"Telco Terrorism" -- Wired on Baby Bells v. the Net

[Declan McCullagh <declan@well.com>]

*******

http://www.wired.com/wired/5.06/netizen.html

Wired
Issue 5.06 - June 1997
Netizen

Telco Terrorism
By Declan McCullagh (declan@well.com)

   If the Baby Bells get their way, you'll pay by the
   minute and through the nose for the privilege of
   logging on. But the Net has an unlikely defender: the
   FCC.

---

Ed Young, Bell Atlantic's chief lobbyist, is a busy man -
so busy, he says, that he can find time to talk only
between meetings in a Nynex boardroom in Washington,
DC. He waves expansively at the juice bar and grins,
"Take whatever you like. It's all paid for by Nynex."
A moment later, Young denounces Internet users for
precisely the same attitude. "There's no longer a free
lunch," he complains. "Internet welfare has to stop."
It's a catchy sound bite - honed through countless
repetitions over the last year - and Young has spent a
lot of time testing it out on Washington regulators.
He says that flat-rate Internet pricing is clogging
phone lines, jamming telephone switches, and, most
important, costing his employer hundreds of millions
of dollars a year. Last summer, Bell Atlantic teamed
up with a few other Baby Bells to try to persuade the
Federal Communications Commission to levy
minute-by-minute access charges on Internet service
providers - hefty fees that could double or triple the
average monthly bill. For the telcos, securing
permission to begin collecting access fees would be
like hitting the jackpot; a charge of merely 3 cents a
minute would bring in nearly US$6 billion in new
revenue each year.

But some important members of the high tech community
worry that it could also trigger the death of the Net.
Three-cents-a-minute access fees would boost a service
provider's costs by more than $100 a month for each
subscriber who logs on for two hours a day. In an era
when $19.95-per month flat-rate pricing reigns
supreme, the thought of shelling out per minute access
charges to local phone companies has the online
industry scared shitless. CompuServe, for example,
estimates that its phone costs would zoom from $36
million to $367 million. The online and high tech
industries have counterattacked, arguing that while
more than 18 million Americans creep through
cyberspace using modems that sip bandwidth through
twisted-pair straws, the telcos want more money yet
refuse to improve service by bringing high-speed data
connections to the local loop.

The stage has been set for a showdown between a
telephone industry regulated since its birth and a new
economy that has prospered with surprisingly little
government interference. The tug-of-war pits
buttoned-down monopolies against a rough-and-tumble
collection of Silicon Valley bigwigs. Faced with
potential disaster, the high tech coalition has had no
choice but to learn the art of war as it is waged
within the confines of the FCC's arcane rulemaking
process.

This strange form of bureaucratized combat - which
operates under the guise of public policy - has plenty
of precedents in the annals of American capitalism.
But in this particular fight, an unusual third set of
combatants has been dragged into the struggle:
grassroots Internet users. Speaking with a mixture of
awe and bewilderment, FCC attorney James Casserly
says, "In the past, we've never seen anything like
this."

A case of congestion It's not that the telcos'
anxieties are entirely unfounded: real problems loom
on the horizon. America's local-loop architecture - in
which modems use analog phone lines for digital
communications - is vulnerable to network congestion,
and flat-rate pricing for phone and Internet service
seems destined to exacerbate the problem. This is
largely because telephone networks are designed around
the assumption that roughly one in every eight
subscribers will try to use the phone simultaneously -
which, in turn, means that if just 12 percent of an
area's customers are online at once, nobody else can
use the phone. In other words, America's
telecommunications infrastructure, was designed to
facilitate occasional analog calls, not continuous
digital connections. The telcos are standing at a
crossroads, stuck with a network that was designed for
voice traffic but that now groans under the weight of
data calls. The Baby Bells understand this, and they
say they want to go digital. Which raises the
questions: How will they do it, when will they do it,
and, more important, who will pay?

Both sides agree that the solution lies in new
technology. Currently, most phone calls travel along
an analog phone line to a digital switch that connects
to an analog outgoing line. Find a way to bypass the
analog connections with end-to-end digital networks,
and the congestion problem disappears. Here's why: To
transmit data, analog circuit-switched networks
require a continuous open channel, which must be
maintained even when it's not in use. But a digital
packet-switched network, such as the Internet, breaks
the data into small chunks that are sent as needed
asynchronously and reassembled by the receiver.

Right now, the telcos have no financial incentive to
promote speedier, more efficient technologies - and
when they've tried, they've blown it through a
combination of high prices and notoriously bad
customer service and support. Take ISDN, a digital
technology that has been ready-to-arrive for 25 years
but never quite did. "The problem isn't technology,"
according to James Love, an economist at the Ralph
Nader-sponsored Consumer Project on Technology. "It's
monopoly pricing by the telcos."

There are even better technical solutions than ISDN,
such as xDSL, about which the telcos appear ambivalent
at best. They shouldn't be. The xDSL family of
digital-subscriber-line technologies could provide a
way out of the regulatory staredown between the telcos
and the Net, supercharging ordinary copper wires to
carry data at Ethernet speeds without clogging the
voice network.

