# Second Computer Inquiry/Final Decision/2
## III. Background
### A. First Computer Inquiry

14. More than a decade ago an inquiry was commenced to address the regulatory and policy problems raised by the interdependence of computer technology, its market applications, and communications common carrier services. In that proceeding, commonly referred to as the "First Computer Inquiry," information was sought regarding actual and potential computer uses of communications facilities and services. Views and recommendations were sought as to whether there was any need for new or improved common carrier service offerings, or for revised rates, regulations, and practices of carriers to meet the emerging communications requirements for the provision of data processing or other computer services involving the use of communication facilities.
15. A number of regulatory issues were raised in the course of the proceeding. A major issue was whether communications common carriers should be permitted to market data processing services, and if so, what safeguards should be imposed to insure that the carriers would not engage in anti-competitive or discriminatory practices. Concern was also expressed as to the appropriateness of a carrier utilizing part of its communications switching plant to offer a data processing service. The potential existed for common carriers to favor their own data processing activities through cross-subsidization, improper pricing of common carrier services, and related anti-competitive practices which could result in burdening or impairing the carrier's provision of other regulated services. There was also concern over the extent to which data processing organizations should be permitted to engage in transmission as part of a data processing package free from regulation.
16. Two fundamental regulatory issues were addressed: (a) whether data processing services should be subject to regulation under Title II of the Communications Act, and b) whether, under what circumstances, and subject to what conditions or safeguards, common carriers should be permitted to engage in data processing. In addressing the first issue, we looked to the basic purpose of our regulatory authority as well as specific statutory guidelines and determined that data processing services should not be regulated, even though transmission over common carrier communications facilities was involved in order to link user terminals to central computers. Thus, certain communications-related services involving electronic transmission over common carrier communication facilities were not subject to regulation under the Act.
17. Regulatory forbearance with respect to data processing services made it necessary to distinguish regulated communications services from unregulated data processing services. Accordingly, in the First Computer Inquiry a set of definitions was adopted to assist in making such determinations. See 47 CFR §64.702. The thrust of this definitional approach was to distinguish between unregulated data processing and permissible carrier utilization of computers by establishing a dichotomy between data processing and message or circuit switching. We recognized that entities would offer "hybrid" services combining both communications and data processing functions. We stated that where message-switching is offered as an incidental feature of an integrated service offering that is primarily data processing, there would be total regulatory forbearance with respect to the entire service. However, where the package offering is oriented to satisfy the communications or message-switching requirements of the subscriber, and the data processing function is incidental to the message-switching performance, we concluded that the entire integrated service would be treated as a communications service. We also stated that in making such determinations we would look to whether the service, by virtue of its message-switching capability, has the attributes of the point-to-point services offered by conventional communications common carriers and is basically a substitute therefor.
18. As to the issue of carrier participation, we recognized that provision of data processing services by common carriers might give rise to certain regulatory problems. Primarily, we were concerned with the possibility that common carriers might favor their own data processing activities through cross-subsidization, improper pricing of common carrier services, and related anti-competitive practices which could result in burdening or impairing the carrier's provision of its other regulated services. We therefore adopted a policy of "maximum separation" whereby a communications common carrier had to furnish data processing services through a separate corporate entity.

