Berkman Center Senior Fellow Andrew McLaughlin has a new blog and one of his first posts is an interesting look at the recent Vonage v. Minnesota Public Utilities Commission [PDF] decision (Judge Davis Gets It: The Internet is Not a Telephone). I think that Andrew and I actually agree quite a bit, but merely differ as to emphasis.

While I sympathize with the outcome (who thinks that the Minnesota Public Utilities Commission should be regulating VoIP?), I don't find the reasoning of the decision particularly compelling and I don't think the decision inherently important. The problem isn't the judge's, but the entire regulatory scheme. The judge is simply making due with a confusing morass of regulation built through decades of industry-driven lobbying. His decision is important only to the extent that it highlights some of the internal contradictions of existing regulation; it doesn't provide a compelling alternative or solution (though that isn't the judge's job).

As Andrew points out, there are two important aspects of the decision but, really, only one is all that important.

Whether, under federal law, VOIP services are "information services" (not subject to state regulation) or "telecommunications services" (subject to state regulation).

This seems to me the crux of the issue. Why are "telecommunications services" subject to state regulation at all? This is the real problem. We can parse definitions of "information services" and "telecommunications services" all day long but, given that bits are cheap to produce and distribute, as long as some bits are subject to state and federal regulation and other bits are subject to federal regulation only, we are going to have issues.

As the judge noted in the decision, "Traditional telephone companies use circuit-switched technology." Emphasis on the word "traditional." How many circuit-switched phone calls did you make today? Vanishingly few, I imagine. How far does your traditional phone call go before it becomes packet-switched? Not far for most nowadays; most likely you're circuit-switched the last mile only - as Andrew notes.

Strangely, the basis of the decision is premised on this distinction between the last mile technology used. In statutory language, the distinction looks like this:

The term ‘telecommunications’ means the transmission, between or among points specified by the user, of information of the user’s choosing, without change in the form or content of the information as sent and received. 47 U.S.C. § 153(43).

“Telecommunications service” is “the offering of telecommunications for a fee directly to the public, or to such classes of users as to be effectively available directly to the public, regardless of the facilities used.” 47 U.S.C. § 153(46).

“Information service” is defined as “the offering of a capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information via telecommunications, and includes electronic publishing, but does not include any use of any such capability for the management, control, or operation of a telecommunications system or the management of a telecommunications service.” 47 U.S.C. § 153(20).

Yeah, I know it says nothing about the last mile, but that turns out to be what the distinction is, according to Judge Davis. You see:

The process of transmitting customer calls over the Internet requires Vonage to “act on” the format and protocol of the information. 47 C.F.R. § 64.702(a). For calls originating with one of Vonage’s customers, calls in the VoIP format must be transformed into the format of the PSTN before a POTS user can receive the call. For calls originating from a POTS user, the process of acting on the format and protocol is reversed.

The problem, of course, is that precisely the same thing happens with most "traditional" calls, the only difference being where the change takes place (your home or one mile from your home). Judge Davis emphasizes this strange distinction when he claims that Vonage phone calls create a "net change in form and content" that "traditional" calls do not. The only "net change" is between whether the packet-switched transformation occurs in the home or at the local telephone switch. Is that really all that significant?

What Happens Next?

Assume that Judge Davis' decision and reasoning is widely adopted. What happens next? Very simple. 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.

Is this the result we want?

Judge Davis summarily dismisses Minnesota's "quack like a duck" argument. But Minnesota has a point. Vonage is acting like a phone company. If we think that phone companies should be held to some regulatory standards (such as common carrier), then ultimately we will have to have some definitions of what can be regulated that includes Vonage.

Andrew states that,

Finally, the decision bolsters the notion that Internet services should not be forcibly shoehorned into decades-old telecommunications regulations. If VOIP is to be regulated, it should be approached in ways that respect the comprehensively different nature of packet-switched networks.

I disagree, but only to the extent that most of our existing telecommunications services should not be forcibly shoehorned into decades-old regulations either. We don't need more needle-threading judicial decisions. We need serious telecommunication reform.

via John Palfrey