I. INTRODUCTION: THE WIRELESS ROAD LESS TRAVELED--TWO
     ROADS DIVERGED
     A. Once Again, Whither Wireless?
     B. Charting a Federal Course for CMRS--The FCC as
        Wilderness Guide
 II. WIRELESS LANDSCAPE IMPROVEMENTS--1998-2003
III. PERSISTENT PROBLEMS: MISGUIDED LEGAL ANALYSES AND





				

				
				 
				


     STATE REGULATORY BURDENS
     A. Conflicting Court and Commission Decisions
        1. Section 332 Cases: Same Laws and Similar Facts Yield
           Inconsistent Holdings
        2. Central Office Telephone and CMRS Preemption
           Law
        3. Bastien v. ATT Wireless Services--Complete
           Preemption Redux
        4. The Burdens of Universal Service Levies
        5. Epidemic of Class Action Suits Against CMRS
           Providers
     B. Continuing Federal, State, and Local Burdens on
        CMRS
        1. State and Local Taxation
        2. The Mobile Telecommunications Sourcing Act
        3. Federal Fees
        4. The Inefficiency of Multiple Regulatory and Tax
           Structures
 IV. NEW CHALLENGES: "CONSUMER PROTECTION" SENTIMENT,
     CONVERGENCE AND OPTIMIZING COMPETITION
     A. Consumer Protection Legislation
     B. Convergence
        1. Wi-Fi and the Proliferation of Unregulated VoIP
           Services
        2. Would Regulation of VoIP Sound the Death Knell for
           Wi-Fi and/or TCP/IP?
     C. Optimizing Competition
  V. REGULATION'S IMPACT ON INVESTMENT: LESSONS FOR
     AMERICAN WIRELESS FROM EUROPE'S SPECTRUM
     MISADVENTURES AND U.S. AIRLINE DEREGULATION
     A. Two Models of Licensing "Scarce" Spectrum
        1. The American Market-Based Spectrum Allocation
           Model
        2. The European State-Sponsored Spectrum Allocation
           Model
     B. Promoting Competition and Encouraging Network
        Investment: Deregulation and Regulatory Consistency in
        Nationally-Networked Industries--The Case of Airlines
        1. Deregulation and Consolidation: The Airline
           Industry
        2. Lessons for CMRS from Airline Deregulation
 VI. THE ROAD AHEAD: REGULATORY ECONOMY, FACILITATED
     INVESTMENT, LIMITED TAXATION
APPENDIX 1

I. INTRODUCTION: THE WIRELESS ROAD LESS TRAVELED--TWO ROADS DIVERGED ...

In May of 1998, the Authors surveyed America's wireless terrain in a Federal Communications Law Journal article (1) and observed that commercial mobile radio services ("CMRS") stood at a pivotal crossroads. (2) One road led to a new land envisioned by the Omnibus Budget Reconciliation Act of 1993 ("1993 Act") (3) and the Telecommunications Act of 1996 ("1996 Act") (4)--a deregulated landscape fostering competition, investment, and regulatory consistency through a uniform federal framework. The other road led back to the far country of the original Communications Act of 1934 ("1934 Act") (5)--a regulated, static industry landscape preserving the legacy of dual, and often conflicting, federal and state jurisdictional regimes tied to artificial geographical and political boundaries and onerous state burdens.

>From this crossroads, the Authors looked back at the history of the 1934 Act and across the ocean to the enviable wireless position held by most European mobile carriers and posed the question: "Whither American wireless?" The Authors argued forcefully that unleashing the full potential of wireless communications in the United States would require both a frank acknowledgement that the unique nature of wireless technologies transcends old categories of state and local networks and an unblinking acceptance of Congress's vision for a national regulatory scheme. This overarching wireless framework marked by federal forbearance and extremely limited state regulatory involvement--was essential to induce the nationwide build-out of a robust wireless communications infrastructure capable of serving customers where they live, work, study, and play.

Yet, many court cases and regulatory decisions since then have struggled to accept this federal "new world order" for wireless prescribed by Congress and identified by the Authors. Presently, the Authors believe that entrenched, regressive attitudes towards CMRS have enticed some policymakers to envision pouring this promising new wine back into yesterday's casks of a balkanized system that ignores the deregulatory framework spelled out by Congress in the 1993 and 1996 Acts. (6) As such, the time appears right to revisit the wireless terrain five years down the road from 1998 to glean the hard-won lessons of the past half decade and the best policy prescriptions for tomorrow.

A. Once Again, Whither Wireless?

Today, the broad telecommunications terrain is littered with the steaming wrecks of failed companies, the struggling remnants of former titans (AT&T, MCI/WorldCom), and gaping potholes of regulatory uncertainty. Scholarly journals and publications are filled with explications of the "parade of horrors" (7) in the telecommunications sector (including corporate fraud, distraught shareholders, overcapacity, commodification of some services, price increases for others, decreasing competition, and investors chilled by constant uncertainty). (8) Even more postmortems detail "what went wrong" with the once lofty promises promoted by many who saw the 1996 Act as a chance to build "castles in the sky." Some even blame the tarnished telecommunications sector for dragging down the U.S. economy as a whole. (9) Yet, important lessons have been learned by those who have managed to survive, and potentially vibrant CMRS, wireless fidelity ("Wi-Fi") and voice over Internet protocol ("VoIP") innovators stand poised on wireless, cable, and telecommunications platforms for the final assault on the status quo of the last century's communications models.

Perhaps most prominently, the wireless industry stands out as a battered but promising survivor of the 1990s telecommunications saga. While facing its own set of significant challenges since 1998 (including costly and complex state and federal mandates, taxes and fees, unpredictable regulation and court decisions, and huge investments in the build-out of their networks), on the whole, wireless carriers have--with the notable exception of Nextwave--avoided the bankruptcies and liquidations encountered by emerging wireline operators. Instead, the wireless industry's past half decade has been marked by increased competition and consumer demand, innovative new products and features, significant debt reduction and balance sheet revival, service improvements, and delivery on the promises of "convergence."

What was done right in this area that helped to set CMRS apart? Will wireless operators be able to improve in the current environment? The Authors believe an examination of the CMRS industry's evolution, its still-looming barriers, and its prospects for the future will provide a useful road map for this critical industry in the 21st century.

B. Charting a Federal Course for CMRS--The FCC as Wilderness Guide

This Article explores legal and policy developments affecting CMRS providers since 1998 in the overall context of national and international telecommunications industry regulation and other networked industries. The Authors conclude that while the amendments to Sections 332 and 2(b) in the 1993 Act give the Federal Communications Commission ("Commission" or "FCC") exclusive, plenary regulatory jurisdiction over CMRS providers, (10) many courts and regulators have failed to recognize this fact--at great cost to industry and consumers. These failures severely impede wireless companies' ability to optimize their inherently national networks as well as their sales, marketing, and billing services. The Authors believe that despite strong overall growth and technological development in the post-1998 CMRS marketplace, the threat of continued inconsistent treatment of wireless companies by judges and regulators stifles investment opportunities, subverts Congress's deregulatory vision, and may ultimately frustrate CMRS's role as the engine of the next stage of technological development.

But which road taken in 2004 and beyond will best achieve these long-term aims of deregulation, innovation, and competition? The Authors believe that the Commission is the appropriate guide to lead the wireless sector out of the current morass and into the full promise of convergence. As the "expert agency" designated in American administrative law structure (11) to be the implementer of laws in complex policy areas, the Commission is the right body to reiterate and implement the federal framework for CMRS laid out by Congress in 1993 and 1996. To rectify the problems identified in this Article and realize the full potential of wireless technologies, the Commission should:

* Overcome political concerns and boldly state the imperative for minimal state regulatory involvement in wireless matters. Clear, well-articulated Commission decisions emphasizing the federal framework for wireless are much more likely to generate judicial deference than Commission orders which somewhat quixotically seek to placate all constituencies;

* Proactively submit clarifying comments to state PUC proceedings affecting wireless carders, just as state regulators now file comments at the Commission. This new commitment by the Commission to "regulatory economy" would shave years off the current process for determining the correct boundaries for state/federal action and greatly improve regulatory predictability for carders and their investors.

Only such a major recalibration of the Commission's approach will address the recurrent problems in the wireless sector and generate the increased competition, convergence, innovation, and regulatory predictability that have so far eluded policymakers, consumers, and industry. Without this shift in Commission leadership, these bright promises for CMRS and the telecommunications sector as a whole will remain constantly beyond the horizon and still further down the wireless road less traveled.

II. WIRELESS LANDSCAPE IMPROVEMENTS 1998-2003

The five-year period from 1998 to 2003 resulted in tremendous growth in the wireless marketplace. Notwithstanding the significant gains in dispatch and messaging services, this period (see Appendix 1) produced dramatic net increases in gross revenue, subscribers, nationwide penetration rates, and average minutes of use for mobile telephony services. (12) In 1998, legacy wireline monopoly networks remained the dominant mode of communication. By 2002, some household statistical data supported the view that CMRS was approaching the status of a "moderate substitute" for fixed wireline monopoly networks. (13)

"Intense" (14) and "fierce" (15) price competition in the provision of CMRS services have also led to continuous decreases in average consumer prices since 1998. (16) Finally, the last half decade also brought the nearly universal transition from analog to digital wireless services (see Appendix 1) and a meteoric rise in the use of mobile data services. (17)

Unprecedented levels of development and innovation in wireless technology have also marked the years from 1998 to 2003. Economists and industry analysts point to continuing technological innovation as the single most important growth factor affecting the wireless marketplace. (18) Today, wireless telephony exemplifies "technological convergence" (as well as the obsolescence of old categories) better than any other industry. (19) Mobile telephones have become the indispensable "Swiss Army knife" of the 21st century and are quickly evolving into a substitute for laptop computers. (20)

A single wireless device may combine mobile telephony, Internet services (e.g., Web browsers, e-mail, and instant messaging), digital photography, organizational tools (e.g., personal digital assistants), productivity applications and interfaces (e.g., Microsoft Office applications), dispatch and Nextel's Direct Connect or walkie-talkie services, paging services, gaming services, music and video recording and playback capacity, storage capacity, GPS services, and streaming music and video services (e.g., video recording and content display from Idetic and Sprint PCS).

