Revenge of the Bellheads: how the Netheads lost control of the Internet

Abstract

Throughout their short, but volatile lives, Internet Service Providers (ISPs) have avoided having to satisfy traditional telecommunications regulatory requirements. ISPs do not operate as common carriers and do not have to pay access charges and make contributions to universal service funding. Having sponsored development of the Internet, many governments consider regulation anathema, despite the fact that ISPs no longer need incubation and many offer some services functionally equivalent to what regulated telephone companies provide. A dichotomy in regulatory treatment exists between ISPs and telecommunications carriers. A large difference in corporate cultures supports this dichotomy. Telephone company executives (Bellheads) may resent regulation, but they accept their fate and work creatively to exploit anomalies and opportunities to secure a regulation-conferred competitive advantage. Most ISP executives (Netheads) appear to embrace a libertarian attitude, strongly opposing any government involvement. Despite the clash of cultures, the telecommunications and Internet worlds have merged. Such convergence jeopardizes the ability of Netheads to avoid some degree of regulation, particularly when they offer services functionally equivalent to what their Bellhead counterparts offer. This paper will assess the regulatory consequences when telecommunications and Internet services converge in the marketplace and in terms of operating technologies. The paper identifies commercial developments in the Internet to support the view that the Internet has become more hierarchical and more like telecommunications networks. For example, the major Internet backbone providers, commonly referred to as Tier-1 ISPs now require smaller ISPs to pay for access rather than simply grant reciprocal “peering” rights. The paper concludes that ownership of the major Tier-1 ISPs and local facilities by incumbent telecommunications carriers provides the basis for management and control of the Internet. Additional opportunities for leadership results from incumbent Bellheads’ superior skill in working the regulatory process to their advantage. The paper suggests that Bellheads will outmaneuver Netheads particularly when the revenue siphoning effect of Internet-mediated services offsets the revenues generated from ISP leases of telecommunications transmission capacity.