The FCC and the Unregulation of the Internet

Jason Oxman\*

*Counsel for Advanced Communications*

*Office of Plans and Policy*

<joxman@fcc.gov>

#### 

###### Office of Plans and Policy

Federal Communications Commission

Washington DC 20554

July 1999

OPP Working Paper No. 31

\*Several FCC colleagues deserve particular mention and thanks for their
assistance with this project. Thank you to Robert Pepper, Lisa Sockett,
Kathryn Brown, Stagg Newman, Dale Hatfield, Tom Power, Michael Kende,
Doug Sicker and Robert Cannon. A special thanks to William Kennard for
his support and his leadership in this era of convergence. The views
expressed in this paper are those of the author, and do not necessarily
represent the views of the Federal Communications Commission, the
Chairman or any of its Commissioners, or other staff.

Contents

[Executive Summary]{.underline} [3](#executive-summary)

I. The Internet, Openness, and the Marketplace
[4](#the-internet-openness-and-the-marketplace)

II\. Unregulated data and deregulated equipment 1960s-1970s: Computer
Inquiry and Carterfone
[7](#unregulated-data-and-deregulated-equipment-1960s-1970s-computer-inquiry-and-carterfone)

*Computer Inquiry* [8](#computer-inquiry)

*Basic vs. Enhanced: What does it mean?*
[12](#basic-vs.-enhanced-what-does-it-mean)

*Competitive Customer Premises Equipment*
[13](#competitive-customer-premises-equipment)

III\. The unregulated data market of the 1980s and 1990s: Universal
Service and the ESP Exemption
[15](#iii.-the-unregulated-data-market-of-the-1980s-and-1990s-universal-service-and-the-esp-exemption)

*Effect of Universal Service* [15](#effect-of-universal-service)

*The ESP Exemption* [16](#the-esp-exemption)

IV\. Recent Developments [18](#iv.-recent-developments)

*Fostering Competitive Broadband Deployment*
[18](#fostering-competitive-broadband-deployment)

*Beyond the phone network: The Internet over Wireless, Cable, and Mass
Media*
[20](#beyond-the-phone-network-the-internet-over-wireless-cable-and-mass-media)

V. Looking to the future: Pressure for Government Intervention
[22](#v.-looking-to-the-future-resisting-government-intervention)

*Effects of Convergence* [22](#effects-of-convergence)

*The Public-Private Internet* [23](#the-public-private-internet)

VI\. Conclusion: Lessons from "Unregulation"
[24](#vi.-conclusion-lessons-from-unregulation)

#  

# [Executive Summary]{.underline}

-   The Internet is becoming the most important communications medium in
    history with the potential to transform personal, social, economic
    and political behavior.

> The typical American family gains an incredible amount of value from
> its \$20 per month Internet account, including such services as
> investing, travel planning, homework research, email communications,
> and shopping, among others.

-   The Internet Economy generated over \$300 billion in revenue in the
    U.S. last year and is rapidly changing the way America does
    business. Nearly one third of the nation's households are regular
    Internet users.

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-   The success of the Internet has not been an accidental development.
    Market forces have driven the Internet's growth, and the FCC has had
    an important role to play in creating a deregulatory environment in
    which the Internet could flourish. This paper examines the history
    of the FCC's data policies and the ways in which those policies have
    benefited the Internet. Key FCC policy decisions have included:

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-   Fostering the development of an interconnected telecommunications
    network that ensured near universal availability of a reliable and
    affordable telephone system over which data services could be
    offered.

-   Determining through the *Computer Inquiry* proceedings that computer
    applications offered over that network were not subject to
    regulation, giving rise to the unregulated growth of the Internet.

-   Exempting enhanced service providers from the access charges paid by
    interexchange carriers, helping drive the availability of
    inexpensive dial-up Internet access.

-   Deregulating the telecommunications equipment market while requiring
    carriers to allow users to connect their own terminal equipment,
    helping to foster the widespread deployment of the modem and other
    data equipment tools that can be easily attached to the public
    switched network.

-   Implementing flexible spectrum licensing policies that permit
    innovative uses of wireless data services, leading to the
    development of wireless Internet applications.

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-   As the Commission moves into the next century, it must continue to
    take the necessary steps, as it has in the past, to ensure that
    communications networks and Internet services that rely on those
    networks will continue their dynamic and vibrant growth. Fundamental
    lessons learned from the Commission's thirty year deregulatory
    approach towards data networks include:

-   Do not automatically impose legacy regulations on new technologies,

-   When Internet-based services replace traditional legacy services,
    begin to deregulate the old instead of regulate the new; and

-   Maintain a watchful eye to ensure that anticompetitive behavior does
    not develop, do not regulate based on the perception of potential
    future bottlenecks, and be careful that any regulatory responses are
    the minimum necessary and outweigh the costs of regulation.

# 

## The Internet, Openness, and the Marketplace

Much as the steam engine revolutionized industry in the 18^th^ century,
electricity changed the way we lived in the 19^th^ century, and the
circuit-switched telephone system shrank distance for voice
communications in the first part of the 20th century, the Internet has
radically altered the way we live in the last decade of this century.
The Internet has created the information revolution, and it is on its
way to becoming the single most important communications tool in
existence. The Internet exercises enormous influence on the commercial,
educational, and social future of this country. According to one survey,
nearly 80 million Americans are online today, with a total of 100
million Americans expected online by the end of the year 2000.[^1] They
are shopping, researching investments, making travel plans, expanding
their educational horizons, and interacting with one another in an
online community.

The growth of the Internet is nothing short of explosive, driven by the
invention in this decade of the World Wide Web, which gives consumers a
user-friendly platform from which to access content in the online world.
In 1993, the year the first commercial web browser hit the consumer
market, there were 1.3 million computers linked to the Internet. In four
short years, that number reached over 16 million,[^2] and an estimated
80 million Americans are online today.[^3] Americans are using the
Internet to communicate with each other like never before, as email has
become the communications medium of choice for millions of users.[^4]
And the Internet is an unprecedented educational tool as well.
Thirty-five percent of U.S. schools had access to the Internet in 1994.
By 1998, 51 percent of the nation's public school instructional rooms --
not just schools, but individual classrooms -- had Internet access.[^5]
School children are using the Internet to explore far off places by
interacting with peers around the globe and bringing educational
materials to their desktops from thousands of miles away. And their
parents are using the Internet for commerce. Commercial activity on the
Internet in this country, estimated to be over 100 billion dollars by
the end of this year, is expected to more than double next year.[^6] In
all, the "Internet economy" generated 300 billion dollars, and was
responsible for 1.2 million jobs, in this country is 1998.[^7]

The Internet's success can be attributed to several ingredients, but
none are as important as the market forces, investment, and competition
that have driven its growth. The Internet is a loose interconnection of
tens of thousand of networks that communicate using a common
communications protocol. Every user that accesses the Internet becomes
part of it. The most important technical feature of the Internet is its
openness, which allows any user to develop new applications and to
communicate with virtually any other user. This openness is driven by
the sharing of that common communications protocol: IP, the Internet
protocol, developed by early Internet pioneers. No one owns the Internet
protocol, no one licenses its use, and no one restricts access to it. IP
is available for all to use, and the explosion of Internet applications,
from online commerce and medicine to educational and social tools,
demonstrates the wide range of individuals and companies taking
advantage of the openness of the Internet.

But the Internet is much more than just a common language. The Internet
is a community, and users need to move in and out of that community with
ease. The Internet has grown up over this country's telephone lines, a
technological development that has made it possible for virtually any
American to join the online community. Because of the vast expanse of
telephone penetration in this nation,[^8] and because of the openness of
that network, the Internet has exploded. Every American with a phone
line and a computer can be part of the Internet. The phone network has
historically been open in two senses: phone customers are permitted to
access any Internet service provider of their choosing, and those
customers are permitted to attach their own equipment to the phone line,
allowing them to use modems to transform their phone lines into their
own information superhighways.