Additionally, mobile telephones produced since 1998 embody significant reductions in size, weight, and, perhaps most importantly, power consumption. Many companies are now working together to standardize operating systems, applications, and network protocols for mobile telephones. (21) Local number portability between CMRS providers, or the preservation of mobile telephone numbers, is now in the process of remaking the industry (although this FCC mandate presents its own set of challenges for the wireless industry). (22)

Other innovative wireless services are also flourishing. Wi-Fi (commonly identified under the IEEE 802.11b/g standard and Bluetooth) technology has brought wireless networking to the mass market and enabled a surge in purchases of new appliances, applications, and devices. Blackberry and Sidekick mobile devices are fast becoming the de rigueur business tool of executive America. Enhanced 911 ("e911") services are now available on many mobile telephones, thus allowing emergency personnel to respond faster and with greater geographic accuracy. In addition, ultra-wideband sensors now monitor the location of emergency personnel, for example, who may be trapped in a fire or may be in need of medical service.

III. PERSISTENT PROBLEMS: MISGUIDED LEGAL ANALYSES AND STATE REGULATORY BURDENS

Despite these impressive advances since 1998, (23) the question today for policymakers, legislators, and industry is whether consumers will benefit more from market-based carrier practices adopted in response to competition or from well intended, but often misguided, assistance provided by regulators and judges. In passing the 1993 Act, Congress expressly acknowledged that the unique interstate characteristics of wireless communications necessitated a new deregulatory environment free from the artificial categories tying regulation to state geographic boundaries and a regulator's view of necessary levels of investment, service cost, and quality. (24) Congress addressed very real problems through the 1993 Act. The regulation that existed in about half of the states before [implementation of the 1993 Act] was clearly harmful to consumers. States with price or entry regulation had higher prices and lower output relative to states that did not have such regulation. (25)

Since then, however, realization of Congress's federal regulatory framework for wireless (26) has stalled due to persistent "attempts by some courts and state and local entities to shackle new wireless service to old regulatory categories." (27)

A. Conflicting Court and Commission Decisions

As detailed in the Authors' 1998 article, Congress amended Section 2(b) in the 1993 Act to establish a federal jurisdictional scheme for CMRS services that is the subject matter of Section 332. (28) As revised in 1993, Congress created a statutory "fence" delineating national boundaries for a CMRS regulatory framework. Instead of merely "fencing out" state regulation addressing "the entry of or the rates charged by any commercial mobile service or any private mobile service," (29) Congress amended Section 2(b) to grant the Commission exclusive jurisdiction

   over wireless "charges, classifications, practices, services,
   facilities, or regulations for or in connection with intrastate
   communication service by wire or radio"--leaving very little
   territory for the state regulators to legally "fence in." In fact,
   all that is left for [state regulation] under the law are "other
   terms and conditions." (30)

This regulatory fence "is a major factor in the wireless success story." (31) Yet, despite establishing a comprehensive and uniform federal regulatory framework for CMRS providers, legal and administrative developments since 1998 are frustrating achievement of Congress's vision for wireless. Several recent decisions continue to misconstrue this national framework by preferring and erroneously imposing a classic preemption analysis to a Section 2(b) analysis when analyzing the "other terms and conditions" (32) language. Such cases threaten to broaden state regulatory jurisdiction at the expense of Congress's intended federal competitive framework.

1. Section 332 Cases: Identical Laws and Similar Facts Yield Inconsistent Holdings

Previously, the Authors concluded that the vestigial state regulatory authority over CMRS services is derived solely from the "other terms and conditions" clause of Section 332(c)(3)(A). (33) The "rates and entry" language of Section 332(c)(3)(A), read in conjunction with Section 2(b), should therefore preempt all other forms of state regulation over CMRS providers. At that time, however, the interpretation of "other terms and conditions" was subject to considerable litigation and uncertainty. For example, two representative pre-1998 U.S. District Court decisions, involving the same defendant and similar CMRS rate plans, demonstrate the inconsistent, unpredictable and often fact-specific analysis used to determine whether state claims are best characterized as "other terms and conditions" or federal "rate or entry regulation."

In DeCastro v. AWACS, (34) a New Jersey federal district court considered claims of deceptive and undisclosed billing practices arising from the defendant's alleged practice of charging for noncommunication time and rounding up minutes for billing purposes. The DeCastro court held that such consumer fraud claims were not preempted by Section 332(c)(3)(A) since "the claims ... in this case challenge a billing practice, not a rate or market entry." (35) Addressing the interplay between Sections 2(b) and 332(c)(3)(A), which creates a federal regulatory framework for CMRS, the DeCastro court reasoned that

   a "general framework" does not rise to the level of an affirmative
   and clear congressional intent to make causes of action challenging
   a provider's billing practice removable to federal court....

      As emphasized repeatedly in Supreme Court and Third Circuit
   jurisprudence, to find complete [preemption], there must be an
   affirmative and clear indication of Congress'[s] intent that the
   Communications Act provides an exclusive federal remedy for the
   plaintiffs' claims. (36)

The DeCastro court relied (37) on another court's decision in Esquivel v. Southwestern Bell Mobile Systems Inc., (38) involving similar issues. The Esquivel case was a class action challenging the validity of a $200 early termination fee for cancellation of a service agreement. In granting the motion to remand to state court for lack of preemption, the district court stated that "the liquidated damage provision here is a 'term and condition' of the agreement rather than a rate" (39) because "332(c)(3)(A) specifically declines to prohibit the states from regulating terms and conditions." (40)

In contrast, In re Comcast Cellular Telecommunications Litigation (41) illustrates the divergent interpretations given to Section 332(c)(3)(A) and the corresponding difficulty of defining rate or entry regulation. Despite involving the same basic CMRS rate plan addressed in DeCastro, (discussed supra), the Comcast court reached the opposite result. The issue before the Federal District Court for the Eastern District of Pennsylvania in Comcast concerned whether four claims of consumer fraud, arising from the defendant's alleged practice of charging for noncommunication time and rounding up minutes for billing purposes, were preempted by Section 332(c)(3)(A). In finding that the four claims were preempted, the Comcast court first addressed the federal regulatory framework and plenary authority granted to the Commission:

   In furtherance of its goal of fostering rapid and uniform
   development of the CMRS industry through deregulation, Congress gave
   the FCC plenary authority to forbear from regulating CMRS providers
   under many of the common carriage provisions of the Act. 47 U.S.C.A.
   [section] 332(c)(1)(C). In addition, sole authority to address
   violations of the Act by CMRS providers was vested with the FCC and
   the federal district courts. (42)

Recognizing the "doctrine of artful pleading," (43) the court explained that "a careful reading of the complaint and the remedies sought by the Plaintiffs demonstrates that the true gravamen of the complaint is a challenge to Comcast's rates and billing practices." (44) The court further justified its preemption holding by explaining that:

   [The Plaintiff's complaint] attacks the reasonableness of the method
   by which Comcast calculates the length and, consequently, the cost
   of a cellular telephone call. As such, the Plaintiffs' claims
   present a direct challenge to the calculation of the rates charged
   by Comcast for cellular telephone service. The remedies they seek
   would require a state court to engage in regulation of the rates
   charged by a CMRS provider, something it is explicitly prohibited
   from doing. (45)

The conflicting holdings in these two Section 332 cases were repeatedly replicated by courts across the nation between 1998 and 2003, (46) yielding scant predictability for wireless carriers and their investors.

2. Central Office Telephone and CMRS Preemption Law

Aside from reaching entirely different outcomes when reviewing similar billing practices, the DeCastro, Esquivel, and Comcast decisions highlight the divergent analysis used by courts interpreting "rate regulation." This inconsistency was further complicated by the Supreme Court's ruling in AT&T Co. v. Central Office Telephone, Inc. (47) In the context of Title II long-distance regulation, Central Office Telephone addressed the issue of whether the federal filed rate doctrine (48) preempts "state-law contract and tort claims based on a common carrier's failure to honor an alleged side agreement to give its customer better service than called for by the carrier's tariff." (49) In ruling that the state claims were preempted by federal law, the Court overturned a Ninth Circuit decision (50) finding the "filed rate doctrine inapplicable '[b]ecause this case does not involve rates or rate-setting, but rather involves the provisioning of services and billing.'" (51) Explaining the Court's holding, Justice Scalia reasoned that "[a]ny claim for excessive rates can be couched as a claim for inadequate services and vice versa." (52)

Uncertainty about whether the Court's conclusion in Central Office that Title II billing practices amounted to rate and entry regulation applies to CMRS providers spurred a great deal of litigation in the years following 1998. Interestingly, and perhaps foreshadowing the resolution of this question, the reasoning of Justice Stevens' dissent in Central Office ultimately became the majority position for resolving this question. As set forth by Justice Stevens:

   More akin to [Central Office Telephone] is Nader v. Allegheny
   Airlines, Inc., in which we held that a common-law tort action for
   fraudulent misrepresentation against a federally regulated air
   carrier could "coexist" with the Federal Aviation Act. To a limited
   degree it may be said that here, as in Nader, "any impact on rates
   that may result from the imposition of tort liability or from
   practices adopted by a carrier to avoid such liability would be
   merely incidental." If the Communications Act's saving clause means
   anything, it preserves state-law remedies against carriers on facts
   such as these. (53)

Shortly after the decision in Central Office Telephone, the Commission responded (54) to a request by Southwestern Bell Mobile Systems ("Southwestern" or "SBMS") to address six questions (55) central to resolving numerous class actions filed in state and federal courts challenging the billing practices of CMRS providers (including charging for calls in whole-minute increments and charging subscribers for incoming calls). Relying partially upon the decision in Comcast, the Commission held as a preliminary matter that "Section 332(c)(3)(A) bars lawsuits challenging the reasonableness or lawfulness per se of the rates or rate structures of CMRS providers." (56) The Commission then addressed each of the six questions individually--four of which bore directly upon the issue of whether state law is preempted by Section 332(c)(3)(A). First, the Commission granted Southwestern's proposed ruling that "there is a 'general preference that the CMRS industry be governed by the competitive forces of the marketplace, rather than by governmental regulation.'" (57) Second, the Commission interpreted Section 332(c)(3)(A)'s use of the phrase "rates charged by" to "include both rate levels and rate structures for CMRS and [held] that the states are precluded from regulating either of these." (58) Finally, the Commission addressed two separate, but related, proposed rulings that questioned whether Southwestern's specific billing practices were governed by federal law and whether states could directly or indirectly challenge "rates charged" by CMRS providers. On this final point, the Commission agreed with Southwestern that "states do not have the authority to prohibit CMRS providers from charging for incoming calls or charging in whole minute increments." (59) However, the Commission balked at giving its complete support for a plenary federal regime by noting that "[w]e do not agree ... that state contract or consumer fraud laws relating to the disclosure of rates and rate practices have generally been preempted with respect to CMRS [and] ... fall within 'other terms and conditions.'" (60) The Commission therefore upheld the plenary federal scheme for "rate and entry regulation," but also adopted a narrowed scheme allowing for the incidental "non-preempted" framework as envisioned by Justice Stevens in Central Office Telephone. (61)

