Law or Technology: Telecommunications in the United States - Essay Example

Law and/or technology to what extent does technology drive the law in the area of telecommunications? Contents Introduction This paper is about how technology has both pushed and dictated telecommunications policy in the United States. Regulated largely on the federal level by the Federal Communications Commission, which is directed under the Executive Branch by the President of the United States, the telecommunications industry is also regulated by congressional law and by the courts. This paper argues that regulatory officials and congressmen, in the face of unknown changes and the speed of technological advancements, have largely driven a pro-competitive and anti-regulatory approach. There have been exceptions to this policy, particularly with cellular telephone service providers, which will also be covered by this paper. History of Telecommunications Regulation: Prior to the AT&T Breakup The United States existed under a monopoly telecommunications structure led by American Telephone & Telegraph Company, otherwise called “Ma Bell.” The telephone company had a monopoly over local and long-distance service, as well as over the sale and/or rental of handsets and PBX (public exchange) services. Although most put the date of telecommunications reform at the breakup of AT&T into Ma Bell and the Baby Bells, the actual disaggregation started earlier. In the 1960’s and 1970’s, companies with new computer networks were seeking ways to communicate between sites. The primary need was for time-sharing service, in which the rare and costly access to CPU time was allocated to several sites around the United States. This so-called “time sharing” first started with large companies which sought to share their computer within their in-house network, but soon spread to “time-sharing services,” in which third-party companies would rent or lease mainframe computers and join smaller companies to use those computers on a time-sharing basis. Table 1: An AT&T ad from the early 20th Century Technological change came slowly in the decades before the 1970’s. The transistor was discovered in Bell Labs in 1947, and the semiconductor discovered in Intel’s labs in 1971. Between those times, transistors and digital technology spread through the computer industry, but did not touch the telecommunications sector. AT&T’s monopoly lines were 100% analogue, despite changes made in technology like the IBM 360 in the late 1960’s. Minicomputer makers, such as Digital Equipment and Prime Computers, started to offer smaller-than-mainframe solutions to medium- and large-sized companies, which continued the digital revolution in that period. Since AT&T offered only analogue services, there was a considerable delay caused by the communications connection between the computers and terminals, which could be spread across hundreds and thousands of miles. Since mainframe and even minicomputers could cost hundreds of thousands to millions of dollars, the use of these expensive resources was most efficient when many could have access at the same time. Thus an opportunity was created for alternative companies to offer first modem (modulating-demodulating) services, which converted from digital to analogue and back to digital again, and later “pure” digital services, which were much faster and did not rely on the difficult and slow conversion process from digital to analogue and back again. In 1974, the Federal Trade Commission sued AT&T for monopoly practices, and asked the courts to order the break-up of the utility. At that time, AT&T felt obligated to free up competition in some ancillary areas. It therefore started to lease trunk lines to time-sharing companies. Companies sprang up to offer digital telecommunications services. Their first offerings were over leased communications lines from AT&T. These companies would typically lease a “trunk line,” which during the 1970’s might be 2,400, 13,400 or 56,000 bits per second. They would then lease out access to this trunk line to several companies, thus saving each company the cost of leasing their own capacity, increasing capacity utilization, and taking a margin on the splitting service. AT&T regarded this as “ancillary business,” and the courts later required AT&T to make this service available at wholesale prices to all comers. The primary competitors in the 1970’s and early 1980’s were Tymeshare and Tymnet, Taking advantage of these trunk line leases, Southern Pacific and MCI (Microwave Communications Inc.) leased lines from AT&T, and also created their own trunk lines. In the case of MCI, the company moved from a regional, Washington, DC-based microwave operation to nationwide use of AT&T lines. Southern Pacific created the Sprint subsidiary, which started business by leasing AT&T lines, but moved quickly to develop its own digital network. Southern Pacific had an advantage in that it could use railroad rights of way in order to expand their fibre-optic network across the United States without costly leasing of land for the purpose. In fact, the railroads had had an exemption from AT&T’s