83
.
Having concluded that Internet access providers do not offer
"telecommunications service" when they furnish Internet access to
their customers, we next consider whether certain other Internet-based
services might fall within the statutory definition of
"telecommunications." We
recognize that new Internet-based services are emerging, and that our
application of statutory terms must take into account such technological
developments. We therefore
examine in this section Internet-based services, known as IP telephony, that
most closely resemble traditional basic transmission offerings.
The Commission to date has not formally considered the legal status of
IP telephony.
The record currently before us suggests that certain
"phone-to-phone IP telephony" services lack the characteristics that
would render them “information services” within the meaning of the
statute, and instead bear the characteristics of “telecommunications
services.” We do not believe,
however, that it is appropriate to make any definitive pronouncements in the
absence of a more complete record focused on individual service offerings.
84
.
"IP telephony" services enable real-time voice transmission
using Internet protocols.
The services can be provided in two basic ways:
through software and hardware at customer premises, or through
"gateways" that enable applications originating and/or terminating
on the PSTN.
Gateways are computers that transform the circuit-switched voice signal
into IP packets, and vice versa, and perform associated signalling, control,
and address translation functions. The
voice communications can be transmitted along with other data on the
"public" Internet, or can be routed through intranets or other
private data networks for improved performance.
Several companies now offer commercial IP telephony products.
For example, VocalTec sells software that end users can install on
their personal computers to make calls to other users with similar equipment,
and also makes software used in gateways.
Companies such as IDT and Qwest employ gateways to offer users the
ability to call from their computer to ordinary telephones connected to the
public switched network, or from one telephone to another.
To use the latter category of services, a user first picks up an
ordinary telephone handset connected to the public switched network, then
dials the phone number of a local gateway.
Upon receiving a second dialtone, the user dials the phone number of
the party he or she wishes to call. The
call is routed from the gateway over an IP network, then terminated through
another gateway to the ordinary telephone at the receiving end.
85
.
Commenters that discuss IP telephony are split on the appropriate
treatment of these services.
Several parties, including Senators Rockefeller, Snowe, Stevens, and
Burns, urge that IP telephony providers offer interstate telecommunications
services and, consequently, should contribute to universal service support
mechanisms.
Other parties, including Senator McCain, Representative White and the
National Telecommunications and Information Administration, oppose application
of Title II regulation.
Some commenters argue that IP telephony is a nascent technology that is
unlikely to generate significant revenues in the foreseeable future.
Regardless of the size of the market, we must still decide as a legal
matter whether any IP telephony providers meet the statutory definitions of
offering "telecommunications" or "telecommunications
service" in section 3 of the 1996 Act.
86
.
As we have observed above in our general discussion of hybrid services, the classification of a service under the 1996 Act depends on
the functional nature of the end-user offering.
Applying this test to IP telephony, we consider whether any company
offers a service that provides users with pure "telecommunications."
We first note that "telecommunications" is defined as a form
of "transmission."
Companies that only provide software and hardware installed at customer
premises do not fall within this category, because they do not transmit
information. These providers are
analogous to PBX vendors, in that they offer customer premises equipment (CPE)
that enables end users to engage in telecommunications by purchasing local
exchange and interexchange service from carriers. These CPE providers do not, however, transport any traffic
themselves.
87
.
In the case of "computer-to-computer" IP telephony,
individuals use software and hardware at their premises to place calls between
two computers connected to the Internet.
The IP telephony software is an application that the subscriber runs,
using Internet access provided by its Internet service provider.
The Internet service providers over whose networks the information
passes may not even be aware that particular customers are using IP telephony
software, because IP packets carrying voice communications are
indistinguishable from other types of packets.
As a general matter, Title II requirements apply only to the
"provi[sion] " or "offering" of telecommunications.
Without regard to whether "telecommunications" is taking
place in the transmission of computer-to-computer IP telephony,
the Internet service provider does not appear to be "provid[ing]"
telecommunications to its subscribers.
88
.
"Phone-to-phone" IP telephony services appear to present a
different case. In using the term
"phone‑to‑phone" IP telephony, we tentatively intend to
refer to services in which the provider meets the following conditions: (1) it
holds itself out as providing voice telephony or facsimile transmission
service; (2) it does not require the customer to use CPE different from that
CPE necessary to place an ordinary touch‑tone call (or facsimile
transmission) over the public switched telephone network; (3) it allows the
customer to call telephone numbers assigned in accordance with the North
American Numbering Plan, and associated international agreements; and (4) it
transmits customer information without net change in form or content.
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.
Specifically, when an IP telephony service provider deploys a gateway
within the network to enable phone-to-phone service, it creates a virtual
transmission path between points on the public switched telephone network over
a packet-switched IP network. These
providers typically purchase dial-up or dedicated circuits from carriers and
use those circuits to originate or terminate Internet-based calls.
