GIPI | Standards | Licensing Options for Internet Service Providers

Some countries require Internet Service Providers ("ISPs") to obtain government- issued licenses before commencing operations. Other countries impose less burdensome regulatory requirements, permitting ISP operations pursuant to general authorizations. A third category of countries imposes neither licensing nor general authorization requirements on ISPs. What are the differences among these approaches? What are the benefits and disadvantages of adopting licensing or authorization requirements for ISPs? In the event a government opts to impose a licensing or general authorization requirement on ISPs, what are the "best practices" for how the licensing or authorization rules and procedures should be structured?

I. What Regulatory Methods Can Be Applied to the Operations of ISPs?

Regulators generally can choose from among three different approaches to regulation of communications operators and services:

A. Open Entry / No Licensing or Authorization Requirements

Under an "open entry" regulatory approach, the affected communications service is fully liberalized and regulators impose no licensing process or qualification requirements. This approach may prove useful where an activity is technically within the definition of a service that is subject to regulation (e.g., offering a communications service to the public), but where there is no justification for imposing a licensing or authorization requirement.[ 1 ] This is not to say that unlicensed operations are unregulated; they are still subject, for example, to laws governing businesses in general. Further, operational requirements can be imposed through legislation or a general regulation or order. The open entry approach means that no license or authorization is needed to commence business. This open entry approach has been adopted in some countries for ISP operations and for the provision of "value-added services."

The U.S., for example, does not license or authorize ISPs.[ 2 ] Instead, e-mail, data and Internet services are treated as unregulated "information services," and ISPs are permitted to operate unfettered in a competitive and free market, subject only, with a few limited exceptions, to general business laws.[ 3 ] The decision not to license Internet service providers or regulate these services has played an important role in the expansion of the Internet in the U.S. Likewise, under the approach favored by the European Union, ISPs and other information services should require no license or general authorization to operate.

However, not all countries have adopted this regulatory approach towards ISPs or related information services. To the contrary, a number of countries require ISPs to obtain a license or a general authorization prior to commencing operations. These two regulatory systems are briefly described below.

B. General Authorizations

General authorizations are used to permit an entity to provide a service without obtaining a prior explicit grant or approval by the national regulatory authority. The terms of the general authorization can be established in advance through either a class license, a rule or regulation, or general legislation. Any entity that complies with the defined terms and conditions of the authorization[ 4 ] is permitted to provide the service without any further decision or licensing action by the regulator.[ 5 ]

This method of authorizing service providers is useful where the issuance of individual licenses is not justified, but where there are significant regulatory objectives that can be achieved by establishing broad, general conditions. Many countries use this authorization method for data transmission services, resale services or for private networks.

C. Individual Operator Licenses

Individual licenses are granted by a national regulatory authority to permit an entity to provide a communications service or to operate specific facilities. Licenses may be subject to conditions established under general law (i.e., conditions that are applied to all operators). In some cases, additional obligations also are included as a specific condition of the individual license. Licenses, therefore, frequently subject an entity's operations to regulatory obligations that are far more extensive than those required in a general authorization.

In contrast to entities operating pursuant to general authorizations, service providers that are subject to a licensing regime are not entitled to commence their service operations until the regulatory authority has granted explicit permission and issued a license. Individual licensing mechanisms, therefore, are most appropriate where the regulator seeks to control the structure or functioning of a market and the entry of service providers into a particular market. This situation could occur, for example, where the regulator seeks to maximize the use of a scarce resource (i.e., radio spectrum), perhaps by permitting only a limited number or type of providers to offer the service. For these reasons, licenses are usually awarded pursuant to a competitive selection process.

