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Washington and Silicon Valley at the Crossroads:
Government Regulation and the Internet
Ronald Nehring
Director of National Campaigns
May 19, 1999
"Over the next five years, I believe the future of this
medium will be determined more by policy choices than by technology
choices."
-- Steve Case, Chairman and CEO of America Online
The federal government has set its sights on America’s burgeoning
high technology industry, and taxpayers, consumers and businesses
should be concerned.
Since the government gave up on its 13-year legal battle with IBM
in 1982, it has largely refrained from grandiose attempts to
regulate the computer industry. Now, however, after six years of an
Administration that believes the federal government should play a
key role in "growing the economy," the feds are looking at several
new ways to meddle with one of the most successful and
fastest-growing segments of the American economy: high-tech.
Without question, America’s computer industry has provided
consumers with increasing computing power at decreasing prices. A
recent report by Citizens Against Government Waste cites World Bank
and International Monetary Fund data indicating that computing costs
in 1994 were 1/10,000th of what they were in 1975.
As mainframe-scale computing power has become available to
consumers for about the same price as a fancy television, computing
has gone mainstream, with millions of Americans now connected to one
another via the Internet.
Unfettered by the limitations of older technologies, the Internet
provides millions of Americans with a portal to a universe of
information. The World Wide Web’s easy-to-use graphical interface is
giving ordinary Americans access to extraordinary data. Every day
more Americans connect to the Internet for everything from
purchasing birthday presents to checking on which fertilizer to use
on the lawn next month.
Millions of Americans use the Internet for all kinds of
commercial transactions involving everything from stock trades to
purchasing books and CDs. These same Americans, of course, also
constitute a market for computing equipment and Internet services
provided by companies such as America Online, Concentric and
AT&T, to name a few.
Which companies will provide the computer hardware and software,
and Internet access, for consumers is being determined in the daily
competition taking place in a rapidly evolving marketplace. Old
companies fall and new companies emerge with each new technological
innovation.
In this daily battle for supremacy in the growing
Internet-related segments of the economy (telecommunications,
computers, online services), some companies are feverishly working
to bring a powerful new player into the marketplace: the federal
government.
Online community to Washington: Get lost
A computer connected to the Internet becomes a window onto a vast
universe of information. Included in this universe of information is
much adult-oriented material, some of which can be viewed with the
simple click of a mouse. In 1996, in an effort to protect children
from intentional and unintentional exposure to obscene material,
Congress enacted the Communications Decency Act (CDA), marking the
federal government’s most dramatic step yet in regulating
information transmitted over the Internet and other online
media.
The CDA made it a crime to put any "indecent" material online
where children might see it, including Internet newsgroups, chat
rooms and other online venues.
In response to the clear threat to the free flow of information
over the Internet, America Online (AOL) helped to organize 27
companies and groups to file suit to overturn the law. AOL’s
attorney, William W. Burrington, testified in federal court against
the CDA, arguing that America Online would be forced to pull the
plug on many of its services if the CDA remained in effect.
AOL vigorously stood against government regulation of online
content, and ultimately prevailed.
Another Internet-related issue to garner significant attention in
Washington is that of Internet taxation: the taxing of commercial
transactions made over the Internet. When local and state
governments perceived a threat to their sales tax revenues as
citizens opted to purchase items over the Internet ("e-commerce"),
some of these governments imposed new taxes on such
transactions.
Taxing e-commerce transactions is inherently problematic,
particularly in determining jurisdictions. Consider, for instance, a
California resident traveling on business in New York, dialing into
his Internet Service Provider (ISP) in Utah, signing onto a Nebraska
company’s Web site which is hosted on a server in Boston, purchasing
an item which is shipped from the company’s Oregon warehouse to the
consumer’s mother in Nevada. Which jurisdiction has the "right" to
tax that transaction? Some of them? All of them?
Recognizing the problems inherent in taxing e-commerce, and the
potentially destructive impact such taxes could have on the
continued development of the Internet, Congress enacted the Internet
Tax Freedom Act in 1996. Once again, companies such as AOL
championed the cause of limited government by lobbying in support of
the Act.
