Hellerstein Regulatory and Industry Review September 8, 1998 HELLERSTEIN REGULATORY & INDUSTRY REVIEW - Fifth Issue: October 15, 1998

Welcome to the fifth issue of HELLERSTEIN REGULATORY & INDUSTRY REVIEW, a monthly free newsletter covering significant industry and regulatory developments in the telecommunications and technology industries. The newsletter is published by Hellerstein & Associates, a telecommunications and technology research group that provides its clients with a competitive edge through market research, competitive intelligence regulatory analysis.

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The topic for this issue comes from a suggestion from one of our international subscribers and focuses on the issues contained in the recently released FCC white paper on Internet access over cable. The discussion and commentary that follows flows from my thinking about the issues raised by the white paper and is intended to stimulate comments and discussion. Cable operators will find the white paper's suggestions supportive of many of their views, while ILECs will find the report's suggestions disturbing in many ways.

The FCC's Office of Plans and Policy recent white paper discusses some of the regulatory issues and problems surrounding Internet over cable. The paper's title "Internet over Cable: Defining the Future in Terms of the Past" is apt since this is exactly what the Commission has been doing--trying to fit new technologies into an old regulatory framework. It is like trying to fit a square peg into an oval. If you squeeze hard enough it just might fit, at least temporarily.

Although the paper was not an official Commission document and did not necessarily represent the views of the FCC, the Commissioners or other staff, it gave an insight into current attitudes in OPP which may influence rulemakings the Commission is currently working on or may initiate.

Over the past 20-30 years the FCC has created different frameworks to regulate cable TV, Broadcast TV, and Wireline telecommunications. However, the rise, growth and popularity of the Internet has caused severe cracks to form in each of these three frameworks. The Internet posses several challenges to government policy goals and to regulators who are trying to implement rules and regulations to achieve these goals.

Each of these regulatory frameworks was created to further specific policy goals. Although these policy goals are now being modified and updated, the regulations behind them have not. For example, the 1996 Act states that it is the policy of the US "to promote the continued development of the Internet and other interactive computer services and other interactive media and to preserve the vibrant and competitive free market that presently exists for the Internet and other interactive computer services, unfettered by Federal or State Regulation." Another stated policy goal is to offer low-cost access to internet access to schools and libraries. A third, is the principle of competitive and technology neutrality.

In the cable arena, operators and services are governed by Title VI of the 1934 Communications Act, while in the broadcasting arena, it was another type of standard, a third standard was employed for wireline telecommunications. In the telecommunication's arena, differing regulations were adopted depending on the type of service offered and whether the service was classified as a basic service (telephone communications) or an enhanced or information (data) service. Basic services are regulated as "common carriers" and fall under Title II, while enhanced services are treated as non-regulated and only subject to 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 on popping out.

Cable service has traditionally been regulated and delivered as an integrated video, information, content, and conduit service under Title VI of the Communications Act of 1934. 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. The 1996 Act, in updating the definition of cable services to bring it closer to modern day usage, broadened significantly what services could be covered. The Act added two words to the definition of subscriber interaction to bring 2-way cable systems and increased subscriber interactivity within the cable regulatory framework.

Thus under the new definition of subscriber interaction, cable Internet services such as Road Runner or @Home that are "made available to all subscribers generally" arguably fall under the definition of "other programming services in Section 602 of the Act. The key here is that any Internet service that is available to all subscribers and that is not "subscriber specific" can be considered a cable service under this part of the definition.

The legislative history of the Act supports this reading and interpretation of the Act when it states that interactive services, the transmission and downloading of computer software, video games, and other information or enhanced services are examples of services covered under the definition of "other programming services." 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. However, this begs the question that all streaming video, audio, customized search and portal sites, practically all Internet content sites would then be considered to be cable services, if provided by a cable operator, and regulated according to Title VI.

In contrast, the FCC has ruled that Internet-based services and Internet service providers that use the wireline public switched network are enhanced or information services and therefore exempt from wireline regulation. 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.

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.

If Internet access is to be governed under Title VI then must carry, leased access, and PEG (public, educational, governmental) requirements also apply to these operators. Could other Internet content providers such as AOL demand carriage under must carry or channels under leased access provisions? Already AOL is lobbying hard for some type of access to cable plant and this may be way for them to obtain this access. Additionally, could municipalities demand Internet access and service to all agencies as a PEG requirement and could these same governmental providers than in turn offer Internet access to citizens in direct competition to other Internet access providers? Free or low cost Internet access services, or just simply e-mail access to all citizens would certainly be seen to be in-line with stated congressional and governmental public policy goals, but would be detrimental to the financial health and business plans of all Internet access providers.

Under the current rules, Internet access and provision can be delivered through cable, satellite, and wireline dial-up or xDSL service. However, each of these three distribution media are regulated differently. Did 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 white paper. Hellerstein & Associates believes that this asymmetric regulation of Internet access, favoring cable TV operators over incumbent wireline operators may ultimately be untenable and will likely collapse under its own weight in a few years. Allowing for the creation of two parallel universes also goes against the stated public policy goal of promoting competitive and technology neutrality as called for in the 1996 Act, The Joint Board Recommended Decision on Universal Service, and other FCC rulemakings. In the Universal Service Order, the FCC stated that "to promote equity and efficiency and to avoid creating regulatory distinction based purely on technology it was not limiting telecommunications to circuit-switched wireline transmission", but that is exactly what it seems to be doing in creating two parallel universes, creating regulatory distinctions based on technology.

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 white 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? What would be the outcome? And what would happen if the authority was not granted? Is this setting a precedent that be result in more problems that it solves? Are we not trying to squeeze the genie back into the bottle only to see it pop out again shortly?

Hellerstein & Associates believes that the FCC needs to create a new paradigm for regulating enhanced information services that crosses all three sectors, broadcasting, wireline, and cable. 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. The FCC white paper acknowledges this issue when it states that we have entered an era " of converging technologies, converging products, converging media, and converging industries."

Creating, an entirely new regulatory framework however,would likely necessitate new legislation from Congress, unless the FCC can find a creative way to avoid this. The FCC might look to Congress to expand the forbearance authority given to it in Section 10. Perhaps an expanded forbearance authority combined with a ruling on the Section 706 NOI on advanced services would provide the FCC with the authority it needs to create this new type of regulatory framework that will be able to last for the next ten years.

Hellerstein & Associates is interested in learning what its readers think of these issues. Please send all comments directly to Judith Hellerstein at Judith@jhellerstein.com . We are in the process of creating a discussion forum for subscribers to comment directly on newsletter topics and will notify all subscribers of its address shortly. If you would like more information on this topic please e-mail Judith Hellerstein at Judith@jhellerstein.com. _________________________________________________________________________________________________

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