Open access across the telecommunications network has driven the
deployment of innovative and inexpensive Internet access services. The
average cost of basic telephone service to most residential consumers is
between 13 and 29 dollars per month (an average of 20 dollars per month
across the country last year).[^9] Hundreds of Internet service
providers offer unlimited dial-up Internet access (no hourly fees) over
that inexpensive phone line for less than 20 dollars per month. Indeed,
Internet service providers themselves utilize this same phone network to
offer an amazing array of Internet services to customers, and the
affordable use of the telephone network has allowed these providers to
offer inexpensive access to the Internet to virtually all Americans.
Once on the Internet, the interconnection of this nation's
communications networks allows Internet users to communicate with
virtually all other users, around the nation and the world. The
Internet's "killer apps," email and the World Wide Web, developed and
flourished by using our nation's phone lines.

In sum, the growth and continued success of the Internet, and the
ability of market forces to sustain and encourage that growth, can be
attributed to one basic attribute: the openness of both the Internet and
the underlying telecommunications infrastructure. The Internet Protocol
ensures that all Internet users can speak a common language, and this
nation's communications highways, operated under the supervision of the
FCC, ensure that the Internet has a platform over which it can access
the world. To the extent that the Internet has relied on the openness of
this nation's communications infrastructure to reach all corners of this
nation, this ingredient in its success has not been an accident. The FCC
has taken numerous steps since the early days of the telecommunications
data services industry three decades ago to permit competitive forces,
not government regulation, to drive the success of that industry. As
discussed in greater detail below, the success of the Internet today is,
in part, a direct result of those policies.

The FCC's goal for three decades has been to ensure that all users of
data services, like the Internet, have access to those services over our
nation's communications infrastructure. The story of the Commission and
its role in the development of the Internet[^10] highlights the benefits
of the FCC's early deregulatory efforts to facilitate the growth of
computer applications offered over the public telecommunications
network. As discussed in greater detail below, the Commission determined
that computer-based services offered over telecommunications facilities
should not be subject to common carrier regulation, and in so ruling the
Commission set forth the necessary unregulated landscape for the growth
and development of the Internet. As the Internet has matured over the
last three decades, the Commission has acted in numerous ways to ensure
that this incredible network of networks continued to develop
unregulated. Equally important, the Commission has also ensured
universal access to the ubiquitous telecommunications network on which
the Internet relies to reach millions of users across America.

This paper provides a brief examination of the FCC's contributions to
the rapid expansion and success of the Internet. The Commission does
not, and should not, take credit for the success of the Internet beyond
the role it has played in providing fertile ground for the growth and
development of data networks over the nation's communications
infrastructure. This paper highlights the distinction drawn by the FCC
between the unregulated Internet and the regulated telecommunications
network, a crucial decision that helped foster the dramatic expansion of
computer applications offered over telephone lines. Finally, it briefly
examines convergence issues that raise new questions about the proper
role of the FCC in the Internet age and the fundamental lessons the FCC
has learned in the last three decades, with the goal of sparking a
dialogue on how such issues should be addressed. Above all, present day
questions about the FCC's role in the Internet are best informed by an
examination of the Commission's thirty-year tradition of "unregulating"
the data services market.

## Unregulated data and deregulated equipment 1960s-1970s: Computer Inquiry and Carterfone

#### 

In September of 1969, a small team of computer pioneers from the
Massachusetts-based computer firm Bolt, Beranek, and Newman (BBN)
installed a prototype packet switch[^11] called an Interface Message
Processor (IMP) at the University of California -- Los Angeles. By the
end of 1969, three more IMPs were in place at U.C. Santa Barbara, the
Stanford Research Institute at Stanford University, and the University
of Utah. BBN's team linked the IMPs, Honeywell 516 servers with a mere
12 kilobytes of memory, together by telephone lines. The researchers
then set about testing the ability of the network to carry data between
the computers. The Internet had an inauspicious debut: the first
packetized data, carried between IMPs at Stanford and UCLA, crashed the
system. As the sixties came to an end, computer processing and
telecommunications facilities, married in a brilliant network
configuration with common protocols, gave birth to the Internet.[^12]

Three years before these historic events, the Federal Communications
Commission foresaw the marriage of computer and telecommunications
technologies and commenced a formal inquiry into the use of
computer-based services over telephone lines.[^13] By opening the
inquiry, the Commission sought to explore the regulatory and policy
issues presented by the convergence of these technologies. Predicting
that the future would bring the convergence and interdependence of
computers and communications, the Commission recognized the difficulty
of separating the two into discrete categories. The Commission noted the
importance of the burgeoning data industry in the opening paragraph of
the inquiry, foreshadowing the very attributes of the Internet that
would make it such a success.

> The modern-day electronic computer is capable of being programmed to
> furnish a wide variety of services, including the processing of all
> kinds of data and the gathering, storage, forwarding, and retrieval of
> information \-- technical, statistical, medical, cultural, among
> numerous other classes. With its huge capacity and versatility, the
> computer is capable of providing its services to a multiplicity of
> users at locations remote from the computer. Effective use of the
> computer is, therefore, becoming increasingly dependent upon
> communication common carrier facilities and services by which the
> computers and the user are given instantaneous access to each
> other.[^14]

The Commission sought information on technological advances in the
computer industry, asking commenting parties to discuss the innovative
new services that would combine common carrier facilities with computer
processing capabilities. Most importantly, the Commission asked if the
policies and objectives of the Communications Act of 1934[^15] would
best be served by permitting computer services to evolve in a free
competitive market, rather than subjecting them to regulation under the
Act. By the time BBN developed the first email program in 1972, the
Commission had already issued its initial decision in the *Computer
Inquiry* and had begun the process of "unregulating" the data service
industry.

### 

### *Computer Inquiry*

The FCC's first *Computer Inquiry*, opened in 1966, generated a
significant response to the Commission's request for comment on the
interdependence of computers and communications services and facilities.
The Commission issued a tentative decision in 1970, followed by a final
decision in March of 1971.[^16] Before discussing its conclusions in the
final decision, the Commission made note of the significant effect the
mere opening of the Computer Inquiry had on the development of
competition and the reduction of prices in the common carrier
marketplace.

For example, the Commission noted that AT&T in early 1970 had filed a
voluntary tariff revision that reduced the minimum rate period for use
of the public switched network from 3 minutes to 1 minute, in response
to the computer industry's request for more flexible minimum usage
periods that reflected the short, bursty nature of packetized data
traffic.[^17] In addition, AT&T reduced its message toll service rates,
permitting more economical transmission of data across the public
switched telephone network (PSTN). The Commission also made note of the
steps it was taking to encourage new entrants into the
telecommunications marketplace to provide competitive voice and data
transmission services. For example, in 1969, the Commission permitted
Microwave Communications, Inc., (now MCI WorldCom) to enter the
intercity private line market, thus offering the public, as well as data
service providers, a wider range of telecommunications services than
provided by then monopoly provider AT&T.[^18]

On the access side of the network, business customers began to seek
inexpensive options for reaching the long distance carriers. The
development of competitive providers of access to the long distance
network, a market that would grow into the expansive competitive access
provider (CAP) market of the 1980s, helped to keep private line prices
down by providing an alternative to the incumbent LEC for access to the
telecommunications network. Inexpensive private lines meant companies
offering data services could purchase telecommunications transport for
those services at reasonable prices. For consumers, more choice in
telecommunications services meant better access to data services offered
over phone lines.

The Commission recognized that its Computer Inquiry was particularly
important because the data processing industry "has become a major force
in the American economy," and the industry "cannot survive, much less
develop further, except through reliance upon and use of communication
facilities and services."[^19] The Commission proceeded to address the
two issues it considered of fundamental importance to the nascent data
industry: (1) are computer data processing service providers subject to
common carrier regulation; and (2) should common carriers that provide
data processing services themselves be subject to regulations that
prevent them from discriminating against competing data service
providers?

The Commission answered the first question in the negative. While
concluding that the Communications Act gave the FCC wide discretion to
regulate any services offered by wire or radio, the Commission began its
inquiry by looking to the basic purpose of the Act and the regulatory
mandate it granted. The Act, the Commission noted, directed the FCC to
remove barriers to entry when such barriers unlawfully restricted free
enterprise, but did not require the FCC to assert and exercise
jurisdiction merely because an activity could be construed as falling
within the parameters of the Act.[^20] As the D.C. Circuit concluded in
*Philadelphia Broadcasting*, the FCC is "entitled to some leeway in
choosing which jurisdictional base and which regulatory tools will be
most effective in advancing the Congressional objective" of the
protection of the public interest.[^21]

After examining the record developed through its Inquiry, the Commission
concluded that the public interest would not be served by regulation of
data processing services. The Commission found "ample evidence" of the
widespread availability of data processing services, indicating "no
natural or economic barriers to free entry into the market for these
services."[^22] The market for data services would continue to flourish,
the Commission determined, in the existing competitive environment. As
discussed in further detail below, so long as the underlying
telecommunications network, over which data services would "travel,"
remained healthy and robust, data services themselves should be free
from regulation. Thus, data processing services were "unregulated" from
the outset, permitting the data industry to develop innovative services
exempt from the numerous common carrier requirements of Title II of the
Communications Act.

