Network Neutrality and the Court of Public Opinion

            Ask most people a basic question about Internet neutrality and the clear majority support it.  Who likes biased networks, particularly if the bias appears to subordinate the views and interests of you and like-minded people?

            On the other hand, ask people about what they think Netflix and their broadband carriers ought to do should network congestion bogging down bandwidth intensive video streams.  The likely answer: fix it!  Okay, but what kind of fix constitutes “reasonable network management” vs. something akin to prioritization of traffic?  The former universally qualifies for exemption from mandatory neutrality, but the latter triggers disputes.  ISPs can tier service by bit rate delivery speeds and monthly allotment of data.  Should they also have additional market segmentation opportunities to exempt certain traffic from debiting a data plan, so-called zero rating, or to slow down (throttle) entire categories of content, e.g., video streaming?

            The Court of Public Opinion seems clearly in favor of service arrangements described by words like free and unlimited. Of course, in the wireless world, nothing is free and unlimited does not have the common meaning.  Free comes with upselling to a more expensive service tier, e.g., “free” and “unlimited” streaming of a Direct Broadcast Satellite operator’s content. 

            “Unlimited data” has several fine print exceptions.  Throttling typically reduces bit transmission rate to 2G speed incapable of delivering video streams when a subscriber exceeds a ceiling of 20 or more Gigabytes of data delivery.  Also, wireless subscribers have to make do with video streaming that reduces the video line resolution of all streaming content, presumably a trade-off for a much higher monthly data allowance.

            Does the Court of Public Opinion favor zero rating and even tolerance for less video line resolution?  We may soon find out how California broadband consumers react if such options become illegal.  The legislature there enacted legislation that restores the consumer safeguards created in the FCC’s 2015 Open Internet Order and in several instances reaches further into the Internet marketplace.

            SB-822 current rests on the desk of California Governor Jerry Brown.  Does the Governor sign the legislation that deems illegal zero rating, most types of throttling and possibly even the paid peering arrangement that Netflix and Comcast negotiated to resolve a traffic delivery dispute? If he does we will see just how ticked off California broadband consumers get when state law mandates strict neutrality that forecloses “better than best efforts routing” and other market enhancements available at a premium price.

            For my part, I part company with my network neutrality friends, because I believe elected officials should rarely stand in the way of allowing a maturing Internet ecosystem to delivery different tiers of service at varying price points.

           

Missing the Burning Forest for the Trees-Verizon Throttles California Fire Fighters at the Worst Possible Time, But Few Get the Lesson

            Verizon’s so-called customer care staff made a grievous mistake when they ignored pleas to override automated software that throttled California fire fighters’ broadband connections.  See https://www.sccgov.org/sites/opa/newsroom/Pages/netneutralitylitigation.aspx?utm_campaign=Newsletters&utm_source=sendgrid&utm_medium=email.  Understandably, network neutrality advocates jumped at the opportunity to provide another example of unintended bad consequences from the abandonment of open Internet regulatory safeguards.  Similarly, network neutrality opponents properly chided the company, but again championed a mostly unregulated Internet subject to the consumer protections available from the Federal Trade Commission.

            Both sides miss the main lesson from this unfortunate situation: broadband networks have become such important infrastructure that it makes absolutely no sense now to suggest that industry self-regulation will remedy anything and everything, except for the occasional privacy and data security issues which the FTC can handle.

            Broadband networks, particularly first and last mile access, are essential to effective firefighting as it is for so many other areas of commerce, self-fulfillment, democracy, governance, etc.  Common carriage status would recognize this importance.  Bear in mind that such a legal status does not require ventures to operate as monopolies, to have market power, or to operate essential facilities.  Landlords, hotel owners, competitive airlines and even wireless carriers, currently operate as common carriers.  Do not for a second buy the bogus assertion that such status disincentivizes investment and blunts profitability.  Also, no one can credibly claim that common carrier oversight is “legacy” “utility” regulation, unjustified in this currently competitive environment. Landlords, hotel owners, bus lines, car rental companies, airlines, cable television systems, wireless carriers and a host of other ventures currently comply with nondiscrimination and other common carrier requirements.

            On the other hand, even common carriers can engage in price discrimination.  Verizon most certainly did not violate common carriage law and policy, or the FCC’s 2015 network neutrality rules, by offering different tiers of service (bit rate, allowable monthly data consumption) at different price points.

            That Verizon could have dithered for even one hour on the matter of waiving data rates for fight fighters provides a clear example that too much is at stake to rely solely on the level of common sense and good business judgment of first responding customer service representatives.  The FCC and the California Public Service Commission should have had jurisdiction and the will to act immediately. 

            Who can dispute this outcome?

“Restoring” Internet Freedom for Whom?

            Recently, a colleague in the Bellisario College of Communications, asked me who gets a freedom boost from the FCC’s upcoming dismantling of network neutrality safeguards.  He noted that Chairman Pai made sure that the title of the FCC’s Notice of Proposed Rulemaking is: Restoring Internet Freedom.  See https://www.fcc.gov/restoring-internet-freedom. My colleague wanted to know whose freedom the FCC previously subverted and how removing consumer safeguards promotes freedom.

