Wednesday, May 27, 2015

FCC Chairman Tom Wheeler, the Wall Street Journal and the Secondary Meaning of Incontinent

          Today the Wall Street Journal reached a new nadir of snark and journalist irresponsibility.  In one op ed, Holman W. Jenkins, Jr. misrepresented the nature of FCC broadband oversight as “monopoly regulation,” and implied that Chairman Wheeler is a liar and Obama pawn. See http://www.wsj.com/articles/washington-makes-a-broadband-hash-1432682871.

            Additionally, Mr. Jenkins accused Chairman Wheeler of incontinence, which I now know has a secondary meaning of lacking in moderation or self-control; unceasing or unrestrained.  So Mr. Jenkins wasn’t making a medical diagnosis. Okay, but I know an (begin encryption) ick pray when I see one.
 
            This kind of op-editorial is shameful. 
 
            If the FCC is engaging in monopoly broadband regulation, how can there be multiple broadband operators who want to merge?  Bear in mind that these merging ventures will take pains to explain the robust competitiveness and non-monopolistic nature of the broadband market.  Mr. Jenkins must be referring to price, or rate of return regulation, but guess what Mr. (begin encryption) Ace in the Hole?  The FCC expressly doesn’t reserve the option of doing either.
 
            So Mr. Jenkins doesn’t believe the FCC or Mr. Wheeler.  Perhaps you should have similar skepticism about Mr. Jenkins’s verisimilitude.

Tuesday, May 26, 2015

If You Like the Airlines’ Consolidation, You Might Love an Even More Concentrated Broadband and Cable Marketplace

          With several cable television operations in play, perhaps we should consider what’s behind the urge to consolidate?  Bear in mind that the broadband and cable television business already is quite profitable and concentrated, a key difference with the U.S. airline industry that lacked profits and high concentration before its flurry of mergers.

            The answer: more concentration makes it easier for the survivors to avoid sleepless afternoons innovating, competing and enhancing the value proposition for consumers.  It is that simple: with fewer major players, the odds decline substantially that a maverick will buck the incentive to match the terms and conditions set by the major operators.  Why offer something faster, better, smarter, cheaper and more innovative in lieu of operating within the price, service and customer care umbrella established by the top one or two operators?

           Consider the consequences on innovation and competition If AT&T has succeeded in acquiring TMobile.  Does anyone (including Wall Street Journal editorial writers) believe consumers would enjoy the benefits of data rollovers, cheaper rates, lower roaming fees and the option to bring their own devices?

            In a concentrated industry, operators have great incentives to match each other’s rates and service. That’s what consumers get from the spate of recent airline mergers.  Even the industry maverick Southwest has “gotten with the program” on fares and many of the highly lucrative extra fees. Call it collusion, consensus, or conscious parallelism: the airlines offer roughly the same fares and fees?  Can you recall a highly advertised sale in the last year?

            I don’t see much upside to consumers in having a stronger number two cable and broadband provider.  Recall that Comcast executives emphasized how their company does not compete with Time Warner Cable.  Comcast’s logic was that if it didn’t compete with Time Warner, then there shouldn’t be any problems in acquiring their market share.  So how would a larger number two cable and broadband operator become a more aggressive competitor of Comcast?

           Extreme concentration of one old media market (cable) and one new media market (broadband) has little impact beyond further enriching managers and stockholders.  With extreme barriers to market entry concentration does not stimulate new competition.
 
            Highly concentrated media markets make it easier for the creation of platforms and bottlenecks through which a substantial portion of video content must travel.  On the buy side, an even larger content distributor might extract greater concessions from content providers.  Maybe size and scale matters, but the risk lies in creating a near monopsony marketplace where only a handful of players compete for content.  Also what incentive does New Charter have in passing program acquisition savings to subscribers?  The airlines haven't had to share a 40% drop in fuel costs.
 
            On the delivery side, what good will result when two companies control nearly 30% of the distribution grid for actual broadband consumption?  I emphasize current broadband usage and not potential competitors who offer a broadband option, albeit one that costs vastly more on a per Megabyte basis (terrestrial and satellite broadband).

            Lastly this deal combines companies that join Comcast at the absolute bottom in terms of customer service.  Ask any 10 cable subscribers if they have had a billing or service hassle and 9 or more will answer yes.  So how would a merger improve service when the companies involved already have determined they don’t have to improve customer care?

Thursday, May 14, 2015

Mistakes, Mistruths and Outright Lies in the Assessment of Broadband Competition

           Readers of the May 13, 2015 edition of the Wall Street Journal got a triple dose of snark and questionable journalism.  On back to back pages, this major publication informed us that U.S. “broadband is a competitive market and becoming more so as fixed and wireless converge.”  Holman W. Jenkins, Jr. suggests that we ignore any rebuttal or contarary reports from the “know-nothings in Washington.”  See http://www.wsj.com/articles/why-aol-matters-again-1431471920.

            On the next page, the editorial writers of the Journal contradict Mr. Jenkins on Verizon’s motivation for wanting to acquire AOL.  Instead of pursuing new profit centers through vertical integration, such as advertising platforms, Verizon has to acquire AOL due to competitive necessity: “A company with a stranglehold on the connection to the customer wouldn’t need to buy AOL.”  See http://www.wsj.com/articles/the-aol-telltale-1431472741.  The editors see broadband competition and the Internet as “hypercompetitive.”

            The Wall Street Journal has led a campaign to convince legislators, judges, consumers and others that the broadband Internet access marketplace operates with such robust and  sustainable competition that any government oversight is inappropriate, if not illegal. 

            This conclusion is simply not true unless one intentionally ignores basic economics, antitrust law and common sense.  To conclude that the U.S. broadband marketplace is competitive one must include any source of access to the Internet, regardless of bandwidth, transmission speed (bitrate) and cost.  Instead of many instances where consumers, such as myself, count one and only one available broadband supplier, broadband competition true believers see seven or more suppliers.

