More on Vonage: Ernest Miller’s Critique

Ernest Miller has posted an interesting response to my earlier analysis of Judge Davis’s Minnesota Vonage decision.  It seems that we agree about the big picture, but disagree about the implications of that decision.  Some thoughts on his thoughts:


Ernest does a good job of capturing what’s irrational in the current telecom regulatory sytsem:  false distinctions and the distorted incentives they create.  Under current law, a “telecommunications service” is subject to state and federal regulation;  an “information service” is subject to federal regulation only.  As Judge Davis ruled, whether an IP telephony service is telecommunications or information turns on last-mile technology.  If a service uses IP for the last mile to the customer, it is an information service.  If a service uses the PSTN for the last mile to the customer, it is a telecommunications service.  From the standpoint of technology, this makes no sense:  both services almost certainly convert calls into packets — the only difference is that the first service does the conversion at a little box in the home while the second does it at a bigger box in the local switching station across the street.  Why should the second service be forced to deal with 50 state regulatory and tariffing schemes as well as the FCC, while the first service is allowed to proceed almost entirely unregulated?  “Tradition” is not a very tasty answer.


As telecom companies increasingly migrate their networks to the Internet Protocol, it becomes ever more nutty to draw momentous regulatory distinctions on the basis of marginal technical differences that carry little if any practical consequence.


Lest you think this is a big Love-In, Ernest and I disagree somewhat on the likely near-term implications of Judge Davis’s decision.  Says Ernest:



The decision amounts to a huge (HUGE) subsidy for VoIP as opposed to “traditional” phone service. The response is obvious. Traditional phone companies begin a major rollout of VoIP technology. By simply having technicians emplace a VoIP router box on the customer’s premises instead of the local switch, major telecommunications companies can easily shed tons of state and federal regulations. The telephone companies will have to split into VoIP and traditional. The traditional phone companies will be stuck providing service to the poorer neighborhoods where DSL isn’t cost effective and still provide basic services (such as 911) to everyone (without many of the usual cross subsidies, however). The new VoIP telephone companies will cherry pick better neighborhoods and will be able to profit at the expensive of the traditional companies because they no longer bear a heavy burden of regulation and taxes. Rollout won’t be that expensive, since the cost of the routers and installation, especially given mass production, will almost certainly be cheaper than the taxes thereby avoided over the period of a year or so. Additionally, VoIP companies avoid all that nasty “common carrier” regulation.


That is a plausible scenario, but one I find unlikely — it does not account for the probability of legislative intervention and reform.  My guess is that Judge Davis’s decision is the depth charge that will bring to the surface the unmistakeable evidence that the creaky old vessel of telecom regulation has been blasted beyond repair.  As a harbinger of doom for the regulatory architecture embodied in the Telecommunications Act of 1996, it strikes me as an awfully important decision.  The forces set in motion by Judge Davis’s ruling will, I predict, impel Congress and/or the FCC to (attempt to) craft a rational nationwide regulatory regime that fits the all-IP future.


(Of course, given the amount of political money and lobbying muscle that the telecom companies can wield, there is no guarantee that a regulatory reform effort will bring improvement.  And, historically, the time and energy required to work through the conflicting interests and to craft legislation for the telecommunications sector are, well, daunting.  Still, given the expected consequences of inaction, comprehensive reform seems well worth a try.)

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