The Likely AT&T Wireless Playbook for Securing Authority to Acquire T-Mobile

     There are several tried and true tactics that AT&T Wireless can use to convince the FCC and Department of Justice to approve the company’s merger with T-Mobile notwithstanding the obvious harmful and anticompetitive consequences.  Regardless of which party controls the White House these tactics work as evidenced by the rare instance where a market concentrating telecommunications mega-merger is not approved.  AT&T will reframe the merger away from market concentration and into the realm of better serving the consumer and responding to delays in FCC regulatory reform.

1)         This merger will benefit consumers! 

            Let me get this straight: a horizontal merger buying out one of 4 major players, which control over 90% of the wireless marketplace, is good for me?  Would a merger of the 2d and 4^th airlines in the U.S. (Delta Airlines and American Airlines) benefit the consumer with lower rates, more choices, better rural options, etc.?  AT&T’s acquisition of T-Mobile’s market share and spectrum will make AT&T a better service provider.  Perhaps, but at what harm to the traditional benefits in a robustly competitive market?  Might an oligopolistic wireless market have carriers implicitly agreeing not to compete on price?  It looks like that already occurs: is it market equilibrium, or price fixing for the 4 major carriers already to offer the same price points for the same number of minutes?  Why won’t a carrier offer discounted service rates to subscribers who do not want a new subsidized handset? 

            Market consolidation typically harms consumers with fewer choices, less competitive necessity to lower prices and greater carrier inflexibility.  Yes carriers need scale and ever more spectrum, but a merger is more about buying out competition than becoming a more effective and efficient competitor.  With fewer carriers it becomes easier for the survivors—collectively, collusively or independently—to reach the same conclusions about network neutrality, service tiering and disabling features available from subscribers’ handsets.  Once AT&T fires the thousands of redundant T-Mobile employees, it can claim how precompetitive FCC regulation “kills jobs.”  Just when the FCC has to show a backbone on matters of consumer protection, the remaining 2 or 3 national wireless carriers will have the clout to persuade fringe and mainstream political factions how carriers can self-regulate.

2)         The FCC made us do it! 

            This tactic shows that the best defense is an outrageous offense.  AT&T frames the need to buyout a competitor as the product of FCC regulatory decisions that deprived the company of enough spectrum to satisfy consumer demand.  So AT&T’s well deserved record of poor service is the FCC’s fault and not the product of selling too many subscriptions and failing to match switching and other infrastructure elements with the onslaught of Iphone subscribers.

            AT&T like wireless subscribers could use more spectrum, but the FCC has accommodated incumbent carriers from the onset of cellular service to present.  AT&T’s local carriers got free spectrum and a first mover advantage when the FCC “set aside” spectrum for wireline incumbent and required newcomers to compete in a comparative hearing.  The FCC abandoned a cap on spectrum controlled by any single carrier and will not designate any new spectrum for market entrants instead of incumbents.

            AT&T does not want the FCC or us to remember that the company first disabled the Wi-Fi features in its handsets, thereby preventing use of additional spectrum that might have made the AT&T network less congested.  AT&T later permitted conditional Wi-Fi use even as the company wanted subscribers to buy a femtocell device that would offload some of its traffic onto the Internet services of other carriers.  AT&T and Verizon recently acquired the lion’s share of newly available spectrum and with fewer competitors bidding for future spectrum the federal government will generate less from spectrum auctions.  Of course with less competition, AT&T might not have to pass through its savings with lower rates for service.  On the contrary AT&T and the surviving wireless carriers soon will abandon unmetered service plans.  Even as the company hypes smartphones as handheld computers, wireless carriers will make metered data services a profit center able to raise average revenue per subscriber (“ARPU”) already at levels few carriers in other nations come close to generating.

3)         Prominent scholars and consultants endorse the merger!

            I could have self-financed my kids’ college educations if only I had joined the ranks of “scholars for dollars.”  An impressive array of academics will write white papers, scholarly law review articles, affidavits, expert statements and other products endorsing the merger. Few will acknowledge their financial sponsor and all will claim that they came up with the ideas in the paper independently of their sponsor’s regulatory agenda.

            The murky world of rarely disclosed sponsored research will provide fire power to AT&T’s arguments how the merger makes operational and economic sense without harming the national interest, or the subscribers of AT&T and T-Mobile.  Sponsored researchers will make outlandish assertions that would not pass muster under rigorous peer review.  Nevertheless these sorts of documents will find a home in filings at the FCC and in prominent law and economic journals.  Rarely do these journals even require notification about AT&T’s sponsorship, or that of countless other Washington think tanks funded by AT&T.

4)         Our merger will achieve the same type benefits as other mega-mergers.         