From a functional standpoint, users of these services obtain only voice
transmission, rather than information services such as access to stored files.
The provider does not offer a capability for generating, acquiring,
storing, transforming, processing, retrieving, utilizing, or making available
information. Thus, the record
currently before us suggests that this type of IP telephony lacks the
characteristics that would render them “information services” within the
meaning of the statute, and instead bear the characteristics of
“telecommunications services.”
90
.
We do not believe, however, that it is appropriate to make any
definitive pronouncements in the absence of a more complete record focused on
individual service offerings. As
stated above, we use in this analysis a tentative definition of
"phone-to-phone" IP telephony.
Because of the wide range of services that can be provided using
packetized voice and innovative CPE, we will need, before making definitive
pronouncements, to consider whether our tentative definition of phone-to-phone
IP telephony accurately distinguishes between phone-to-phone and other forms
of IP telephony, and is not likely to be quickly overcome by changes in
technology. We defer a more
definitive resolution of these issues pending the development of a more
fully-developed record because we recognize the need, when dealing with
emerging services and technologies in environments as dynamic as today's
Internet and telecommunications markets, to have as complete information and
input as possible.
91
.
In upcoming proceedings with the more focused records, we undoubtedly
will be addressing the regulatory status of various specific forms of IP
telephony, including the regulatory requirements to which phone-to-phone
providers may be subject if we were to conclude that they are
"telecommunications carriers."
The Act and the Commission's rules impose various requirements on
providers of telecommunications, including contributing to universal service
mechanisms, paying interstate access charges, and filing interstate tariffs.
We note that, to the extent we conclude that certain forms of
phone-to-phone IP telephony service are "telecommunications
services," and to the extent the providers of those services obtain the
same circuit-switched access as obtained by other interexchange carriers, and
therefore impose the same burdens on the local exchange as do other
interexchange carriers, we may find it reasonable that they pay similar access
charges. On the other hand, we
likely will face difficult and contested issues relating to the assessment of
access charges on these providers. For
example, it may be difficult for the LECs to determine whether particular
phone-to-phone IP telephony calls are interstate, and thus subject to the
federal access charge scheme, or intrastate.
We intend to examine these issues more closely based on the more
complete records developed in future proceedings.
92
.
With regard to universal service contributions, to the extent we
conclude that certain forms of phone-to-phone IP telephony are interstate
"telecommunications," and to the extent that providers of such
services are offering those services directly to the public for a fee, those
providers would be "telecommunications carriers."
Accordingly, those providers would fall within section 254(d)'s
mandatory requirement to contribute to universal service mechanisms.
Finally, under section 10 of the Act, we have authority to forbear from
imposing any rule or requirement of the Act on telecommunications carriers.
We will need to consider carefully whether, pursuant to our authority
under section 10 of the Act, to forbear from imposing any of the rules that
would apply to phone-to-phone IP telephony providers as
"telecommunications carriers."
93
.
We recognize that our treatment of phone-to-phone IP telephony may have
implications for the international telephony market.
In the international realm, the Commission has stated that IP telephony
serves the public interest by placing significant downward pressure on
international settlement rates and consumer prices.
In some instances, moreover, IP telephony providers have introduced an
alternative calling option in foreign markets that otherwise would face little
or no competition. We continue to
believe that alternative calling mechanisms are an important pro-competitive
force in the international services market.
We need to consider carefully the international regulatory requirements
to which phone-to-phone providers would be subject. For example, it may not be appropriate to apply the
international accounting rate regime to IP telephony.
4. Policy
Implications
94
.
Congress directed us to explain in this Report "the impact of the
Commission's interpretation . . . on the current and future provision of
universal service,"
and "the consistency of the Commission's application" of statutory
definitions.
Therefore, we address in this section the policy consequences of the
legal analysis described above. We
conclude that our reading of the statutory definitions reflects a consistent
approach that will safeguard the current and future provision of universal
service to all Americans, and will achieve the 1996 Act's goals of a
"pro-competitive, deregulatory communications policy."
Further, we are committed to monitoring closely developments in the
telecommunications industry to ensure that such changes do not undermine our
obligation to ensure universal service.
a.
Generally
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.
The Internet and other enhanced services have been able to grow rapidly
in part because the Commission concluded that enhanced service providers were
not common carriers within the meaning of the Act.
This policy of distinguishing competitive technologies from regulated
services not yet subject to full competition remains viable.
Communications networks function as overlapping layers, with multiple
providers often leveraging a common infrastructure.