### B. Second Computer Inquiry

19. The First Computer Inquiry was a vehicle for identification and better understanding of problems spawned by the confluence of computer and communications technologies taking place at that time. The scope of the Inquiry was very broad and determinations were made based on the state of the art as it then existed. However, significant advances in computer hardware and software have been made since that time. In particular, dramatic advances in large-scale integrated circuitry and microprocessor technology have permitted fabrication of mini-computers, micro-computers, and other special purpose devices, which are capable of duplicating many of the data-manipulative capabilities which were previously available only at centralized locations housing large scale general-purpose computers. With this new technology, users now find it cost-beneficial to remove some of the computing power from a centralized computer location. The phenomenon of distributed processing allows computers and terminals to perform both data processing and communications control applications within the network and at the customer's premises. See Notice at paras. 8–10.
20. The First Computer Inquiry addressed the informational processing environment as it then existed. The definitions and policy determinations incorporated into Section 64.702 reflect the fact that data processing applications were then marketed under a service structure which employed a central host computer in conjunction with a remote, "untelligent" terminal device; The current distributed processing environment, wherein computer processing capabilities are placed throughout a data information or transmission system, compelled, at a minimum, a re-examination of the definitional structure used to distinguish regulated communications services from unregulated data processing services. Due to the inadequacy of the existing definitional structure we proposed to revise the current definitional structure set forth in Section 64.702. See Notice at paras. 15–22. Essentially, we sought to define data processing positively in terms of what it is, rather than by exception as we had previously done. Under this approach a carrier could use a computer for any purpose that is not data processing.
21. The Notice focused on the market applications of computer processing technology within a carrier's network. Shortly after its release, however, we were confronted in our Dataspeed 40/4 decision with the issue of computer processing applications incorporated into terminal devices and whether such equipment should be offered as part of a regulated communications service. Because the computer rules embodied in Section 64.702 did not address the situation where data processing elements are removed from a central computer and distributed among various components within the particular service offering, a void existed in the Commission rules when it came to determing whether carrier provided computer terminals should fall within the scope of a regulated communications service. In Dataspeed 40/4 we determined that AT&T could offer its Dataspeed 40/4 terminal as part of a tariffed communications services; however, this determination was made subject to an examination in this proceeding of the issues raised by a carrier's provision of peripheral devices which incorporate computer information processing functions.
22. As a result of the Dataspeed 40/4 decision, a Supplemental Notice was issued. We proposed to enlarge the scope of the proceeding to include all processing activities, whether performed at a central location, at the customer's premises, or at intermediate locations within or interconnected with a telecommunications network. A modified definition of data processing was proposed to render our computer rules applicable to the distributed processing environment and to determinations as to the nature of a carrier's processing activities—regardless of location or system structure. We proposed that "data processing" be defined as:
   the electronically automated processing of information wherein: (a) the information content, or meaning, of the input information is in any way transformed, or b) where the output information constitutes a programmed response to input information.
Supplemental Notice at para. 8. Recognizing that various computer processing functions are performed in the provision of both data processing and communications services, the new definition was structured in a manner so as to focus on processing activities. Under the new definition the determination as to whether a communications or data processing service is being offered would depend on the nature of the processing activity involved.
23. In addition to its impact on network services, we noted that microprocessor technology has clearly made it possible for terminals to perform many processing operations which they previously performed poorly or not at all by employing techniques previously limited to central computers. Microprocessor technology permits terminals to perform many sophisticated arithmetic and word processing functions at the remote location while reducing the processing load at the central location. Thus technology may have rendered meaningless any real distinction between "terminals" and computers. With the trend toward distributed processing, functions are being taken over by "smart" terminals which are (a) offered to users by the regulated carrier sector and by the unregulated terminal equipment manufacturing sector, and (b) under the control of the user—not the carrier.
24. We indicated in the Supplemental Notice that the confluence of data processing and communications may be such that it is no longer practical or possible to make such classifications with respect to carrier equipment offerings. The potential exists for changing the nature of the processing performed in such devices through utilization of interchangeable software programs. Comments were sought as to whether the offering of customer-premises equipment which performs any information processing activity should be considered a communications common carrier activity, and the proper institutional arrangements, terms, conditions, and regulations under which communications common carriers should be permitted to offer such equipment. At the same time comments were sought on (a) whether the proposed definition of "data processing" correctly divided "communications" and "data processing" when applied to a carrier's processing activities, regardless of location within a service offering; (b) whether the proposed Section 64.702 would be administratively enforceable and in the public interest; and (c) whether the proposed amendment of Section 64.702 would afford flexibility in the structuring of service offerings, and, at the same time, be conducive to innovation in the communications and data processing fields. Comments were also sought on the possible relevance of the 1956 consent decree and its applicability to AT&T's ability to offer various services and customer-premises equipment.