3. Bastien v. AT& T Wireless Services--Complete Preemption Redux?

The Central Office Telephone case, however, led the Seventh Circuit to a completely different conclusion about the preemptive force of Section 332(c)(3)(A) than was reached by the Commission in the SBMS Ruling. In Bastien v. AT&T Wireless Services, (62) the Seventh Circuit considered whether breach of contract and consumer fraud claims against a CMRS provider were properly preempted by Section 332 and removed to federal court. (63) The Seventh Circuit relied partially on Central Office to get to the heart of the state claims against wireless carriers:

   In practice, most consumer complaints will involve the rates charged
   by telephone companies or their quality of service. As the Supreme
   Court recognized in Central Office Telephone, a complaint that
   service quality is poor is really an attack on the rates charged for
   the service and may be treated as a federal case regardless of
   whether the issue was framed in terms of state law. (64)

By finding in favor of the defendants, the Seventh Circuit thus upheld the federal plenary framework promulgated by Sections 332 and 2(b). (65) The court found that the plaintiff's complaint, "although fashioned in terms of state law actions, actually challenges the rates and level of service offered by AT&T Wireless, an area specifically reserved to federal regulation." (66) Because the plaintiff in Bastien challenged only the validity of the jurisdiction, and not the dismissal of his suit under Rule 12(b)(6) based on the preemption afforded by 332, the suit was dismissed.

Many courts initially followed the Seventh Circuit's reasoning in Bastien that Section 332 completely preempts state rate or entry regulation. (67) However, several other subsequent cases soon distinguished or criticized the Seventh Circuit's preemption holding in Bastien. (68) Despite involving similar claims that CMRS providers were violating state law on unlawful and unfair business practices, the California Court of Appeals in Ball v. GTE Mobilnet (69) noted that the plaintiff's claims were "more directly related to 'the rates charged' than the challenges found preempted under section 332(c)(3)(A)" in Bastien. (70) In sustaining the defendant's demurrer--without directly applying the Bastien decision--the court held that the plaintiffs state law claims were preempted.

   In the end, the gravamen of plaintiffs' complaint, as they
   themselves allege, is that the defendants' actions have resulted "in
   subscribers, including plaintiffs, being overcharged for service."
   From this description, it is clear that plaintiffs challenge the
   rates charged by defendants. If the states could still regulate in
   the context presented by the plaintiffs here, that would undermine
   the 1993 amendment to section 332(c)(3)(A), and that statute would
   not have "dramatically revise[d] the regulation of the wireless
   telecommunications industry." (71)

In Naevus Int'l, Inc. v. AT&T Corp., (72) the New York Superior Court considered whether federal law preempted claims (73) seemingly identical to those litigated in Bastien. Yet in comparing the case to Bastien, the court stated that "[u]nlike the complaint in Bastien, the instant complaint does not attack defendants' access to the market or demand any judgment that restricts market entry." (74) While the Naevus court dismissed a breach of contract claim for poor quality of service, relying upon Bastien's prohibition of state rate and entry regulation, it upheld "plaintiff's causes of action for deceptive acts and practices, false advertising and common law fraud [to] be litigated in state court. Like the cases involving a failure to disclose certain billing practices, plaintiffs' statutory claims do not require the court to engage in retroactive rate-setting." (75)

The line drawing as to whether billing practices involve "rate-setting" continued in two other post-Bastien cases, Brown v. Washington-Baltimore Cellular, Inc. (76) and Gilmore v. Southwestern Bell Mobile Sys., Inc.. (77) In Brown, the complaint asserted that state law prohibited late fee charges by the wireless carrier and sought damages based on the excessive late fees. (78) In rejecting complete preemption, the Brown district court found that the challenge to the validity of late fee charges was not precluded by the Section 332 ban on rate regulation. (79) Specifically interpreting "other terms and conditions" as requiring a case-specific factual inquiry, the court reasoned that "any legal claim that results in an increased obligation ... could theoretically increase rates.... Congress did not preempt all claims that would influence rates, but only those that involve the reasonableness or lawfulness of the rates themselves." (80)

An example offered by the court was a claim of false advertising that results in greater costs to inform consumers of charges, which could be manifested as high rates. (81)

In Gilmore, similar to the Naevus decision, the United States District Court for the Northern District of Illinois split the preemption baby. By applying a fact-specific inquiry into whether the plaintiff's claims required proof that rates or fees were "unreasonably high" (82) or "unjust," (83) the court held that all but one of plaintiff's claims for violation of state law consumer fraud and billing practices were preempted.

After the Seventh Circuit decision in Bastien, as originally promised in the SBMS Ruling, (84) the Commission issued a Memorandum Opinion and Order (85) in response to a Petition for Declaratory Ruling filed by the Wireless Consumers Alliance ("WCA Petition") to resolve whether, as a matter of law, the Communications Act preempts state courts from awarding monetary damages as relief against CMRS providers for violating state consumer laws or to resolve disputes involving state contract or tort law. (86) The WCA Petition came in response to the increasing uncertainty wrought by conflicting fact-specific Section 332 court decisions. The WCA argued that "CMRS providers are not endowed with a special status in the market place which shields them from state laws which regulate normal commercial practice." (87) The response of the Commission to the WCA Petition, however, preserved the trend of fact-specific, case-by-case analysis by disregarding the federal framework for CMRS intended by Congress:

   Section 332 does not generally preempt the award of monetary
   damages by state courts based on state tort or contract claims. (88)

      [T]he award of monetary damages based on state contract or tort
   causes of action is not necessarily equivalent to rate regulation
   and thus is not generally preempted by Section 332. We further
   conclude that the award of monetary damages in these types of causes
   of action would generally fall under the terms and conditions
   provisions of Section 332, which can be the subject of state action.
   Finally, we conclude that whether a specific damage award or damage
   calculation is prohibited by Section 332 will depend on the specific
   details of the award and the facts and circumstances of a particular
   case. (89)

In support of its conclusion, the Commission found the filed rate doctrine "inapposite because there are no filed rates or tariffs for CMRS services." (90) Subsequently, the Commission found that filed rate doctrine cases (e.g., Central Office) "regarding the issue of whether awarding monetary damages is tantamount to ratemaking" were "inapplicable." (91) The Commission thus adopted an interpretation of Section 332 that finds preemption only where express rate or entry regulation occurs, notwithstanding the well-reasoned cases supporting an interpretation of Section 332 as broadly excluding any state claims that may affect rate or entry regulation. In a subsequent Order on Reconsideration, (92) issued in response to a petition by the Cellular Telecommunications Industry Association ("CTIA"), the Commission affirmed its position in the WCA Order and again rejected the arguments that "damages awards are in fact retroactive rate adjustments" and "that the logic or analysis of the filed-rate doctrine cases should apply." (93)

The effect of the Commission's WCA Order was readily apparent in Union Ink Co. v. AT&T Corp. (94) As in previous Section 332 cases, the Union Ink court considered "the extent to which the statutory language expressly pre-empts a state court from awarding damages against providers of cellular telephone service based upon state statutes dealing with consumer fraud or under the state's common law regarding fraud or negligent misrepresentation." (95) After a detailed review of Bastien and relying upon the Commission's WCA Order, the court held:

   On the basis of the analyses employed by the FCC and several other
   courts, especially those in Ball, Naevus, and Spielholz, and for
   substantially the same reasons expressed in those cases, we conclude
   that plaintiffs' State law claims for relief based on the Consumer
   Fraud Act, common law fraud, and negligent representation are not
   barred by federal law. (96)

Other cases following Union Ink reasoned similarly that only express or overt rate or entry regulation by a state (an increasingly narrow set of actions) is preempted by Section 332. (97) The majority of these cases generally distinguish the Bastien decision as finding preemption only where there are purely direct attempts by a state to regulate rates or entry of a CMRS provider. (98) Thus, as a result of this serpentine line of cases, in 2004 realization of Congress's deregulatory and federal framework, and the concomitant growth of the domestic wireless industry, remains, at best, uncertain.

4. The Burdens of Universal Service Levies

In addition to conflicting court decisions, the question of whether "other terms and conditions" in Section 332(c)(3)(A) allows nonfederal universal service levies against CMRS providers (99) continues to cast shadows of uncertainty over the wireless arena. In 1998, the Commission relied on reasoning in its Universal Service Report and Order (100) to "find that section 332(c)(3) does not preempt [a state] from requiring CMRS providers to contribute to state [universal service] mechanisms." (101) The second sentence of Section 332(c)(3)(A) provides the primary basis for challenges to state universal service requirements:

   Nothing in this subparagraph shall exempt providers of commercial
   mobile services (where such services are a substitute for land line
   telephone exchange service for a substantial portion of the
   communications within such State) from requirements imposed by a
   State commission on all providers of telecommunications services
   necessary to ensure the universal availability of telecommunications
   service at affordable rates. (102)

Instead of interpreting the conditional language "where such services are a substitute for land line telephone exchange service" by its plain meaning, (103) as a mandatory condition for any state universal service regulation, the Commission and courts have interpreted the condition only to modify the first sentence--which prohibits direct or express "rate and entry" regulation. (104)

Since 1998, the majority of courts that have considered this issue have found that state universal service contributions by CMRS providers fall under the "other terms and conditions" language, rather than constituting forbidden rate or entry regulation by a state or local government, (105) In upholding state universal service levies, most courts (106) have looked beyond the plain language of Section 332 (107) to the broad language of Section 254(f) (108) that requires universal service contributions from intrastate telecommunications providers. Continuing to ignore the Iowa Utilities decision (109) and its corresponding reliance on the Section 2(b) "fence," the Commission and most courts have examined Sections 332 and 254 in isolation and found no statutory conflict between the two sections. (110) Notably, only the court in Metro Mobile CTS, Inc. v. Dep't of Pub. Util. Control (111) found that universal service fees do fall under "other terms and conditions" of Section 332. Several courts criticized Metro Mobile, however, because it was decided prior to the Commission's Pittencrief Order and gave Section 254(f) minimal treatment. (112)

In one case, the narrow construction of Sections 332 and 254, applied by the majority of courts since 1998 to impose state universal service contributions on wireless carriers, was even extended to permit the collection of local universal service fees. In AT&T Communications of the Pacific Northwest, Inc. v. City of Eugene, (113) the plaintiff CMRS provider challenged the validity of a city ordinance imposing a registration fee on cellular providers. The City of Eugene ordinance specifically required any company offering telecommunications services through a facility located in the city to pay an annual registration fee to fund universal service, among other goals. (114) Addressing the federal preemption claims of AT&T arising under Section 332(c)(3)(A), the Oregon Court of Appeals overturned a lower court decision finding the ordinance preempted by state and federal law. The court concluded that the registration fee was valid, in part, because local government regulation of zoning is included within the "other terms and conditions" of Section 332. Based on this reasoning, the court found that this provision must therefore apply equally as much to local governments as to state governments. (115)

These developments since 1998 reveal that a focus on primarily local interests has blinded many courts and regulators to the federal wireless framework intended by Congress and has effectively gutted many prohibitions on state and local actions against the wireless industry. Most significantly perhaps, over the past five years, this tearing down of the 2(b) "fence" built by Congress to promote the development of wireless has left CMRS providers vulnerable to ongoing destructive attacks on multiple fronts, including litigation and taxation.