As long as the underlying market for provision of transmission
facilities is competitive or is subject to sufficient pro-competitive
safeguards, we see no need to regulate the enhanced functionalities that can
be built on top of those facilities. We
believe that Congress, by distinguishing "telecommunications
service" from "information service," and by stating a policy
goal of preventing the Internet from being fettered by state or federal
regulation, endorsed this general approach.
Limiting carrier regulation to those companies that provide the
underlying transport ensures that regulation is minimized and is targeted to
markets where full competition has not emerged. As an empirical matter, the level of competition, innovation,
investment, and growth in the enhanced services industry over the past two
decades provides a strong endorsement for such an approach.
b.
Impact on Universal Service
96
.
Congress has directed us to explain how our interpretation of the 1996
Act promotes "the current and future provision of universal service to
consumers in all areas of the Nation, including high cost and rural
areas."
With regard to the current provision of universal service, we have
established programs under section 254 to fund telecommunications services in
high-cost areas and for low-income consumers, as well as access to advanced
services for schools, libraries, and rural health care providers.
We believe that these programs have been designed with a sufficiently
broad contribution base to support current universal service needs.
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.
As we have explained, our interpretation of the terms
"telecommunications" and "information service" reflect
continuity with pre-existing legal categories.
Consequently, we do not believe that these interpretations would create
significant shifts in contribution obligations based on the current
configuration of the communications industry.
Retail revenues of Internet service providers -- approximately five
billion dollars in 1997
-- are relatively small compared to the $100 billion in long-distance revenue
reported in the latest telecommunications relay service fund worksheet report.
The fact that Internet access is not considered a
"telecommunications service" therefore does not have a significant
impact on the current universal service funding base. More importantly, however, Internet access generates
additional telecommunications revenue to support universal service in the form
of the thousands of business lines (with their associated tariffed rates,
subscriber line charges, and presubscribed interexchange carrier charges) that
Internet service providers must purchase in order to provide connectivity to
their users, and the high-capacity leased lines that they use to route data
across their networks.
98
.
It is critical, however, to make sure that our interpretation of the
statute, to the extent legally possible, will continue to sustain universal
service in the future. Some
parties argue that, as new communications services such as Internet access and
IP telephony grow, traffic will shift away from conventional
telecommunications services, thus draining the support base for universal
service.
We are mindful that, in order to promote equity and efficiency, we
should avoid creating regulatory distinctions based purely on technology.
Congress did not limit "telecommunications" to
circuit-switched wireline transmission, but instead defined that term on the
basis of the essential functionality provided to users.
Thus, for example, we have previously required paging providers to
contribute to universal service funding, because they are providers of
"telecommunications service."
We have also required private carriers to contribute to federal
universal service funding, even though they are not common carriers.
In this Report, we have further addressed providers of pure
transmission capacity used for Internet services, and have concluded that
these entities provide services that meet the legal definition of
"telecommunications." We
also have considered the regulatory status of various forms of
"phone-to-phone IP telephony" service mentioned generally in the
record. The record
currently before us suggests that certain of these services lack the
characteristics that would render them “information services” within the
meaning of the statute, and instead bear the characteristics of
“telecommunications services.” We
do not believe, however, that it is appropriate to make any definitive
pronouncements in the absence of a more complete record focused on individual
service offerings. As noted, to
the extent we conclude that certain forms of phone-to-phone IP telephony are
"telecommunications," and to the extent that providers of such
services are offering those services directly to the public for a fee, those
providers would be "telecommunications carriers."
Accordingly, those providers would fall within section 254(d)'s
mandatory requirement to contribute to universal service mechanisms.
If such providers are exempt from universal service contribution
requirements, users and carriers will have an incentive to modify networks to
shift traffic to Internet protocol and thereby avoid paying into the universal
service fund or, in the near term, the universal service contributions
embedded in interstate access charges. If
that occurs, it could increase the burden on the more limited set of companies
still required to contribute.
Such a scenario, if allowed to manifest itself, could well undermine
universal service. At this time,
however, there is no evidence that there is an immediate threat to the
sufficiency of universal service support.
99
.
Several commenters urge us to subject Internet access providers and
other information service providers to universal service contribution
requirements.
The potential future threat to universal service funding posed by use
of the Internet derives from services that are functionally substitutable for
telecommunications services at the same level of the network hierarchy.
An end user that shifts its local exchange service from an incumbent
local exchange carrier (LEC) to a competitive LEC, or to a wireless carrier,
is purchasing a functionally identical service using different providers or
technologies. We have designed
the universal service regime so that shifting between such services does not
eliminate the contribution requirement. Substitutability
in a particular case, however, is not sufficient under the statute to require
universal service contributions. Instead
of making a telephone call or sending a fax, an end user could send an
overnight letter. It is unlikely,
however, that anyone would argue that the overnight delivery service should
contribute to universal service funding.
