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Dialing for dollars: should the FCC regulate Internet telephony?


On March 4, 1996 America's Carriers Telecommunication Association ("ACTA"),(1) a trade group representing primarily medium and small long distance telephone companies, filed a controversial Petition for Declaratory Ruling, Special Relief and Institution of a Rulemaking with the Federal Communications Commission ("FCC").(2) ACTA alleged that providers of Internet telephony software operate as uncertified and unregulated common carriers(3) in contravention of FCC Rules and Regulations. The trade association suggested the need for regulatory parity: the assertion of jurisdiction and the imposition of common carrier regulation by the FCC over Internet telephony software companies because conventional, telephone service providers face such government oversight.(4) ACTA also charged that increasing use of Internet resources for telephony "could result in a significant reduction of the Internet's ability to handle the customary types of Internet traffic."(5)

Much of the extensive opposition to the ACTA Petition predictably focused on the relief ACTA sought: expanding FCC jurisdiction and regulation to unregulated software enterprises that make it possible to use "the Internet to provide telecommunications services . . . ."(6) Netscape Communications Corporation and other stakeholders in the current controversy have asserted that the FCC cannot subject Internet telephony software providers to common carrier regulation.(7) The basis of this assertion is that their products constitute enhanced services(8) and information services.(9) Others(10) argued that Internet telephony software providers are exempt from the common carrier classification because the definitions of access software(11) access software providers(12) and interactive computer service(13) expressly qualifies such entities for exclusion.(14)

The ACTA Petition also raises several broader issues largely ignored by the commenting parties:

* What steps, if any, the FCC should undertake to eliminate regulatory asymmetry, i.e., different and inconsistent regulatory treatment of competing enterprises and services,(15) where to do so it must assert jurisdiction and regulate a previously unregulated industry, as opposed to fostering regulatory symmetry, typically resulting in fewer or eliminated regulations;

* When should the FCC maintain regulatory asymmetry, despite some legal and economic arguments favoring a single, consistent regulatory regime;

* To what extent does Internet telephony support or frustrate long-standing efforts to foster universal service;(16) and

* How should the FCC balance the long-standing objective of achieving universal access to Plain Old Telephone Service ("POTS") with its new and broader mandate to "encourage the provision of new technologies and services to the public"(17) including a "high-speed, switched, broadband telecommunications capability that enables users to originate and receive Pretty Advanced New Services ("PANS"), including high-quality voice, data, graphics, and video telecommunications using any technology."(18)

This Article will examine the consequences of continued regulation of incumbent common carriers in an environment where certain newcomers can operate free of regulation. Incumbent common carriers argue that a level competitive playing field necessitates either their deregulation, or the regulation of newcomers, such as internet telephony software providers. However, ongoing asymmetrical regulation has compelling justifications, including serving objectives articulated in the Telecommunications Act, promoting competition and innovation, stimulating downward pressure on rates, and promoting universal service.

This Article concludes that while Internet telephony itself may fall within the new, broader definition of telecommunications service,(19) the enabling software required for such use does not. The FCC can avoid key policy and regulatory issues raised by ACTA, based on a narrow interpretation of the Communications Act, as amended. Because Internet telephony has characteristics which may in the future render it functionally equivalent to conventional telephone service, however, the FCC may soon face challenges more compelling than ACTA's present petition. In support of its universal service objectives, the FCC may have to determine whether Internet telephony is equivalent to common carriage under the Telecommunications Act. This task is further complicated by the potential for significant migration of incumbent carrier traffic and revenues as new Internet telephony options enter the marketplace. Industry and market leaders in telecommunications, information processing, computers and software(20) are currently competing to bundle their products and services with widely used Internet browsers such as Netscape Navigator.(21) This migration may hasten as new Internet telephony products arrive which provide such services via telephones in lieu of costly personal computer configurations.(22)

The FCC can avoid key policy and regulatory issues raised by the ACTA petition by simply rejecting it in much the same manner as it could reject a petition to regulate Internet radio services as broadcasting.(23) While the Internet currently provides services analogous to telephony and broadcasting, the limited scope and availability of such services, combined with the language of the Communications Act of 1934 ("Communications Act"), clearly does not favor regulation. However, in view of the possibility for near ubiquitous Internet access and the potential for the integration of Internet telephony products, including software with more traditional telecommunications services, these factors may change. This Article provides a starting point for considering whether maintaining inconsistent and asymmetrical regulation of competing services is a viable option in the face of rapidly advancing technologies.

A. Internet Telephony Technology: The Basics

Internet telephony uses the digital, packet-switched nature of the Internet, along with its routing and addressing standards, to provide real time audio conferencing.(24) Internet switching and routing technology manages the transmission and processing of text, graphics, data, audio, or video. The Internet's TCP/IP protocols(25) provide a standard for subdividing content into a stream of packets that are routed via any available path between the sender and intended call recipient. Each packet contains a header with destination information so that intermediary routing facilities can determine how and where to send the packets. This header information includes a sequence of digits that correspond to an Internet address, much like the numbering sequence in direct distance dialing via telephone.

The Internet Protocol addressing scheme makes it possible to route traffic onward in the event of initial failure, by resending packets and routing them via different and possibly circuitous links. This requires software processing to reassemble the packets in proper order. For services that do not require immediate, real-time delivery, e.g., electronic mail, possible delays and time for reassembly present few problems. Messages can be delivered despite outages, blockages and busy conditions. However, Internet telephony requires immediate "real time" delivery of the packets in their proper order. Any delay, loss or improper sequencing of packets will result in distortions or the temporary loss of the audio stream.

Until now, Internet telephony has lacked the quality, reliability and security to be considered comparable to conventional telephone services. However, after an initial investment, the cost of Internet telephony substantially undercuts the current per-minute rates for conventional services. Unlike conventional telephone service, Internet-mediated telephony requires an intelligent terminal: a personal computer, modem, sound card, speakers, microphone, and software. But users incur few charges, if any, above this initial investment in hardware and software, plus the monthly fees for local telephone or cable modem service.(26) Conventional telephone services use an inexpensive, "dumb" terminal, the telephone handset, but users incur per-minute charges that can exceed $1.00 a minute for many international destinations.

B. Who's There?

A key problem faced by FCC decision makers and analysts of the ACTA petition is identifying who provides Internet telephony as opposed to enterprises involved in the design, marketing and software integration with hardware needed by consumers to make an Internet-mediated telephone call. ACTA's petition focused on the software providers, but it could have targeted:

* Internet Service Providers, like Netcom, PSI, Panix and America On-Line, which link individuals with the networking capabilities of the Internet and which own or lease the transmission facilities needed to transport packets to and from subscribers' terminals;

* Internet browser developers, like Microsoft and Netscape, which provide the user-friendly link to Internet resources and which bundle Internet telephony software typically as a point and click icon on the browser;

* Internet telephony hardware manufacturers, like Lucent, IBM and Intel, which develop the computer chips, servers and other devices that make it possible to route telephony packets via the Internet;

* Most telecommunications ventures, whether regulated or not, that consider the Internet a potential new profit center even if some of the services provided cannibalize existing revenue streams, including local and long distance telephony; or

* Any venture that uses Internet telephony in conjunction with the sale or marketing of a good or service.

Internet telephony can occur only through the integration of products and services from different market segments in telecommunications, information processing, computer hardware and software. While the ACTA petition singled out the software component for regulation, software alone cannot deliver any telecommunications services. The FCC faces the broader question of whether any law or regulation requires it to regulate players in the packaging and delivery of Internet telephony. For example, counsel for Netscape Communications Corporation readily acknowledges that the company, its affiliates and partners "are leaders in the new market for Internet voice and video services by creating the open standards, protocols, compression technologies and software products necessary to enable transmission of interactive voice and video information over the Internet."(27) Netscape's counsel asserts that promoting user-friendly access to Internet telephony, which includes a telecommunications transport function, does not make the company a common carrier, nor should the FCC use regulation to shield against technological development, particularly in the absence of harm to incumbent regulated carriers or to the Internet.


Despite its current predisposition toward regulatory parity, in many instances the FCC has established a different regulatory regime for competing telecommunication services and carriers. For example, the price, but not necessarily the cost, of a minute of telecommunication use depends on such factors as: the perceived value of the service;(28) which regulatory agency has jurisdiction over cost allocation and tariffing;(29) whether the service is domestic or international;(30) whether another carrier or end-user seeks facilities interconnection;(31) the type of carrier(32) or enterprise(33) providing service;(34) the type of line or facility providing service;(35) and whether the service can access the public switched telephone net Work ("PSTN").(36)

With increasing frequency, the FCC has expressed its intention to rely on facilities-based and resale competition rather than use heavy handed "command and control" regulatory oversight. Economic analysis has driven this migration and provided the methodology for both predicting and measuring enhanced consumer welfare. Yet despite such reliance on marketplace self-regulation and the scientific discipline of economic analysis, the FCC and its state regulatory counterparts persist in market distorting activities. Such intervention continues by design rather than as a product of "deregulatory lag" resulting from a backlog of procompetitive initiatives.