    
        The FCC rarely receives a merger application it cannot conditionally approve.  AT&T surely will have to share the wealth to make the merger happen, but a company that come up with $25 billion in cash to acquire T-Mobile, surely can spend an extra few hundred million dollars to persuade Congress that the merger will serve the national interest.  I mention Congress, because the FCC and DOJ surely do not want to make the legislature unhappy, especially the individuals who chair oversight and funding hearings.

      Of course AT&T will come up with a bunch of “voluntary concessions” that will secure votes from ambivalent Commissioners.  These concessions typically add a minor cost to the acquisition and sound wonderful.  But AT&T in particular has a skill in offering something that is both limited in time and actual benefit.  We can expect to see AT&T offering all sorts of rural buildout commitments, as well as support for open and neutral access to its network.  The commitment will have conditions and exceptions that mitigate the benefit.  For example, when AT&T acquired BellSouth the FCC received a voluntary network neutrality commitment, but one limited to a few years and applicable only the DSL service line linking retail subscribers and the first AT&T switching facility.  

            A year or so from now AT&T probably will get conditional merger authority.  The future dominant means for accessing the Internet will become an unregulated conduit controlled by companies free to leverage employment and infrastructure buildouts for a free reign.

AT&T-T Mobile One Merger Too Many?

So AT&T wants to acquire T-Mobile's market share concentrating the wireless marketplace so that 3 carriers control over 90% of the market.  Would anyone buy the bogus argument that No. 2 Delta Airline's acqusition of No. 4 American would "promote competition"?  Does anyone notice that mergers are job killing?  Does the FCC and the Justice Department have the courage to say no? 

Bear in mind the FCC rarely refuses to approve with conditions market concentrating mergers.  For wireless the FCC has abandoned spectrum caps and making new spectrum available only to new market bidders.

I predict that months from now the FCC will find a way to frame this merger as something really great for consumers.  Bogus!

New Publication--Legislative and Regulatory Strategies for Providing Consumer Safeguards in a Convergent Information and Communications Marketplace

The Hastings Communications and Entertainment Law Journal, Vol. 33, No. 2, has published my article entitled Legislative and Regulatory Strategies for Providing Consumer Safeguards in a Convergent Information and Communications Marketplace. Here's the abstract:   

Many ventures involved in information, communications and entertainment (“ICE”) industries have begun to expand their array of offered services.  Technological convergence, digitization and the ability of the Internet to handle many different service types within a single bitstream make it possible for companies to offer “quadruple play” bundles of wireless and wireline telephony, video, and Internet access services.  Financial and efficiency gains from vertical integration, and the search for new revenues to replace declining margins from maturing and newly competitive services, combine to create robust incentives for carriers to diversify.

Diversification by ventures typically results in a single company providing services that fit within more than one regulatory classification.  This frustrates the FCC’s desire to apply a single regulatory classification to services and service providers, a process the Commission could achieve when ventures concentrated on one function, e.g., operating a conduit for content created by others, and offered one readily identifiable service, e.g., telephony.  Diversification also obscures the specific reach of the FCC’s regulatory wingspan, both in terms of what regulatory classification applies to which services and what regulatory safeguards the Commission can lawfully apply.  For example, an appellate court recently reversed the FCC’s attempt to subject Internet Service Providers (“ISPs”) to regulatory safeguards identified in Title II of the Communications Act, as amended, but which the Commission wanted to apply using the concept of “ancillary jurisdiction” based on Title I of the Act.  The D.C. Circuit Court of Appeals rejected the FCC’s attempt to apply such safeguards on ventures classified as information service providers, a status that qualifies for a largely unregulated “safe harbor.”

In light of an appellate court reversal, the FCC must rethink how it can serve the public interest and safeguard consumers, despite having broadly applied the information service classification to all Internet services and ISPs.  Already the FCC has had to find ways to impose Title II-type regulatory safeguards on providers of Voice over the Internet Protocol (“VoIP”)  service.  Additionally the Commission has avoided making necessary regulatory classifications as to which category new services such as VoIP and Internet Protocol Television fit.  

Absent a legislative remedy the FCC must find a way that will pass muster with reviewing court, but also provide necessary safeguards.  FCC Chairman Julius Genachowski has proposed to reclassify Internet access as Title II regulated service subject to extensive forbearance from applying many regulatory safeguards he considers unnecessary.  Such a re-classification, coming on the heels of court reversal, appears as after the fact scrambling to re-arrange the wingspan of Title II jurisdiction without statutory authority.