            True believers see what economists term cross-elasticity where it surely does not exist.  They treat as “options” Internet access technologies that consumers do not consider equivalents. So for true believers, it is reasonable to include Digital Subscriber Line and perhaps even conventional dial up access, even though 1.5 Megabits per second service and surely 5.6 kilobit per second service does not cut it for the kinds of services broadband subscribers expect to access via their links.  DSL might barely provide a single, tolerable link to Netflix, but not if two members of a single household seek access at the same time.

            True believers in broadband competition readily add four or more terrestrial wireless carriers and at least one satellite option to the invemtory.  Yes 4G wireless can provide broadband access at sufficient high speeds, but a competitive analysis requires consideration of cost.  Many 4G subscribers gladly pay for wireless data plans, but the willingness to pay ends when a free or lower cost option is available. With data plans limiting subscribers to a miserly 1 or 2 Gigabytes per month, subscribers understandably migrate to their wired broadband service accessible with a wireless Wi-Fi router. Wireline broadband offers a monthly data allowance of 250 Gigabytes or more.  

            A back of the envelop calculation shows a wireless broadband rate of approximately $20 a Gigabyte and even more for a satellite option, factoring in equipment costs.  Wireline access costing as low as 12 cents a Gigabyte, based on monthly consumption of the full allotment.  The statistical compilation gets tricky here based on one’s agenda.  Sponsored researchers can show that Americans have the lowest cellphone rates in the world as least for voice and texting, by using 1000s of minutes and 1000s of texts per month.  So in fairness the 12 cent rate for wired broadband access could rise to about a $1 per Gigabyte if a broadband subscriber used far less than the total amount available.

            Wall Street Journal editorial writers and columnists ignore the reality of what consumers consider truly competitive broadband options.  Few consumers think “Two Buck Chuck” wine from Trader Joe’s competes with one hundred dollar Grand Cru even though both are wine products. Some might even consume both on different occasions, but doing so does not make the two product competitive alternatives.

            So at the end of reading the two pages, this loyal subscriber to the Journal wonders did they make a simple mistake or two or three, offer a little misinformation to make a bigger point, or lie through their teeth?

Tuesday, May 12, 2015

Verizon and the Mixed Prospects of Vertical Integration

          Verizon will invest $4.4 billion to acquire AOL; see http://www.nytimes.com/2015/05/13/business/dealbook/verizon-to-buy-aol-for-4-4-billion.html?emc=edit_na_20150512.

            At first blush, this makes plenty of sense: Verizon has lots of retrained earnings and the ability to borrow billions; the company does not want to rely solely on wireless; and moving up the vertical food chain into content helps the company diversify and augment its home grown content.
 
            Okay so far, but we should not forget the billions lost in value when Time Warner, another content distribution carrier, tried to extract the value in AOL.  So what’s different this time?  Bear in mind that a few years after divestiture from AT&T, Verizon experimented with self-generated content and failed miserably.

            On the other hand, Comcast has successfully integrated content distribution with content generation.  The company acquired NBC-Universal and has ownership interests in many cable programming networks.

            Is there a way to predict a company’s prospects for a vertically integrating acquisition?

            I can think of two factors: the willingness of the acquiring company to encourage management of the acquired company to stay and more broadly whether the acquiring company can broaden its perspective.  Verizon need to expand its telephony (Bellhead) management skills to include content and alternative distribution channel management (Cablehead/Nethead).  Telephone company management skills will not suffice.
 
            You can teach an old dog new tricks, but Verizon would be wise to bring in several new breeds.

Monday, May 11, 2015

Circuit-Switched Telephony Metadata

          The Second Circuit Court of Appeals has determined that the acquisition and storage of all wireline and wireless telephone traffic does not comply with applicable laws covering national security.  See ACLU v. Clapper, available at: http://www.ca2.uscourts.gov/decisions/isysquery/773a98db-d41d-4db8-95aa-182f994923b5/1/doc/14-42_complete_opn.pdf.

            You might consider reading the section defining metadata as applied to telephone calls, particularly in the context of now knowing that the National Security Agency and/ or other government entities capture such information for each and every call, international and domestic. Former Vice President Dick Cheney and others take comfort in the fact that telephone metadata does not include a recording of the call.  However, this fact provides little comfort if a larger number of citizens—and voters—understand what is captured and cataloged.

            In current circuit-switched telephony, carriers set up a temporary, dedicated pathway between call originator and recipient.  Metadata data identifies the telephone company switching facilities used to create a complete link. Put another way, because the location of telephone switching facilities are known—and do not move—telephony metadata provides an accurate report on the location of callers and call recipients.

            The Second Circuit did not address the Constitutional (First Amendment and Fourth Amendment) implications of such data gathering. Had the court done so, it quite likely would have held that government has no lawful authority to track who associates with whom, absent probable cause that one or both telephone users have, or soon will commit a crime.

            A metadata capture program for every call captures information that violates the privacy expectation of citizens as well as their right to associate with anyone free of government cataloging. 

            Would citizens tolerate a government program that compiles the name and address of each letter writer and letter recipient?  Such information may be necessary for the Postal Service to route and delivery letters.  Additionally this information is quasi-public in the sense that it lies on the envelope and not inside it.  But who would support a massive investment of time and money for a government program to record such metadata?

 

Hi-Fi, Wi-Fi and Fi Wordplay

             Readers of a certain age probably know the full words to the acronyms in this blog edition.  Hi-Fi refers to high fidelity and the stereo receivers and amplifiers of the 1960s that reproduced music with greater frequency range.  Wi-Fi refers to wireless fidelity, possibly a stretched play on words using the Hi-Fi concept to cover wireless broadband access.  The mostly male, engineers that served on various 802.11 Institute of Electrical and Electronics Engineers standards groups must have had a chuckle.