The FCC has maintained regulatory asymmetry in particular circumstances for justifiable public policy reasons: political expediency, the belief that it must temporarily insulate operators from competition(37) or the perceived need to incubate competition.(38) Each of these rationales provides support, in addition to jurisdictional and legal limitations, for the FCC to decline from regulating the Internet telephony software industry by denying the ACTA petition outright. Despite the invitation to foster an immediate level competitive playing field, a simple cost/benefit analysis would inform the FCC that the costs to individual companies--members of ACTA and their stakeholders--are greatly offset by the benefits accruing to the public if the FCC refrains from regulating Internet telephony altogether.


The FCC could avoid a possibly controversial cost/benefit analysis by concluding that Internet telephony does not constitute "telecommunications" as defined in the Communications Act as recently amended by the Telecommunications Act of 1996 ("Telecommunications Act"). However, the newly revised definitions of "telecommunications," "telecommunications service" and "telecommunications carrier" contained in the Telecommunications Act may be broad enough to include Internet telephony as a new common carrier service.

A. Telecommunications

The Communications Act now defines "telecommunications" as: "the transmission, between or among points specified by the user, of information of the user's choosing, without change in the form or content of the information as sent and received."(39) The providers of Internet telephony software do not necessarily provide the needed Internet access and transmission function--the first prong of the definition. However, the FCC might consider the provider of such access as also providing a transmission function if the FCC were to couple Internet access with the transmission functionality derived from the owned or leased transmission facilities needed for any Internet service, including telephony. The second and third prongs of the definition are met because users choose what to transmit, e.g., voice messages, and the intended recipient receives the same voice message.(40)

The definition of "telecommunications" appears not to exempt functionality which involves intermediary processing that temporarily renders content incomprehensible to users. Under the policies already established in the FCC's Computer Inquiries, processing Internet packets using the TCP/IP protocol(41) might qualify as noncommon carriage, enhanced services, even if the final output constituted a voice message.(42)

B. Telecommunications Service

The Communications Act now defines "telecommunications service" as "the offering of telecommunications for a fee directly to the public, or to such classes of users as to be effectively available directly to the public, regardless of the facilities used."(43) While software sellers do not provide telecommunication services, as the for-pay services of Internet access providers approach some level of ubiquity, Internet access may be "effectively available" to the public, even if only a small percentage of the public is currently using the service. Because the definition contains a reference that the nature of the facility used does not matter, the FCC might infer that "telecommunication services" subject to the Communications Act may include access methods other than that provided by incumbent operators. Arguably then, some services of Internet access providers might constitute "telecommunication services," despite the definitions contained in the Telecommunications Act exempting "customary" services, e.g., electronic mail, the World Wide Web and the transmission of data packets that correspond to letters, graphics, audio and video works.(44)

When the Internet provides real time delivery of voice and data services, the FCC may infer that such services are not customary, accepting ACTA's characterization, or that the potential for interference with other telecommunication policy objectives, such as universal service, bears further scrutiny. Notwithstanding its desire to refrain from restraining the scope and array of services available via the Internet, the FCC may have to reconsider whether certain Internet services, telephony among them, can remain unregulated. In addition to the potentially adverse impact on ACTA's interchange carriers, Internet telephony has a direct and potentially adverse impact on incumbent local exchange carriers because these carriers, providing first and last mile access to interexchange lines leased by Internet service providers, rely on subsidies to achieve universal service goals.

C. Telecommunications Carrier

The new definition of "telecommunications carrier" creates the possibility that providers of access to the Internet, as well as service providers, might fit into the telecommunications carrier classification with the application of software that makes the Internet a conduit for telephony. It may seem difficult to envision "involuntary" common carriers, because Internet access and service providers surely do not seek common carrier status, nor do they as yet offer an essential service or hold themselves out indiscriminately to the public.(45) However, the FCC's public interest mandate and concerns about the potential for adverse financial consequences on incumbent telephony providers may trigger the need for the FCC to classify Internet service elements as telecommunications.

The Communications Act now defines "telecommunications carrier" as "any provider of telecommunications services, except [for] . . . aggregators [which provide pay telephone services to the transient population] . . . ."(46) This provision classifies a telecommunications carrier as a common carrier "to the extent that it is engaged in providing telecommunication services."(47) Nonetheless, a separate provision in the Communications Act now accords the FCC flexibility to refrain from applying almost any provision that the FCC determines is no longer needed to ensure just and reasonable rates, consumer protection and service in the public interest.(48)


Even if the FCC concludes that Internet telephony constitutes "telecommunications" under the Communications Act, it need not apply the same regulatory regime to the actors involved, particularly if Internet telephony does not constitute the functional equivalent of common carrier telecommunications like Message Telephone Service ("MTS"). One way to make such an equivalency evaluation is to apply antitrust case law(49) and economic analysis of users' cross-elasticities.

The FCC has employed an interdisciplinary "functional equivalency" analysis which in this instance would involve its assessment of the "likeness" between Internet telephony and the services provided by ACTA's members and other carriers. The FCC has previously used a likeness comparison to determine whether a common carrier has engaged in unlawful discrimination. If two services are not like, then they presumably do not need to have the same price or be subject to the same regulatory regime.

A. Past "Like-Services" Analysis: Tariff 12

FCC like-services analysis and judicial interpretation have favored a functional analysis, rather than simply comparing cost of service. To consider whether a new service discriminates against users of previously offered services, the FCC's functional equivalency test "focuses on whether the services in question are different in any material functional respect."(50) This assessment ignores any cost differential(51) and looks solely at the nature of the service offered and whether users perceive the two services as performing the same functions.

AT&T's Tariff 12 case provides an example of how the functional analysis is applied. In the late 1980s, AT&T, responding to an increasingly competitive marketplace predominated by nondominant carriers freed of most tariffing obligations, filed a new set of services and rates in Tariff F.C.C. No. 12.(52) In the service options provided under this tariff, AT&T proposed to integrate into a package a number of services that previously were available on an individual basis, typically at higher rates. Competing carriers argued that AT&T had repackaged already available "like" services and that providing such similar services at a lower rate discriminated against users taking such services at the previously available terms and conditions.

To assess whether Tariff 12 was indeed discriminatory, the appellate court applied a three-part test established in MCI Telecommunications Corp. v. FCC(53) and concluded that the functional equivalency analysis should be used to determine whether the services are "like" one another. The court found that the FCC had improperly relied on cost differentials to determine whether Tariff 12 was discriminatory. Accordingly, the court remanded the cases "with directions that the FCC resolve it without regard to differentials in cost to the carrier and price to the customer."(54)

On remand the FCC again determined that the Tariff 12 package was not "like" the individually tariffed services previously provided by AT&T on a disaggregated basis. The Commission applied a functional equivalency test to assess likeness on the basis of customer perceptions and determined that customers considered the Tariff 12 package of services to be functionally different from AT&T's individually tariffed services, because of the carrier's flexible provision of lines, its network monitoring functions and the "turnkey," "one stop shopping" nature of the package offering.(55) If the FCC found unlikeness based on a pricing difference, it would have violated the holding in the prior court decision that rejected the use of price as the basis for finding unlikeness.(56) Instead, the FCC determined that various Tariff 12 options resulted from extensive negotiation between AT&T and a prospective customer and that each option would contain various types of transmission capabilities and features not otherwise available from an existing option.

The D.C. Circuit Court of Appeals affirmed the FCC solely on grounds that provisioning flexibility made the Tariff 12 packaged services unlike other previously available services. As to network monitoring and turnkey servicing, the court found that likeness could exist within the meaning of Section 202 of the Communications Act if a carrier simply provided additional service features at a lower price.(57)

B. "Like-Services " Analysis Applied to Internet Telephony

Under either a functional or comparative cost analysis, Internet telephony at the present time cannot be deemed the functional equivalent of or "like" conventional dial-up MTS. MTS is characterized by ubiquitous access from dumb terminals, i.e., telephone hand sets or pay phones, while Internet telephony involves complex and expensive terminals, i.e., personal computers, present in less than forty percent of United States households in 1996.(58) In addition, the personal computer must be equipped with a modern(59) as well as a sound card, microphone and telephony software, further reducing the number of households with Internet telephony access to, at most, a few percentage points.(60)


The ACTA petition states that continuing regulatory asymmetry will "distort the economic and public interest environment in which ACTA carrier members and nonmembers must operate."(61) While providing no projections on traffic migration and revenue diversion, the ACTA petition states that "[c]ontinuing to allow [unregulated Internet telephony] . . . threaten[s] the continued viability of ACTA's members and their ability to serve the public and acquit their public interest obligations under federal and state laws."(62) In addition to arguing that definitions in the Telecommunications Act should subject Internet telephony to provisions of the Communications Act, the ACTA petition claims the FCC must assert jurisdiction in much the same way as it did when it found it necessary to regulate cable television.(63)

The ACTA petition appears to extrapolate from the cable television regulatory model the assumption that an allegation of adverse financial impact would force the FCC to assert ancillary jurisdiction. As with cable television, Internet telephony has the potential to "siphon" traffic and divert revenues. However, the potential migration of traffic and revenues does not threaten the continuing viability of an essential industry. Local and long distance telephone service providers can continue to meet their public interest mandates, including subsidization of universal service. Neither the FCC, nor the Supreme Court, favors foreclosing competition merely on grounds that a competitor might lose revenues, or even go out of business.(64) It is evident from the history of the Communications Act, especially the amendments included in the Telecommunications Act, that Congress intended to foster competition(65) and not to insulate from competition a particular operator, or class of operators, absent compelling justifications.

