The We Don’t Want to Pay for Universal Telecommunications Access Litigants Finally Hit Paydirt

           For several years now, a well-funded litigation group has sought a federal appellate court decision deeming unconstitutional congressional legislation directing the FCC to establish a subsidy mechanism to achieve affordable and ubiquitous access to telecommunications and broadband.  In three appellate court districts, the litigants filed the same claims and lost. 

         Even a panel in the nation’s most conservative district, failed to buy the argument that the decades long FCC-created subsidy mechanism constituted a tax, made worse by the Commission’s delegation of administrative duties to a private company.

        The litigants finally hit paydirt in an enbanc appeal to the Fifth Circuit Court of Appeals that ruled in their favor on a 9-7 vote.  See https://www.law360.com/articles/1861779/attachments/0. The litigants finally have a conflict in appellate court rulings that eventually will result in a Supreme Court appeal and the opportunity for the conservative majority there to issue yet another order framed as rightsizing the administrative state.

        The litigants ostensibly expressed concerns about constitutional rights, economic freedom, what constitutes a tax, how specific a congressional delegation of authority has to be, and the extent to which the FCC could lawfully delegate administration of the universal service program to a company.  These arguments are creative rationales to support a basic mission: to find a way for a court to eliminate an increasingly expensive subsidy burden flowing from telecommunications carriers to qualifying subscribers based on their income. Reduced to its basic premise the litigation is funded by stakeholders who do not want to pay anything to support affordable Internet for everyone, including all those Republican voters in rural America.

           Apparently jettisoning a successful, albeit expensive, subsidy program should be shut down as a unfair, and apparently unnecessary gravy train for undeserving beneficiaries, many of which happen to live in rural Red States!

           Ever since the onset of telephone service telephone companies, the FCC, and even Congress have supported a universal service mission.  For decades, no one objected to the basic premise that society benefits when as many people as possible have access to affordable telecommunications.  In light of how right-wing conservatives currently rail against universal service, historically sparsely populated Red, Republican states receive the largest share of universal service funding.  Now that universal surface funding has substantially increased to support broadband access, the right-wing rails against so-called Obama Phones and unconstitutional taxation.

           The 5^th Circuit En Banc decision reeks of partisan, doctrinal overreach.  The majority, emboldened by recent Supreme Court decisions to eliminate reliance on regulatory agency expertise, blows up a subsidy mechanism that has significantly achieved progress, and funneled billions of dollars into the coffers of telephone companies.

           The ultimate irony from this misguided mission will be a massive increase in employment at the FCC that no longer can off load administrative duties to a separate company.  Telephone companies quite likely will regret losing a generous subsidy and I expect them to lobby for a resurrection of the program, with even more explicit, unambiguous language now required by the Supreme Court.

 

 

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.