America’s Internet Transformation Demands an All-IP Future

by on October 31, 2012 · 0 comments

If the FCC stops moving forward on Internet transformation, the universal service and intercarrier compensation reform order will become a death warrant for telephone companies.

CLIP hosted an event earlier this month to discuss Internet transformation. What is Internet transformation? In a recent op-ed, FCC Commissioner Ajit Pai noted that it “is really two different things—a technology revolution and a regulatory transition.”

The technology revolution began with the commercialization of the Internet, which enables the delivery of any communications service over any network capable of handling Internet Protocol (IP). According to the National Broadband Plan, the “Internet is transforming the landscape of America more rapidly and more pervasively than earlier infrastructure networks.” In little more than a decade, the Internet destroyed the monopoly structure of the old communications industry from within and replaced it with intermodal competition.

Creative Destruction is the essential fact about capitalism.” Unfortunately, the same cannot be said of regulation. Years after the Internet debunked the 20th Century notion that telephone service is a natural monopoly, the Communications Act soldiers on as if the Internet did not exist. The theory of natural monopoly assumes the market will support only one facilities-based telephone network. The current regulatory scheme is premised on this theory even though the overwhelming majority of consumers today can obtain telephone service from at least six different facilities-based communications companies: the incumbent telephone company, the incumbent cable operator, and four nationwide mobile providers.

Though they provide similar services, telephone, cable, and mobile companies are subject to very different legal requirements. When Congress overhauled the Communications Act in 1996, the commercial Internet was still in its infancy. Different communications services were generally provided by different network architectures: Cable systems provided one-way video programming, cellular networks provided mobile telephony, and the public switched telephone network provided plain old telephone service. Congress assumed this traditional status quo would continue indefinitely and fashioned the law accordingly.

Unfortunately, this assumption was outdated almost as soon as it was made. Millions of American consumers have been cutting the telephone cord in favor of mobile telephony for a decade. Consumers have been able to access high-speed Internet services over multiple, IP-based network architectures for a decade as well, including largely unregulated Wi-Fi hotspots that are routinely available for “free” in most metro areas. Consumers have viewed the “triple play” packages provided by cable and telephone companies over fiber networks as competitive substitutes for years. Their respective status as “cable” and “telephone” companies remains relevant only in outdated statutory definitions that now serve primarily as a source of rent seeking for opportunists who are generally unwilling to invest in their own networks.

Companies that benefit from these rent-seeking opportunities have long claimed that policies favoring certain companies at the expense of others promote “competition.” The DC Circuit rejected this reasoning in 2004, when it remanded FCC broadband rules applicable only to telephone companies because the FCC had failed to consider the importance of intermodal broadband competition from cable providers.

In its 2011 order reforming outdated intercarrier compensation policies and establishing the Connect America Fund (the “CAFIC Order”), the FCC finally conceded that “leveling the playing field” promotes competition by allowing consumers to more accurately compare service offerings from telephone companies, cable companies, and wireless providers. The FCC recognized that its legacy policies were “designed for an era of separate long-distance companies” and “established long before competition emerged among telephone companies, cable companies, and wireless providers.” It also recognized that the implicit subsidies provided by intercarrier compensation are “a deterrent to deployment of all IP networks” and “unfair for consumers.” The FCC decided to “promote innovation by eliminating barriers to the transformation of today’s telephone networks into the all-IP broadband networks of the future.” It began this transition by phasing out intercarrier compensation.

The CAFIC Order took a significant step toward fulfilling the vision of Internet transformation, but it is only the first step. The FCC left the details of its implementation to future proceedings and has yet to address many critical regulatory transition issues at all. Revising a regulatory framework developed over nearly a century is no easy task, and the FCC should be commended for committing to move forward. Now that journey has begun, however, the FCC must keep moving.

Internet transformation will leave no company untouched. It is affecting laws and regulations governing every aspect of communications policy and broader issues as well, including privacy, copyright, and free speech, all of which should considered during the regulatory transition. Ironically, however, telephone companies are among the most vulnerable to delay. If the FCC stops moving forward on Internet transformation, the CAFIC Order will become a death warrant for telephone companies.

The CAFIC order encourages Internet transformation by eliminating the largest source of support for the switched telephone network – intercarrier compensation. Although removing implied subsidies for switched telephone service is a necessary step in promoting the deployment of all-IP networks, it is not sufficient by itself: The FCC must also eliminate regulations requiring telephone companies to continue offering 1930s-1960s era technology in the form of switched telephone services. A telephone company that deploys an all-IP infrastructure cannot capture the increased efficiencies produced by its investment in modern infrastructure if it is required to continue supporting a duplicative (and inefficient) switched telephone network. Without additional reform, the CAFIC Order will result in a significant reduction in revenue for telephone companies without a corresponding reduction in their cost of providing service. That result is unsustainable in a communications market that is increasingly demanding broadband services.

If telephone companies must continue to maintain outdated and inefficient switched networks while their unregulated broadband competitors reap the benefits of modern network technologies, telephone companies will continue to lack incentives to invest in all-IP networks. In the long run, they would be unable to compete with cable operators and other providers of IP-based services who are not required to maintain inefficient, duplicative networks. Faced with that future, telephone companies would have every incentive to invest their capital elsewhere, which would reduce opportunities for additional consumer choice in the wired broadband segment.