### C. Tentative Decision
#### Network Services

25. After reviewing the comments on the Notice and Supplemental Notice (Tentative Decision, at paras. 8–58), we concluded that a revised definitional structure, standing alone, would not adequately resolve the issues before us. Tentative Decision, at para. 67. Moreover, we noted that continued reliance on a pure definitional approach would merely accentuate the controversy over whether communications is incidental to data processing or data processing is incidental to communications. It became evident that any such proposal would be, at best, a short term solution and would fail to recognize and take advantage of the potential for new and innovative competitive computer services. Accordingly, we concluded that the regulatory problems arising from the interplay of data processing and communications must be addressed by way of a more comprehensive solution — a solution which accomodates the market applications of computer processing technology taking into consideration the realities of the marketplace and user needs—consistent with the mandate entrusted to us by Congress under the Communications Act of 1934, as amended. Id.
26. We proposed to address the structure under which competitive computer processing services are provided. In so doing we recognized that the confluence of communications and data processing renders unlimited the possible combinations and permutations of services which can be offered to the consumer. Moreover, we noted that the nature of these services are determined not by the transmission facilities but, rather, by the specific processing applications offered through electronic equipment attached to the channel of communication. Recognizing that a carrier's telecommunications network is a common denominator in the provision of these services, we proposed a regulatory structure which reflected this fact. However, an attempt was made to rely on a definitional approach for distinguishing regulated communications services from unregulated data processing services.
27. The regulatory structure proposed in the Tentative Decision divided common carrier communications services into three classes&emdash;"voice", "basic non-voice" (BNV), and "enhanced non-voice" (ENV) services. We defined these three categories of services as follows:
   1) A "voice" service is the electronic transmission of the human voice such that one human being can orally converse with another human being. 2) A "basic non-voice" service is the transmission of subscriber inputted information or data where the carrier: (a) electrically converts originating messages to signals which are compatible with a transmission medium, (b) routes these signals through the network to the appropriate destination, (c) maintains signal integrity in the presence of noise and other impairments, (d) corrects transmission errors, and (e) converts the electrical signals to usable form at the destination. 3) An "enhanced non-voice service" is any non-voice service which is more than the "basic" service, where computer processing applications are used to act on the form, content, code, protocol, etc., of the inputted information.
28. We noted that it is primarily when carriers seek to provide "enhanced non-voice" service that uncertainty arises as to the nature of the service and whether maximum separation applies. This is because the category of "enhanced non-voice" service subsumes both regulated communications and unregulated data processing services. We therefore focused our attention on the establishment of a regulatory structure under which carriers could provide "enhanced non-voice" services free from regulatory constraints as to the communications or data processing nature of the service. In order to provide the necessary regulatory safeguards and still foster a competitive environment where computer services can be custom-tailored to individual user needs, we concluded:
   First, communications common carriers owning transmission facilities used in the provision of interstate communications services may directly provide only "voice" and "basic non-voice" services. Second, carriers owning such transmission facilities may provide "enhanced non-voice" services only through a separate corporate entity on a resale basis. Third, the computer facilities of the underlying carrier which are used in the interstate provision of "voice" and "basic non-voice" services may not be used for those computer processing applications associated with "enhanced non-voice" services and which would render the service more than a "basic non-voice" service.
Id., at para. 71. In essence, we proposed a resale structure for the provision of all ENV services.
29. We found that this regulatory structure has distinct benefits over the existing manner in which hybrid services are provided. By separating out those services which must be provided on a "resale" basis, a structure is provided whereby the concerns which prompted the maximum separation policy are substantially minimized. It permits "enhanced" services to be provided under a framework that does not require the complete separation of communications and data processing services and their provision through separate entities with separate computer equipment. This removes regulatory restrictions that serve to artificially structure or limit the types of services that can be offered consumers. Moreover, it substantially reduces the impact any determination as to the communications or data processing nature of an offering would have on the availability of services to the consumer. Whereas under the existing rules a determination that a particular service constitutes a data processing service would foreclose a carrier from offering the particular service or processing application, under this structure the resale carrier could offer an ENV communications service on a tariffed basis, and could offer an ENV data processing service on a non-tariffed basis.
30. This structure obviously did not negate the need to establish a regulatory boundary between ENV communications services and ENV data processing services. Rather than adopting the definition of data processing as proposed in the Supplemental Notice, we set forth a new definitional structure to distinguish the use of data processing in the provision of various regulated communication services from the offering of a data processing service. This definitional structure would allow carriers to perform data processing as part of a communications offering as long as the data processing directly relates to and is for the purpose of providing a communications service or for meeting its own internal operational and financial management needs.
31. We also attempted to set forth a candid appraisal of the regulatory implications of the resale structure and this definitional scheme if they were adopted. In this regard we noted that the need to distinguish between regulated communications services and unregulated data processing services was not eliminated. Because of the inherent flexibility of the definitional scheme, uncertainty would remain as to the exact boundary line beyond which regulation ceases. To the extent there is regulatory uncertainty as to the dividing line between communications and data processing services, a corresponding degree of uncertainty would exist as to the status of resale entities as communications common carriers. For example, a resale entity is not regulated as a communication common carrier if it is only providing a data processing service. In addition, we noted that decided marketing advantages attend regulated status. A resale carrier would be able to offer any ENV service, whereas an unregulated data processing vendor would be limited to providing only ENV data processing services. Because the resale carrier would have more flexibility, one result may be an indirect forcing of currently unregulated entities to acquire common carrier status in order to have the same marketing flexibility as a regulated resale carrier.
32. We also raised questions as to the need for any regulation over ENV services. Arguments were advanced by various parties to the effect that regulation in this area restricts competitive activity, and increases the potential for regulatory responses to foster inefficiencies and misallocations of resources in the telecommunications market. We also noted that the nature of the telecommunications industry may be such that application of the resale structure to every carrier owning transmission facilities may not be necessary. With the relatively recent development of competition in selected telecommunications markets, we inquired into whether the resale structure should be applied to those carriers lacking the ability or incentive to engage in predatory pricing or other anticompetitive conduct. Finally, we sought comment on whether the requirement that carriers provide ENV services on a resale basis should apply to the international arena, particularly the International Record Carriers (IRCs).
33. In light of these concerns, various alternatives were advanced for comment prior to reaching a final decision. The thrust of the various options revolves around the nature and extent of regulation, if any, to be applied to "ENV" services; and the application of the resale structure to selected underlying carriers. We proposed that the relative merits of the following five options be considered in reaching a final decision:
| (1) | Adoption of the Tentative Decision as proposed; |
| (2) | Adoption of the resale structure of the Tentative Decision; however, a) extend the resale structure to the IRCs, and/or b) limit the application of the resale structure to those underlying carriers having the potential to engage in cross-subsidization or other anti-competitive behavior; |
| (3) | Adoption of the resale structure of the Tentative Decision; however, exclude from Title II jurisdiction "enhanced non-voice" services; |
| (4) | Adoption of the resale structure of the Tentative Decision with enhanced non-voice services excluded from Title II regulation (same as #3); however, a) extend the resale structure to the IRCs, and/or b) limit the application of the resale structure to those underlying carriers having the potential to engage in cross-subsidization or other anticompetitive behavior; |
| (5) | Adoption of a regulatory scheme giving specific recognition to a regulatory "gray area" under which the provider of an "enhanced non-voice" service would decide the communications or data processing nature of the service. |