monopoly for over a century, as they needed first telegraphs, then telephones, in order to coordinate their trains and communicate between stations. This paper argues that technology pushed regulation, not the other way around. Southern Pacific’s fortuitous in-place network and their brave decision to install the nation’s first all-digital network allowed the company to create a faster, cheaper main trunk line in comparison to AT&T. Sprint soon dominated digital communications between businesses, and with time-sharing and computer communications services. MCI meanwhile used its political clout to push the Federal Courts and congressmen to keep up the pressure on AT&T. MCI’s lobbying resulted in AT&T begrudgingly offering trunk line service to the upstart, which gave it a small margin for operations. Consumers who bought MCI’s alternative (long-distance only) service were obligated to dial special numbers, then put in a code in order to save 10-30% on their long-distance bills. Although technology was opening up digital and company-to-company communications, the ‘last mile’ to the retail consumer was controlled by Ma Bell through its 7 regional operating companies. Judge Green, who presided over the Washington, DC federal court where the anti-trust case was being heard, heard testimony for nearly a year before telling the FTC and AT&T to come to an out-of-court agreement in February, 1981. By January, 1982, the two parties had come to an agreement, largely due to AT&T’s willingness to recognize that its monopoly days were coming to an end. Ma Bell proposed selling of its 7 regional subsidiaries, and keeping long-distance and handset/telephone manufacturing and R&D operations (Western Electric and Bell Laboratories). The Justice Department agreed, and Ma Bell became “Mother and the Seven Bells” in 1982. Such changes would not have been possible had it not been for technology changes in the 1970’s. The major changes which foretold Ma Bell’s breakup included (Economist, 1981, 1982, 1983): 1. The rise of business to business digital communications, for which Ma Bell’s analogue network was not suited, 2. The rise of Sprint’s digital network along a competing national line, which better suited the companies’ needs for communication, and 3. The ability to circumvent AT&T’s monopoly, through innovations pioneered by MCI and copied by others. The 1980’s changes: DARPA, the Internet, and PC’s The 1980’s was not the decade of the Internet, but it laid the groundwork for subsequent technological innovations in the 1990’s which fundamentally changed the technical landscape and called for further regulatory changes, covered below. The primary changes wrought during this decade were as follows: The linking of government agencies, beginning with the Defense Department, started in the late 1960’s, but developed into a system-wide network by the end of the 1970’s. This led to a university communications network, called UUNet, which began in the 1980’s and spread to all universities. UUNet’s ubiquity gave the first non-governmental experience to millions of university users in the United States and around the world. 1981 marked the introduction of the first IBM PC, which put computers in the hands of individuals and companies. From 1982 to 1996, IBM had planned on selling 1 million computers. Instead, they sold 3 million. By the end of the decade, the PC had become a mass-market item, and de rigueur for most medium- to large-sized companies. The advent of the PC then opened universities up to the possibilities of distributed computing on desktops, and the need and desire to communicate between computers. As with BASIC and other programs in the 1960’s, several nodes of development began spontaneously, mainly in the United States, to develop variants of existing programs to make such communication easier. One of the places that pioneered in this kind of work (later called “browsers”) was the University of Illinois at Champaign/Urbana, which started the Mosaic project, which was later to become Netscape. The regulatory scene was largely laissez-faire during this decade. Although the Reagan Administration originally opposed the imposition of the break-up settlement in 1982, William Baxter, the Secretary of Commerce, came to support it and defended the break-up as a way to introduce competitiveness into the system. Congress was largely hands-off during the 1980’s, as the majority of activity was governed by Judge Green, who presided over the break-up and its aftermath for over 10 years after the settlement was agreed in 1982. He would rule on all matters large and small, and deliberated the many conflicts that arose between Baby Bells and with Ma Bell. In addition, he was responsible to ensure that AT&T continued to offer wholesale rates to MCI, Sprint and others, and should not be unduly penalised by their dependence at first on one supplier of trunk lines. These companies continued to expand their own trunk lines, but depended on the Baby Bells for “last mile” access. The Baby Bells’ lobbying power prevented MCI and Sprint from achieving substantial market share gains, despite the stated