5. Epidemic of Class Action Suits Against CMRS Providers

As suggested by the preceding cases, the fact-specific analysis necessary to determine whether billing practices or universal service contributions fall within federal jurisdiction as "rate and entry regulation" or state jurisdiction as "other terms and conditions" places a heavy financial burden on CMRS providers that may undermine Congress's intent to create a competitive wireless marketplace. Increasingly, wireless carders have been the targets of a steady barrage of class action litigation relating to routine billing practices--often those practices used by carriers to pass through or recoup universal service and other governmental levies. The plaintiffs in these cases often allege multiple state causes of action ranging from fraud to deceptive trade practices. Because the carriers generally argue that any such state claims are preempted, these cases also often implicate Section 332(c)(3)(A). (116) This groundswell of litigation acts as a significant entry barrier for nascent firms and significantly increases the costs of service for incumbent wireless providers--costs that are ultimately passed on to consumers. A review of currently pending litigation suggests that the lack of detailed guidelines for assessing what amounts to "rate and entry" regulation is diverting significant resources away from competition and innovation and into the defense of an avalanche of claims rooted in the misguided court decisions of 1998-2003.

Nextel Communications, Sprint PCS, Verizon, and other wireless carriers have all been named in lawsuits contesting billing practices under various state laws. (117) In a recent exemplary case, (118) the United States District Court for the Northern District of Alabama concluded that Section 332(c)(3)(A) does not completely preempt a plaintiff's state law claims challenging billing practices. This court dismissed the Bastien approach, noting:

   Regardless of the Seventh Circuit's take on the [Communications
   Act], this court is bound by a dispositive, post-Bastien case from
   the Eleventh Circuit. In Smith v. GTE Corp., putative class
   representatives attempted to enjoin GTE.... In an interesting
   twist, plaintiffs retreated to the argument that their state-law
   claims against GTE for fraud, unjust enrichment, breach of
   contract, and breach of warranty were completely preempted by
   [section] 207 of the [Communications Act] and, therefore, that the
   court had federal-question jurisdiction. The Eleventh Circuit noted
   that the [Communications Act's] savings clause, 47 U.S.C. [section]
   414, contemplates the application of state law and the exercise of
   state-court jurisdiction. If there is state-court jurisdiction the
   jurisdiction cannot be exclusively federal.... The savings clause
   also applies to [section] 332. The Eleventh Circuit's analysis that
   the savings clause evidences Congress's intent to save state-law
   actions precludes complete [preemption] within the Eleventh Circuit
   and thus in this case. (119)

The Lewis court further examined the plain language of Section 332 (without regard to the amendment to Section 2(b)) and concluded that "[p]ermitting states to regulate 'other terms and conditions' strongly suggests that Congress did not intend complete preemption." (120)

Another example of the fact-specific class actions burdening CMRS providers is Moriconi v. AT&T Wireless PCS, LLC. (121) In AT&T Wireless, plaintiffs brought a class action alleging state claims of misleading advertising, billing practices, and unfair contract terms. Holding that Section 332(c)(3)(A) did not completely preempt state-law consumer fraud-type causes of action, the United States District Court for the Eastern District of Arkansas removed the case to state court on the plaintiff's motion. (122) The district court reasoned that the plaintiff's state law claims were not merely disguised federal claims, nor were the claims direct challenges to rate or entry regulation. (123)

While Nextel and Sprint PCS achieved a partial victory when a federal court in Western Missouri agreed to consolidate seven pending billing practices cases into a multi-district litigation framework, (124) the onslaught of these class actions, generally based on state claims, exemplifies just the sort of deleterious local actions Congress sought to shield the CMRS industry from through its actions in the 1990s. In Verizon Wireless's case, the cost of settling similar class action billing practices lawsuits is reported to exceed $1 billion dollars--costs inevitably impacting consumers and shareholders more than the parties to the settlement. (125) The time and resources devoted by wireless carriers to defending and resolving these attacks also illustrate the deeply negative effects of this trend on both industry and innovation.

Despite the Commission's early pronouncement that "[o]ur preemption rules will help promote investment in the wireless infrastructure by preventing burdensome and unnecessary state regulatory practices that impede our federal mandate for regulatory parity," (126) the expensive case-specific factual analysis necessary to determine whether a state (or local) government engages in forbidden rate or entry regulation significantly increases the financial burdens upon CMRS providers and diverts them from their mission of bringing innovative new products to consumers on a profitable basis. To avoid further costly litigation, reduce barriers to entry, and promote competition in the wireless marketplace, the Commission should reconsider its conclusion in its WCA Order in light of recent developments and clearly draw the line between legitimate state claims (e.g., consumer protection suits pursued by state attorneys general) and inappropriate attacks on CMRS "rates and entry" merely disguised as state claims.

B. Continuing Federal, State, and Local Burdens on CMRS

In addition to class action litigation battles, state and local initiatives and mandates continue to place increasing anticompetitive regulatory burdens on CMRS providers. This section of the Article examines the effects of increased regulation and taxation of CMRS providers and questions the wisdom of state and local efforts to expand the heavy regulatory shadow cast by legacy wireline regulation. As recently noted by the Progress & Freedom Foundation in a report profiling major regulations and taxation affecting the wireless industry:

   [W]ireless [providers operate] in a highly regulated environment.
   And, as wireless applications converge with traditional
   Telecommunications functions (e.g., wireline telephony), pressures
   build to bring wireless into the traditional framework of
   telecommunications regulation and taxation.

      [T]he now arguably "mature" wireless sector is under increasing
   pressure on a number of regulatory fronts--most notably in the areas
   of taxation and regulatory mandates. Wireline telephony is one of
   the most heavily taxed services, and states and localities are
   moving to apply similar treatment to wireless. (127)

While the continued growth of wireless service requires the removal of barriers to effective competition, the crazy quilt of myriad state and local taxation rules undermines the efforts of Congress to create a truly competitive national wireless marketplace. The federal deregulatory framework for wireless should be embraced, rather than repeatedly disregarded, particularly considering federal efforts to revitalize wireline competition in long distance.

1. State and Local Taxation

State and local governments have often taken the misguided view of CMRS "as a ready source of tax revenue" (128)--a "quasi-luxury good" that could be taxed not unlike cigarettes, (129) espresso, (130) or lottery tickets. (131) However, as historical differences in the technological capability of wireline and wireless networks increasingly fade away, the stereotype of wireless service as a "luxury good" must also disappear or else serve to raise even greater barriers to effective wireless competition, specifically, and telecommunications competition, generally. (132) Regardless of whether wireless service can realistically be labeled" mature," (133) at this stage, the potential for wireless service to become a truly competitive substitute hinges upon a sensible tax and limited regulation by federal, state, and local governments. (134) The success of the wireless industry depends upon the removal of artificial taxation obligations. As one observer has noted, "[I]t is time [that CMRS providers are] taxed on a level playing field with other businesses rather than being [taxed] at levels comparable to products the government wants to discourage, such as liquor and tobacco." (135)

The 1996 Act contains a tax savings clause that does not preclude state and local governments from collecting taxes and other fees. (136) Specifically, subject to one exception, (137) "[n]othing in [the 1996] Act or the amendments made by [the 1996] Act shall be construed to modify, impair, or supersede, or authorize the modification, impairment, or supersession of, any State or local law pertaining to taxation...." (138) However, as the Commission noted in a 1999 Notice of Inquiry on competition ("1999 NOI"), "[s]tate and local tax policies that impose excessive or unequal burdens on competitive service providers have the potential to inhibit the development of competitive facilities-based networks in local telecommunications markets." (139)

The 1999 NOI raised the issue of "excessive or unequal" (140) taxes when it responded to allegations by CMRS providers that some States and local taxes are excessive or discriminatory. (141) "[O]ut of respect for principles of federalism," (142) the Commission declined to initiate an instant rulemaking based upon the allegations. Nevertheless, a "concern[] about the potential discriminatory and anticompetitive effects of certain State and local tax policies" (143) motivated the Commission to announce a further inquiry into state and local taxation of competitive telecommunications providers. (144) Comments received by the Commission during the 1999 NOI identified two major disparities in wireless taxation by State and local governments: (1) taxes that are either excessive and discriminate against wireless technology, (145) and (2) taxes that subject wireless providers to outmoded geographical or monopoly-based (146) taxation assumptions. Presumably, comments received during the Commission's 1999 NOI, in part, prompted Congress to address one disparity in state and local taxation beginning in early 2000.

2. The Mobile Telecommunications Sourcing Act

Traditionally, state and local governments premised taxation of wireline networks upon the location of network elements or transactions (e.g., phone calls) within their geographic boundaries. (147) The advent of CMRS challenged these legacy assumptions; determining the origination and termination of calls became increasingly difficult, particularly given the popularity of "fiat-rate" calling plans. Many states retained the historic model of taxation, often subjecting CMRS providers to overlapping tax obligations for the same phone call. Congress enacted the Mobile Telecommunications Source Act ("MTSA") (148) in 2000 to "provide customers with simpler billing statements, reduce the chances of double taxation of wireless telecommunications services, and simplify and reduce the costs of tax administration for carriers and state and local governments." (149) The MTSA was the result of a federal government and industry effort (150) to resolve consumer confusion and unify the widely divergent taxation of wireless providers by state and local governments. (151) Under the MTSA, taxation of a customer's phone calls are imposed only by the taxing jurisdiction "whose territorial limits encompass that customer's 'place of primary use.'" (152) The legislation also mandated the creation of a national database to indicate what taxes are due from the CMRS provider for calls placed by a customer in any location.

