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April 11, 1998

FCC Urges That Internet Phone Service Be Fee-Based

By SETH SCHIESEL

arking a profound shift in the way the federal government views cyberspace, the Federal Communications Commission said Friday that at least some companies that provide telephone service over the Internet should be regulated in some of the same ways that traditional phone companies like AT&T are regulated.

The recommendation could signal the end of the Internet as a wide-open, overwhelmingly unregulated frontier. It is the first time the FCC has proposed that some Internet companies pay the same charges as long-distance phone carriers, and it puts the commission at odds with the Clinton administration's "hands-off" policy toward cyberspace.

The fees proposed Friday would not apply to all Internet service providers and would not raise the bills of everyday Web surfers. Instead, they would apply to the small group of companies that are infiltrating the highly competitive world of long-distance calling by routing conversations over the Internet.

This new generation of Internet long-distance companies provides service between normal telephones but at prices far below those of mainstream carriers like MCI Communications or Sprint. They have been undercutting the long-distance giants because they do not have to pay myriad charges that federal regulators levy on traditional carriers.

That could now begin to change. And Internet advocates fear that the proposal was only the first glance from a government that is turning its regulatory magnifying glass on the digital world.

"To begin regulating any portion of this industry is, to me, a very bad signal," said Barbara Dooley, executive director of the Commercial Internet Exchange, a group based in Herndon, Va., that represents about 130 Internet service providers. "This sets a path down a very bad trail toward regulating an industry that we've grown very quickly and that is critical to the future of our economy."

To the FCC, however, Friday's decision was a matter of simple fairness. The recommendation came in a report on the universal service program, which helps subsidize telephone service in rural and poor areas and which helps pays for computer systems for schools and libraries.

The basic question before the commission was whether Internet phone companies, like most other sorts of phone companies, should have to contribute to the universal service pool. Almost every phone company in the nation must contribute about 4 percent of the revenue it gets from its customers to the fund. In addition, long-distance phone companies must pay per-minute "access fees" to local phone companies for originating and terminating long-distance calls.

Currently, providers of an "information service," like Internet providers, are exempt from most of those charges, while providers of "telecommunications service" must pay them.

When Internet telephony meant talking into a computer equipped with a microphone, it could still be considered an information service, people close to the commission said Friday. But once entrepreneurs starting using the Internet to connect long-distance calls between two standard telephones, the case for a regulatory exemption weakened, they said.

Using the abbreviation for Internet Protocol, the computer technology at the heart of cyberspace, FCC Chairman William Kennard said: "If you look at the characteristics of IP telephony and compare them to the characteristics of a traditional long-distance telephone call, functionally they are the same. What this report does is state that very obvious fact, and certain things flow from that."

Kennard said the specific implications of Friday's decision would not become clear until the FCC held additional hearings. He added that the commission would consider imposing charges on a specific Internet phone company only after receiving a specific complaint against it.

But officials close to the commission said it was clear that the FCC would be in favor of imposing the 4 percent universal service contribution and per-minute access fees on some companies that use the Internet to provide phone-to-phone long-distance calls.

Friday's report put the FCC, which includes three Democrats and two Republicans, at odds with the Clinton administration. Last year a White House commission led by presidential adviser Ira Magaziner recommended that the government shy away from regulating cyberspace.

The administration repeated that stance Thursday in a letter to Kennard from Larry Irving, assistant secretary of commerce for communications and information. "Any proposal to regulate Internet telephony as a 'telecommunication service' would raise contentious issues, resolution of which would have international, as well as domestic, repercussions," Irving wrote. "Thus, the administration urges the commission not to change its current approach."

Kennard was unfazed Friday by the prospect of contradicting the White House.

"Once this decision is fully understood, it will be understood that this is not a fundamental threat to the Internet," he said. "We were looking at a very narrow class of services that resemble telecommunications services."

The big winners in Friday's announcement were the traditional long-distance giants. Most analysts estimate that only about $30 million will be spent on Internet phone service this year -- a minuscule amount of the $80 billion overall long-distance market. But Internet phone carriers like IDT Corp., based in Hackensack, N.J., have won the confidence of Wall Street and have raised the hackles of the long-distance traditionalists.

In a statement Friday, AT&T, the No. 1 long-distance company, said: "The success of universal service requires competitive neutrality and a broad contribution base. To that end, the FCC must insure that Internet service providers and other carriers who are using new technologies contribute to the universal service fund based on their telecommunications revenues and pay cost-based access charges as well."

That made sense to Eli M. Noam, a professor of finance and economics at Columbia University and director of the university's Institute for Tele-Information.

"You want neutrality," he said. "You don't want anyone getting a competitive advantage or disadvantage based on the regulatory treatment of the technology they are employing."

He added: "The Internet industry would shrink in horror from the idea of industrial policy. But that is exactly what they are advocating. They say they are young, they are new, so treat us preferentially."

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