In calling for parity in regulatory treatment, the ACTA petition seeks a contrarian outcome: in a time when non-dominant carriers have few regulatory responsibilities, the FCC properly has a bias against expanding its regulatory wingspan. The FCC has no legal right to regulate software and does not automatically impose the same regulatory classifications and burdens on operators. If the FCC can analogize Internet telephony software to enhanced services or Customer Premises Equipment, it cannot impose common carrier regulatory requirements on Internet telephony software providers.


Internet telephony creates an opportunity for individuals to exploit technological innovation for private benefit without public harm. It is a kind of "self-help" for individuals who collectively can provide the same impetus for competition, downward rate pressure, innovation and other public benefits as customarily sought by regulatory bodies. Consumers can affect the industry in this way as significantly as when Congress, the FCC and the courts make it possible for facilities-based or resale competition.

Unregulated Internet telephony reminds decision makers that changes in user strategies reflect actual buyer behavior. The ACTA petition assumes broadsweeping traffic and revenue migration without providing evidence that users in large numbers will tolerate the inconvenience, relatively poor quality, and increased expense of hardware required for Internet long-distance services. Even if only a relatively small percentage of users embrace such "grey market" strategies as international callback,(66) leaky PBXs(67) and other incumbent carrier or service bypass techniques, companies and regulators may assume the potential for vast changes to the status quo. Notwithstanding the degree to which Internet telephony will affect the market, there is a need for changes in business and regulatory policies.

A. Benefits of Self-Help Strategies and Techniques

Real or perceived opportunities to bypass incumbent networks can trigger service and price changes well before actual traffic and revenue figure mandate an accommodation. The doctrine of market contestability encourages regulators to change policies in anticipation of market entry. Perhaps a corollary lies in the FCC's predisposition not to impose regulation until such time as market entry is proven to have harmed the public interest. Until such self-help causes such severe traffic or revenue migration as to handicap universal service accomplishments and goals, the FCC should remain steadfastly opposed to expanding its regulatory wingspan.

B. The Example of International Call-Back Services

High international accounting rates and commensurately high-end user charges in many nations present a lucrative market for entrepreneurs willing to evade or interpret liberally regulations or laws that prohibit, limit or condition market entry for "call-back services."(68) "Code-calling" via call-back service providers enable callers to place a call to the United States or another country with low outbound international calling rates, hang up and soon receive from the United States a second dialtone with outbound calling capability or the intended call recipient on the line.(69)

Rather than reject call-back as a violation of International Telecommunication Union Rules and Recommendations, or at least the "spirit" of such provisions, the United States Department of State officially noted that such tactics do not violate any treaty commitment of the United States, and the FCC has refused to revoke authorizations granted to international carriers providing call-back services. In a letter to FCC Chairman Reed Hundt on March 22, 1995, Ambassador Vonya B. McCann stated the view that no treaty or general concept of law obligates the United States to require that Section 214 authorizations for call-back configurations be denied or licenses revoked upon assertion by foreign carriers that call-back operators operating in the United States are violating their countries' laws.(70) The letter also stated that the United States had made no commitment in any ITU forum to prohibit call back services:

In sum, the United States did not undertake any obligation in

ratifying the Melbourne Agreement which modified the ITU's

International Regulations to account for developments in

telecommunication services that would obligate the United

States (or any other Member) to consider the call-back

configuration an "international telecommunication service"

regulated by the Melbourne Agreement or to enforce foreign

laws regarding callback.(71)

While agreeing not to permit call-back services to users in nations expressly deeming the tactic illegal, the FCC has refused to invalidate callback service operator authorizations granted under Section 214 of the Communications Act. In the absence of actual facilities-based competition, which may or may not result despite assumptions made by Congress when enacting the Telecommunications Act, self-help tactics such as call-back and Internet telephony provide immediate "virtual competition." While the actual numbers of users may be low and the revenue diversion small, such techniques evidence how vulnerable markets are, particularly ones that have generated supra-competitive prices, or how markets have been so saddled with expenses and subsidy burdens that users seek ways to lower their total service costs.

International call-back services will force incumbent carriers to reduce their negotiated accounting rates as well as their user charges. Similarly, Internet telephony can force facilities-based carriers to establish rational and cost-based prices, particularly the cost of accessing the PSTN. Users may pursue Internet telephony simply to avoid international rates and domestic rates boosted by artificially high local access charges.(72)

C. Internet Telephony and Universal Service Goals

Internet telephony has the potential to promote universal service goals recently broadened by Congress.(73) However, it may reduce the flow of money from interstate exchange to local carriers that is currently(74) used to promote the universal service mission. Al though the Internet stimulates demand for second telephone lines in homes resulting in additional charges to consumers, flat rates for local calls make it possible for users to occupy lines for hours without incurring additional local exchange carrier charges. Consequently, Internet traffic has an insignificant effect on local exchange carrier revenues because it will not generate additional revenues when such carriers provide service on a usage insensitive basis. However, Universal Service Fund ("USF") charges apply on a per-minute basis to interexchange carriers which may be adversely affected by Internet use. To the extent Internet telephony generates user migration from conventional long distance telephone services subject to access charges and USF contributions, the aggregate sum of funds collected to subsidize universal service will fall. Because current access charge payments exceed costs and because information service providers qualify for an access charge exemption, Internet telephony providers have plenty of incentives to avoid the interexchange carrier classification.

However, the potential shortfall in universal service funding resulting from traffic migration to the Internet does not warrant regulation of Internet telephony. It does suggest the need to consider changes in funding universal service goals(75) and the possible elimination of usage insensitive pricing including the prospect for imposing USF payments by Internet service providers for local exchange services.


In the past, the FCC has justified regulatory asymmetry by ascribing the private carrier classification to non-essential services that it believes would stimulate competitive benefits. Such a strategy creates a regulatory "safe harbor" even for enterprises that increasingly offer "like," functionally-equivalent services that access the PSTN and provide alternatives to customers previously "captive" to incumbent common carriers. The use of a private/common carrier dichotomy motivates market entrants to craft services that qualify for the private carrier classification, e.g., enhanced services as defined in the Computer Inquiries(76) line of cases and International Value Added Networks or permissive private line resale and shared use under International Telecommunication Union Recommendations.(77) Securing the private carrier classification and the regulatory exemption it provides has become a market distorting goal. Ventures seek to characterize services as enhanced and value-adding regardless of whether a discrete market exists, or whether consumers perceive a difference between private carrier and incumbent common carrier services.

Congressional concern about regulatory asymmetry and market distortion has resulted in two amendments to the Communications Act requiring the FCC to apply a single common carrier classification. In 1982, Congress revised the Communications Act(78) to require the FCC to deem as common carriage the services of all enterprises providing commercial mobile radio services, irrespective of prior FCC determinations that classified some of these services as private carriage.(79) The Telecommunications Act of 1996 required the FCC to classify as common carriage the provision of any telecommunications service.(80) However, both of the 1982 amendments to the Communications Act distinguish between the baseline classification of common carriage and the extent to which the FCC should regulate any particular carrier. Rather than allow the FCC to apply an increasingly suspect private/common carrier dichotomy, Congress gave the FCC discretion to determine what amount of conventional common carrier regulatory burdens a particular type of common carrier should bear. Section 332 authorizes the FCC to forbear from applying most regulatory burdens established in Title II of the Communications Act to commercial mobile radio service providers.(81) Section 332 also expands the regulatory forbearance option to any common carrier if the FCC determines that such deregulation would serve the public interest.(12)

The Telecommunications Act of 1996 creates an opportunity for the FCC to apply a single regulatory classification--common carriage, without having to impose symmetrical regulatory burdens. Rather than perpetuate a dichotomy in carrier classifications, the FCC should take advantage of the freedom from regulating an increasingly large set of common carriers. Consequently, the FCC should refrain from attempting to finesse a private carriage classification for Internet telephony. It should classify Internet telephony service providers as common carriers and then decide, for the time being, to forbear from applying any common carrier regulations. This action would require the FCC to define which groups within the large set of software, hardware and telecommunications service providers warrant the common carrier classification, and which groups serve as collaborators, integrators and packagers. By applying the definition of telecommunications service provider in the Telecommunications Act of 1996, the FCC could exempt Internet browser and other software developers, hardware manufacturers, and even ventures that use Internet telephony in conjunction with the sale or marketing of a good or service from regulation as a common carrier. Alternatively, the FCC could classify as telecommunication service providers, all ventures that lease or own packet transport facilities used to link end-users with Internet-mediated telephony, regardless of whether they might have previously as private carriers.