This paper will explain how the FCC has backed itself into a corner in light of its predisposition to apply the information service classification indiscriminately and its perceived duty to make either/or determinations about services, i.e., to apply either the telecommunications service classification singularly, or the information service singularly to a convergent service that combines both elements.  The paper also will provide recommendations on how the Commission might recognize that convergent services, such as Internet access, combine both components in much the same way as wireless cellular telephone companies offer both regulated common carrier telecommunications services, subject to forbearance, and unregulated information services via the same conduit.  The paper recommends that in light of the ascending importance of Internet access and the lack of sustainable competition that would favor self-regulation, Congress should amend the Communications Act to authorize the FCC to apply limited elements of Title II safeguards as already exists for wireless telephony.  In light of the failure of Congress to reach consensus, the paper suggests that the FCC safeguard consumers when information service providers cause harm as the Commission did when a DSL service provider blocked access to competing VoIP services.

     

Lies, Damn Lies and Broadband Statistics

The FCC and NTIA have launched a broadband map that purports to give quite granular and current data about broadband accessibility.  Don't count on realistic statistics.  See Broadband Map

The casual reader won't catch the use of advertised, maximum speeds.  When, if ever, will the FCC and NTIA start to plug in real, measured speeds? 

The casual reader also may not quibble about the reported, advertised speeds.  When the site reports 50-100 megabits per second, as it does for my location, would not a reader infer a speed somewhere probably midway between the two poles?  Comcast offers a $99.99 plus, plus Extreme 50 Plan for downlink speeds "up to" 50 megabits per second.  So why not bump that platinum plan up to the NEXT rate band?  And let's forget about how many people actually subscribe to this level of service, if really available.

At first glance, the FCC and NTIA, are overstating reality.  This reminds me that there are lies, damn lies and broadband statistics.

New, Old and Forgotten Frames in the Network Neutrality Debate

            One key reason for confusion about Network Neutrality lies in the many different and inconsistent frames used to shape the debate.  The Tea Party has entered the fray by characterizing the matter primarily in terms of freedom.  Republicans decry the “job killing” impact of the FCC’s rules.  Network Neutrality advocates appear ambivalent whether the FCC has capitulated to special interests, or shaped a pragmatic compromise.

            Older frames typically use hyperbole to justify government intervention or forbearance.  Network Neutrality advocates frame the matter as impacting the Internet’s openness and its ability to incubate new ventures such as Google, Netflix, Amazon and EBay.  Opponents reject the need for government safeguards based on the view that there is no problem requiring a solution.

            Everyone seems to have ignored a more basic question whether or not the Internet access market currently operates competitively.  If the market is sufficiently competitive one can vote with their dollars and change carriers if and when the carrier operates in ways subscribers do not like.  Of course there are transaction costs in making such a move, and in the wireless market carriers offer subsidized handsets to lock in subscribers for two years.  As well the matter of identifying the cause of network congestion, sluggish service or discriminatory practices presents a forensic problem.  In light of the interconnected and integrated nature of the Internet, where content and conduit converge, an end user cannot readily determine if degradation in service—however defined—is caused by the content or application provider, a long haul carrier, or the ISP providing first and last mile access to the Internet cloud.

            Still if the Internet access marketplace operates competitively, then consumers, if so inclined, can reward or punish ISPs based on the real or perceived openness.  Even in competitive markets, carriers can agree explicitly or decide unilaterally not to emphasize or market different degrees of openness.  But at least the potential exists for an ISP to identify the openness factor and target consumers who consider it a priority.  This is not happening in the Internet access marketplace either because openness, transparency and nondiscrimination are non-issues, because all ISPs are fair and neutral, or because consumers do not have the ability to identify and subscriber to an ISP promising fair and neutral service should the existing carrier explicitly or subversively operate in a non-neutral manner.

            So competition in the Internet access marketplace matters greatly and somehow this issue constitutes a “huge omission” in the debate according to the fair minded writers at The Economist.  See A tangled web, America’s new internet rules are mostly sensible—but the country’s real web problem is far more basic (Dec. 29, 2010); available at: http://www.economist.com/node/17800141.  If I had access to a competitive marketplace ISPs would have offer me something better than the one (and only one viable) option I have now:  $59.95 plus tax and fees for downloads up to 15Mbps, and  uploads up to 3Mbps, or $40.95 plus tax and fees for up to 1.5 Mbps download and uploads up to 384 Kbps.

            Just because many consumers have a choice of two broadband distribution platforms (cable and DSL) does not by definition ensure robust competition with affordable rates. The Economist dares to report the issue frame ignored by the FCC and others:

the failure in America to tackle the underlying lack of competition in the provision of internet access. In other rich countries it would not matter if some operators blocked some sites: consumers could switch to a rival provider. That is because the big telecoms firms with wires into people’s homes have to offer access to their networks on a wholesale basis, ensuring vigorous competition between dozens of providers, with lower   prices and faster connections than are available in America. Getting America’s phone and cable companies to open up their networks to others would be a lot harder for politicians than prattling on about neutrality; but it would do far more to open up the net.

