WASHINGTON AND SILICON VALLEY AT THE CROSSROADS: GOVERNMENT REGULATION AND THE INTERNET

 

AMERICANS FOR TAX REFORM
POLICY BRIEF
1320 18TH STREET, N.W. - SUITE 200 - WASHINGTON, D.C. 20036 - 202-785-0266 - HTTP://WWW.ATR.ORG

 

by 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.

###

For more information about Americans for Tax Reform, visit http://www.atr.org.

 




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