In an era where scarcely a day goes by during which the
Administration does not propose some new way of using the federal
government to help (or hurt) some individual, group or industry,
some companies are using their Washington influence to encourage the
federal bureaucracy to expand its regulatory presence to help their
bottom line or, more specifically, to shackle their competitors. Two
high-profile cases come immediately to mind.
Case 1: Sun Microsystems, IBM, Oracle and Netscape versus
Microsoft
The issue: Encouraged by Microsoft’s competitors, the
Department of Justice contends that Microsoft is using the dominance
of its Windows operating system to run competitor Netscape out of
the Internet browser market. A victory for the federal government
could result in federal oversight of product development at
Microsoft.
Last February the federal government filed an anti-trust suit
against software giant Microsoft amid much brouhaha over Microsoft’s
integration of Internet-browsing technologies into its Windows
operating system.
Is the Department of Justice’s suit against Microsoft based on an
interest in protecting consumers from being gouged by an omnipresent
monopolist? It cannot be. As mentioned earlier, computing costs
during the last several decades have plummeted. I helped to put
myself through college by selling computer software at a local
retailer where the store would charge more than $300 for a database
program with a manual that weighed five pounds. Today, far more
powerful and easy-to-use database applications are available at a
fraction of that cost. The power of software applications in every
conceivable category from business to entertainment has increased
across the board, while prices have steadily dropped.
The price-to-performance ratios in the hardware area have also
become more favorable to consumers. Ask anyone who owns a laptop
that is more than a year old if they could buy more, or less, with
the same money today.
The closer one examines the government’s case against Microsoft
and its origins, the more obvious it becomes that, in bringing the
suit, the government is looking after the corporate welfare of
Microsoft’s competitors more so than the welfare of consumers.
The government’s case was brought only after an intensive
lobbying campaign by Microsoft’s competitors, including Sun
Microsystems and Netscape, maker of the dominant Web browser,
Netscape Navigator. Netscape CEO James Barksdale personally met with
Joel Klein, the DoJ’s chief anti-trust attorney, to encourage the
department to pursue the case.
On Oct. 20, 1998, Barksdale testified under cross-examination
that urging the government to bring suit against Microsoft has been
a part of the company’s corporate strategy for years. Barksdale also
testified that Netscape employed a strategy of getting the
government to file suit against Microsoft, as opposed to Netscape
filing the suit itself, because to have his own company seek a
remedy in court would have been "too expensive."
Meanwhile, the free market has not come to a halt while the
government attempts to make its case in court. A month after the
trial got underway, AOL announced it would acquire Netscape in a
$4.2 billion merger that will give the Netscape browser a 58 percent
share of the Internet browser market. The two companies also
announced an alliance with another Microsoft competitor, Sun
Microsystems.
While the free market continues to work to the advantage of
consumers and those who provide the products consumers want, the
case against Microsoft has developed its own momentum, and the trial
continues. Meanwhile, by allowing itself to be dragged into doing
the bidding of one group of companies, the Clinton Administration
has sent a signal that, if you have enough political clout in
Washington, you too can have the government intervene on your
behalf.
One company that appears to have noticed is America Online.
Case 2: AOL versus the cable television industry
The issue: AtHome and Time Warner’s RoadRunner provide
broadband, high-speed Internet access to consumers at speeds up to
100 times faster than traditional dial-up connections. AOL proposes
expanding federal regulatory authority to compel cable companies to
deliver content provided by their competitors.
Should the Federal Government set prices for Internet
access?
AOL argues that it should be granted access to the cable
companies’ new broadband networks at a "fair price." If AOL succeeds
in its campaign to drag the federal regulatory leviathan into the
online world, we will eventually come to the question of just what
constitutes the "fair price" for high-speed access to a medium that
is often called the "World Wide Wait."
While the content available to consumers through the Internet is
not at issue, the speed at which that content is delivered to living
rooms, home offices and workplaces is. What is the fair price for
speed and convenience?
