Verlag C.H.Beck

March 1999

The Implications of Asymmetric Regulations on Internet Access

Although the US Federal Communications Commission's (FCC) decided at the end of January 1999 not to force TCI or other operations to unbundle their networks, and later approved the merger between AT&T and TCI. The fight over cabel unbundling is far from over. The FCC's decision only put off the debate until a later date.

The AT&T-TCI Merger

The TCI-AT&T merger poses thorny and complicated policy issues with worldwide implications as to whether the cable infrastructure should be unbundled and opened up just like the wireline phone network. The FCC was cognizant that any action on AOL, US West and other ISP's demand for open access to the cable broadband network could permanently alter the landscape of broadband communication to the Internet by changing who controls future broadband access to the Internet via cable. Thus they declined to take any action despite statements by top FCC officials that the current system was unsustainable. In Germany and in other countries the regulator will be facing similar tough policy decisions. For example, the value of Deutsche Telekom's sale of its cable network can be substantially affected, as a decision by the FCC requiring cable operators to unbundle networks is likely to reduce the value of Deutsche Telekom's cable network. Clearly, the FCC's rulings on broadband access will have substantial international affects on cable operators, satellite and wireline providers and regulatory regimes in other countries.

A recent white paper of the FCC's Office of Plans and Policy (OPP) (Barbara Esbin, Internet over Cable: Defining the Future in Terms of the Past), although not an official document and therefore not necessarily representing the views of the FCC may give some insight into the FCC's thinking. The paper's title is apt since this is exactly what the Commission has been doing - trying to fit new technologies into an old regulatory framework - like a square peg into an oval. The different frameworks that have regulated cable TV, broadcast TV, and wireline telecommunications in the past 20-30 years, are no longer sufficient to regulate the growing popularity of Internet use.The Internet poses severe challenges to government policy goals and to regulators who are trying to implement rules and regulations to achieve these goals.

The problems with regulating new technologies

In the cable arena, operators and services are governed by Title VI of the 1934 Communications Act. A different regulatory framework governs broadcasting. And a third standard governs wireline telecommunications. In telecommunications, basic services (telephone communications) are regulated as "common carriers" and fall under Title II of the Communications Act, and enhanced or information (data) service are treated as non-regulated and regulated under the looser rules of Title I. These regulatory definitions of "basic" and "enhanced" are over 20 years old, while the technologies they are being applied to, such as the Internet, are new and rapidly evolving in ways that are difficult to predict. Often regulators have tried to squeeze these new technologies into the old frameworks and definitions, but like a jack-in-the-box, they keep popping out.

To unbundle or not to unbundle

Cable service has traditionally been regulated and delivered as an integrated video, information, content, and conduit service. Cable operators are not subject to interconnection or facilities unbundling requirements; rather they are subject to carriage requirements that require them to reserve channel capacity for certain programming provided by other entities. Lobbyists from Online and Internet service providers are pushing hard for the US FCC to change its regulations and force cable operators to unbundle their networks, similar to the unbundling of wireline networks. They have joined together with other consumer groups and have asked the FCC to not approve the TCI-AT&T merger unless TCI's cable network is unbundled. AT&T has been extremely active in lobbying against the unbundling of the cable network and infrastructure even so far as threatening the FCC that it will walk away from the merger if the FCC forces TCI to unbundle its network.

How should internet access through cable-TV be classified

The 1996 US Telecom Act, in updating the definition of cable services, broadens significantly what services could be covered, thereby allowing any Internet service that is available to all subscribers and that is not "subscriber specific" to be considered a cable service. Moreover, where cable Internet providers supply a significant amount of their own content and local programming and information, it is not difficult to see why this type of programming could be considered a cable service. Thus, if cable services include information and enhanced services as well as Internet-based services then it seems that the FCC has created two separate regulatory frameworks for the same service. 

The legislative history of the Act supports this reading and interpretation of the Act when it uses interactive services and software downloads as examples of covered services. However, this begs the question whether, streaming video, audio, customized search and portal sites, practically all Internet content sites could be considered cable services, if provided by a cable operator, and regulated according to Title VI. If these can be considered a cable service, can cable operators also control the type of content offered? Will some operators block subscribers from reaching certain sites? Already Home limits video and audio streaming to 10 minutes.

