NMRC Newsroom

TELECOM POLICY REPORT

July 21, 2004

MCI's Proposal Establishes A Framework For The Debate

Unlike the decade of debate leading up to the 1996 Telecom Act, the next long and bitter legislative fight waged in the U.S. Congress will not be about local exchange competition or Bell company access to the interstate long distance market. The next big telecom battle will be fought for the biggest prize of them all -- control of the Internet.

In fact, the battle lines for what TPR predicts will be an exasperating and brutal campaign are now being drawn. The Bells and their supporters have begun postulating various policy proposals, all of which largely call for markedly less FCC oversight of the broadband marketplace. On the other side of the equation, financially weaker would-be competitors of the incumbent Bells have begun positioning themselves as underdogs in need of government protection and, in certain cases, intervention.

As always, both sides are in pursuit of the illusive, proverbial "level playing field." And as always, some playing fields appear more level than others.

Early last week, the New Millennium Research Council (NMRC), a purported "independent" project of Washington, D.C.-based Issue Dynamics Inc. (a self-described "consumer and public affairs consulting firm" whose client list includes the Bell companies), produced a scathing critique of a regulatory proposal authored by MCI's top policy wonk, Richard Whitt.

Whitt, a colleague and close associate of amed Internet pioneer Vint Cerf, is responsible for crafting MCI's proposal for new legislation aimed at reshaping U.S. communications law. The MCI plan calls for a "layers" approach to regulating Internet Protocol (IP) applications, such as IP telephony (also known as Voice over IP). In a nutshell, the MCI legislative proposal calls for the following:

All IP-enabled applications and services would be defined as information services, and subject to a separate, largely unregulated legal
regime.
Broadband access platforms would be defined as telecommunications services, but subject only to a "light-touch" regulatory regime.
Those broadband platform providers with demonstrable market power would be subject to narrowly tailored wholesale carriage obligations.
Fundamental reform of the intercarrier compensation and universal service regimes would be mandated to help bridge differences between the new IP world and the old telecom world.

The 27-page MCI legislative proposal can be viewed in its entirety at http://global.mci.com/about/publicpolicy/presentations/.

During a news conference last Tuesday (July 13) at the National Press Club in Washington, D.C., the NMRC lined up an array of academics and conservative-leaning public policy analysts who summarily put a hatchet to the MCI plan. In fact NMRC's experts issued their own report -- a 45-pager -- appropriately titled, "Free Ride: Deficiencies of the MCI 'Layers' Policy Model and the Need for Principles that Encourage Competition in the New IP World." The report can be viewed in its entirety on the NMRC's Web site at http://www.newmillenniumresearch.org/news/071304-report.pdf.

Adding insult to injury, the attack on MCI launched by NMRC was quickly followed up by yet another verbal broadside -- this one coming from the Progress and Freedom Foundation (PFF), the conservative-leaning think tank founded by former Speaker of the House Newt Gingrich. The PFF went so far as to host a day-long panel discussion last Friday (July 16) at a glitzy Washington, D.C., hotel.

Calling it a panel discussion may be a bit misleading. The discussion was largely dedicated to dragging Whitt and MCI over the proverbial bed of hot coals. And just as the NMRC had done four days earlier, the PFF produced its own lengthy rebuttal to MCI's plan -- a 44-page white paper written by Chrisopher Yoo, an associate law professor at Vanderbilt University.

The Yoo paper, titled "The Economics of Net Neutrality: Why the Physical Layer of the Internet Should Not Be Regulated," can be viewed in its entirety at http://www.pff.org/issues-pubs/pops/pop11.11yoonetneutrality.pdf.

Yoo's paper, which was underwritten by the PFF, mostly appears to be a reiteration of an earlier paper he wrote titled, "Would Mandating Network Neutrality Help or Hurt Broadband Competition? -- A Comment on the End-to-End Debate."

Regardless of where one might be on the issue of telecom policy reform, the media hoopla surrounding last week's release of both the NMRC-backed white paper and the PFF-backed white paper is a clear signal that the MCI plan is gaining some political traction on Capitol Hill. Indeed, Senate staffers tell TPR that the MCI proposal is being treated by a number of key senators as a possible starting point for the legislative debate expected to get under way next year when lawmakers begin tackling the thorny issue of revamping the 1996 Telecom Act.

In essence, the NMRC and PFF responses to MCI's proposal may have been prompted by concerns raised by the Bell Operating Companies (BOCs). The BOCs clearly are preparing for a major legislative campaign, and they have already started spending millions of lobbying dollars on Capitol Hill in an effort to shore up support for their cause. But exactly what that cause is remains unclear.

