Cybertelecom :: Computer II

The ink had not dried on the Computer I before it had become clear that it had problems. The FCC was inundated with applications concerning hybrid services and forced to make a case-by-case analysis of where these services might fall. [CII Tentative ¶ 86 (“We recognize the inadequacy of the hybrid service definitions in the existing rule.”)] [CIII R&O ¶ 10 (“After Computer I took effect, technological and competitive developments in the telecommunications and computer industries exposed shortcomings in its definitional structure, and in particular its ad hoc approach to evaluating the ‘hybrid’ category.”)] Computer processing was involved in both “pure communications” and “data processing.” [CII Supp NOI ¶ 8]

In the meantime, a curious thing had happened. The relatively dumb terminals that had been used to communicate with the mainframe computers had become smart. The cost of computer processing units (“CPUs”) was dropping dramatically. Computer chips were showing up in places other than IBM big iron. Suddenly, microcomputers made their appearance, there was intelligence at both ends of the line, and distributed computing had been born. [CII Final ¶ 19, 23] [CII Tentative ¶ 8-11] [CII Supp NOI ¶ 3-7] [CII NOI ¶ 8-10] The Commission took note of the introduction of packet-switched networks such as Telenet. [CII NOI ¶ 10, 12 (describing packet switching networks as “radically new”)] AT&T was building customer premise equipment — telephones — with which one could enter and manipulate text—word processors. [CII Final ¶ 19, 23] [CII Supp NOI ¶ 4 (“In our new Computer Inquiry, we noted that peripheral devices are now capable of duplicating many of the data-manipulative capabilities which were previously available only at centralized locations housing large scale general purpose computers.”)] IBM showed no hesitation in demonstrating its displeasure about AT&T’s entrance into its market.

The stage was set. Computer I would have to be scrapped; Computer II was initiated in 1976. Meanwhile the Internet continued in its childhood. In 1972, the nation saw the first public demonstration of ARPANet. The InterNetworking Working Group was convened in 1972. Bob Metcalfe completed his Ph.D. thesis in 1973 on the Ethernet. Vint Cerf and Bob Kahn presented a paper in 1974 on the Internet Protocol. In 1983, the U.S. government declared that ARPANet would migrate from the Network Control Protocol to the Internet Protocol TCP/IP.

The Issue

The FCC returned to square one. How should it classify these different sets of computers? The hybrid middle ground had been a source of aggravation. Dumb remote terminals had given way to smart microcomputers or minicomputers. [CII Supp NOI ¶ 7 (“The new technology may also have rendered meaningless any real distinction between ‘terminals’ and computers.”)] The concept of interactive computers as something that one accesses with remote terminals over the communications network, with all processing taking place at the mainframe, was vanishing. The classifications of pure communications and pure data processing were unsustainable. Now the FCC faced interactive computers forming logical networks overlaying physical networks. The Commission understatedly described its new situation as “more complicated.” [CII Final ¶ 83]

Furthermore, the rigid safeguards of “maximum separation” were called into question. Was it really necessary for a small incumbent telephone company in the foothills of the Appalachian Mountains, with less than 1000 subscribers, to set up a separate corporation simply to offer data processing services?

The Resolution

Basic Versus Enhanced Service Dichotomy

Out of the analytical turmoil over classification of these services was born the basic versus enhanced services dichotomy. This established a division between “common carrier transmission services from those computer services which depend on common carrier services in the transmission of information.” [CII Final ¶ 86] It established a transformation in the conceptual framework, migrating from attempts to determine differences between technologies to an examination of differences between services experienced by edge users. This came to be the foundation of the FCC’s Computer Inquiries.

