"**How Technology Will Change Regulation"**

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# Harold Furchtgott-Roth

Commissioner, Federal Communications Commission

Federalist Society of Silicon Valley

Palo Alto, California

December 7, 1999

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It is a great honor and privilege for me to be here today before the
Federalist Society of San Francisco Bay area. It really is a great
privilege to be back here in the Silicon Valley. This is the most
successful place in America today.

And its success is not just limited to comparisons within America.
Everyone in this country, and a good many of the six billion people
around the world, would like to be in the Silicon Valley. It's where
things are happening. It's where the future is.

I'm very pleased to say that much of the great accomplishments of
Silicon Valley has occurred not because of extensive government
regulation.

How did Silicon Valley achieve its success? Through innovations, and new
technologies. They are what Silicon Valley's all about.

People want to come to the U.S. for identifiable reasons. Most
importantly, this is a country that respects contracts and property.
Moreover, we have relatively limited taxation in this country \--
although it's not as limited as some of us might like. And, despite
those of us who rail against regulation, the US probably has less
terrible forms of regulation than other countries. And those are some of
the themes in my talk tonight.

Let me return to the success of Silicon Valley. Success brings problems
and one of those problems is envy. Not just from other parts of the
world but from other parts of America. Every part of America has its
imitation of Silicon Valley. It sounds like "Silicon Valley," but it is
a little different, and somehow falls a little short. Have you noticed
how many places in America now have a "Silicon" adjective placed in
front of a broad area: "Silicon Hill," "Silicon Alley," "Silicon this
and that."

But there is another form of envy. That's the envy of government,
particularly the federal government in Washington. I have a message
today; it's very simple.

You have succeeded. Don't let government claim the success that you've
accomplished on your own. And don't let the federal government take it
away.

I'm reminded of a recent press release that I've been told about from
China. It's an excavation of an ancient burial site and they found some
unknown herbal substances. The scientists spent a lot of time
discovering this ancient herb, and they issued a press release hailing
the ancient Chinese as very advanced in medicine.

Recently, in an ancient burial site in Egypt, Egyptian archeologists
found ancient writings that were very much earlier than anyone had known
about. And the Egyptians issued a press release, and they claimed that
ancient Egyptian culture was very advanced.

Well, some California archeologists, not to be outdone, did some
excavation and they dug down and down. And they found nothing, nothing,
nothing. They thought about it for a long time, and they issued a press
release claiming that the ancient Californians had discovered wireless
technology.

We can laugh at these anecdotes because we know that technology moves in
one direction\-- always for the better. It is true that there are
ancient mysteries that we do not fully understand today. But generally
what can be done technologically in the past, we can do today, and we
can do it better.

Technology is information about people organizing themselves, organizing
transactions, and exchanging anything and everything. The best practices
in technology can be taught. They can be taught to your children, to
your colleagues at work. They can also be learned by your competitors,
and you can learn from your competitors.

It's pretty easy to be quite conceited about technology. Technology and
time march inexorably in the same direction. We do technology better
today than we did in the past. We have every expectation in the future
that people will do technology better than we do today.

Unfortunately it is less easy to be conceited about government and law.
History is not a uniform improvement in either area; good governments
and law can and have been followed by bad ones, and vice versa. We can't
simply teach good government and law to our children, to our colleagues.
It's not always easy to learn about it from our competitors.

Moreover, improvements in technology have not always led to improvements
in government. Technologists do not claim to having created better
government. But, oh, the conceit of government about having created
better technology. It must be very painful for people from Silicon
Valley to go to Washington, D.C. or to listen to people from Washington
D.C. talking about technology. Is it really credible that someone in
Washington could have created the Internet? Or is it any more credible
that Washington politicians can claim any and all credit for all sorts
of wonderful new technological innovations? As if nothing would happen
but for the presence of government officials from Washington, DC.

**Four roles of government**

There is a very important role that Washington, D.C. and government
officials play for technological innovation. It comes back to the simple
four themes.

1)  respect for property

2)  respect for contract,

3)  limited taxation and

4)limited involvement in regulation beyond what is necessary.

About a year ago, I met a venture capitalist from Silicon Valley, and it
was a delightful meeting. He told me about the wonderful things he was
doing. He turned to me, and he said, "What do you do?"

And I said, "I'm with the FCC."

he said, "Well what's that?"

And I explained that it's a government regulatory authority.

Then he said, "Oh, I've got some friends who are on some of these blue
ribbon panels in Washington, D.C., and they fly to Washington once a
quarter. So, tell me: what's your real job?"

And I sheepishly explained that the FCC is really a full time job, and
I'm not allowed to do anything else.

He was kind of amazed about that\-- it was refreshing I was very
delighted to understand. He had no idea about the FCC.