Many cable providers as well as satellite providers provide Internet access by allocating one or more 6 MHz channels to this service. Thus customers order Internet access by subscribing to "the Internet channel". Cable and satellite operators can increase the amount of bandwidth available throughout the system by devoting more channel space or spectrum to Internet or data access. According to the Wall Street Journal, Home has been trying to sign up AOL as a premium channel to its customers, much like it offers HBO or Cinemax. AOL and others have refused to accept this set-up because it would result in less control over their customers and also less advertising dollars. They prefer to lease portions of the cable providers broadband network to connect their subscribers directly, rather than having to risk losing subscribers to Home or cede any control over their subscribers. 

It is unclear whether the FCC has the authority to force cable networks to unbundle their networks. Many claim that the FCC's only authority stems from Section 706, while others claim it results from the AT&T-TCI merger approval process. Section 706 of the Telecom Act directed the FCC and the state regulatory commissions to encourage the deployment on a reasonably timely basis of advanced telecommunications capability to all Americans. The Act defined advanced telecommunications as high speed, switched broadband transmission of voice, video, data, and graphics using any technology. The FCC was required to begin an inquiry into the status of the deployment of broadband access by August 8, 1998 and complete it by February 8. 1999. Section 706 instructed the FCC to remove any barriers to infrastructure investment if it found that advanced services were not being deployed in a reasonable and timely fashion. Thus if the FCC finds that the proprietary nature and ownership of cable networks and infrastructure are a barrier to the deployment of advanced services it could use its forbearance power to order some kind of unbundling of the cable networks. However, this outcome would result only if Internet access was viewed as added service and not as a cable service.

Did the US Congress intend for the FCC to create two, even three, frameworks for regulating what essentially is the same service Internet access and service? There is no indication in either the Act itself, the legislative history of the Act, or even in the most recent Congressional hearings and reports issued by Senator Stevens that this interpretation would be contrary to Congressional intent. In fact, just the opposite may be the case. Congress seems to tacitly endorse the perpetuation of two conflicting regulatory structures, or "parallel universes" as the FCC titles it in the Esbin paper. 

The problems with asymmetric regulations

This asymmetric regulation of Internet access, favoring cable TV operators over incumbent wireline operators, is untenable and will likely collapse under its own weight in a few years. Allowing for the creation of two parallel universes goes against the stated public policy goal of promoting competitive and technology neutrality as called for in the 1996 Act, but is exactly what the FCC seems to be doing in creating two parallel universes; creating regulatory distinctions based on technology.

The outcome of the FCC's and the Department of Justice's merger analysis and the decisions that result, have the potential to change the landscape of broadband access worldwide. Moreover, a forced unbundling of the network could slow down the migration to broadband access as the battle will likely move to the courts, thereby jeopardizing the expected consumer benefits. A decision in favor of the cable operators could result in the creation of two parallel but different set of rules, which also will likely have harmful effects on the movement to broadband access.

If Internet access and service are found to be covered under Title VI, what effect would this have on the stated Government and Congressional policy of not regulating the Internet? Although the Esbin paper provides no answer to this question, it does state that the FCC might require additional forbearance authority from Congress to resolve some pending regulatory problems arising from trying to squeeze Internet access and service into the old regulatory framework for cable services. Should this new authority be granted? And what would happen if the authority was not granted? Is this setting a dangerous precedent? Are we not trying to squeeze the genie back into the bottle only to see it pop out again?

A new paradigm for regulating enhanced information services that crosses all three sectors, broadcasting, wireline, and cable, is needed. It is untenable to have Internet access regulated differently depending on the medium used, and will become even more so in the upcoming years as the communications, broadcasting, computer, satellite, and cable industries converge on each other. 

However, it is unlikely that Congress would give the FCC any additional authority; in fact there is talk in Congress about reorganizing the FCC and giving it less authority and power. Thus any new legislation is extremely unlikely. It is also unlikely that the FCC has the power to completely unbundle the cable networks, even with its authority under Section 706.

There are no easy answers to resolving some of these thorny and complex policy issues surrounding Internet access through cable. Each side appears to be drawing battlelines in the sand, with no side ready to budge for fear of tipping the balance of power adversely. The FCC, the referee, also appears to be hesitant to act, mostly because it has not figured out the entire game plan and how its actions may affect the future deployment of broadband access to the Internet. One can only hope that the FCC will find a way to resolve the inherent tension between protecting the values that have grown up under past regulatory regimes and the stated policy goals of promoting competitive and technology neutrality. Otherwise, the road to broadband Internet access for all Americans will be a long and winding road.

Judith Hellerstein, President of Hellerstein & Associates, a telecom and technology research group specializing in market analysis, competitive intelligence, and regulatory analysis of telecom, market access, and competition policy issues, Washington, DC.