A Concise and Preliminary Summary of the FCC's Published Open Internet Order

        Soon after learning that the FCC would release it Open Internet Order, I started to read, skim and summarize. Nine or so hours later, I have generated a summary that should correctly provide the main points of this 400 page document.  A better formatted version of the summary is available at:
http://www.personal.psu.edu/rmf5/.

 

          So with the proviso that a more complete reading will uncover more, set out below is an overview.

            Opting to find and apply direct statutory links to establish lawful jurisdiction, the FCC’s 2015 Open Internet Order reclassifies broadband Internet access [1] as common carriage with no distinction between wireline and wireless Internet Service Providers (“ISPs”). [2] The Commission chose to apply muscular rules and regulations rather than continue treating ISPs as information service providers, subject to private carrier, government oversight.

            Reclassification offers the opportunity for more clear-cut regulatory oversight.  However, it certainly will trigger litigation whether the FCC has engaged in rational decision making based on a complete record evidencing substantially changed circumstances occurring in the ten years running from 2005, when the FCC opted to classify Internet access as an information service. [3]

            The FCC emphasized the need for narrowly crafted rules designed to “prevent specific practices we know are harmful to Internet openness—blocking, throttling, and paid prioritization—as well as a strong standard of conduct designed to prevent the deployment of new practices that would harm Internet openness.”  [4]  The Commission emphasized that ISPs have both the incentive and ability to leverage access in ways that can thwart the virtuous cycle of innovation and investment in the Internet ecosystem:

The key insight of the virtuous cycle is that broadband providers have both the incentive and the ability to act as gatekeepers standing between edge providers and consumers.  As gatekeepers, they can block access altogether; they can target competitors, including competitors to their own video services; and they can extract unfair tolls. [5]

            The FCC considers it essential that ISPs not have the ability to exploit Internet access in anticompetitive ways that would reduce demand for Internet services. [6] The Commission established a clear, ISP nondiscrimination rule:

Any person engaged in the provision of broadband Internet access service, insofar as such person is so engaged, shall not unreasonably interfere with or unreasonably disadvantage (i) end users’ ability to select, access, and use broadband Internet access service or the lawful Internet content, applications, services, or devices of their choice, or (ii) edge providers’ ability to make lawful content, applications, services, or devices available to end users.  Reasonable network management shall not be considered a violation of this rule. [7]

            The FCC also clarified and strengthened its requirement that ISPs operate with transparency [8] so that both retail broadband subscribers and upstream carriers and sources of content understand the manner in which they can acquire broadband services. [9]  However the FCC specified that its Internet access requirements only apply to the retail practices of ISPs, vis a vis downstream end users, and not to the terms and conditions of interconnection between ISPs and other upstream carriers and sources of content. [10]

            The FCC now considers ISPs as gatekeepers standing between end users, who rely on common carriage, telecommunications service and upstream content and applications still treated as information services. [11]  While the Commission determined that the common carrier classification applies to both upstream and downstream interconnections, [12] it will refrain from applying the access restrictions on upstream interconnection unless and until anticompetitive conduct arises. [13]  Similarly the FCC specified that it will not apply open Internet access rules on data services, which may traverse the same networks used for Internet access.  However, the Commission will seek to ensure that ISPs do not use this exemption as a way to evade the nondiscrimination requirements. [14]

            The FCC emphasized that while subjecting ISPs to Title II, common carrier oversight, the Commission will use its statutory authority quite narrowly as evidenced by the decision to forbear [15] from applying “27 provisions of Title II of the Communications Act, and over 700 Commission rules and regulations.” [16]  The Commission recognized the need to explain how the new requirements satisfy pressing needs, but in the most narrow and well calibrated matter in light of virulent opposition from most ISPs and the two Republican Commissioners.  The Order reports that “there will be fewer sections of Title II applied than have been applied to Commercial Mobile Radio Service (CMRS), [the regulatory classification for wireless voice telecommunications service] where Congress expressly required the application of Sections 201, 202, and 208, and permitted the Commission to forbear from others.  In fact, Title II has never been applied in such a focused way.” [17]
 

            The FCC opted not to construct an order applying Section 706 of the Communications Act as the sole foundation for creating narrowly calibrated non-common carrier rules applicable to ISPs in their capacity as information service providers.  The Commission interpreted the D.C. Circuit Court of Appeals for the District of Columbia as limiting the scope and efficacy of Section 706 based on the court’s determination that the FCC could not impose common carrier duties, even though the court acknowledged that ISPs perform a traffic carriage function for upstream sources of content, commonly referred to as edge providers:

[A]bsent 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.  Thus, in order to bring a decade of debate to a certain conclusion, we conclude that the best path is to rely on all available sources of legal authority—while applying them with a light touch consistent with further investment and broadband deployment.  Taking the Verizon decision’s implicit invitation, we revisit the Commission’s classification of the retail broadband Internet access service as an information service and clarify that this service encompasses the so-called ‘edge service.’”  [18]

 

               The FCC established “clear, bright-line rules” prohibiting ISPs from blocking lawful traffic, deliberately slowing traffic down absent legitimate network management requirements and offering to managed and deliver traffic on a preferential basis, commonly known as “paid prioritization.” The Commission’s ban on traffic blocking uses clear cut language:

A person engaged in the provision of 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. [19]

            The FCC also establishes an absolute ban on throttling absent legitimate network management requirements:

A person engaged in the provision of broadband Internet access service, insofar as such person is so engaged, shall not impair or degrade lawful Internet traffic on the basis of Internet content, application, or service, or use of a non-harmful device, subject to reasonable network management. [20]

            To prevent ISPs from dividing the Internet into fast-lanes offered at a premium with slow lanes constituting an inferior baseline, the FCC prohibits paid prioritization:

A person engaged in the provision of broadband Internet access service, insofar as such person is so engaged, shall not engage in paid prioritization. ‘Paid prioritization’ refers to the management of a broadband provider’s network to directly or indirectly favor some traffic over other traffic, including through use of techniques such as traffic shaping, prioritization, resource reservation, or other forms of preferential traffic management, either (a) in exchange for consideration (monetary or otherwise) from a third party, or (b) to benefit an affiliated entity [21]

            In addition to the specific prohibitions on blocking, throttling and paid prioritization, the FCC established a general prohibition on ISP practices that would unreasonably interfere with, or disadvantage downstream consumers and upstream edge providers of content, applications and services.  The Commission will consider on a case-by-case basis whether an ISP has engaged in a practice “that unreasonably interfere[s] with or unreasonably disadvantage[s] the ability of consumers to reach the Internet content, services, and applications of their choosing or of edge providers to access consumers using the Internet.” [22]  The Commission opted to apply more open-ended evaluative than legal standard prohibiting commercially unreasonable practices it had proposed in the 2014 Open Internet NPRM.  The Commission concluded that it should “adopt a governing standard that looks to whether consumers or edge providers face unreasonable interference or unreasonable disadvantages, and makes clear that the standard is not limited to whether a practice is agreeable to commercial parties.”[23]

            The FCC reported that it will use the “no-unreasonable interference/disadvantage” standard to evaluate controversial subjects including the lawfulness of “sponsored data” arrangements where an ISP accepts advertiser payment in exchange for an agreement not to meter and debit the downstream traffic delivery.  The Commission also will use this standard to consider the lawfulness of data caps that tier service by the amount of permissible downloading volume.  In both instances, the FCC sees the potential for an ISP to create artificial scarcity to extract higher revenues, to favor corporate affiliates and third parties willing to pay a surcharge as well as the potential for disadvantaging competitors, e.g., using data caps to harm new vendors of video programming that compete with an ISP service.  On the other hand, the Commission recognizes that service tiering can promote innovation and new, customized services.