            Along comes Fi from Google: we move from high, to wireless to a new brand of wireless.

            Okay, some of us get the wordplay.

Tuesday, May 5, 2015

Will Skinny Bundles Reduce Your Video Bill?

            Consumers have tolerated years of bloated video programming tiers with annual rate increases well in excess of the generate inflation rate. They have not had any options largely because no intermediary wanted to tick off a key programming source.

            Seemingly overnight, intermediaries have begun to offer smaller and presumably cheaper bundles of programming.  If we’ve reached a tipping point, perhaps intermediaries have grown bolder in light of programmer experiments with disintermediation, the elimination of an intermediary heretofore able to impose a markup for little value enhancement.  HBO, CBS, Netflix, Major League Baseball and others now offer a viewing option requiring a broadband subscription without also requiring a pay television subscription.

            Will these new skinny bundles offer consumers a cheaper and better value proposition? Don’t bank on it.

            Savings, if they occur, will flow to consumers that eschew all sports content networks and refrain from the most costly non-sports networks.  So if the following content providers offer you “must see” video, a skinny bundle probably won’t save you money: any and all ESPN channels, any Regional Sports Network, TNT, Disney, Fox News, NFL, USA and TBS.

            Programmers, new packagers like Hulu and incumbent distributors know how to blend must see and never see video.  Those undesirable channels do not add much by way of cost and get added, largely because content producers like to expand their “shelf space” with ancillary channels.

            A skinny bundle likely will not have must see content in inventory, or will require supplemental payments.  No one has announced a true a la carte single network purchase option, instead offering smaller, additional tiered, themed content like sports, children’s programming, lifestyle, etc. as Verizon has proposed.

            Bottom line: even if you might make do with 7 -15 channels, others in your household typically won’t make do with the same ones you like, or the skinny bundle inventory.

Thursday, April 23, 2015

5 Reasons Why Consumers Hate Comcast

     Comcast suffers from an unintended, but surely predictable consequence of its corporate strategies.  The company makes itself an easy target for scorn by taking every opportunity to maximize revenues.  Of course publicly traded companies have to maximize shareholder value.  But Comcast ignores the usual adjunct of trying to be a good citizen and not coming across as too clever and greedy.

     Set out below are 5 reasons while subscribers, in particular, personify and vilify the company.

1)         Deliberately skimping on customer service
 
     I simply cannot find one Comcast subscriber who lacks a story about shoddy treatment by the company.  It’s that simple: Comcast assumes that it does not have to invest in customer care.  For so many years, the company has been able to raise rates well in excess of statistical measures of price increases, even after normalizing for expanding numbers of channels.  Such assumed inelastic demand tilts the assumed negotiating leverage in favor of Comcast.
 
2)         Bait and Switch

     Like many companies, Comcast offers “promotional” short term inducements for new subscribers.  Unlike most companies, Comcast does not remind you when the “actual” rates kick in.  Subscribers who receive a 100% rate increase are not happy with the company, but Comcast knows that most won’t cut the cord. 

3)         Sneaky Ever Expanding Billing Line Items

     Comcast appears to have a strategy of raising subscribers’ out of pocket payments with new billing line items.  Perhaps Comcast wants subscribers to think the government is responsible for the new charges.  Perhaps the company thinks subscribers will ignore a higher out of pocket cost by discounting the new fees, or passively accepting them just as we do with car rental line items.
           
     Recently Comcast inserted a new charge ostensibly to help the company defray the cost of carrying local broadcast signals.  Why a new charge when the company already charges for basic tier service and has a lengthy history of having to pay for carriage rights?  Comcast wants to highlight how such retransmission consent payments have increased.  Of course the company wins on both sides of this outcome: its NBC stations receive the payments and Comcast can now secure a dedicated line item to help defray this expense.  Bear in mind that the company’s charge has no relationship to the number of local stations carried, or the rate of increase in retransmission costs.
 
     Additionally Comcast has executed a strategy that makes it difficult or impossible for subscribers to avoid having to rent devices such as cable cards, modems, converters and set top boxes.  The company earns over $1 billion annually in equipment rentals.  With such a large revenue stream, Comcast predictably takes ever effort to prevent subscribers from using their own devices.  The company does not cooperate with consumer electronics manufacturers and has made it near impossible for subscribers to use a non-Comcast set top box and Comcast supplied CableCard.  Extra points for requiring that a Comcast technician install the Card, only after a few or more calls to customer service.
 
     Subscribers can save $10 a month simply by installing their own cable modem.  Of course it will take some calls to Comcast to register the device and yet again poor customer service awaits.

 4)         Lackluster Compliance with Legislative and Regulatory Mandates

     The FCC has fined Comcast for failing to comply with requirements the company offered, or the FCC mandated when approving prior mergers and acquisitions.  Comcast deliberately failed to place the Bloomberg business news network on a channel near the company’s CNBC network, despite having agreed to do this.  Just slipped their mind.

     Similarly the company directed its customer service agents not to mention that subscribers have the option of buying broadband access only.  Extra points for charging more for broadband if a subscriber does not also pay for cable.

     The company also has a penchant for making lemonade out of regulatory lemons.  For example, Comcast wants everyone to know how much it has embraced network neutrality, going so far as to extend it to Time Warner properties.  Never mind that the company opposed the FCC at every step, litigated the issue and triggered the campaign for network neutrality by lying to the FCC about whether Comcast used tactics to block BitTorent traffic.

5)         Intracorporate Favoritism

     Comcast and its sponsored researchers want to convince Congress and the FCC how a vertically integrated company can operate more efficiently and presumably better serve consumers.  Sometimes this makes sense, but let us not forget that the largest reduction in shareholder value resulted when two companies sought such synergy through vertical integration.  The two companies: Time Warner and America Online.
 