The issue of provision of data services by common carriers presented
more serious competitive concerns for the Commission. The Commission
determined that the participation of common carriers in the data
processing market would benefit consumers by offering them innovative
new services at lower prices.[^23] The Commission was concerned,
however, that common carriers would compete unfairly against other
unaffiliated data service providers in two ways. First, the Commission
noted that data processing services required common carrier facilities
and services as necessary inputs, and that common carriers that offered
their own data services would have the ability and incentive to
discriminate against unaffiliated data service providers by denying them
access to fairly priced telecommunications services. Second, the
Commission noted that common carriers might improperly cross-subsidize
their unregulated data processing services with rate-regulated common
carrier revenues.

The Commission addressed these discrimination and cross-subsidization
concerns in the *Computer Inquiry* proceeding by requiring common
carriers seeking to offer data services to offer such services through a
separate affiliate.[^24] Such a separation of communications and data
service activities constituted a reasonable means, the Commission
concluded, of permitting such carriers to offer data services. The
Commission required common carriers to serve their data processing
affiliates and competitors equally in all respects, so that the
carrier's affiliate could not receive preferential provisioning
intervals, service quality, or maintenance. Thus, common carriers were
permitted to enter and compete in the data market, but with safeguards
in place to ensure that competing data providers had nondiscriminatory
access to the underlying communications components of their service
offerings.

The Commission continued its examination of these issues in the
*Computer II* proceedings, opened in the 1970s. In *Computer II*, the
Commission focused on the need to develop a workable categorical
definition of both regulated telecommunications services and unregulated
data services. The result: the creation of the categories of "basic" and
"enhanced" services. The Commission defined the term "basic service,"
which referred to common carrier telecommunications offerings, like
telephone service, as a common carrier offering of a pure "transmission
capacity for the movement of information."[^25] The Commission defined
"enhanced services" as:

> services, offered over common carrier transmission facilities used in
> interstate communications, which employ computer processing
> applications that act on the format, content, code, protocol, or
> similar aspects of the subscriber's transmitted information; provide
> the subscriber additional, different, or restructured information; or
> involve subscriber interaction with stored information.[^26]

Present day examples of enhanced services include voice messaging,
protocol processing, alarm monitoring and electronic publishing, as well
as Internet access services. Enhanced services are often thought of as
"basic service plus;" in other words, they combine a basic service, like
telephone service, with an enhancement, like a computer processing or
storage service. For example, the telephone service used to access an
interactive voicemail system is a regulated basic service, while the
voicemail system, which combines the telephone service with computer
storage facilities, is an unregulated enhanced service. This distinction
is discussed in greater detail in the next section.[^27] In sum, though,
*Computer II* saw the Commission reiterating its commitment to
regulating only the common carrier "basic" transmission service
offerings while continuing to exempt enhanced services from common
carrier regulation. The Commission in *Computer II* continued to require
common carriers that offered enhanced services to provide those services
through a separate affiliate, based on the same concerns about
discrimination and cross-subsidization expressed in the *First Computer
Inquiry*.

The next step in the Commission's *Computer Inquiry*, the *Computer III*
proceeding, saw the replacement of the separate affiliate requirement
for common carriers offering data services with a model of nonstructural
safeguards, such as accounting safeguards, that permitted common
carriers to offer enhanced services on an integrated basis, *i.e.,*
within the regulated telephone company. Even as the Commission eschewed
the separate affiliate model for common carrier data service offerings
in favor of nonstructural safeguards, the fundamental principle of
nonregulation of data services remained intact.[^28] In addition, the
Commission continued to require common carriers to unbundle their basic
service offerings from their enhanced service offerings. The Commission
also maintained the requirement on common carriers, first established in
the initial *Computer Inquiry*, to make basic services available to
competing enhanced service providers at tariffed rates. For the
Commission, the main purpose of *Computer III* was to establish a
deregulatory means of ensuring that common carriers and non-common
carriers alike could compete fairly in the market for data services.

The practical effect of the Commission's decision not to regulate data
processing services has been nothing short of explosive. Early Internet
pioneers utilized data processing services over telecommunications
facilities to inter-network computers across great distances. The use of
a common protocol,[^29] TCP/IP,[^30] permitted the transmission across
telephone lines of data from end users on virtually any computer
network. In the 1980s, the Internet was primarily an educational and
research tool used for electronic mail, file transfers, and newsgroups.
In the 1990s, the Internet would explode with the development of the
World Wide Web and the first web browsers, software used to navigate the
web. The worldwide connection of disparate networks over the Internet,
most connected via telecommunications lines, and increasingly over
wireless technologies and cable networks, has made that explosive growth
possible. And the FCC's early recognition that regulation of data
services as common carrier offerings would inhibit flexibility in the
development and deployment of these already competitive services was a
crucial component of that growth.

### *Basic vs. Enhanced: What does it mean?*

The difference between regulated communications services and unregulated
data services has often given rise to confusion as to exactly which
aspect of communications services the FCC regulates. This confusion is
particularly evident in the present-day discussion of Internet services,
where rumors of imminent FCC regulation of the Internet surface
frequently. As the public debates the future deregulatory role of the
Commission in an age of convergence, it is particularly important to
understand the conceptual basis of the distinction between basic and
enhanced services.

A useful way to think about the distinction between basic and enhanced
services is an analogy to the nation's oil pipelines, storage
facilities, and the refineries that rely on pipelines to transport oil.
Oil pipelines are bare transport mechanisms that carry oil from, for
example, ship to storage facility, often across great distances. The
pipelines take oil in at one end, and transport that oil to the
destination of the customer's choosing. The pipeline is a "dumb"
transmission mechanism that does not interact with its cargo.

In the case of a data service, like a dial-up Internet access service,
for example, there are two components involved. First, the consumer
purchases local telephone service, the equivalent of the empty pipeline,
from the phone company. This purchase entitles the customer to put its
"oil," i.e., voice or data, into the pipeline, and the telephone company
will transport it to the user's chosen destination. Second, the consumer
purchases Internet access from an Internet Service Provider (ISP). The
ISP takes data placed in the pipeline by the end user and performs
computer processing on that data. Using the oil analogy, imagine a
pipeline that has a ship at one end (the end user), a storage facility
at the other end (the Internet), and a refinery in the middle. Oil is
transported via the pipeline from ship to refinery, where the pipeline
offloads the oil; the refinery transforms the oil into gasoline; and the
pipeline then carries the processed oil to the storage facility. The
pipeline still performs no more of a function than the transmission of
its cargo: it is not responsible for the changes the cargo has
undergone.

The ISP is the equivalent of the refinery. Thus, when the user dials in
to the ISP and establishes a modem connection, the telephone line is the
transmission path. The end user transmits data over the telephone line
to the ISP, the ISP modifies that data, and the telephone line carries
that data to its destination. When the data reaches its destination, the
telephone line "unloads" it, and prepares to carry back to the end user
whatever data has been requested. In the case of Internet access, the
end user utilizes two different and distinct services. One is the
transmission pathway, a telecommunications service that the end user
purchases from the telephone company. The second is the Internet access
service, which is an enhanced service provided by an ISP. The telephone
service is the basic service; the Internet access service, offered over
the telephone service, is the "basic service plus" protocol processing
and other computer offerings, so it is an enhanced service. The ISP
provides the end user the capability of sending, retrieving, and storing
data, as well as transforming data to different protocols to allow the
end user to interact with other computer networks that speak other
"languages." These functions are separate from the transmission pathway
over which that data travels. The pathway is a regulated
telecommunications service; the enhanced service offered over it is not.

