Anthony J. Pennings, PhD

WRITINGS ON DIGITAL STRATEGIES, ICT ECONOMICS, AND GLOBAL COMMUNICATIONS

Broadband Policy and the Fall of the US Internet Service Providers

Posted on | November 15, 2016 | No Comments

Much of the success of the Internet can be attributed to the emergence of a unique organizational form, the Internet Service Provider or “ISP,” which became the dominant provider of the broadband and web services. These organizations resulted from a unique set of regulatory directives that pushed the Internet’s development and created a competitive environment that encouraged the proliferation of ISPs and the spread of the World Wide Web. But after the Federal Communications Commission (FCC) repealed its Computer II decision in 2005, the ruling drove out competition. It effectively made a small number of telecom-media conglomerates, the dominant providers of high-speed broadband services in the USA.

This post discusses the rise of the ISPs and how thousands of these organizations, also known as competitive local exchange carriers (CLECs), emerged to provide Internet access around the USA. But the competitive stance of Clinton-Gore administration was replaced by a new pro-telco regime in 2000. By 2005 many ISPs were forced out of business as traditional telecommunications companies, were given ISP status.

The incumbent local exchange carriers (ILECs), primarily AT&T, BellSouth, Hawaiian Telecom, Quest, and Verizon were able to take advantage of their new status to take over the ISP business. As carriers they were required to allow CLECs to interconnect with their facilities, they consistently resisted this practice through pricing and non-tariff barriers. This peering practice was necessary to allow data traffic to flow through the entirety of the World Wide Web. As ILECs then combined their services (VOIP, TV, Internet) into an unregulated bundle of offerings, it became extremely difficult for smaller ISPs to remain competitive.

The first ISPs began as US government-funded entities that served research and education communities of the early Internet. Secured by Al Gore in 1991, legislation signed by President George H. Bush created the model of the National Research and Education Network (NREN), a government-sponsored internet service provider dedicated to supporting the needs of the research and education communities within the US. Internet2, Merit, NYSERNET, OARnet, and KanRen were a few of the systems that provided schools and other non-profit organizations access to the World Wide Web. Only later were the ISPs released for commercial traffic and services.

While telecommunications carriers had been involved in moving some Internet traffic since the late 1980s, their role expanded dramatically after the Internet began to allow commercial activities. As part of the National Information Infrastructure (NII) plan, the US government decommissioned the US National Science Foundation Network (NSFNET) in 1995. It had been the publicly financed backbone for most IP traffic in the US. The NII handed over interconnection to four Network Access Points (NAPs) in different parts of the country to create a bridge to the modern Internet of many private-sector competitors.

These NAPS contracted with the big commercial carriers such as Ameritech, Pacific Bell, and Sprint for new facilities to form a network-of-networks, anchored around Internet Exchange Points. These former regional Bell companies were to be primarily wholesalers, interconnecting with ISPs. This relatively easy process of connecting routers was to put the “inter” in the Internet but are also sites of performance degradation and unequal power relations.

As the Internet took off in the late 1990s, thousands of new ISPs set up business to commercialize the Internet. The major markets for ISPs were: 1) access services, 2) wholesale IP services, and 3) value-added services offered to individuals and corporations. Access services were provided for both individual and corporate accounts and involved connecting them to the Internet via dial-up, ISDN, T-1, frame-relay or other network connections. Wholesale IP services were primarily offered by facilities-based providers like MCI, Sprint, and WorldCom UUNET (a spinoff of a DOD-funded seismic research facility) and involved providing leased capacity over its backbone networks. Value-added services included web-hosting, e-commerce, and networked resident security services. By the end of 1997, over 4,900 ISPs existed in North America, although most of them had fewer than 3,000 subscribers.[1]

FCC policy had allowed unlimited local phone calling for enhanced computer services and early Internet users connected to their local ISP using their modems. ISPs quickly developed software that was put on CD-ROMs that could be easily installed on a personal computer. The software usually put a browser icon on the desktop of the computer that once clicked on would dial the ISP automatically, provide the password, and connect the user to Internet.

The ISPs emerged as an important component to the Internet’s accessibility and were greatly aided by US government policy. The distinctions made in the FCC’s Second Computer Inquiry in 1981 allowed ISPs to bypass many of the roadblocks experienced by traditional communication carriers. Telcos were to provide regulated basic services and “enhanced services” were to stay unregulated. Schiller explained:

    Under federal regulation, U.S. ISPs had been classed as providers of enhanced service. This designation conferred on ISPs a characteristically privileged status within the liberalized zone of network development. It exempted them from the interconnection, or access, charges levied on other systems that tie in with local telephone networks; it also meant that ISPs did not have to pay into the government’s universal service fund, which provided subsidies to support telephone access in low-income and rural areas. As a result of this sustained federal policy, ISPs enjoyed a substantial cross-subsidy, which was borne by ordinary voice users of the local telecommunications network.[2]

ISPs looked to equip themselves for the potential new markets and also connect with other companies. For example, IBM and telecom provider Qwest hooked up to offer web hosting services. PSINet bought Metamor to not only transfer data, but to host, design, and move companies from the old software environment to the new environment. ISPs increasing saw themselves as not only providers of a transparent data pipe but also as a provider of value-added services such as web hosting, colocation and support for domain name registration.

