Thursday, May 6, 2010

Network Neutrality and the FCC’s Inability to Calibrate Regulation of Convergent Operators

That FCC Chairman Julius Genachowski is struggling to find a way to calibrate network neutrality and Title I ancillary jurisdiction confirms the difficulty in regulating operators that seamlessly blend carriage and content. See, THE THIRD WAY: A NARROWLY TAILORED BROADBAND FRAMEWORK; available at:

Internet Service Providers offer convergent services that blend telecommunications, as in bit transport, with telecommunications services, such as telephony and arguably first and last mile Internet access, with video services, such as Internet Protocol Television, and with information services that ride on top of the bit transmission link. For administrative convenience and not as required by law, the FCC likes to apply an either/or single regulatory classification to convergent operators. Having classified ISPs as information service providers, the Commission unsuccessfully sought to sanction Comcast’s meddling with subscribers’ peer-to-peer traffic. Now Chairman Genachowski wants to further narrow and nuance regulatory oversight without changing the organic information service classification.

Some network neutrality advocates have urged the FCC simply to abandon the information service classification and reclassify aspects of ISP Internet access as Title II, common carrier regulated telecommunications service. Why use tortured and legally suspect analysis to craft an absolute dichotomy?

What is wrong with the FCC acknowledging that providers of convergent services trigger different regulatory classifications as a function of what service they provide? Even thought the FCC largely emphasizes wireless carriers’ information services, the Commission occasionally reminds cellular radio service providers that they still operate as common carriers that for example have to interconnect with other wireless carriers to provide seamless roaming opportunities for users. So it’s possible for the FCC to recognize that in the case of wireless carriers, a single venture using the same conduit can configure both regulated telecommunications services and generally unregulated information services.

The FCC has to confront the messy reality that when ventures offer convergent services that combine conduit and content and when these ventures vertically and horizontally integrate throughout many market segments, the Commission cannot rely on absolute either/or service dichotomies to classify everything a venture provides. Even to this day the Commission cannot bring itself to confront this reality as evidenced by its utter silence on what regulatory regime should apply to Voice over the Internet Protocol and Internet Protocol Television.

It’s time to recognize that layered and convergent services defy compartmentalization into convenient, single regulatory classifications and regimes.

Determining Causality in Telecommunications

With the FCC and most government actors obsessed with incentive creation, it makes sense to determine whether and how a regulatory or deregulatory action causes some desired outcome. Consider the creation of incentives to invest in physical plant. Incumbent carriers have spent a lot of time, money and effort arguing that regulation creates investment disincentives and deregulation does the desired opposite. This simplistic and not always correct premise constitutes the prevailing wisdom in the U.S.

Using this mindset, sponsored researchers have argued that next generation network plant skyrocketed soon after the FCC abandoned local loop unbundling and other “sharing” requirements. Let’s probe this assertion. First, recall that local loop unbundling was not something incumbent Local Exchange Carriers (“ILECs”) gave away or shared. Resellers and repackagers of local switching and routing plant paid the incumbents, albeit at a rate below what the ILECs would like to have been paid. Second I have found—deep, deep, deep in the FCC’s obscure statistics and data collection process—that compulsory rentals from incumbents to newcomers peaked at 12%, a level never close to forcing incumbents to invest in plant that they would have to make available solely to competitors. See Trends in Telephone Service (Aug. 2008), at p. 8-8; available at

The FCC stopped preparing this helpful source of information, but the percentage of resold ILEC lines has declined below the 8% reported in 2007 in light of the fact that rates to Competitive Local Exchange Carriers (“CLECs”) can exceed retail rates to end users, a price squeeze, but one the FCC and the Supreme Court in the Linkline case has no concerns.

Let’s assume that ILECs actually did increase their aggregate plant investment after the FCC abandoned local loop unbundling, bearing in mind that the Commission never required leasing of next generation plant such as dark or even lit fiber. Did deregulation cause all of the new investment? Of course not. Might the business cycle have had something to do with it? Might the cost of capital have had something to do with it? Might competitive necessity have had something to do with it? Oh and might declining market share and revenues in core business lines such as Plain Old Telephone Service have had something to do with it?

Whatever disincentive local loop unbundling imposed paled in comparison to incumbents’ need to find new revenues. Giving the ILECs due credit they have invested in next generation networks, mostly wireless and video plant for which no unbundling requirement ever applied. As to new found zeal in investing in Digital Subscriber Line services, might the ILECs want to make relatively small additional investment in already amortized copper plant, to secure some of the broadband growth market?

In a nutshell: do not buy the assertion that carriers make investment go/no decisions solely on the state of regulatory oversight. Carriers make sound business decisions, affected more by business conditions than the relatively minor impact of any FCC regulatory or deregulatory decision.