               The Order expresses the view that reclassifying Internet access as a telecommunications service provides the strongest legal foundation for the Open Internet regulations, coupled with a secondary reference to Section 706 of the Telecommunications Act of 1996 and Title III, which addresses the use of radio spectrum and applies common carriage regulation to wireless voice carriers. [24] By using the stronger Title II foundation, the FCC asserts that it can establish clear and unconditional statutory authority, but also use the flexibility contained in Title II to forbear from applying most common carrier requirements not relevant to modern broadband service just as occurs for wireless telephone service.  However with a Title II regulatory foundation, the Order makes it possible for the FCC to create an open Internet conduct standard that ISPs cannot harm consumers or edge providers with enforcement tools available to sanction violations. [25]

While the debate over network neutrality has become quite contentious and hyperbolic, the three core requirements imposed by the Order have generated much popular support.  With the common carrier reclassification, the FCC considers it lawful to impose explicit requirements that ISPs not: block, legal content, applications, services, or non-harmful devices; throttle, impair or degrade lawful Internet traffic on the basis of content, applications, services, or non-harmful devices; or offer paid prioritization that would favor some lawful Internet traffic over other lawful traffic in exchange for additional compensation, or based on corporate affiliation.

             The Order addresses the need for ISPs to have the ability to manage their networks and to offer specialized services not available to all users.  The FCC seeks to promote flexibility without creating a loophole for practices that violate network neutrality. Coupled with requirements that ISPs operate with transparency in terms of how they provide service, the FCC will permit deviations from absolute neutrality on a case-by-case basis taking into consideration the particular engineering attributes of the technology used as well as the rationale supporting the legitimacy of the practice. 

 

            The FCC will have to defend its legal right to reclassify services in light of changed circumstances.  Additionally the Commission will have to convince an appellate court that the Communications Act authorizes service reclassifications, or lacks specificity thereby allowing an expert regulatory agency to clarify ambiguities.

 

 

 

 

 

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[1]           The FCC defines “broadband Internet access service”  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.” Protecting and Promoting the Open Internet, GN Docket No. 14-28, Report and Order on Remand, Declaratory Ruling, and Order, FCC 15-24, ¶25 (rel. March 12, 2015); available at: http://www.fcc.gov/openinternet. [hereinafter cited as 2015 Open Internet Order].

 

[2]           The FCC previously had imposed less stringent rules on wireless carriers in light of spectrum use, greater potential for congestion and recent entry in broadband markets.  The 2015 Open Internet Order treats wireless ISPs no differently than wireline ISPs: “Today, we find that changes in the mobile broadband marketplace warrant a revised approach.  We find that the mobile broadband marketplace has evolved, and continues to evolve, but is no longer in a nascent stage.  As discussed below, mobile broadband networks are faster, more broadly deployed, more widely used, and more technologically advanced than they were in 2010.  We conclude that it would benefit the millions of consumers who access the Internet on mobile devices to apply the same set of Internet openness protections to both fixed and mobile networks.” 2015 Open Internet Order at ¶88.

 

[3]           “It is also well settled that we may reconsider, on reasonable grounds, the Commission’s earlier application of the ambiguous statutory definitions of ‘telecommunications service’ and ‘information service.’” Id. at ¶334. “The [Supreme] Court’s application of . . . [the] Chevron test in Brand X makes clear our delegated authority to revisit our prior interpretation of ambiguous statutory terms and reclassify broadband Internet access service as a telecommunications service.  The Court upheld the Commission’s prior information services classification because ‘the statute fails unambiguously to classify the telecommunications component of cable modem service as a distinct offering.  This leaves federal telecommunications policy in this technical and complex area to be set by the Commission . . . .’  Where a term in the Act ‘admit[s] of two or more reasonable ordinary usages, the Commission’s choice of one of them is entitled to deference.’  The Court concluded, given the ‘technical, complex, and dynamic’ questions that the Commission resolved in the Cable Modem Declaratory Ruling, ‘[t]he Commission is in a far better position to address these questions than we are.’” Id. at ¶332 (citations omitted).

 

[4]           Id. at ¶4.

 

[5]           Id. at ¶20.

 

[6]           “Broadband providers’ networks serve as platforms for Internet ecosystem participants to communicate, enabling broadband providers to impose barriers to end-user access to the Internet on one hand, and to edge provider access to broadband subscribers on the other.  . . .[T]he record provides substantial evidence that broadband providers have significant bargaining power in negotiations with edge providers and intermediaries that depend on access to their networks because of their ability to control the flow of traffic into and on their networks.   Another way to describe this significant bargaining power is in terms of a broadband provider’s position as gatekeeper—that is, regardless of the competition in the local market for broadband Internet access, once a consumer chooses a broadband provider, that provider has a monopoly on access to the subscriber.  . . . Broadband providers can exploit this role by acting in ways that may harm the open Internet, such as preferring their own or affiliated content, demanding fees from edge providers, or placing technical barriers to reaching end users. Without multiple, substitutable paths to the consumer, and the ability to select the most cost-effective route, edge providers will be subject to the broadband provider’s gatekeeper position.”   Id. at ¶80.

 

[7]           Id. at ¶21.  The FCC defines reasonable network management practice as one having

“a primarily technical network management justification, but does not include other business practices.  A network management practice is reasonable if it is primarily used for 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 ¶32.

 

[8]           The enhanced transparency requirements include the duty to disclose prices, including the full monthly subscription charge, other fees and data caps and downloading allowances.  Additionally ISPs will have to report on actual network performance and disclose network practices, including congestion management, application-specific behavior, device attachment rules and security.  See Id. at ¶¶164-69.

 

[9]           “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 ¶23.

 

[10]          “[B]roadband Internet access service does not include virtual private network (VPN) services, content delivery networks (CDNs), hosting or data storage services, or Internet backbone services (to the extent those services are separate from broadband Internet access service).” Id. at ¶190.

 

[11]          “Based on this updated record, this Order concludes that the retail broadband Internet access service available today is best viewed as separately identifiable offers of (1) a broadband Internet access service that is a telecommunications service (including assorted functions and capabilities used for the management and control of that telecommunication service) and (2) various “add-on” applications, content, and services that generally are information services.”  Id. at ¶47. 

 

[12]          “[W]e find that broadband Internet access service is a ‘telecommunications service’ and subject to sections 201, 202, and 208 (along with key enforcement provisions).  As a result, commercial arrangements for the exchange of traffic with a broadband Internet access provider are within the scope of Title II, and the Commission will be available to hear disputes raised under sections 201 and 202 on a case-by-case basis: an appropriate vehicle for enforcement where disputes are primarily over commercial terms and that involve some very large corporations, including companies like transit providers and Content Delivery Networks (CDNs), that act on behalf of smaller edge providers.” Id. at ¶29.

 

[13]          “[W]e find that the best approach is to watch, learn, and act as required, but not intervene now, especially not with prescriptive rules.  This Order—for the first time—provides authority to consider claims involving interconnection, process that is sure to bring greater understanding to the Commission.” Id. at ¶31.

 

[14]          “The Commission expressly reserves the authority to take action if a service is, in fact, providing the functional equivalent of broadband Internet access service or is being used to evade the open Internet rules.” Id. at ¶35.