“Basic service is the offering of ‘a pure transmission capability over a communications path that is virtually transparent in terms of its interaction with customer supplied information.’” [CCIA p 205 n 18] [CII Final ¶ 96] It is the transmission capacity in the physical network for the movement of information. [CII Final ¶ 93] The basic service is limited to this transmission capacity [CII Final ¶ 95] and does not interact with user supplied information. Computer processing, including protocol conversion, security, and memory storage, provisioned in the network for the benefit of the network, and not for the edge user, is a part of the basic service. [Frame Relay Order ¶ 11 (“The use of packet switching and error control techniques ‘that facilitate the economical, reliable movement of [such] information [do] not alter the nature of the basic service.’”)] [CIII R&O 1986 ¶ 10 (“Data processing, computer memory or storage, and switching techniques can be components of a basic service if they are used solely to facilitate the movement of information.”)] [CII Final ¶ 95, 98] In other words, processing used “solely to facilitate the movement of information” is a part of the basic service. [CIII R&O 1986 ¶ 10]

[T]he generic characteristic of the communications function is that the semantic content of information is not changed at the completion of a given process. A message entering a network is intended to arrive at its destination unchanged. Several computer operations, such as message and circuit switching, may be required to permit the message to transit the network. In this process, individual symbols may be processed, as in code conversion and error correction. Or the message may be accompanied by addressing information, such as dial pulses or message headers, which are used by the communications network for centralized message routing. The purpose of these computer operations is, nevertheless, the transmission of an unaltered message through a network and they do not constitute a data processing service.

[CII NOI ¶ 18] Note that what is not a part of the definition of the basic service is the telephony application; basic service is the provisioned transmission service “regardless of whether subscribers use it for voice, data, video, facsimile, or other forms of transmission.” [CII Final ¶ 94 (thus we see the initial uncoupling of the telephony application from the transmission facility)]

The Commission wanted to ensure that carriers were able to use computers within their networks, [CII Final ¶ 97] [CII Tentative ¶ 12 (“It was stated
that by defining data processing positively a carrier would be able to use computers for any purpose which is not data processing.”)] [CII Supp ¶ 10] so it sought “the stimulation of economic activity in the regulated communications sector by removing ambiguities in the existing definitions.” [CII NOI ¶ 16] By the creation of the basic versus enhanced dichotomy, the Commission sought to create regulatory certainty, permitting carriers to use computers in association with the basic service without fear that such use would be considered enhanced. If the service were enhanced, either AT&T may not be able to offer the unregulated service, or the carrier could offer the service but only through a separate subsidiary. [CII Tentative ¶ 70-71 “[C]omputer processing applications employed within a carrier’s network in conjunction with ‘voice’ and ‘basic non-voice’ services can be performed without restriction on the use of data processing applications utilized within the framework of these two services.” ¶ 70] Thus, the Commission concluded that computer processing that “relates to and is for the purpose of providing a communications service or meeting its own in-house needs” is a basic service and may be provisioned freely by the carrier. [CII Tentative ¶ 87]

In its tentative decision, the Commission proposed that there would be three categories: voice, basic non-voice, and enhanced non-voice services. Both voice and basic non-voice fell within what is now known as basic services. Voice was “the electronic transmission of the human voice such that one human being can orally converse with another human being.” [CII Tentative ¶ 69] Basic non-voice was an intriguing formulation. It was:

[CII Tentative ¶ 69] This formulation is noteworthy because it describes the behavior of such things as TCP/IP. Had this formulation been accepted, the regulatory status of the Internet might have been quite different. But the basic non-voice category along with the division of basic service into two parts was
rejected.

As with pure communications, basic services are regulated under Title II under the same rationale, with the same concerns for discrimination and anticompetitive behavior. [CII Tentative ¶ 125 (“The objectives of the maximum separation policy are still valid today.”)] Computers associated with basic service could be used for the provision of basic service alone. [CII Tentative ¶ 71].

After considerable consideration and reformation, enhanced services was defined as:

[47 C.F.R. § 64.702(a) (2002)] This generally means that what goes into the network is different than what comes out of the network.

The definition was originally proposed as a reformation of "data processing." In the 1976 Supplemental Notice, the definition of data processing proposed was as follows: "'Data processing' is the electronically automated processing of information wherein: (a) the information content, or meaning, of the input information is in any way transformed, or (b) where the output information constitutes a programmed response to input information." [CII Tentative ¶ 12].