            With an evaluative template emphasizing employment, innovation and investment, one can see that deregulation benefits enterprises that employ, innovate and invest in the Internet ecosystem.  However, the Pai emphasis lies in ventures operating the bit distribution plant reaching broadband subscribers.  The Chairman provides anecdotal evidence that some rural wireless Internet Service Providers have curtailed infrastructure investment because of regulatory uncertainty, or the incentive-reducing impact of network neutrality.  If the FCC removes the rules, then rural ISPs and more market impactful players like Verizon and Comcast will unleash a torrent of investment, innovation and job creation.

            O.K. let us consider that a real possibility.  Let’s ignore the fact that wireless carriers have expedited investment in next generation networks during the disincentive tenure of network neutrality requirements.

            To answer my colleague’s question, I believe one has to consider ISPs as platform intermediaries who have an impact both downstream on end users and upstream on other carriers, content distributors and content creators. My research agenda has pivoted to the law, economics and social impact of platforms; see https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2935292.

            Using the employment, innovation and investment criteria, the FCC also should have considered the current and prospective freedom quotient for upstream players.  Does nearly unfettered price and quality of service discrimination options for ISPs impact upstream ventures’ ability to employ, innovate and invest more?

            Assume for the sake of discussion that ISPs can block, throttle, drop and prioritize packets.  A plausible, worst case scenario has an innovative market entrant with a new content-based business plan less able to achieve the Commission’s freedom goals.  Regardless whether you call it artificial congestion, the potential exists for an ISP to prevent traffic of the content market entrant from seamless transit.  The ISP could create congestion with an eye toward demanding a surcharge payment, even though the market entrant’s traffic had no possibility of itself creating congestion.  The ISP also might throttle traffic of the innovative newcomer if its market entry might adversely impact the content market share and profitability of the ISP, its affiliates and its upstream content providers that previously agreed to pay a surcharge.

            Of course network neutrality opponents would object to this scenario based on the summary conclusion that an ISP would never degrade network performance, or reduce the value proposition of its service.  The airlines do this and so would an ISP if it thought it could extract more revenues given the lack of competition and the inability of consumers on both sides of its platform to shift carriers.

            ISPs do not operate as charities.  The FCC soon will enhance their freedom which translates into higher revenues and possibly more customized service options for consumers willing to pay more. 

            Before the FCC closes shop and hands off any future dispute resolution to the generalist FTC consider this scenario.  Subscribers of Netflix, or the small content market entrant discussed above, suddenly see their video stream turn into slide shows.  The FTC lacking savvy as to the manifold ways ISPs can mask artificial congestion and network management chicanery orders an investigation with a “tight” six month deadline for reported findings. 

            Just how long after the onset of degraded service will video consumers get angry and cast about for a villain?  Might the list of candidates include Congress, the FTC and FCC?

Summary of the FCC's Restoring Internet Freedom NPRM

            With the election of President Donald Trump and the appointment of Ajit Pai as FCC Chairman, muscular network neutrality rules soon will evaporate as the Commission reverts to a general promotion of openness and best practices. [1]  Despite judicial affirmance of an earlier reclassification of broadband Internet access as a telecommunications service, subject to common carrier regulation, the Restoring Internet Freedom Notice of Proposed Rulemaking proposes to revert to a looser regulatory classification triggering substantially less government oversight:

Today, we take a much-needed first step toward returning to the successful bipartisan framework that created the free and open Internet and, for almost twenty years, saw it flourish.  By proposing to end the utility-style regulatory approach that gives government control of the Internet, we aim to restore the market-based policies necessary to preserve the future of Internet Freedom, and to reverse the decline in infrastructure investment, innovation, and options for consumers put into motion by the FCC in 2015. [2]

            The FCC now proposes to apply an information service regulatory classification to broadband Internet access [3] and to treat wireless service as private carriage rather than the existing commercial designation established by Congress. [4] The Commission heavily relies on a questionable conclusion that common carriage regulation stifles investment, innovation and employment in the Internet ecosystem.  While offering a passing reference to contrary studies, the FCC opts to accept unconditionally the conclusion in one study sponsored by incumbent carriers that existing regulation imposed substantial marketplace harms.  The Commission espite clear evidence that Internet ventures continue to invest billions in both content delivery plant and content creators who need a robust distribution network to deliver content to consumers. [5] 

            Remarkably, the Commission appears confident that any and all reductions in investment, innovation and employment have resulted directly and exclusively from common carrier responsibilities imposed by a Democratic majority.  It provides no evidence of causation, nor does it even consider other factors that may have contributed, such as the billions of dollars recently invested in content, e.g., Verizon’s acquisition of America Online and Yahoo,  AT&T’s acquisition of DirecTV and several mergers of cable television operators.  Additionally, the Commission conveniently ignores the cyclical nature of facilities investment that, for example, triggers a spike in a new generation of wireless plant, e.g., from 3d generation to 4^th generation, followed by a normal reduction capital expenditures as the new equipment becomes operational.