 

[15]          47 U.S.C §160(a) authorizes the FCC to streamline the scope of its Title II oversight by forbearing from applying many common carrier requirements: “[T]he Commission shall forbear from applying any regulation or any provision of this chapter to a telecommunications carrier or telecommunications service, or class of telecommunications carriers or telecommunications services, in any or some of its or their geographic markets, if the Commission determines that—

(1) enforcement of such regulation or provision is not necessary to ensure that the charges, practices, classifications, or regulations by, for, or in connection with that telecommunications carrier or telecommunications service are just and reasonable and are not unjustly or unreasonably discriminatory;  (2) enforcement of such regulation or provision is not necessary for the protection of consumers; and  (3) forbearance from applying such provision or regulation is consistent with the public interest.”

 

[16]          Id. at ¶5. The major provisions of Title II that  the Order will apply are: nondiscrimination and no unjust and unreasonable practices under Sections 201 and 202; authority to investigate complaints and resolve disputes under section 208 and related enforcement provisions, specifically sections 206, 207, 209, 216 and 217; protection of consumer privacy under Section 222; fair access to poles and conduits under Section 224, protection of people with disabilities under Sections 225 and 255; and providing universal funding for broadband service, but not the requirement to collect contributions to such funding through partial application of Section 254.

 

[17]          Id. at ¶38.

 

[18]          Id. at ¶42.

 

[19]          Id. at ¶15.   The FCC did opt to eliminate rules that would establish a baseline, minimum broadband access standard.  It acknowledged practical and technical difficulties associated with setting any such minimum level of access.  Additionally the Commission concluded that the no blocking and throttling rules would “allow broadband providers to honor their service commitments to their subscribers without relying upon the concept of a specified level of service to those subscribers or edge providers . . ..” Id. at ¶115.

 

[20]          Id. at ¶16.

 

[21]          Id. at ¶18.  Even though one can anticipate instances where a broadband subscriber would want ISPs to provide higher quality of service to reduce the potential for degraded service in the delivery of “must see” video content, the FCC largely forecloses this option.   ISPs cannot offer paid prioritization, even at the voluntary request or approval of subscribers based on the Commission’s apprehension that ISPs would abuse the opportunity by imbedding blanket authorization in subscription service agreements. “[T]here is no room for a blanket exception for instances where consumer permission is buried in a service plan—the threats of consumer deception and confusion are simply too great. Id. at ¶19.  However the FCC will allow exceptions on an ad hoc basis using rigorous criteria.  “The Commission may waive the ban on paid prioritization only if the petitioner demonstrates that the practice would provide some significant public interest benefit and would not harm the open nature of the Internet.” Id. at ¶130.  “First, the applicant must demonstrate that the practice will have some significant public interest benefit, such as providing evidence that the practice furthers competition, innovation, consumer demand, or investment.  Second, the applicant must demonstrate that the practice does not harm the nature of the open Internet, including, but not limited to, providing evidence that the practice:

•           does not materially degrade or threaten to materially degrade the broadband Internet           access service of the general public;

•           does not hinder consumer choice;

•           does not impair competition, innovation, consumer demand, or investment; and

•           does not impede any forms of expressions, types of service, or points of view.” Id. at ¶131. Note that the FCC “anticipate[s] granting such relief only in exceptional cases.” Id. at ¶132(citing extremely bandwidth intensive telemedicine applications as an example worthy of an exception).

 

[22]          Id. at ¶135.

 

[23]          Id. at ¶150.  The FCC identified a number of factors it will consider in future evaluations.  These include an assessment whether a practice allows end-user control and is consistent with promoting consumer choice, its competitive effect, whether consumers and opportunities for free expression are promoted or harmed, the effect on innovation, investment, or broadband deployment, whether the practice hiders the ability of end users or edge providers to use broadband access to communicate with each other and whether a practice conforms to best practices and technical standards adopted by open, broadly representative, and independent Internet engineering, governance initiatives, or standards-setting organization.  Id. at ¶¶139-145.

 

[24]          “We ground the open Internet rules we adopt today in multiple sources of legal authority—section 706, Title II, and Title III of the Communications Act.  We marshal all of these sources of authority toward a common statutorily-supported goal:  to protect and promote Internet openness as platform for competition, free expression and innovation; a driver of economic growth; and an engine of the virtuous cycle of broadband deployment.

            We therefore invoke multiple, complementary sources of legal authority. As a number of parties point out, our authority under section 706 is not mutually exclusive with our authority under Titles II and III of the Act.” Id. at ¶¶273-74.

 

[25]          With an eye toward providing timely, certain and flexible enforcement of its open Internet rules, the FCC announced its intention to use advisory opinions similar to those issued by the Department of Justice’s Antitrust Division.  “Advisory opinions will enable companies to seek guidance on the propriety of certain open Internet practices before implementing them, enabling them to be proactive about compliance and avoid enforcement actions later.   The Commission may use advisory opinions to explain how it will evaluate certain types of behavior and the factors that will be considered in determining whether open Internet violations have occurred.  Because these opinions will be publicly available, we believe that they will reduce the number of disputes by providing guidance to the industry.” Id. at ¶229.

 

Comcast Streaming of NBC Broadcast Content

            NBC soon will join the ranks of content providers offering a streaming option to cord cutters and mobile consumers.  See, e.g., http://www.engadget.com/2015/03/03/nbc-comedy-streaming-service/.  This future service warrants special attention, because two corporate affiliates within the Comcast family will participate in many parts of the United States: Comcast, as the last mile, “retail” ISP and Comcast, the parent of NBC-Universal.

            Operating as an ISP, Comcast has at least three pricing/interconnection options, each of which raise questions relating to network neutrality and what the company considers strategic, “best behavior” during the time the FCC evaluates its proposed acquisition of Time Warner.

            The Neutral/Non-Discrimination Option treats NBC traffic as nothing special, just plain video bits requiring streaming delivery to Comcast broadband subscribers.  Comcast shows its commitment to network neutrality by refraining from prioritizing the traffic, or claiming that the traffic does not traverse the conventional Internet.

            The Specialized Service Option puts NBC traffic in the same category as Comcast video on demand traffic that gets routed to Microsoft Xboxes.  The company will try to differentiate NBC traffic from conventional Internet-delivered traffic, so that Comcast has the option to engage in price and quality of service discrimination.  Comcast might exempt NBC traffic from debiting a subscriber’s monthly data allocation. The company also might use routing techniques to ensure congestion-free carriage—what I call “better than best efforts” routing and Most Favored Nation treatment.

            The Surcharge Option requires NBC to pay a surcharge to a corporate affiliate consistent with Comcast’s successful demand for more money from Netflix and probably the same type demand the company will make to HBO and other high volume sources of video traffic.

            Many Comcast senior managers have distinguished themselves as the best in the business, but the company often pushes the revenue generating envelop when other factors might have supported a less aggressive posture.  For example, the company has substantially increased its cable modem rental rate (20+%) at a time when it should not call attention to its awful customer service, including possibly deliberate hassles for subscribers trying to activate their own modems.

            If Comcast decides on a prudent, less provocative posture it will refrain from executing the Surcharge or Specialized Service Option.  Critics will quickly note that having brother NBC pay brother Comcast ISP keeps all revenues “in the family.”  The Surcharge Option would maintain consistency with the strategy successfully executed with Netflix and soon to be applied to punish HBO for trying to eliminate the cable television intermediary.  The Specialized Service Option would show what a large loop hole the FCC unintentionally has created, particularly because Comcast would only have to make cosmetic changes to qualify video delivery of NBC traffic, or Comcast premium content to an Xbox, for a network neutrality exemption.

