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POLICY BRIEF FROM AMERICANS FOR TAX REFORM
Washington and
Silicon Valley at the Crossroads: Government Regulation and the Internet
By: Ronald
Nehring
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.
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