"Based on this record, the mandate of this Commission in a rapidly changing technological environment, the market developments resulting from the confluence of technologies, the impossibility of defining at the enhanced level a clear and stable point at which "communications" becomes "data processing," the ever increasing dependence upon common carrier transmission facilities in the movement of information, the need to tailor services to individual user requirements, and the potential for unwarranted expansion of regulation, we conclude that the public interest would not be served by any classification scheme that attempts to distinguish enhanced services based on the communications or data processing nature of the computer processing activity performed. Accordingly, we conclude that all enhanced computer services should be accorded the same regulatory treatment and that no regulatory scheme could be adopted which would rationally distinguish and classify enhanced services as either communications or data processing." [CII Final ¶ 113] [CII Tentative ¶ 61-63, 68, 78 (“The regulatory focus should be upon the service being offered and not merely upon performance of a message switching function.”)]

The simplicity of this definition belies the turmoil that was experienced in developing it. Originally the FCC simply envisioned a reformation of the Computer I definitions. The types of activity covered by "data processing" were anticipated to be such things as word processing, arithmetic processing, and process control. [CII Tentative ¶ 13] [CII Supp ¶ 9] [CII NOI ¶ 17-18] But the Commission was uncomfortable with the way that the old definition left too much to the hybrid category. Pointing to processing was insufficient as processing could be utilized by either communications or data processing. The Commission therefore transformed the concept so that, instead of trying to segregate processing capabilities, it instead would make the classification dependent on the nature of the activity involved. [CII Final ¶ 131 (“We have tried to draw the line in a manner which distinguishes wholly traditional common carrier activities, regulable under Title II of the Act, from historically and functionally competitive activities not congruent with the Act’s traditional forms.”)] [CII Tentative ¶ 15 (“Under the new definition the determination as to whether a communications or data processing service is being offered would depend on the nature of the processing activity involved.”)] This transforms the analysis from an examination of the technology to an examination of the service provisioned.

The basic versus enhanced dichotomy was designed as a bright-line test, [CII Final ¶ 97 (“[T]he regulatory demarcation between basic and enhanced services becomes relatively clear-cut.”)] eliminating the "hybrid" middle ground [CII Tentative ¶ 15, 87] [CII NOI ¶ 14] and case-by-case review. [CCIA ¶ 209] Enhanced services are anything [CCIA ¶ 205 (“Enhanced service is any service other than basic service.”)] more than the transmission capacity of basic service. [Sec. 255 Order, ¶ 2 n.5 (“‘Enhanced services’ use the telephone network to deliver unregulated services that provide more than a basic voice transmission offering.”)] [BOC’s Joint Petition, ¶ 1 n 3] [CII Tentantive ¶ 69 (“An ‘enhanced non-voice service’ is any non-voice service which is more than the ‘basic’ service, where computer processing applications are used to act on the form, content, code, protocol, etc., of the inputted information.”)] [CII Final ¶ 95 (stating “we believe that a basic transmission service should be limited to the offering of transmission capacity between two or more points suitable for a user’s transmission needs”)]. The Commission has articulated a three-prong test for enhanced services. It "employs computer processing applications that: (1) act on the format, content, code, protocol or similar aspects of a subscriber's transmitted information; (2) provide the subscriber additional, different, or restructured information; or (3) involve subscriber interaction with stored information." [Sec. 255 Order, ¶ 16] Enhanced services do not facilitate the basic service; they alter the fundamental character of the basic service (instead, while the basic service remains the same, the enhanced service is layered on top, creating a new service for the edge user). [Sec. 255 Order, ¶ 16] [Compare CII Tentative ¶ 77 (“Of the three categories of services that we have established—‘voice,’ ‘basic non-voice,’ and ‘enhanced non-voice’—‘voice’ and ‘basic non-voice’ services may employ any computer processing applications as long as they do not change the nature of the service.”)] Anything that takes the basic service and uses computer processing to alter that service is enhanced. The image the Commission has at this time is of enhanced service providers (“ESPs”) acquiring basic services, adding enhanced services, and then selling the bundled service to consumers on a resale basis. [CII Tentative ¶ 73]

The Commission affirmed its Computer I finding that enhanced services should be unregulated on the grounds that the market was competitive. [CII Final ¶ 7, 127-132 (“The market is truly competitive. Experience gained from the competitive evolution of varied market applications of computer technology offered since the First Computer Inquiry compels us to conclude that regulation of enhanced services is simply unwarranted.” ¶ 128)] [CCIA p 207] [CPE Order 2001 ¶ 3, 23 (describing market as truly competitive)] [Access Charge Reform 1996 ¶ 285 (“The Internet access market is also highly competitive and dynamic, with over 2,000 companies offering Internet access as of mid-1996.”)]. The Commission has found that

