Results-driven Decisions that Do Not Pass the Smell Test: The D.C. Circuit Affirms Most of the FCC’s Restoring Internet Freedom Order

            Yet again, I will closely examine an appellate court review of FCC decision making with a variety of evaluative templates including the “smell test.”  Does the court buy into plausible rationales, because they comport with a deregulatory anti-government mind set, or does the court play it straight?  In Mozilla Corp. v. FCC, No. 18-1051 (D.C. Cir. Oct. 1, 2019), the court does a little bit of both.  See https://www.cadc.uscourts.gov/internet/opinions.nsf/FA43C305E2B9A35485258486004F6D0F/$file/18-1051-1808766.pdf.

            It will take me countless hours to parse through everything the court does and does not do.  In a nutshell, the court largely defers to FCC expertise and judgment using the so-called Chevron Doctrine.  This two-pronged judicial review model first considers whether applicable statutory language is ambiguous.  If no, the court must assess whether the FCC complied with clear enough statutory directions.  If yes, the court must consider whether the FCC’s chosen course of action was reasonable under the circumstances.  Because judges lack expertise in statistics, economics, electronic engineering, accounting, corporate management, finance etc. they must rely on the expertise others have, even though these experts may have ulterior motives and financial sponsors that precludes an unbiased assessment.

            The court offers a quite disappointing “punt” on the question whether the FCC lawfully relied on sponsored research and non-stop utterances by FCC Chairman Ajit Pai that network neutral regulation thwarts innovation and retards infrastructure investment.  The Chairman remarkably has isolated a single variable that he reports is the exclusive cause of declining innovation (however measured) and investment by telecommunications carriers.

The court all too willingly defers to the sponsored research that provided support for the Pai campaign.  The court dismisses countervailing research and in so doing it violated common sense.

            Consider this question: Would all the excitement and investment in fifth generation wireless upgrades decline measurably starting today had the court invalidated the Restoring Internet Freedom Order?  Of course not!  Corporations have to deal with perennial regulatory and legal uncertainty.  Additionally, there are far more impactful factors than a regulatory regime.  In the case of 5G wireless carriers HAVE to make substantial investments in both spectrum and plant, irrespective of the current political party majority at the FCC and where the arrow currently points on the continuum from regulation to unregulation.  Can you anticipate a major telecommunications carrier CEO state to Wall Street analysists and shareholders that the company will “sit on the sidelines on 5G” until the FCC gets a judicial “all clear” that “there won’t be any unconstitutional taking of property in the form of mandatory common carrier neutrality.”

            I know most of the economists mentioned by the FCC and the court who “proved” or endorsed the mantra that network neutrality singularly triggered adverse consequences for telecommunications innovation and investment.  They are smart, have a great sense of humor and make great dining and drinking partners.  Notwithstanding these fine characteristics, I see the merit in “agreeing to disagree” on matters where ideology, doctrine and financial sponsorship come into play.  Suddenly these fine friends become dogmatic and doctrinal. With straight faces, they insist that fewer competitors can generate “greater” competition.  They create and enforce economic rules as unimpeachable as laws.  They reject common sense smell tests as irrational, non-empirical and foolish.

            They have won again, because lots of jurists in this day want to see the virtue in unfettered markets and constrained government.

            There’s an irony and perhaps a silver lining in the today’s court decision. The majority decision refuses to uphold the FCC’s reclassification of broadband access as an information service AND the Commission’s attempt to preempt any degree of state regulation.  The FCC cannot have its cake and eat it too. If the FCC deems a service off limits and unregulatable, it cannot turn around and require states to comply with its statutory interpretation mandating non-regulation, particularly where Congress unambiguously retained states’ right of oversight.

            Of course, we are days away from someone coming up with a clever rationale for federal preemption, because interstate and intrastate information services are seamlessly integrated and what reasonable person does not hate California?

The Sun Will Rise on Monday Even With the Sunset of Network Neutrality

By all accounts, the prior Network Neutrality regime will evaporate on Monday June 11, 2018.  The earth will spin on its axis and  it will not be curtins for the free world.  On the other hand, the absence of a referee does mean that at some future date, certain unscrupulous Internet Service Providers may test  the reach and scope of their freedom to discriminate and operate biased networks.

In the short run, ISPs are too smart to reduce the value proposition of their services, even though they probably could get away with it like the airlines.  In the longer term, I expect ISPs to create more service tiers, to offer "better than best efforts" routing opportunities and to come up with more zero rating/sponsored data upselling propositions.  This outcome will have a mixed impact on consumers.

On one hand, comsumers might want  prioritization of "mission critical," "must see" video.  On the other hand, the potential exists for ISPs to extort surcharges from small ventures, with content volumes nowhere near Netflix.  In kinder, gentler times, these ventures could expect ISPs to route their traffic without objection and demand for surcharge payments.  ISPs used to be content with the subscription payment of their downstream subscribers.  Now these ventures, operating in a two-sided market want payment from both upstream content providers and downstream broadband subscribers.

This reminds me of the adage that bulls make money in the stockmarket as do bears, but pigs get slaughtered.

A Deep Dive into the FCC’s Circulated Restoring Internet Freedom Document

             Press accounts and the FCC’s own summary, provide a general sense of how the Commission rationalizes its abandonment of network neutrality.  See https://www.fcc.gov/restoring-internet-freedom.  However, a deeper dive can provide further insights and perhaps identify areas of vulnerability in terms of judicial review and future conflict.

Set out below, I offer such an analysis.

