today - technology and the industry have developed in ways that were wholly unforeseeable in 1996.

A Decade Of Change

In the last 10 years, every segment of the telecom industry has undergone a radical transformation. In fact, it is difficult to say today how much longer there will even be discrete industry segments. For example, it no longer makes sense to speak of a separate long distance market. More than half of all interstate calls are made from cell phones. Similarly, the majority of landline long distance service users now buy bundles of local and long distance calling for a single monthly price, so that the incremental cost of an interstate call is zero.

Similarly, the local telephone market is under siege from a multitude of technologies operating independently of the traditional local network, and primary providers like Verizon and AT&T (SBC) are losing 6-8 percent of their lines every year. There are now more wireless than wireline subscribers, almost 10 percent of all wireless customers do not even have a landline telephone, and analysts predict that one-third of all telephone customers will drop their landline phones by 2010. Cable television companies are aggressively entering the local telephone market as part of their bundled service offerings. There are roughly 6 million cable telephony customers today, and some analysts expect that number to quadruple over the next few years. And email and instant messaging traffic undoubtedly are supplanting huge amounts of local telephone traffic.

A whole new broadband Internet access market has developed since 1996, with tens of millions of customers conducting every manner of business and social interaction over the World Wide Web at speeds up to 200 times faster than the best available when the 1996 Act was passed. Cable companies and telephone providers are competing head-to-head in this market, and a host of other technologies - including broadband over powerline, WiMax, WiFi, and broadband mobile wireless - offer still further choices for consumers.

At the same time, and conversely, cable's dominance over the video market has come under serious attack - first (and still) from satellite providers DirecTV and EchoStar, and now by Verizon and other telephone companies which are making bet-the-company investments in this sector.

The Challenges Ahead

In my view, the main policy challenges facing the telecommunications industry today result from the demarcation lines in the 1996 Act which no longer make sense in a converged, IP-centric marketplace. Even though the 1996 legislation paid lip service to convergence, it still presumed that historically distinct market segments would remain separate, operating under their own unique rules even when providing services that compete with one another. The Act also perpetuated a distinction between "telecommunications services," which are subject to traditional common carrier regulation, and "information services," which are not so regulated. And the statute preserved the longstanding dual jurisdictional scheme, under which the FCC regulates interstate services and the states oversee intrastate offerings.

With convergence, these core precepts have become more and more untenable. The fact that all types of providers now offer all types of services leads to substantial uncertainty as to how any particular offering should be regulated. For example: If a telephone company provides broadband Internet access, should it be regulated the same as a cable or wireless operator offering that service? The FCC has tried mightily to bring about some form of regulatory parity but its ability to do so has been severely constrained by the Act's preexisting service categories. Similarly, functionally equivalent services can be offered over different technical platforms, some historically regulated and others unregulated. Moreover, new services such as VoIP are not susceptible to easy jurisdictional classification.

The answer to these conundrums may lie in new, innovative approaches to regulation and legislation. In this regard, serious efforts to pass broadband-friendly telecom legislation are now underway in both Houses of Congress - all of which may bear fruit in the next year or so, depending on how ambitious the legislators decide to be. As I see it, a key lesson of the 1996 Act experience is that highly-detailed legislation has considerable difficulty in keeping up with a dynamic technology. Accordingly, what may make sense this time around is a much briefer statute that establishes guiding principles in a technology-neutral manner, with an eye to eliminating remaining federal and state barriers to broadband investment. Congress (and the FCC, using the authority that it has) also might be wise to focus on a few key areas that, if left unaddressed, could threaten to impede such investment: universal service, the local franchise process and "net neutrality."

Universal Service Reform

Turning first to universal service, it has been a longstanding policy in this country that all consumers should have access to affordable, high quality telephone service. That policy is threatened today by two developments: first, the universal service fund is rapidly growing - and the line item on consumers' bills to support universal service continues to increase - even though competition is driving basic phone rates down. And second, new technologies such as VoIP are diverting traffic from traditional phone networks; and yet, many providers of these offerings are not contributing to universal service. Policy-makers - either the FCC or Congress - need to act quickly to limit the size of the fund and to adopt a new means of supporting universal service that does not draw distinctions among classes of service providers and technologies.

Franchising Reform

There are more than 30,000 local franchise authorities ("LFAs") in the United States today, and any new entrant seeking to provide widespread video service must negotiate with a large subset of them. All of this can add considerable delay and expense to the already substantial risk and resources inherent in building a new broadband network. While state and local authorities are beginning to respond to the new environment, progress has been sometimes ad hoc and uneven. Likewise, the FCC has initiated a proceeding to consider ways of streamlining the local franchise process, but many municipalities and incumbent providers have questioned its authority to do so. Thus, federal legislators may want to focus on clearing away remaining barriers to entry posed by unnecessary, multi-tiered regulation. Congress preempted state regulation of wireless service rates and entry in 1993, and the result has been a robustly competitive and innovative industry that has thrived beyond anyone's most optimistic expectations. Doing something similar in the video marketplace - for all participants - could yield equivalent benefits.

Network Neutrality

Many parties want telecom reform legislation to include provisions assuring "net neutrality." To some, this phrase denotes a legal requirement protecting consumer access to content, applications, and services offered over the Internet. To others, it might mean a ban on any disparate treatment of different content or application providers by network owners. My own view is that policy-makers should proceed with caution in this area and should ask themselves such questions as: Are binding rules really needed at this time? Will they chill investment and perhaps even impair service quality? And will such regulations possibly restrict the ability of broadband operators to strike creative deals with downstream content providers and deter deployment of next-generation networks? Accordingly, I believe that Chairman Martin and his FCC colleagues were wise to issue a non-binding policy statement on net neutrality which, in a rapidly changing marketplace, stops short of imposing binding rules absent verifiable evidence of consumer harm.

The Future

Looking down the road 10 years from now, it is likely that the dual federal/state regulatory system may need to be transformed because competition in all segments of the market will obviate the need for rate and entry regulation. However, the states likely will continue to play important roles - e.g., in consumer protection, perhaps under a set of national consumer standards governing such issues as customer proprietary network information and truth in billing. The FCC's responsibilities also are apt to change, with primary focus on assuring that new services have enough spectrum and also guarding against interference among different uses of the airwaves. Ultimately, the leading telecommunications providers today will still be around in some form in 2016. But emerging companies - probably a few that we have not even heard of today - may assume key positions in the telecom industry of the future.

Published September 1, 2006.