#### Customer-Premises Equipment (CPE)

34. The Tentative Decision distinguished between the computer processing capabilities within a carrier's network and the processing capabilities incorporated into equipment located on the customer's premises. We concluded that customer-premises equipment (CPE) should not be subject to a definitional scheme which classifies either the device or its functions as communications or data processing. Tentative Decision at paras. 104–107. Recognizing the trend toward integration of communications and information processing functions into terminal devices, we proposed to distinguish betwen CPE which performs a basic media conversion (BMC) function and that equipment which serves more than a BMC function. (See Tentative Decision at paras. 108-111 for an explanation of BMC terminal equipment). Delineating between various types of CPE in this manner was thought to offer a relatively stable criterion which was independent of the information processing capabilities of the equipment.
35. We found that the provision of CPE was not a common carrier activity and that CPE need not be provided as part and parcel of a common carrier communications service. Conditions were set forth under which various types of equipment could be marketed. We concluded that carriers owning transmission facilities could market only BMC devices as part of a "voice" of "basic non-voice" service. As to that class of equipment which performs more than a BMC function, we concluded that there should be no requirement that such equipment be offered as part of a tariffed communications service. Moreover, if a carrier desired to tariff such equipment as part of a communications offering, it could only be tariffed in conjunction with an "enhanced non-voice" communications service at the resale level. Under this structure the marketing of CPE which performed more than a BMC function was to be separated from the carrier's basic transmission services; such equipment, if tariffed, would be offered only in conjunction with competitive enhanced services. This arrangement essentially reflected the dynamics of the CPE market and the desirability of having such equipment provided on a competitive basis. It and the possibility of deregulating terminal equipment supply through a separate subsidiary were advanced as alternative approaches to achieving an enduring, consumer-oriented solution to the problems raised by the increasing intelligence of CPE.