Summary of FCC's Net Neutrality Report and Order

In a split decision, likely to face congressional and judicial review, the FCC issued rules designed to promote transparent, unblocked and nondiscriminatory Internet access. [1]  Ostensibly structured to offer an acceptable compromise the Report and Order imposes basic network neutrality obligations on Internet Service Providers (“ISPs”) [2] with exceptions made for reasonable network management, [3] specialized services [4] and wireless access. [5]  The FCC reiterated that to ensure open Internet the Commission must establish clear and certain rules applicable to both fixed. i.e., wire-based and mobile, i.e., wireless, ISPs.

 The transparency requirement obligates all ISPs to disclose their network management practices, performance characteristics, and terms and conditions of their broadband services. [6]

The FCC adopted different requirements for fixed and broadband providers on the other two key requirements.  Fixed providers may not block lawful content, applications, services, or non-harmful devices while mobile broadband providers may not block lawful websites, or block applications that compete with their voice or video telephony services. [7] On the other key requirement fixed broadband providers may not unreasonably discriminate in transmitting lawful network traffic while mobile carriers face a general no blocking rule that guarantees end users’ access to the web and protects against mobile broadband providers’ blocking applications that compete with their other primary service offering—voice and video telephony. [8] 

            The Report and Order rejects assertions that network neutrality requirements would stifle innovation reduce incentives to invest in network infrastructure and reduce employment in the Internet economy:

We believe these rules, applied with the complementary principle of reasonable network management, will empower and protect consumers and innovators while helping ensure that the Internet continues to flourish, with robust private investment and rapid innovation at both the core and the edge of the network.  This is consistent with the National Broadband Plan goal of broadband access that is ubiquitous and fast, promoting the global competitiveness of the United States. [9]

In light of strident dissents from the two Republican Commissioners, the Report and Order appears to emphasize that the final rules logically follow from the nonpartisan consensus reached in documents created in 2005 and 2007, [10] and do not violate the Constitution,[11] particularly First Amendment expression rights of ISPs and the prohibition on government takings in the Fifth Amendment. 

Additionally the Report and Order extensively attempts to demonstrate that the FCC has lawful jurisdiction to promulgate network neutrality rules, primarily because Congress, in Section 706 of the Telecommunications Act, authorized the Commission to take all reasonable steps to promote widespread access to the Internet. [12] In light of the D.C. Circuit Court of Appeals reversal of the FCC’s sanctioning Comcast for violating Network Neutrality principles, the Commission must establish clear and direct statutory authority to impose new rules.  The Commission heavily relies on Section 706 of the Telecommunications Act which does not explicitly authorize regulation and rule making.  The FCC infers that the duty to encourage the deployment of “advanced telecommunications capability” authorizes the Commission to use whatever tools it considers necessary to achieve timely progress. [13] 

The assumption of statutory authority requires two novel reinterpretations of the definition for telecommunications contained in the Communications Act, as amended.  First, the FCC has to consider advanced telecommunications capability to include Internet access, [14] despite having previously concluded that the technologies providing such access constitute an  insignificant factor when the Commission determined that cable modem service constituted an information service and not a telecommunications service. [15]  Second, the FCC now has to elevate the significance of the telecommunications bit transmission function in Internet access [16] to trigger public interest concerns about competition and anticompetitive practices having previously subordinated it so that the Commission could provide an unregulated “safe harbor” for all Internet access technologies including cable modem service, [17] Digital Subscriber          Lines, [18] Broadband over Power Lines [19] and wireless services. [20] Now the FCC wants to validate the telecommunications component as the driver for public interest regulatory safeguards.

Despite having previously concluded that the broadband marketplace was robustly competitive and close to ubiquitous, the Commission now cites to more recent market penetration data to support its involvement:

Section 706(b) of the 1996 Act provides additional authority to take actions such as enforcing open Internet principles.  It directs the Commission to undertake annual inquiries concerning the availability of advanced telecommunications capability to all Americans and requires that, if the Commission finds that such capability is not being deployed in a reasonable and timely fashion, it “shall take immediate action to accelerate deployment of such capability by removing barriers to infrastructure investment and by promoting competition in the telecommunications market.”  In July 2010, the Commission “conclude[d] that broadband deployment to all Americans is not reasonable and timely” and noted that “[a]s a consequence of that conclusion,” Section 706(b) was triggered.  Section 706(b) therefore provides express authority for the pro-investment, pro-competition rules we adopt today. [21]

Additionally the FCC invokes elements of Title II, III and Title VI regulatory authority to ISPs that qualify for the largely unregulated statutory classification of information service providers and not telecommunications service providers for which Title II customarily applies. Instead of stating that ISPs operate as telecommunications service providers when they provide essential first and last mile access to the Internet—a scenario suggested by FCC Chairman Julius Genachowski and now apparently rejected—the Report and Order states that because some Internet-based services compete with traditional telephone, broadcast and video services, the Commission has jurisdiction to impose rules and regulations to prevent anticompetitive practices and to promote competition.