In light of the heavy involvement and oversight demanded of the regulator under this licensing scheme and the significant regulatory burdens placed on service providers, it is not surprising that the European Union has concluded that the use of an individual licensing mechanism is not justified for ISPs.[ 6 ] Individually, many countries have determined that ISPs should be permitted to operate under a lesser regulatory burden than that imposed by an individual licensing scheme.[ 7 ] Some countries, however, have opted to impose a licensing requirement on ISPs.[ 8 ]

II. What Are the Pros and Cons of Adopting a Licensing or General Authorization Requirement for ISPs?

The decision to adopt an individual licensing mechanism for ISPs effectively establishes a nation's regulatory authority as the country's "gatekeeper" to the Internet market. If the regulator adopts requirements for ISPs that are unduly burdensome, restrictive or opaque, these procedures may slow or prevent the entrance of ISPs into a nation's market. The licensing process thus can become a means for regulators to restrict, intentionally or not, the market access of ISPs, which will keep costs high and limit the overall growth of the country's communications and information services. To avoid such results, the U.S. and the European Community advocate that countries not adopt licensing requirements in mature and competitive markets.

Although this deregulatory approach has many advantages, it may not be appropriate in every market. To the contrary, there may be legitimate reasons for countries to require individual licenses where the telecommunications market is not fully competitive or where the business regulatory and consumer protection framework has not yet been established. In some markets, therefore, it may be beneficial to provide ISPs with some type of licensing mechanism.

In some countries, regulators detail, in the license itself, the rights as well as the obligations of communications service providers. In some instances the license constitutes an actual contract between the regulator and the operator.[ 9 ] Consumer protection conditions (those related, e.g., to price regulation; billing practices; consumer complaint mechanisms; dispute resolution; limitations on liability for service defaults; and mandatory services due to consumers, such as directory services, operator assistance and emergency services) and conditions related to interconnection are frequently described in telecommunications licenses that are issued to carriers in such countries. In Mexico, for example, quality of service standards and targets for the telecommunications carrier are explicitly included in the carrier's license. Similarly, the license may specify rights to which the operator is entitled.

This licensing practice differs from that found in countries, such as the U.S. and Canada, where there has not been a tradition of issuing licenses for certain telecommunications or information services. Instead, regulatory terms and conditions have traditionally been imposed on service providers through decisions, orders or tariff approval processes of a government regulatory authority rather than through the terms of an individual license. In Canada, therefore, quality of service standards, targets and other matters would not be included in a telecommunications license and would instead be specified in ancillary decisions and orders of the regulator.

The use of licenses that detail the specific rights and obligations of service providers may be desirable, however, in countries that lack clear or consistent regulatory policies or frameworks, or that have economic or governance problems. Countries that lack an established regulatory framework yet seek to facilitate growth of and investment in communications or information service providers may choose to issue licenses in order to provide sufficient regulatory certainty to these service providers.

By specifying the rights and obligations of an ISP, a license may provide the relevant stakeholders - including the ISP, its investors, the government, and even consumers - with a clear understanding of what the ISP is, and is not, permitted or required to do during the term of its license. This clear definition of a communications provider's rights is often critical to enable the business to raise the financing needed to fund its operations and otherwise to operate its business.[ 10 ]

In the event that a licensing mechanism is adopted in an effort to protect ISP rights, regulators must ensure that any general authorization or individual licensing system is structured to provide for the lightest possible regulation of ISPs.

III. Best Practices for Licensing and Authorizations

Although licensing methods vary widely among countries, there are some common features that are considered to be among the best licensing practices. The following description draws largely upon practices advocated in the Licensing Directive adopted by the European Union in 1997, the General Agreement on Trade in Services (GATS) and the 1997 Agreement on Basic Telecommunications of the World Trade Organization (WTO). While the EU Licensing Directive is designed to govern procedures for authorizing telecommunications networks, many of its general principles also would be applicable to any licensing scheme adopted for ISPs.

The recommended elements of an ISP licensing or authorization scheme are briefly listed below. These elements generally seek to ensure that any licensing or authorization requirements are open, non-discriminatory and transparent, and do not constitute unnecessary barriers to competition and innovation.

A. Best Practices for General Authorizations

B. Best Practices Applicable to Licenses

C. Best Practices Applicable to Both Licenses and Authorizations

1. In a market-based system, regulations frequently are used to promote desirable conduct that the regulator doubts would occur in the market in the absence of regulation. Alternatively, regulations may be used to deter undesirable conduct that the regulator believes the marketplace may promote or allow in the absence of government prohibitions. In many cases, however, the marketplace will function in a beneficial manner and will not create undesired results, so active regulation of a particular activity is not necessary.