Applying a single common carrier classification means the FCC could oversee, but not necessarily regulate, the growing number of service providers involved in telecommunications and telecommunications services as defined by the Telecommunications Act. Such oversight does not expand the FCC's regulatory wingspan unless and until the FCC articulates a compelling case for reregulation or the application of traditional common carrier regulatory burdens to new ventures. The FCC may have to take such action if newcomers adversely affect the universal service mission, or if the recently impaneled Federal-State Joint Board on universal service(83) recommends that telecommunications service providers, including Internet telephony providers, contribute to a revamped system for funding universal service programs.


The FCC has treated the private carrier classification as a regulatory safe harbor. The FCC believes it can better stimulate competitive benefits if it protects certain enterprises from regulation. However, concerns about regulatory asymmetry and a level competitive playing field make it less likely that the FCC can continue to erode the dichotomy between common and private carriers. Amendments to the Communications Act have created a preference for a single common carrier classification. The amendments include a proviso whereby the FCC can selectively reduce or eliminate common carrier regulatory requirements.(84) Previously, the FCC tried unsuccessfully to eliminate tariff filing requirements for certain types of common carriers.(85) The Telecommunications Act now gives the FCC the necessary power to eliminate such tariff filing requirements,(86) even as the deregulated companies like AT&T retain common carrier status.

The Telecommunications Act of 1996 continues to blur the difference between common and private carriage because it fails to eliminate the private carrier safe harbor while allowing the FCC to confer private carrier freedoms to certain common carriers. Such ambiguity fosters regulatory flexibility, but it also creates an environment where stakeholders seek competitive advantages by qualifying for private carrier status, despite the fact that they provide services functionally equivalent to what common carriers offer. Consequently, carriers who are unable to qualify as private carriers demand regulatory parity in order to establish a level competitive playing field.

Even without statutory allowance for different regulatory responses, the FCC should not have to apply consistent, symmetrical regulations where asymmetrical regulation makes sense. For example, the FCC does not auction all radio frequencies, even though it places a financial burden on operators who had to bid competitively--a burden that incumbent operators and licensees of nonauctioned spectrum did not have to bear.(87) Likewise, the FCC does not have to apply the full panoply of regulatory requirements on all common carriers.

In an attempt to solve the problem of asymmetrical regulation, the ACTA petition seeks increased regulation at a time when deregulation predominates. Congress now expects the FCC to support deployment of new technologies. Additionally, Congress requires opponents to prove that a new technology will not serve the public interest. For several years, the FCC has consistently sought to reduce regulatory requirements, as recently exemplified by its decision to reclassify AT&T as a non-dominant carrier and the FCC's proposal to forbear from requiring most carriers to file tariffs. AT&T realized that its best regulatory strategy would be to seek deregulatory parity, rather than to encourage the FCC to impose new or additional regulatory burdens.(88) ACTA must come to the same realization.

Carriers having to compete with Internet telephony services should focus their efforts on key regulatory adjustments, rather than grand scale regulatory realignments. The ACTA petition primarily seeks a financial remedy: eliminating Internet service providers' exemptions from access charges and universal subsidy payments. By convincing the FCC that a larger set of Internet telephony and enhanced services providers should contribute to universal service funding obligations, already fettered carriers could achieve the proper sharing of a financial burden.(89) This outcome simply requires the FCC to conclude that Internet telephony constitutes a telecommunications service. It does not require the FCC to impose the entire range of common carrier regulatory burdens. Rather than petition the FCC to impose uniform regulations, ACTA should have emphasized the public interest merits in requiring Internet telephony providers to contribute to universal service funding.

(1.) America's Carriers Telecommunication Association, In re Provision of Interstate and International Interexchange Telecommunications Services Via the "Internet" By Non-Tariffed, Uncertified Entities (visited Nov. 26, 1996) < Bureaus/Common Carrier/Other/acatapet.html> [hereinafter ACTA Petition] (using Internet pagination).

(2.) See Federal Communications Commission, Public Notice, Common Carrier Action, Common Carrier Bureau Clarifies and Extends Request for Comment on ACTA Petition Relating to `Internet Phone' Software and Hardware-RM No. 8775, CC 96-10 (released Aug. 12, 1996) (providing public notice of the ACTA Petition and requesting comments).

(3.) Legislative, regulatory and judicial action have eliminated a bright line distinction between common carriers and private, non-common carriers. See Eli M. Noam, Beyond Liberalization II: The Impending Doom of Common Carriage, 18 Telecomm. Pol'y, 435, 441-52 (1994); Robert M. Frieden, Contamination of the Common Carrier Concept in Telecommunications, 19 Telecomm. Pol'y, 685, 694-95 (1995).

(4.) See ACTA Petition, supra note 2, at 2 (using Internet version pagination).

ACTA submits that it is not in the public interest to permit long distance

service to be given away, depriving those who must maintain the

telecommunications infrastructure of the revenue to do so, nor is it in the

public interest for these select telecommunications carriers to operate

outside the regulatory requirements applicable to all other carriers.

See id.

(5.) Id. at 7.

(6.) Id. at 6.

(7.) See, e.g., Netscape Opposition to ACTA Petition on Internet Telephony (posted May 8, 1996) < html#n53> [hereinafter Netscape Opposition].

(8.) The FCC at first attempted to create a "bright line" separation between enhanced service functions, which are unregulated and subject to robust competition, and basic transport capacity, which is regulated and not robustly competitive. See Second Computer Inquiry, 77 F.C.C.2d 384, 400 et seq. (final dec.), mod on recon., 84 F.C.C.2d 50,50-51 (1980), further mod., 88 F.C.C.2d 512 (1981), aff'd sub nom. Computer & Communications. Ind. Ass'n v. FCC, 693 F.2d 198 (D.C. Cir. 1982), cert. denied, 461 U.S. 938 (1983). The FCC subsequently decided that structural separation imposed unnecessary costs and burdens. It opted for non-structural safeguards such as account auditing and the complaint process. See Third Computer Inquiry, Report and Order, 104 F.C.C.2d 958 (1986), mod on recon., 2 F.C.C.R. 3035, 3062 (1987), further recon., 3 F.C.C.R. 1135 (1988); 2 F.C.C.R. 3072 (1987), recon. denied, 3 F.C.C.R. 1150 (1988), partially rev'd and remanded sub nom. California v. FCC, 905 F.2d 1217 (9th Cit. 1990), on remand, 6 F.C.C.R. 7571 (1991) partially rev'd and remanded sub nom. California v. FCC, 39 F.3d 919 (9th Cir. 1994); Robert M. Frieden, The Third Computer Inquiry: A Deregulatory Dilemma, 38 FED. Comm. L.J. 383, 387-89 (1987); Robert M. Frieden, The Computer Inquiries: Mapping the Communications/Information Processing Terrain, 33 FED. Comm. L.J. 55, 55-115 (1981).

(9.) Information services are defined as "the offering of a capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing or making available information via telecommunications. . . ." Telecommunications Act of 1996 (Telecommunications Act), 47 U.S.C. [sections] 153 (20) (1996).

(10.) See, e.g., Opposition of the Information Technology Industry Council (May 8, 1996) <>.

(11.) Access software is defined as

[S]oftware (including client or server software) or enabling tools that do

not create or provide the content of communications but that allows a

user to do any one or more of the following: (A) filter, screen, allow or

disallow content; (B) pick, choose, analyze, or digest content; or (C)

transmit, receive, display, forward, cache, search, subset, organize,

reorganize, or translate content.

Communications Act of 1934 (Communications Act) 47 U.S.C. [sections] 223(h)(3) (1996).

(12.) Access software providers are "providers of software (including client or server software) or enabling tools that do any one or more of the following: (A) filter, screen, allow or disallow content; (B) pick, choose, analyze, or digest content; or (C) transmit, receive, display, forward, cache, search, subset, organize, reorganize, or translate content." 47 U.S. C. [sections] 230(e)(4) (1996).

(13.) Interactive computer service is "[a]ny information service, system, or access software provider that provides or enables computer access by multiple users to a computer server, including specifically a service or system that provides access to the Internet and such systems operated or services offered by libraries or educational institutions." 47 U.S.C. [sections] 230(e)(2) (1996).