policy of the FCC and congressional opposition (although Congressmen were lobbied constantly to prevent breaking up the last-mile monopoly). The Baby Bells justified their continuing monopoly by claiming that they were obligated to maintain rural access, which was generally a money-loser for the firms. They argued that opening their access to consumers’ homes would therefore harm poor, rural consumers (who had particular clout in Congress). Al Gore played a role in breaking the ‘last mile logjam,’ by proposing a “Gore Tax” on each telephone bill which created a universal access fund. He proposed this tax in 1998, and it was duly passed as the “Universal Access Tax (TechLaw, 1998).” This tax, which amounted to about 90 cents per retail user per month, created a fund which offset the costs of serving rural and poor customers. This move thus took away the last prop for Baby Bells, which started to lose some customers to cable, voice over IP (VoIP) and other carriers. Although the regulatory barriers were removed, the subsequent 9 years have demonstrated that the Baby Bells’ control over the last mile remains difficult to overcome. Southwestern Bell, based in San Antonio, realised that it needed to buy up the Baby Bells and combine them with the “rump” AT&T to recreate a piece of the former Ma Bell monopoly. The FTC allowed this set of acquisitions through 2006 because it reasoned that the old AT&T monopoly no longer posed as serious a threat to competition as before 1982. With the advent of e-mail and corporate communications, the groundwork was laid for the next step: internet access for the masses. 1990’s: Technological Change and Regulatory Innovation Continues In 1990, ARPANET, the Defense Department’s pioneering internet backbone, closed down. Its service was taken up by Sprint, MCI and other international trunk line companies. In 1991, the NSF (National Science Foundation) allowed for a relaxation of university-driven internet access, which opened the ‘Net to outside users (Computer History, 2007). 1994 saw the establishment of Mosaic’s Netscape, the first popular consumer-oriented (and free) browser, which could be used by anyone with internet access. In 1994, AOL introduced its service, alongside competitors like Compuserve. These companies had “gated gardens,” which allowed limited internet access, but tended to keep people within the “walls” of their network. Netscape offered an alternative which made it more attractive for experienced computer users to access the ‘Net directly. The FCC, which regulated telephony, including digital and analogue access, and internet services, adopted a hands-off attitude. When Microsoft developed the Internet Explorer browser to compete with Mosaic, for example, neither the FTC nor the FCC stepped in to accuse Microsoft of uncompetitive behavior, although the engaged in considerable “jawboning” to attempt to hinder Microsoft’s moves against Netscape. Netscape offered its shares on the IPO market in August, 1995. Netscape’s meteoric stock price rise on the first day, from $28 to $75, demonstrated to venture capitalists and consumers alike the power of the Internet. Ironically, at the time of Netscape’s IPO, the company had an 85% global share of the worldwide browser market. By late 1996, that share had dropped to less than 1% in the face of Microsoft’s and others’ competition. Netscape’s founders brought suit in federal courts against Microsoft, but saw their suit thrown out by 2000. The FCC’s decision to leave hands off competition and potential monopolisation in the competitors. In fact, Microsoft dominated the browser ‘market’ (the browsers were free), but the door was left open for eventual competition from new directions. Although Microsoft IE remains a dominant supplier of browsers today, its market share has been penetrated by shareware companies, such as Mozilla (Firefox), Opera, Linux-based browsers and others. Congressional Debates: How to Regulate? Congress started to debate Internet regulation in the late 1990’s. The primary questions revolved around access for all (digital divide), taxation of sales, prevention of certain kinds of undesirable content, particularly pornography and child exploitation. Later, the debates were expanded to include internet scams and spamming. The first debate on internet taxation occurred in Congress in 1998. There was considerable pressure on the part of the majority Democrats (in the Senate) and minority Democrats (in the House) that the Federal government and State governments were being denied sales tax revenues due to sales on the Internet. In the words of a major Democratic lobbying organisation: The House and Senate Committee versions of the Internet Tax Freedom Act and the new Senate version are structured as general prohibitions on the power of states and localities to levy any types of taxes on the use of the Internet or on-line services for communication or transactions (Mazerov, 1998). Some Democrats and a majority of Republicans made it clear that the Internet was too nascent, but too important to the future of technological progress in the United States, to regulate or impose