          Both options would show how unrestrained ISP pricing flexibility can harm consumers and competitors.

            Comcast probably will avoid any appearance of treating NBC traffic more or less favorably.  This option would create an exception to the strategy of demanding surcharges from high volume video distributors like Netflix, but Comcast might simply differentiate NBCs’ comparatively low volume vis a vis Netflix.

            In any event, the horizontally and vertically integrated Comcast corporate structure will trigger interesting tensions between affiliates.

Federalism Versus Balkanization and Muni Wi-Fi

         While most attention today focused on the FCC’s Open Internet, I was intrigued with the discussion—make that righteous indignation—presented by Commission’s Pai on the FCC’s partial preemption of state laws restricting territorial build outs by municipal Wi-Fi networks.  Commissioner Pai gave an extensive review of Constitutional law with emphasis on state sovereignty.

          Commissioner Pai never addressed the considerable body of case precedent favoring FCC preemption of state regulation, including the attempt by state public utility commissions to regulate—if not prohibit-Voice over the Internet Protocol (“VoIP”).  See Minn. PSC v. FCC, 394 F.3d 568 (8th Cir. 2004).  States’ rights notwithstanding, many courts share the FCC’s view that much in telecommunications and now the Internet involve interstate commerce. 99.9999999+ percent of the time, Internet traffic crosses a state border.  Over the years, such a crossing “contaminated” any pure intrastate link which arguably includes the wireless few feet linking a tablet and the Internet cloud.

          Not so long ago Commissioners of both parties would express concern about “balkanization” of telecommunications policy, i.e., fragmentation and proliferation of many inconsistent state policies.  That environment would generate “regulatory uncertainty” and “disincentives for investment in next generation networks.”  Now Commissioners and others earn brownie points for how well they can express fealty to the Constitution.

          An ignored but obvious issue in the debate lies in the vast increase in scrutiny and involvement in telecommunications policy by groups such as the American Legislative Exchange Council.  The real possibility exists that ALEC offered state legislators in places like North Carolina and Tennessee a template for a law few framed as pro-market/pro-state.  Might state legislators have voted for something without much analysis?

          In any event I saw a huge irony in the universal view that America needs more competition in broadband, but Commission Pai’s insistence that municipalities do not count, even when no one else seems “incentivized” to make the effort.

A Very Preliminary and Tentative Summary of the FCC’s Open Internet Order

            I have prepared a tentative summary of the FCC’s Open Internet Order based on pre-release documents as well as what transpired at the Commission meeting today (Feb. 26, 2015). I expect to read the entire 300+ page document as soon as it is released.  Until then, here are the main points:

            The FCC opted not to construct an order solely applying Section 706 of the Communications Act as the foundation for creating narrowly calibrated non-common carrier rules applicable to ISPs in their capacity as information service providers.  Despite a finding by the D.C. Circuit Court of Appeals that Section 706 grants the FCC an independent right of authority to examine broadband availability with an eye toward removing barriers—financial and regulatory--, the Commission decided to reclassify Internet access so that Title II applies.  The Order goes to extraordinary lengths to emphasize that it will forbear from applying most common carrier regulations, [1] but opponents have objected to the regulatory options the Commission now make available. [2] The FCC voted on party lines to adopt the order that staff emphasized would provide necessary safeguards without imposing unnecessary public utility requirements, but which the Republican Commissioners consider micromanagement, including rate regulation. [3]

            The Order expresses the view that reclassifying Internet access as a telecommunications service provides the strongest legal foundation for the Open Internet regulations, coupled with a secondary reference to Section 706 of the Telecommunications Act of 1996.  By using the more muscular Title II foundation, the FCC asserts that it can establish clear and unconditional statutory authority, but also use the flexibility contained in Title II to forbear from applying most common carrier requirements not relevant to modern broadband service just as occurs for wireless telephone service.  However with a Title II regulatory foundation, the Order makes it possible for the FCC to create an Open Internet conduct standard asserting that ISPs cannot harm consumers or edge providers with enforcement tools available to sanction violations.

           The Order defines “broadband Internet access service” as a telecommunications service under Title II, with emphasis on the “retail” link between an ISP and broadband subscribers. However the FCC does apply the Title II classification to upstream ISPs and content providers, commonly referred to as “edge providers.”  This means that the FCC will have jurisdiction to examine ISP carriage both downstream to broadband subscribers and upstream to edge providers, but the nature and type of such oversight and the applicable regulations may differ.  Additionally the Commission will have direct statutory authority to consider complaints and to resolve disputes, including ones claiming that interconnection and compensation terms are unjust and unreasonable.

           The Order deviates from previous open Internet initiatives by opting to apply the same requirements on wireline and wireless broadband.  Previously the Commission had imposed less burdensome requirements on wireless broadband based on its comparatively recent availability, as well as the potential for spectrum scarcity and other technological factors that might necessitate deviation from absolute access neutrality. The FCC also rebuts claims that Title III does not allow classification of mobile broadband as a telecommunications service, noting that the Commission has asserted Title II oversight of wireless telephone service, termed Commercial Mobile Radio Service by Congress in amendments to Title III.

           While the debate over network neutrality has become quite contentious and hyperbolic, the three core requirements imposed by the Order have generated much popular support.  With the common carrier reclassification, the FCC considers it lawful to impose explicit requirements that ISPs not: block, legal content, applications, services, or non-harmful devices; throttle, impair or degrade lawful Internet traffic on the basis of content, applications, services, or non-harmful devices; and offer paid prioritization that would favor some lawful Internet traffic over other lawful traffic in exchange for additional compensation, or based on corporate affiliation.

           The Order addresses the need for ISPs to have the ability to manage their networks and to offer specialized services not available to all users.  The FCC seeks to promote flexibility without allowing these options to provide a loophole for practices that violate network neutrality policy. Coupled with requirements that ISPs operate with transparency in terms of how they provide service, the FCC will permit deviations from absolute neutrality on a case-by-case basis taking into consideration the particular engineering attributes of the technology used as well as the rationale supporting the legitimacy of the practice.  

 

 

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[1]              The major provisions subject to forbearance include no rate regulation: the Order makes clear that broadband providers shall not be subject to tariffs or other form of rate approval, unbundling, or other forms of utility regulation, no last-mile unbundling, no burdensome administrative filing requirements or accounting standards, no requirement to contribute to

universal service funding under Section 254, and no new taxes or fees.

 

[2]           The major provisions of Title II that  the Order will apply are: nondiscrimination and no unjust and unreasonable practices under Sections 201 and 202; authority to investigate complaints and resolve disputes under section 208 and related enforcement provisions, specifically sections 206, 207, 209, 216 and 217; protection of consumer privacy under Section 222; fair access to poles and conduits under Section 224, protection of people with disabilities under Sections 225 and 255; and providing universal funding for broadband service through tpartial application of Section 254.

 

[3]              The presentation of the order before the Commissioners noted that 27 customary common carrier requirements would not apply to ISPs, nor would they have to tariff their services, unbundle offerings into separate elements and make financial contributions to universal service funding.

A Foolproof Toolkit for Hiding Sponsored Research

      Today’s New York Times has a front page story reporting on how a reliably anti-climate change researcher failed to disclose substantial financial support from electric utilities and their advocacy groups. 