     A cheeky example of Comcast family treatment lies in the place of the Golf Channel on the basic tier and the Tennis Channel on a more expensive and less viewed sports programming tier.  Was this decision the product of disciplined financial analysis, or did the company opt to showcase its owed networks while handicapping unaffiliated ones?

     The company adds insult to injury by sponsoring experts to “prove” that the company did, or could have done the necessary analysis that would show the comparatively greater popularity of golf over tennis.  An appellate court bought the analysis in large part, because the Tennis Channel could not readily prove how much more popular it would be had Comcast opted to place it on the basic tier.

Wednesday, April 22, 2015

Google Wireless: This Could Get Big . . . Eventually


             It appears that Google soon will launch a lower cost, metered wireless service.  See http://www.wsj.com/articles/google-set-to-unveil-wireless-service-1429660082.  The company has made an impact in data transmission infrastructure with Google Fiber, albeit only in the 8 metropolitan areas it now serves.  See https://fiber.google.com/about/.  Google may repeat its success on a slow and incremental basis.

            Bear in mind that Google Fiber offers facilities-based broadband competition.  At least initially Google will package and resale bulk wireless bandwidth from TMobile and Sprint.  Additionally most consumers will have to acquire one of the few handset types compatible with the service.

            On the other hand, Google has the patience and deep pockets needed to see this project through.  Google is not the first venture to resale wireless, or to combine cellular and Wi-Fi access to the Internet.  However it has the buying power and tolerance for financial losses sufficient to allow the venture to acquire market share slowly.

            Should Google Wireless reach a critical mass, the impact will be huge.  Consumers’ expectations could change in terms of what a wireless service should offer and what it will cost.  Currently consumers have to commit to data plans that add significant blocks of capacity, but at rates considered quite expensive relative to global averages. U.S. carriers can tout low data rates only by spreading high monthly costs over similarly high data monthly allowances.  Had AT&T gotten government authorization to acquire TMobile, no carrier or reseller would have offered subscribers the opportunity to carry forward unused capacity into the next month. 
 
            Google Wireless will offer a metered, pay as you go a la carte opinion that appeals to cost-conscious consumers.  If Google gets traction, expect more sponsored data plans to become available, provided the FCC does not consider them a violation of network neutrality policies.

Tuesday, April 7, 2015

Rethinking Efficiency in Size and Vertical Integration

       My Wharton education in economics has led me to assume that large firm can exploit greater economies of scale and scope.  Similarly vertically integrated firms—operating up and down an industry “food chain” can accrue operational efficiencies.

       Theory conflicts with my frequent—and less than satisfactory—encounters with large firms.  In the last two weeks I have travelled extensively and regularly have encountered instances where large firms clearly and intentionally scrimp on customer service, management of web sites and possible maintenance of aircraft.

        Over my 22 years at Penn State, one out of three or four airplane departures from and to my little down has triggered a delay, or cancellation.  On two recent occasions, staff at United Express’s Commuteair, took over 90 minutes to attempt a light bulb repair.  They achieved success in one instance and gave up in the other.  Mainline United cannot seem to get its old or new inflight entertainment systems to work: the audio jacks break, or the new Wi-Fi system doesn’t work.  On an 8 hour flight from Frankfort to Washington, Dulles a light bulb turned on and off repeatedly for the duration of trip.  Minor inconveniences, but what do all these screw up say about United’s commitment to maintenance big and small?

            Bigness, or perhaps the lack of competition also encourages companies to cut corners and to chisel.  I am convinced that so many Comcast customers viscerally hate the company, because of the perception that Comcast conscientiously tries to extract maximum revenues in sneaky and clever ways; just examine the ever increasing line items in their bills.
 
            Comcast is no alone in this race to the bottom. While buying hotel space on Hotwire, using a non-U.S. site, the company snuck in trip insurance without even offering customers the opportunity to choose no.  The U.S. site requires customers to opt out rather than opt in, but the European and Asian site simply includes the charge. Try getting Hotwire to respond to emails. Company reps simply cut and paste scripts that do not respond to the problem and of course do not offer a refund.  I was told to contact the insurance company, even though it was Hotwire that triggered the charge in the first place.  While abroad I was supposed to call Hotwire, so I did.  Of course no live person was available to take my call.
 
            On an on it goes leading me to think that more and more companies can reduce the value proposition of their service without loss of market share.  This has prompted me to rethink my leeriness about the FCC’s reclassification of Internet access. 

            Might companies like Comcast see a financial gain in reducing quality of service as a means to nudge—if not push—end users and upstream content providers to more expensive “better than best efforts” traffic carriage?

Friday, March 20, 2015

New Video Streaming Options and Network Neutrality

           Over the last few weeks, several video streaming options have arrived.  See, e.g., http://www.nytimes.com/interactive/2015/business/media/streaming-tv-cord-cutting-guide.html?_r=0.  These new services raise two key pocketbook issues:

            1)         Can consumers reduce their total out of pocket costs by cutting, or shaving the cable television cord? and

            2)         Can incumbent broadband access providers retaliate by raising the costs of both content providers’ and end users, despite the FCC’s 2015 Open Internet Order?

            Cord Cutter/Shaver Empowerment?

            Many press accounts suggest that consumers can save money by terminating their cable subscription, or migrating to cheaper programming tiers.  If one can tolerate the loss of access to some live sporting events, from networks such as ESPN, then a significant savings accrues even factoring in a Netflix and Hulu subscription.  Cord cutting/shaving works best for consumers who can receive broadcast networks off air without having to install rooftop antennas.