The FCC justifies imposing Network Neutrality rules on ISPs based on the Commission’s conclusion that ISPs have the incentive and ability to engage in anticompetitive practices that limit Internet openness in terms of content, applications, services, and devices accessed over or connected to broadband Internet access service. The Commission provides three examples suggesting that ISPs may have incentives to block or degrade content that competes with that offered by the ISP or an affiliate, to impose surcharges on competing content providers in addition to end user subscription fees, and to degrade competitors’ traffic:

1)         “[B]roadband providers may have economic incentives to block or otherwise disadvantage specific edge providers or classes of edge providers, for example by controlling the transmission of network traffic over a broadband connection, including the price and quality of access to end users.  A broadband provider might use this power to benefit its own or affiliated offerings at the expense of unaffiliated offerings.” [22]

2)         “[B]roadband providers may have incentives to increase revenues by charging edge providers, who already pay for their own connections to the Internet, for access or prioritized access to end users.  Although broadband providers have not historically imposed such fees, they have argued they should be permitted to do so. A broadband provider could force edge providers to pay inefficiently high fees because that broadband provider is typically an edge provider’s only option for reaching a particular end user. Thus broadband providers have the ability to act as gatekeepers.” [23]

3)         “[I]f broadband providers can profitably charge edge providers for prioritized access to end users, they will have an incentive to degrade or decline to increase the quality of the service they provide to non-prioritized traffic.  This would increase the gap in quality (such as latency in transmission) between prioritized access and non-prioritized access, induce more edge providers to pay for prioritized access, and allow broadband providers to charge higher prices for prioritized access.  Even more damaging, broadband providers might withhold or decline to expand capacity in order to “squeeze” non-prioritized traffic, a strategy that would increase the likelihood of network congestion and confront edge providers with a choice between accepting low-quality transmission or paying fees for prioritized access to end users. [24]

            The FCC considers the three examples of discrimination as more than theoretical in light of actual examples where ISPs, such as Comcast, blocked or degraded traffic without legitimate network management concerns.  Similarly the Commission states that the benefits in guarding against such anticompetitive practices outweighs the costs. [25]

           

---

[1]           Preserving the Open Internet, GN Docket No. 09-191, Report and Order, FCC 10-201 (rel. Dec. 23, 2010); available at http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-10-201A1.doc [hereinafter cited as Network Neutrality Order].

[2]           Specifically the FCC imposes rules on the providers of broadband Internet access service, defined 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.” Id. at ¶44.

[3]           “A network management practice is reasonable if it is appropriate 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 ¶82.

[4]           “‘[S]pecialized services,’ such as some broadband providers’ existing facilities-based VoIP and Internet Protocol-video offerings, differ from broadband Internet access service . . ..” Id. at ¶112. “We will closely monitor the robustness and affordability of broadband Internet access services, with a particular focus on any signs that specialized services are in any way retarding the growth of or constricting capacity available for broadband Internet access service.  We fully expect that broadband providers will increase capacity offered for broadband Internet access service if they expand network capacity to accommodate specialized services.  We would be concerned if capacity for broadband Internet access service did not keep pace.  We also expect broadband providers to disclose information about specialized services’ impact, if any, on last-mile capacity available for, and the performance of, broadband Internet access service.  We may consider additional disclosure requirements in this area in our related proceeding regarding consumer transparency and disclosure.” Id. at ¶114.

[5]           Despite the likelihood that wireless network access will grow and perhaps become the primary way people access the Internet, the FCC established relaxed anti-blocking rules based on spectrum and operational limitations not applicable to wire-based networks. “A person engaged in the provision of mobile broadband Internet access service, insofar as such person is so engaged, shall not block consumers from accessing lawful websites, subject to reasonable network management; nor shall such person block applications that compete with the provider’s voice or video telephony services, subject to reasonable network management.” Id. at ¶99.

[6]           Id. at ¶1.  “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 ¶54.

[7]           “A person engaged in the provision of fixed 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.” Id. at ¶63.

[8]           Id. at ¶99.