     The Times identified a direct link between funder and researcher coupled with an explicit quid pro quo: the delivery of peer-reviewable, academic papers absolving humans of any role in climate change in exchange for money.  How could the Times find a “smoking gun” when hundreds of millions get funneled into sponsored research in telecommunications and Internet policy and other areas?

     The answer lies in the combination of two factors easily addressed and remedied by just about every other sponsored researcher.  His contract for service specified work for hire instead of general financial support for the “mission” of an institute, center, or foundation.  Additionally he worked for a federal government organization—not a University—having a duty to comply with generally avoidable Freedom of Information disclosure requirements.

     Rather than consider the Times piece a marvelous piece of journalistic sleuthing, I marvel at the failure of the researcher to use readily available tools to avoid detection.  So in the spirit that “sunlight is the best disinfectant,” I offer the following toolkit that identifies how easy a sponsored researcher can cover her tracks.

      1)         Create, or affiliate with an institute, center, or foundation having a vague “mission” that can provide cover for both researchers and sponsors.  Who could have a problem with promoting a better functioning marketplace, more innovation and extra competition?  You don’t have to disclose the intent to help the Koch brothers emasculate the EPA and in turn earn more billions.

     2)         Exploit plausible deniability, i.e., the sheer “coincidence” that financial underwriter and researcher happen upon identical interests without direct—and forensically identifiable—consultation.  Never create a specific contract deliverable specifying the content of a publication.  Financial benefactors understand the need for ambiguity and willingly will pay vast sums to support what can appear as benign academic support.

     3)         Disclose financial support in a single ambiguous sentence.  Sponsored researchers only need to add a footnote “gratefully acknowledging financial support from the Institute for the Study of Solar Flux Density.” Nothing in this sentence implies that the researcher has abandoned academic freedom and independence in exchange for money.

     4)         Build “your brand,” reputation and expertise with available funding.  Sponsored researchers can flood the “marketplace of ideas” without voluminous work made possible by having funds to hire staff.  There are plenty of groups having dozens of researchers available to generate work product, while people like me are lucky to have a single graduate student assistant.  The volume of sponsored research available for placement in academic journals can easily crowd out the work of unsponsored researchers.

     High productivity coupled with cheerleading by sponsors makes it possible that certain professors and institute “Fellows” can enhance their visibility and in turn their available to provide background and provocative media quotes.  The network neutrality debate has created a cottage industry of experts known for where they lie on a pro/con continuum.  The New York Times may support an “open Internet,” but articles surely will contain a quote from some expert in the anti-network neutrality camp who has achieved visibility through sponsored research, disclosed or not.

     Sponsored research has a profound and pernicious effect on public policy debates.  In a nutshell blatant advocacy becomes wrapped in the legitimacy of research.  Few seem to know or care that the research has a champion, and that the work product would not pass muster under blind peer review even with financial disclosure.

The Title II Reclassification Distraction

            By now even most of my undergraduate students at Penn State have heard about the FCC’s likely reclassification of broadband access from information service to telecommunications service. So much attention has focused on the reclassification and so little on the real problem: stimulating investment, market entry and facilities-based competition in broadband service.

            Show me a robustly competitive broadband marketplace and I will show you an ecosystem that has no network neutrality problem. 

            Regulating broadband access as common carriage offers no panacea.  Even with light handed regulation, the potential exists for extraordinary waste and distraction in litigation and a “regulatory practice” over what an Internet Service Provider can and cannot do.  I am concerned that the FCC and stakeholders will devote far too much time battling over minor points with little concern for the big picture.

            While I am not keen on Title II regulation, I have every confidence that ISPs can survive the burden and sustain capital investment levels.  The problem in Title II regulation lies in how it can distract the FCC from its core mission.  Bear in mind that wireless carriers have managed to thrive despite having the common carrier classification.  So even “public utility” Title II regulated markets can generate ample profits without apparent investment “disincentivization” resulting from government oversight.  Wireless competition forces carriers to enhance the value proposition.  No carrier would dare degrade its service and invite subscriber churn.

            Thankfully the FCC and Justice Department did not buy the bogus claim of sponsored researchers, AT&T and T-Mobile that reducing the number of facilities-based competitors would serve the national interest.  Once deprived of a big buyout payday, T-Mobile has innovated and sharpened its pricing pencil.  The other carriers have had to follow T-Mobile’s lead on pricing, roaming, bring your own device and the ability to rollover data capacity.

            A competitive wireless marketplace provides clear evidence that Title II can provide possibly unnecessary safeguards without imposing costly burdens.  The risk in Title II broadband regulation lies in its distraction coupled with less than optimal competition.

Who's Who in Telecommunications Preemption

            In the not too distant future the FCC will preempt state laws that prevent municipalities from offering Wi-Fi services.  About 19 states have done so largely because private carriers and their trade associations have asserted that public ventures cannot operate efficiently, preempt private enterprise, unfairly have lower costs of capital and tap taxpayers to sustain deficit operations.  In my home state, Bell of Pennsylvania secured legislation that explicitly granted it veto power over any municipal operation outside Philadelphia.

            My initial instinct supports private options in lieu of state or municipal efforts.  However, at some point it becomes fruitless to wait for the marketplace to support private carrier market entry, especially in rural areas.  Incumbent carriers cannot have it both ways: 1) expressing righteous indignation at municipal initiatives, but also 2) refraining from making the investment themselves. Most municipalities install Wi-Fi, because private carriers will not do it and city officials assume wireless broadband access will enhance the welfare of citizens and establish a comparative advantage vis a vis other localities lacking such access. 

           Arguably Wi-Fi constitutes an essential service (maybe not a public utility) that consumers increasingly assume to be available everywhere.  As towns developed in the United States, municipal governments created water and sewage authorities rather than await private ventures that might consider such sunk investment as prudent.

            I do not seeing muni wi-fi as evidence of governmental mission creep where market failure exists.  Municipalities become the carrier of last—and only—resort.

            A different and more complex issue lies in the lawfulness of federal preemption.  Case precedent supports preemption when interstate service becomes so integrated with intrastate service that the two types of service are not separable.  In effect the interstate service “contaminates” and prevails so that the FCC can lawfully assert jurisdiction.  Additionally case law supports FCC preemption when a service evidences basic long-haul, interstate characteristics.   Internet access typically involves traffic routing that crosses state borders.  Lastly the FCC can prempt a service that constitutes a functional equivalent to, or interconnects with a federally regulated service.  A federal court affirmed the FCC’s preemption of state Voice over the Internet Protocol regulation (the Vonage case, Minn. PSC v. FCC, 394 F.3d 568 (8th Cir. 2004) based on the fact that most services interconnect with federally regulated long distance telephone service.  Additionally courts are receptive to arguments that different regulation by 50+ jurisdictions would “balkanize” and unnecessarily complicate the regulatory process.

            So why all the agitation by incumbent carriers?  I cannot see municipal networks becoming a major service alternative, particularly for larger cities where some attempts already have failed.  Likewise I don’t see incumbents hell-bent to offer “free” wi-fi service, although they may execute a strategy to use wi-fi for back-haul and video delivery to off-load traffic from 3G and 4G cellular networks.

            Perhaps incumbents simply shoot first and ask questions later on any initiative that does not include them and their approval. Maybe incumbents want to foreclose any unlicensed alternative to licensed operations, particularly ones that cost billions to acquire in spectrum auctions.

            Unlike the network neutrality debate, I believe incumbents will have a harder time convincing an appellate court to overturn the FCC.  This court would have to ignore ample case precedent, but who knows maybe the Supreme Court will ultimately hear the case and change course so that federalism and states’ rights trumps common sense.