The FCC also ignores the fact that despite operating within a so-called public utility regulatory regime, wireless carriers have invested billions on spectrum and network facilities capable of delivering content as near wireline speeds. [6]

            The Restoring Internet Freedom NPRM devotes substantial space supporting the proposed reclassification of broadband Internet access as an information service.  The Commission considers this classification more appropriate and lawful, going so far as to claim bipartisan support, despite the fact that the previous Democratic majority favored common carrier requirements:

We believe the Commission under Democratic and Republican leadership alike was correct in these decisions to classify broadband Internet access service as an information service and that, 20 years after the passage of the Telecommunications Act, we should be reluctant to second-guess the interpretations of those more likely to understand the contemporary meaning of the terms of the Telecommunications Act.  [7]

            The Commission identifies ample precedent where reviewing courts defer to its technical expertise and statutory interpretation, particularly where the underlying law lacks clarity.  [8] 

           Ironically, reversion to the information services classification will result in two outcomes that can have directly harmful impact on consumers and carriers.  First, reliance on Title I authority does not in and of itself reduce will the regulatory uncertainty which the FCC and stakeholders abhor, [9] because of the potential disincentives for investment, innovation and employment it creates.  The FCC clearly signals that its reliance on Title I will promote deregulation, if not unregulation, but ample case precedent shows that reviewing courts may not trust regulatory agencies to maintain consistency. [10] The FCC clearly seeks to remove regulatory oversight, but it also retains Title I, so-called ancillary jurisdiction to intervene as circumstances warrant, e.g., when a carrier deviates from any of the 2005 Open Internet principles.

            Second, reversion to Title resurrects the view that the FCC can compartmentalize Internet technologies into an air tight, mutually exclusive dichotomy of telecommunications services and information services, [11] despite market and technological convergence.   For example, the FCC already has had to address the fact that wireless devices combine basic, regulated, telecommunications services, such as voice telephony and texting, with unregulated or differently regulated content and information services.  Even during a time when the Commission considered broadband access as constituting an information service, it imposed common carrier type, affirmative duties to deal and interconnect on wireless carriers so that consumers can access Internet services when “roaming” outside their home service territories. [12]

            The FCC also proposes to eliminate the application of a catch-all standard used in the 2015 Open Internet Order that prohibited “current or future practices that cause the type of harms [the Commission’s] rules are intended to address.”  [13] This standard allows the Commission to prohibit practices that it determines unreasonably interfere with or unreasonably disadvantage the ability of consumers to reach the Internet content, services, and applications of their choosing or of online content, applications, and service providers to access consumers.   It also enables the FCC to prohibit any Internet service provider practice that it believes violates any one of the non-exhaustive list of factors adopted in the 2015 Open Internet Order.

            The Commission believes that eliminating a standard of conduct will provide greater clarity to stakeholders, because the current Internet conduct standard “is premised on theoretical problems that will be adjudicated on an individual, case-by-case basis, Internet service providers must guess at what they are permitted and not permitted to do.” [14] The Commission cites the zero rating as an example where the FCC, under a Democratic majority, investigated the lawfulness of subsidized data access, while the new Republican majority quickly shut down the investigation.  Arguably, the regulatory uncertain resulted from different interpretations of the conduct standard, based on political party affiliation, rather than the conduct standard itself.  Removing the standard provides no guidance at all, unless the Commission has signaled that it cannot anticipate a problem with any carrier offer to exempt specific types of traffic from debiting a monthly data allowance.

            The 2017 Restoring Internet Freedom NPRM also seeks comments on whether the FCC should eliminate three carrier conduct prohibitions contained in the 2015 Open Internet Order: blocking, throttling, and paid prioritization.  The Commission strongly hints that it considers these, ex ante safeguards both unnecessary and imposed without evidence that consumers have, or would suffer harm if the prohibitions did not exist.[15] 

            The Commission also seeks comments on whether Section 706 of the Telecommunications Act provides it with direct statutory authority to impose regulatory safeguards, or simply requires the FCC to assess the competitiveness and accessibility of the broadband marketplace and report findings to congress.  This portion of the NPRM may appear insignificant and narrow, but the Commission clearly implies its view that Section 706 provides no statutory authority to impose regulatory safeguards under any circumstances. [16]  Even if the current FCC Commissioners did retain the option of regulatory intervention, an already expressed view that the wired and wireless broadband marketplace operates competitively strongly implies that a majority Republican FCC would never seek to impose regulatory safeguards based on Section 706 authority. 

            For good measure, the Restoring Internet Freedom NPRM  also seeks comments whether any regulatory burden on broadband access providers would violate their First Amendment expression rights, a matter summarily dismissed by the D.C. Circuit Court majority, but raised in a dissent. [17]  Lastly, the FCC expresses a keen interest in applying a disciplined and substantive cost/benefit analysis assessing the financial impacts of its action. [18] While laudable, the FCC’s NPRM provides several instances where the Commission reaches broad sweeping conclusions without the empirical evidence and analysis it now regularly seeks to conduct.