            However, the cost savings equation also has to factor the cost of broadband access and the near certainty that last mile providers, like Comcast, will increase rates for “naked” broadband services, i.e., subscriptions that do not bundle video and/or telephone service with broadband access.  Despite the theoretical argument that platform operators/intermediaries controlling a doubled-sided market cannot gouge, the possibility exists that cable modem service providers can simultaneously raise broadband rates for downstream retail subscribers and extract higher prices and surcharges from upstream content distributors.

            The Specialized Network Exemption from Neutrality

            Another more ambiguous, but potentially harmful issue arises with the proliferation of streaming options: what flexibility and exemption from absolute neutrality can Internet Service Providers (“ISPs”) can achieve?

            This issue will start the process for the many ad hoc FCC "interpretations" that will occur going forward.  Predictably the Commission will have two conflicting issues in play.  On one hand, the 2015 Open Internet Order recognizes a specialized network option for traffic such as VoIP.  I believe the Commission will recognize that the low latency requirements of IPTV also qualifies for a conditional exemption from absolute neutrality.  But on the other hand, the Order explicitly states that the specialized network exemption shall not provide a loop hole for evading the overarching requirement for neutrality.

            The 2015 Open Internet Order generally prohibits paid prioritization and establishes a “no-unreasonable interference/disadvantage” standard for ISP treatment of upstream traffic, like that flowing from content sources.  This probably means that the FCC will want to make sure that specialized routing arrangements are technically necessary on quality of service grounds and not simply a construct to favor traffic of affiliates, or surcharge payers.  Sponsored data arrangements also fit into this category.

            Does an ISP simply partition generic bandwidth and call it a specialized network, or does the ISPs really and truly do something by way of dedicated, management?  Bear in mind that some way, somehow the FCC has avoided having to examine the functions and services performed by proxy server/CDN companies like Akamai.  Does an ISP simply have to show it operates like Akamai, but extends the value added, specialized features for the link downstream to end users?

            Stay tuned.

Thursday, March 12, 2015

A Concise and Preliminary Summary of the FCC's Published Open Internet Order

        Soon after learning that the FCC would release it Open Internet Order, I started to read, skim and summarize. Nine or so hours later, I have generated a summary that should correctly provide the main points of this 400 page document.  A better formatted version of the summary is available at:
http://www.personal.psu.edu/rmf5/.
 
          So with the proviso that a more complete reading will uncover more, set out below is an overview.

            Opting to find and apply direct statutory links to establish lawful jurisdiction, the FCC’s 2015 Open Internet Order reclassifies broadband Internet access [1] as common carriage with no distinction between wireline and wireless Internet Service Providers (“ISPs”). [2] The Commission chose to apply muscular rules and regulations rather than continue treating ISPs as information service providers, subject to private carrier, government oversight.


            Reclassification offers the opportunity for more clear-cut regulatory oversight.  However, it certainly will trigger litigation whether the FCC has engaged in rational decision making based on a complete record evidencing substantially changed circumstances occurring in the ten years running from 2005, when the FCC opted to classify Internet access as an information service. [3]
            The FCC emphasized the need for narrowly crafted rules designed to “prevent specific practices we know are harmful to Internet openness—blocking, throttling, and paid prioritization—as well as a strong standard of conduct designed to prevent the deployment of new practices that would harm Internet openness.”  [4]  The Commission emphasized that ISPs have both the incentive and ability to leverage access in ways that can thwart the virtuous cycle of innovation and investment in the Internet ecosystem:
The key insight of the virtuous cycle is that broadband providers have both the incentive and the ability to act as gatekeepers standing between edge providers and consumers.  As gatekeepers, they can block access altogether; they can target competitors, including competitors to their own video services; and they can extract unfair tolls. [5]
            The FCC considers it essential that ISPs not have the ability to exploit Internet access in anticompetitive ways that would reduce demand for Internet services. [6] The Commission established a clear, ISP nondiscrimination rule:
Any person engaged in the provision of broadband Internet access service, insofar as such person is so engaged, shall not unreasonably interfere with or unreasonably disadvantage (i) end users’ ability to select, access, and use broadband Internet access service or the lawful Internet content, applications, services, or devices of their choice, or (ii) edge providers’ ability to make lawful content, applications, services, or devices available to end users.  Reasonable network management shall not be considered a violation of this rule. [7]
            The FCC also clarified and strengthened its requirement that ISPs operate with transparency [8] so that both retail broadband subscribers and upstream carriers and sources of content understand the manner in which they can acquire broadband services. [9]  However the FCC specified that its Internet access requirements only apply to the retail practices of ISPs, vis a vis downstream end users, and not to the terms and conditions of interconnection between ISPs and other upstream carriers and sources of content. [10]
            The FCC now considers ISPs as gatekeepers standing between end users, who rely on common carriage, telecommunications service and upstream content and applications still treated as information services. [11]  While the Commission determined that the common carrier classification applies to both upstream and downstream interconnections, [12] it will refrain from applying the access restrictions on upstream interconnection unless and until anticompetitive conduct arises. [13]  Similarly the FCC specified that it will not apply open Internet access rules on data services, which may traverse the same networks used for Internet access.  However, the Commission will seek to ensure that ISPs do not use this exemption as a way to evade the nondiscrimination requirements. [14]
            The FCC emphasized that while subjecting ISPs to Title II, common carrier oversight, the Commission will use its statutory authority quite narrowly as evidenced by the decision to forbear [15] from applying “27 provisions of Title II of the Communications Act, and over 700 Commission rules and regulations.” [16]  The Commission recognized the need to explain how the new requirements satisfy pressing needs, but in the most narrow and well calibrated matter in light of virulent opposition from most ISPs and the two Republican Commissioners.  The Order reports that “there will be fewer sections of Title II applied than have been applied to Commercial Mobile Radio Service (CMRS), [the regulatory classification for wireless voice telecommunications service] where Congress expressly required the application of Sections 201, 202, and 208, and permitted the Commission to forbear from others.  In fact, Title II has never been applied in such a focused way.” [17]
 