Interestingly, the MSTA challenges the traditional understanding of federalism under the Constitution: "[w]hile the federal government has the authority to regulate conduct throughout the nation, states generally can regulate only that activity occurring within their borders or which produces harmful local effects." (153) In other words, the MSTA allows state or local governments to assess sales or use tax on calls that may originate and terminate entirely outside their respective political boundaries: "[t]he [MSTA] plainly authorizes states to impose extraterritorial taxes." (154)

By the federally-mandated deadline of August 1, 2002, forty-nine states enacted legislation to comply with the MTSA. (155) Notably, "[t]he only state that did not enact MTSA conforming legislation was Montana, whose governor vetoed the legislation because it would have appeared as a tax increase for the state, and Montana does not currently tax mobile telecommunications." (156) While the effects of statewide compliance with the MTSA remain unknown, some commentators laud the MTSA as a model of industry and federal cooperation. (157) Alternatively, the implementation of a simplified and standardized process for state and local government tax assessment of mobile communications may lead to increasing tax burdens that are ultimately passed on to CMRS consumers.

3. Federal Fees

In another action which may generate potentially negative unintended consequences for wireless consumers, the Commission has also increased levies on CMRS carriers to provide universal service for landline telephone users and to provide Internet subsidies to schools and libraries. (158) It is not known whether the consumer benefits flowing from such regulations outweigh the efficiency costs to consumers of such taxation. (159) However, one influential study determined that the Commission

   could estimate the costs to consumers and the economy when
   they implement tax and subsidy programs and only implement
   regulatory requirements that lead to commensurate benefits to
   consumers. This recommendation is particularly important given
   the finding of this study that the marginal efficiency loss of these
   taxes increases significantly as the overall tax rates increase.
   (160)

4. The Inefficiency of Multiple Regulatory and Tax Structures

To unleash the potential of wireless innovation, it is essential that state and local governments recognize the interstate nature of networked industries and the concomitant success wrought by reducing regulatory burdens on businesses. Even in the face of looming budget cuts, state and local governments must resist the temptation to place undue regulatory or tax burdens on CMRS providers, which may subvert the federal framework and create inefficient tax structures. Typically, high taxes decrease the consumption of a good or service and, "in this case, [may] lead to the under-utilization of the infrastructure investment made by wireless providers." (161)

Professor Jerry Hausman's 2000 study comparing wireless taxation to other income and sales tax revenue sources suggests three reasons why "luxury good" or revenue-raising taxes on mobile telephone services engender high societal costs: "(1) the price elasticity of wireless services is relatively high, (2) the taxation of wireless services is high, and (3) the price to marginal cost ratio of wireless services is high." (162) Generally, Hausman concludes that taxation of telecommunications services produces "distortionary effects" (163) when compared to federal, state, and local taxation of income or sales. Specifically, Hausman concludes:

   [T]axation of wireless cannot be justified on income distribution
   grounds (e.g., the luxury good approach) nor can it be justified on
   economic efficiency grounds. Government use of wireless as a
   taxation source to fund expenditure in other areas leads to high
   efficiency costs to the economy. One reason for increased government
   taxation of cellular may be that consumers see an overall decreasing
   price, despite increasing taxes, due to improved technology that
   decreases costs and increased competition. Nevertheless, the lack
   of consumer complaints does not provide a valid reason for creating
   large efficiency losses on the economy, especially for a new and
   rapidly expanding technology such as cellular telephones. (164)

In a December 2003 article in this Journal, (165) Thomas Hazlett suggests an alternative and highly persuasive argument that decentralized and piecemeal regulatory (and tax) treatment by state and local governments is inefficient compared to a unified federal paradigm. Specifically, Hazlett's article compares the efficiency of state and federal consumer protection standards, (166) akin to California's proposed Consumer Bill of Rights. (167) Hazlett examines two key pieces of marketplace evidence with bearing upon this question: the efficiency of national versus state wireless standards and the failure of states to lower consumer rates prior to federal preemption in the 1993 Act. Ultimately, Hazlett distills a seven-part test for determining optimal regulatory jurisdiction. (168) into three fundamental questions that, when answered in the affirmative, support the view that a unified national regulatory structure is more efficient than a decentralized state regulatory structure:

   First, "[i]s the proposed national regulatory activity justifiably
   national in scope involving national externalities?" Next, "[i]s
   the proposed regulatory activity ... efficiently provided at the
   national level?" Finally, "[d]o the potential efficiency advantages
   of the proposed legislation outweigh the likely loss of political
   participation when policies are decided at the national rather than
   at the state level?" (169)

Hazlett answers each question in the affirmative in the context of the wireless industry. (170) For questions one and two, Hazlett concludes:

   [T]he [wireless] industry is clearly characterized by strong
   national network effects, and policies adopted by a company or a
   state regulatory authority in one part of the country tend to
   have important implications for consumers and carriers in other
   parts of the country.

      Mobile wireless services are efficiently provided, packaged, and
   sold via national service plans.

      Competitive rivalry has pushed all firms to adapt, seizing the
   efficiencies of national scope to offer the services--and
   prices--demanded by consumers. Local service provision has been
   replaced by aggregation of thousands of wireless licenses and
   nationalization of service plans offered to subscribers....
   [I]diosyncratic state regulatory regimes threaten such
   efficiencies. (171)

Describing the third question as essentially a "political judgment," (172) Hazlett finds that efficiency gains from a national regulatory framework outweigh the loss of political participation at local levels since "market evidence reveals state [rate] regulation failed to protect consumers" (173) prior to the 1993 Act.

Under a decentralized wireless framework, local governments have no incentive to refrain from imposing discriminatory or excessive regulations or taxes on CMRS providers--they raise revenue but experience none of the negative effects of their actions directly (the classic "moral hazard" dilemma). From a limited local perspective, the short-term gains of state and local regulation and taxation offset the long-term price reductions for consumers. These burdens incrementally add up to create a net loss to the consumer that outweighs the revenues brought in by the local entity. The state and local governments, in effect, free-ride on an apparently inconsequential revenue source whereas indirect taxation of consumers through the CMRS providers mediates the otherwise unsavory aspects of direct taxation. The problems presented by balkanized regulatory and tax structures illustrate exactly why Congress deemed it necessary to step in with a national strategy for CMRS during the 1990s and why the time is now right again for another federal clarification of the telecommunications sector in the national interest: "Today's market, which has generated great increases in efficiency by developing six competing national networks, owes much to regulatory harmonization, suggesting that the results of a reverse experiment today would likewise underscore the deleterious effects of balkanization." (174)

IV. NEW CHALLENGES: "CONSUMER PROTECTION" SENTIMENT, CONVERGENCE & OPTIMIZING COMPETITION

In addition to the conflicting court and Commission decisions and governmental anticompetitive burdens discussed in the previous sections, three other serious problems now confront the wireless industry. First, the recent emergence of short-sighted regulatory consumer protection proposals cloaked as "consumer protection" measures threatens to hinder industry competitiveness by handcuffing innovation and flexible responses to market conditions. A second problem concerns converging communications technologies. Robust end-to-end wireless networks necessarily force reexamination of regulatory structures built upon wireline technologies and economics. Finally, the growth of competition following passage of the 1996 Act is now approaching viral levels in the wireless industry. The Authors believe the CMRS industry's complexity forever relegates government economic regulation to "dead hand" status. A perhaps greater challenge is to recognize the threat of "consumer protection" and social policy regulation to the development, enhancement and financial stability of the wireless industry.

A. Consumer Protection Legislation

In perhaps the leading example of the current consumer protection movement, California Public Utilities Commissioner Carl Wood's recent regulatory proposal has been labeled a "Telecommunications Bill of Rights" bestowing "the most comprehensive and far-reaching set of consumer protections rules ... released anywhere in the U.S." (175) The stated purpose of this proposal is to enhance or provide California telecommunications consumers with certain "rights," pertaining broadly to carrier disclosure, marketing practices, service initiation and changes, billing practices, tariff and contract modifications, privacy, and safety. (176)

Despite its laudable stated goals, the expansion of regulation in an already competitive marketplace threatens to raise transaction costs and disrupt effective price competition as regulatory costs are passed on to CMRS subscribers without meaningful gains in service offerings. Indeed, this proposal is really a comprehensive regulatory scheme cloaked in "other terms and conditions" garb. As one analysis of the California "Bill of Rights" argues, the regulatory proposal is "fundamentally misguided.... If consumers found the matters covered by these proposed rules useful and worth the cost, carriers would compete on [that] basis...." (177) In particular, the proposed regulations appear likely to negatively impact CMRS competition in at least four ways: (1) increasing mandatory disclosures ratchets up advertising costs which may ultimately cause firms to provide less information to consumers; (2) technological innovation is impeded by restricting how new technologies are offered and advertised; (3) increasing advertising costs raises business costs and reduces opportunities for entry and competition in California's CMRS market; and (4) increased regulation encourages more litigation, thereby further increasing business costs, (178) Finally, at an estimated cost of an additional $3.86 per monthly California CMRS bill, (179) the costs of the California Telecommunications Bill of Rights could exceed "the combined cost of E9 11, number pooling, number portability, and CALEA." (180)

A restrictive regulatory proposal similar to the California "Bill of Rights" was also recently introduced in both houses of Congress. The federal Cell Phone Users Bill of Rights (181) is almost identical in philosophy to the California bill. Most remarkably, the proposed federal bills would directly contravene the deregulatory competitive mandate of the 1996 Act and require the FCC to monitor wireless service quality and maintain network and consumer data from each wireless provider. Imposing increased regulation and restrictions on CMRS providers will not only increase costs likely to be passed on to consumers; in addition, such provisions suggest a return to the micro-regulation that has stunted competitive growth in the wireline industry and bode only in for the creation of an investment climate that will foster the promise of convergence to be realized.

B. Convergence

In a world where "'a bit is a bit is a bit' seems to have become the motto of our digital age," (182) it seems clear that inflexible reversion to old regulatory models tied to legacy technology stand out as unequivocal roadblocks on the road to the great promise of converging communications technology. Certainly, in the age of instant messaging, picture phones, and wireless video games, it is naive to suggest that CMRS providers merely provide wireless "telephone service." Technological convergence is occurring at all levels of communication--an unavoidable byproduct of Moore's Law. (183) No longer does cable merely provide a broadcast alternative--nor do historical "telephone companies" merely provide "plain old telephone service." (184) Technology has blown through the distinctions of even a decade ago, and the world of communication is increasingly defying old-world classification. (185)

The Authors believe that realization of the quantum shifts offered by convergence ultimately require leadership and dynamic action by the Commission. Some might call for a wholesale overhaul of the current U.S. regulatory and legislative framework by Congress to allow for a more enlightened regime where functionally similar services are treated independent of their historic transmission mediums. (186) While conditions may eventually require such a revisitation of the 1996 Act, the Authors believe that taking this drastic path would be premature and costly. The sixty-two years (1934-1996) it took to marshal political and industry support for overhauling federal communications policy unfortunately suggest that exhaustive regulatory reform at the federal legislative level is unlikely to occur anytime soon.