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[1]              Restoring Internet Freedom, WC Docket No. 17-108, Notice of Proposed Rulemaking, FCC 17-60 (released May 23, 2017); available at: https://apps.fcc.gov/edocs_public/attachmatch/FCC-17-60A1.docx [hereinafter cited as Restoring Internet Freedom NPRM].  The FCC proposes to treat broadband Internet access as an information service, subject to Title I of the Communications Act, that does not authorize the FCC to impose common carrier regulations.  Instead the Commission has an ambiguous regulatory authority to impose safeguards and to promote goals.  For example, the Restoring Internet Freedom NPRM endorses four principles for Internet freedom to further ensure that the Internet would remain a place for free and open innovation with minimal regulation.   These four “Internet freedoms” include the freedom to access lawful content, the freedom to use applications, the freedom to attach personal devices to the network, and the freedom to obtain service plan information. See Appropriate Framework for Broadband Access to the Internet over Wireline Facilities, CC Docket No. 02-33, Policy Statement (2005); available at: https://apps.fcc.gov/edocs_public/attachmatch/FCC-05-151A1.pdf.

[2]              Restoring Internet Freedom NPRM  at ¶5. 

[3]              “Today, we propose to reinstate the information service classification of broadband Internet access service and return to the light-touch regulatory framework first established on a bipartisan basis during the Clinton Administration.” Id. at ¶24.

[4]              “We also propose to reinstate the determination that mobile broadband Internet access service is not a commercial mobile service.” Id. “Furthermore, insofar as mobile broadband Internet access service is best interpreted to be an information service, we believe that likely also would counsel in favor of classifying it as a private mobile service to avoid the inconsistency of the service being both an information service and a common carrier service.  The Commission explained this reasoning when originally classifying mobile broadband Internet access service as both an information service and a private mobile service, and we propose to apply that same reasoning again here.” Id. at ¶60. 

[5]              “We believe that these reduced expenditures are a direct and unavoidable result of Title II reclassification, and exercise our predictive judgment that reversing the Title II classification and restoring broadband Internet access service to a Title I service will increase investment.” Id. at ¶46.  The Commission relies on a single study, prepared by a researcher financially sponsored by stakeholders opposed to network neutrality rules. Id. at n.113.

[6]              The FCC implies that regulatory compliance forces carriers to incur costs that otherwise would have accrued consumer benefits. “Internet service providers have finite resources, and requiring providers to divert some of those resources to newly imposed regulatory requirements adopted under Title II will, unsurprisingly, reduce expenditures that benefit consumers.” Id. at ¶46.

[7]              Id. at ¶39.

[8]              “An agency also is free to change its approach to interpreting and implementing a statute so long as it acknowledges that it is doing so and justifies the new approach. [citing FCC v. Fox Television Stations, Inc., 556 U.S. 502, 515-16 (2009) (Fox); Mary V. Harris Found. v. FCC, 776 F.3d 21, 24-25 (D.C. Cir. 2015)]  Evaluating the change in regulatory approach in the Title II Order, the D.C. Circuit majority in USTelecom applied a ‘highly deferential standard’ to the agency’s predictive judgments regarding the investment effects of reclassification, [citing United States Telecom Ass’n v. FCC, 825 F.3d 674,707 (D.C. Cir 2016), reh’g en banc denied, No. 15-1063, 2017 WL 1541517, at *1 (D.C. Cir. May 1, 2017)] and deferred to the Commission’s ‘evaluat[ion of] complex market conditions’ underlying its rejection of providers’ reliance interests in the prior classification [citing Id. at 710 (quoting Gas Transmission Northwest Corp. v. FERC, 504 F.3d 1318, 1322 (D.C. Cir. 2007)]. Restoring Internet Freedom NPRM  at ¶53.  “The Commission has authority, as the Supreme Court recognized in Brand X, to interpret the Communications Act, including ambiguous definitional provisions.” Id. at ¶52, citing Nat’l Cable & Telecomms. Ass’n v. Brand X Internet Servs., 545 U.S. 967 (2005).

[9]              The Commission considers Title II regulation as causing substantial regulatory uncertainty despite the greater specificity this Title provides as compared to Title I. “In addition to imposing significant regulatory costs on Internet service providers, Title II reclassification created significant regulatory uncertainty.  USTelecom specifically identified ‘regulatory uncertainty’ as one of the causes of reduced investment.   Id. at ¶48.  Title I provides an ambiguous sphere of regulatory authority which the FCC overstepped when it imposed common carrier responsibilities on broadband service providers then classified as information service providers. See,  See Formal Complaint of Free Press and Public Knowledge Against Comcast Corp. for Secretly Degrading Peer-to-Peer Applications, Memorandum Opinion and Order, 23 F.C.C.R. 13,028 (2008), vacated, Comcast Corp. v. FCC, 600 F.3d 642 (D.C. Cir. 2010) (FCC deemed to have exceeded its statutory authority when responding to a complaint and imposing network neutrality rules); Preserving the Open Internet, Report and Order, GN Docket No. 09-191, WC Docket No. 07-52, 25 F.C.C.R. 17905 (2010)[hereinafter cited as 2010 Open Internet Order] aff’d in part, vacated and remanded in part sub nom. Verizon v. FCC, 740 F.3d 623 (D.C. Cir. 2014).