Internet access service takes the basic transmission capacity and transforms it for the benefit of the edge users. An Internet user and an Internet service provider ("ISP") take transmission capacity and add to it in order to enable Internet access. The physical network speaks analog dial tone. The equipment at the edge of the logical network speaks IP. Therefore, the language of the basic service is transformed into a language that the edge users speak. It is the edge computers, and not the transmission capacity, that adds Internet packets (user-supplied information). Those Internet packets are not a necessary component of the basic service; the basic service is already complete and does not need the packets in order to be successful.

A challenge for the Commission was what to do with adjunct services. Adjunct services "facilitate the use of traditional telephone service but do not alter the fundamental character of telephone service."[US West Petition ¶ 2 n 5] The FCC concluded that adjunct services would "be regulated in the same fashion as the underlying service-whether basic or enhanced-with which it is associated in a particular offering." [CIII R&O 1996 ¶ 7] Note that it is never the other way around-the underlying service does not take on the classification of the adjunct service. The existence of the adjunct service does not alter the regulatory classification of the underlying service. [US West Petition ¶ 2 n 5]

Some examples follow: directory assistance provides a telephone number in order to facilitate the use of the basic telephone network. Therefore, directory assistance takes on the characteristic of the basic service (it does not transform the basic service into an enhanced service). [Sec. 255 Order, ¶ 17-18] Reverse directory assistance provides a name or an address that is used for something other than the basic telephone service. Because it does not facilitate the use of the network, it is not an adjunct to the network. [US West Petition ¶ 26] Services that facilitate use of the basic service by individuals with disabilities are also basic services. [Sec. 255 Order, ¶ 17-18]

The Commission was confronted with how to deal with protocol processing. As much as the Commission strove to eliminate the middle ground of "hybrid" services, protocol processing remained a gray area. The Commission conceded that protocol processing could be either basic or enhanced. It set forth a straightforward analysis in order to determine in which category such processing should fall. This analysis is the same as determining whether an adjunct service is a basic service. Generally, protocol conversion services are enhanced services. [CIII R&O 1996 ¶ 7] Traditionally, however, three things were considered basic:

[Non Accounting Safeguards Order on Recon ¶ 2] [Frame Relay Order ¶ 14-16] As with the adjunct services analysis, where protocol conversion is for the benefit and facilitation of the network as opposed to the edge user, it is a basic service.

The Commission concluded that the simple involvement of packetswitching is not sufficient to conclude that a service is enhanced. AT&Tcame up with a peculiar resolution with its Interspan service. With this offering, AT&T provisioned a packet-switched frame relay service over a high-speed connection, bundling it with enhanced services, and attempted to sell it as a single indivisible service. [Frame Relay Order ¶ 6] The Independent Data Communications Manufacturers Association challenged the provisioning, arguing that under Computer II, AT&T had to unbundle the basic from the enhanced service and offer the basic service to other enhanced service providers. This time, however, the basic service was the AT&T packetswitched frame relay service.

AT&T argued that the Interspan offering as a whole was an information service. In the alternative, AT&T argued that contamination theory meant that the provisioning of the information service indicated that the whole offering was an information service.

The Commission rejected this argument. The frame relay service “provides transport of customer data ‘transparently’ across the AT&T frame relay network.” [Frame Relay Order ¶ 40] Regardless of whether the service provisioned to the customer comes as an information service, AT&T was required to unbundle the basic from the enhanced service. [Frame Relay Order ¶ 41] The Commission noted that it has never applied the contamination theory to facility-based providers. [Frame Relay Order ¶ 42-45]

What do we take away from these decisions? Many things. AT&T frame relay confirmed that the Commission in Computer II intended to open up the communications facility over which enhanced services could be provisioned, regardless of the nature of the basic service. The basic service can be packet-switched and it need not involve telephony. It can be broadband and digital. AT&T's Interspan offering was a far cry from Plain Old Telephone Service (POTS); Computer II still applied.