What’s Certain About the Regulatory Uncertainty Debate

            Incumbent carriers, such as AT&T, Comcast and Verizon, have made countless “curtains for the Free World” assertions in the Network Neutrality debate.  They claim that if the FCC reclassifies as common carriage aspects of Internet access, it will create “regulatory uncertainty” and “disincentive investment.” 

            Not one of the countless sponsored researchers funded by incumbents has provided a shred of empirical evidence to support these assertions.  In fact, senior management officials at these carriers readily acknowledge that capital expenditures are based on marketplace conditions.

            These managers act like children in the back seat of a car driven by a parent.  Assuming the parent cannot hear them, kids say very candid things.  So do senior telecommunications managers when discussing capital expenditure with buy-side Wall Street analysts.  AT&T CEO Randall Stephenson has “warned that he could hold off on many of his company's capital investment plans -- including fast new fiber lines -- if uncertainty persists over how the US government will regulate the Internet.” See http://www.cnet.com/news/at-t-ceo-net-neutrality-uncertainty-puts-a-pause-in-investing/.

            Mr. Stephenson and other senior managers would not dare understate future capex in statements to the financial community, or to the Securities and Exchange Commission.

            In my mission to find and tell the truth, here are some inconvenient facts:

Congress Created Regulatory Uncertainty

            Regulatory uncertainty results when Congress fails to legislate despite changed circumstances, or when its laws lack clarity.  Congress last created telecommunications in 1996, before the Internet changed everything.  In that kinder and less partisan time, the legislature achieved consensus, albeit one rife with compromises that translated—over time—into statutory ambiguity.

            The FCC has acted in light of the vacuum generated by congressional inaction.  On two separate occasions, the FCC has failed to convince a reviewing court that its statutory interpretation is reasonable and that the judiciary should defer to its expertise in making sense out of an outdated and ambiguous statutory mandate.

Incumbents Use Regulatory Uncertainty as a Lobbying Tool

            Incumbents sustain regulatory uncertainty based on an assumption that the FCC will raise their cost of doing business and somehow limit their ability to maximize profit.  Yes these carriers will need plenty of staff and expensive lawyers to litigate and perpetuate uncertainty, but where are the constraints on profits?  Broadband access generates triple-digit returns.  Comcast can generate over $1 billion a year in cable modem and set top box rentals, largely because the FCC can’t seem to apply the longstanding Carterfone policy that obligates even private carriers to permit consumers to attach their own devices.

            Regulatory uncertainty is a red herring, because incumbents surely know that if the FCC oversteps, a reviewing court will overturn the rules.  The FCC may fail to convince a reviewing court that circumstances support reclassification of Internet access as common carriage, but the predicate for regulatory uncertainty lies with Congress that created it by not doing its job and by incumbents exploiting it for an uncertain monetary gain.

Competitive Necessity Drives Capex

            AT&T and other incumbent cannot carry out their threat to reduce or stop investing in infrastructure.  The decision to raise, lower or maintain capex results from a strategic assessment of competition.  Competitive necessity forces wireless carrier incumbents to acquire more spectrum, whether to use it, or to warehouse it to prevent market entry.  The lack of competitive necessity makes it possible for wire carriers, like Verizon, to cherry pick and red line the geographical areas where it chooses to offer fiber optic broadband service.

This Debate Increasingly Looks Like a “Tempest in a Teapot”

            The network neutrality debate has triggered the worse sort of exaggeration and hype. Incumbents have not and cannot prove any measurable short and long run harm to their bottom line, but their vigorous and effective claims trigger false positives, i.e., the assumption of harms such as capex disincentives.

            Recent market entrants deem common carriage rules, subject to forbearance of most regulations, as minimally necessary to safeguard competition and innovation.  Maybe, but the real possibility exists that they have identified false negatives, i.e., harms to competition and consumers. 

            Today, tomorrow and for the foreseeable future the remedy to network neutrality concerns likes in having a far more robustly competitive broadband ecosystem, something incumbents strive everyday to thwart.

Did Netflix Want Service Quality to Degrade?

            Through mostly unofficial channels, Comcast has alleged that Netflix wanted transmission bitrates to decline ostensibly to accrue greater impact at the FCC.  A major official at Comcast told me that Netflix wanted to show a deterioration in ISP delivery speeds so that it could derail FCC approval of the Comcast-Time Warner Cable acquisition.  This official alleged that Cogent had a similar strategy.

            Would Netflix risk upsetting many of its subscribers to achieve questionable additional persuasion points with the FCC?

            In light of the trigger-quick discomfort broadband subscribers feels when real or artificial congestion occurs, I find the Comcast claim hard to believe.  Few companies, outside commercial aviation, would risk ticking off their customers to achieve a political point.  So perhaps the answer lies in determining whether Netflix has so much in common with the airlines, that it too can degrade service to nudge/push customers into paying more for same service.

 

            The airlines can degrade standard economy service and unbundle components of what used to be considered part of an airfare in light of limited competition.  Travelers cannot readily avoid add-on fees by shifting carriers.  Can Netflix subscribers vote with their currency and shift allegiance if the company’s video streams become a slide show?

            The answer: it depends. Increasingly one can find much—but not all—of the content available from Netflix.   Disintermediation of cable television operators has become an option for some content, but note that the cable ISP constitutes the only double digit megabit per second option for most consumers.  Comcast and other retail ISPs have raised broadband subscription rates and these ventures probably with become more aggressive should content disintermediation become more prevalent.

            Netflix does not strike me as a company willing to risk subscriber churn based on poor video quality.  The company paid quite high tuition to learn that it could not raise rates overnight by unbundling online content delivery from postal delivery.  Would Netflix risk ticking off its customers based on a view that now they are so hooked on the company’s content that they would tolerate poor delivery quality?

Raising Consumer Rates with Sneaky Unbundling

           With talk about how a la carte pricing of video can reduce consumer costs, I offer a rebuttal.  First video consumers should understand that if they select the most expensive networks, such as ESPN (at about $6.04 a month), they may not see a significantly lower out of pocket cost despite the sizeable reduction in available channels.

            But there is a more important factor that most consumers and the media do not understand.  Ventures like Comcast can reduce or eliminate their financial harm in subscriber “cord shaving” by increasing billing line items and by raising the cost of a “naked” broadband subscription having no additional video service.

            Despite having to be on its best behavior as the FCC considers the proposal to acquire Time Warner, Comcast inserted a new line item ostensibly to help recover its cost of retransmitting broadcast television channels.  Of course basic cable rates already cover this costs, because broadcast signals constitute the vast majority of the available channels in this tier.  In my market Comcast just DOUBLED the rate even though it surely did not incur a doubling of its costs.

            Comcast also increases the broadband subscription price when customers don’t also take a video service.

 

            By inserting various billing line items, Comcast and other cable companies want consumers to think the costs are a mere pass through.  Many are not a tax or government imposed fee and in a competitive marketplace a venture might have to absorb such costs.

            The most egregious example of billing line item abuse comes from the electric utility serving central Pennsylvania.  West Penn Power charges me for a smart meter I do not yet have.  But the most obnoxious charge is a “Consumer Education Charge” which the company defines as “a monthly charge for ongoing consumer education concerning your bill, shopping for electricity, energy efficiency and conservation.” It’s annual $6 tuition charge for something they probably don’t want me to know about in the first place.  So why not charge consumer for having to tell them about electricity conservation. 

          Clever!

