The construction and expansion of the global fiber optics network and its effect on labor markets worldwide is arguably one of the most significant developments of the past decade. And while it has taken a back seat to the War on Terror here in the US, it is topic of choice in many other countries (especially Asia). Certainly the offshoring process has garnered attention in this election and US businesses have been the most adaptive at outsourcing, but other national governments are engaged in major reconstruction of legal, educational and private sector practices in response to this phenomenon.

In my MA dissertation titled "The Offshoring of Teleservices, Opportunities and Macroeconomic Effects in Developing Countries," I explore the future possibilities for the export of real-time service jobs performed over a telephone as well as the economic and social implications for recipient countries.

One of the major barriers for countries to absorb back office processing (BOP) work is their heavily regulated telecommunications industries, characterized by high access fees and weak infrastructure. In fact, my paper points to India's telecom reforms of the early and late 1990s as one of the key policy moves that allowed India to capture billions of dollars worth of service employment for their economy. International trade in services is growing, and there will be many opportunities for countries that possess and prioritize an appropriate regulatory framework.

The FCC intends to resolve an impressive number of pressing issues by year end. (See Comm Daily, Oct. 22 2004 [Lexis subcription required].) So it may seem too much to ask, like an urchin from the musical "Oliver!": Please, sir, may I have some more?" Yet, at least in the voice over Internet Protocol (VoIP) context, there are a few areas in which "some more" may mean a great deal to companies hungry for as much regulatory certainty as they can ingest before this season's porridge pot runs empty. In particular, the Commission should pay careful attention to the scope of its decisions and proceedings regarding VoIP.

First, the Commission should do as much as it can to decide jurisdiction in a manner that covers as many VoIP offerings as possible. Ideally, this would mean deciding that all VoIP should be subject to exclusive federal jurisdiction, whether or not a company provides the service using its own network. Without asserting federal jurisdiction over VoIP, the FCC cannot secure from state intrusion the "minimally regulated" environment that has served as the linchpin of its efforts to promote investment and innovation in broadband networks and related services and applications. These efforts have encompassed narrow requirements for leasing telephone company networks, attempts to establish a consistent regulatory framework for cable modem and DSL services, and even with respect to calls for broadband providers to maintain consumers' freedom to use the content, applications and devices of their choice voluntarily and without government mandate.

The jurisdictional determination should cover as many VoIP offerings as possible so as not to undermine the Commission's longstanding commitment to promote deployment of competing broadband networks. Deciding only that non-network-based VoIP providers offer interstate services runs the risk that parties will argue, future Commissions will decide or courts will conclude that network-based providers should be treated more onerously, notwithstanding their investment in the very wires and equipment that have spurred the emergence of these transformative services. This kind of "network versus no network" approach, of course, is the traditional method by which the FCC has regulated services related to data processing, and much of the criticism surrounding the agency's current treatment of broadband and advanced services centers around its wise divergence from that traditional method given the existing and prospective competition among networks that new digital technologies make possible. Leaving companies that have built or hope to build their own networks exposed to potential regulation could ultimately mean the Commission withstood all that criticism for nothing. More importantly, the regulatory uncertainty that such an approach would maintain or even exacerbate for those considering future investment in competing broadband networks leaves a critical flank of the agency's campaign to promote such deployment unprotected.

If time or other practical considerations prevent the FCC from deeming all VoIP services interstate, it should at a minimum avoid concluding or suggesting that these services somehow mutate into different jurisdictional form based simply on who owns "last mile" broadband networks. In particular, the agency in this case should state expressly that it is declining to determine the jurisdictional nature of services offered over a provider's own network. Further, in concluding that the other VoIP offerings are interstate, the Commission should avoid relying on any factors that, by implication, subject network-based VoIP providers to state jurisdiction. Given that all VoIP services rely on broadband networks whether or not they own them, it does not seem to follow that a provider's ownership or lack of a network is a logical jurisdictional distinction to make in any case.