"I think a lot of their concerns are based on confusion or misguided thinking about MCI's approach," Whitt told TPR. Critics of network neutrality seem to come from one set of core principles "that's about minimizing, if not
eliminating, all regulation of broadband platforms," he said.

The gist of their concerns seems to be about MCI's proposal for having some kind of access requirement applicable in cases where a service provider has market power at the broadband physical layer (i.e., DSL or cable modem). "They don't seem to have any problem with the framework, generally," Whitt said of the NMRC and PFF critiques of his work. "They made some fairly positive comments about why this is much better than vertical [regulatory] silos we now have. They didn't seem to have many questions about VoIP applications where we talk about VoIP remaining unregulated. They didn't raise any questions about the e-commerce issues. Their criticism seemed focused on the broadband question."

Nevertheless, it is TPR's view that MCI's critics mistakenly believe the company's position is that vertical integration involving any entity with market power is wrong, and that regulators should not prevent cable companies or DSL providers with market power from providing services or bundling services from any other layer. It is a view that is shared by Whitt.

"That's just completely off base," Whitt says. "We have nothing like that in our proposal. That's just not part of our thinking."

Indeed, MCI's proposal clearly acknowledges that there are benefits to vertical integration, even with companies that have market power. With respect to that issue, "our only point is that if you've got market power, you might use it to the detriment of other layers," Whitt says. "But rather than banning you from being in those layers, we believe you can continue providing services in those layers, but you need to open up your network to make sure people have adequate access to the underlying technology."

It's difficult for TPR to understand why the BOCs or any self-proclaimed "free market" advocate would oppose such a concept. The Bell companies and their supporters have frequently criticized federal regulators for not compelling the cable industry to open their broadband networks for access by competitors. In fact, based on what we are being told by some senior level BOC lobbyists, TPR fully expects the Bells to push for "regulatory parity" between telcos and cablecos in the upcoming congressional debate on telecom policy reform.

It may be that some of the angst being expressed by critics of the MCI plan for "layered" regulation is rooted in a belief that such regulation will result in lame attempts by the FCC to control the forces of competition. Indeed,
some of the participants at both the NMRC and PFF events invoked to the FCC's inability to win key court battles on the issue of so called "unbundled network elements" (UNEs), as well as the Commission's confusing and complicated UNE pricing formula, TELRIC (an acronym for Total Element Long Run Incremental
Costs).

"That's not what we're talking about here," insists Whitt. "We're not talking about breaking up broadband networks into UNEs. We're not talking about cost-based standards like TELRIC. All we're suggesting is that you use the
current safeguards that apply in the telecom world and apply them in the ISP [Internet service provider] world."

For example, if an ISP wants to provide a narrowband dial-up service, it should have the right to purchase the underlying piece part -- i.e., the loop -- from the Bell company at non-discriminatory rates and conditions.

"That's a very simple concept," Whitt says. "Obviously, it's a lot more difficult in terms of practice. However, in terms of theory, that's far different than saying we're going to set the costs for the Bell companies, and
they have to comply with that. What we're saying is that if a Bell company owns an ISP and that ISP purchases access to the Bell company's local loop, then the Bell company has to offer that same level of access to other ISPs on the same
non-discriminatory terms and at the same non-discriminatory price. That's a fairly straightforward concept. It's simple. It's clean. It's gets us where we need to go, which is to give consumers the right to choose their own ISPs, to choose whatever application providers they want on the broadband connections."

Basically, what MCI is saying -- and a point apparently overlooked by authors of both the NMRC and PFF white papers -- is that once sufficient competition exists in the broadband marketplace, the need for regulation should go away.

As things now stand, there are two primary providers of broadband access -- the telephone companies with their DSL offer, and the cable companies with cable modem access. Even though it has been around for about a decade, broadband access via satellite remains a fairly small blip on the broadband competition radar screen. And while wireless access to broadband services appears to be gaining inroads into the marketplace, it is by no means a competitive alternative for most consumers -- particularly residential customers. Unless and until the broadband landscape changes to reflect diversified and robust competition, it seems logical that some level of regulation should remain intact. TPR fully anticipates Congress ultimately will reach this conclusion when it completes its forthcoming telecom legislative initiative.