AT&T and Comcast Violate the First Rule of Regulation During a Pending Acquisition

              One would think AT&T and Comcast would be on their best behavior while the FCC considers the merits of multi-billion dollar acquisitions of DirecTV and Time Warner Cable.
Why come across to the court of public opinion as greedy, small-minded and mean-spirited?  Why provide opponents with evidence of just how uncompetitive the marketplace is?

            What was AT&T CEO Randall Stephenson thinking when he threatened to reduce capital expenditure on next generation networks on grounds that the FCC might impose greater regulation?  See AT&T to “pause” 100-city fiber buildout because of net neutrality rules; available at: http://arstechnica.com/business/2014/11/att-to-pause-100-city-fiber-buildout-because-of-net-neutrality-rules/.  He probably was attempting to blame “regulatory uncertainty” as grounds for reducing investment in plant.  To my mind, he comes across as showing the absence of competitive necessity to build out the AT&T network as quickly as possible.  The company can try to leverage investment as a reward to the FCC and the public for retaining possibly inadequate and ineffectual regulation.  Such a generous and noble consolation prize.

            Comcast goes one step further in violating the rule requiring a low profile.  The company has doubled its broadcast signal carriage fee in many markets.  This comes across as both sneaky and not cost-based. It’s sneaky, because the company recently created and now doubled a new line item that consumers might infer as required by government, or as some kind of legitimate cost-pass through, somehow not covered by the overall cost of doing business.  It’s not cost-based, because retransmission consent costs have not doubled in the last year and the company charges the same amount regardless of the number of local signals it carries.  In simple terms Comcast has raised rates at time when it probably should not do so, unless it has such a low opinion of our ability to decode the impact of a 100% increase in its “Broadcast TV Fee.”

            The fact that AT&T can threaten to ration or cut capital expenditure and Comcast can raise rates may mean that both companies see no need in playing nice during the pendency of it 90+ billion dollar acquisitions.  Fine, but don’t tell us how hard you have to work to stay competitive and how your mergers are essential for your continuing ability to serve.

7+ Examples Where Consumers Don’t Call the Shots

            There are plenty of examples where the marketplace’s invisible hand does not seem to favor consumers.  As much as I want to believe unconditionally in the power of the marketplace, there are too many powerful examples where consumers lack sovereignty.  Here are 7+ examples in the information, communications and entertainment marketplace:

1)         Take it or Leave It Contracts that Include Binding Arbitration Clauses 

            Perhaps you can show me a wireless contract that does not require subscribers to give up their day in court if a carrier cheats them.  There are too many instances where a wireless carrier imposes an unjustified charge, or demands payments for one.  Where is the marketplace punishment when this occurs?  There is none, because consumers cannot vote with their feet and migrate to an alternative service provider that allows subscribers a judicial forum.  Every major carrier in the U.S. has received a sizeable fine from the FCC for unlawful and bogus charges, but I don’t want to rely on a regulatory remedy that could evaporate, or apply only if the politics are right.

2)         The Supreme Court’s Aversion to Class Action Law Suits

                I support tort reform that seeks to eliminate frivolous law suits, but another powerful remedy has evaporated when telecom ventures cheat.  Class action law suits make it possible to remedy a problem that collectively add up to millions of dollars, are not worth the bother for any one victim to sue—assuming they still have that option.

            For example, Verizon collected a cool $52 million in unauthorized data access charges in $1.99 increments.  An individual subscriber could not recover the overcharges given the cost of litigation, or even arbitration.  Verizon continued the practice for over four years, before the FCC made the company stop.

3)         Walled Gardens

            I appreciate that most of us are content to treat the millions of wireless apps as more than enough options.  However, compare what Apple allows versus what the complete and unwalled Internet has to offer.  With the rising importance of wireless data access, some content and app creators already have opted to concentrate on App Store availability in lieu of plain old web access.  A lot of time, money and effort goes in creating different versions of the same content accessible by handsets using different operating systems.

4)         Internet Access From a 7 Inch Screen

            Consumers readily accept an inferior web experience for the opportunity to access it via a mobile device.  Okay, the market has functioned and allocated resources accordingly.  In some places in the world, wireless constitutes the first and only medium that offers an affordable and available option.  Still I lament that consumers may have access to fewer and fewer options via 20 inch, fixed screens.

5)         Throttling

            I find it hard to understand why a wireless carrier would deliberately degrade service to a “power user.”  Why not send them a fruit basket and new service options?  Carriers want the option of upselling, but also to punish users, even ones who have acquired so-called unlimited service.

6)         Tiering When Extra Usage Costs Little

            Unmetered, All You Can Eat (“AYCE”) service is economically inefficient when it stimulates “excessive” consumption and triggers cross-subsidies from low volume users to high volume users.  This can occur when everyone pays the same price, or there are negative consequences resulting from excess use, e.g., the need to build more electric power plants.

            Internet access may have different characteristics, particularly if carriers can provide additional units of service without significant additional cost.  Absent congestion, a broadband service provider incurs little cost if it allows subscribers to binge watch Netflix.  That’s why fixed, wireline broadband consumers have AYCE access, or sizeable monthly data allowances in the 100s of Gigabyte range.

            It probably makes economic sense for wired broadband carriers to tier service based on bit transmission speed, but perhaps not on the basis of download volumes.

7)         Video Access Constraints

            Yes the marketplace has made significant accommodations of consumers’ impatience with access constraints.  Video on demand and television everywhere provides alternatives to “appointment television.”   However do not fool yourself into thinking the consumer can demand unlimited access, anytime, anywhere, via any device and in any presentation format.  There are legitimate copyright and content windowing constraints, and there are plenty of questionable ones.

            Why can’t cable subscribers select content on an a la carte basis?  It surely is technically feasible and while the savings depend on the 10-15 channels most consumers would choose, the absence of this options is telling.  ESPN and other very high cost networks understand that they and their cable partners can generate far more revenues by forcing every subscriber to pay for a bundle of channels than by charging even higher rates (above the $6-$7 a month for ESPN) from the smaller base of voluntary subscribers.

            Why can’t consumers access ESPN, HBO and other premium content sources without also subscribing to cable or satellite television?  This access pre-condition constitutes what antirust experts call a tying arrangement. HBO has begun to experiment with alternatives, but until direct access becomes an option, legacy ventures can close ranks and add to consumers’ costs.

            Speaking of costs, how can both content and broadband access providers treat the monthly consumer subscription as just one revenue center?  Does one’s broadband subscription contract contain language allowing the carrier to degrade service to particular upstream content sources unless they agree to pay a surcharge?  Put differently does a broadband carrier have a duty to provide adequate service to its subscribers even if it fails to receive surcharge payments?

            Comcast officials recently claimed that Netflix deliberately caused their content downloads to degrade as a way to improve the odds that the FCC would reject the merger with Time Warner, or impose more burdensome conditions.  I know that Comcast on occasion has intentionally degraded its service, but why would Netflix, particularly given low consumers’ pain thresholds for inferior video?

            Lastly, why do subscribers have to pay the full monthly rate when compensation disputes temporarily block access to “must see” channels?  Where’s my refund?

             

Telecom Policy Lessons From Recent Aviation Mergers

         During this sabbatical year, I have had more opportunities for air travel. While I still marvel at the opportunity to be somewhere on the other side of the globe in a day, I cannot believe how even doubly diminished expectations are not achieved.

            Acquiring companies United, Delta and American swore how buying out a competitor would promote competition and help airlines become more financially stable so they could compete better.  Right, so they can spend up to $35,000 per business class seat and concentrate on the high margin customer even as they install cheaper, smaller and more numerous seats in economy.