### *Competitive Customer Premises Equipment*

At about the same time the Commission launched its first *Computer
Inquiry*, it released a short order addressing the complaint of Thomas
F. Carter and his company, the Carter Electronics Corporation, against
AT&T.[^31] In 1959, Carter invented a device, which he named for
himself, that permitted users of mobile radio systems to interconnect
their landline telephone with the radio system to permit mobile and
fixed users to communicate with each other. AT&T advised its customers
that the Carterfone, if used in conjunction with an AT&T telephone,
would subject the end user to penalties pursuant to AT&T's FCC tariff
number 132, which provided that:

> No equipment, apparatus, circuit or device not furnished by the
> telephone company shall be attached to or connected with the
> facilities furnished by the telephone company, whether physically, by
> induction or otherwise . . . .

Carter filed a private antitrust suit against AT&T, and the District
Court referred the matter to the FCC.

The Commission concluded that AT&T's tariff was unreasonable and
discriminatory and ordered the restrictive tariff provisions stricken.
The Commission was troubled by the tariff provision that would have
permitted end users to install AT&T-manufactured equipment with exactly
the same functionality offered by the Carterfone, but not the Carterfone
itself. The Commission determined that a customer desiring to improve
the functionality of the telephone network by interconnecting a piece of
equipment not manufactured by the phone company should be permitted to
do so, so long as that equipment does not harm the network.

The principle of consumer usage of non-telephone company manufactured
equipment with the public switched telephone network, outlined by the
Commission in Carterfone, would later be codified as Part 68 of the
FCC's rules. Part 68 was first adopted in 1975 as part of the
Commission's WATS rulemaking,[^32] in response to telephone company
slowness in modifying tariffs to permit consumers to attach their own
equipment to the public network. Part 68, which addresses connection of
terminal equipment[^33] to the public telephone network, permits
consumers to connect equipment from any source to the public network if
such equipment fits within the technical parameters outlined in Part 68.
Competitive manufacturers of equipment were able, by means of the
Commission's equipment registration and certification procedures, to
build and deploy an incredible variety of voice and data equipment for
use with the public network, without seeking prior permission from
either the Commission, or more importantly, the monopoly telephone
companies.

Through Carterfone and Part 68, the Commission opened the door to
manufacturers of devices that interconnected with the telephone network
and offered value-added services and capabilities. Most important for
the growth and development of the Internet, the Commission's
deregulation of customer premises equipment, or CPE, cleared the way for
the rapid deployment of the modem. The modem allows any consumer with a
computer and a telephone line to access data services, requiring no
network alterations by the telephone company. Residential modem use, in
turn, has driven the growth of Internet applications as consumer use of
the Internet has increased. In fact, without Part 68, users of the
public switched network would not have been able to connect their
computers and modems to the network, and it is likely that the Internet
would have been unable to develop.

As the application of Moore's law[^34] to computer processing speeds
witnessed an exponential growth in computing capabilities, the modem
followed suit. Analog modem speeds rose from 300 baud to 28.8
kilobits/second, and then to today's nearly standard 56
kilobits/second.[^35] Digital modems and codecs,[^36] using such
technologies as digital subscriber line (DSL),[^37] promise multiple
increases in speed that will create demand for even more innovative
Internet-based resources and tools. As a result, consumers will continue
to be exposed to an endless variety of Internet-based applications that
meet their increased bandwidth capabilities.

The Carterfone decision enabled consumers to purchase modems from
countless sources, to install and use the modem without permission from
the telephone company, and to use these modems to take advantage of an
array of data services offered by a diverse assortment of service
providers over their home telephone service. Without easy and
inexpensive consumer access to modems, the Internet would not have
become the global medium that it is today.

## III. The unregulated data market of the 1980s and 1990s: Universal Service and the ESP Exemption

### *Effect of Universal Service*

Since its creation, the FCC has operated under a congressional mandate
of ensuring that common carriers offer service to all that desire it at
reasonable rates and terms.[^38] Since the enactment of the
Communications Act of 1934, the Congress, the states, and the FCC have
established a system of universal service that ensures the availability
of affordable basic telephone service to all Americans. Universal
service policies not only have obvious economic and social benefits for
society, they also have had an incalculable impact on the Internet.
Although the Commission has never regulated the Internet itself, it has
helped to ensure its growth by fostering, through universal service, the
availability of the public telephone network, the network via which the
Internet reaches into millions of American homes and businesses.

The universal service system is designed primarily to ensure that
low-income and rural consumers have access to local phone service at
reasonable prices. [^39] Before the passage of the Telecommunications
Act of 1996 (1996 Act), universal service at the state and federal
levels was a mixture of implicit and explicit subsidies.[^40] Local
telephone companies were permitted to price services offered to
interexchange carriers, as well as certain intrastate services, above
cost, with this implicit subsidy applied to rural and high cost phone
service to provide residents in those areas with affordable local
service. In the 1996 Act, Congress directed the FCC to include schools,
libraries, and rural health care providers as beneficiaries of the
universal service system. [^41] In general, universal service funding
ensures that rural telephone customers do not pay the actual cost of
phone service, which could be hundreds of dollars more than the
subsidized rate that the Universal Service fund makes possible. In large
measure, this funding mechanism is responsible for the very high levels
of telephone subscriber rates in America.

Combined with other common carrier regulations, such as the mandatory
interconnection of all telecommunications carriers,[^42] universal
service helps create low cost accessibility to the telephone network.
The availability of reliable and universally accessible telephone
service is, in turn, the gateway to the Internet. With schools,
libraries, and rural health care providers able to afford the
telecommunications facilities they need to access the Internet, the
Internet becomes even more accessible to all Americans.

### *The ESP Exemption*

For the Internet, the development of a broadly accessible, high quality
phone network meant virtually universal access for end users. As use of
the Internet grew, data service providers became Internet Service
Providers, offering dial-up access to the Internet for consumers with a
phone line, a computer, and a modem. But long before the explosion of
ISPs, even before the invention of the World Wide Web, the FCC took
action that would eventually help pave the way for the nationwide growth
of ISPs. In the early 1980s, the FCC determined that enhanced service
providers (ESPs) would be exempt from access charges. Had the Commission
decided differently, the tens of millions of Americans today who enjoy
unlimited use of the Internet for around \$20 a month, and who invest,
shop, learn, and otherwise benefit from home Internet access, might
never have experienced this extraordinary tool.

In order to offer service to consumers, enhanced service providers
purchase local exchange services at business line rates from local
exchange carriers. For example, Internet service providers generally
charge customers a flat monthly fee for access to the ISP via a local
telephone call. The ISP purchases business telephone lines from a local
exchange carrier, and the ISP's customers dial into a modem bank,
generally located at the ISP's premises, over these telephone lines. At
the same time, interexchange carriers (IXCs), the nation's long distance
telephone companies, also use local telephone company facilities. In
order to originate and terminate long distance calls, IXCs purchase
"access services" from local exchange carriers. Access services include
usage-sensitive access charges, which are per-minute charges that IXCs
pay to both the originating and terminating local telephone companies
for each minute a long distance call is in progress.[^43]

In 1983, the Commission addressed the applicability of access charges to
enhanced service providers.[^44] The FCC answered the question of
whether ESPs had to purchase access services from local telephone
companies. Were they found to be subject to access charges, ESPs would
be responsible for per-minute charges for any services they offered to
customers over common carrier facilities, forcing the ESPs to pass along
those usage charges to their customers. The Commission concluded that
because ESPs were not subject to common carrier regulation, and they did
not use the local exchange network in a manner analogous to IXCs, they
should be treated as end users rather than carriers in their usage of
the network. The Commission noted that ESPs purchase telephone exchange
services, typically voice grade business lines, at business rates and
pay interstate subscriber line charges as end users, and it concluded
that ESPs should not have to pay access charges as well. On the one
hand, the imposition of flat rate end user charges meant that ESPs would
pay their fair share for their use of the telecommunications network,
because the common carriers providing transmission generally pass
universal service costs on to consumers through such charges. On the
other hand, the absence of per-minute measured usage charges assessed on
ESPs had enormous implications for the Internet.