[9]           Id. at ¶1.

[10]          “The rules we proposed in the Open Internet NPRM and those we adopt today follow directly from the Commission’s bipartisan Internet Policy Statement, adopted unanimously in 2005 and made temporarily enforceable for certain broadband providers in 2005 and 2007; openness protections the Commission established in 2007 for users of certain wireless spectrum; and a notice of inquiry in 2007 that asked, among other things, whether the Commission should add a principle of nondiscrimination to the Internet Policy Statement.  Our rules build upon these actions, first and foremost by requiring broadband providers to be transparent in their network management practices, so that end users can make informed choices and innovators can develop, market, and maintain Internet-based offerings.  The rules also prevent certain forms of blocking and discrimination with respect to content, applications, services, and devices that depend on or connect to the Internet.” Id. at ¶5(citations omitted).

[11]          See Id. at ¶¶138-150.

[12]          See Id. at ¶¶115-137.

[13]          “As noted, Section 706 of the 1996 Act directs the Commission (along with state commissions) to take actions that encourage the deployment of ‘advanced telecommunications capability.’  . . . Under Section 706(a), the Commission must encourage the deployment of such capability by ‘utilizing, in a manner consistent with the public interest, convenience, and necessity,’ various tools including “measures that promote competition in the local telecommunications market, or other regulating methods that remove barriers to infrastructure investment.” Id. at ¶117.

[14]          “‘[A]dvanced telecommunications capability,’” as defined in the statute, includes broadband Internet access.” Id. at ¶¶117, citing 47 U.S.C. § 1302(d)(1) (defining “advanced telecommunications capability” as “high-speed, switched, broadband telecommunications capability that enables users to originate and receive high-quality voice, data, graphics, and video telecommunications using any technology”); National Broadband Plan for our Future, Notice of Inquiry, 24 FCC Rcd 4342, 4309, App. para. 13 (2009) (“advanced telecommunications capability” includes broadband Internet access); Inquiry Concerning the Deployment of Advanced Telecomms. Capability to All Americans in a Reasonable and Timely Fashion, 14 FCC Rcd 2398, 2400, para. 1 (Section 706 addresses “the deployment of broadband capability”), 2406 para. 20 (same). 

[15]          See Nat’l Cable & Telecomm. Ass’n v. Brand X Internet Servs., 545 U.S. 967, 977–78 (2005).

[16]          Note that before the FCC deregulated Internet access, the Commission considered it possible to separate the telecommunications component: “We conclude that advanced services are telecommunications services. The Commission has repeatedly held that specific packet-switched services are ‘basic services,’ that is to say, pure transmission services. xDSL and packet switching are simply transmission technologies. . . . An enduser may utilize a telecommunications service together with an information service, as in the case of Internet access. In such a case, however, we treat the two services separately: the first service is a telecommunications service (e.g., the xDSL-enabled transmission path), and the second service is an information service, in this case Internet access.” Deployment of Wireline Services Offering Advanced Telecommunications Capability, Memorandum Opinion and Order, and Notice of Proposed Rulemaking 13 FCC Rcd. 24012, 24029-30 (1998).

[17]          Inquiry Concerning High-Speed Access to the Internet Over Cable and Other Facilities, 17 FCC Rcd. 4798 (2002), affirmed sub nom. Nat’l Cable & Telecomm. Ass’n v. Brand X Internet Servs., 545 U.S. 967, 977–78 (2005).

[18]          Appropriate Framework for Broadband Access to the Internet Over Wireline Facilities,

Report and Order and Notice of Proposed Rulemaking, 20 FCC Rcd. 14853 (2005) petition for

review denied by Time Warner Telecom, Inc. v. FCC, 507 F.3d 205 (3d Cir. 2007).

[19]          United Power Line Council’s Petition for Declaratory Ruling Regarding the Classification of Broadband Over Power Line Internet Access Service as an Information Service, Memorandum Opinion and Order, 21 FCC Rcd. 13281 (2006).

[20]          Appropriate Regulatory Treatment for Broadband Access to the Internet Over Wireless

Networks, WT Docket No. 07-53, Declaratory Ruling, 22 FCC Rcd. 5901(2007).

[21]          Id. at ¶123.

[22]          Id. at ¶21.

[23]          Id. at ¶24.

[24]          Id. at ¶29.

[25]          “By comparison to the benefits of these prophylactic measures, the costs associated with the open Internet rules adopted here are likely small. Broadband providers generally endorse openness norms—including the transparency and no blocking principles—as beneficial and in line with current and planned business practices (though they do not uniformly support rules making them enforceable) Even to the extent rules require some additional disclosure of broadband providers’ practices, the costs of compliance should be modest.” Id. at ¶39.