A more realistic option for handling the problems presented by converging technologies rests squarely in the Commission's hands. As discussed in Part I.B supra, Congress granted exclusive plenary power over CMRS services to the Commission. Moreover, Congress also granted regulatory power covering "ancillary" communications services to the Commission. (187) The Authors therefore recommend the Commission take the lead by guiding the telecommunications industry on a path of "regulatory economy" and "regulatory forbearance." Congress established the Commission as an expert agency to implement more specifically the broad policies contained in federal legislation. (188) The Commission must therefore truly wield its expertise to identify and proactively clarify the appropriate boundaries for state versus federal regulation in the wireless arena, as well as in the new regulatory paradigms in a converging world. The 1996 Act clearly outlines the Commission's role in bringing competition to all communications markets. It is time for the Commission: 1) to recognize the unique challenges and opportunities presented by converging communications technology, 2) to act boldly and unequivocally to reestablish the federal preeminence over wireless and 3) to adopt meaningful and modernized categories for new services. As developed below, the necessity of such change is particularly evident when considering the deployment and popularity of wireless networking standards (e.g., 802.11x or Wi-Fi and Bluetooth technology) and VoIP services.

1. Wi-Fi and the Proliferation of Unregulated VoIP Services

>From its 1980 origins, (189) Wi-Fi has fast become the "TCP/IP of wireless," (190) or rather, an almost universally adopted standard for wireless communications that delivers packetized data over a neutral or "dumb" network. (191) Wi-Fi networks are relatively inexpensive and easy to administer, and they provide a spectrum-efficient method for networking computers and sharing Internet connections. (192) Wi-Fi networks now abound in private homes, airports, coffee shops, commercial businesses, libraries, and bookstores. Such wide acceptance suggests that Wi-Fi networks may even offer resolution of the last mile bottleneck for broadband networking. (193) Others suggest that Wi-Fi is a necessary ingredient for achieving pervasive or ubiquitous computing--"the creation of environments saturated with computing and wireless communication, yet gracefully integrated with human users." (194) This last application suggests the turbulent and challenging future that continued Wi-Fi deployment may hold for CMRS providers (195)--pervasive deployment of Wi-Fi "hotspots" combined with the further convergence of telephony and data services across competing networks may enable the "Napsterization" (196) of subscriber-based CMRS services. Moreover, the success of unregulated Wi-Fi and spread-spectrum technology underscores the boundless character of wireless technology and again suggests the necessity for traditional regulatory paradigms in competitive markets.

Technological convergence has already established a means for providing heretofore subscriber-based services for free or at substantially lower rates than on public regulated networks. The optimized packetization of telephony services, commonly referred to as VoIP, allows networks to transmit and receive calls from other computer users or wireline customers (assuming interconnection) without noticeable degradation in quality of service. (197) Some firms are even experimenting with stand-alone Wi-Fi phones that take advantage of similar protocols. (198)

Two recent cases highlight the uncertain regulatory treatment currently facing converging technologies and specifically bring into question future regulatory treatment for VoIP. While addressing non-wireless technology, these cases illustrate the need to reframe the American approach to telecommunications through concerted use of tools Congress has provided the FCC.

In Brand X Internet Services v. FCC, (199) the Ninth Circuit Court of Appeals reviewed an FCC Order ("Order") (200) that stated that cable broadband Internet service was not "cable service" but was instead an interstate "information service" within the meaning of the 1996 Act. Congress used the 1996 Act to establish a "pro-competitive, de-regulatory national policy framework" designed to promote the "deployment of advanced telecommunications and information technologies and services to all Americans by opening all telecommunications markets to competition." (201) However, at that time, Congress did not specifically address how nascent cable modern technology would be regulated. Congress's framework maintained substantial common carrier obligations on "telecommunications services" providers, while significantly reducing the regulatory commitments for providers of "information services." Given conflicting interpretations (202) as to whether cable broadband service was in fact "cable service" (and therefore subject to "telecommunications services" obligations in the 1996 Act), the Order found cable modem service as an "information service" with no "telecommunications service" component. (203) The Ninth Circuit disagreed with the interpretation of the Order, in part, and reversed by reasserting its holding in City of Portland, that cable broadband service was not "'cable service' but instead was part 'information service and part telecommunications service.'" (204)

The recent decision by the United States District Court for the District of Minnesota in Vonage Holdings Corporation v. Minnesota Public Utilities Commission, (205) confronts the question of how to classify VoIP services, particularly given the highly categorized regulatory framework of the 1996 Act. The plaintiff in Vonage provides VoIP services over high-speed Internet connections that permit its customers to access public-switched telephone networks. (206) Upon receiving a complaint by the Minnesota Department of Commerce demanding that Vonage comply with state fees and rules for the provision of telephone service, the Minnesota Public Utilities Commission held a hearing and issued an order declaring Vonage must "comply with Minnesota statutes and rules regarding the offering of telephone service." (207) The district court upheld Vonage's subsequent motion for a permanent injunction, concluding that

   the VoIP service provided by Vonage constitutes an information
   service because it offers the "capability for generating,
   acquiring, storing, transforming, processing, retrieving,
   utilizing, or making available information via
   telecommunications." The process of transmitting customer calls
   over the Internet requires Vonage to "act on" the format and
   protocol of the information.... [T]his Court finds that Vonage
   uses telecommunications services, rather than provides them. (208)

The Vonage holding is instructive in that the district court was presented with a converged technology that does not fit into a classification within the 1996 Act. Despite enabling phone-to-phone communication via the exchange of TCP/IP packets of data, the district court concluded that the services provided by Vonage did not even satisfy the FCC definition of phone-to-phone IP telephony promulgated in its Universal Service Report. (209) The court stated:

   In applying the FCC's four phone-to-phone IP telephony conditions to
   Vonage, it is clear that Vonage does not provide phone-to-phone IP
   telephony service.... Use of Vonage's service requires [consumer
   premises equipment] different than what a person connected to the
   PSTN uses to make a touch-tone call. Further, a net change occurs
   when Vonage's customers place a call. If the end user is connected
   to the PSTN, the information transmitted over the Internet is
   converted from IP into a format compatible with the PSTN. Vonage's
   service is not a telecommunications service because "from the user's
   standpoint" the form of a transmission undergoes a "net change."
   (210)

The district court therefore concluded that Vonage's service did not fit within the FCC's framework because "Vonage never provides phone-to-phone IP telephony (it only provides computer-to-phone and phone-to-computer IP telephony)." (211) lacing great weight upon the technical structure of Vonage's services, the district court held that "from a 'functional standpoint,' Vonage's service is distinguishable from the scenario the FCC considered to be telecommunications services." (212) Finally, the court refused to over simplify (213) classification of VoIP by adopting the "quacks likes a duck" (214) argument furthered by the Minnesota Public Utilities Commission. The Vonage court, despite acknowledging the attractiveness of the argument, found that departing from Congress' statutory intent would work to the "detriment of an accurate understanding of this complex question." (215)

2. Would Regulation of VoIP Sound the Death Knell for Wi-Fi and/or TCP/IP?

While the Brand X and Vonage cases ultimately appear destined for the Supreme Court, each presents interesting questions for the treatment of converging technology and the development of wireless technology. While ultimately rejected in Vonage, the "quacks like a duck (and therefore it's a duck)" argument has been adopted by many an exasperated jurist or regulator when attempting to assess converging technology. The Vonage court, however, aptly realized that this argument can go both ways. In the constantly morphing world of new technology, what quacks like a duck may very likely also swim like a fish--so judges, business people and policymakers may argue ad nauseum which genus really fits (with their arguments almost inevitably colored by who will win or lose based on the ultimate classification). Convergence defies classification and challenges regulators to rethink the assumptions underlying current regulatory boundaries.

The increased proliferation of VoIP, Wi-Fi, and other new technologies only heightens the need to reexamine regulatory structures. (216) Commendably, the Commission recently initiated a comment period for determining whether to regulate VoIP services. (217) While the constantly changing effects of converging technology on existing communications providers may necessitate rapid changes to current business models (and access to investment capital), the burdens imposed by preserving failing regulatory models may significantly decrease the ability of CMRS providers to adapt to or embrace such new technology.

The uncertainty about what is or is not an information or telecommunications service serves as merely one example of why further regulation is not the best answer for technological convergence. (218) Blindly forcing converging technology into existing regulatory buckets is fraught with the danger of unintended and highly negative consequences. (219) For example, if VoIP is ultimately found to be a telecommunications service subject to common carrier obligations, how can VoIP be regulated without unalterably changing the Internet or current regulatory paradigms? (220) Presumably, regulating VoIP would require accounting for regulated "voice" bits versus unregulated "data" bits--thus, unavoidably changing the end-to-end ("dumb") nature of the TCP/IP protocol. "[R]egulable code is closed code." (221) Alternatively, a truly open network, defies regulation.

As recently illustrated by the progeny of Napster, attempts to curtail unauthorized file-sharing applications have created a new "Cold War" between an industry clinging to old categories (music sold only on CDs) and young consumers hungry to adapt new technologies (downloading only desired songs and bypassing tangible formats). (222) Given the persistence of Moore's Law, VoIP may soon be a viable alternative over Wi-Fi networks. Will regulators and courts treat mobile VoIP as a regulated "telecommunications service," or will the 1996 Act's deregulatory and competitive mandates for wireless ultimately justify its classification as an "information service"? These current and pending quandaries cry out for broad reassessment and firm action by the Commission. Hopefully, the comments in the pending IP-Enabled Services Rulemaking proceeding will reflect the best and brightest thinking in this complicated arena, and the Commission will lead the way to a new taxonomy of convergence based on neutral pro-competitive principles--including a light-handed federal regulatory framework for wireless. Only by abandoning artificial and categorical assumptions of the past can the Commission fulfill its mission as an expert agency and promulgate Congress's deregulatory and public interest mandates.