Over 6,000 Internet service providers (ISPs) today offer dial-up service
to the Internet, and over 95% of Americans have access to at least four
local ISPs.[^45] Although America Online, with over 18 million worldwide
members, dominates the ISP field, millions of Americans rely on small
"one POP"[^46] or medium-sized ISPs for their service, ISPs that may
serve several hundred or fewer customers. Accessing an ISP through a
non-metered telephone call allows consumers to attain affordable access
to the Internet. ISPs can purchase the business lines they need to offer
service from any local telephone company.[^47] That so many thousands of
ISPs offer service in this country at relatively low rates is evidence
of the positive impact of the ESP exemption on that field.

Contrasting the American ISP market with that in Europe provides
additional insight into the effect of the FCC's ESP exemption and the
promotion of competition in the telecommunications marketplace. In the
United Kingdom, for example, ISPs may offer a flat rate for monthly
service, but end users are subject to per-minute charges for local
dial-up connections to that ISP, resulting in a relatively expensive
Internet experience for most consumers. Just as importantly, users are
conscious of the fac that the meter is "ticking" as they browse the web.
In the U.S., end users whose ISPs are located within their local calling
area generally pay a flat monthly fee to that ISP and are not charged
per-minute rates for the local call to the ISP. Adding to the expense of
Internet service in the UK, leased lines can cost upwards of \$64,000 a
year for a mere 1 megabit/second of bandwidth because of the absence of
vibrant competition, tens of thousands of dollars more than in the
U.S.[^48] The combination of the high price of telecommunications
services provided to ISPs and the measured usage charges imposed on end
users has meant significantly lower Internet usage rates in the UK, and
in similarly situated European countries, than in the U.S. In this
country, for example, the ISP market generated over 15 billion dollars
in income in 1998, compared with only 4 billion for the entire European
ISP market.[^49] This is one reason why UK policy makers are considering
changing the way British consumers are charged for Internet access.

One final note: the ESP exemption is not, despite persistent rumors to
the contrary, at risk. One of the most prevalent rumors about the FCC is
the myth, occasionally circulated on the Internet, that the FCC is set
to impose long distance charges on the Internet. This rumor circulated
heavily recently when, in early 1999, the Commission issued its decision
addressing reciprocal compensation payments for dial-up Internet
calls.[^50] As the Commission made clear, that decision addressed the
limited issue of compensation exchanged between local telephone
companies for terminating local calls and did not revoke, or even
address, the ESP exemption. Rumors of imminent application of per-minute
charges on dial-up Internet accounts are untrue.

## IV. Recent Developments

### *Fostering Competitive Broadband Deployment*

Building on three decades of policy, the Commission has made numerous
decisions in recent years that continue to have a positive impact,
direct or indirect, on the growth and development of the Internet. The
list of recent actions is long, but a brief examination of some of the
more notable decisions indicates the efforts of the FCC to ensure that
consumers continue to have access to a wide variety of innovative
high-speed data services from a multitude of service providers.

-   In April 1998, in response to congressional direction, the FCC
    released a report on the Commission's progress in implementing the
    universal service provisions of the 1996 Act.[^51] In the report,
    the Commission reaffirmed its long-standing determination that basic
    services (referred to as "telecommunications services" in the 1996
    Act) and enhanced services (referred to as "information services" in
    the 1996 Act) were separate and distinct categories of service.
    Telecommunications services are regulated common carrier services,
    and information services are not. As such, the Commission concluded,
    information service providers are not required to make direct
    contributions to the universal service fund, as telecommunications
    carriers are required to do. This action preserved the unregulated
    status of Internet Service Providers.

-   In October 1998, the Commission issued an order and proposed
    rulemaking addressing the deployment of advanced services by
    telecommunications carriers.[^52] Advanced services offer consumers
    high speed, high capacity communications pipelines that can carry
    data more quickly and more efficiently than traditional narrowband
    dial-up and circuit-switched networks. The Commission clarified that
    advanced services are telecommunications services, because they
    provide a basic transmission path from the end user to a service
    provider. As such, advanced services are subject to Title II
    regulation. By clarifying that advanced telecommunications services
    are common carrier services subject to the interconnection and
    unbundling obligations of Title II, the Commission helped encourage
    increased facilities-based and resale deployment of advanced
    services over incumbent carriers' networks, providing high-speed
    service offerings that ISPs can combine with Internet access to
    provide broadband Internet connectivity to consumers.

-   In April 1999, the Commission issued an order and proposed
    rulemaking addressing collocation and line sharing issues.[^53]
    Specifically, the Commission adopted several measures to ensure that
    competitive providers of advanced services have access to the space
    in incumbent telephone company offices they need in order to offer
    innovative telecommunications services to consumers. In addition,
    the Commission explored line sharing and loop management issues that
    would help ensure that advanced services are available from the
    widest possible variety of providers. These decisions that prevent
    incumbent dominant local carriers from creating barriers to entry
    are helping to speed the deployment of competitive broadband
    telecommunications services, offering consumers more choice and
    better service.

-   In late 1998, the Commission addressed tariffs filed by certain
    incumbent telephone companies for their digital subscriber line
    (DSL) services, a type of advanced service.[^54] DSL is a high speed
    telecommunications service that offers consumers the ability to
    access data services at speeds of up to 50 times the traditional 56
    kbps dial-up modem. The Commission concluded that DSL services were
    properly classified as interstate telecommunications services and
    should be tariffed at the federal level. This level of regulatory
    certainty is assisting carriers in speeding their deployments of
    high speed telecommunications services by providing a consistent
    forum for regulatory issues related to service deployment. These
    broadband telecommunications services are now being used by ISPs to
    provide high speed Internet access to consumers.

-   The Commission has acted on several requests for waivers of its Part
    68 CPE rules to permit the testing and deployment of innovative new
    data equipment. For example, the Commission recently permitted
    Nortel to demonstrate how its "One Meg" modem would provide
    beneficial services to consumers without harming the public
    telephone network. By permitting flexible deployment of innovative
    data equipment, the Commission encourages manufacturers to create
    and market new equipment for consumers to use in accessing the
    Internet at high speeds.

These recent decisions evince a continuing effort on the part of the FCC
to encourage service providers, equipment manufacturers, and end users
to develop and deploy innovative new data services.

### *Beyond the phone network: The Internet over Wireless, Cable, and Mass Media*

[Wireless]{.underline}

As we look to the future of technology and the Internet, applications
are spreading across communications media, from the telephone network
and beyond. For example, wireless Internet solutions have taken hold in
the last several years. Since the early 1990s, the FCC has recognized
the need for flexibile use of the wireless spectrum and has licensed
commercial mobile radio service (CMRS), including personal
communications service (PCS) providers, without restricting their
ability to use the spectrum for data services. The Commission also
grants wireless multichannel-multipoint distribution system (MMDS) and
local multipoint distribution system (LMDS) operators flexible use of
their spectrum for data services. Thus, the FCC opened the door for
wireless providers to develop innovative data services for consumer use.
Indeed, products like Ricochet, Metricom's wireless modem service that
currently offer 28.8 kbps access to the Internet, are a direct result of
that flexibility. MCI WorldCom's recent decision to make a substantial
investment in Metricom promises an increased focus on wireless
technologies that provide an alternative to wireline broadband
services.[^55] MCI WorldCom and Sprint, among others, are also
purchasing wireless cable providers in an effort to expand their
wireless local loop capabilities.[^56]

Numerous satellite providers are planning to enter the broadband
residential market in the next several years. Loral's Cyberstar, Hughes'
Spaceway, Lockheed Martin's Astrolink, SkyBridge, and Teledesic are just
a few of the satellite-based technologies that promise broadband
services to customers that may otherwise not receive land-based
services.[^57] Broadband provider Tachyon.net is currently testing a
two-way satellite based service that would provide high-speed Internet
access across a footprint encompassing all of the U.S. and Europe by the
end of 1999. Such services would be of particular benefit to rural
consumers and those in the developing world, who may be too far from a
telephone company central office to access xDSL, or may not be served by
cable modem services.

[Cable]{.underline}

Cable modem deployment is beginning to bring high speed access to the
Internet over a broadband pipe that traditionally has been used only for
video program delivery. Like xDSL services, cable modems utilize an
existing pipe into the home (in this case, coaxial cable) in combination
with electronics at the customer's premises and the cable company's
offices to offer high bandwidth capacity to residential users.