And tonight sitting next to Troy -- he turned to me and said: "What are
you doing now now that you've left government?"

I said: "Left government?"

And he said "Yes, I thought I read in your bio that you were *formerly*
with the government."

I said that I have to check with my office --tomorrow.

I suspect that are a few people who long for the day when I've left
government. My wife is probably one of them.

**Regulation following technology**

The empirical observation could probably be made at times that
regulation follows new technology. Much of the regulation of the
railroad, for example, didn't occur until 50 years after the railroad
started.

But it doesn't always work that way. Many new innovations were delayed
after there were invented by federal regulations, sometimes for decades.
One of these is wireless phone service. Back in the 1950s, there were
petitions to create new wireless phone services\--similar to cellular
services and PCS today. The FCC sat on these and other applications for
about 30 years.

Then, when it came out in the early 80's, who claimed credit for this
wonderful technology? The FCC . It claimed to be doing wonderful things
for America

No one has actually sat down to try to calculate how much consumers were
harmed by having this wonderful new technology delayed for decades. The
number would be staggering.

**The Internet and fees**

Where does the Internet fit into all of this? I think it's fair to say
that the Internet is slightly regulated today. There is no formal
federal Internet regulation at the Commission yet, but there are a lot
of folks in Washington who would very much like to see that.

Daily clips at the FCC are often filled more with stories about the
Internet than stories about the FCC. I'm sure that's true at other
agencies around Washington as well. Every agency protests that it does
not regulate the Internet, while, at the same time, plotting how to
regulate the Internet, directly or indirectly. There is much
bureaucratic power to the agency or agencies that eventually regulate
the Internet.

When people in Silicon Valley look at the Internet, they see success,
the triumph of markets. In Washington many people look at the Internet,
and they see failure- the failure of markets.

In Silicon Valley, you may see new technologies that flourish without
regulation. In Washington, people see more opportunities for more
regulation or new regulation.

You may see the prospect for broadband access as an opportunity to
invest and innovate to meet consumer demands for lots of new Internet
services. Washington sees broadband access as an opportunity for more
regulation or mandates by government not governed by the laws of supply
and demand.

**Common carriage**

Discussion of government-mandated universal service requirements for
broadband service is going on at this very moment in Washington. DC. For
example, you may see services such as the Internet operating just fine
without common carriage requirements. Common carriage means ostensibly
requirements for terms and conditions that are equally available to
everyone, and it also means an awful lot of regulation. And yet there is
a lot of discussion about common carriage obligations for various parts
of the Internet.

And just exactly where would the common carriage requirements for the
Internet be imposed? Would it apply just to ISPs? To cable operators? To
Internet telephony? To electronic commerce?

It's very easy to understand the concept of common carriage for
railroads, for airlines, but it is very difficult, I think, to
understand the concept of exactly how it would work on the Internet.
Designation of common carriage is not merely an obligation to serve.
Bound up in the common carriage regulations are a lot of obligations,
taxes, and fees. And also limitations on liability.

The taxes and fees are alone are sobering, There is a 3-percent excise
tax on all common carrier telecommunication services. It's been in place
since the Spanish-American War. And there's approximately a five-percent
fee that applies on interstate telecommunications services to pay for
universal service. Added together, that's an 8-percent user fee just for
the privilege of being a common carrier.

What's universal service? It's about a five billion-dollar federal
program nearly half of which goes for schools and libraries. The rest
goes to extend telecommunication networks.

And how do we pay for all of this as consumers? Well, Jerry Hausman of
MIT has estimated that the fees structure imposed on common carriers,
including universal service, is one of the most punishing taxes in the
arsenal of the American tax collection system. American consumers pay
more than \$2 for every dollar that's raised for universal service.
Suddenly the 5 billion dollar universal service program cost the
American consumer 10 billion dollars.

There has been much public discussion about taxation on the Internet.
And of that discussion much has been focused on whether taxes can be
collected by state or local governments, or whether the Internet will
become a tax free zone. Relatively little discussion however is focused
on the tax implications of the Internet being labeled telecommunications
service or a common carrier service.

And why should you worry about the FCC? Well, because it's the FCC that
will ultimately determine whether the Internet, or some portion of it,
is a telecommunications service and thus subject for all these fees.

The Commission has started to take steps that could lead inevitably to
that result. We've declared that all internet traffic is interstate in
nature. That is, all traffic originating at home or office and
terminating at any server anywhere in the world is subject to FCC
jurisdiction. Even by the standards of Washington, claiming jurisdiction
in central Australia is a pretty big stretch, I must say.