taxes. Both parties attempted to present themselves as supporting progress. In 2001, the bill was extended an additional 5 years with broad support. According to the Congressional Record: Rep. Goodlatte stated that "Republicans have been working hard to benefit the high tech community" and "Republicans get it when it comes to high tech." He added that "we are the party with a record of achievement" (TechLaw, 2001). Thus the anti-tax, anti-regulation forces continued a 25-year policy supporting continued lack of regulation of the Internet, in the hope that the United States would benefit from its growth. The FCC Sees Itself as Promoting Innovation In 2001, President Bush appointed Michael Powell (the son of Secretary of State Colin Powell) to head the FCC. He came with a clear mandate: liberate all elements of the market for telecommunications, and ensure that there is a fair and transparent auction of additional spectra in order to spread the use of telecommunications technologies. As Powell took office, he was hailed by both sides of the aisle in Congress for his hands-off approach: Proof of this hands-off approach came in a speech Powell delivered to The Progress & Freedom Foundation last December. Powell spoke of "foster[ing] competitive markets, unencumbered by intrusions and distortions from inept regulations. (Russo, 2001)" Powell’s mandate extended well beyond the Internet. He attempted to open the telecommunications markets on all fronts, from the introduction of digital radio and television stations (with auctioned and granted spectrum), to the opening of new venues for cellular telephone service. He met up against powerful lobbying forces: the incumbent cell phone providers fought the imposition of free-market policies, and tried to prevent new entrants from taking nationwide spectrum in a way that could create a new competitor. As a result of their political lobbying, the US cellular companies were successful in challenging the sale of spectrum to other companies. As a result, the competitive situation in the US is different than other major regions of the world: dominated by 5 (now 4) suppliers, the cell phone operators provide an oligopolistic structure that is both less competitive, and offers lower rates of technological change than the more-competitive markets in Europe, Japan and the rest of East Asia. This lack of competitiveness predated Powell by one hundred years: Over the past century the federal government has carved up the airwaves and given them away to private and special interests ranging from television broadcasters and power utilities to universities and the Catholic Church. The result is that one of Americas most valuable natural resources sits paralyzed, consigned to uses that time and technology have long since passed by. Old technologies are swamped with excess airwaves they dont use; newer technologies gasp for airwaves they desperately need; and promising industries of the future are asphyxiated (Woolley, 2002). This black mark on the FCC was insurmountable by Powell, and Congress lacked the courage to face entrenched suppliers, despite the courage they had shown earlier in the face of Ma Bell’s opposition to change. Conclusion The US has generally pursued an open policy towards telecommunications entrants and new technology. Its ability to keep regulatory hands off the budding internet industry, including sales to consumers and businesses, has resulted in a fast-growing industry where US companies have the opportunity to dominate major markets, including auctions (E-Bay), books (Amazon), search (Google) and browsers (Microsoft). These hands-off changes have not been universal. The US’ failure to sufficiently deregulate spectrum allocation to incumbent broadcasters and cell phone network operators has resulted in a strange market which has little access for new technologies, and high barriers to entry for new companies which may want to offer better services. Bibliography Computer History. (2007). Internet 1990s. Retrieved December 2, 2007, from Computer History: http://www.computerhistory.org/internet_history/internet_history_90s.shtml Economist. (1981, 1982, 1983). AT&T. Economist . Higham, N. (1993). EC Telecommunications Law. London: Chancery. Hutchison, D. (1999). Media Policy: An Introduction. London: Blackwell. Mazerov, M. a. (1998). A Federal "Moratorium" on Internet Commerce Taxes Would Erode State and Local Revenues and Shift Burdens to Lower-Income Households. Retrieved December 2, 2007, from cbpp.org: http://www.cbpp.org/512webtax.htm#I.%20The%20Internet%20Tax%20Freedom%20Act Russo, K. (2001). Meet the New FCC Chairman - Michael K. Powell - Government Activity. Telecommunications , n.p. TechLaw. (1998, June 4). Debate Over Gore Tax Heats Up. Retrieved December 2, 2007, from TechLaw Journal: http://www.techlawjournal.com/telecom/80604.htm TechLaw. (2001). Internet Tax Freedom Law. Retrieved December 2, 2007, from TechLaw Journal: http://www.techlawjournal.com/topstories/2003/20030917.asp Walden, I. a. (2001). Telecommunications Law. London: Blackstone Press. Woolley, S. (2002, November 25). Dead Air. Forbes , p. n.p. Read More