Victory for Vonage

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Yesterday a federal appeals court rejected Minnesota's attempt to regulate Internet-based voice communication like traditional telephone service. The U.S. Court of Appeals for the 8th Circuit upheld a lower court's determination that calls over the Internet are an "information service" rather than a "telecommunications service." Federal Communications Commission Chairman Michael Powell discussed the subject in his December Reason interview.

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  1. I realize libertarians generally believe that less regulation is better, but aren’t there some pretty serious market-distorting effects from placing a much higher tax and regulatory burden on one technology (landlines) over another (internet phones)?

  2. Joe,

    Yes, of course, there are. The answer is to regulate the first one less, not the second one more.

  3. mark, you don’t see the problem with that position?

  4. “Information service” vs. “telecommunications service”? Oh, that’s rich.

  5. joe:

    You think that the regulatory system surrounding land lines makes sense? Voice is just data now, so the justification for regulating voice had better be pretty good.

  6. What IS the justification for regulating Internet voice communication, anyway? With land phones, I can kind of see the argument that only one company owns the physical network, so we can’t let that one company gouge the consumer. But what is the perceived danger from unregulated Internet service?

  7. Jason, I’m not arguing in favor of the existing regulatory regime, or any other. I’m pointing out that letting one technology off the regulatory hook while keeping another on it is not a free market approach, it’s crony capitalism, a system of using government authority to favor a select industry.

    Maybe traditional voice telephony shouldn’t be taxed. But as long as it is, supporting an exemption for your favored technology is an anti-market position.

  8. or it’s the first step in getting rid of the second regulatory position, as VOIP’s success might point to the failures of regulated land lines more brightly.

  9. …or, dhex, it might allow them to claim that their business failures are the result of their competitors’ special treatment, and mask the genuine uncompetitiveness of their service.

    You know, like Fidel getting away with claiming that Cuba’s economy would be booming, if it weren’t for the sanctions.

  10. Joe-
    Of course by your standards, the solution would be to impose sanctions on OTHER countries as well, rather than remove them from Cuba.

  11. dhex, if you want to get rid of landlines’ regulations, work to get rid of landlines’ regulations.

    Setting up complicated, arbitrary systems of regulation that favor certain technologies can have unanticipated consequences, you know.

  12. Joe-
    Could you answer my question concerning WHY the Internet, or any part thereof, needs to be regulated? What are the dangers of an unregulated Internet? How will we consumers suffer as a result?

  13. Not exactly, Jennifer. Internet telephony is more comparable to a sector of Cuba’s economy than to the economy of a different nation, in this metaphor.

    Dropping the blockade on aluminium building supplies, but not wood, being exported to Cuba may well improve Cubans’ ability to afford construction materials. But it would also unfairly screw the lumber mills (actually, this understates the problem, since Cuban homebuilders are a much smaller share of lumbermills’ customers than American telephone owners are of the telephone companies’ customers), and lead to a certain amount of construction in Cuba using aluminum that would be better done with wood.

  14. Jennifer, I don’t know if it should. What I DO know is that “Setting up complicated, arbitrary systems of regulation that favor certain technologies can have unanticipated consequences.”

  15. Joe-
    So then fight to remove the old regulation, rather than push for the new. Saying, “The Internet should be taxed and regulated solely because the landlines are” is a little like a hundred years ago saying, “Since women are forbidden to vote, men should be, too.” Or, more recently, “Since black Southerners can’t vote without first paying an outrageously high poll tax, white Southerners should pay the poll tax, too.”

  16. joe-

    I do see your point, and I frequently argue in favor of things like revenue-neutral tax simplification to reduce the market distortions of gov’t policy.

    Although I will grant that it’s unrealistic to expect deregulation (or at least less taxation) of traditional telephony in the near future, I still don’t think that taxation should be extended to Voice over Internet (hereafter abbreviated VoI) to “even things out”. Here’s why:

    1) Although I’m no expert, my understanding is that the price advantage of VoI isn’t due solely to the tax situation. If so, then this technology isn’t taking off solely due to a regulatory loophole.