The protocol processing issue has an odd history. Originally, the carriers wanted the protocol processing to be categorized as basic services. At that time, the Bell operating companies ("BOCs") either were not permitted to offer unregulated service pursuant to the Modified Final Judgment, or they were permitted, but only through a separate subsidiary. Thus, unless protocol conversion was basic, they could not offer it. [CIII R&O 1996 ¶ 33-35] By Computer III, carriers such as AT&T wanted protocol conversion to be categorized as enhanced services. Those services, which they were then permitted to offer, would not fall under Title II regulation.

While the year 1996 brought the Telecommunications Act with its new terminology including "telecommunications," "telecommunications service," and "information service," it did not use the terms "basic" or "enhanced services." The Commission concluded [CPE Order 2001 ¶ 2 n 6 (“The Commission has concluded that Congress sought to maintain the basic/enhanced distinction in its definition of ‘telecommunications services’ and ‘information services,’ and that ‘enhanced services’ and ‘information services’ should be interpreted to extend to the same functions.”)] [CPE Further Notice 1998 ¶ 1 n 2] that Congress codified the basic versus enhanced dichotomy using the new terms of "telecommunications" and "information services." The FCC concluded that all enhanced services are information services, although not all information services are necessarily enhanced services. The explanation for this conclusion is rooted in the physical network. Enhanced services are provisioned over common carriers; information services are provisioned over telecommunications (not necessarily telecommunications services). While some entities that provision telecommunications are telecommunications services ("common carriers"), not all are. Otherwise, the Commission concluded that the term "information services" should be "interpreted to extend to the same functions" and understood in a consistent manner of enhanced services. [CPE Order 2001 ¶ 2 n 6] [CPE Further Notice 1998 ¶ 1 n 2] [Non-Accounting Safeguards Order on Reconsideration] [CIII Further Notice 1998 ¶ 40]

The problem of the bottleneck communications facility remained present on the Commission's mind:

[CII Final ¶ 219 ] The Commission continued to be concerned that communications services adequately met the needs of computer processing technology. [CII Final ¶ 100-01 ] [CII Tentative ¶ 66 (“A regulatory structure must be established which adequately addresses present and foreseeable market applications of computer processing technology.”)] The Commission affirmed its recognition of the value to individuals and in the economy of these new innovative services. [CII Tentative ¶ 66] It also affirmed its concern that the communications facility be maintained as an open platform available to all and that cross-subsidization be prevented. [CII Tentative ¶ 71-73 (seeking to “insure the availability of transparent common carrier transmission facilities to all on an equal basis.”)]

However, the Commission's theme concerning the inefficiency of structural separation began to grow. The Commission developed the opinion that it was not necessary to impose structural separation on all carriers, but only on those with sufficient market size to be able to abuse their position. Those carriers with insufficient size and market position do not have the same incentives and thus do not require the same level of safeguards:

Moreover the monopoly rent that a company can extract from such bottleneck facilities is likely to bear some relation to the number of subscribers served. It is probable that many of the new information services that will be offered over telephone lines will incur developmental expenses that will require large customer bases. As we observed, many of them are likely to be national in scope. A telephone company serving a relatively small proportion of the nation's homes and businesses is perhaps less likely to pursue such activities independently. For the most part, long-term profitable entry into the enhanced services field will probably require penetration of the market on a national scale, and it is unlikely that such a national operation could be effectively subsidized from a small pool of monopoly revenues, or that it could gain any significant competitive advantage by restricting the access of its competitors to a very limited network of underlying facilities. The effectiveness of other regulatory tools available to this Commission and other authorities is also considerably improved when they are applied to smaller telephone carriers.