(14.) "Nothing in this section shall be construed to treat interactive computer services as common carriers or telecommunications carriers." 47 U.S.C. [sections] 223(e)(6) (1996). This language may help explain why the ACTA did not seek common carrier regulation of Internet service providers who lease the telecommunications lines necessary to provide access to the Internet, including the transmission of traffic between users, various network nodes and servers.

(15.) The FCC appears inclined to eliminate regulatory asymmetry where it can deregulate a particular carrier or service to foster a "level" competitive playing field. In re AT&T, FCC 96-209 (released May 14, 1996); In re AT&T, 11 F.C.C.R. 3271 (1995) (deregulating AT&T by reclassifying it as a non-dominant carrier, even in markets where AT&T was previously viewed as having market power).

(16.) Presently, the universal service system is incompatible with the procompetitive efforts required by the Telecommunications Act:

The current universal service system is a patchwork quilt of implicit and

explicit subsidies. These subsidies are intended to promote telephone

subscribership, yet they do so at the expense of deterring or distorting

competition. Some policies that traditionally have been justified on

universal service considerations place competitors at a disadvantage.

Other universal service policies place the incumbent LECs at a

competitive disadvantage. For example, LECs are required to charge

interexchange carriers a Carrier Common Line charge for every minute of

interstate traffic that any of their customers send or receive. This

exposes LECs to competition from competitive access providers, which are

not subject to this cost burden. Hence, section 254 of the

[Telecommunications Act of 1996] Act requires the Commission,

working with the states and consumer advocates through a Federal/State

Joint Board, to revamp the methods by which universal service payments

are collected and disbursed.

Interconnection between Local Exchange Carriers and Commercial Mobile Radio Service Providers, CC Docket No. 95-185, FCC 96-325, 1996 WL 452885 (F.C.C.) (released August 8, 1996), citing Federal-State Joint Board on Universal Service, Notice of Proposed Rulemaking and Order Establishing Joint Board, FCC 96-93 (released Mar. 8, 1996).

(17.) 47 U.S.C. [sections] 157 (1996).

(18.) Telecommunications Act, 47 U.S.C. [sections] 157(c)(1) (1996) (requiring the FCC and each state regulatory commission with jurisdiction over telecommunication services to encourage the timely deployment of advanced telecommunications capability to all Americans).

(19.) Telecommunications service is "the offering of telecommunications for a fee directly to the public, or to such classes of users as to be effectively available directly to the public, regardless of the facilities used." 47 U.S.C. [sections] 153(46) (1996).

(20.) See, e.g., Lucent Jumps into Internet Telephony, 62 Telecomm. Rep. at 21 (Sept. 30, 1996) (reporting that Lucent Technologies' plans to offer an Internet server capable of routing nonessential facsimile transmissions, voice mail and Internet telephone calls and deeming such product marketing the final touch in Lucent's separation from AT&T).

(21.) For example, Netscape Communications Corporation provides users access to Internet telephony software as a freely available "plug-in" option that, after downloading into computer memory, becomes a readily additional service feature. "Netscape has incorporated ... real-time audio and video technology into the latest release of its Internet software." Netscape Opposition, supra note 7, at 9.

(22.) "Unlike other Internet telephony products that require a computer with special software to complete calls, AlphaNet's service will work over normal telephone lines and fax machines `at a considerable price advantage over traditional voice networks...'" AlphaNet Unveils `Mondial' Internet Telephony Service, 62 Telecomm. Rep., No. 39 at 37 (Sept. 30, 1996).

(23.) However, the Ninth Circuit Court of Appeals has upheld the right of a telephone company to terminate a "dial-a-porn" service as a matter of business judgment, i.e., that adverse publicity might affect public relations and profits. See Carlin Communications, Inc. v. Mountain States Tel. and Tel., 827 F.2d 1291 (9th Cir. 1987). The service provided by Carlin Communications is known as audiotext, which uses a 7 digit local telephone with a 976 prefix, or an 11 digit number with an 1+800 or 1+900 prefix. The Ninth Circuit held that this type of service was more like broadcasting than common carriage:

Moreover, we question whether state public utility law in its traditional

form makes sense as applied to Mountain Bell's 976 network. The

technology of that network differs fundamentally from that of basic

phone service... . Under these circumstances, the telephone is serving

as a medium by which Carlin broadcasts its messages. The phone company

resembles less a common carrier than it does a small radio station.

Id. at 1294.

(24.) For a helpful nontechnical introduction to Internet telephony, see The Internet Telephony Consortium, Frequently Asked Questions: How Can I Use the Internet as a Telephone? (visited Nov. 23, 1996) <http: // edu/voice_faq.html>; Lisa C. Green & John M. Mrsich, Terminology Tips, Terms You Need to Know: Internet Telephony, 2 No. 10 Multimedia Strategist 3 (1996).

(25.) Richard Allan Horning, Has Hal Signed a Contract: The Statute of Frauds in Cyberspace, 12 Santa Clara Computer & High Tech. L.J. 253, 258 (1996). The common denominator for e-mail communications is the use of a standard programming protocol, TCP/IP-Transmission Control Protocol/Internet Protocol-upon which inter-computer communications are based. The TCP protocol divides messages into packets which are marked with a sequence number and the address of the recipient. TCP also inserts error control information. The packets are then sent over the network to the addressee. The routing of the individual packets varies, with IP controlling the transport of the packets to the remote host computer. At the remote host, TCP receives the packets and checks for errors. When an error occurs, TCP asks for the particular packet to be re-sent. Once all the packets have been received, TCP will then use the sequence number to reconstruct the original message. It is the job of IP to get the packets from one place to another; it is the job of TCP to manage the flow and insure that the data are correct. See id.

(26.) As a broadband distribution technology, cable television lends itself to medium speed data delivery. Cable operators currently are testing modems capable of providing Internet access at data speeds well in excess of what telephone companies can deliver to customers via the local loop, twisted pair wire.

(27.) Netscape Opposition, supra note 7, at 10.

(28.) Both the FCC and state regulatory commission have allowed carriers to price some services on the perceived value or "utility" consumers accrue. For example, some local exchange telephone service rates have increased when the number of accessible subscribers reaches a benchmark. Federal Communications Commission, Trends in Telephone Service, at 10, available in 1991 FCC LEXIS 4305 (Aug. 7, 1991).

In most states, the Bell Operating Companies and larger independents

charge higher rates in metropolitan areas than in rural areas--a pricing

practice that dates back to the turn of the century and is traditionally

justified in the belief that the value of the service provided is higher for

subscribers with larger local calling areas.


(29.) Typically an intrastate long distance minute of use significantly exceeds the price of an interstate long distance minute of use. Ironically, an intrastate call originated via a cellular telephone may be significantly cheaper than the corresponding rate for a call originated over wireline facilities. The rate differential results, in part, from rate making policies, which may include cross-subsidies to local exchange service, as opposed to actual cost of service differences.

(30.) International message telephone service rates substantially exceed domestic rates on a per minute and mileage band basis, primarily because international carriers have negotiated toll revenue division agreements that have failed to drop commensurately with cost reductions. See generally Robert M. Frieden, International Toll Revenue Division: Tackling the Inequities and Inefficiencies, 17 Telecommunications Pol'y 221 (1993) (examining FCC accounting rate initiatives); Robert M. Frieden, Accounting Rates: The Business of International Telecommunications and the Incentive to Cheat, 43 Fed. Comm. L.J. 111 (1991) (explaining how international carriers exploit artificially high accounting rates while avoiding them when such rates reduce their profits).

(31.) The Telecommunications Act and pre-existing FCC regulations differentiate the terms and conditions for interconnection between carriers as opposed to customer-carrier interconnection. The Telecommunications Act orders favorable and potentially zero-cost interconnection between certain types of carriers. For example, Section 251 requires a local exchange carriers "to establish reciprocal compensation arrangements for the transport and termination of telecommunications." 47 U.S.C. [sections] 251(b)(5) (Supp. I 1996). End-users and interexchange ("long distance") carriers must pay higher "access charges," see infra note 35, while Internet service providers currently pay no additional access fees above the leased line charges. Such a dichotomy in charges encourages arbitrage and efforts to qualify for reduced or eliminated access/interconnection charges.

