By George C. Landrith

The race between technology and regulation has been a one-sided contest for as long as we’ve been keeping records.

As New York City’s population and horse-drawn traffic exploded over the course of the 19th Century, far-thinking regulators warned that it was just a matter of time before the city’s streets would be buried in horse manure. If history records what regulatory scheme was proposed to solve the problem, I haven’t come across it.

By the dawn of the 20th Century, of course, technology had provided its own solution in the form of gasoline-driven engines and the automobile. Not that gas-powered vehicles didn’t create some regulatory concerns of their own, but their arrival was one more example of technological reality leaving well-intentioned regulatory policy behind.

As we make our way into the 21st Century, we’re seeing an even more fundamental example of technology outrunning regulation. It’s happening in America’s volatile telecom industry and the fuel for change this time is not gasoline but the Internet.

Internet-based technology, which I’ll refer to by the current shorthand of Internet Protocol or “IP,” is ready to bring consumers the kind of competitive choice and access to exciting new features that Congress had hoped to encourage by passing the Telecom Act of 1996.

The new IP options extend to how we watch television as well as the way we make phone calls. In both TV and voice, IP innovators are charging into the 21st Century at a gallop. Unfortunately, they are still dragging a 20th Century regulatory mind-set behind them.

In the case of IP-based TV, that mindset is being encouraged by the cable TV industry. The cable giants want their new IP-based competitors saddled with the requirement for local franchise agreements that have applied to cable service for decades. Never mid that IPTV, like voice over internet protocol (VOIP), is essentially a data service. Never mind that cable companies originally signed those franchise agreements in return for a virtual monopoly in the municipalities that issued them.

The IPTV providers would be the stone opposite of monopoly providers. They would be the challengers to incumbents who’ve had a 30-year head start and a long history of an overwhelming market share. What they would have going for them is a fundamentally new technology that would finally make interactive TV a reality, giving viewers the option of accessing movies on demand from a huge data base and even watching broadcast programs whenever they choose to access them.

Making IPTV providers pay local franchise fees and go through months of negotiating local franchise agreements would only raise the cost and delay the introduction of a new service consumers should be allowed to evaluate for themselves. Hardest hit will be the rural consumer. Initial offerings will be made in larger population centers and once the phone companies recognize profit, they can invest in the capital expenditures necessary to bring this service to rural America. History tells us that eventually technology will triumph, but it could be an uphill fight.

Regulators tend to be creatures of habit and their first instinct upon seeing a new technology is to slap it with the same regulatory restrictions that they’ve used to control previous technologies. So when a handful of entrepreneurs began offering reliable VOIP phone service a few years ago, there were those in the regulatory community who wanted to saddle this new technology with the same regulations that apply to traditional telecom service.

Last year the FCC ruled that states couldn’t apply the same taxes and fees to VOIP as they do to standard voice telephone service because VOIP is an essentially different kind of service. It’s a data service that comes through your telephone in the form of voice after traveling most of the way via the Internet.

VOIP service was pioneered by little companies like New Jersey based Vonage. As customers caught on to the lower prices and high flexibility of VOIP service, though, America’s cable
TV giants have become enthusiastic players in the VOIP market. The cable companies’ VOIP services have made a good sized dent in the phone revenues of the traditional telecom companies, enjoying an immunity from state regulations that the big telecoms don’t have.

Now the phone companies, notably SBC and Verizon, are geared up with IP-based TV services that will give the cable companies a competitive run for their money on their home turf. Cable companies dominate the pay-TV market so thoroughly that they’ve been able to hit consumers with one price increase after another while prices for phone service has trended down.

The cable industry grew up since the 70’s operating as patchwork of local monopolies, granted through franchises from municipalities. Their only serious competition comes from two satellite TV companies, but many consumers are discouraged by up-front costs of switching from cable to satellite.

This cozy arrangement is threatened by the prospects of phone companies using a new technology to make cable customers a potentially very competitive offer. Not surprisingly, the cable companies show no signs of welcoming IP-based competition from the likes of an SBC or Verizon. In the long tradition of regulated monopolies, the cable companies are looking to regulators to stave off new competition instead of simply making their customers a better offer.

Our organization has lined up in the past with opponents of excessive federal regulations that impeded the introduction of new technology and competition. In the IP arena, though, right now it’s state governments that want to shove the IP genie back into the bottle of standard telecom regulation. There are some spirited fights going on now in Virginia and Texas over IPTV franchising laws.

This is only delaying the inevitable competitive match-up that the public really wants: phone companies strengthened by consolidation going up against the cable companies to provide bundles of voice, video and data service.

The technology to give consumers what they want has left the starting gate. Let’s hope regulatory policy won’t be too far behind.

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Mr. Landrith is a graduate of the University of Virginia School of Law, where he was Business Editor of the Virginia Journal of Law and Politics. He had a successful law practice in business and litigation. In 1994 and 1996, Mr. Landrith was a candidate for the U.S. House of Representatives from Virginia's Fifth Congressional District. He served on the Albemarle County School Board. Mr. Landrith is an adjunct professor at the George Mason School of Law. He is recognized as an authority on constitutional law and jurisprudence, federalism, global warming, and property rights. gcl@ff.org