A Brief History of Internet Regulation

By / 3.13.2014

Proposals to regulate the Internet are often presented as “new” solutions to deal with modern problems, but the most significant of these proposals, such as “network neutrality” and common carrier rules on unbundling and interconnection, are actually vestiges of long-outmoded ways of thinking about telecommunications policy. This paper explores the relevant regulatory history, offering critical context to today’s Internet policy debates.

From the early days of the AT&T monopoly well into the 1990s, regulators, the courts and the Congress engaged in a lengthy effort to protect consumers and ultimately bring competition into the markets for local and long-distance telephone service. This included strict “common carrier” utility regulations and mandatory interconnection requirements and ultimately the 1984 Modified Final Judgment, which forced the breakup of AT&T into regional Baby Bells. From the beginning of “community antenna TV” through the 1990s, a parallel but more limited effort was made to regulate the nascent cable industry. While these regulations had some success, technological change quickly outstripped them—both in the telephone business and the emerging field of high-speed data—and a bipartisan consensus formed in the early 1990s that additional steps were needed to promote competition in all these arenas.

The result was the Telecommunications Act of 1996, watershed legislation that marked the end of the telephone age and the beginning of the Internet age from a policy perspective. The Act embraced and codified the FCC’s distinction between traditional telephony/telecommunications services and the emerging world of information services, with strict common carrier rules limited to the former. On the telephone side, this meant a stifling regime of mandatory “unbundling” and rigid price controls, while giving the private sector more latitude to innovate and invest on the “information services” side. The 1996 Act may not have specifically contemplated the rise of the broadband Internet (the idea of an “information superhighway” was in the air, but the exact form it would take was still unclear as a matter of both technology and policy), but by protecting information services from the common carrier framework, the Act set the stage for the dynamic growth we have seen in American broadband.

The result was a boom in cable broadband investment that telecommunications providers attempted to counter by offering DSL services. But any new DSL capability they constructed had to be leased out to competitors at below market prices under the unbundling regime, which limited their efforts. When fiber and DSL were relieved of their unbundling obligation in the early 2000s, however, capital poured in and these services flourished as fixed-broadband competitors to cable. In fact, that competition drew a competitive response from cable, in turn leading to a virtuous cycle of improvement and enhancement resulting in the United States ascending to the upper reaches of the International broadband rankings.

This background sheds important light on current calls to impose “new” regulations on broadband either through “network neutrality” rules or by reclassifying it as a “telecommunications service” subject to common carrier obligations. While advocates suggest otherwise, these proposals are clearly not new, but would represent a return to the dated—and in the view of this paper failed—approach that the bipartisan 1996 Act was designed to sweep away. Most of these proposals for network micromanagement, forced sharing of investments, and government influence on pricing have been associated with low investment and innovation. These rules may have made sense when the problem was how to protect consumers in the days of the sanctioned Ma Bell monopoly, but the business and consumer landscape is dramatically different today in almost every regard.

Ultimately, three key lessons emerge from this policy review. First, information services and telecommunications services really are different, and broadband has flourished as an information service free from ill-fitting and stifling common carrier constraints. Second, investment and capital flow to where regulation (or the absence thereof) encourages them to flow. And third, technology, business models, and consumer behaviors change and, as they change, the meaning and effect of different regulatory proposals change as well.

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