(32.) During a time when interexchange carrier competitors of AT&T received inferior access to the PSTN, the FCC authorized discounted access charges. However, the FCC never stated that the discounts were cost-based as opposed to a rough justice solution designed to reflect both inferior access and the FCC's desire that carriers like MCI acquire market share. See, e.g., Exchange Network Facilities for Interstate Access (ENFIA), 71 F.C.C.2d 440, 450 (1979), on recon., 93 F.C.C. 2d 739 (1983), aff'd in part and remanded in part sub nom. MCI Telecommunications. Corp. v. FCC, 712 F.2d 517 (D.C. Cir. 1983). Currently, the FCC is considering whether wireless mobile service providers like cellular radio operators should have to compensate wireline local exchange carriers for terminating calls while such wireline carriers do not have to compensate the wireless operators for similar call terminations. See Interconnection Between Local Exchange Carriers and Commercial Mobile Radio Service Providers, 11 F.C.C.R. 502 (1996) (proposing reciprocal termination between wireline and wireless carriers, including the possibility of an interim zero termination charge between carriers); Interconnection between Local Exchange Carriers and Commercial Mobile Radio Service Providers, CC Docket No. 96-98, FCC 96-325, 1996 WL 452885 (1996).

The Telecommunications Act requires all local exchange carriers to establish reciprocal compensation agreements for the transport and termination of traffic. See 47 U.S.C.A. [sections] 251 (b)(5) (Supp. I 1996).

(33.) "Captive" long distance callers from hotel rooms and callers not familiar with "dial around", options for avoiding price gouging by some pay phone service providers recognize the vast price differences for long distance telephone service.

(34.) Certain types of services have qualified for exemption from regulatory burdens that impose extra costs. For example, enhanced services qualify for noncommon carrier status, thereby qualifying Internet service providers and users for an exemption from having to pay an access charge otherwise applicable to basic services. A 1987 FCC initiative to eliminate the exemption generated substantial opposition by users who claimed the FCC had proposed to impose a "modern tax:"

In 1983 we adopted a comprehensive `access charge' plan for the recovery

by local exchange carriers (LECs) of the costs associated with the

origination and termination of interstate calls. At that time, we concluded

that the immediate application of this plan to certain providers of

interstate services might unduly burden their operations and cause

disruptions in provision of service to the public. Therefore, we granted

temporary exemptions from payment of access charges to certain classes

of exchange access users, including enhanced service providers.

Enhanced Service Providers, CC Docket No. 87-215, Notice of Proposed Rulemaking, 2 F.C.C.R. 4305 (1987) (citing MTS and WATS Market Structure, Memorandum Opinion and Order, 97 F.C.C.2d 682 (1983)) (proposing to imposed access charges on enhanced service lines), terminated, 3 F.C.C.R. 2631 (1988) (abandoning the proposal on ground that, despite the apparent discrimination in charges, "a period of change and uncertainty" besetting the enhanced services industry justified ongoing exemption from access charge payments).

Currently the FCC requires users of ISDN services to pay only one Subscriber Line Charge, an access payment, despite the fact that ISDN circuits can derive more than one voice-grade equivalent channel.

In December 1996, the FCC initiated a proceeding to reexamine and reform the system of access charges paid by interexchange carriers to local exchange carriers. See Access Charge Reform, Notice of Proposed Rulemaking, Third Report and Order, CC Docket Nos. 96-263, 96-262, 94-1, and 91-213, FCC 96-488 (released Dec. 24, 1996). In the Notice of Proposed Rulemaking, the FCC tentatively concluded that information service providers should continue not having to pay interstate access charges. However, the Commission did note that emerging packet-switched data networks, which include Internet services, have generated concerns about congestion of the circuit-switched telephone network.

Until the FCC equalizes its access and interconnection policies for local and interstate carriers, as well as for end users and information service providers, ventures will seek to exploit price differentials. They will seek to qualify for reduced fees or a complete exemption by characterizing themselves as private carriers providing information services even if they provide functionally equivalent services to regulated telephony.

(35.) The FCC's access charge regime established a different pricing structure for switched and special access. Switched access includes regular dial up services and requires end users to pay a monthly flat-rated Subscriber Line Charge, currently $3.50 for residential and small business users and $6.00 for other business users. Special access includes leased, private line users, who certify that the line does not "leak" into the PSTN through the use of, for example, an on-premises switch like a Private Branch Exchange that could couple the private line with trunks that access the PSTN provided by Local Exchange Carriers ostensibly for local switched services. See MTS/WATS Market Structure, 93 F.C.C.2d 241 (1983) modified on recon., 97 F.C.C.2d 682, further modification on recon., 97 F.C.C.2d 834, partially aff'd and partially remanded sub nom., National Ass'n Regl. Util. Comm'rs v. FCC, 737 F.2d 1095, 1139, cert. den., 469 U.S. 1227 (1985), further modification, 99 F.C.C.2d 708 (1984), 100 F.C.C.2d 1222, further recon. denied, 102 F.C.C.2d 899 (1985); see also Investigation of Access and Divestiture Related Tariffs, 101 F.C.C.2d 911, recon. denied, 102 F.C.C.2d 503 (1985); Investigation of Access and Divestiture Related Tariffs, 101 F.C.C.2d 935 (1985).

(36.) International private line services, which typically do not access the PSTN, are exempt from the accounting rate regime. Their per-minute costs are significantly lower than switched services. However, undetected private line leakage into the PSTN has become commonplace, making it possible for resellers to provide a service functionally equivalent to international message telephone service at a fraction of the cost. See Robert M. Frieden, The Impact of Boomerang Boxes and Callback Services on the Accounting Rate Regime, Proceedings of the Pacific Telecommunications Council Eighteenth Annual Conference 781, 781-90 (D. Wedermeyer & R. Nickelson, eds., 1996).

(37.) For example, the FCC required the formation of a single consortium comprising all individual mobile satellite service applicants. The FCC then granted the American Mobile Satellite Corporation a geostationary mobile satellite service monopoly on the belief that the market could not support multiple operators and because of its perception that the United States would have the most success in coordinating satellite orbital slots with other nations and the Inmarsat cooperative if a fully licensed operator existed. See Land Mobile Satellite Serv., 2 F.C.C.R. 1825 (1986), 2 F.C.C.R. 485 (1987), recon. denied, 2 F.C.C.R. 6830 (1987), on further recon., 4 F.C.C.R. 6029 (1989), partially rev'd and remanded sub nom. Aeronautical Radio, Inc. v. FCC, 928 F.2d 428 (D.C. Cit. 1991), tentative decision on remand, 7 F.C.C.R. 266 (1992), aff'd sub nom. 983 F.2d 275 (D.C. Cir. 1993).

(38.) Establishment of Domestic Communication Satellite Facilities by Nongovernmental Entities, First Report and Order, 22 F.C.C.2d 86 (1969), 35 F.C.C.2d 844 (1972), on recon., 38 F.C.C.2d 665 (1972) (imposing a moratorium on the acceptance of applications from AT&T to construct, launch and operate a domestic satellite).

(39.) 47 U.S.C.A. [sections] 153(43) (1991 & Supp. I 1996).

(40.) Some parties filing oppositions to the ACTA petition claim that while packet switching by itself constitutes a basic service under the Commission's Computer Inquiries, interconnections among the various networks comprising the Internet result in data and protocol conversions that constitute enhanced services:

Not only do all Internet applications employ computer processing, but

the Internet itself is a network of interconnected clients, hosts, routers

and gateways that request, store, direct, transport, retrieve and utilize

data to deliver to Internet users information different from a subscriber's


Netscape Opposition, supra note 7, at 9.

(41.) Religious Tech. Ctr. v. Netcom On-Line Communication Serv., Inc., 907 F. Supp. 1361 (N.D. Cal. 1995) (quoting Daniel P. Dern, The Internet Guide for New Users 16 (1994)).

The Internet today is a worldwide entity whose nature cannot be easily

or simply defined. From a technical definition, the Internet is the `set of

all interconnected IP networks'--the collection of several thousand local,

regional, and global computer networks interconnected in real time via the

TCP/IP Internetworking Protocol suite . . . ."


(42.) Enhanced services "employ computer processing applications which 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." 47 C.F.R. [sections] 64.702(a) (1995).

(43.) 47 U.S.C.A. [sections] 153(46) (1991 & Supp. I 1996).

(44.) The FCC has concluded that its definition of enhanced services does not include the provision of telecommunication services. See Implementation of the Local Competition Provisions in the Telecommunications Act of 1996, 1996 WL 452885 (F.C.C.), at * 1247 n. 1416 (Aug. 8, 1996).

(45.) See National Ass'n. of Regulatory Util. Comm'rs v. FCC, 525 F.2d 630 (D.C. Cir. 1976).

(46.) 47 U.S.C.A. [sections] 153(44) (1991 & Supp. I 1996).

(47.) Id.

(48.) 47 U.S.C.A. [sections] 160(a) (1991).

(49.) See, e.g., United States v. E.I. DuPont de Nemours & Co., 351 U.S. 377 (1956) (holding that "reasonably interchangeable" products constitute the relevant product market in antitrust analysis).