            The FCC opted not to construct an order applying Section 706 of the Communications Act as the sole foundation for creating narrowly calibrated non-common carrier rules applicable to ISPs in their capacity as information service providers.  The Commission interpreted the D.C. Circuit Court of Appeals for the District of Columbia as limiting the scope and efficacy of Section 706 based on the court’s determination that the FCC could not impose common carrier duties, even though the court acknowledged that ISPs perform a traffic carriage function for upstream sources of content, commonly referred to as edge providers:
[A]bsent a classification of broadband providers as providing a ‘telecommunications service,’ the Commission could only rely on section 706 to put in place open Internet protections that steered clear of regulating broadband providers as common carriers per se.  Thus, in order to bring a decade of debate to a certain conclusion, we conclude that the best path is to rely on all available sources of legal authority—while applying them with a light touch consistent with further investment and broadband deployment.  Taking the Verizon decision’s implicit invitation, we revisit the Commission’s classification of the retail broadband Internet access service as an information service and clarify that this service encompasses the so-called ‘edge service.’”  [18]
 
               The FCC established “clear, bright-line rules” prohibiting ISPs from blocking lawful traffic, deliberately slowing traffic down absent legitimate network management requirements and offering to managed and deliver traffic on a preferential basis, commonly known as “paid prioritization.” The Commission’s ban on traffic blocking uses clear cut language:
A person engaged in the provision of broadband Internet access service, insofar as such person is so engaged, shall not block lawful content, applications, services, or non-harmful devices, subject to reasonable network management. [19]
            The FCC also establishes an absolute ban on throttling absent legitimate network management requirements:
A person engaged in the provision of broadband Internet access service, insofar as such person is so engaged, shall not impair or degrade lawful Internet traffic on the basis of Internet content, application, or service, or use of a non-harmful device, subject to reasonable network management. [20]
            To prevent ISPs from dividing the Internet into fast-lanes offered at a premium with slow lanes constituting an inferior baseline, the FCC prohibits paid prioritization:
A person engaged in the provision of broadband Internet access service, insofar as such person is so engaged, shall not engage in paid prioritization. ‘Paid prioritization’ refers to the management of a broadband provider’s network to directly or indirectly favor some traffic over other traffic, including through use of techniques such as traffic shaping, prioritization, resource reservation, or other forms of preferential traffic management, either (a) in exchange for consideration (monetary or otherwise) from a third party, or (b) to benefit an affiliated entity [21]
            In addition to the specific prohibitions on blocking, throttling and paid prioritization, the FCC established a general prohibition on ISP practices that would unreasonably interfere with, or disadvantage downstream consumers and upstream edge providers of content, applications and services.  The Commission will consider on a case-by-case basis whether an ISP has engaged in a practice “that unreasonably interfere[s] with or unreasonably disadvantage[s] the ability of consumers to reach the Internet content, services, and applications of their choosing or of edge providers to access consumers using the Internet.” [22]  The Commission opted to apply more open-ended evaluative than legal standard prohibiting commercially unreasonable practices it had proposed in the 2014 Open Internet NPRM.  The Commission concluded that it should “adopt a governing standard that looks to whether consumers or edge providers face unreasonable interference or unreasonable disadvantages, and makes clear that the standard is not limited to whether a practice is agreeable to commercial parties.”[23]
            The FCC reported that it will use the “no-unreasonable interference/disadvantage” standard to evaluate controversial subjects including the lawfulness of “sponsored data” arrangements where an ISP accepts advertiser payment in exchange for an agreement not to meter and debit the downstream traffic delivery.  The Commission also will use this standard to consider the lawfulness of data caps that tier service by the amount of permissible downloading volume.  In both instances, the FCC sees the potential for an ISP to create artificial scarcity to extract higher revenues, to favor corporate affiliates and third parties willing to pay a surcharge as well as the potential for disadvantaging competitors, e.g., using data caps to harm new vendors of video programming that compete with an ISP service.  On the other hand, the Commission recognizes that service tiering can promote innovation and new, customized services.
               The Order expresses the view that reclassifying Internet access as a telecommunications service provides the strongest legal foundation for the Open Internet regulations, coupled with a secondary reference to Section 706 of the Telecommunications Act of 1996 and Title III, which addresses the use of radio spectrum and applies common carriage regulation to wireless voice carriers. [24] By using the stronger Title II foundation, the FCC asserts that it can establish clear and unconditional statutory authority, but also use the flexibility contained in Title II to forbear from applying most common carrier requirements not relevant to modern broadband service just as occurs for wireless telephone service.  However with a Title II regulatory foundation, the Order makes it possible for the FCC to create an open Internet conduct standard that ISPs cannot harm consumers or edge providers with enforcement tools available to sanction violations. [25]
While the debate over network neutrality has become quite contentious and hyperbolic, the three core requirements imposed by the Order have generated much popular support.  With the common carrier reclassification, the FCC considers it lawful to impose explicit requirements that ISPs not: block, legal content, applications, services, or non-harmful devices; throttle, impair or degrade lawful Internet traffic on the basis of content, applications, services, or non-harmful devices; or offer paid prioritization that would favor some lawful Internet traffic over other lawful traffic in exchange for additional compensation, or based on corporate affiliation.
             The Order addresses the need for ISPs to have the ability to manage their networks and to offer specialized services not available to all users.  The FCC seeks to promote flexibility without creating a loophole for practices that violate network neutrality. Coupled with requirements that ISPs operate with transparency in terms of how they provide service, the FCC will permit deviations from absolute neutrality on a case-by-case basis taking into consideration the particular engineering attributes of the technology used as well as the rationale supporting the legitimacy of the practice. 
 