[10]            For example, a reviewing court twice rejected a Democratic majority FCC from imposing consumer safeguards based on a general conferral of jurisdiction over wire and radio contained in Title I of the Communications Act of 1934, as amended.  See Formal Complaint of Free Press and Public Knowledge Against Comcast Corp. for Secretly Degrading Peer-to-Peer Applications, Memorandum Opinion and Order, 23 F.C.C.R. 13,028 (2008), vacated, Comcast Corp. v. FCC, 600 F.3d 642 (D.C. Cir. 2010) (FCC deemed to have exceeded its statutory authority when responding to a complaint and imposing network neutrality rules); Preserving the Open Internet, Report and Order, GN Docket No. 09-191, WC Docket No. 07-52, 25 F.C.C.R. 17905 (2010)[hereinafter cited as 2010 Open Internet Order] aff’d in part, vacated and remanded in part sub nom. Verizon v. FCC, 740 F.3d 623 (D.C. Cir. 2014). 

[11]            “The Commission has previously concluded that Congress formally codified information services and telecommunications services as two, mutually exclusive types of service in the Telecommunications Act.   The Title II Order did not appear to disagree with this analysis, finding that broadband Internet access service was a telecommunications service and not an information service.   We believe this conclusion regarding mutual exclusivity is correct based on the text and history of the Act.” Id. at ¶40. “We also believe that mobile broadband Internet access service is not the ‘functional equivalent’ of commercial mobile service. Id. at ¶61.

[12]            Reexamination of Roaming Obligations of Commercial Mobile Radio Service Providers

and Other Providers of Mobile-data Services, Second Report and Order, 26 F.C.C.R. 5411

(2011), aff’d sub. nom. Cellco Partnership v. FCC, 700 F.3d 534 (D.C. Cir. 2012).

[13]            Protecting and Promoting the Open Internet, WC Docket No. 14-28, Report and Order on Remand, Declaratory Ruling, and Order, 30 FCC Rcd 5601, 5659 (2015), aff’d sub nom., United States Telecom Ass’n. v. FCC, 825 F.3d 674 (D.C. Cir. 2016). pet. for en banc rehearing denied.

[14]            Restoring Internet Freedom NPRM  at ¶74. 

[15]            “In the Title II Order, despite virtually no quantifiable evidence of consumer harm, the Commission nevertheless determined that it needed bright line rules banning three specific practices by providers of both fixed and mobile broadband Internet access service: blocking, throttling, and paid prioritization.  The Commission also ‘enhanced’ the transparency rule by adopting additional disclosure requirements. Today, we revisit these determinations and seek comment on whether we should keep, modify, or eliminate the bright line and transparency rules.” Id. at ¶76. 

[16]            “We seek comment on whether section 706(a) and (b) of the 1996 Act are best interpreted as hortatory rather than as delegations of regulatory authority.  Such an interpretation generally is reflected in the Commission’s approach to section 706 prior to 2010.” Id. at ¶101.

[17]            Id. at ¶104.

[18]            Id. at ¶105-15.

       

TMobile’s 480p Video Delivery Gambit: Tiering, or Throttling?

Predictably, and perhaps appropriately, broadband carriers are spending sleepless afternoons crafting new ways to diversify service without violating the FCC’s Open Internet Order restrictions on traffic blocking, throttling and paid prioritization.

TMobile has opted to give with one hand and somewhat furtively take with the other.  The carrier will offer “unlimited” data, subject to quality of service limitations, including delivery of video at 480 p regardless of what format it received from an upstream content provider or distributor. See, e.g., http://variety.com/2016/digital/news/t-mobile-unlimited-data-plan-video-caps-1201840422/.  TMobile will retain a higher screen resolution provided a subscriber pays a $25 upcharge.

Is TMobile throttling service by deliberately downgrading quality, or is the carrier simply using screen resolution as a tiering option and proxy for bit transmission speed? 

Bear in mind that many wireless carriers have offered “unlimited” data, subject to throttling to 2G or 3G speeds after a subscriber exceeds a stated allowance.  Perhaps a carrier does not throttle if it does so on a nondiscriminatory basis.  The carrier does not single out traffic from a specific content provider or carrier.  Every content source faces service degradation if the subscriber exceeds a still enforceable cap.

So one person’s tiering may be another’s throttling and the FCC places itself in the middle as an awkward judge, jury executioner. 

Who Pays What to Whom in the Internet Ecosystem?

Internet interconnections and compensation arrangements have been based on voluntary terms and conditions after government underwriting stopped. In a commercial context, funds flow on the basis of traffic volume, but also bargaining power (individually, or collectively held).

Last mile ISPs have significant bargaining power in light of their control of access to end users ("eyeballs" to advertisers and content providers alike).  While we could debate about the robustness of competition and last mile broadband options (functional equivalency), few would disagree that most consumers select one and only one last mile wireline provider (where available) for traffic requirements exceeding 10 Gigabytes.  The FCC termed last mile ISPs as "terminating monopolists," appropriate insofar as most consumers are willing to pay for and rely on a single wireline last mile ISP.  Consumers might also subscriber to a wireless broadband carrier, but data caps force conservation and create incentive to retain a wireline option offering unlimited data, or very high caps like Comcast's 1 terabyte monthly cap, plus Wi-Fi tethering.