C. Optimizing Competition

In addition to the convergence of new technologies, the consolidation and commoditization in the wireline long-distance sector may hold another important lesson for the wireless industry. The mergers of many long-distance companies suggest a return to vertical-integration and great difficulty in maintaining any semblance of financial viability for an entity engaged in commoditized competition. Two lessons have emerged: (1) selling unbundled services makes it difficult to maximize profits-particularly when technology changes at an incredibly rapid pace and (2) the risk of "creative destruction" (223) increases exponentially whenever government steps in to act as a "handicapper" in competitive markets. Schumpeter's theory of "creative destruction" may reveal why it is difficult for the telecommunications sector to stabilize each company is unable to optimize its offerings by combining vertically-related services. (224) When newer technology supplants existing service offerings, and consumers cannot foretell what services a provider will offer them, they may switch to another provider (particularly now that line-number portability ("LNP") is underway). Thus, while competition is the goal, too much cut-throat competition and commoditization may ultimately limit service offerings to consumers and investment in infrastructure and handsets because firms find it impossible to operate as profitable entities. The Microsoft vertically-integrated model (225)--while reviled on many fronts--certainly has proven viable and profitable in the tumultuous world of technology and may (226) represent the right path for the future for CMRS. (227)

V. REGULATION'S IMPACT ON INVESTMENT: LESSONS FOR AMERICAN WIRELESS FROM EUROPE'S SPECTRUM MISADVENTURES AND U.S. AIRLINE DEREGULATION

In evaluating the necessity of regulatory harmonization (228) for converging wireless services, regulators must remain cognizant of the investment incentives necessary for the technological advancement and expansion of wireless networks. As discussed in Part I, supra, the demand for spectrum bandwidth seems limitless given the increasing consumption of next-generation wireless Internet and data services. Historically, U.S. spectrum allocation and ownership policy divided spectrum into relatively static technological categories (e.g., radio, CMRS, television). Today, the advent of converging digital wireless technology increasingly questions the wisdom of preserving these historic distinctions, (229) particularly given increasing demands for additional CMRS spectrum allotments. (230)

In answering the difficult questions raised by converging technology, however, we must not abandon what has worked well for American spectrum allocation and licensing policy. Resoundingly, U.S. experience reaffirms the success of neutral, market-based spectrum allocation and licensing policy for encouraging network investment and technological advancement. The Authors discuss this principle below by contrasting U.S. and European experiences in allocating spectrum. The Authors further emphasize the relationship between regulatory consistency and network-industry investment incentives by evaluating the incomplete deregulation plaguing the American airline industry. This examination suggests that, in contrast with multiple jurisdictions imposing different rules on carders in the same industry, minimal regulation, consistently and uniformly applied, creates investment incentives and promotes network improvement and expansion. Thus, the Commission's recent licensing policies in the wireless spectrum arena illustrates just what federal regulators may do best--creating and implementing an overarching framework to allow free-market breezes to energize a previously static system.

A. Two Models of Licensing "Scarce" Spectrum

The current U.S. regulatory system for allocating and managing spectrum, while recently overhauled, has come under attack for raising barriers to the efficient transferability of spectrum and preventing innovative uses of spectrum and the promulgation of new technology. (231) Coordinated by the Commission, spectrum allocation and management refer, respectively, to the current system of initially assigning licenses to spectrum and the renewal, transfer or reallocation of licensed spectrum. The historic regulatory model, originating from the early Commission assumption that spectrum was a "scarce" resource, (232) established a centralized "command-and-control" regulatory architecture, whereby the uses and users of spectrum are restricted. (233) The Commission's adoption of a market-based regulatory model for spectrum management has greatly improved efficient and desirable outcomes for both consumers and the industry.

Recent critics, however, most notably Chairman Powell, (234) have questioned the utility of even this revised regulatory framework, given significant technological advancements and the demand for more spectrum. (235) Noting the high administrative costs and alleging the protection of incumbent spectrum holders, some commentators urge the adoption of an open or commons property rights model. (236) Even the FCC has officially called for reform, albeit of a much less revolutionary nature. (237) This reform, however, must tread cautiously to preserve investment incentives for network build-out and maintenance by new entrants and incumbent CMRS providers. While the goal of making more efficient use of spectrum is laudable, legislators and regulators alike should ensure that the desire for a "spectrum commons" does not justify sacrifice of wireless operator investment for the sake of academic or libertarian idealism. Regulators must not abandon the market-based spectrum allocation and ownership approach that permitted the United States to move ahead of European wireless network development and expansion in recent years. (238) The following two parts discuss spectrum allocation and management and analyze the importance of establishing a regulatory framework that preserves investment incentives in wireless markets by implementing substantively neutral market-based allocation processes.

1. The American Market-Based Spectrum Allocation Model

The current U.S. spectrum allocation model originated in response to the increasing popularity of wireless telecommunications, the success and ability of early CMRS providers to pay for spectrum, the transition from analogue to digital ("Second Generation" or "2G") cellular systems and, most importantly, the failure of alternative spectrum assignment mechanisms. (239) Responding to a rapidly increasing demand for spectrum in the early 1980s, the Commission replaced an expensive and inefficient competitive hearing system (240) with a lottery system for cellular spectrum allocation. (241) Less than a decade after its implementation, however, the Commission realized that a lottery system did not efficiently allocate spectrum in the public interest. (242) The lottery system failed to ensure that the firm valuing the spectrum and most likely to build and operate the system reasonably could obtain that spectrum. (243)

As part of the 1993 Act, Congress established a new spectrum allocation process, whereby the Commission would auction certain licenses to the highest bidder. Congress further responded by expanding the scope of auctionable spectrum in the Balanced Budget Act of 1997 (244) to cover "full power commercial radio and analog television stations." (245) Almost a decade after Congress's promulgation of the auction model, the Commission concluded that auctions "[m]aximize benefits to consumers by assigning licenses to the parties that value them most highly and foster[] efficient spectrum use." (246) Economists and other commentators generally agree that "[a]llowing for the play of market forces in the allocation of spectrum and allowing spectrum licensees greater leeway in choices of technologies used and services provided will open up new possibilities in increased efficiency and innovation in one of our economy's most dynamic sectors." (247)

Today, history suggests that scarcity is more a function of technological innovation than a physical constraint inherent in the radio spectrum. (248) Nowhere is the rationale supporting market-based spectrum allocation, versus a command-and-control "scarcity" regulatory model, more apparent than by examining European spectrum allocation.

2. The European State-Sponsored Spectrum Allocation Model

Whereas the U.S. spectrum allocation experience offers many success stories for regulators, the recent history of western European wireless regulation (249) and spectrum allocation reads like a classic Shakespearean tragedy. Once regarded as the model for American wireless deployment, one commentator recently described the European wireless marketplace as "a hole in the form of billions of dollars in debt issued to pay for new licenses and networks." (250) The lessons learned from wireless development in Europe inform broadband wireless deployment in America and suggest that rushing to build high-capacity networks, without regard to consumer demand or investment cost, is fraught with peril. (251) In addition, Europe's mistakes are due, in part, to poor government licensing decisions and a desire to exploit demand for new services and to reap huge revenue rewards at the expense of a successful network implementation.

In 1998, digital wireless network expansion by European CMRS providers appeared ready to outpace expansion by their American counterparts. (252) This growth was fueled, in part, by technological advancements that prompted many European CMRS providers to convert legacy analog networks to digital networks. (253) In 1998, the arrival of next-generation wireless networks seemed imminent--as well as significant demands for increased spectrum capacity, (254) To meet increasing demands for spectrum, the European Commission ("EC") embarked upon a new regulatory framework for allocating spectrum. During the later 1990s and early 2000s, the EC initiated a series of spectrum auctions to spur build-out for 3G networks. As many European governments eyed the spectrum auctions as a potentially significant revenue source, however, European regulators created a "beauty contest" auction process, whereby preconceived revenue goals prevented or impaired independent market valuation of spectrum. (255) As noted by a former Director of the European Telecommunications Network Operators' Association:

   Europe used to have a two-year lead on the United States in mobile
   phones, but that lead is being lessened largely because of the severe
   debt companies fell into paying for their 3G licenses....

      It is easy to blame the operators, but the governments that reaped
   the rewards of the highly priced licenses are equally to blame....
   They were greedy, and they didn't consider the impact such high
   license prices would have on the telecoms [sic] industry.

      Until our members have certainty that broadband won't be over
   regulated they won't make the necessary investments.... The
   question of who is going to pay for broadband is missing from the
   debate. (256)

The recent experience of European spectrum auctions suggests that, to ensure spectrum allocation in the public interest, government regulators must resist the temptation to manipulate policy for revenues in an auction system for which the government is the recipient of funds paid. Even now, the future of European wireless is uncertain because much of the capital to "feed Europe's growth industries ... disappeared down the 3G sinkhole." (257) Europe's failure to establish a commercially sensible spectrum allocation procedure produced a business climate making investment uncertain and ultimately delaying rollout of next generation services.

B. Promoting Competition and Encouraging Network Investment: Deregulation and Regulatory Consistency in Nationally-Networked Industries--The Case of Airlines

Politicians in both parties hailed the deregulation of networked industries in America (e.g., airlines and electricity), particularly in the telecommunications sector, as the antidote to "[t]he economic stagnation of the 1970s." (258) Deregulation, it was claimed, would "loosen federal control over crucial economic sectors" (259) and lead to increased competition and technological innovation, thus placing all consumers in a pareto-optimal position. Particularly in the area of telecommunications, policymakers forcefully made such optimistic claims in the proceedings leading to passage of the 1996 Act. For example, one Senator stated:

   [The 1996 Act] will result in many things for consumers .... [I]t
   will accelerate an explosion of new devices, an explosion of new
   investment.... [I]t will lower prices on local telephone calls
   through competition. It will lower prices on long-distance calls
   through competition. It will lower cable TV rates through
   competition. It will provide an explosion of ... services and
   inventions. (260)

In the end, many of "[t]hose good things did happen. Deregulation and low interest rates spurred a burst of technological investment that accelerated the growth of the economy and slashed the unemployment rate." (261) Wireless services, in particular, provided many "explosions" as the premier example of the benefits made possible by deregulation. (262)

Notwithstanding the varied and tangible benefits for consumers, deregulation of network industries also engenders negative, and sometimes severe, consequences for the consumer. As Federal Reserve Chairman Alan Greenspan has suggested, even "the savviest [policymakers] knew they were making a choice 'between economic growth with associated potential instability, and a more civil ... way of life with a lower standard of living.'" (263) Chairman Greenspan's reference to the "potential instability" of decentralized economic growth tacitly acknowledges what the Authors believe are three necessary components for industry deregulation and healthy competition within the wireless marketplace--an effective referee, acknowledgement of deep regulatory effects on supposed deregulated industries, and regulatory certainty.