No Free Lunch in Internet Peering or Transit

              Like many of you, I am keenly following the Comcast-Level 3 dispute and am trying to make sense of it all.   The dispute confirms several universal principles about Internet traffic routing that have passed the test of time:

1)         Consumers pay Internet Service Providers (“ISPs”) a monthly subscription with the expectation that the fee covers access to available content, i.e., the conduit.  As the World Wide Web evolves and content options diversify to include full motion video, consumers simply expect their ISPs to make sure the download distribution pipes are sufficiently robust to handle high bandwidth requirements and commensurately large monthly download volume.  Cable modem service agreements may have a cap on downloading per month, but consumers generally assume “All You Can Eat” access rights, plus the expectation that video streaming will work, i.e., no blurring, frozen frames, or blue screens.

2)         Because upstream requests for content are narrowband and because the typical consumer downloads much more content than he or she uploads, ISPs serving end users, such as Comcast, typically will have a large traffic imbalance with more downstream traffic to deliver than upstream traffic that the end user serving ISP might want other ISPs, such as Level 3, to handle.

3)         Until such time as Comcast’s “Television Anywhere” takes off and generates lots more traffic that Comcast will need other ISPs to handle—whether on a peering or transit basis—Level 3 vastly contributes to Comcast’s download “surplus” delivery burden to end users.  Of course Level 3 replaces another content distribution network so the total volume of Comcast’s downloading burden does not change in the short term. However, in the context of peering and transit between Comcast and Level 3, the traffic volume relationship changes with a greater imbalance resulting from the new Netflix traffic Level 3 now delivers to Comcast.

4)         The Comcast- Level 3 dispute distills to a disagreement over whether and how much either should pay in light of changed traffic patterns.  Because the parties already have traffic agreements, modification of terms might require additional payments from Level 3 to Comcast, absent Comcast’s need for Level 3’s upstream transmission services.  Of course Comcast does need the services of Tier 1 ISPs like Level 3, but until Comcast starts distributing lots more of its cable television video product over the Web, Netflix downloading to Comcast subscribers will predominate.

5)         Cooperative ISPs typically align inbound and outbound peering traffic with an eye toward creating a balance, but either or both ISPs might also want to expand transiting services as these paid arrangements are based on the unlikelihood of balanced traffic loads.   Digital Society Policy Director George Ou reports that Comcast and Level 3 have both peering and transit agreements; see http://www.digitalsociety.org/2010/12/video-level-3-versus-comcast-peering-dispute/.  George lays blame on Level 3 for expecting Comcast to absorb the newly increased volume of traffic delivered to it by Level 3 without additional payment by Level 3, or the offer of additional free upstream capacity.

            Reasonable people can disagree as to the mutual exclusivity or substitutability of peering versus transit.  George considers the two types of traffic arrangements mutually exclusive and has chided me for thinking that the parties could recalibrate both to mitigate the traffic imbalance if they wanted to.  See http://www.digitalsociety.org/2010/12/many-analysts-wrong-on-comcast-versus-level-3/. 

            The Comcast- Level 3 dispute confirms that there is no such thing as a free lunch.  It also highlights disagreement over who has to pay when consumers’ download requirements increase with full motion video access.  George considers it a nonstarter for Comcast to raise end users cable modem rates, despite a vast increase in the value proposition created by IPTV.   Some economists consider it a given that Comcast has the “right” to demand compensation from both sides of its market position, upstream from Level 3—and possibly the real instigators of greater bandwidth requirements Netflix and Google—and also downstream from end users, i.e., cable modem subscribers, co-conspirators with Netflix and Google.

            Bottom line: one or more players in the Internet “network of networks” will have to pay for greater capacity.  Early on in the Internet’s development, avoiding payment strategies were depicted as “hot potato routing.”  Carriers unwilling to upgrade facilities to accommodate greater demand sought to hand off traffic as soon as possible.  Level 3 has no such option of passing the packets off to several different carriers for the last mile to end users.  Comcast knows this and true to form the company exploits its position to the fullest extent possible.

Pick Your Poison: FCC Chairman Genachowski’s New Network Neutrality Strategy

FCC chairman Julius Genachowski appears set to abandon a strategy applying selective portions of Title II regulatory safeguards in lieu of general Title I ancillary jurisdiction. Either strategy appears likely to fail upon review by a court or Congress.