Second, to the extent the Commission falls short of preempting state jurisdiction over VoIP entirely, it should be as clear as possible about the type of role state utility commissions will be allowed to play. The Telecommunications Act of 1996 maintains a framework of "cooperative federalism," in which the FCC shares regulatory authority with state utility commissions. Thus, states have been involved even with respect to issues the Act gives the FCC to address, such as states' successful attempts in the context of telephone numbering to obtain authority to help establish new area codes.

Although there are likely problems associated with state regulation of services like VoIP that inherently defy state and even network boundaries, those problems will be compounded if the FCC fails to preclude state involvement and then leaves ambiguous what role states can play. About half of state commissions have taken some action on VoIP, and that activity seems likely to continue even to the extent the Commission deems VoIP interstate. Rather than allowing states to fill this perceived gap "piecemeal," the agency should identify as clearly (and narrowly) as possible the areas in which it does not reject state involvement, relying heavily on some survey of where states' actions suggest they may intervene next. In addition to promoting regulatory certainty, detailing a role for states might discourage any court that is skeptical about the FCC's authority to eclipse states on VoIP from overruling the agency's decision that VoIP is interstate. Such a court might deem semantic the "difference" between allowing states to participate in regulating an "interstate" service and treating the service as though it were both interstate and intrastate.

Third, the agency should state affirmatively that it has no intention of regulating the overwhelming majority of services and applications that fall under its impossibly broad IP-Enabled Services proceeding. That proceeding sweeps in, not only voice, but any service or application (existing, emerging or as yet unborn) that relies on the Internet Protocol - a vast universe that will continue expanding rapidly in the foreseeable future. The Commission's instinct in asserting authority over computer applications that it has not traditionally regulated was not without some base; the agency might have predicted greater success in maintaining its commitment to "minimal regulation" if it lumped new offerings that (to some) quack like the "duck" of traditional phone service with other services few have considered subjecting to FCC regulation. (Do we really want the FCC to regulate online interactive video games?) But predictably, the record supporting -- or even mentioning -- regulation of most non-voice services covered by the proceeding is scant and diffuse.

Given the almost limitless possibilities that the Internet Protocol offers applications developers, this near silence is understandable; there are simply too many existing or emerging applications for participants in the proceeding to focus on any of them constructively without the kind of policy imperative that VoIP faces. This silence, however, is not golden - it has a dark side. As common sense and a recent report suggest, the uncertainty caused by such a cloud of potential future regulation strikes at the heart of the Commission's overall plan to promote investment and in innovation in digital technologies. In any event, the Commission does not need to assert authority over services it has never intended to regulate simply to acknowledge that VoIP is technologically similar or identical to those unregulated services. Thus, the Commission should rope off as broad a category of services as possible from regulation in the proceeding, beginning with primarily non-voice applications that do not rely heavily on the traditional public telephone network. In doing so, the Commission should underscore that, much like it has in decades past, it is promoting the development of data processing applications by expressly exempting them from regulation at the federal and (hopefully) state levels.

Again, it may seem somewhat gratuitous to ask more of an agency that already has too much on its plate. But if the FCC gives this kind of attention to the scope of its decisions and proceedings on VoIP, its care will be more than rewarded by making its actions more effective in promoting these innovative services and, ironically, by saving the Commission some work and headaches in the long run.

Last week on this weblog, Ray mentioned how his Vonage Colorado home phone and mobile could be reached from Washington, DC using a local 202 area code that acts as a 'toll bridge' to circumvent paying distance charges and this threatens the principal redistributive purpose of telephone rates.