First, the avoidance or removal of an ex ante regulatory system does not obviate the need for a system of ex post checks and balances to address, for example, anticompetitive behavior. In place of centralized industry-specific regulatory oversight, a decentralized means of addressing wrongs is appropriate. Typically, ex post regulatory enforcement occurs via two mechanisms: (1) public administrative agencies (e.g., the Securities & Exchange Commission and the Justice Department) charged with enforcing antitrust and securities law, or (2) private litigation. Both mechanisms, however, may prove to be expensive (and therefore inefficient) (264) corrective measures if the taxpayer or consumer ultimately incurs the costs of deregulatory litigation. (265) Discussing the ramifications of the recent corporate accounting scandals, journalist Jacob M. Schlesinger notes:

   The decision in the 1990s not to regulate the arcane financial
   instruments known as over-the-counter derivatives made it tougher to
   uncover accounting tricks favored by Enron Corp. And it is now
   obvious that investors, and the stock analysts who advised them,
   [were not] up to the task of making sure that corporate executives
   kept their priorities and books straight.

      In short, it's clear in hindsight that the marketplace's own
   "checks," ... weren't enough to prevent the upheaval roiling the
   business world today.

      Blame for business's recent troubles has been assigned to everyone
   from greedy executives to naive investors. But there were singular
   moments when [the federal government] also made decisions with
   serious consequences. (266)

Schlesinger's argument also suggests a second necessary component for deregulated industries: regulators must act with knowledge that they can (and often do) implicitly regulate a deregulated industry through nonregulatory channels. Certainly, deregulation in the telecommunications industry is no exception. As Willis Emmons notes:

   Deregulation ... produce[s] a number of paradoxes. First is the
   persistence of regulation in the wake of deregulation. The United
   States, for instance, has experienced an enormous amount of
   regulatory change in the telecommunications sector since the early
   1980s, impacting local telephone, long-distance, wireless, cable
   television, and a variety of other communications services. Overall
   there has been a significant opening up of markets in the sector.
   Despite this, as a regulatory agency the [Commission] has seen annual
   increases in its budget, staff, and number of rules issued. In fact,
   the [Commission] is probably mentioned more frequently in the press
   today than when the telecommunications industry was "regulated."
   (267)

Emmons characterizes this paradox as an ongoing "bargain" or relationship between business enterprises and government regulators--"as litigation substitutes for more direct forms of regulation, the notion of deregulation leading to 'less government' becomes quite murky in practice." (268) In the case of the "deregulated" wireless industry, federal and state oversight of pricing controls, entry regulation, licensing, and taxation serve to impose unintended regulatory consequences on market structure and performance. Furthermore, as an example of "neoregulation," federal or state adoption of a "consumer bills of rights" may impose further government scrutiny and restrictions. (269)

Building upon the recognition that deregulation redirects, but does not erase, the regulatory pressure felt by network industries, the final component necessary for a healthy and competitive wireless marketplace is regulatory consistency. Particularly for industries exhibiting strong demand-side "economies of scale," "network effects," or "network externalities," (270) regulatory consistency is critically necessary for firms trying to build long-term capital-intensive networks. The threat of future regulation or regulatory inconsistency substantially increases the investment risks in an already highly tumultuous technological market. Addressing this point, Warren Lavey notes:

   For businesses in regulated industries, uncertainty about future
   regulations can add to difficulties of companies in attracting
   capital and making investments in infrastructure, products, and
   services. Business plans are developed with long-term assumptions
   about a wide range of factors, some of which are heavily influenced
   by regulators. While regulators require or induce carriers to spend
   billions of dollars annually on networks and offerings, regulators
   also often preserve the flexibility of present and future
   commissioners to shape future regulations, which will determine in
   substantial part the carriers' returns on these investments. The
   business uncertainty for carriers resulting from such regulatory
   flexibility can impose costs on carriers in terms of less productive
   use of resources and lost opportunities. Costs can be imposed on
   consumers in terms of higher prices and lower service quality. (271)

Federal and state regulators must remain cognizant that for industries with large investments in long-lived assets and long cycles for product and service development, regulatory uncertainty or churn has substantial costs. (272) The creation and maintenance of long-term or multi-year regulatory promises, (273) not merely "getting out quick [regulatory] decisions," (274) will help the wireless industry avoid costly churn and provide substantial incentives to invest in next generation networks and technology.

The following Part's examination of "Laissez Faire Era" (275) deregulation in the airline industries shows that an acutely focused competition policy may offer the best means for facilitating network investment.

1. Deregulation and Consolidation: The Airline Industry

As one of the first national network industries to deregulate in America, (276) the airline industry is particularly noteworthy for the communications industry, generally, and CMRS providers, specifically. Despite the best efforts of Congress to bring price competition to airline consumers, the resulting deregulation of airlines was incomplete and left several avenues open for extra-regulatory pressure. These types of extraregulatory pressures felt by the airline industry provide insight into the negative consequences of the persistent regulatory burdens felt by CMRS providers.

Passage of the Airline Deregulation Act of 1978 ("ADA") (277) abolished the Civil Aeronautics Board ("CAB"), a close regulatory cousin of the original Interstate Commerce Commission and the FCC. (278) Congress established the CAB in 1938 to address the "near chaos" and "uneconomic, destructive competition and wasteful duplication of services" in the airline industry. (279) Before passage of the ADA, the CAB "regulated all domestic air transport, controlling fares and setting routes and schedules." (280) The beginning of the end for airline deregulation notably began with President Carter's 1976 appointment of Cornell economics professor Alfred E. Kahn as Chairman of the CAB. Kahn openly criticized CAB regulation as having: (a) caused air fares to be considerably higher than they otherwise would be; (b) resulted in a serious misallocation of resources; (c) encouraged carrier inefficiency; (d) denied consumers the range of price/service options they would prefer, and; (e) created a chronic tendency towards excess capacity in the industry. (281)

Shortly after his appointment, Kahn successfully instituted several liberal entry and pricing reforms that created a deregulatory fervor culminating in passage of the ADA. (282) The intention of the ADA was to provide "a gradual transition to deregulated entry and rates" (283) that would allow the market to set the price, quantity, and quality of domestic air service. However, "[w]hat had begun as a program of modest liberalization became an avalanche of abdication of responsible government oversight." (284) The ADA thus set forth a partial, (285) but "comprehensive," (286) deregulatory framework ultimately calling for the sunset of CAB regulatory responsibility by 1985.

Airline deregulation resulted in price competition that lowered real average fares, by as much as thirty-three percent, and improved and expanded service frequency. (287) The elimination of entry barriers stimulated competition from incumbent and entrant airlines that "spurred innovations in marketing, operations, technology, and governance that enabled firms to become more efficient, improve their service quality, introduce new services, and become more responsive to consumers' preferences." (288) Yet, despite lower fares and increased passenger utilization, many experts regard airline deregulation as an incomplete or partial success story at best. (289)

One major consequence of airline deregulation involved the rapid consolidation or bankruptcy of new entrants "competing" in the deregulated airline markets. Many incumbent and new entrant airline providers did not weather the deregulatory storm of (partially) unfettered competition. By 1996, "[s]ome of the most established carriers have gone bankrupt, although some operated through bankruptcy and came out on the other side. Instead of ten trunk (i.e., major) carriers in the United States, there are now six." (290)

Even today, airline consolidation makes entry difficult. (291) The recent history of airline deregulation suggests that airline provider networks, which display economies of scale over a limited infrastructure, will consolidate to a market-chosen equilibrium. In other words, demand-side economies of scale--that value consolidated networks more than independent or less-connected networks--act as a natural limit for entry in deregulated competitive markets. The success of Southwest's point-to-point business model illustrates this concept. In the 1980s, "Southwest Airlines, whose origins predate deregulation, was freed by deregulation to offer its then-unique type of short-haul, no-frills, low-priced, interstate service." (292) As noted by Poole and Butler:

   The obvious appeal of the Southwest model led to a host of startup
   airlines attempting to replicate its success. Many have failed or
   have pursued other niche market strategies (e.g., Alaska and Midwest
   Express with more-frills, point-to-point service). Most recently,
   several of the major airlines--including Continental, Delta, United,
   and US Airways--have created subsidiaries offering low-fare,
   low-frills, point-to-point service using a single type of aircraft
   and lower-paid crews.

      The low-fare, point-to-point revolution has succeeded thus far
   despite the constraints of bureaucratic, non-market aviation
   infrastructure.... But the very success of this type of service is
   putting stress on the airports it serves and on the [ATC] system. Its
   continued growth depends critically on freeing up the infrastructure
   to respond to increased future demand. (293)

Despite Southwest's success, continuing expansion of their business model by other entrant and incumbent airline providers depends critically upon infrastructure and consumer demand. As offered by Frontier Airlines' senior manager of government relations, "You can't take an SUV and expect to turn it overnight into a Honda Accord." (294)

Another major consequence of airline deregulation was the accelerated transition into a hub-and-spoke architecture for the airline networks. Hub-and-spoke architecture refers to the centralization of airline providers in a "hub" city that serves "spoke" or satellite cities. The consolidation of the airline network into a hub-and-spoke architecture was not anticipated, (295) and general disagreement exists as to the expediency of such a system. Some claim that the hub-and-spoke architecture is a direct economic result of reducing government control that accounts for consumer demand. (296) Others claim that "shifting to a hub-and-spoke system ... may cause various problems, such as increased delays, additional noise, and dissatisfied customers." (297) The incompleteness of airline deregulation, and the perniciousness of regulation in "deregulated" industries, may itself explain this disagreement. As one commentator notes:

   [T]he changes in service that resulted from the hub-and-spoke system
   were constrained by the limitations of the aviation
   infrastructure--airports and [air traffic control ("ATC")]--which had
   not been altered by deregulation. Huge increases in landings and
   takeoffs at hub airports put enormous stress on the [ATC] system.
   Unlike an investor-owned network utility (e.g., the telephone
   system), the [ATC] system is not paid for directly by fees charged to
   customers. Thus when traffic soared the system's revenues did not.
   The [Department of Transportation] still had to go to Congress every
   year to request funding for capital investments and for additional
   controllers. Its top-down, bureaucratic management style led to
   serious problems in developing and implementing technological
   modernization to cope with an airline system whose growth was now
   taking off in unpredicted ways.

      That system remains in place today, seriously constraining
   aviation growth. (298)

The "pernicious effects" (299) of regulation in an unregulated industry induced ear