As they would say in the new industry, “Its not about putting your company on the web as much as its about putting the web into your company.” Rather than just a presence on the World Wide Web, businesses were interested in combining the capabilities of the Internet with their business objectives. Sales, logistics, and accounting could be integrated along with other internal computing systems in order to create new dimensions of commerce. ISPs facilitated this process but were significantly devastated by the dot.com crash of 2000 and the telecom crash of 2002. Furthermore, Internet policy changed when the Bush administration took power in 2000.

During the 1990s, the telcos were conducting tests using a new technology called ADSL (Asynchronous Digital Subscriber Line). It was originally designed to provide video over copper lines to the home. It was called asynchronous because it could send data downstream to the subscriber faster (256Kbps-9Mbps) than upstream (64Kbps-1.54Kbps) to the provider. Different versions emerged based on the local telco’s ability and willingness to get a fiber link close to the neighborhood. They were soon generally called Digital Subscriber Lines (DSL) and they began to replace dial-up modems. High demand and competition from cable companies with high-speed coaxial lines pressured ISPs and telcos to adapt DSL technologies. DSL and new cable technologies that carried Internet traffic as well as television came to be collectively called “broadband” communications.

The broadband industry changed significantly after the 2000 election. Internet traffic grew at a fantastic rate during the late 1990s as individuals and corporations rushed to “get on the web” and the rhetoric of the “new economy” emerged and fueled investments in web-based companies and telecommunications providers. A temporary bubble emerged as many companies lacked the technology or business expertise to effectively profit from their organizations. Dot.coms such as Drkoop.com, eToys.com, Flooz.com, GeoCities, Go.com, Kozmo.com, Pets.com, theGlobe.com, and Webvan.com failed for a variety of reasons but mainly flawed business plans and the premature expenditure of investment capital. Similarly, many carriers such as Global Crossing, WorldCom and ISPs overestimated web traffic and built excess capacity. In the wake of the dot.com crash in 2000 and the telecom crash in 2002, a third of all CLECs filed for bankruptcy.

Cable companies began to offer Internet services and the power of the telcos grew. The Telecommunications Act of 1996 had maintained Computer II’s competitive distinctions (See video above) although enhanced services were essentially renamed “information services.” But FCC decisions made during the new administration would use this distinction to give incumbent telcos a major advantage. This action would have profound influence on the structure of the modern broadband/media industry.

In 2002, the FCC ruled that cable modem service was an information service, and not a telecommunications service. Cable companies became unregulated broadband providers and were exempted from the common-carrier regulation and network access requirements imposed on the ILECs.

Then in 2005, an FCC decision during the Bush administration effectively made telcos, companies unregulated ISPs. FCC WC Docket 02-33 allowed DSL to become an unregulated “information service.” This effectively repealed Computer II and allowed the ILECs such as Verizon and BellSouth to take over the ISP industry. ILECs were resistant to interconnect with the CLEC ISPs, claiming that sharing their network equipment was akin to subsidizing their competition.

The 1996 Act also allowed media companies to invade the other’s turf by removing regulatory barriers to entry to the once protected monopoly-controlled sectors. For example, broadcasters could move into broadband and carriers could offer content. It also allowed consolidation of different media companies, creating a new frenzy of mergers. Cable companies began to provide many broadband services and have merged with telcos (AT&T, Verizon, and Sprint) to form large integrated telecom-media companies.

Today, US broadband service is dominated by large integrated service providers such as AT&T, Comcast, Sprint, and Verizon. These companies are now trying to merge with content providers. AT&T is trying to merge with Time-Warner, Comcast has completed its merger with NBC, and Verizon is merging with Yahoo!, although a data hack slowed its progress.

Notes

[1] McCarthy, B. (1999) “Introduction to the Directory of Internet Service Providers,” Boardwatch Magazine’s Directory of Internet Service Providers. Winter 1998-Spring 1999. p. 4.
[2] Schiller, D. (1999) Digital Capitalism. Cambridge MA: The MIT Press. p. 31.

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AnthonybwAnthony J. Pennings, PhD is Professor and Associate Chair of the Department of Technology and Society, State University of New York, Korea. Before joining SUNY, he taught at Hannam University in South Korea and from 2002-2012 was on the faculty of New York University. Previously, he taught at St. Edwards University in Austin, Texas, Marist College in New York, and Victoria University in New Zealand. He has also spent time as a Fellow at the East-West Center in Honolulu, Hawaii.

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    Professor and Associate Chair at State University of New York (SUNY) Korea. Recently taught at Hannam University in Daejeon, South Korea. Moved to Austin, Texas in August 2012 to join the Digital Media Management program at St. Edwards University. Spent the previous decade on the faculty at New York University teaching and researching information systems, media economics, and strategic communications.

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