Studying the studies For now, however, both sides are
pumping most of their energy into spinning the
argument. Last June and July, Bell Atlantic, U S West,
PacBell, and Nynex launched the opening salvo in the
access-fee battle by passing along a few studies to
the FCC. The Bell Atlantic report noted that Net
surfers use their phone lines to make longer calls,
with an average length of 18 minutes, compared with 5
minutes for a typical voice call. Meanwhile, Bell
Atlantic said it spends $75 to service and maintain
each local loop that runs into an ISP line - lines
that generate revenues of only $17 per month. That
piddling 17 bucks, the telcos claim, barely covers the
cost of keeping a dial tone humming, and isn't nearly
enough to pay for the expensive upgrades needed to
handle circuit-gobbling Internet providers. If more
money isn't spent to upgrade the network, the
scaremongers warn, traffic jams caused by gluttonous
Internauts could become a public menace. The report
concluded that "service interruptions of even a
temporary length could affect public safety services
such as 911 service, with unthinkable consequences."
The telcos' solution: the FCC must let them levy
per-minute access charges to raise the hundreds of
millions of dollars a year needed to keep the phone
system from crashing.

To battle the phone companies' analytical onslaught,
Intel, Compaq, IBM, America Online, CompuServe, and a
handful of trade associations formed the Internet
Access Coalition in the autumn of 1996 to craft a
counterstudy to rebut the telcos' claims. Delivered to
the FCC in January 1997, the coalition report, titled
"The Effect of Internet Use on the Nation's Telephone
Network," blasted telco assumptions and pointed out
their hypocrisy: the Baby Bells whine that flat-rate
Internet services are congesting phone lines even as
many of them are peddling flat-rate Internet access
themselves. Some have actually given it away - in
California, PacBell offered five months of free
Internet service and waived installation charges for
customers who ordered a second phone line. How can a
cash-strapped phone company afford this? Since many
homes are already wired for two lines, second-line
service has become a source of easy profits for the
telcos. In 1995, for example, second lines generated
six times the revenues the Baby Bells now say they
need to upgrade their networks.

The coalition's debunking was thorough. Even if data
calls average 20 minutes - so what? One such call eats
up fewer phone company resources than 20 individual
one-minute voice calls. Moreover, the much-publicized
"clogged network" numbers came from areas with
exceptionally heavy modem use - regions that are
hardly representative of the network as a whole. In
other words, the telcos gave the FCC anecdotal,
worst-case estimates of network-congestion
difficulties and presented them as commonplace, or
perhaps even dangerous.

The phone companies reacted to the IAC study by
retreating from their initial position. No longer will
you hear their lobbyists talk of 3-cents-a minute
access surcharges; since early this year the fallback
stance has been to seek some charge - any charge! - as
long as it's collected through a metered pricing
scheme. "It doesn't have to be a large charge," Bell
Atlantic's Ed Young now says. "It can be something of
the magnitude of a penny a minute, or even less. But
it has to be something."

The friendly FCC? The Baby Bells might have assumed
they had allies in the four FCC commissioners. The
agency's history is replete with precedents in which
decisions have shielded venerable industries from
competition by upstarts. The commission delayed the
introduction of FM radio to protect AM stations. It
stalled cable television to benefit broadcasters. No
wonder, then, that many Internet users took for
granted that it would happily sacrifice the Net to
spare the telcos.

But, surprisingly, the FCC has often gone out of its
way to protect the Net from telco onslaughts. A 1980
directive dubbed "Computer II" said the commission
would regulate only "basic" telephone services, not
providers of "enhanced services." That marked the
Net's first reprieve, as the "enhanced service
provider" category includes everything from voicemail
services to alarm-monitoring firms to Internet
providers.

In 1984 Ma Bell splintered, and the FCC decided to
tack an "access charge" of roughly 5 cents a minute
onto every long distance call to compensate local
phone companies for completing the local-loop
connection. The Net's second reprieve came when
commissioners ruled that enhanced service providers
wouldn't be obliged to pay similar access charges
because of the "severe rate impacts" that would
result.

Finally, in 1987, the telcos trotted out many of the
hardship claims they still use today, saying that
voice users were subsidizing the clunky online
services of the time, and demanding that the FCC
impose per-minute access charges on them. The nascent
high tech community responded to the affront quickly.
Irate BBS sysops buried the agency in faxes (a novelty
at the time), while firms such as IBM, Digital, and
CompuServe persuaded a few members of Congress to
intervene. In the end, the commissioners ruled for the
Net and against the telcos, saying that it was
inappropriate to assess per-minute charges on the
fledgling online industry.

That ruling, which immunized ISPs and online services
against access charges, is what the telcos now call
obsolete. Access charges, paid mostly by long distance
companies, added up to more than $23 billion in 1996.
These days, however, long distance companies like MCI
and AT&T are cajoling the commission to reduce access
charges, and the FCC seems sympathetic to the idea.
This means long distance rates may soon be dropping.
But it also means the Baby Bells will pull in less
cash from long distance carriers - a potential
shortfall that perhaps explains why they are now so
hungry to levy access charges on Internet providers.

