June 24, 2004

Review of Regulatory Requirements for IP-Enabled Services

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The FCC is seeking comment on ways in which the Commission might categorize IP-enabled services so that regulations are limited to those services and/or applications which are most appropriate.


The FCC raises a variety of issues related to the regulation of "Internet Protocol"-enabled services, such as instant messaging, interactive games, gambling, virtual private networks, maps, various video services, and (perhaps most significantly) Internet Protocol telephony. Key issues include whether IP-enabled services should be subject to economic regulation, pay access charges to local telephone companies, and make contributions to federal universal service programs.

The FCC is rightly suspicious of the claim that IP-enabled services should be subject to regulation of prices or entry. There is no evidence that these services can or would be monopolized. The history of telecommunications, as well as a wide variety of other regulated industries, suggests that consumers bear significant costs when economic regulation becomes a substitute for competition. Deregulation and competition in the long-distance telecommunications, airline, railroad, natural gas, and trucking industries has led to price reductions and other consumer benefits worth more than $50 billion annually; regulation deprived consumers of these benefits.

IP-enabled services currently are treated as business telephone customers; unlike long-distance phone companies, they do not pay access charges to local phone companies. These access charges subsidize local telephone service, so that every household has access to a cheap phone line regardless of income. Imposing access charges on IP-enabled services would generate significant consumer costs while doing little or nothing to increase the number of people who subscribe to local phone service.

The Commission also asks whether IP-enabled services should contribute to federal universal service programs. Economic research shows that these "contributions" (or taxes) generate significant costs for consumers over and above the amount of money they transfer from consumers of interstate telecommunications services to favored recipients. The "excess burden" associated with these taxes on long-distance and wireless, for example, was approximately $2.6-3.0 billion in 2003. This excess burden represents the value of long-distance and wireless services that consumers and producers forego because the universal service contribution factor raises the price of these services. About 70 percent of the universal service funds are spent on poorly-targeted programs that generate relatively small increases in telephone subscribership at a very high cost per subscriber.

Given these realities, the Commission could best promote consumer welfare by moving expeditiously on its initiatives in other proceedings to reform intercarrier compensation and universal service subsidies, rather than trying to expand the current systems to additional services. Specifically, the Commission should:

  • Refrain from imposing economic regulation on IP-enabled services.
  • Keep IP-enabled services, including all forms of Internet Protocol telephony, free from access charges. In the short term, allow IP-enabled services continued treatment as business phone customers.
  • Assess whether Internet Protocol telephony should be subject to some other form of intercarrier compensation arrangement only after this service becomes better-established in the market, and after the Commission has implemented a reformed, universal intercarrier compensation system that avoids the significant consumer costs of the current access charge regime.
  • Keep IP-enabled services other than Internet telephony free from requirements that they contribute to fund universal service programs.
  • Delay deciding whether Internet Protocol telephony should make contributions to universal service programs until those programs are reformed to substantially reduce their costs to consumers.
  • Evaluate whether widespread adoption of Internet Protocol telephony could reduce the cost of universal service programs by reducing the number of high-cost wireline telephone loops that would need to be subsidized.