Indeed what Vonage and other VoIP companies are doing on a nationwide basis, Primus' Lingo VoIP service is doing worldwide. Look at their $19.99 a month plan that includes unlimited calling in the US, Canada, and Western Europe (landline only). If you call someone in Western Europe the number that will appear on that person's caller ID begins with a local European number (usually the nearest big city). So, that if I call a friend in the UK, it comes up as a London number. When they ask, "Hey are you in London? Let's meet up!" I have to respond, "No, I'm calling from an internet based phone in Washington, DC which is tricking your national PSTN system into thinking that I'm in London so that I don't have to pay any international toll charges."

Lingo doesn't stop with Europe; it also has a $34.95 a month plan that will add on eight Asian countries as well as Australia and New Zealand. For $79.95 a month it offers unlimited international calls to 35 countries worldwide. No doubt other VoIP providers will begin to offer similar plans, but Lingo has taken the lead.

Routing over the IP network is a neat little technique that illustrates quite clearly how VoIP technology is well ahead of current national based regulation regimes. This diagram below shows how a call made over a broadband line is transported via the internet (1) in IP format to a gateway in the terminating country, where it is then converted (2) to analog format and completed as a local PSTN call (3) with no international settlements paid. Cool huh?

How Lingo routes international calls:

The Federalist Society sponsored a panel today on Antitrust Modernization and Public Choice. Judge Easterbrook, former antitrust chief Douglas Melamed and FTC General Counsel William Kovacic generally agreed that the "Antitrust Modernization Commission" shouldn't have much work to do.

Judge Easterbrook noted that "modernization" implies that there is a need to craft special rules for emerging technologies, but that industry-specific rules should be avoided at all costs. Instead, if there's a shortcoming in the antitrust laws, that should be fixed across-the-board. Much of his talk was a refresher of his classic article, The Limits of Antitrust.

Kovacic discussed the interplay between public choice and institutional design, recommending that agencies look at the use of self-limiting principles (such as merger guidelines), efforts to increase transparency (e.g., committing to explain decisions not to prosecute after antitrust investigations are complete), ex post reassessment of completed matters, and heavy investments in both offensive and defensive advocacy. Or, much of what the FTC has been doing.

Melamed warned the Modernization Commission to stay away from addressing questions involving the substance of antitrust law, such as overruling Trinko v. Verizon. He noted that these issues would be: (1) intensely politicized, and (2) better left to the common law process, as our understanding of the underlying economic principles behind antitrust changes over time.

On the whole, as the old saying goes: If it is not broken, then there is no need to repair it.

BPL is finally going mainstream - at least as far as media attention is concerned. Today's Boston Globe and the Pittsburgh-Tribune Review highlight the challenges facing regulators and potential entrants - including interference issues, standards and entrenched broadband providers offering bundled services.

Today's San Francisco Chronicle contains the latest attempt to decipher a substantial difference between the Bush and Kerry platforms on tech and telecom issues. Cato's Adam Thierer points out that the current administration has given Chairman Powell little support over the past four years - yet the article includes the FCC's recent broadband over powerline and fiber-to-the-premises orders on its list of the President's 'accomplishments.'

Some of us attending this week's Voice on the Net Conference shuddered, not because of Boston's damp cold, but because of what we thought we witnessed: an expanding effort by competitive local exchange carriers (CLECs) to co-opt voice over IP (VoIP) providers by playing on fears that large broadband providers would begin to degrade VoIP providers' use of those "last mile" networks. (See October 19, 2004 issue of TR Daily (subscription required). This strategy appears to build on the "regulate the biggest pipes and leave the rest of the Internet alone" rationale underlying the so-called "layered model" of regulation.) Never mind that CLECs' revival of a familiar justification for government to impose "net neutrality" mandates fails (as always) to provide any persuasive evidence that cable modem and DSL providers want to and, in fact, do single out certain packets for poor treatment. The appeal of this would-be alliance is less factual or economic than it is political.

