ISPs Ready "Doomsday Defense" To Thwart FCC Rule Change by Brock N. Meeks Chief Washington Correspondent Washington -- Internet service providers are quietly discussing a strategy aimed at blunting the potentially devastating effect of a pending Federal Communications Commission rule change that could torpedo flat rate pricing and send Internet access rates skyrocketing. They call it the "Doomsday Defense." The "Doomsday Defense" relies on ISPs essentially turning themselves into telephone companies. Such a move changes the entire dynamics of the telecommunications landscape, says Doug Humphrey, chief technology officer of Digex, a Maryland-based ISP with a nationwide network. As Humphrey explains it, ISPs are currently "vendors" of the Bell companies, but if they become telephone companies, "suddenly, the scenario changes to a peer-to-peer relationship." And once an ISP "becomes a telephone company, they are automatically entitled to be paid access fees by the Bell telephone companies," Humphrey says. The plan is deceptively simple: Under new rules outlined in the Telecommunications Act of 1996, the Baby Bells are required to pay per minute fees for any call their customers make to another telephone company. Therefore, if an ISP is officially registered as a telephone company, it is entitled to collect access fees from local telephone companies on a per minute basis. At issue is a pending FCC rule change, which could be released as early as Friday, which would require ISPs to pay a fee to local telephone companies for each minute their customers remain hooked up to the Internet. Currently ISPs are exempt from paying this so-called "access fee." Ten years ago when the FCC first proposed levying these charges on what were then called "enhanced service providers," essentially commercial on-line services, the nascent on-line industry fought back, labeling the pending fee as a "modem tax." The FCC relented, granting the exemption to help foster the growth of on-line services. But the world looks very different today than it did a decade ago. Flat rate pricing didn't exist, neither did ISPs. The telephone industry now says the exemption should be lifted and the data traffickers made to pay the real cost of their customers' use of their local phone networks. If the exemption is lifted, few, if any, ISPs could afford to eat that cost and would be forced to pass the additional costs on to their customers. Such a move would essentially sound the death knell for monthly flat rate pricing, which is the predominate pricing model for the industry today. For an idea of the impact these access fees might have, look at one ISP, Netcom. If each of Netcom's 550,000 customers spent an average of an hour per day connected to the Net each day of the year, Netcom would have to pony up $48 million per year in access fees. This is based on a suggested per minute rate of $0.004 cents, as outlined by the FCC. (The Commission suggested a "default" range for such fees from $0.002-$0.004). "This is a case of 'be careful what you wish for because you just may get it,'" said a Bell company spokesman who requested anonymity after first agreeing to go on the record. His company is still working through what its official policy should be on the access charge issue, he said, "We're on the fence right now." The telephone industry, as a whole, is really a "house divided" on whether to support the lifting of the exemption, the Bell company spokesman said. "But this so-called 'Doomsday Defense' has a lot of people worried," he said. "The ISPs are smart guys... they've obviously thought about this. It's an intriguing idea." The idea of ISPs reinventing themselves as telephone companies is "too cute by half," says Sam Simon, president of Issues Dynamics, Inc., a Washington-based telecommunications consulting firm that works with several of the Bell companies. "I can put on a dress, say I'm a female, but that doesn't' make me one," Simon said, referring to the difficulty ISPs would have in convincing the FCC that they are actually telephone companies. The ISPs talking about a Doomsday Defense "must be smoking dope," he said. FCC Policy Analyst Kevin Werbach said there was nothing inherently worrisome, from a regulatory standpoint, that would prohibit ISPs from becoming telephone companies. "They would be subject to certain regulations, like other telephone companies, which they aren't used to dealing with," he said. That ISPs are floating the idea of a doomsday defense isn't causing all Bell companies to sweat bullets. The "thesis of a doomsday scenario is that it isn't," says Jeffery Ward, of Nynex's Government Affairs department. Nynex is currently paying access fees or "termination charges" to companies in New York City that also provide Internet service," Ward said, and the company hasn't crumbled. Ward said his company is "paying a lot of money for a lot of traffic" flowing from Nynex customers to competing local phone companies. "Obviously it's a cash-flow-friendly situation for those providers," he said, "but that's the way the rules work." Nynex "welcomes the competition," Ward said, noting that the company is no stranger to competition. New York City is the most competitive market in the U.S. However, he cautioned ISPs thinking of jumping into the regulatory deep-end of becoming a telephone company. That move "carries significantly more burdens than ISPs are used to," he said. "If they want to undertake those responsibilities, more power to them," he said. IDI's Simon, after thinking out loud about the Doomsday Defense, found what he thinks is the final coffin nail on the idea. "Who do you think is going to end up paying for the access fees Bell companies would be paying to ISPs?" Simon asked. "The telephone customer," he added quickly, answering his own question. "So do the ISPs or their customers really win anything? I don't think so."