           

What makes this matter so difficult is that while an appellate court might try to consider the issue narrowly in terms of whether sufficient statutory authority exists, broader business and political factors matter as well.  Recall that the FCC was able to justify substantial deregulation of DSL, replacing Title II with Title I oversight, based on changed circumstances, largely concerns about "regulatory parity" with largely unregulated cable modem service.  In this politicized and super-charged environment, coupled with the Comcast court decision, the FCC cannot readily reassert Title II based on changed circumstances supporting light-handed government oversight and the public interest, e.g., evidence that Internet access has become an essential public need coupled with proof of discriminatory conduct.
       

There is much speculation that Chairman Genachowski has abandoned his Third Way link to streamlined Title II authority, replacing it with Title I ancillary jurisdiction based on language contained in Sec. 706 of the Telecommunications Act of 1996.  This section requires the FCC and states to encourage ubiquitous access to "advanced telecommunications capability."  The Commission probably will face judicial skepticism whether and how Sec. 706 confers statutory authority to encourage Internet access through selective regulation.
       

I can appreciate that Chairman Genachowski would want to apply a streamlined version of Title II.  It provides the direct statutory authority a reviewing court requires and before changed circumstances provided the basis for its abandonment, Title II required nondiscrimination, transparency and the other Internet Freedoms.  But the political impracticality of re-regulation and the Supreme Court's Brand X affirming the FCC's functional abandonment of Title II, by classifying cable modem Internet access as an information service, makes reliance on Title II a sure loser on appeal.
       

Chairman Genachowski appears to have acknowledged this, but returning to Title I ancillary jurisdiction.  There is case precedent for judicial deference to the FCC's expertise to fashion public interest serving remedies under Title I, e.g., the Commission imposition of cable television regulations in advance of having received explicit statutory authority.  But as emphasized by the D.C. Circuit in the Comcast case, the link to some sort of statutory authority must exist.  The D.C. Circuit likely will remain quite skeptical about an FCC claim of ancillary jurisdiction, simply because Title I confers some general oversight duty over "wire and radio" communications, or the advanced telecommunications capability promotion elements of Section 706.
       

From my vantage point, it looks like the Commission loses either way, should some aggrieved party appeal.  Since Congress has a near zero likelihood of passing explicit statutory authority, the status quo remains.  This means that companies, such as Comcast, which can't help but push the envelope, will exploit the absence of rules to its financial advantage.  The demand for video carriage surcharge from Level 3, provides an example how an ISP can raise the cost of doing business of a rival.  Expect Comcast and others to raise the cost of doing business for both content delivery networks, which generate traffic for Comcast to deliver, as well as content producers, like Netflix, that compete with Comcast's video products.

Comcast’s Demand for a Video Surcharge From its Level 3 “Peer”

According to Level 3, a major long haul Internet Service Provider, Comcast has demanded a “recurring fee” when Level 3 hands off movie and other high capacity video traffic for delivery by Comcast to one of the cable company’s subscribers.  See http://lb.vg/46734.  This demand warrants scrutiny, perhaps less in the context of Network Neutrality and more in terms of further diversification (unraveling) of the peering process.

I will leave to others the advocacy for and against another Comcast innovation in non-neutrality.  The company must consider its merger with NBC a done deal as it continues to maintain a high profile for provocative actions that raise rates to rivals and subscribers alike.

My interest lies in the evolution of peering, a process that used to be symmetrical and largely uniform between similarly sized ISPs.  Under the old school model, Level 3 would have similar peering agreements with Comcast as with other national cable operators.  Likewise Level 3 would have symmetrical terms for the carriage of its traffic downstream via a “peering partner,” such as Comcast, and for Level 3’s carriage upstream of traffic originated or passed onto Level 3 by Comcast.  So under the old model, if Comcast wants to single out a particular type of traffic for a surcharge payment from Level 3, then all things being equal at least in terms of traffic volume, Level 3 could require a similar payment from Comcast. 

           

Under the traditional peering model, if traffic volumes are roughly equal, the surcharge Level 3 would have to credit for payment to Comcast would be offset by a roughly equivalent credit to Level 3 for video traffic originated over the Comcast network, or transiting through it. If Comcast unilaterally has demanded and received the right to a video delivery surcharge without a reciprocal payment to Level 3, then Comcast either has eliminated the conventional symmetry in peering, or much more traffic originates or transits through Level 3 networks destined for Comcast subscribers than Comcast hands off to Level 3.  The fact that Level 3 has capitulated to Comcast’s surcharge demand points to a significant imbalance in traffic flow and commensurate negotiating clout.

           

Much of the Network Neutrality debate has focused on end user access, while peering changes are negotiated agreements about access upstream from end users.  The peering process is obscured by Nondisclosure Agreements and the lack of readily available data on traffic flows.  Comcast may be engaging in a shakedown designed to handicap competitive alternatives to Video on Demand, but the possibility exists that the company is responding to unequal traffic volumes.  We may never know which.