Forbes: The Pony Express

IT IS JUST AMAZING. Rather than embrace digital communications, the regional Bells keep putting up roadblocks.

BellSouth and now US West are going to charge access fees to companies offering Internet telephony.

That is like charging a fee to water the Pony Express horses when the telegraph comes to town.

On the surface, though, it seems quite fair. AT&T must pass along 40% of its long distance revenues to the local providers, 20% on each end. If the phone call happens to be carried via the Internet, why should BellSouth not be compensated? A phone call is just a phone call, right?

Wrong. Data are data, and if you try to charge more for their transmission, they will find a way to go around you. The current price for long distance telephony is about 10 cents a minute. On the Internet backbone, which uses the same fiber as long distance but mixes voice packets with other data, the price for bandwidth equivalent to one telephone call can drop to a tenth of a cent per minute.

So why the stiff tariffs at the end points? The local telephone companies cite the costs of universal access (phone lines for the poor and rural markets). But there are lots of ways to pay for universal access: less corporate fat, lower dividends or maybe a federal subsidy. In short, it is not necessary to penalize progress.

If the access tariffs persist, telephone entrepreneurs will find a way around them. Some options:

Wireless. We don’t need your stinking wires. AT&T probably overpaid for McCaw Cellular, but didn’t care because the economics of bypass work in its favor. On its cellular calls, the long distance giant can spare itself the usual 20% tax at one or both ends.

Cable. We have our own wires. Cable is still questionable as a channel for telephony, but AT&T’s purchase of TCI implies that it’s worth trying.

Digital subscriber line. Rent us the wires. The Federal Communications Commission forces the regional Bells to sell pairs of wires to businesses and homes. A group of competitive local exchange carriers—such as NorthPoint, Rhythms Net and Covad—have popped up to compete with the regional Bells, using in some degree the Bells’ own hardware.

IP stack. Beat you at your own pricing game. This last one is my favorite, and almost practical. The mechanism that connects your PC to the Internet, called the Internet Protocol stack, takes the packets received and turns them into text or graphics or voice, and does the opposite on the way out. It used to be quite hard to implement an IP stack, but now it costs maybe $10—you can get one for your Palm Pilot.

Data are data, and if you try to charge more for their transmission, they will find a way to go around you.

If the regional Bells continue to charge huge sums for local access, I envision a very healthy business selling cheap $50 boxes that would sit under your phone and plug into the phone outlet. When you picked up your phone, the box—not the phone network—would provide a dial tone and figure out where you were dialing. If it were a local call, it would just pass it through, as there is no charge. If it were a long distance call, it would dial a local number, reaching a modem bank, and use packets to complete the call.

There might be a charge at the other end, since you could be calling a non-Internet phone. But if you were calling a similarly equipped IP stack phone, you would have bypassed the 20% tariffs at both ends.

Now let’s think of the implications. We all pay a flat $20 monthly fee for unlimited Internet access. I come home at night, log on and then log off before going to bed. On weekends, I will often log on Friday night and log off Sunday evening. Why not?—there’s no extra charge. So why shouldn’t I pay a flat fee for telephone service? If it is local-Internet-local call, there are no per-minute charges. Call your mom, leave the phone off the hook all night. Why not? Even better, the fiber-everywhere companies, like Qwest and Level 3, could someday offer unlimited calling, anywhere you wanted, for a flat $100 a month.