Monday, November 09, 2009

The Computer Inquiries – Then and Now

There is much with which I agree in the Oct. 29 post, "43 Years of Internet Policy" by the FCC's Bob Cannon. And because I was happily ensconced at the FCC as Associate General Counsel at the time the Second Computer Inquiry decision was developed, and played at least some role in its development, I get somewhat nostalgic when the Computer Inquiries are invoked. I might take issue with the description of the Computer Inquiries proceedings as "wildly successful" in light of the generally lengthy delays experienced in modifying the policies once they became outdated. But I have no problem in agreeing they were successful in helping to achieve an important public policy objective – encouraging the development of nascent online services – at a particular time in history, when AT&T and then the divested Bell Companies exercised dominant market power.

But just because an FCC policy was successful when adopted does not mean that it should be carried forward for all time. Indeed, Mr. Cannon's post itself makes clear that the then-market power exercised by the Bell Companies was a central premise underlying the adoption of the Computer Inquiry orders. ("The FCC wanted to ensure that carriers were offering the telecommunications services necessary in order for computer services to thrive and that the telecommunications networks could not use their market power to engage in anti-competitive behavior.") I can testify from my own experience – without fear of contradiction – that the Bell Companies' dominant market power was central the Commission's understanding of the desirability of developing safeguards to prevent the carriers from acting anti-competitively in a way that would injure the emerging online services. I agree the Computer Inquiries' separation of basic and enhanced services, and the implementation of safeguards, worked…for a considerable amount of time. And the Commission can take pride in this success.

But it is a mistake of the highest order to assume that a regulatory policy devised for a certain time in a particular environment is appropriate three decades later in a radically different environment. The fact of the matter is that, in today's broadband environment, the providers no longer exercise the dominant market power that concerned the Commission at the time of the Computer Inquiries. Indeed, Mr. Cannon's post, rightly, keeps referring to the "telecommunications networks" of the time. Now, as a result of findings made by the FCC beginning in 2002 concerning the competitive nature of the marketplace, the broadband providers that pro-regulatory zealots want to put under the yoke of common carrier regulation are no longer even classified as "telecommunications" providers. Rather, in light of the integration of communications and data processing functionality and marketplace changes, they are classified as information services providers.

Even in the 1980s marketplace conditions had begun to change sufficiently, along with the agency's understanding of the costs to consumers of strict separation of basic and enhanced services, that the FCC replaced the structural separation requirements of Computer II with the non-structural safeguards of Computer III. Even a casual skimming of the massive Computer III record will show this relaxation of regulation had mostly to do with the Commission's understanding that the costs of strict separation outweighed the benefits.

Well, it almost 2010. We can argue if you like about exactly how competitive the broadband marketplace is today. I'll grant it is not now and never will be the perfectly-competitive wheat marketplace that I read about in my Econ-101 text. But it certainly is no longer similar to the communications marketplace in which the Bell Companies once exercised dominant market power – the marketplace upon which the Computer Inquiries decisions were premised. Today's broadband Internet marketplace -- with wireline, cable, satellite, and wireless providers all competing, even if not with totally substitutable services – simply is much more competitive. In today's dynamic Internet environment, the costs to consumers of imposing separation requirements of the Computer Inquiries-variety greatly outweigh the benefits of such regulation that seeks to maintain a "bright line" separation between "telecom" and "information" services. Anyone pretending otherwise is living in the past, and conjuring up a black-telephone handset and 56K modem dial-up communications world that, thankfully, no longer exists.