All this wonk warfare might have gone largely
unnoticed on Main Street USA, were it not for an FCC
Web page that solicited public input on the
access-charge issue. Only a few comments trickled in
during the first few weeks after the page was put up
in December 1996. But as the spring comment deadline
grew near, the word got out: the FCC was poised to
screw the Net. Between February 1 and February 14,
hundreds of thousands of irate emails flooded
isp@fcc.gov. In message after message, Internet users
pleaded, argued, and reasoned with the agency not to
levy access charges. One message labeled the telcos'
demands "just another scam so the greedy phone
companies can separate even more money from
consumers."

This tidal wave of digital bile did not escape the
attention of Reed Hundt, chair of the FCC. "Imposing
today's interstate access charges on Internet users is
the information-highway equivalent of reacting to
potholes by making drivers pay for a new toll road,"
he says. Such comments are reassuring, but like any
veteran bureaucrat, Hundt seems eager to find a middle
ground between the telcos and the Net. Thus, he has
also offered his own solution. Right now, residential
phone lines are cheap because federal and state
agencies have mandated increases in the cost of long
distance calls and premium services like call waiting
to subsidize basic dial-tone access for everyone.
Hundt has suggested removing these subsidies from
second phone lines. In the absence of local-loop
competition, his proposal would potentially double the
price of a second line. But it would also give the
telcos less to grumble about.

Hundt has only one vote on the four-member Federal
Communications Commission (the fifth spot remains
vacant at the time of this writing), but other
commissioners seem to agree with his position. "We're
going to walk very carefully so as not to impede
progress or competition," insists Commissioner Susan
Ness. Indeed, when the group held a preliminary vote
on access charges last December, it ruled that
Internet providers should not be subject to access
charges of around 3 cents a minute. Since today's
system is so screwed up, the agency said, "We see no
reason to extend this r�gime to an additional class of
users, especially given the potentially detrimental
effects on the growth of the still-evolving
information services industry."

The Net had - once again - found an improbable ally in
the FCC. But the lovefest may be short-lived. The
ruling left the door open for the commission to impose
access charges of less than 3 cents, and the telcos
are now asking for a penny a minute.

Inside the Beltway, the buzz is that the FCC won't
impose new access fees anytime soon. But no matter
what the commissioners decide, the losing side is
likely to take its grievances to the Senate's
Commerce, Science, and Transportation Committee, which
oversees the agency and could overrule its decision.
The Commerce Committee's new chair, Senator John
McCain (R-Arizona), harbors little sympathy for the
telcos - or their lobbyists. (See "The McCain Mutiny,"
page 122.) After presiding over a recent hearing on
universal service, McCain began spreading the word
that he opposes new access charges. "The claims that
are being made by the telcos are somewhat
exaggerated," he says. "I'm persuaded that online
access isn't nearly the burden they are complaining
about." McCain's assessment is not universally shared
- Alaska's Senator Ted Stevens, a senior Republican on
the committee, said in March that Internet services
should be regulated as telephone companies, and forced
to pay some form of access charge or universal service
fee.

The ad hoc alliance All of which means that the
peculiar synergy that exists between grassroots
Internet users and high tech corporations remains as
important as ever. In the face of the telcos'
onslaught, netizens are joining ranks with business
interests to lobby the government and protect the Net.
Although the flood of angry email that stuffed the
FCC's in-box was a chaotic, word-of-mouth effort, it
worked wonders - and effectively changed the course of
the debate in DC. "I think people in Washington
recognize that the 300,000-message deluge was just the
tip of the iceberg," says Paul Misener, Intel's chief
(and only) telecom lobbyist and coordinator of the
Internet Access Coalition.

Yet in a very real way, the digital nation had
misidentified its foe. As a rule, Washington's
bureaucrats are not power-crazed authoritarians; most
are reactive creatures who simply respond to
demonstrations of influence and power. Bell Atlantic,
PacBell, Nynex, et alia leaned hard on the FCC for
access fees, and the agency reacted in its own
instinctively bureaucratic way. The high tech
community responded by forming its own ad hoc
coalition to pressure the FCC, and thousands of
Internet users chimed in to express their collective
dismay. Of course, the best way to win not just the
battle but the war may be to remove the commission's
power to regulate the Net altogether. Still, so far
the real threat to netizens has come from complacent
telcos and their legions of starched-collar lobbyists,
not the FCC. The distinction is important, because the
old rule of thumb still holds true: The enemy of our
enemy may occasionally prove to be our friend.

-----

Declan McCullagh (declan@well.com) is the Washington
correspondent for The Netly News (http://netlynews.com/).

Copyright � 1993-97 Wired Magazine Group Inc. All
rights reserved. Compilation Copyright � 1994-97 Wired
Digital Inc. All rights reserved.


-------------------------
Declan McCullagh
Time Inc.
The Netly News Network
Washington Correspondent
http://netlynews.com/