Therefore structural safeguards requiring separate subsidiaries, formerly known as maximum separation, continued to be applied only to the large carriers: AT&T and GTE. [CIII R&O 1996 ¶ 14 (AT&T established AT&T Information Systems, Inc. as its separate subsidiary)] [CII MOO ¶ 5] Other carriers merely had to comply with unbundling rules. [CII Final ¶ 12, 215-28 (“There is little need to subject carriers to the resale structure if such entities lack significant potential to crosssubsidize or to engage in other anticompetitive conduct.” ¶ 12)] In 1984, AT&T begot the BOCs and the BOCs found themselves under the structural separation of Computer II. [US West Petition ¶ 2] [BOC’s Joint Petition, ¶ 3] [CIII Remand ¶ 3-4] The Computer II structural separation safeguards were consistent with Computer I's maximum separation, requiring a high degree of separation, independence, and visibility. [47 C.F.R. § 64.702 (2002)]

Smaller carriers lacked the resources from the regulated side with which to subsidize their unregulated side. They had fewer customers and less ability to discriminate, turning away paying consumers. In light of the reduced incentive in the smaller markets and the reduced resources smaller carriers might have to administer a separate subsidiary, the relative cost of "maximum separation" did not justify the requirement on smaller carriers.

Nevertheless, the small carriers remained in a bottleneck position in the market as the sole supplier of the essential communications service. They still had the incentive and opportunity to take advantage of their monopoly control of the transmission capacity, and to act in anticompetitive ways. In order to ensure that this bottleneck did not hinder the enhanced services market, the Commission required that all facilities-based common carriers who desire to provide enhanced services must unbundle the basic from the enhanced services. They also had to provide the basic service to all other enhanced services on the same terms and conditions. [CII Final ¶ 231] [CPE Order 2001 ¶ 4] [CPE Further Notice 1998 ¶ 33] [Frame Relay Order ¶ 59] The carrier could provide the service on a bundled basis, but had to make the unbundled offering to unaffiliated ESPs. [CPE Order 2001 ¶ 39 ]

Computer I never mentioned CPE because there was no thought that the CPE would get smart enough be a part of the unregulated service. As a result, the Commission promulgated as a part of Computer II’s unbundling rules a prohibition against carriers bundling CPE with the provision of telecommunications service. [47 C.F.R. § 64.702(e) (2002)] [CII Final ¶ 8-10 ] [CPE Further Notice 1998 ¶ 2] This prohibition was eliminated in 2001. [CPE Order 2001 ¶ 1].

Legacy of Computer II

Computer II brought a radical revision in framework. The rationale and the policy goals, however, remained the same. As with Computer I, the enhanced services market was viewed as dynamic, innovative, and competitive, while the basic services were viewed as having both the incentive and the opportunity to act anticompetitively. [CII Tentative ¶ 125 (“The objectives of the maximum separation policy are still valid today.”)]

The premier legacy of Computer II is the establishment of the basic versus enhanced dichotomy. This layered approach to regulation becomes the bedrock of the Computer Inquiries success, and distinguishes it from other international schemes. It established a bright-line test and amplified the separation of the communications facility from the enhancement.

This is a "dichotomy." These are things that are opposed to each other. It is a competitive market as opposed to a noncompetitive market. It is an essential service as opposed to innovation built on top. It is a physical network as opposed to a logical network. It is a regulated service as opposed to an unregulated service.

The dichotomy is a bottom-up analysis. First, the basic telecom service is identified. This is the policy concern. This is the restrained market. This is the essential service. Anything more is more. Anything more is competitive. Anything more is not the essential service but the innovation. Anything more is therefore unregulated.

The next significant legacy of Computer II is a cost-benefit analysis of structural separation. This theme will lead into Computer III, resulting in further drastic revisions to the Computer Inquiry safeguards.

Finally, Computer II continued to make clear that, while enhanced services themselves were not regulated, they were the clearly intended beneficiaries of the safeguards.

Computer Inquiries:
Computer II

The Setting

The Issue

The Resolution

Basic Versus Enhanced Service Dichotomy

Basic Services

Enhanced Services

Adjunct Services

Protocol Processing

The Telecommunications Act of 1996 and “Information Services”

Safeguards

Maximum Separation to Structural Separation

Unbundling

Legacy of Computer II

Computer Inquiries: Computer II

The Setting

The Issue

The Resolution

Basic Versus Enhanced Service Dichotomy

Basic Services

Enhanced Services

Adjunct Services

Protocol Processing

The Telecommunications Act of 1996 and “Information Services”

Safeguards

Maximum Separation to Structural Separation

Unbundling

Legacy of Computer II

Computer Inquiries:
Computer II