In the context of platform/double-sided markets model, last mile ISPs have 2 compensation/revenue streams available: 1) last mile broadband subscriptions and 2) payments from upstream CDN and content providers.  While I can see how a credit card company might need to offer free cards, or even pay car users with airline miles and rebates, last mile ISPs have not given up imposing tiered service rates, primarily based on transmission speed (and not data volume like wireless carriers).  Last mile ISPs now want to increase the compensation received from upstream players.

Netflix, Google and other large volume generators of content have been free riders only if one considers content providers/distributors as solely responsible for compensating downstream carriers handling more traffic than generating upstream.  But Netflix is not the sole revenue source: last mile ISPs used to rely primarily (if not exclusively) on their retail subscribers' monthly payments.  The last mile ISPs want to maximize revenues on BOTH sides of their platform and I don't see the same financial constraints like that incurred by credit card companies.

Netflix blinked first, had payer's remorse, but the commercial negotiation process generates winners and losers.  For my part, I don't see how commercially negotiated compensation arrangements trigger network neutrality concerns, unless and until the FCC has jurisdiction to apply Title II, which it now has, plus evidence that the arrangement is discriminatory and/or unreasonable as defined by the FCC.  Bear in mind that the FCC has eschewed requiring tariffs and doesn't apply the prohibition of paid prioritization upstream from the last mile ISP.

So in large part, it seems to me that a maturing Internet ecosystem has diversified from the traditional peering/transiting dichotomy into a variety of hybrid arrangements.  Has such diversification harmed competition and/or consumers?  I'm not sure that it has, even when zero rating has the potential to influence consumers' content choices by injecting a possible cost avoidance factor.

A Nuanced Analysis of Zero Rating

            Zero rating has become the next network neutrality issue in light of two simultaneously occurring marketplace developments: 1) wireless and now wireline carriers impose data caps as a part of their revenue maximization strategy and 2) these very same carriers want to create deal enhancers to improve the value proposition of more expensive service tiers by offering zero rating to specific data streams.  Can carriers get away with a strategy of creating scarcity, rationing broadband capacity, despite its low incremental cost, and upselling subscribers to more generous data plans at higher rates?

            The zero rating issue generates the most controversy when carriers ration and tier broadband access. While they may frame the matter in terms of congestion and network management, in application, zero rating provides a convenient way to tier service at different price points.  Broadband carriers largely have eliminated the prospect of actual congestion and they have every right to recoup substantial infrastructure investment.  However, broadband capacity does not closely match the cost characteristics of other metered, public utility services, such as electricity and water.  Broadband carriers incur insignificant extra costs when increasing a monthly data allotment.  How else can they profitably offer truly unlimited voice and text, particularly a few years ago when subscribers primarily relied on their handsets for these services?

            Unfortunately carriers have resorted to zero rating as a solution to problems they have created for consumers: “unlimited data plans” that punish high volume users with throttling at 2G bit transmission rates; disabling subscriber commands not to auto play commercials; and miserly data rate plans with high financial penalties for overages. 

            Also in the mix is the possibility for artificial congestion manufactured by carriers to justify data caps.  Consider the on again/off again congestion subscribers of both Netflix and Comcast experienced. A remarkable thing happened virtually overnight after Netflix agreed to a preferred co-location/paid peering arrangement.  Congestion evaporated without any new facilities construction and Netflix traffic returned to normal.

            Network neutrality advocates fairly point out that zero rating prioritizes specific traffic streams, by making them more attractive to consumers in light of their lower out of pocket cost.  However, I believe they overstate their case, particularly with the premise that zero rating condemns people with low incomes to perpetual hardship resulting from subsidized access to an inferior, curated sliver of Internet content.

            Zero rating offers access opportunities to individuals who want broadband access, but lack sufficient discretionary income.  A subsidy provides an opportunity to test the waters and to decide whether to change spending priorities.  In developing countries, penetration rates continue to rise to near that of developed countries, because even poor people want and will pay for access.

            Zero rating also provides a new incentive for people with sufficient funds who do not see the value proposition in ascending a steep learning curve toward digital literacy, plus making even a small financial commitment in buying a smartphone and subscribing to a monthly data plan.  Surely these people are not condemned to a lifetime of inferior access, because they might opt to pay for access to the entire Internet cloud.

            Lastly, we should consider the consequences if the FCC—or any regulatory agency—rules against a subsidy arrangement that consumers like.  Does the FCC really want to invoke fairness when doing so prevents consumers from “free” access to certain video streams?

            I provide a deep dive on zero rating in a paper available at:  https://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=102928.