July 14, 2004

COMMUNICATIONS DAILY

MCI'S LAYERS APPROACH SAID TO DISCOURAGE INDUSTRY INVESTMENT

The network layers model proposed by MCI is "fatally flawed" as a framework for new regulation of broadband and other services, said a report released by the New Millennium Research Council (NMRC) Tues. The authors said the proposal would "lock in the worst elements of existing telecommunications rules and discourage new industry investment." They dismissed the MCI legislative proposal specifically, saying it did "not provide a deregulatory path as envisioned by the Telecommunications Act of 1996" and would be "at cross-purposes" with the Act's goal of promoting broadband growth, creating competitive markets and benefiting consumers." The NMRC is part of Issues Dynamics, which has Bell companies as clients.

MCI last Dec. proposed that IP services should be regulated based on horizontal layers rather than "vertical silos," such as wireline, wireless and Internet (CD Dec 18 p9). It suggested that the lower physical network facilities layer should be regulated based on market power, rather than legacy service or labels, while the higher applications and content layer should be unregulated. For example, it said under the model, VoIP would reside on the unregulated applications layer, while universal service and interconnection issues on the regulated network layer.

"The question is not whether we need to change a form of regulation, but whether we need regulation at all," said TeleNomic Research Pres. Stephen Pociask. He said the problem with the MCI model was that it wouldn't encourage investment. Heritage Foundation Fellow-Regulatory Policy James Gattuso said he was concerned that "we may be replacing vertical regulations with horizontal ones." "We should be looking for a new model of competition, and not for a new model of regulation," said Wayne Brough, chief economist at Citizens for a Sound Economy.

The speakers said the layers approach had several flaws. Competitive Enterprise Institute Technology Counsel Braden Cox said the problem with the model was that "it keeps too much power with the FCC, and we want to get out of there." U.S. Internet Industry Assn. CEO David McClure said the model was "simple, but it doesn't work, and one reason for that is Internet companies don't recognize integrity of layers." Several panelists said it was important to keep in mind that architectures changed over time, and the layers approach may become obsolete in several years, as technology continues to evolve.

Some speakers admitted that the layers approach had a merit and was initially appealing, because regulatory silos weren't working, but they said MCI had drawn wrong conclusions from the model. The authors recommended "a light regulatory touch or voluntary adherence to industry-created principles" to balance competitive concerns, while at the same time providing incentives for investment and innovation.

But MCI Senior Dir.-Global Policy & Planning Richard Whitt, who wasn't on the panel, told reporters after the event there were "misconceptions" about the way panelists addressed the layers approach. Particularly, he criticized "the notion that MCI is suggesting that no vertical integration should be allowed between the layers, which is completely a misreading of the paper and of our policy points and our proposed legislation." He said "the whole notion behind the layers approach is deregulatory, to bring competition to where there is no competition and to get out of the regulatory game where there is competition."

Cato Institute Dir.-Telecom Studies Adam Thierer expressed concern that the approach could become "an invitation to Internet regulation." He said that once at least one layer is regulated, that approach could embrace all the other layers. But MCI's Whitt responded after the panel: "That would be contrary to the whole point of the model, which is to say you only regulate where there is market power."

Whitt said "the fact that they are talking about [the layers model] at all suggests that they are interested, perhaps even a little bit concerned or worried that layers approach is starting to gain some traction here, inside the Beltway." He said the approach already gained "interest" from Senate Commerce Committee Chmn. McCain (R-Ariz.)'s office and some other offices.

"We've met with a lot of key folks on the Senate side and the House side," he said. Whitt said he hoped the model would be used as the basis when Congress starts re-writing the Communications Act next year. He also said he hoped the model would "kind of form the VoIP debate up there. I think it has to some degree, with particularly Senator Sununu's bill. I think he is heading in the right direction on it." Whitt said MCI was also talking to the FCC: "We think they have some authority under portions of the Act... to step in and start trying to break down the walls between the silos in a deregulatory way. But ultimately we think we are going to have the solution come from Congress. There is so much the FCC can do." -- Susan Polyakova

WASHINGTON INTERNET DAILY

MCI's Layers Approach Said to Discourage Industry Investment

MCI last Dec. proposed that IP services should be regulated based on horizontal layers rather than "vertical silos," such as wireline, wireless and Internet. It suggested that the physical network facilities layer should be regulated based on market power, rather than legacy service or labels, while the higher applications and content layer should be unregulated. For example, it said under the model, VoIP would reside on the unregulated applications layer, while universal service and interconnection issues on the regulated network layer.