(50.) Ad Hoc Telecommunications Users Comm. v. FCC, 680 F.2d 790, 795 (D.C. Cir. 1982) (comparing dial up long distance telephone service with inbound and outbound 800 service and holding that a "likeness" assessment focuses on whether the services in question are different in any material functional aspect) (quoting American Trucking Ass'n v. FCC, 377 F.2d 121, 127 (D.C. Cir. 1966)); see also In re AT&T, 61 F.C.C.2d 587 (1976), aff'd in part and vacated in part sub nom. Aeronautical Radio, Inc. v. FCC, 642 F.2d 1221 (D.C. Cir. 1980) (affirming use of fully distributed costing methodology for assessing adequacy of cost allocation).

(51.) The courts have determined that "[p]ricing differences a fortiori cannot be a basis for finding the services unlike--otherwise, the very discrimination Section 202 attempts to prevent would be the grounds for finding that section inapplicable." MCI Telecommunications Corp. v. FCC, 917 F.2d 30, 39 (D.C. Cir. 1990). "Consideration of cost differentials and competitive necessity are properly excluded from the likeness determination and introduced only when determining whether the discrimination is unreasonable or unjust." Id. (quoting American Broad. Corp. v. FCC, 663 F.2d 133, 139 (D.C. Cir. 1980)); see also Western Union Int'l v. FCC, 568 F.3d 10 12, 1019 n. 15 (2d Cir. 1977) (deeming "like" access facilities used by domestic and international carriers).

(52.) AT&T Communications, 4 F.C.C.R. 4932, 4938 (1989) recon. denied, 4 F.C.C.R. 7928 (1989), rev'd and remanded sub nom. MCI Telecommunications Corp. v. FCC, 917 F.2d 30 (D.C. Cir. 1990).

(53.) 842 F.2d 1296 (D.C. Cir. 1988). The test looked to "(1) whether the services are `like;' (2) if they are `like,' whether there is a price difference; and (3) if there is a difference, whether it is reasonable." Id. at 1303; see also American Broad. Co. 663 F.2d at 139 (holding that carrier offering an integrated service package bears the burden of justifying any price disparity with an aggregation of the services as unpackaged).

(54.) MCI Telecommunications Corp., 917 F.2d at 40.

(55.) AT&T Comm., Revisions to Tariff F.C.C. No. 12, 6 F.C.C.R. 7039, 7047 (1991):

The proper frame of reference in evaluating the likeness of such packages

vis-a-vis other packages is to look at the function of the package as a

whole: Is the package, as a whole, functionally equivalent to other,

individually negotiated packages? Viewed in this light, the four Tariff 12

options at issue in this remand proceedings are not "like."

Id. at 7048.

(56.) MCI Telecommunications Corp., 917 F.2d at 39 (identifying the core issue as "whether a carrier must justify a lower rate it charges for integrated packages than for an aggregation of the individually-tariffed services comprising the packages").

(57.) "By providing only a benefit and nary a detriment to the user, the network monitoring function and the `turnkey' feature of Tariff 12 each constitute an inkind bonus, which is the functional equivalent of a price discount." Competitive Telecommunications Ass'n v. FCC, 998 F.2d 1058, 1062 (D.C. Cir. 1993).

(58.) See, e.g., Modem Ownership; Online Usage Up, Interactive Daily, March 5, 1996 available in LEXIS, News Library, CURNWS file (reporting 1995 home personal computer penetration at 35.5%).

(59.) See id. (reporting that more than half of home PCs now have moderns).

(60.) The research company International Data Corporation projects the number of regular Internet telephone users to rise from fewer than 400,000 in 1995 to 16 million by 1999, generating $500 million in revenues. Peter H. Lewis, Free Long-Distance Phone Calls, N.Y. Times, Aug. 5, 1996, at D1.

(61.) ACTA Petition, supra note 2, at 4.

(62.) Id.

(63.) Id. at 9 (citing United States v. Southwestern Cable Co., 392 U.S. 157 (1968)).

(64.) See FCC v. Sanders Bros. Radio Station, 309 U.S. 470 (1939) (holding economic harm to an incumbent radio station by market entry is not grounds to foreclose the authorization of an additional radio station).

(65.) See 47 U.S.C.A. [sections] 157(a) (1991).

It shall be the policy of the United States to encourage the provision

of new technologies and services to the public. Any person or party

(other than the Commission) who opposes a new technology or service

proposed to be permitted under this Act shall have the burden to

demonstrate that such proposal is inconsistent with the public interest.


(66.) See generally Gene Retske, The International CallBack Book--An Insider's View (1995).

(67.) "`Leaky PBX' is a term used to describe a PBX or other similar device through which a private line subscriber can `patch' an interstate call to off-network destinations in the local exchange." WATS-Related and Other Amendments of Part 69 of the Commission's Rules, CC Docket No. 86-1, Second Report and Order, FCC 86-377, 1986 WL 290930 (F.C.C.) n. 46 (released August 26, 1986) (citing NITS and WATS Market Structure, Second Supplemental Notice of Inquiry and Proposed Rule Making, 77 F.C.C.2d 224, 241 (1980)).

(68.) Retske, supra note 66, at 5.

(69.) In its simplest form, code calling involves the assignment of a unique telephone number or code to each subscriber. When the subscriber wants to make an international call, he dials a local or international telephone number and hangs up after two or more rings. A switch or Private Branch Exchange, also known as a "boomerang box," receives the call and is able to consult a database of subscriber identities and telephone numbers as a function of having received a call to a particular number. After determining who seeks calling access, the boomerang box delivers long distance dial tone to the calling party and generates a billing record. See id. at 5.

(70.) Letter from Ambassador Vonya B. McCann, U.S. Coordinator, International Communications and Information Policy, Department of State, to Reed Hundt, Chairman, F.C.C. 4 (Mar. 22,1995) in 10 F.C.C.R. 9540 (1995).

(71.) Id. at 3; see also id. at 9 n.10 (discussing the extent to which ITU regulations require extraterritorial application of domestic law and stating that "the United States and like-minded countries refused to bind themselves in Art. 1.7 or elsewhere in the Melbourne Agreement to enforcing the domestic laws of other ITU Members").

(72.) See Gerald W. Brock, The Economics of Interconnection (Tele. Comm. Group, Staten Island, NY), April 1995, at ii (discussing the history of interconnection controversies and possible solutions).

(73.) Section 254 of the Communications Act, as amended, requires the formation of a Federal-State Joint Board on Universal Service to recommend changes to any universal service policy. 47 U.S.C. [sections] 254 (West Supp. I 1996). This section sets out several guiding principles: 1) access to quality services at just, reasonable and affordable rates; 2) access to advanced services throughout the nation now defined to include low-income consumers and those in rural, insular, and high cost areas, as well as advanced telecommunications services access for schools, health care providers and libraries; 3) equitable and nondiscriminatory contributions by all providers of interstate telecommunications services to universal service funding; and 4) specific and predictable support mechanisms. See id [sections] 254(b); see also Federal-State Joint Board on Universal Service, Notice of Proposed Rulemaking and Order Establishing Joint Board, 61 Fed. Reg. 10499 (March 14, 1996).

(74.) The FCC adopted the current Universal Service Rules in 1984. Amendment of Part 67 of the Commission's Rules and Establishment of a Joint Board, Decision and Order, 96 F.C.C.2d 781 (1984). The rules provide for subsidies from interstate interexchange carriers to local exchange carriers ("LECs") whose average cost per loop is substantially higher than the national average cost per loop. LECs with an average cost per loop above 115 percent of the national average cost per loop can allocate a specified percentage of these costs to the interstate jurisdiction. See Amendment of Part 36 of the Commission's Rules and Establishment of a Joint Board, Notice of Proposed Rulemaking, 8 F.C.C.R. 7114 (1993). In 1993, the FCC initiated a rulemaking to examine and reevaluate rules governing Universal Service Fund ("USF") assistance and growth. See id. The FCC proposed a temporary cap on the amount the USF could grow during the time that a previously established Federal-State Joint Broad would meet to consider revisions. See id. The FCC proposed a temporary cap on the amount the USF could grow, during which a previously established Federal-State Joint Board subsequently recommended, and the FCC adopted, an interim cap that was to expire on January 1, 1996. See Amendment of Part 36 of the Commission's Rules and Establishment of a Joint Board, Recommended Decision, 9 F.C.C.R. 334 (1993). In December 1995, the Joint Board recommended extending the cap for six months, in order to complete the rulemaking initiated in the interim notice. See Amendment of Part 36 of the Commission's Rules and Establishment of a Joint Board, Recommended Decision, 11 F.C.C.R. 3061 (1995). Subsequently, the FCC issued a Report and Order extending the interim cap until July 1, 1996. See Amendment of Part 36 of the Commission's Rules and Establishment of a Joint Board, Report and Order, 11 F.C.C.R. 2538 (1995). With enactment of the Telecommunications Act of 1996, the FCC and the Federal-State Joint Board face a rigorous timetable for addressing universal service issues. The Telecommunications Act of 1996 requires a Joint Board to submit a recommended decision to the FCC by November 8, 1996, and the Commission must issue its final rules by May 8, 1997. See 47 U. S.C.A. [sections] 254(a)(1) (West Supp. I 1996).