 

 

           

Preliminary Summary of the D.C. Circuit Court of Appeals Network Neutrality Decision

By a 2-1 vote, reflecting vastly different legal philosophies and regulator expectations, the D.C. Circuit Court of Appeals rejected all challenges to the FCC’s Open Internet Order. [1] The majority deemed limited its review function and opted to apply ample case precedent that defers to regulatory agencies on both procedural and substantive areas. [2] In a nutshell, the majority opted not to second guess the FCC and expressed support for the Commission’s interpretation of law and its assessment of how consumers access the Internet and what they expect from service providers. [3] This decision supports a rare instance where the FCC substantially expands its regulatory wingspan, despite the general trend toward less government oversight. [4]

The partial dissent chided the FCC for poor economic analysis and its failure to provide adequate notice to affected parties, citing F.C.C. v. Fox Television Stations, Inc., 556 U.S. 502, 515 (2009).  Additionally, the partial dissent took an activist posture suggesting that the FCC wrongly applied common carriage obligations on a market that the FCC wrongly considered to evidence monopoly characteristics. [5]

 With unexpected uniformity, the court majority rejected claims that the FCC lacked legal authority to reclassify broadband internet access as a common carrier telecommunications service provided via either fixed or mobile carriers.  The court noted that, while the FCC previously had deemed broadband access an information service, it did reserve the option to revisit its classification [6] and had good reason to do so. [7]

 Additionally the court did not consider it a fatal flaw that the FCC extended its telecommunications service jurisdiction to include the upstream links from so-called last mile Internet Service Providers to content providers and distributors.  The court noted that in the Supreme Court’s Brand X review of the FCC’s determination that last mile access fit within the information service classification, the case applied the Chevron Doctrine analysis and determined that the definitions of telecommunications service and information service were ambiguous and the FCC’s interpretation and policy prescriptions were reasonable.[8]

 The court accepted the FCC’s rationale for reclassification, considering it reasonable [9] in light of how consumers rely on telecommunications links to access information services, largely offered by ventures other than the carrier providing access. Additionally, the majority decision considered and rejected many of the objections raised in the partial dissent.  In particular, the majority rejected the partial dissent’s reliance on assertions that reclassification would harm carriers’ incentives to invest in infrastructure.  The court held that “it was not unreasonable for the Commission to conclude that broadband’s particular classification was less important to investors than increased demand.” [10]  The partial dissent endorsed various filings that found flaws in the FCC’s economic and market analysis, but the majority refrained from rejecting the FCC’s overall assessments and replacing them with general criticisms on the appropriateness of the FCC’s analysis. [11]

 

The majority decision also found no defects in the FCC’s decision to apply its Open Internet access rules to mobile broadband access. The court rejected the rationale that the rules could only apply to fixed services, because the traditional understanding of common carrier delivered Public Switched Telephone Network services only applies to fixed service made available to the public.  The court considered mobile broadband as now generally available to the public as evidenced by the common use of smartphones that provide both voice and data services. [12]

The majority decision strongly rejected the argument that the FCC’s Open Internet rules   impermissibly constrain Internet Service Provider First Amendment freedom:

Common carriers have long been subject to nondiscrimination and equal access obligations akin to those imposed by the rules without raising any First Amendment question. Those obligations affect a common carrier’s neutral transmission of others’ speech, not a carrier’s communication of its own message. [13]

 

The court noted that telephone companies, railroads, and postal services have borne equal access obligations like that now applied to Internet Service providers “without raising any First Amendment issue.”  [14]

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[1]           United States Telecom Association v. Federal Communications Commission, No. 15-1063, slip op., (D.C. Cir. June 14, 2016); available at: https://www.cadc.uscourts.gov/internet/opinions.nsf/3F95E49183E6F8AF85257FD200505A3A/$file/15-1063-1619173.pdf.

 

[2]              “[W]e think it important to emphasize two fundamental principles governing our responsibility as a reviewing court. First, our “role in reviewing agency regulations . . . is a limited one.” Ass’n of American Railroads v. Interstate Commerce Commission, 978 F.2d 737, 740 (D.C. Cir. 1992). Our job is to ensure that an 23 agency has acted “within the limits of [Congress’s] delegation” of authority, Chevron, 467 U.S. at 865, and that its action is not “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law,” 5 U.S.C. § 706(2)(A). Critically, we do not “inquire as to whether the agency’s decision is wise as a policy matter; indeed, we are forbidden from substituting our judgment for that of the agency.” Ass’n of American Railroads, 978 F.2d at 740 (alteration and internal quotation marks omitted). Nor do we inquire whether “some or many economists would disapprove of the [agency’s] approach” because “we do not sit as a panel of referees on a professional economics journal, but as a panel of generalist judges obliged to defer to a reasonable judgment by an agency acting pursuant to congressionally delegated authority.” City of Los Angeles v. U.S. Department of Transportation, 165 F.3d 972, 978 (D.C. Cir. 1999).” Id. at 22-23.

 

[3]              The court supported the FCC’s determination that Broadband Internet Access constitutes a separate and standalone service vis a vis the information services consumers acquire via telecommunications service links.  “That consumers focus on transmission to the exclusion of add-on applications is hardly controversial. Even the most limited examination of contemporary broadband usage reveals that consumers rely on the service primarily to access third-party content.” Id. at 22.  The court also noted that Broadband Internet Access providers use information services to facilitate links to content, but agreed with the FCC that such reliance does not convert the telecommunications service into an information service.