"The question is not whether we need to change a form of regulation, but whether we need regulation at all," TeleNomic Research Pres. Stephen Pociask said on a Washington Press Club panel in connection with release of the NMRc report. He said the problem with the MCI model was that it wouldn't encourage investment. Heritage Foundation Fellow-Regulatory Policy James Gattuso said he was concerned that "we may be replacing vertical regulations with horizontal ones."

BENTON'S COMMUNICATIONS-RELATED HEADLINES for JULY 14, 2004

MCI'S LAYERS APPROACH SAID TO DISCOURAGE INDUSTRY INVESTMENT Current US telecommunications is based on a silos approach: there are rules for telephony, for cable, for broadcasting, etc. But with advances in technology, the lines are blurring between these silos, making it harder to effectively regulate the sector. In response, MCI has proposed that IP services should be regulated based on horizontal layers rather than "vertical silos." MCI suggests that the lower physical network facilities layer should be regulated based on market power, rather than legacy service or labels, while the higher applications and content layer should be unregulated. For example, the company says under the model, VoIP would reside on the unregulated applications layer, while universal service and interconnection issues reside on the regulated network layer. The idea has gained some traction in DC, so a bunch of people who don't like the proposal got together on Tuesday to bash it. A new report from the New Millennium Research Council fins the proposal would lock in the worst elements of existing telecommunications rules and discourage new industry investment.

The report was written by a really diverse "let the market rule" gang: Wayne T. Brough, Chief Economist at Citizens for a Sound Economy; Braden Cox, Technology Counsel with the Competitive Enterprise Institute's Project on Technology and Innovation; James L. Gattuso of the Heritage Foundation; David P. McClure, CEO of the US Internet Industry Association; Andrew Odlyzko, University of Minnesota; Stephen B. Pociask, President of TeleNomic Research; Adam Thierer, Cato Institute; Glenn A. Woroch, University of California at Berkeley. [SOURCE: Communications Daily, AUTHOR: Susan Polyakova] See NMRC Press Release: http://www.newmillenniumresearch.org/news/event_071304.pdf and Report: http://www.newmillenniumresearch.org/news/071304_report.pdf

BoardWatch Magazine Online

Thinktank Slams MCI Proposal

WASHINGTON -- A proposal advanced by MCI for revamping U.S. regulation for broadband and other services would lock in the worst elements of existing telecommunications rules and discourage new industry investment, according to eight experts writing in a new report from the New Millennium Research Council (NMRC). In describing the MCI plan as "fatally flawed," the report authors also argue that it relies upon an overly simplistic view of the increasingly complex telecommunications sector and appears to be designed to protect the interests of certain industry participants, including MCI itself.

Entitled "Free Ride: Deficiencies of the MCI 'Layers' Policy Model and the Need for Principles that Encourage Competition in the New IP World," the NMRC report concludes: "The authors of this report found that the network layers model was fatally flawed as a framework for new regulation or legislation. Many of the authors dismissed the MCI legislative proposal specifically because it does not provide a deregulatory path as envisioned by the Telecommunications Act of 1996. The authors conclude that the network layers model would be at cross-purposes with the Act's goals of promoting broadband growth, creating competitive markets and benefiting consumers. The authors recommend a light regulatory touch or voluntary adherence to industry-created principles to balance competitive concerns, while at the same time providing incentives for investment and innovation. Regulatory reform is an important issue. The MCI layers approach highlights that. But it is an option which warrants a great deal more analysis and study."

Under the MCI "layers" proposal, regulatory oversight would remain in place only for infrastructure companies such as incumbent local exchange carriers (ILECs) and cable companies -- but not for their competitors (including MCI), which would get access to the underlying infrastructure on a largely or entirely unregulated basis.

JULY 13, 2004

TR DAILY

NMRC-BACKED PAPER PANS MCI's 'LAYERS' PROPOSAL

Seven of the eight authors of a New Millennium Research Council-sponsored study that criticizes MCI, Inc.'s "layers" policy model today outlined their concerns that any regulatory model would soon be outdated by changing technology and that the time had come to rely on the market rather than regulation to ensure competition and innovation.

Audience members, including two FCC staffers, however, asked the author-panelists at the NMRC event in Washington for more details on what regulations, if any, they would retain to ensure various social policy goals such as universal service are met and what sort of regulatory model could possibly withstand technology and market changes indefinitely.

"Why do we need to find a Platonic [ideal] regulatory model" that would be good for all time, asked one Commission staffer, suggesting that criticisms of the layers proposal on the grounds that industry structure might change are a red herring.

