Commentary

A ‘Firewall’ to Protect Telecom

By Lawrence Gasman and Solveig Bernstein
This article originally appeared in The Wall Street Journal.

Last week, the U.S. Supreme Court heard oral arguments about a law restricting “indecency” on the Internet. Constitutional or not, such legislation sets a terrible precedent. It has been precisely the absence of government control that has allowed the Net to develop as rapidly as it has.

Contrast this with the rest of the telecommunications sector. The Telecommunications Act of 1996 was supposed to give the industry the freedom to develop. But the act didn’t accomplish full-scale deregulation, and after more than a year consumers have seen few benefits. Although free to enter each other’s businesses, cable and telephone companies have retreated from plans to do so. Local phone companies are battling the Federal Communication Commission’s rules for allowing new competitors into their markets. Some economists even question whether long-distance markets are really as competitive as is commonly thought.

Deregulation of telecommunications has proceeded in an entirely different manner from deregulation of other industries. As Sen. John McCain (R., Ariz.) recently noted, “When we deregulated the airline industry, we did away with the regulatory body. When we passed the Telecommunications Act, we gave [the FCC] enormous new powers.” Real deregulation will have to wait until Congress revisits the 1996 act. In the meantime, how can we speed the development of competition?

We believe a simple solution would be to create a “firewall” around advanced services, with regulators forbidden to touch anything within it. The 1996 act gives the FCC the power to encourage competition by “forbearing” from enforcing regulations that appear to inhibit progress. Section 706 of the act specifically gives the FCC broad authority to “encourage the deployment … of advanced telecommunications capability to all Americans.” Such capability is defined by the act as “highspeed, switched, broadband telecommunications capability that enables users to originate and receive, high-quality, voice, data, graphics, and video telecommunications.” Within our proposed firewall, the provision of services by any provider would be entirely deregulated. Service providers would not be subject to any price controls; state and local price regulation would be pre-empted. Advanced services would be completely left out of any future universal-service requirements and, where services are provided over a wireless infrastructure, providers would have the flexibility to use the spectrum however they please. Advanced services within the firewall would also be exempt from interconnection requirements currently plaguing the telephone industry.

Anyone wanting to profit from providing advanced services would have to build his own infrastructure or bargain to share facilities in a free market. Since no one, not even the local phone companies, has much of a head start in these areas, the markets can be fully competitive. Services that would fall within the deregulated firewall would include all forms of Internet access, advanced television services, business data networking, electronic commerce services and other non-traditional services in which existing service providers do not have any overwhelming power derived from a monopoly past.

The firewall concept is not a perfect solution. But we do believe it would end the competitive doldrums that has so far resulted from the 1996 act. In the past, the FCC took a similar approach to customer premises equipment and information services. In both areas, competition flourished.

In the short run, freeing prices to rise or fall in advanced telecommunications markets to whatever those markets will bear would create a strong profit incentive for both new entrants and incumbents to invest in new infrastructure. In the long run, more and more telecommunications traffic would travel over the new infrastructure, making the final push toward total deregulation much easier. The relative importance of the regulated sector of the telecommunications industry would dwindle over time. Complete deregulation of the entire industry would then not be such an alarming prospect.

Today’s advanced services are tomorrow’s basic infrastructure. Those services must be freed as soon as possible, to show the rest of the market how it’s done. As long as the FCC retains broad discretion over those markets, the industry will devote its resources to litigation and politicking, not competition.

Lawrence Gasman is director and Solveig Bernstein assistant director of telecommunications and technology studies at the Cato Institute.