#### 1956 AT&T Consent Decree

36. In the Tentative Decision we recognized that the extent to which AT&T would be able to participate on an unregulated basis in the provision of customer-premises equipment and/or ENV services on a non-tariffed basis was not clear due to possible constraints imposed by the terms of the 1956 AT&T consent decree. We set forth the regulatory complications created by the decree, and our view as to how various plausible interpretations of the consent decree should be factored into the decision making process in reaching a final decision. See Tentative Decision, paras. 135–148.
Footnotes
* ↑ Regulatory & Policy Problems Presented by the Interdependence of Computer & Communications Services & Facilities, 28 FCC 2d 291 (1970) (Tentative Decision); 28 FCC 2d 267 (1971) (Final Decision), aff'd in part sub. nom. GTE Service Corp. v. FCC, 474 F.2d 724 (2d Cir. 1973), decision on remand, 40 FCC 2d 293 (1973).
* ↑ 47 C.F.R. §§64.702(c) and (d) require that a carrier establish a separate data processing entity having separate books of accounts, separate officers, separate operating personnel and separate equipment and facilities devoted exclusively to rendition of data processing services; and the carrier is prohibited from promoting the data processing services offered by the separate subsidiary. Carriers with annual revenue less than one million dollars were exempt from the maximum separation requirement.
* ↑ In the Notice we proposed that data processing be defined as: "the use of computer for the purpose of processing information wherein: (a) the semantic content, or meaning, of input data is in any way transformed, or (b) where the output data constitute a programmed response to input data."
* ↑ American Telephone and Telegraph Co. (AT&T) Revisions to Tariffs FCC No. 269 and 267 Relating to Dataspeed 40/4, 62 FCC 2d 21 (1977), aff'd sub. nom. International Business Machines Corporation v. FCC, 570 F.2d 452 (2d Cir. 1978).
* ↑ A function is a separable specific operation, such as storing, merging, etc., whereas an activity is the aggregate result of a combination of functions, regardless of where they may be performed.
* ↑ United States v. Western Electric Co., 1956 Trade Cas. 71, 134, (D.N.J. 1956).
* ↑ The Tentative Decision, at para. 83, proposed the following definitional structure to distinguish between ENV communications services and ENV data processing services at the resale level: 64.702 Furnishing of computer processing services: (a) For the purpose of this subpart — (1) "Computer Processing" is the use of a computer for processing information where the output information constitutes a programmed response to input information. The term "computer" encompasses, inter alia : general purpose stored program processors, general and special purpose mini-computers and microprocessors. "Processing" entails the use of a computer for operations upon data which include, inter alia: arithmetic and logical operations, storage, retrieval, and transfer. (2) "Data processing" is the computer processing of input information for the purpose of providing additional, different, or restructured information. (3) A "data processing service" is the offering for hire of computer processing capabilities for the purpose of: (a) transforming or altering for the subscriber of the service the information content or meaning of information provided by the subscriber; or (b) maintaining, managing, or providing a data information bank or information retrieval service whereby information may be selectively retrieved by or for a subscriber to the service; or (c) monitoring or controlling an on-going non-communications process or event. (4) "Hybrid data processing service" is an offering of a data processing service utilizing common carrier communications facilities for the transmission of data between remote computers and customer terminals. (b) Communications common carriers may utilize computer processing, including data processing, in the provision of a communications service; provided, however, that any data processing performed by a carrier as part of a tariffed service must directly relate to and be for the purpose of providing a communication service, or for meeting the carrier's own internal operational and financial management needs.
* ↑ See n. 42 infra.
* ↑ We noted that under option #1 we would have the discretion to waive the resale structure for a given carrier upon a proper showing that the public interest would be better served by grant of such a waiver of the Commission's Rules. Options #2 and #4 suggest the possibility of excluding at the outset certain carriers from the resale structure, as opposed to subsequent ad hoc determinations.
* ↑ "Customer-premises equipment" (CPE) is terminal equipment located at a subscriber's premises which is connected with the termination of a carrier's communication channel(s) at the network interface at that subscriber's premises. However, see n. 57, infra.
This work is in the public domain in the United States because it is a work of the United States federal government (see 17 U.S.C. 105).
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