            The FCC will have to defend its legal right to reclassify services in light of changed circumstances.  Additionally the Commission will have to convince an appellate court that the Communications Act authorizes service reclassifications, or lacks specificity thereby allowing an expert regulatory agency to clarify ambiguities.
 
 
 
 
 



[1]           The FCC defines “broadband Internet access service”  as: “A mass-market retail service by wire or radio that provides the capability to transmit data to and receive data from all or substantially all Internet endpoints, including any capabilities that are incidental to and enable the operation of the communications service, but excluding dial-up Internet access service.  This term also encompasses any service that the Commission finds to be providing a functional equivalent of the service described in the previous sentence, or that is used to evade the protections set forth in this Part.” Protecting and Promoting the Open Internet, GN Docket No. 14-28, Report and Order on Remand, Declaratory Ruling, and Order, FCC 15-24, ¶25 (rel. March 12, 2015); available at: http://www.fcc.gov/openinternet. [hereinafter cited as 2015 Open Internet Order].
 
[2]           The FCC previously had imposed less stringent rules on wireless carriers in light of spectrum use, greater potential for congestion and recent entry in broadband markets.  The 2015 Open Internet Order treats wireless ISPs no differently than wireline ISPs: “Today, we find that changes in the mobile broadband marketplace warrant a revised approach.  We find that the mobile broadband marketplace has evolved, and continues to evolve, but is no longer in a nascent stage.  As discussed below, mobile broadband networks are faster, more broadly deployed, more widely used, and more technologically advanced than they were in 2010.  We conclude that it would benefit the millions of consumers who access the Internet on mobile devices to apply the same set of Internet openness protections to both fixed and mobile networks.” 2015 Open Internet Order at ¶88.
 
[3]           It is also well settled that we may reconsider, on reasonable grounds, the Commission’s earlier application of the ambiguous statutory definitions of ‘telecommunications service’ and ‘information service.’” Id. at ¶334. “The [Supreme] Court’s application of . . . [the] Chevron test in Brand X makes clear our delegated authority to revisit our prior interpretation of ambiguous statutory terms and reclassify broadband Internet access service as a telecommunications service.  The Court upheld the Commission’s prior information services classification because ‘the statute fails unambiguously to classify the telecommunications component of cable modem service as a distinct offering.  This leaves federal telecommunications policy in this technical and complex area to be set by the Commission . . . .’  Where a term in the Act ‘admit[s] of two or more reasonable ordinary usages, the Commission’s choice of one of them is entitled to deference.’  The Court concluded, given the ‘technical, complex, and dynamic’ questions that the Commission resolved in the Cable Modem Declaratory Ruling, ‘[t]he Commission is in a far better position to address these questions than we are.’” Id. at ¶332 (citations omitted).
 
[4]           Id. at ¶4.
 
[5]           Id. at ¶20.
 
[6]           “Broadband providers’ networks serve as platforms for Internet ecosystem participants to communicate, enabling broadband providers to impose barriers to end-user access to the Internet on one hand, and to edge provider access to broadband subscribers on the other.  . . .[T]he record provides substantial evidence that broadband providers have significant bargaining power in negotiations with edge providers and intermediaries that depend on access to their networks because of their ability to control the flow of traffic into and on their networks.   Another way to describe this significant bargaining power is in terms of a broadband provider’s position as gatekeeper—that is, regardless of the competition in the local market for broadband Internet access, once a consumer chooses a broadband provider, that provider has a monopoly on access to the subscriber.  . . . Broadband providers can exploit this role by acting in ways that may harm the open Internet, such as preferring their own or affiliated content, demanding fees from edge providers, or placing technical barriers to reaching end users. Without multiple, substitutable paths to the consumer, and the ability to select the most cost-effective route, edge providers will be subject to the broadband provider’s gatekeeper position.”   Id. at ¶80.
 
[7]           Id. at ¶21.  The FCC defines reasonable network management practice as one having
“a primarily technical network management justification, but does not include other business practices.  A network management practice is reasonable if it is primarily used for and tailored to achieving a legitimate network management purpose, taking into account the particular network architecture and technology of the broadband Internet access service.” Id. at ¶32.
 
[8]           The enhanced transparency requirements include the duty to disclose prices, including the full monthly subscription charge, other fees and data caps and downloading allowances.  Additionally ISPs will have to report on actual network performance and disclose network practices, including congestion management, application-specific behavior, device attachment rules and security.  See Id. at ¶¶164-69.
 
[9]           “A person engaged in the provision of broadband Internet access service shall publicly disclose accurate information regarding the network management practices, performance, and commercial terms of its broadband Internet access services sufficient for consumers to make informed choices regarding use of such services and for content, application, service, and device providers to develop, market, and maintain Internet offerings.” Id. at ¶23.
 
[10]          “[B]roadband Internet access service does not include virtual private network (VPN) services, content delivery networks (CDNs), hosting or data storage services, or Internet backbone services (to the extent those services are separate from broadband Internet access service).” Id. at ¶190.
 
[11]          “Based on this updated record, this Order concludes that the retail broadband Internet access service available today is best viewed as separately identifiable offers of (1) a broadband Internet access service that is a telecommunications service (including assorted functions and capabilities used for the management and control of that telecommunication service) and (2) various “add-on” applications, content, and services that generally are information services.”  Id. at ¶47. 
 
[12]          “[W]e find that broadband Internet access service is a ‘telecommunications service’ and subject to sections 201, 202, and 208 (along with key enforcement provisions).  As a result, commercial arrangements for the exchange of traffic with a broadband Internet access provider are within the scope of Title II, and the Commission will be available to hear disputes raised under sections 201 and 202 on a case-by-case basis: an appropriate vehicle for enforcement where disputes are primarily over commercial terms and that involve some very large corporations, including companies like transit providers and Content Delivery Networks (CDNs), that act on behalf of smaller edge providers.” Id. at ¶29.
 