Cable companies may argue that a higher price is justified,
considering that the single-largest complaint about the Internet
currently is speed and efficiency. Further, high-speed access makes
certain types of online content more practical, such as streaming
audio and video. Ask the people at Broadcast.com, which provides a
range of online video selections, if they expect to see more traffic
on their site as more Internet users move from dial-up to broadband
service.
AOL and others may argue for lower prices as just compensation
for connecting broadband customers to their services. With an
existing customer base of more than 17 million users, AOL could
argue that what cable providers lose in lower prices could be more
than made up for with volume.
In the end, it’s likely that the Federal Communications
Commission – or the courts – could play a key role in setting the
prices which AOL and others must pay broadband providers to access
their customers. This not only affects the prices which end-users
will pay, but it also gives the federal government the power to
influence the return on investment in these emerging
technologies.
For instance, in paying $32 billion for TCI, and then spending
another $2 billion to upgrade TCI’s network to provide interactive
online services, AT&T is providing the investment needed to make
broadband Internet access widely available. What is the likely
impact on emerging technologies if such a sizeable investment is met
by a rate structure imposed by either the FCC or the courts, instead
of one determined by the market? What incentives are left for other
potential investors to provide the capital necessary to develop new
technologies if a competitor can exert enough influence in
Washington to cause the federal bureaucracy to weigh in with
mandates and prices? How many other cable providers are likely to
upgrade their networks knowing that once those upgrades are
completed, they must give access to AOL and other online providers,
at prices which may be set by federal bureaucrats or a judge?
Opening the door to federal regulation
America Online and its "Open Net" coalition partners are engaged
in a regulatory campaign that, if successful, would bring the
federal government in to regulating the Internet in the same way it
regulates the telephone and cable industries. Members of Congress
who tend to view positively government intervention in the
marketplace are now echoing AOL’s call for expanded regulation.
Rep. Edward Markey, the Massachusetts Democrat, recently wrote to
FCC Chairman Kennard expressing concern for the emerging broadband
networks. Markey urged the FCC to "move quickly to ensure no
gatekeeper channels for broadband access are being created."
Translation: move quickly to adopt new regulations on access to the
Internet.
History reminds us that once the federal bureaucracy moves in to
regulate an industry, it is usually reluctant to leave. Although
some political players on the ideological left may echo the call for
an expanded regulatory presence in the computer industry, the drive
continues to originate with a few big companies trying to place
regulatory shackles on their competitors.
The drive to place conditions on the AT&T/TCI merger
originated with America Online, as well as MCI WorldCom and US West.
MCI WorldCom is of course a major competitor with AT&T in the
long distance telephone market. US West will also find AT&T a
competitor if and when both companies enter each other’s
markets.
Conclusion
Some high-tech companies are trying to gain an advantage over
their competitors by dragging the federal government into regulating
the computer industry. While much of the campaign for federal
intervention is couched in lofty rhetoric, the end result of such a
campaign, if successful, will be the permanent regulation of the
Internet by federal bureaucrats in Washington.
The same federal government that wastes billions of dollars each
year on failed computer projects is being invited to stick its nose
into one of the most dynamic segments of the American economy. The
end result can only be disastrous for consumers, taxpayers and,
ultimately, high-tech companies.
The Department of Justice should drop its case against Microsoft,
and let the free market determine which companies design and deliver
the computing products that best suit the needs of consumers.
Microsoft’s competitors should not sacrifice the long-term growth
potential of the high-tech community simply to bolster their bottom
line for a quarter or two.
Similarly, AOL should return to its advocacy of government
non-intervention in high-tech. Lobbying the Congress and the FCC to
regulate broadband access to the Internet in the same way it
regulates the fossilized telecommunications industry is incredibly
dangerous in the long term. The federal government should not be
choosing winners and losers in the race to provide consumers with
the best online access. The drive for "access" to the networks being
built by the new online providers like AtHome can only end with
federal price controls that stifle investment and innovation.
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