            Rather than become more robust competitors it has become easier for the airlines to siphon consumer surplus by raising rates.  The survivors have less incentives to concentrate on consumer service, what with all the new opportunities to extract higher revenues, particularly from ancillary services like charging $300 for a change in an itinerary.

            Even former mavericks have come to realize that they have more to gain by joining the consensus than by offering a better value proposition.  Both Southwestern and Jet Blue have implemented some of the new fees the other carriers charge and neither typically offer the lowest fare anymore.  The smaller group of airlines can engage in consciously parallel pricing—some might call it price fixing—and get away with it, because no one wants to buck the trend of ever rising prices.

            If these mergers were supposed to make the airlines better competitors, why aren’t prices dropping, particularly in light of a 30-40% drop in fuel prices?  Most international flights from the U.S. have sizeable fuel surcharges, a term creating the impression that this billing item might drop, or evaporate if fuel prices decline.  This has not happened.  Why part with as much as $615 per trip if no other carrier reduces the surcharge?

            Fundamental economics suggests that if incumbent gouge and get too greedy, they create ever larger incentives for market entry.  Okay, where is the market entry?  It cannot happen when incumbents control all available takeoff and landing slots.  Even with low interest rates, what bank would loan millions to a startup airline boldly willing to jump high barriers to market entry?

 

            Of course the incumbents have every incentive to exploit their survivorship and to incur the lobbying and campaign investments necessary to sustain the status quo and their upper hand in the marketplace.  Congress is not about to force a reallocation of landing slots to market entrants any more than they would enact a law earmarking radio spectrum for competitive bidding only by non-incumbents. 

 

            It has become easier from incumbent airlines to pursue a strategy of reducing the value proposition of flight and to unbundle elements so that the sum of the line charges well exceeds the former single fare.  While much of this affects the economy class traveler United Airlines CEO Jeff Smisek even bragged how replacing whole cashews with pieces in business class would save the airline money without any fallout.  This miserly airline does not offer a free glass of wine in coach, even though US Airways does having previously tried to charge for water.

            Tweaks to frequent flier programs and a variety of line items, like that one sees on their cable television and wireless bills, make incumbents not much different than so-called low cost carriers.  These carriers do not look and act much different than carriers like Ryanair or Spirit. 

            So the thought has crossed my mind many times of late whether Comcast and AT&T have anything to offer other than higher stock prices from their proposed $100+ billion acquisitions.

Ted Cruz’s Bumper Sticker Reference to Network Neutrality as Obamacare for the Internet

            It’s quite understandable for a politician to summarize complex issues and to distill them into pithy bumper sticker slogans.  So it comes as no surprise that Senator Ted Cruz (or his staff) would come up with the glib analogy between Obamacare and network neutrality.

            Yet again our elected officials fail us with media-ready quips.  From my unsponsored vantage point, I can agree that the President should avoid overstep and respect the role of independent regulatory agencies such as the FCC.  But I surely can take umbrage at Senator Cruz’s sloganeering.

           The network neutrality debate suffers from politicization and more broadly much of the FCC’s work product has become politicized, and interpreted as partisan.  Similarly, anyone who writes about FCC subjects ends up being assigned to one, mutually exclusive camp, or the other.

             I reject such cubby holing.  Should you read my considerable work on network neutrality, you would see someone striving to find the truth and a proper way forward.  My work does not fit into any single camp.

            Robust and sustainable broadband competition does not exist in the United States for first and last mile access despite the blessing of having two wireline options (DSL and cable modem).  Data caps, latency, questions about congestion, equipment costs etc. preclude treating wireless as a functional equivalent to wireline at least for the time being.

            On the other hand, I do not support converting Internet Service Providers into utilities, or thinking that Title II reclassification will solve all ills.

            I do not think the Internet should be completely neutral either.  If I want to view "must see" television, e.g., a Penn State football game, or a Netflix movie, I want my ISP and every other carrier involved in carrying "mission critical" bits to handle them with priority, "Most Favored Nation” treatment.  

            On the other hand (I am an academic!), I don't want Comcast deliberately messing with a competitor’s traffic to extort additional payment.  Netflix should have the option for securing "better than best efforts" routing, but I don't want Comcast to have the ability to penalize small ventures that do not have the traffic volume to cause congestion, or have the funds to pay a surcharge that Comcast does not deserve.

            So I am no one’s true believer.  For this I am ignored and/or defriended by parties on both side.

            Whatever became of reasonable disagreements and civility?

Lessons in Telecom Portion Control

            Greetings from Leuven, Belgium where I am spending two weeks of my sabbatical at the Interdisciplinary Centre for Law and ICT.  See https://www.law.kuleuven.be/icri/en/about.

While one can learn many things in Flanders, I will limit this post to the concept of portion control. 

            You won’t see many wide bodies in Belgium thanks to portion control.  But you won’t see many triple digit monthly wireless bills either.  Simply put, there is little tolerance for excess: most folks bring their own device and opt for pre-paid plans.  Many carriers and resellers in Belgium offer 200 voice minutes, unlimited texting (no portion control there!) and 1 Gigabyte of data for 20 Euros per month, which converts to about $25 USD.  Plus or minus, this rate stands at about half what we typically pay in the U.S. 

            Why? How?  Portion control!  Few consumers have an appetite for unmetered, all you can eat plans.  I did not see many students at KU Leuven immersed in their wireless devices, or engaged in multi-tasking. Even their beer comes in humble 25 and 33 centiliter bottles (8-11.2 ounces).

            So if you can live with, or embrace portion control, you can halve your wireless budget.

            Of course there is a rebuttal to this rosy scenario, particularly for high volume, “power users” who may or may not like buffets, especially ones on cruise ships and Las Vegas. For these folks, the U.S. offers the lowest price, whether measured on a per minute, per text or per megabyte basis.  

            Perhaps there is something constraining and anathema to the U.S. credo in portion control.  Why tolerate a limit?  Why drive with 4 cylinders when 6 will do the job better? My dear wife introduced portion control in my life and I know I’m better off as a result.

            Just keep me away from a cruise ship and Vegas.

Terminating ISP Monopolies and the Similar Harm to Edge Providers and End Users

            It appears that FCC Chairman Tom Wheeler wants an Open Internet order that differentiates access into 2 categories: 1) edge provider downstream access and 2) end user upstream access to content.  This frame has some appeal, particularly when one looks at Internet access as a two-sided market.  However the real world does not create a bright line dichotomy or separation of these two functions.

            Edge providers and end users can face the same potential for harm if an Internet Service Provider (“ISP”) discriminates in ways that constrain, degrade, block or otherwise meddle with a downstream traffic flow.  Both sides of the market suffer if an ISP exercises its market power: 1) the edge provider sells fewer ads, subscriptions, or product; and 2) the end user encounters a reduction in utility and value for his or her monthly broadband access subscription.

            I do not understand the possible FCC emphasis on upstream edge providers.  Perhaps the drafters seek to structure an order that resonates with the D.C. Circuit Court of Appeals examination of potential discrimination to edge providers.  But the court also endorsed the FCC’s view that retail ISPs providing the last mile delivery can operate as terminating monopolies.  Applying an emphasis on this market power in the last mile delivery, both edge providers and end users suffer when retail ISPs engage in some types of discrimination.

            It makes little sense to differentiate between edge providers and end users if both groups have similar grievances with the intermediary.