If that happens, consumers will lose a potential broadband competitor and the public interest will suffer. Consumers are already feeling the frustration of a regulatory system that has not kept up with the pace of Internet transformation in the market for communications services. I told a true story at the CLIP event about a former employee of mine who “cut the cord” so long ago he didn’t know he was required to dial a “1” before making a long distance call on a wireline telephone. He did not know there was a difference between “local” and “long distance” calls in FCC regulation. From his perspective, the requirement to dial a “1” was arbitrary and confusing.

The FCC knows the United States must seize the opportunity for Internet transformation through regulatory reform or “we will fall behind those countries that do.” The communications industry knows it. Consumers know it too. They know Internet transformation will be disruptive, but they also know that disruption is the constant companion of innovation – and innovation is the key to our global competitiveness.

I expect it is the inevitability of disruption that prompted the so-called Broadband Coalition to claim that Internet transformation is a “lie.” If you want to know the “truth” about Internet transformation, you don’t have to take my word for it.

  • You can read the National Broadband Plan or the FCC’s Connect America Fund order, which describes the nation’s goal as building “the all-IP broadband networks of the future.”
  • You can read this announcement by T-Mobile describing its all-IP backhaul strategy as the key to a competitive 4G experience. According to T-Mobile, “A 4G network without appropriately dimensioned backhaul is like building a mile of six-lane highway (the radio network) that converges into a one lane dirt road (Time-division multiplexing (TDM) circuits).” T-Mobile says it has completed backhaul upgrades (95% of which are fiber) throughout its 4G network, which gives it a competitive advantage over those who “continue to use [TDM-based] T1s at cell sites for backhaul, which provide a slower connection to the Internet.”
  • You can read this announcement from Sprint Nextel stating that its backhaul network upgrade from T1s to Ethernet will increase Sprint’s bandwidth by 20 times at each cell site and reduce its cost per bit by 95 percent.

Sprint Nextel and T-Mobile compete in the lightly regulated mobile wireless segment in which market-based competition drives network deployment and innovation. Their announcements indicate the market has already spoken: The future of mobile wireless broadband is all-IP infrastructure. Shouldn’t consumers of wired broadband services have an opportunity to enjoy that future too?

It is the future consumers want. It’s the future that innovation entrepreneurs in Silicon Valley want too. Broadband applications and devices rely on high-speed IP infrastructure to reach consumer markets. The longer we wait to upgrade our networks, the more uncertainty there will be for entrepreneurs eager to create new IP-based products and services and distribute them to a wider audience. Even Hollywood can agree with Silicon Valley on this issue. Content producers of all kinds benefit from the ability of all-IP networks to support the distribution of video and other high-bandwidth services online.

The Broadband Coalition, which says it represents America’s “innovative” broadband providers, claims it “doesn’t matter” whether packets are “organized” using TDM (used by T1 lines) or IP technology. I suspect engineers at the FCC, T-Mobile, and Sprint would be surprised to hear that transitioning to IP “doesn’t matter.” Does the Broadband Coalition intend to contact the Federal Trade Commission and alert them to the “false” claims of T-Mobile and Sprint about the significantly faster speeds and lower costs of their IP backhaul networks? Not when the technical and economic advantages of all-IP networks tell the true story so plainly.

I did some online research to see whether other countries believe IP networks matter. China recently focused its “Broadband China” initiative on the deployment of all-IP networks. This initiative aims to provide high-speed broadband connections to more than 250 million households in urban and rural locations in China by 2015, and is expected to connect 35 million new families to the Internet with fiber-to-the-home networks by the end of 2012. I did not see any announcements regarding new “TDM-to-the-home” network deployments, and I don’t expect we’ll be hearing about new deployments of this 1960s era technology to consumer neighborhoods anytime soon. The global consensus appears to favor all-IP networks for the foreseeable future.

If someone is being disingenuous about Internet transformation, it’s the Broadband Coalition. It says continued FCC enforcement of the current regulatory framework will enable “innovative” technology providers to offer lower prices and “technology breakthroughs.” The FCC has been following that prescription for nearly two decades, yet it concluded in its most recent broadband progress report that “broadband is not yet being deployed ‘to all Americans’ in a reasonable and timely fashion.” Americans cannot afford to wait another 18 years to see whether an outdated regulatory regime adopted in 1996 will eventually work. Delaying regulatory reform might shield some companies from competitive disruption in the short-term, but domestic regulatory policies cannot stop Internet transformation from occurring internationally.

It is past time the United States adopted a regulatory framework designed for today’s communications markets – one that serves the needs of consumers and enhances our global competitiveness. At the CLIP event on Internet transformation, Commissioner Pai recommended that the FCC create an IP Transition Task Force to “track down and remove all the tariffs, the arcane cost studies, and the hidden subsidies that distort competition for the benefit of companies, not consumers,” while “preserv[ing] the vital consumer protections that are still likely to be needed in an all-IP world.” He believes a comprehensive approach to regulatory transition is required to meet “the great infrastructure challenge of the early 21st century” – high-speed Internet access for all Americans.

The Broadband Coalition recommends that we adopt the Homer Simpson approach to this challenge: “hide under some coats, and hope that somehow everything will work out.” That approach would be no better for the United States than it was for Homer Simpson. As the National Broadband Plan recognized, “the choice is not whether the transformation will continue. It will.” The choice is whether we, as a nation, will rise to meet the challenge.

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