The key difference is that delivery service does not provide
"telecommunications" as defined in the Act. Congress limited universal service contribution obligations
to providers of "telecommunications," because only those services
are truly substitutable in a functional sense.
100
.
Some parties argue that we should reclassify Internet service providers
as telecommunications carriers in order to address congestion of local
exchange networks caused by Internet usage.
We note that the Commission addressed this argument last year in the Access
Reform proceeding, and decided to continue to treat Internet service
providers as end users for purposes of access charges.
As the Commission stated in that Order, although concerns about network
congestion deserve serious consideration, imposition of per-minute interstate
access charges on Internet service providers is not an appropriate solution.
Commenters in this proceeding have raised many of the same arguments
that we considered in the Access Reform proceeding.
We make no conclusions here as to whether some alternate rate structure
for Internet service providers would be more efficient.
That is an issue best addressed either on reconsideration of our Access
Reform decision, or in connection with the Notice of Inquiry on Internet
and Information Services that Use the Public Switched Telephone Network that
we issued in the Access Reform proceeding.
For purposes of this Report, we believe that the central issue is
whether our decision that Internet access is not a "telecommunications
service" is likely to threaten universal service.
In other words, will Internet usage place such a strain on network
resources that incumbent LECs will be unable to provide adequate service?
As we noted in the Access Reform Order, both ILECs and the
Network Reliability and Interoperability Council agreed that Internet usage
did not pose any threat to overall network reliability.
Incumbent LECs are investing in network upgrades to handle Internet
traffic, and our Notice of Inquiry docket provides the appropriate
forum to consider steps that we could take to ensure that incumbent LECs have
incentives to choose the most efficient technology.
101
.
We realize that, as technology evolves, new means of providing
telecommunications service may emerge. Although
we conclude that Internet access is not a "telecommunications
service," we acknowledge that there may be telecommunications services
that can be provisioned through the Internet.
We have singled out IP telephony services for discussion in this
Report.
As discussed above, users of certain forms of phone-to-phone IP
telephony appear to pay fees for the sole purpose of obtaining transmission of
information without change in form or content.
Indeed, from the end-user perspective, these types of phone-to-phone IP
telephony service providers seem virtually identical to traditional
circuit-switched carriers. The
record currently before us suggests that these services lack the
characteristics that would render them “information services” within the
meaning of the statute, and instead bear the characteristics of
“telecommunications services.”
With respect to the provision of pure transmission capacity to Internet
service providers or Internet backbone providers, we have concluded that such
provision is telecommunications.
102
.
As some parties observe, our interpretation of the 1996 Act may mean
that information services such as Internet access are not eligible for
subsidies outside of the limited scope of schools and libraries under section
254(h).
We believe Congress made a policy decision to limit support for
information services to schools and libraries.
"Telecommunications services" provide the basic transmission
functionality that enables customers in rural and high-cost areas to connect
to the rest of America. These
services also enable users to reach Internet access providers, so reductions
in the cost of basic telephone service in rural areas will effectively reduce
the cost of Internet access in those areas.
The information services delivered over telecommunications networks are
not sensitive to distance and density to the same extent as the
telecommunications facilities themselves.
Therefore, the rationale for establishing a subsidy mechanism for these
services is far more attenuated.
103
.
At this early stage of Internet development, we cannot know whether
market and technological forces will result in Internet access being widely
available in rural and high cost areas. Already,
free electronic mail services such as Juno and low-cost Internet access
devices such as WebTV have made Internet-based services far more affordable. A recent study found that at least 87% of the U.S. population
has access to a commercial Internet service provider through a local call, and
that three-fourth of Americans live in local calling areas with at least three
Internet service provider points of presence.
America Online reports that seventeen percent of its local access nodes
are in rural counties.
Rural Internet service providers, especially smaller entrepreneurial
companies, will be able to provide more affordable and widely-available
service if they are not subject to unnecessary regulatory burdens.
Finally, the support mechanism that will benefit schools and libraries
established pursuant to section 254(h) of the 1996 Act will enable rural
libraries to provide public access Internet terminals, and rural school
districts to make Internet access available to their students.
104
.
Congress did recognize that "telecommunications services"
would evolve over time, and that universal service should adapt to reflect
those change. Thus, for example,
universal service today includes functionalities such as touchtone service and
access to 911 that simply did not exist in previous decades.
Other such innovations, as well as improvements in voice transmission
quality, will no doubt occur in the future, and we will update our definition
of universal service to account for those changes. For example, it appears that universal service funds could be
used to ensure rural and high-cost areas have affordable access to high-speed
data transmission services, such as xDSL, when those services meet the
criteria for support outlined in section 254(c).