Many CLECs are, unfortunately, fighting for their regulatory survival in the face of repeated slaps by the courts. These stern rebukes - which focus mostly on past FCC efforts to promote competition by companies with few of their own facilities - had the effect of exacerbating uncertainty even for those CLECs who hoped to or did rely primarily on their own facilities. Simply put, the courts balked whenever the FCC attempted to stretch the 1996 Telecommunications Act to erase the advantage the latter, facilities-based entrants would otherwise enjoy relative to entrants relying exclusively on the facilities of the incumbent LEC. CLECs may thus see opportunity in joining forces with the political darlings that VoIP providers (with good reason) have become in the minds of policymakers seeking to promote broadband and innovation.

Beyond politics, the substantive rationales for such an alliance are difficult to fathom. Certainly, VoIP providers have little to gain. In the reality that stubbornly refuses to fade, broadband providers continue to offer consumers generally unfettered access to and use of the content, applications and network devices of their choice, notwithstanding long-standing assertions that such freedom is imperiled. Unless and until broadband providers' long-anticipated incentive and ability to "discriminate" materializes, VoIP providers will flourish whether or not CLECs survive in sufficient numbers to augment broadband alternatives that are expanding in the form of cable, DSL, wireless and emerging technologies such as broadband over power lines. And there is no inkling that companies investing in broadband networks will decide to jeopardize those substantial sums by denying premium-paying consumers the freedom they want, just so the broadband provider can fight a doomed battle to wield power in the unconcentrated national market for obtaining broadband content.

CLECs, ironically, also bear some risk in this gambit, particularly those who have invested in their own facilities. For it would be unwise to forget that calls for "net neutrality" mandates performed an effective "end run" around earlier calls by Internet service providers (ISPs) for regulators to guarantee them "open access," i.e., use of other companies' broadband networks to provide Internet access to their customers. Facilities-based CLECs and ISPs in the broadband context are in many cases rough analogs, in the sense that both may serve as physical middlemen between end users and a wider global network beyond. Thus, these CLECs should be concerned about championing mandated access to content, as they may find themselves shortchanged if the political powers that be figure out that CLEC facilities are not technically or economically necessary for beloved consumers to enjoy the freedoms they have come to expect in surfing the Internet. How concerned are politicians likely to get about protecting wholesale competition that relies on the legacy telephone network when neat, new broadband networks are deploying and consumers can use the Internet as they please?

Yet "net neutrality" promises to be a live issue among policymakers for some time, as shown by FCC Chairman Powell's stirring re-endorsement of the importance of broadband and other Internet companies promoting consumers' Internet freedom without regulation. Thus, the rhetorical appeal of linking "the fate of telecommunications competition" with consumers' freedom to use the Internet will remain undeniable, reminiscent of the "anti-big company" groundswell that so complicated the FCC's efforts last year to address repeated court remands in the charged media ownership context. This regulatory strategy also seems well-suited to the business plans of those entrants that once sought to dominate, with few facilities, in the local telephony market, but that now may be betting (perhaps the farm) on VoIP. The political sway held by those companies, of course, was at least in part responsible for the FCC's finally-aborted collision course in promoting certain types of local telephone competition under the 1996 Act.

So broadband providers would do well to monitor the issue of "net neutrality" closely and be prepared, not just to shudder, but to reiterate their support of the status quo, which has brought consumers both increasing investment in broadband networks and unfettered use of and access to content, applications and devices without the need for government intervention.

As for VoIP providers and facilities-based CLECs, they should think carefully about whom they partner with as they push (hopefully with much success) for sustainable and economically rational reforms that will allow them to bring more of the benefits of competition to American consumers. In politics, bedfellows may prove more harmful than strange.

The FCC's decision last week that unbundling obligations will not extend to Fiber-to-the-Curb loops (see Ray's posting on "Ownership, Investment and the FCC" below) accelerated deployment plans by BellSouth and SBC. Now, according to an article in Telephony Online,
it appears that a yet-to-be announced ruling on the interplay between sections 251 and 271 of the Telecom Act is behind Verizon's announcement that they will be deploying Fiber-to-the-premises in six former Bell Atlantic states.