    2) Along the same lines, VoI offers significant flexibility and other advantages that traditional technology doesn’t enjoy. Once again, the rise of VoI isn’t due solely or even largely to a regulatory loophole, so it’s hard to say that this loophole is distorting the market.

    3) Of course, any crony capitalist could claim that they would survive even without gov’t assistance (be it direct assistance via subsidies, or indirect assistance via higher regulatory burdens on competitors), so they “deserve” their advantages.

    However, I suspect that taxation of VoI would be largely irreversible. If so, then that’s significantly different from something like my pet project of revenue neutral tax simplification (RNTS). RNTS wouldn’t increase the total gov’t burden, whereas taxing VoI would.

    Now, I might rethink things if a small VoI tax was accompanied by a cut in the taxes on traditional phone calls. Even then, however, I would be reluctant to support it. If untaxed internet telephony takes off and squashes other methods, the result would be a future where telephony is untaxed.

  17. “Jason, I’m not arguing in favor of the existing regulatory regime, or any other. I’m pointing out that letting one technology off the regulatory hook while keeping another on it is not a free market approach, it’s crony capitalism, a system of using government authority to favor a select industry.”

    Though I don’t support the current tax/regulatory structure for local loop telephony, I think one key difference here is that local loop services make use of the public infrastructure in a way that IP telephony services don’t. From an ISP’s perspective (whether cable, DSL, or dial-up), IP phone calls are just another service offered over the Internet, much like web browsing, streaming video, Kazaa, etc. So if you believe that a tax/regulatory structure similar to the one for local loop services should be put in place, it should be at the ISP level rather than the voice-over-IP service provider level.

    One prediction here: Because of a sensible regulatory regime, the abundance of venture capital, and the lack of monopoly protection of legacy revenue streams, America is going to be at the forefront of the global voice-over-IP boom. Just as it was at the forefront of the dial-up Internet boom. And just as an ill-conceived regulatory regime and monopoly protectionism have made it a laggard in the broadband Internet boom.

  18. The reason not to regulate VOIP? Because what we’re seeing in VOIP is markets attempting to overcome regulation by seeking the least-obstructed alternatives.

    Technology and the market forces that encourage its development are simply moving too fast for regulators now, and that speed will continue to increase — leaving government far behind. My household laughed as the government desperately tried to win judgements against Microsoft for things in Windows 95, even as Windows 2000 and XP were being released. The government cracks down on Kazaa just in time to see everyone moving from Kazaa to other distributed file-sharing systems. VOIP is no different.

    If VOIP is regulated, another technology will emerge to overcome or sidestep the regulation. 128-bit encrypted voice transmission. Distributed voice data networks. Peer-to-peer voice transmission. With a shareware server/client setup here at home, I’m voice-chatting with friends several times a week, totally under the regulatory radar.

    That aside: calling the morass of special market protections, subsidies, and mutual back-scratching currently applied to traditional phone companies ‘capitalism’ that’s in need of regulatory defense is… funny, in a sad way. If ever there was a crony-capitalist industry, it’s the phone companies. They’re almost the definitive example of ‘government-propped-up industry that routinely fucks their customers because they can’.

    It suggests that Joe would not know capitalism if it bit him on the ass. Seriously, regulation *always* leads to favoring one competitor over another. Crony capitalism is what you *want* — the inevitable outcome of any regulation — why would you object to it?

  19. Jennifer, ending taxation and regulation of traditional telephony is not going to happen in the short term. Even if that is your preferred outcome, it’s not a likely one. Like the Iraq war hawks, you need to consider the realistic, expected outcomes of your policy recommendations, not just the ideal you’d like to see.

    In 1970, would you have supported lowering the voting age to 18 for white people, but not for black people? Wouldn’t that be a good half step, like exempting one type of voice telephony from the regulation and taxes imposed on another type? What, don’t you support expanding suffrage?

    I suspect that thoreau is right when he claims that VOIP’s advantage is inherent in the technology, and isuldur wrong when he claims that it is created by the dual tax structure. I know he is wrong when he writes that regulation always favors one competitor over another – when two competetors are regulated the same way, neither is favored.

    Eric II, what public infrastructure is used in traditional telephony?

  20. Any initiation of force is wrong, therefore to fail to impose a tax cannot be wrong, no matter the sophistry employed.