As companies like \@Home and Roadrunner deploy service across the
country, the Commission has determined in two separate proceedings in
early 1999 that it would not impose any regulation on cable Internet
services at this time.[^58] The competitive, market-driven strategy that
the Commission has embraced in the cable arena is the same market-driven
approach that has guided the Commission's policy in the Internet sphere
for three decades: the market, not the government, should bring
broadband to all Americans. This FCC policy has important implications
for the ongoing deployment of cable modems. A deregulatory approach to
cable modem deployment is aimed at permitting this nascent market to
flourish without governmental interference.[^59] Rather than risk
hindering cable Internet service deployment in its early stages by
imposing a potentially inappropriate regulatory model, the Commission
has determined that the marketplace should address early deployment
issues while the FCC monitors the ongoing deployment closely. At
mid-1999 it appears that this policy is working, with nearly one million
cable modems deployed, up from only 500,000 at the beginning of the
year.

[Digital Television]{.underline}

With the rollout of digital television (DTV) well underway, broadcasters
are exploring numerous different applications to offer consumers,
including data services. In assigning DTV frequencies to broadcasters,
the Commission hoped that innovative data services might become part of
the DTV offerings. As such, the Commission did not impose strict
limitations on DTV spectrum usage, leaving the door open for
broadcasters to offer Internet-based applications. Although the
potential data uses of DTV have yet to be fully explored, the FCC's
flexible DTV rules allow for further development and eventual deployment
of innovative data services.

## V. Looking to the future: Resisting Government Intervention

Although the FCC has a long tradition of encouraging the growth and
development of the Internet by nonregulation, deregulation, and certain
affirmative market-opening policies, there are frequent calls from many
sources for the FCC to become more heavily involved in Internet
regulation. Moreover, the distinction between the traditionally
regulated and unregulated sectors of the information industry is
blurring, providing new challenges to the FCC's
telecommunications/information services structure. The challenge to the
FCC, other government agencies, and the affected industries they touch,
is to enter the era of convergence in a way that furthers the
Commission's longstanding goal of promoting competition, not regulation,
in the marketplace.

### *Effects of Convergence*

Incumbent LECs have been suggesting for years that the Commission's
longstanding ESP exemption should be eliminated. These parties argue
that enhanced service providers use the telephone network exactly as
long distance companies do, originating and terminating interstate
traffic while using the access network of the local telephone company.
In particular, U S WEST filed a petition with the Commission in April
1999 asking for the Commission to declare that providers of Internet
voice telephony services are not enhanced service providers, despite
their use of the Internet Protocol, and should be subject to the access
charge regime.[^60] U S WEST and others argue that the provision of a
phone to phone service, even one that uses the Internet, should be
treated as a telecommunications service. ISPs counter that they should
not be subject to access charges, and that they already contribute to
universal service through subscriber line charges and business line
charges. The distinction between telecommunications and information
services is, U S WEST argues, most difficult to maintain when voice
applications are at issue.

The issue of Internet telephony suggests a greater pressure on the FCC
in the age of the Internet: the rapidly expanding convergence of media.
No longer are cable companies strictly video programmers. They offer
video, data, and even voice service over traditional cable television
facilities. Wireless service providers offer voice and data
capabilities. Indeed, even within a particular technology, the
traditional distinction between information and telecommunications
services is blurring. Internet telephony is one example. As more
services are offered that use the Internet Protocol in a packet-switched
environment, it becomes increasingly difficult to determine where the
telecommunications service ends and the information service begins.
Despite this difficulty, however, it remains important for the FCC to
maintain the unregulated status of data services offered over
telecommunications facilities. One area where this distinction between
telecommunications and information services is particularly important is
the Internet backbone.

The Internet backbone carries Internet traffic between Internet service
providers over transmission facilities that traverse the nation and the
globe. Backbone providers, including MCI WorldCom, Sprint, and PSINet,
exchange traffic with one another at public network access points, or
NAPs, and also at private points of interconnection. As the Commission
stated in the *Universal Service Report to Congress*, Internet service
providers that lease telecommunications capacity from common carriers,
in order to operate an Internet backbone, are not themselves common
carriers, but are providers of information services.[^61] Thus, for
example, backbone providers negotiate arrangements for the transport and
exchange of Internet traffic, called either "peering" or transit
arrangements depending on their terms, which are private contractual
agreements.[^62] In contrast, telecommunications carriers interconnect
with one other for the exchange of telecommunications traffic pursuant
to Title II, which obligates all carriers to interconnect pursuant to
reasonable terms and conditions.[^63] The Internet backbone "travels"
over telecommunications facilities, traditionally fiber optic cables.
The Internet backbone is regulated differently than circuit-switched
voice traffic because they are two different types of services. Much as
Internet access services ride on top of local exchange services, the
Internet backbone rides on top of ATM, frame relay, or similar
high-speed telecommunications services. The underlying
telecommunications services, when provided by common carriers, are
regulated; the information services that travel over those
telecommunications services are not. Because the Commission has made the
important policy determination that such data services should not be
regulated, the Internet backbone is treated as an unregulated
information service.

Another example of the complexities convergence will bring is in the
area of universal service. Questions may arise on the issue of universal
service fund contributions when the converging service offerings muddy
the distinction between those revenues that give rise to contribution
obligations and those that are exempt. For example, a service provider
may offer a bundle of voice, video, and data services, some offered via
the Internet Protocol and some offered over more traditional
communications architectures. This situation may test current rules
about which revenue is included in computing contributions to support
universal service.

### 

### *The Public-Private Internet*

Both government and the private sector have played important roles in
the growth of the Internet. The Internet began as a government-funded
research project. The Department of Defense, seeking a means of
fostering secure and protected communications between institutions
conducting defense research, funded the early computer projects that
gave birth to the Internet. The Defense Department, and later the
National Science Foundation (NSF), continued to fund the construction of
this research network for two decades, until 1995 when the NSF
privatized the Internet backbone, leading to an explosion of commercial
Internet applications. The government has nurtured this important
technology, stepping back in recent years to permit the energy and
inventiveness of the Internet community to take over. Research
institutions and private industry, meanwhile, continue their partnership
to improve the Internet with the Internet II project, a high speed
backbone linking educational and research facilities.

## VI. Conclusion: Lessons from "Unregulation" 

From the FCC's initial determination that data processing should not be
subject to regulation, through the development of a universally
accessible and affordable telephone network, and to the flexibility
granted to data service providers over new technologies, the FCC has
played an important role in the Internet's expansion. The seeds of the
powerful economic and social force that is the Internet have been
carefully germinated over the last three decades, and the FCC has taken
positive steps to cultivate the Internet and ensure it has an open and
free growth.

The principal challenge for the future comes from the convergence of
technologies, and the growing use of the Internet protocol for the
delivery of numerous services traditionally offered over legacy
technologies. Where the distinction blurs between the regulated and the
unregulated, between traditional categories of service and new methods
of delivering traditional services, the Commission's challenge is to
maintain its deregulatory stance towards data services and the Internet.
The Commission should be guided by the last thirty years of unregulation
of data services and the lessons it has learned in formulating that
important policy. The Commission has had a role to play in regulating
the underlying communications services over which the unregulated
Internet travels. But as the foregoing discussion of the Commission's
treatment of data services indicates, the FCC has met the introduction
of new communications technologies with the right attitude: let the
marketplace, not the government, pick the winners and losers among new
services. The fundamental lessons learned from the Commission's three
decades of hand-off, deregulatory action towards data networks include:

-   [Don't automatically impose legacy regulations on new
    technologies]{.underline}. Perhaps the most important contribution
    to the success of the Internet that the FCC has made has been its
    consistent treatment of IP-based services as unregulated information
    services. When innovative new IP communications services first
    entered the marketplace, the Commission had already firmly
    established its deregulatory approach. The FCC did not seek to apply
    legacy Title II regulations to the Internet as it developed and
    flourished -- the first email programs in the 1970s, interactive
    newsgroups in the 1980s, and the World Wide Web in the 1990s all
    grew up over the nation's telephone lines free from regulation. The
    next generation of Internet technologies should be treated in a
    similar manner. The Commission has followed this important principal
    in several readily apparent ways. For example, the FCC has not moved
    to impose broadcast regulations on Internet-provided streaming audio
    and video services. Traditional regulatory structures were designed
    to fit services in existence at the time of enactment. New
    technologies, while perhaps similar in appearance or in
    functionality, should not be stuffed into what may be ill-fitting
    regulatory categories in the name of regulation. Rather, the
    Commission should continue the approach of studying new technologies
    and only stepping in where the purpose for which the Commission was
    created, protecting the public interest, demands it. The best
    example of this approach was the Commission's determination, in the
    *Computer Inquiry* proceeding, that the public interest did not
    require regulation of data services.