(75.) Section 254 of the Telecommunications Act of 1996 expands the concept of universal service to include insular areas, such as Pacific Island territories, low-income consumers, health care providers for rural areas, elementary and secondary school classrooms and libraries. See 47 U.S.C.A. [sections] 254(h) (West Supp. I 1996). Rates for rural health care services shall be "reasonably comparable" to charges for similar service in urban locales. Id. [sections] 254(h)(1)(a). Service provided to meet an educational purpose must be discounted with the difference offsetting the carrier's universal service payments or qualifying it for reimbursement from the USF. See id. [sections] 254(h)(1)(b). Section 254 also requires the formation of a new Federal-State Joint Board to review existing universal service support mechanisms, including financial subsidies, with an eye toward recommending new procedures. See id. [sections] 254(a)(1). All telecommunications carriers providing interstate telecommunications must contribute, on an equitable and non-discriminatory basis, to a universal service funding mechanism. See id. [sections] 254(d).

(76.) See supra note 8.

(77.) See International Telecommunication Union, International Telegraph and Telephone Consultative Committee Blue Book, Vol. II, Fascicle II.1, Recommendation D.1, Sec. 7.1.1, General Tariff Principles, Charging and Accounting in International Telecommunications Services. The Recommendation addresses the conditions under which facilities-based carriers should allow the shared use and resale of private lines that historically had been provisioned for the exclusive use of only one large volume customer. The Recommendation suggests that administrations can condition, consult and agree to the scope of access to public networks provided to users of international private leased circuits.

(78.) See 47 U.S.C.A. [subsections] 153(gg), 331 (West 1991). In 1982, Congress amended the Communications Act in order to: (1) define private land mobile service; (2) distinguish between private and common carrier land mobile services; and (3) specify the appropriate authorities empowered to regulate these same services. H.R. Rep. No. 97-765, at 54 (1982). Section 153(gg) of the 1982 revision defined private land mobile service as "a mobile service . . . for private one-way or two-way land mobile radio communications by eligible users over designated areas of operation." 47 U.S.C. [sections] 153(gg) (West 1991). In addition, the 1982 revision preempted state authority to impose rate or entry regulation upon any private land mobile service. See id. [sections] 332(c)(3). The FCC interpreted Section 332(c)(1) as confirming that the commercial sale of interconnected telephone service was a common carrier offering. The FCC concluded that the statute allowed private land mobile services to interconnect with the public switched telephone network yet retain their regulatory status, so long as the licensee did not profit from interconnection. See Private Land Mobile Systems, Memorandum Opinion and Order, 93 F.C.C.2d 1111 (1983). The FCC also determined that Section 332 allowed it to extend the range of eligible users for Specialized Mobile Radio (SMR) and Private Carrier Paging (PCP) services, enabling licensees to offer these services to a broad customer base with minimal restrictions. See Amendment of Part 90, Subparts M and S of the Commission's Rules, Report and Order, 3 F.C.C.R. 1838 (1988), clarified, 4 F.C.C.R. 356 (1989); Amendment of the Commission's Rules To Permit Private Carrier Paging Licensees To Provide Service to Individuals, 8 F.C.C.R. 4822 (1993).

(79.) The 1993 revision of Section 332 created two new categories of mobile services: commercial mobile service (CMS) and private mobile service (PMS). CMS is defined as "any mobile service . . . that is provided for profit and makes interconnected service available (A) to the public or (B) to such classes of eligible users as to be effectively available to a substantial portion of the public." 47 U.S.C.A. [sections] 332(d)(1) (West Supp. 1996). PMS means "any mobile service . . . that is not a commercial mobile service or the functional equivalent of a commercial mobile service." Id. [sections] 332(d)(3). Congress replaced traditional regulation of mobile services with an approach that brings all mobile service providers under a comprehensive, consistent regulatory framework and gives the FCC flexibility to regulate mobile services. Section 332(c) states that a person providing commercial mobile service will be treated as a common carrier, with some exceptions, but grants the FCC the authority to forbear from applying the provisions of the chapter. See id. [sections] 332(c)(1)(A). Sections 332(c)(1)(A) and (C) identify the criteria for forbearance. The statute also preempt state regulation of entry and rates for both CMS and PMS providers. States, however, may petition the Commission for authority to regulate CMS rates under some circumstances. See id. [sections] 332(c)(3).

The Telecommunications Act explicitly exempts CMS providers from the definition of local exchange carrier "except to the extent that the [FCC] finds that such service should be included in the definition of such term." 47 U.S.C. [sections] 153 (26) (West Supp. I 1996).

(80.) See 47 U.S.C.A. [sections] 251 (West Supp. I 1996). Section 251 of the Communications Act of 1934 as amended requires all telecommunications carriers to provide direct or indirect interconnection with other telecommunications carriers. See id. [sections] 251(a)(1). The 1996 Telecommunications Act defines telecommunications carrier as "any provider of telecommunications services" except call aggregators that provide access to telephone operator services. Id. [sections] 153(42). Section 153(42) requires all such carriers to be treated as common carriers. See id.

(81.) See 47 U.S.C. [sections] 332(c)(1)(A) (West Supp. 1996).

(82.) See id. The FCC may forbear from applying any provision of the Communications Act and existing Commission regulations if it determines that such oversight is unnecessary to ensure just and reasonable rates, consumer protection and service in the public interest. Quite soon after enactment of the Telecommunications Act of 1996, the FCC initiated a proceeding designed to eliminate the tariff filing requirement for long distance common carriers providing interstate services. See Policy and Rules Concerning the Interstate Interexchange Marketplace Implementation of Sec. 254(g) of the Communications Act of 1934, as amended, Notice of Proposed Rulemaking, 11 F.C.C.R. 7141 (1996).

(83.) See supra note 73.

(84.) See 47 U.S.C.A. [sections] 160(a) (West Supp. I 1996). Soon after the enactment of the Telecommunications Act, the FCC initiated a proceeding designed to eliminate the tariff filing requirement for long distance common carriers providing interstate services. See Policy and Rules Concerning the Interstate, Interexchange Marketplace Implementation of Sec. 254(g) of the Communications Act of 1934, as amended, Notice of Proposed Rulemaking, 11 F.C.C.R. 7141 (1996).

(85.) 47 U.S.C. [sections] 203(a) (West 1991).

(86.) See Competitive Common Carrier Services and Facilities Therefore, Notice of Inquiry and Proposed Rulemaking, 77 F.C.C.2d 308 (1979); First Report and Order, 85 F.C.C.2d 1 (1980); Second Report and Order, 91 F.C.C.2d 59 (1982), reconsideration denied, 93 F.C.C. 2d 54 (1983); Third Report and Order, 48 Fed. Reg. 46,791 (1983); Fourth Report and Order, 95 F.C.C.2d 554 (1983), rev'd and remanded sub nom. AT&T v. FCC, 978 F.2d 727 (D.C. Cir. 1992); Fifth Report and Order, 98 F.C.C.2d 1191 (1984); Six Report and Order, 99 F.C.C.2d 1020 (1985), rev'd and remanded sub nom. MCI Telecommunications Corp. v. FCC, 765 F.2d 1186 (D.C. Cir. 1985), aff'd sub nom. MCI Telecommunications Corp. v. AT&T, 114 S. Ct. 2223 (1994).

(87.) Currently, the public interest contributions of television broadcasters have motivated Congress not to require the auctioning of spectrum for advanced, high definition television. However, applicants to operate on newly allocated spectrum for Interactive Video Distribution Service, a new and unproven technology, did have to competitive bid for the spectrum.

(88.) Motion of AT&T Corp. to be Reclassified as a Non-Dominant Carrier, Order, 11 FCC Rcd 3271 (1995); Motion of AT&T Corporation to be Declared Non-dominant for International Service, Order, FCC 96-209 (released May 14, 1996).

(89.) Section 254(d) of the Communications Act of 1934, as amended, requires "[e]very telecommunications carrier that provides interstate telecommunications services . . . [to] contribute, on an equitable and nondiscriminatory basis, to the specific, predictable, and sufficient mechanisms established by the Commission to preserve and advance universal service." 47 U.S.C. [sections] 254(d) (1996); see also Access Charge Reform, Notice of Proposed Rulemaking, Third Report and Order, and Notice of Inquiry, CC Docket Nos. 96-263, 96-262, 94-1, 91-213, FCC 96-488 (released Dec. 24, 1996).

(*) Robert M. Frieden is an Associate Professor at the College of Communications, Penn State University, 201 Carnegie Building, University Park, PA 16802. He can be reached by phone at (814) 863-7996 and by e-mail at
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Author:Freiden, Robert M.
Publication:Rutgers Computer & Technology Law Journal
Date:Mar 22, 1997
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