 

[4]              That brings us to our colleague’s suggestion that the Order embodies a ‘central paradox[]’  in that the Commission relied on the Telecommunications Act to ‘increase regulation’ even though the Act was “intended to ‘reduce regulation.’” Concurring & Dissenting Op. at 53. We are unmoved. The Act, by its terms, aimed to ‘encourage the rapid deployment of new telecommunications technologies.’ Telecommunications Act of 1996, Pub. L. 104–104, 110 Stat 56. If, as we reiterate here (and as the partial dissent agrees), section 706 grants the Commission rulemaking authority, it is unsurprising that the grant of rulemaking authority might occasion the promulgation of additional regulation. And if, as is true here (and was true in Verizon), the new regulation is geared to promoting the effective deployment of new telecommunications technologies such as broadband, the regulation is entirely consistent with the Act’s objectives.” Id. at 97.

 

[5]              “Given the Commission’s assertions elsewhere that competition is limited, and its lack of economic analysis on either the forbearance issue or the Title II classification, the combined decisions to reclassify and forbear—and to assume sufficient competition as well as a lack of it—are arbitrary and capricious. The Commission acts like a bicyclist who rides now on the sidewalk, now the street, as personal convenience dictates.” Id. Sr. Judge Williams Partial Dissent at 66.

 

[6]           Id. at 15. “Although the Commission’s classification decisions spared broadband providers from Title II common carrier obligations, the Commission made clear that it would nonetheless seek to preserve principles of internet openness. In the 2005 Wireline Broadband Order, which classified DSL as an integrated information service, the Commission announced that should it ‘see evidence that providers of telecommunications for Internet access or IP-enabled services are violating these principles,’ it would “not hesitate to take action to address that conduct.” 2005 Wireline Broadband Order, 20 FCC Rcd. at 14,904 ¶ 96. Simultaneously, the Commission issued a policy statement signaling its intention to ‘preserve and promote the open and interconnected nature of the public Internet.” In re Appropriate Framework for Broadband Access to the Internet over Wireline Facilities, 20 FCC Rcd. 14,986, 14,988 ¶ 4 (2005).

 

[7]              The FCC concluded that in light of the Verizon case, which reversed the Commission on grounds that it could not impose common carrier regulations on information services, the Commission had to reclassify broadband access explicitly and not rely on Section 706 of the Telecommunications Act of 1996 that provided general authority to take affirmative steps to promote access to advanced telecommunications services throughout the nation. “[I]n light of Verizon,’ the Commission explained, ‘absent 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.’ [citing 2015 Open Internet Order, 30 FCC Rcd. at 5614 ¶ 42]. This, in our view, represents a perfectly “good reason” for the Commission’s change in position.” Majority Decision at 43. The partial dissent did not challenge the legal right of the FCC to interpret and apply the ambiguous definitions of telecommunications service and information service in the Telecommunications Act of 1996.  The majority considered the interpretation and reclassification as reasonable, but the partial dissent vigorously disagreed.

 

[8]              [E]ven if the Brand X decision was only about the last mile, the Court focused on the nature of the functions broadband providers offered to end users, not the length of the transmission pathway, in holding that the “offering” was ambiguous. As discussed earlier, the Commission adopted that approach in the Order in concluding that the term was ambiguous as to the classification question presented here: whether the “offering” of broadband internet access service can be considered a telecommunications service. In doing so, the Commission acted in accordance with the Court’s instruction in Brand X that the proper classification of broadband turns “on the factual particulars of how Internet technology works and how it is provided, questions Chevron leaves to the Commission to resolve in the first instance.” Id. at 33, citing

National Cable & Telecommunications Ass’n v. Brand X Internet Services, 545

U.S. 991 (2005).

 

[9]              The problem in Verizon was not that the Commission had misclassified the service between carriers and edge providers but that the Commission had failed to classify broadband service as a Title II service at all. The Commission overcame this problem in the Order by reclassifying broadband service—and the interconnection arrangements necessary to provide it—as a telecommunications service.” Id. at 54-55.

[10]            Id. at 49.

[11]          Id. at 49, quoting Gas Transmission Northwest Corp. v. FERC, 504 F.3d 1318, 1322 (D.C. Cir. 2007): “We see no reason to second guess these factual determinations, since the court properly defers to policy determinations invoking the [agency’s] expertise in evaluating complex market conditions.” (internal quotation marks and alteration omitted).

 

[12]          “Aligning mobile broadband with mobile voice based on their affording similarly ubiquitous access, moreover, was in keeping with Congress’s objective in establishing a defined category of “commercial mobile services” subject to common carrier treatment: to ‘creat[e] regulatory symmetry among similar mobile services.’” Id. at 60 (citation omitted). “In mobile petitioners’ view, mobile broadband (or any non-telephone mobile service)—no matter how universal, widespread, and essential a medium of communication for the public it may become—must always be considered a ‘private mobile service’ and can never be considered a ‘commercial mobile service.’ Nothing in the statute compels attributing to Congress such a wooden, counterintuitive understanding of those categories.” Id. at 62.

 

[13]            Id. at 108-09.

[14]            Id. at 111.  The court did noted that in some instances, ISPs do create and distribute content, but in such instances common carriage requirements do not apply. “If a broadband provider nonetheless were to choose to exercise editorial discretion—for instance, by picking a limited set of websites to carry and offering that service as a curated internet experience—it might then qualify as a First Amendment speaker. But the Order itself excludes such providers from the rules.” Id. at 114.