  21. Thinking more about the differential taxation issue, this is one of those areas that left and right libertarians disagree on.

    It is, to me, an odd sort of criticism to say that while the regulation and taxation of an existing technology are outdated, allowing any new technology to come in the door without suffering the same fate would create more problems. I just don’t see it. The argument is really that our regulatory inertia is sufficient justification to move all taxes and regulations to the highest level that currently exists at any time. The difference in regulation is bad, but that hardly demonstrates that the problems caused by the difference are greater than the problems caused by increasing regulation and taxes over all forms of data transmission.

    Further, I think that there is a more accurate way of looking at a difference in regulation than describing it as ‘crony capitalism’ in the sense that the government picks favorites to win. In this case, the government is picking a loser. If we say that the government should make everyone losers, well, we all become losers. We are implicitly acknowledging that the regulation is harmful, but we are still saying that an industry wide increase in regulation will help consumers?

    Finally, this particular area is scary. We have largely irrational regulation and taxation on voice transmissions of a certain flavor. Moving that regulatory system to encompass digitally transmitted voice is identical to the expansion of an irrational regulatory system to cover the transmission of all 1s and 0s. There is no difference at all between VOIP and anything else streamed over the internet.

    We are faced with a new technology that illustrates the absurdity of our existing regulatory system. To say that the system won’t go away, so we’d better make all data transmission absurd to be fair seems shortsighted.

  22. “I know he is wrong when he writes that regulation always favors one competitor over another – when two competetors are regulated the same way, neither is favored.”

    That’s an extremely narrow, zero-sum view of technological development. There aren’t two competitors. There are an arbitrary number of competitors in each field, and an arbitrary number of fields. You can regulate A, and B will rise up to occupy A’s market share. Regulate B, and C will emerge. And so on.

    And the time lag between the development of a technology and the regulators’ comprehension of the technology is large enough that someone is always being favored. Every time you regulate, restrict, tax and fine, you inevitably create new market oppportunities for others providing a similar service in an as-yet unregulated field.

    Or would you propose that direct voice chat through, say, MSN Messenger *also* be regulated as the phone companies? Because that’s an easy alternative for me, at least, and if it’s the best alternative — something regulation of VOIP could make a possibility — I’ll use it, and so will others. That’s just one example of the myriad ways in which VOIP is not ‘the alternative’ but ‘an alternative’.

    Particularly in the field of communications, it’s ridiculous to think regulators can do more than favor one technology over another. Making it easier and more convenient to talk to each other is arguably the most accelerated field of human endeavor, and every day someone comes up with a new way to do it.

    Personally, I don’t care if the phone companies stay regulated, because it’s only a matter of time before they wither and die, and this would have been true regardless of how regulated or free they were. I don’t mourn the passing of the buggy whip industry, either.

  23. JL, “The difference in regulation is bad, but that hardly demonstrates that the problems caused by the difference are greater than the problems caused by increasing regulation and taxes over all forms of data transmission.” Nor do your comments demonstrate the opposite, that the “harm” done by regulation outweighs the distortions caused by unequal tax and regulatory systems.

    ” In this case, the government is picking a loser. If we say that the government should make everyone losers, well, we all become losers.” Um, telephone companies have managed to do pretty well under the regulations and taxes you decry. Do you think VOIP’s growth would seriously be hindered by treating it the same was old-school telelphony?

    “To say that the system won’t go away, so we’d better make all data transmission absurd to be fair seems shortsighted.” If the absurdity of the taxes are the problem, why extend those taxes’ lives by alleviating the symptoms?

  24. I will not mourn the passing of the “buggy whip” metaphor.

    “The genie’s out of the bottle” can happily die along with it.

  25. Thinking more about the differential taxation issue, this is one of those areas that left and right libertarians disagree on.

    Jason-

    I don’t think all differential taxation should be remedied with tax hikes. It depends on whether the tax is picking a winner or picking a loser.

    I would call it “picking winners” if the law says “All businesses except those doing (insert practice favored by lobbyists) shall pay a tax of such and such.” The exemption should be removed but the tax should also be cut, so that most people pay less but the gov’t isn’t picking a winner.