[13]          “[W]e find that the best approach is to watch, learn, and act as required, but not intervene now, especially not with prescriptive rules.  This Order—for the first time—provides authority to consider claims involving interconnection, process that is sure to bring greater understanding to the Commission.” Id. at ¶31.
 
[14]          “The Commission expressly reserves the authority to take action if a service is, in fact, providing the functional equivalent of broadband Internet access service or is being used to evade the open Internet rules.” Id. at ¶35.
 
[15]          47 U.S.C §160(a) authorizes the FCC to streamline the scope of its Title II oversight by forbearing from applying many common carrier requirements: “[T]he Commission shall forbear from applying any regulation or any provision of this chapter to a telecommunications carrier or telecommunications service, or class of telecommunications carriers or telecommunications services, in any or some of its or their geographic markets, if the Commission determines that—
(1) enforcement of such regulation or provision is not necessary to ensure that the charges, practices, classifications, or regulations by, for, or in connection with that telecommunications carrier or telecommunications service are just and reasonable and are not unjustly or unreasonably discriminatory;  (2) enforcement of such regulation or provision is not necessary for the protection of consumers; and  (3) forbearance from applying such provision or regulation is consistent with the public interest.”
 
[16]          Id. at ¶5. The major provisions of Title II that  the Order will apply are: nondiscrimination and no unjust and unreasonable practices under Sections 201 and 202; authority to investigate complaints and resolve disputes under section 208 and related enforcement provisions, specifically sections 206, 207, 209, 216 and 217; protection of consumer privacy under Section 222; fair access to poles and conduits under Section 224, protection of people with disabilities under Sections 225 and 255; and providing universal funding for broadband service, but not the requirement to collect contributions to such funding through partial application of Section 254.
 
[17]          Id. at ¶38.
 
[18]          Id. at ¶42.
 
[19]          Id. at ¶15.   The FCC did opt to eliminate rules that would establish a baseline, minimum broadband access standard.  It acknowledged practical and technical difficulties associated with setting any such minimum level of access.  Additionally the Commission concluded that the no blocking and throttling rules would “allow broadband providers to honor their service commitments to their subscribers without relying upon the concept of a specified level of service to those subscribers or edge providers . . ..” Id. at ¶115.
 
[20]          Id. at ¶16.
 
[21]          Id. at ¶18.  Even though one can anticipate instances where a broadband subscriber would want ISPs to provide higher quality of service to reduce the potential for degraded service in the delivery of “must see” video content, the FCC largely forecloses this option.   ISPs cannot offer paid prioritization, even at the voluntary request or approval of subscribers based on the Commission’s apprehension that ISPs would abuse the opportunity by imbedding blanket authorization in subscription service agreements. “[T]here is no room for a blanket exception for instances where consumer permission is buried in a service plan—the threats of consumer deception and confusion are simply too great. Id. at ¶19.  However the FCC will allow exceptions on an ad hoc basis using rigorous criteria.  “The Commission may waive the ban on paid prioritization only if the petitioner demonstrates that the practice would provide some significant public interest benefit and would not harm the open nature of the Internet.” Id. at ¶130.  “First, the applicant must demonstrate that the practice will have some significant public interest benefit, such as providing evidence that the practice furthers competition, innovation, consumer demand, or investment.  Second, the applicant must demonstrate that the practice does not harm the nature of the open Internet, including, but not limited to, providing evidence that the practice:
           does not materially degrade or threaten to materially degrade the broadband Internet           access service of the general public;
           does not hinder consumer choice;
           does not impair competition, innovation, consumer demand, or investment; and
           does not impede any forms of expressions, types of service, or points of view.” Id. at ¶131. Note that the FCC “anticipate[s] granting such relief only in exceptional cases.” Id. at ¶132(citing extremely bandwidth intensive telemedicine applications as an example worthy of an exception).
 
[22]          Id. at ¶135.
 
[23]          Id. at ¶150.  The FCC identified a number of factors it will consider in future evaluations.  These include an assessment whether a practice allows end-user control and is consistent with promoting consumer choice, its competitive effect, whether consumers and opportunities for free expression are promoted or harmed, the effect on innovation, investment, or broadband deployment, whether the practice hiders the ability of end users or edge providers to use broadband access to communicate with each other and whether a practice conforms to best practices and technical standards adopted by open, broadly representative, and independent Internet engineering, governance initiatives, or standards-setting organization.  Id. at ¶¶139-145.
 
[24]          “We ground the open Internet rules we adopt today in multiple sources of legal authority—section 706, Title II, and Title III of the Communications Act.  We marshal all of these sources of authority toward a common statutorily-supported goal:  to protect and promote Internet openness as platform for competition, free expression and innovation; a driver of economic growth; and an engine of the virtuous cycle of broadband deployment.
            We therefore invoke multiple, complementary sources of legal authority. As a number of parties point out, our authority under section 706 is not mutually exclusive with our authority under Titles II and III of the Act.” Id. at ¶¶273-74.
 
[25]          With an eye toward providing timely, certain and flexible enforcement of its open Internet rules, the FCC announced its intention to use advisory opinions similar to those issued by the Department of Justice’s Antitrust Division.  “Advisory opinions will enable companies to seek guidance on the propriety of certain open Internet practices before implementing them, enabling them to be proactive about compliance and avoid enforcement actions later.   The Commission may use advisory opinions to explain how it will evaluate certain types of behavior and the factors that will be considered in determining whether open Internet violations have occurred.  Because these opinions will be publicly available, we believe that they will reduce the number of disputes by providing guidance to the industry.” Id. at ¶229.