Thinly Disguised Disgust Coupled with Supreme Confidence

            On balance, I am surprised at the lack of humility and decency in such an important document.  As perhaps never before, the Pai-led FCC makes it clear that it must correct grievous shortcomings in the legal interpretation, evidence interpretation, economic philosophy and overall perspective of the Wheeler-led, but Obama-controlled Commission and its Open Internet Order. 

            The new Commission comes ever so close to asserting that its predecessor distorted the truth.  The document states that the prior Commission engaged in “results-driven” decision making (¶50) and “manipulated” service definitions to “engineer[] a conclusion” (¶70).  That comes across as disingenuous in light of the paucity of unimpeachable empirical evidence in the Pai document and the heavy reliance on cherry picked conjectures of preferred commenters who repurpose sponsored research.

            Despite a commitment to empirical data collection, fair-minded cost/benefit analysis and transparency, the nearly 200 page document comes up remarkably short on facts and stands at parity with the Democrats on result-driven decision making.

Doubling Down the Telecommunications/Information Service Dichotomy

            The Restoring Internet Freedom document relies heavily on the questionable conclusion that the FCC can and should create mutually exclusive regulatory classifications, despite technological and marketplace convergence.  Throughout the document, the FCC relies on a number of dichotomies whose air tightness supports divergent regulatory treatment, despite the reality that the telecommunications and Internet ecosystems do not support such neatness.

            The document supports extension of a view that the FCC must separate its treatment of telecommunications and telecommunications services, on one hand, and information services, on the other hand.  The Commission expressed such a need in 1998 in response to a Senate query (the Stephens Report) and implemented this air tight strategy in the Computer Inquiries.

            While such a dichotomy might work in a world where dial up common carriers provided a stand-alone link to information services, conduit and content now converge.  For example, smartphones offer voice telephone service, regulated as common carrier, Commercial Mobile Radio Service.  These carriers also offer data services, including access to the Internet cloud.  Consumers expect to have access to both types of services regardless of their different regulatory classifications.  A Republican majority FCC agreed when it mandated data roaming, at a time when such a service qualified for light-handed, information service oversight.

            Put another way, on functional equivalency grounds, consumers understand voice as different from data only insofar as how much the carrier charges, not how the carrier provides either service.  Similarly, consumers don’t quibble about whether a mobile broadband service is public or private, interconnected or not and whether the Public Switched Telephone Network and telephone numbers are used.

Misreading the Venerable Justice Scalia

            To legitimize its reclassification of broadband Internet access as an information service and wireless broadband as private, not commercial carriage, the FCC now must return to the rationale that bit and packet transmission cannot be distinguished and carved out from the information service it carries.  The Commission blithely ignores that Justice Scalia, dissenting in the Brand X case, rejected the view that the telecommunications element could not be carved out and recognized for what it is: publicly available conduit functionality.

            Justice Scalia recognized that deference to the FCC on its interpretation of conduit and content severability would promote deregulation in one instance, but could just as easily be used again by the FCC—having a different political party majority—to justify more government oversight:

Finally, I must note that, notwithstanding the Commission’s self-congratulatory paean to its deregulatory largesse . . . what the Commission hath given, the Commission may well take away—unless it doesn’t. This is a wonderful illustration of how an experienced agency can (with some assistance from credulous courts) turn statutory constraints into bureaucratic discretions {to regulate or deregulate based on the agency’s legal interpretation and politics]. . . . Such Möbius-strip reasoning mocks the principle that the statute constrains the agency in any meaningful way.

Self-Inflicted Wounds on the VoIP Regulatory Question

            Without a doubt, Chairman Pai must be basking in the limelight and congratulating himself for delivering an unimpeachable document that will survive judicial review.   Perhaps, but I would like to raise the VoIP question.

            Until now, the FCC has managed to avoid classifying VoIP so that it can mandate universal service contributions from VoIP services that access the PSTN.  The reemphasis on mutual exclusivity between basic telephony and enhanced, information services may force the Commission’s hand.  How can the FCC emphasize access to the PSTN, use of telephone numbers, the degree of accessibility by the public and the nature of interconnection to justify the unregulation of wireless broadband even as these factors pretty much line up in favor of treating VoIP as the functional equivalent of common carrier, regulated voice telephony?

 Employment, Innovation and Investment

            The document reiterates how network neutrality and the Title II classification decimated the telecommunications ecosystem with all sorts of disincentives.  However, the Commission never proves causality, nor does it have evidence that it, or the sponsored research it chose to embrace, can prove causality: that network neutrality and/or common carrier status constituted the direct cause for any and all reduction in employment, innovation and investment.

            Ironically, while the document obsessively invokes the gospel of disincentives, later the Commission emphasizes that ongoing investment in plant constitutes one of the major reasons the broadband marketplace is robustly competitive. 

            Compare these two conclusions:

The Commission has long recognized that regulatory burdens and uncertainty, such as those inherent in Title II, can deter investment by regulated entities . . .. The balance of the evidence in the record suggests that Title II classification has reduced ISP investment in the network as well as hampered innovation because of regulatory uncertainty. ¶88

With the advent of 5G technologies promising sharply increased mobile speeds in the near future, the pressure mobile exerts in the broadband market place is likely to grow even more significant.¶130

            Let me get this straight.  Without identifying evidence of causality and generating or identifying anything close to peer review worthy data, the FCC concludes that the Obama era Network Neutrality regime singularly caused a woeful decline in broadband plant.  Yet at the very same time, during the Obama-managed FCC, carriers like AT&T and Verizon expedited 5G plant investment, unimpeachable proof of how competitive the broadband marketplace has become, particularly in light of the functional equivalency of wired and wireless networks.

            Can the FCC have it both ways, or might a reviewing court question the science, economics and lawfulness of the FCC’s rationales for reclassification?  That’s the Trillion Dollar question.

“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?