    And I might still support removing the tax altogether for other reasons, but I see the issue of selective taxation as being separate from the issue of taxation in general.

    On the other hand, if the law is that only those doing a particular thing have to pay a tax, then that’s a case of “picking losers” and the tax should be eliminated.

    Of course, VOIP doesn’t really fit either category, since it’s a business model that was tax exempt simply because nobody ever thought to tax it, rather than because the lobbyists got a loophole engineered. I usually oppose extending taxes to new technologies. Maybe part of it is my own personal bias toward new technologies, in which case maybe I’m no better than the lobbyists who want everybody else taxed. But I also figure that the longer a new innovation goes untaxed, the stronger the opposition will be when the gov’t finally tries to tax it.

  26. joe:

    “Nor do your comments demonstrate the opposite, that the “harm” done by regulation outweighs the distortions caused by unequal tax and regulatory systems.”

    At least we agree that resolving the differential regulation is not obviously the highest priority in all cases. Harm to whom is the question. Regulation is supposed to help the consumer and not the business, or I so often hear from regulation cheerleaders. What are the harms to the consumer that would be remedied by increasing regulation on VOIP, and what are the harms to the consumer that result from choosing to leave VOIP alone. My thesis here is that the regulation buys you exactly nothing other than an equally inhibited playing field. The big picture (for our glorious regulators) is that we want the most progress possible, and I can’t fathom how the application of outdated regulations helps us get there.

    “Do you think VOIP’s growth would seriously be hindered by treating it the same was old-school telelphony?”

    As compared to what it would be without such treatment? Yes.

    “If the absurdity of the taxes are the problem, why extend those taxes’ lives by alleviating the symptoms?”

    I’m sympathetic to this argument in all honesty. If rich white kids were locked up for posession, we’d have much better drug laws. If federal withholdings were prohibited and everyone were forced to pay taxes all at once, we’d have much lower taxes. The problem is that the regulatory scheme only becomes obviously absurd when you have something rational to compare it to.

  27. Semolina:

    How about the analogy of horse droppings to smog? I’m fond of that one.

  28. If taxing VoIP is desireable in order to not pick winners and losers, should we institute a 37-cent tax on all e-mails? How about a 37=cent tax on all faxs? Maybe we could use the new tax sources to drop the overall price of a stamp to a dime, regardless of method of transporting text. That’d be neutral, wouldn’t it?

    Just think: every post to Hit-and-Run would cost you a dime. What could possibly be fairer? Isn’t “fairness” the highest possible good of a tax system?

    Oh, I think I just made myself sick. Maybe I should call myself “Ad Nauseum” instead…

  29. Joe,

    Do you want to extend the FCC’s indecency oversight to HBO? Isn’t Time Warner getting an unfair advantage over “Local” broadcasters by being able to say “Somebody better whack that fucking bitch!” while CBS has to say “Somebody better whack that voting booth.” or some such nonsense?

    Maybe you DO want to see everything brought to the same high level of government control as the most regulated industry or activity. I’m sure it would be good for the penny ante local zoning business not to have to deal with competing authorities. But in the real world, productive people see it as a win to not have to pay phony fees and taxes to make a call through their cable modem.

    I can just see Joe in school, raising his hand, ‘ooh, ooh, ooh, Mrs. Smith, when you took away Jimmy’s baseball cards at recess you forgot to take Johnny’s! He’s got a Rollie Fingers in his back pocket!”

  30. Sorry, forgot Joe’s age – Substitute Honus Wagner for Rollie Fingers.

  31. Oooh, the famous Wagner T-206 was a tobacco card! joe got to fink on smoking, too!

    Mrs. Smith must have had a pleasant retirment, as that card in now worth upwards of $500K.

    Kevin

  32. joe: Jennifer, ending taxation and regulation of traditional telephony is not going to happen in the short term.

    Yes it will. Very soon. Within 10 yrs VIOP’s *successors* online will have almost displaced telephony, espcecially for long distance. So the regulation of and tax revenues from the latter will be moot/nothing. Praise Be the Internet God. The only remaining question is will we allow Leviathan to inhibit what we do “out here.”

    You statists say Yes. We who like dynamism say No.

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