A microcosm of the demise of toll charges (and the access charges embedded within them) is an e-mail I just sent to my staff. I told them to call my virtual "202" VoIP number, which rings here in Denver and simultaneously on my mobile phone. Both of these are "720" Denver-located area codes. So now, any call from Washington to me reaching me on a Denver VoIP line or my Denver cell phone incurs no long distance toll charge.

From a cost and competition standpoint, this is a ho-hum point. I as a consumer am taking advantage of the competitive pressures in a declining cost industry to save money.

But wait. There is a hue and cry against this practice--regulatory arbitrage!! goes the epithet. Indeed, my old days as a regulator, if this were taking place wholly within the state of Colorado, we would have been petitioned to stop this practice as illegal "toll bridging," the practice of routing calls simply to avoid access charges. [Qwest to its credit has embraced a "no-access charge for VoIP" position.] From a regulatory perspective, this "toll bridging" is intolerable. It threatens a principal redistributive purpose of telephone rates.

This just goes to show how legacy regulation and its internal logic has ceased to have the individual consumer's interests at heart, but rather exists to preserve the prerogatives of a given set of consumers, usually in rural, high-cost areas (and, oh yes, it also persists to protect and perpetuate the interests of the regulatory class).

After reading Larry Lessig's article on "Coase's First Question" in the current issue of Regulation, I finally understand the argument that the commons proponents have been making. A commons for goods such as spectrum and broadband is the same as free trade, and we all know that free trade is a good thing. Q.E.D.

Lessig's article--which is a comment on Bruce Owen's very good discussion of "net neutrality" in a property rights context in the Summer 2004 Regulation--illustrates the pitfalls of practicing economics without a license. (Owen's article is a short version of the paper Bruce and Greg Rosston presented at PFF's Net Neutrality conference last year, which will be included in our forthcoming conference volume.)

Citing Coase's famous 1959 Journal of Law and Economics article on the FCC, Lessig argues that "proper-Coaseans" first ask the question of whether the resource in question should be the subject of property at all, before asking where the property right should reside. This is in contrast to "property-Coaseans" (e.g., Owen), who go straight to the second question.

Clever language aside, Lessig's "proper-Coasian" concept is based on quoting Coase out of context. As Lessig indicates, Coase did write, "All property rights interfere with the ability to use resources. What has to be insured is that the gain from interference more than offsets the harm it produces." But, the point he was making (yes, I did go back and reread it) was that once property rights are defined, the market can bring about an optimum utilization of those rights and that, in the context of spectrum, the optimum interference, e.g., between operators on adjacent frequencies, is not necessarily zero. He was not suggesting the need to subject every property rights decision to an ex ante cost-benefit analysis to determine "whether the resource should be the subject of property at all." That would be a pretty radical notion, indeed.

The free trade argument comes from a 2002 article on spectrum rights by Yochai Benkler--another apostle of the commons approach--that Lessig also quotes. The argument appears to go as follows. The right to trade internationally, like spectrum, is a valuable right. If we were to create a set of tradable international trade rights and auction them off, people might pay a lot of money for them. But we know that this "property system" would interfere with free trade and be inefficient. The same reasoning applies to goods like spectrum and broadband.

Critiquing this argument would be a good question for an undergraduate economics exam. But the central point of the answer is obvious. Creating international trade rights creates an artificial scarcity where no real scarcity exists. This, by definition, is inefficient. In fact, such rights--quotas--have been used to protect domestic industries, with adverse effects on efficiency that are familiar to most economics undergraduates. Spectrum and broadband, on the other hand, really are scarce, which is why they need to be subject to a property-rights regime to be allocated efficiently. Broadband obviously has scarcity value, because it takes lots of real resources--capital and labor--to provide it. We know that spectrum is scarce, at least in the amounts that the government has made available, because it commands very high prices in the market. Q.E.D.