The Plot to Stop the Internet Telephone Revolution

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Much has been written over the past few months about therevolutionary potential of Internet telephony, or voice overInternet protocol (VoIP) service. VoIP would let consumers makephone calls through an Internet connection, largely bypassingtraditional circuit-switched wireline telephone networks. In time,some think it might come to completely replace older phonenetworks.

In just a few short years, VoIP has gone from wishful thinkingto marketplace reality as numerous companies now plan to deploysuch services. This has also led many industry watchers to speak ofVoIP as a veritable deregulatory deus ex machina that potentiallyoffers a sudden and unexpected way to escape from the pastcentury's regulatory morass.

"Not so fast!" say opponents. That same potential forrevolutionary change that excites some, frightens many others. Thisis an old story, of course. New, "disruptivetechnologies" are often viewed with suspicion, or even outrighthostility, by those who fear they have something to lose by achange in the status quo. But technological revolutions are thehealthiest part of a capitalist economy. In a world where "only the paranoid survive," it's good thatorganizations are forced to stay on their toes, constantlyconcerned about the impact of new technologies on the old ways ofdoing business. That's what drives the Schumpeterian "creative destruction" that makes our economy soinnovative and prosperous.

Often, however, when the fears over technological change reach afever pitch, certain interests substitute a political response fora market response. For many, adjusting or abandoning an oldbusiness model is just not an option they are willing to consider.Instead, they lobby legislators or regulators for protection fromthe new competitors or technologies. Steamboat operators feared therise of railroads; butter makers petitioned against margarine as a substitute;television broadcasters sought to delay competition from cable providers; and some small retailers still fight to keep large chain stores likeWal-Mart out of local communities.

It should come as no surprise, therefore, that this process isplaying itself out today in the debate over Internet phone calls.The issue at hand involves the regulatory classification ortreatment of Internet telephone service. VoIP is something new; itdoes not fit neatly into the Byzantine regulatory taxonomy the FCChas established for older communications services. Its opponentswant to open the door for regulation of this new service byneedlessly subjecting it to the full force of traditional telecomregulations.

In what would be viewed by most people as a silly squabble oversemantics, volumes of paper are currently being filed at the FCCover the question of whether VoIP should be classified as a"telecommunications service" or something else, such as an"information service." Incredibly, in an era in which we should bemapping out the abolition of the FCC altogether, such definitionsmake a world of difference to the development of a new service.Because of the haphazard manner in which communications law hasdeveloped over the past 70 years, there exist distinct regulatoryparadigms for telecom, cable, broadcasting, and wireless service.Internet-based applications do not fit into any of thesecategories, especially since providers in each of those old sectorscan provide online services using different technological platformsor delivery mechanisms. But if VoIP comes to be regulated under oneof these archaic classification schemes, especially the "telecomservices" paradigm, it could be strangled while still in the cradleby a bewildering batch of federal and state regulations.

Consequently, in the filings and public statements made by thevarious interest groups that have lined up to oppose aregulation-free VoIP environment, several recurring themes havebeen cited to justify its classification as a "telecom service":The potential loss of state and local telecom taxes; the need tocollect universal service fees and subsidies; access for thedisabled; public safety requirements such as "E911;" and the needfor various other "consumer protections." For example, citing suchconcerns, a number of state regulators have raised a big stink aboutVoIP, but really they're just worried about losing some of theirregulatory turf and power.

Of much greater concern is the recent intervention of the lawenforcement community, led by the Federal Bureau of Investigation,the Department of Justice, and the Drug Enforcement Administration,which have jointly asked the FCC to assure thatwiretap and monitoring capabilities easily apply to the newtechnology. Apparently the law enforcement agencies opposetelecommunications deregulation because it means they won't be ableto spy on us quite as easily. As Jim Harper, founder ofPrivacilla.org, put it, "The law enforcement cart is comingbefore the civil society horse. The communications infrastructureis being created with eavesdropping in mind before there is anyevidence of [the need for] it, plus with VoIP it won't work anywayas the criminals will use offshore VoIP or open source VoIP, ratherthan . . . any of the major carriers." A wiretap-ready Internetthat enables the sort of online surveillance that the FBI, DOJ, andDEA desire will be a costly proposition, requiring expensiveequipment upgrades and ongoing regulation of this dynamic sector.Moreover, the scheme would likely entail heavy FCC involvement inthe regulation of Internet telephony in the future.

In one sense, what all these diverse parties, from the oldhidebound state regulators to the FBI, are really saying is thatunless VoIP providers can learn to "play the game" exactly the sameway old telecom companies did, they should not, effectively, beallowed to provide service at all. Stated differently, this newtechnology must be pigeonholed into old regulatory classificationschemes and regulatory paradigms of the past; it must not beallowed to breathe the free air of an unregulated communicationsmarketplace.

After all, if VoIP was allowed to develop in a relatively free,unregulated environment, just think of the horrors that mightbefall our society! We might make cheap phone calls orsomething.