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-   [When Internet-based services replace traditional legacy services,
    begin to deregulate the old instead of regulate the
    new.]{.underline} The Commission should not, and has not, respond to
    the advent of innovative category-challenging services by squeezing
    them into existing regulatory categories. Rather, the FCC should
    permit market forces to work without interference from inappropriate
    regulation. For example, the Commission has embraced the provision
    of wireless data services over a variety of technologies and
    spectrum categories. Rather than regulate such services, the FCC
    has, as noted above, provided a great deal of flexibility to
    licensees seeking to offer such services. The unregulation of
    wireless data services should be a model for the wireline world as
    well. As bypasses to the monopoly local network, like satellite,
    wireless, and cable, are increasingly available, and IP technologies
    over a variety of media make the single pipe into the home seem like
    the distant past, there will undoubtedly be calls for the Commission
    to step in and level the playing field. Any leveling that may be
    appropriate in the future should focus on having the Commission
    examine its existing rules that affect legacy providers and
    eliminate those that may be unnecessary in view of increased
    competition.

-   [Maintain a watchful eye to ensure that anticompetitive behavior
    does not develop, and be careful that any regulatory responses are
    the minimum necessary and outweigh the costs of
    regulation.]{.underline} As bypass networks and new technologies
    change the communications landscape, the Commission must be ever
    vigilant to prevent the creation or furtherance of bottlenecks that
    block free and fair access to essential facilities. As the steward
    of the communications public interest, the Commission must ensure
    that all players in the communications marketplace, including owners
    and users of telephone networks and cable systems, have a fair
    opportunity to compete. That goal should, and very often can, be
    accomplished without governmental regulation, by permitting market
    forces to work and shape the competitive landscape. The Commission
    should, of course, avoid regulation based solely on speculation of a
    potential future problem. But oversight by the FCC is crucial to
    ensure that market forces do not fail or are otherwise unfairly
    manipulated by inappropriate behavior by entities with market power.
    If a bottleneck should develop, the FCC's first step should be to
    question whether the costs of governmental intervention against that
    bottleneck would outweigh the benefits. The same question should
    guide any Commission examination of a potential tying arrangement --
    not every tying is unlawful, and the Commission should begin its
    inquiry with the potential harm to the public that may result from
    such an arrangement. In essence, the Commission's approach should be
    minimalist, only taking those steps that are directly necessary to
    solve the problem. Traditional methods of regulatory intervention
    may be available, but may not be necessary. Rather than imposing
    obligations on an entire industry, for example, the Commission could
    seek solutions that address the specific problems posed by a
    particular bottleneck. For this reason, the Commission must continue
    to monitor the provision of access to Internet services to determine
    whether the market is working sufficiently to protect against
    anticompetitive behavior.

In 1966, the FCC opened the *Computer Inquiry* to examine the
interrelationship of computers and communications, noting that "the
growing convergence of computers and communications has given rise to a
number of regulatory and policy questions within the purview of the
Communications Act."[^64] This statement is just as true today as it was
three decades ago. The convergence of today is still computer and
communications, but increasingly the interrelationship of content and
transport is challenging traditional regulatory categorizations. Where
once data communications were offered "over" the voice network, the
network of the future promises voice services as just another data
offering. The FCC's challenge is to maintain its hands-off approach to
the Internet in an era when traditionally regulated services, such as
voice telephony, are offered over traditionally unregulated mechanisms,
like the Internet Protocol. The Commission's instinct, as it has always
been, should be to permit market forces to work, because competition
leads to the widest variety of consumer choices.

The openness of the data communications marketplace, anchored by the
Internet Protocol, has driven the growth of this incredible medium. The
openness of the telecommunications network, mandated by the FCC,
provided an architecture over which the Internet could reach into a
majority of American homes and businesses. Even though there are calls
from numerous sources for the FCC to regulate the Internet, the
Commission has a thirty-year tradition of encouraging its open and
unregulated growth. New challenges like the convergence of technologies
will call for new solutions. The FCC must be prepared to maintain its
commitment to fostering the most powerful and dynamic communications
medium of the modern era.

[^1]: Intelliquest, *cited at* Nua Internet Surveys,
    http://www.nua.ie/surveys/how_many_online/n_america.html.

[^2]: Hobbes Internet Timeline, located at
    http://www.isoc.org/guest/zakon/Internet/History/HIT.html.

[^3]: According to the Department of Commerce's recently released
    *Digital Divide* report, 32.7% of Americans are online today. *See
    Falling Through the Net: Defining the Digital Divide*, Department of
    Commerce, National Telecommunications and Information
    Administration, at 43 (rel. July 1999) ("Digital Divide").

[^4]: 80% of Americans who use the Internet use it to send email. *See
    id.* at 40.

[^5]: "Internet Access in Public Schools and Classrooms: 1994-98,"
    National Center for Education Statistics, U.S. Department of
    Education, Office of Educational Research and Improvement (rel. Feb.
    1999). The survey defined "instructional rooms" as "classrooms,
    computer or other labs, school libraries, and media centers."

[^6]: Forrester Research figures, cited at
    http://www.nua.ie/surveys/analysis/graphs_charts/comparisons/ecommerce_us.html.

[^7]: *1999 Internet Economy Indicators*, Cisco Systems, located at
    http://www.internetindicators.com/features.html.

[^8]: According to the Commerce Department, over 94% of U.S. homes owned
    telephones in 1998. *See Digital Divide* at 2.

[^9]: *See* Tracy Waldon, Federal Communications Commission, *The
    Industry Analysis Divisions' Reference Book of Rates, Price Indices,
    and Expenditures for Telephone Service* at 4-6 (rel. July 1998 ).

[^10]: Of course, the most notable federal government contributions to
    the creation and development of the Internet have been those of the
    Department of Defense and the National Science Foundation, whose
    myriad contributions are beyond the scope of this paper.

[^11]: Packet switches take information that is partitioned into small
    packets and route them to their destinations. Packet switches will
    route their payloads over the best available pathway, so that
    packets of data with the same destination may take different
    transmission paths to get there. Circuit switches, on the other
    hand, establish a single dedicated transmission pathway for the
    transportation of information.

[^12]: For a list of useful timelines and histories of the Internet,
    visit the Internet Society (ISOC) web page at
    http://www.isoc.org/internet-history/.

[^13]: *In the Matter of Regulatory and Policy Problems Presented by the
    Interdependence of Computer and Communication Services and
    Facilities*, 7 FCC 2d 11 (1966) (*First Computer Inquiry)*.

[^14]: *First Computer Inquiry*, 7 FCC 2d 11, ¶ 1 (1966)

[^15]: The 1934 Act created the Federal Communications Commission for
    "the purpose of regulating interstate and foreign commerce in
    communication by wire and radio . . . ." 47 U.S.C. § 151.

[^16]: *See First Computer Inquiry,* Tentative Decision, 28 FCC 2d 291
    (1970); *First Computer Inquiry*, Final Decision and Order, 28 FCC
    2d 267 (1971).

[^17]: *See* *First Computer Inquiry,* First Report and Further Notice
    of Inquiry, 17 FCC 2d 587, 590 (1969).

[^18]: *See Microwave Communications, Inc.*, 18 FCC 2d 953 (1969).

[^19]: *First Computer Inquiry*, Final Decision and Order, 28 FCC 2d at
    ¶ 7. The Commission had previously defined "data processing" as "the
    use of a computer for the processing of information as distinguished
    from circuit or message-switching." 'Processing' involves "the use
    of the computer for operations which include, *inter alia*, the
    functions of storing, retrieving, sorting, merging and calculating
    data, according to programmed instructions." *First Computer
    Inquiry*, 28 FCC 2d at Subpart F.

[^20]: *First Computer Inquiry*, Tentative Decision, 28 FCC 2d at ¶ 18.