The layers policy model suggests that instead of looking at communications services as segregated in different "silos" under the various titles of the 1934 Communications Act, policy-makers should view them as lying in different layers, with the physical infrastructure at the bottom, content at the top, and services and applications in between. One of the authors of the NMRC paper, Braden Cox, technology counsel at the Competitive Enterprise Institute's Project on Technology and Innovation, said the layers approach wasn't flexible enough and seemed "to want to banish players to their respective layers."

In a similar vein, David P. McClure, president and chief executive officer of the U.S. Internet Industry Association, said, "The Internet and Internet companies don't respect layers. A digital segregation policy won't work." He added, "We are so obsessed with making sure no one dominates the physical layer that we can't get anyone to invest" in the infrastructure.

Adam Thierer, director-telecommunications studies for the Cato Institute, said, "I fear a layer-breaker might become a lawbreaker" if the layers policy were adopted.

"Forcing industry into layers would block innovation" by forcing technology to adhere to the layer architecture, said Glenn A. Woroch, executive director of the Center for Research on Telecommunications Policy at the University of California-Berkeley's Haas School of Business.

Richard Whitt, MCI's senior director-global policy and planning, who wrote the MCI paper proposing the layers policy model, attended the event, and during the question-and-answer period was permitted to defend his approach and question the panelists' interpretation of it. "There's no prohibition on vertical integration" across the layers in the proposal, he said. The proposals' call for "respecting layers" refers to regulators, not to service providers and other industry players, he added.

He told reporters after the event that MCI had been promoting the policy proposal on Capitol Hill and at the FCC, which could take some action in line with the proposal under its regulatory forbearance authority. "But there's only so much the FCC can do under its own authority," he added. MCI hopes the proposal could be incorporated into the major telecom legislation that many in the industry and in Washington expect to be written over the next two to three years. Mr. Whitt said Sen. John McCain's (R., Ariz.) office had "expressed interest" in the proposal. - Lynn Stanton, lstanton@tr.com

NATIONAL JOURNAL'S TECH DAILY

Telecom Experts Criticize MCI Proposal For Rewriting Law
By Drew Clark

An MCI-drafted proposal to rewrite telecommunications law based on the concept of "network layers" is flawed because it does provide the deregulation necessary to spur high-speed Internet deployment, a panel of seven telecom experts said Tuesday.

Releasing a report on MCI's layers model, the experts uniformly criticized a white paper released in December by Rick Whett, senior director of global policy and planning for MCI. The New Millennium Research Council, a group with ties to Verizon Communications, assembled the experts.

The experts -- including the CEO of the U.S. Internet Industry Association (USIIA), officials of four free-market think tanks, an industry consultant and a law professor -- said MCI's plan is "fatally flawed" because it relies on a simplistic view of the telecom sector and appears designed to protect MCI.

In the paper, Whett said the current telecom law is tailored to "vertical" industry sectors of telephone, broadcasting and cable service. That approach is flawed and needs to be replaced with "horizontal" layers, he said.

Under Whett's proposal, which is gaining increasing attention on Capitol Hill as legislators consider a revision of the 1996 Telecommunications Act, the physical infrastructure like cables or digital subscriber lines of telecom firms are the bottom of a four-layer stack. Riding on top are a logical layer using Internet protocols, an applications layer for e-mail or Internet telephony, and a content layer with video or text data.

Under the MCI proposal, the top layers would be freed from regulation, but the bottom physical layer occupied by the regional Bell telecom firms or cable carriers would be subject to regulations that curb market power.

Many of the seven experts, including the Heritage Foundation's James Gattuso and former engineer Braden Cox, a technology counsel with the Competitive Enterprise Institute, praised the analytical value of the layers framework. But it is ill suited to policy prescriptions, they said.

"The MCI report says that [telecom carriers] need to be regulated because there is no competition at that level," Gattuso said. "That assumes the competition there is not" present.

Several panelists said there is a need to move to deregulation, not alternative models of regulation. "As a formal regulatory proposal, we are simply substituting one new, misguided industry policy for the old industry policy," said Adam Thierer of the Cato Institute.

David McClure, the CEO of USIIA, said the Whett proposal would continue to delay the widespread availability of broadband, noting that America is now 11th in the world in per-capita access to high-speed Internet service. "What we need is not more regulation of the physical layer but more investment," he said.

"I am going to Wisconsin to explain why west-central Wisconsin is being left behind," he said. "Part of the reason is that we are so busy making sure no one dominates the physical layer that we can't get anyone to invest in the infrastructure."

University of California at Berkeley economist Glenn Woroch said MCI's plan would block valuable vertical integration. "There are vertical economies that are available from crossing layers," he said.