2. Although the U.S. regulates "telecommunications services" when such services are provided by common carriers, it has opted not to regulate the provision of "information services," such as Internet access, that are provided over these telecommunications facilities. The U.S. has determined that the public interest does not require the regulation of these information services.

3. The Federal Communications Commission ("FCC"), the federal agency which regulates the provision of most communications services in the U.S., also has declined to impose regulations that would guarantee ISP access to the increasingly important cable platform. To date, the FCC has declined to intervene in some of the infrastructure access questions that have been raised by information service providers and has instead opted to let these issues be resolved by the marketplace.

4. The conditions imposed in these authorizations frequently relate to consumer protection and essential technical requirements. See the discussion in Section III regarding permissible authorization procedures.

5. See e.g. Directive 97/13/EC of the European Parliament and of the Council of 10 April 1997 on a common framework for general authorizations and individual licenses in the field of telecommunications services, Official Journal L 117, 07/05/1997 p. 0015-0027 ("Licensing Directive") http://europa.eu.int/ISPO/infosoc/telecompolicy/en/dir97-13en.htm. The EU Directive recommends that any conditions imposed via general authorizations should be limited to "essential requirements."

6. Under current EU law, the provision of voice telephony can be licensed. There is a proposal pending, however, that would limit licensing even in the field of telephone services only to situations that involve rights to use scarce radio frequencies and numbers.

7. For example, a website maintained by the International Trade Administration of the U.S. Department of Commerce ("ITA") indicates that, as of November 1999, France, Sweden, Finland and Canada did not require ISPs to obtain licenses. Belgium and Austria did not require ISPs to obtain a license, however, both required ISPs to submit a declaration form to the relevant national regulatory authority before initiating operations. Italy required ISPs to obtain a general authorization.

8. The ITA website indicates that, as of late 1999, Venezuela and Argentina required ISPs to obtain value added service licenses. Greece, Turkey and Portugal also reportedly required individual licensing of ISPs.

9. This approach is used where licenses are granted by way of traditional "concessions." Licenses in this format generally describe the rights and obligations of both the regulator and the operator in detail and are signed by both parties. See Telecommunications Regulation Handbook � Licensing Telecommunications Services (Module 2), ed. Hank Intven (2000) at 2-9, http://www.infodev.org/projects/314regulationhandbook/.

10. The potential importance of this licensing mechanism is demonstrated in a Web site post by the International Trade Administration of the U.S. Department of Commerce ("DOC"), dated August of 1999. This website indicates that ISPs in Botswana requested that the Botswana Telecommunications Authority (BTA), the country's independent regulatory body, create a licensing mechanism in order to give the ISPs legal standing in negotiations with the Botswana Telecommunications Corporation (BTC), the country's monopoly line telephony provider. The BTA was reportedly considering the request although it wanted to avoid a regulatory situation where it would be required to scrutinize companies that sought to provide Internet services. The DOC speculated that the likely outcome would be a license on demand system where the BTA provided licenses to ISPs without a review process. Since this Web site has not been updated since late 1999, there is no further information regarding action by the BTA on this request.

11. These conditions are drawn from the Annex to the EU Licensing Directive. Many of the conditions are applicable to telecommunications providers rather than ISPs and therefore have not been listed here.

12. See Appendix A, Annex to the Fourth Protocol to the GATS Agreement, the "Agreement on Basic Telecommunications" negotiated under the auspices of the World Trade Organization (WTO) in February 1997, which came into effect on January 1, 1998. These procedures also should be applied to any criteria associated with an authorization or licensing process.

13. The regulator must publish any notification, registration or licensing requirements that must be met before any ISP is permitted to do business.

14. Some of this information may be relevant to regulators when they are reviewing requests to provide broadcast, wireless, voice telephony or other services that use scarce resources or otherwise affect the provision of essential communications services. These showings are arguably of lesser importance, however, for information service providers, such as ISPs. Regulators should request such materials only when they have an actual need.

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