[^21]: *Philadelphia Television Broadcasting Co. v. FCC*, 359 F.2d 282,
    284 (D.C. Cir. 1966).

[^22]: *First Computer Inquiry*, Tentative Decision, 28 FCC 2d at ¶ 20.

[^23]: *First Computer Inquiry*, Final Decision, 28 FCC 2d at ¶ 11.

[^24]: *Id.* at ¶ 12 *et seq.* The Commission later eliminated the
    separate affiliate requirements in *Computer III*, determining that
    a series of non-accounting safeguards would serve the same
    non-discrimination policy without requiring physical separation of
    services. The Ninth Circuit Court of Appeals remanded the *Computer
    III* order to the Commission with instructions to further explain
    its decision to lift structural separation. *See California v. FCC*,
    4 F.3d 1505 (1993).

[^25]: *In the Matter of Amendment of Section 64.702 of the
    Commission\'s Rules and Regulations (Second*

    *Computer Inquiry*), 77 FCC 2d 384, 419 (1980) (*Computer II Final
    Decision).*

[^26]: 47 C.F.R. § 64.702(a).

[^27]: In 1996, Congress effectively replaced the FCC's basic and
    enhanced terminology with "telecommunications" and "information"
    service categories. The Commission has noted that
    "telecommunications services" and "basic services" appear to extend
    to the same services, as do "information services" and "enhanced
    services." For a more detailed discussion, *see Federal-State Joint
    Board on Universal Service*, Report to Congress, 13 FCC Rcd 8776 at
    ¶¶ 33-48 (1998).

[^28]: The Commission recently modified certain of the requirements
    placed on Bell Operating Companies pursuant to *Computer III* in
    order to streamline the reporting and filing obligations placed on
    those companies*. In the Matter of Computer III Further Remand
    Proceedings: Bell Operating Company Provision of Enhanced Services*,
    13 FCC Rcd 6040 (1998).

[^29]: Protocols are rules that communications networks follow to
    determine the format and speed, for example, of data transmissions.

[^30]: TCP/IP, the Transmission Control Protocol/Internet Protocol
    allows disparate networks to communicate with each other and share
    data with the use of a common language.

[^31]: *In the Matter of Use of the Carterfone Device in Message Toll
    Telephone Service*, 13 FCC 2d 420 (1968).

[^32]: *Proposals for New or Revised Classes of Interstate and Foreign
    Message Tolls Telephone Service (MTS) and Wide Area Telephone
    Service (WATS)*, 56 FCC 2d 593 (1975).

[^33]: Terminal equipment refers to telephones and other equipment
    (modems and answering machines, *e.g.*) attached to the customer end
    of the telephone line.

[^34]: Moore's law holds that the processing speed of computers doubles
    approximately every 18 months. It is named for Gordon Moore, a
    co-founder of Intel.

[^35]: It is important to note that very few 56 kbps modem users
    actually attain such a high speed in actual usage.

[^36]: Codec = coder/decoder. Modem = modulator/demodulator.

[^37]: DSL technology takes advantage of those frequencies on a copper
    telephone line that are not used for the provision of voice services
    and, using advanced modulation techniques, transports broadband data
    services over those frequencies to the home.

[^38]: 47 U.S.C. § 201.

[^39]: 47 U.S.C. § 254(d), (e).

[^40]: Examples include the high cost fund, Lifeline, and Link-Up. The
    interstate access charge system also provided implicit universal
    service funding support.

[^41]: *See* 47 U.S.C. § 254. Enhanced service providers are not
    required to contribute to the universal service funding mechanism
    because they are not considered to be "telecommunications carriers."
    *Federal-State Joint Board on Universal Service,* 12 FCC Rcd 8776,
    ¶¶ 788-90 (1997).

[^42]: Pursuant to section 251(a) of the 1996 Act, all
    telecommunications carriers must "interconnect directly or
    indirectly with the facilities and equipment of other
    telecommunications carriers." Section 251(c)(2) imposes additional
    interconnection obligations on incumbent LECs.

[^43]: *See generally* 47 C.F.R. § 69.1 *et seq.*

[^44]: *MTS and WATS Market Structure*, 97 FCC 2d 682, 711-22 (1983).

[^45]: Downes, Thomas and Shane Greenstein, "Do Commercial ISPs Provide
    Universal Access," (Dec. 1998), available at
    http://skew2.kellogg.nwu.edu/\~greenste/research/papers/tprcbook.pdf.

[^46]: POP stands for Point of Presence and refers to the number of
    local nodes for dial-up access that the ISP has deployed.

[^47]: Although business telephone lines may feature metered usage rates
    (for intraLATA toll calls, for example), such per-minute charges are
    only assessed on outgoing, not incoming calls, and thus dial-up
    ISPs, which receive calls from customers dialing in to modem banks,
    would not be subject to such charges. Although ISPs connect to the
    PSTN by purchasing a local connection, in order to avoid forcing
    ISPs to pay above-cost per minute charges, the Commission has found
    that the service provided to ISPs by telephone companies is an
    interstate service. *See Implementation of the Local Competition
    Provisions in the Telecommunications Act of 1996, Inter-Carrier
    Compensation for ISP-Bound Traffic*, FCC No. 99-38 (rel. Feb. 26,
    1999).

[^48]: Baguely, Richard, "An Insider's Look at the UK Internet
    Industry," *Boardwatch Magazine*, May 1999 at 94.

[^49]: *1999 Internet Economy Indicators*, Cisco Systems, located at
    http://www.internetindicators.com/features.html.

[^50]: *Implementation of the Local Competition Provisions in the
    Telecommunications Act of 1996, Inter-Carrier Compensation for
    ISP-Bound Traffic*, FCC No. 99-38 (rel. Feb. 26, 1999).

[^51]: *In the Matter of Federal-State Joint Board on Universal
    Service*, Report to Congress, 13 FCC Rcd 8776 (1998).

[^52]: *Deployment of Wireline Services Offering Advanced
    Telecommunications Capability*, 13 FCC Rcd 24012 (1998).

[^53]: *Deployment of Wireline Services Offering Advanced
    Telecommunications Capability,* FCC 99-48 (rel. Mar. 31, 1999).

[^54]: *See, e.g.,* *GTE Telephone Operating Companies Tariff No. 1*, 13
    FCC Rcd 22466 (1998).

[^55]: See "MCI WorldCom Invests in Metricom," CNET News.com (June 21,
    1999), available at
    http://www.news.com/News/Item/0,4,0-38104,00.html

[^56]: Indeed, the Commission continues to adopt more flexible spectrum
    usage policies for broadband service providers. *See* "FCC Revisits
    Licensing and Service Rules for 39 Ghz Band," News Release (rel.
    July 14, 1999), available at
    http://www.fcc.gov/Bureaus/Wireless/News_Releases/1999/nrwl9029.html.

[^57]: *Report on Advanced Telecommunications Capability*, FCC 99-5,
    Report No. CC 99-1 at ¶ 60.

[^58]: *Applications for Consent to the Transfer of Control of Licenses
    and Section 214 Authorizations from Tele-Communications, Inc.,
    Transferor to AT&T Corp., Transferee*, FCC No. 99-24 (rel. Feb. 18,
    1999); *Report on Advanced Telecommunications Capability*, 14 FCC
    Rcd 3160 (1999). In the AT&T/TCI proceeding, the Commission
    determined that the equal access issues raised by parties did not
    provide a basis for conditioning, denying, or designating for
    hearing any of the requested license transfers or authorizations.

[^59]: *See* *Remarks of William E. Kennard, Chairman, FCC, before the
    National Cable Television Association*, Chicago, Illinois, June 15,
    1999, available at
    http://www.fcc.gov/Speeches/Kennard/spwek921.html.

[^60]: *See Petition of U S WEST Inc. for Declaratory Ruling Affirming
    Carrier's Carrier Charges on IP Telephony*, filed April 5, 1999.

[^61]: *Universal Service Report to Congress* at ¶ 67.

[^62]: Peering arrangements involve the exchange of traffic between
    backbone providers without either provider paying the other. Transit
    arrangements involve a payment from one backbone provider to the
    other for the transit of packets.

[^63]: *See* 47 U.S.C. § 251.

[^64]: *First Computer Inquiry*, 7 FCC 2d at 11, ¶ 2.