We issued a report to Congress in 1998 saying that the content of
internet services is not a telecom service. If, however, you make a
mistake of using a telephone hand set attached to a computer to call
someone who picks up another handset\--now that is a telecommunications
service. Of course, the set of bits and bytes is indistinguishable
whether one uses hand set or not

Now this technologically naive idea has implications not just for
internet telephony, it has implications for all the internet because it
is impossible to distinguish those bits and bytes that originate and
terminate with a hand set from other information that goes over the
Internet. And who would tell the difference. Who would *try* to tell the
difference?

The federal government in general, and the FCC in particular, are at
their best when they are not out trying to regulate. They are at their
best when they are out trying to do the four things that I described
earlier: enforcing property rights, enforcing contracts, providing
minimal and rational taxation, and in keeping regulation to a minimum.

**Property rights**

I've already addressed the tax issue, let me just address the other
three briefly and then I'll open up to questions. America stands for
property rights, and usually our government defends the rights of
property owners all over the world, whether it's intellectual property
or real property.

But, at the FCC we do things to erode the edges of property rights. We
issue licenses for the use of spectrum, and yet we restrict the use of
those licenses. We don't provide for flexibility in the use of licenses.
We tell people they have to use a license in a certain way, often if
alternative uses wouldn't harm anyone.

We also erode property rights for people who have to deal with the FCC
by imposing "public interest: standards which are not codified anywhere.
Even worse, the public interest standards vary depending on the identity
of the party and the type of service providing, sometimes even within
the same service.

**Contracts**

Contracts are negotiated agreements between private parties. While
government agencies can and do prescribe certain requirements for
contracts, and can and do require *certain* narrow terms and conditions
that must be included in certain contracts, it is very rare for the
government specify *all* the terms and conditions it must be included in
every contract, including prices. But, at times, this kind of regulatory
approach has been the preferred option at the Commission. The threat of
common carriage obligations, is in essence a forced contract that might
potentially apply to some new services.

**Excessive regulation**

Economists have long noted that the potential need for government
intervention where there is market failure. Markets may fail for several
reasons including information problems and problems of what economist
refer to as externalities --factors that are not taken into account in
the consumption patterns or supply patterns of market participants

When the Commission uses it power to regulate, it often attributes the
decision to "market failure." Markets can and do fail, but not as often
or as systematically as one might believe in Washington. When it comes
to markets, contempt in Washington is rarely the product of familiarity.

One of the most frequently cited market failures of the Commission has
been low demand. To me, that is not market failure. It is a sign the
market is working just fine. It's just that there is not a lot of demand
out there.

Affordability is another often-cited basis for market failure at the
Commission. Again, to an economist, affordability is not a sign of
market failure.

The combination of affordability and demand is leading to a lot of
discussion about making broadband access to residences part of universal
service. Well there may be some here in Silicon Valley who would jump
for joy at the prospect of the government-subsidized broadband access to
the home. But it's a very heavy price to be paid when the government
gets involved in these programs, and it's a very heavy price that in the
end it is very difficult to justify.

**Failing to act**

At the same time, there are instances where the Commission can and ought
to be involved, where there is a form of market failure, and yet the
Commission routinely turns a blind eye. One of these has to do with
Section 253 of the Act, which outlaws state, local and federal
regulations that establish barriers to entry for businesses to enter
telecommunications markets. There is no doubt there are a great many
barriers to entry, the telecommunications markets at the state and local
level. But the Commission refuses to even look at these very seriously.
As a great fan of federalism, I certainly don't want to be out there
leading a charge to overturn the state and local sovereignty. But we
have a federal responsibility that we often shirk.

The Commission also has obligations under section 11 to review all
telecommunications regulations every two years, and if they are no
longer needed we ought to get rid of them. The Commission has
consistently refused to review all telecommunications regulations. Well,
heck, we've hardly reviewed any of them! And why is that? We're too
busy. We're too busy off doing a whole bunch of things where we have no
legal authority to do.

**The Federalist Society**

I want to thank all of you for coming tonight and to thank the
Federalist Society which has its on its emblem James Madison. Some
people think of the Federalist Society as some right-wing, nut case
group. Perhaps, some people think that James Madison is a right-wing nut
case. I'm here to tell you that Madison was not a right-wing nut case.

I don't think people of America in the late 18^th^ & early 19^th^
century thought of James Madison as conservative in any way. He was if
anything a great moderate. He was a believer that rules and laws
mattered, that the Constitution mattered, that the Constitution was
necessary, not just for the proper function of government, but to
protect individuals from the abuses of government.

I hope that the Federalist Society will continue to champion the cause
of insisting that laws be followed and that the constitution be
followed. Nowhere can the Federalist Society serve a greater role than
here in Silicon Valley where individuals, not government, have brought
so much great wealth to this country. The wealth has come through the
exercise of property and contracts. And yet it is here where there is
very much that the government can do to threaten this great wealth.

I believe that the Federalist Society can do very much to help preserve
a great deal that has been created here in Silicon Valley. Thank you
very much.