VoIP and the Future of Telecom Regulation

Published March 1, 2004

Much has been written over the past few months about the revolutionary potential of Internet telephony, or voice over Internet protocol (VoIP) service. VoIP would let consumers make phone calls through an Internet connection, largely bypassing traditional circuit-switched wireline telephone networks. In time, some think it might come to completely replace older phone networks.

In just a few short years, VoIP has gone from wishful thinking to marketplace reality as numerous companies now plan to deploy such services. This has also led many industry watchers to speak of VoIP as a veritable deregulatory deus ex machina that potentially offers a sudden and unexpected way to escape from the past century’s regulatory morass.

“Not so fast!” say opponents. That same potential for revolutionary change that excites some, frightens many others. This is an old story, of course. New, “disruptive technologies” are often viewed with suspicion, or even outright hostility, by those who fear they have something to lose by a change in the status quo. But technological revolutions are the healthiest part of a capitalist economy. In a world where “only the paranoid survive,” it’s good that organizations are forced to stay on their toes, constantly concerned about the impact of new technologies on the old ways of doing business. That’s what drives the Schumpeterian “creative destruction” that makes our economy so innovative and prosperous.

Often, however, when the fears over technological change reach a fever pitch, certain interests substitute a political response for a market response. For many, adjusting or abandoning an old business model is just not an option they are willing to consider. Instead, they lobby legislators or regulators for protection from the new competitors or technologies. Steamboat operators feared the rise of railroads; butter makers petitioned against margarine as a substitute; television broadcasters sought to delay competition from cable providers; and some small retailers still fight to keep large chain stores like Wal-Mart out of local communities.

It should come as no surprise, therefore, that this process is playing itself out today in the debate over Internet phone calls. The issue at hand involves the regulatory classification or treatment of Internet telephone service. VoIP is something new; it does not fit neatly into the Byzantine regulatory taxonomy the FCC has established for older communications services. Its opponents want to open the door for regulation of this new service by needlessly subjecting it to the full force of traditional telecom regulations.

In what would be viewed by most people as a silly squabble over semantics, volumes of paper are currently being filed at the FCC over the question of whether VoIP should be classified as a “telecommunications service” or something else, such as an “information service.” Incredibly, in an era in which we should be mapping out the abolition of the FCC altogether, such definitions make a world of difference to the development of a new service.

Because of the haphazard manner in which communications law has developed over the past 70 years, there exist distinct regulatory paradigms for telecom, cable, broadcasting, and wireless service. Internet-based applications do not fit into any of these categories, especially since providers in each of those old sectors can provide online services using different technological platforms or delivery mechanisms. But if VoIP comes to be regulated under one of these archaic classification schemes, especially the “telecom services” paradigm, it could be strangled while still in the cradle by a bewildering batch of federal and state regulations.

Consequently, in the filings and public statements made by the various interest groups that have lined up to oppose a regulation-free VoIP environment, several recurring themes have been cited to justify its classification as a “telecom service”: The potential loss of state and local telecom taxes; the need to collect universal service fees and subsidies; access for the disabled; public safety requirements such as “E911;” and the need for various other “consumer protections.” For example, citing such concerns, a number of state regulators have raised a big stink about VoIP, but really they’re just worried about losing some of their regulatory turf and power.

Of much greater concern is the recent intervention of the law enforcement community, led by the Federal Bureau of Investigation, the Department of Justice, and the Drug Enforcement Administration, which have jointly asked the FCC to assure that wiretap and monitoring capabilities easily apply to the new technology. Apparently the law enforcement agencies oppose telecommunications deregulation because it means they won’t be able to spy on us quite as easily.

As Jim Harper, founder of Privacilla.org, put it, “The law enforcement cart is coming before the civil society horse. The communications infrastructure is being created with eavesdropping in mind before there is any evidence of [the need for] it, plus with VoIP it won’t work anyway as the criminals will use offshore VoIP or open source VoIP, rather than … any of the major carriers.” A wiretap-ready Internet that enables the sort of online surveillance that the FBI, DOJ, and DEA desire will be a costly proposition, requiring expensive equipment upgrades and ongoing regulation of this dynamic sector. Moreover, the scheme would likely entail heavy FCC involvement in the regulation of Internet telephony in the future.

In one sense, what all these diverse parties, from the old hidebound state regulators to the FBI, are really saying is that unless VoIP providers can learn to “play the game” exactly the same way old telecom companies did, they should not, effectively, be allowed to provide service at all. Stated differently, this new technology must be pigeonholed into old regulatory classification schemes and regulatory paradigms of the past; it must not be allowed to breathe the free air of an unregulated communications marketplace.

After all, if VoIP were allowed to develop in a relatively free, unregulated environment, just think of the horrors that might befall our society! We might make cheap phone calls or something.

Adam Thierer ([email protected]) is director of telecommunications studies and Wayne Crews ([email protected]) is director of technology studies at the Cato Institute in Washington, DC.