Who Won the Net Neutrality Case?

by on January 15, 2014 · 1 comment

On its face, Verizon won a resounding victory in Verizon v. FCC since the controversial net neutrality regulations were vacated by all three DC Circuit judges. This marks the second time in four years the FCC had its net neutrality enforcement struck down.

Look at published reactions, though, and you’ll see that both sides feel they suffered a damaging loss in yesterday’s decision.

Prominent net neutrality advocates say “the court loss was even more emphatic and disastrous than anyone expected” and a “FEMA-level fail.”

Conversely, critics of net neutrality say that it was a “big win for FCC” and that “the court has given the FCC near limitless power to regulate not just broadband, but the Internet itself.”

Most analysis of the case will point out that it’s a mixed bag for both sides. What is clear is that the net neutrality movement suffered an almost complete loss in the short term. The FCC’s regulations from the Open Internet Order preventing ISPs from “unreasonable discrimination” and “blocking” of Internet traffic were struck down. The court said those prohibitions are equivalent to common carrier obligations. Since ISPs are not common carriers–per previous FCC rulings–most of the Open Internet Order was vacated.

The long term is more uncertain and net neutrality critics have ample reason to be concerned. The court yesterday said the FCC has broad authority to regulate ISPs’ treatment of traffic under Section 706 of the 1996 Telecommunications Act. This somewhat unanticipated conclusion–given its breadth–leaves the FCC with several options if it wants to enact net neutrality or “net neutrality-lite” regulations.

Putting aside the possibility that the FCC or Verizon will appeal the decision, these are the developments to watch:

1. Title II reclassification.

The FCC could always reclassify ISPs as common carriers and subject them to common carrier obligations. I think this is unlikely for several reasons.

First, reclassification would absolutely poison relationships with Congressional Republicans, some important Democrats, and the broadband industry. This is a large reason why then-FCC Chairman Genachowski did not seriously pursue reclassification in 2010. If anything, the political climate is worse for reclassification. Republicans and ISPs simply oppose reclassification more than Democrats and advocates support it.

Second, the content companies–like Google, Hulu, and Netflix–who would ostensibly benefit from net neutrality seem to have cooled to the idea. Part of content companies’ waning interest in net neutrality, I suspect, is exhaustion. This fight has gone on for a decade with little to show for it. They may also realize that ISPs are not likely to engage in truly abusive behaviors. Broadband speeds and capacity have advanced substantially in a decade and concerns about being squeezed out have lessened. There are also powerful norms that ISPs are not likely to violate. Consumers don’t like unseemly behavior by ISPs–like throttling a competing VoIP or video provider. If only because of the PR risk, ISPs have significant incentives to maintain the level of service they have historically provided.

Third, reclassification is a time-consuming and legally fraught process. Even the most principled net neutrality proponents don’t want ISPs subjected to every applicable Title II obligation. But “forbearance” of Title II regulations means several regulatory proceedings, each one potentially subject to litigation.

Finally, Chairman Tom Wheeler, fortunately, does not appear to be an ideologue willing to spend most of his tenure as chairman re-fighting this bitter fight. His comments last month were telling:

I think we’re also going to see a two-sided market where Netflix might say, ‘well, I’ll pay in order to make sure that . . . my subscriber receives, the best possible transmission of this movie.’ I think we want to let those kinds of things evolve.

This statement struck dread in the hearts of many net neutrality proponents. I’ve always believed he was talking about specialized services when he made this statement since pay-for-priority deals were essentially banned by the Open Internet Order. Regardless, his apparent comfort with changing pricing dynamics in two-sided markets indicates he is not a net neutrality partisan. I suspect Chairman Wheeler wants to go down as the chairman who guided America to a mobile future. His priorities seem to be in getting spectrum auctions right, not in rehashing old battles.

2. Pay-for-priority deals.

The legal uncertainties need to be settled before ISPs begin looking at prioritization deals, but they’ll probably pursue some. For example, gaming services might want to pay ISPs to make sure gamers receive low latency connections and large enterprise customers might want prioritized traffic for services like virtual desktops for, say, on-the-road employees. No one knows how common these deals will be. In any case, these deals will probably be closely monitored by the FCC for perceived abuses of market power, as explained next.

3. Increased FCC scrutiny using Section 706.

Substantial and costly scrutiny of ISPs’ traffic management from the FCC is the long-term fear. It now appears that the FCC has many tools to regulate how ISPs treat traffic under Section 706. I call this net neutrality-lite but 706 authority has the potential to be a more powerful weapon than the Open Internet Order. Not only can the FCC use 706 to regulate ISPs through adjudications, the mere threat of using 706 against ISPs may induce compliance. If there is a bright side to the court’s recognition of the FCC’s 706 authority, it’s that it makes Title II reclassification of ISPs less likely.

Verizon v. FCC was mostly a win for those of us who viewed the Open Internet Order as a regulatory overreach. Risks remain since net neutrality as a policy goal will not die, but reclassification is a long shot, fortunately. Policy watchers will be analyzing Wheeler’s actions, in particular, to see whether the FCC pursues its Section 706 authority to regulate ISPs. Hopefully the court’s decision is accepted as final and marks the end of the most heated battles over net neutrality. The FCC could then turn its attention to important issues like spectrum auctions, the IP transition, and the rapidly changing television market.

  • Cost Causation Lover

    Brent, respectfully, I disagree with your views.

    Make no mistake about the Eyeball Owning Network Operator’s (EONOs)
    endgame. They want a switched packet access regime (SPAR) modeled right
    after the switched access structure for voice that’s been in place for
    decades.

    A SPAR permits the EONOs to maintain a lower rate for subscribers
    which keeps new entrants out of the market while raising the cost of
    content. (Remember, nobody outside of telecom blamed the baby bells for
    the inflated long distance voice rates but it was the originating and
    terminating access costs that kept LD rates inflated. )

    This is a pure cross-subsidy model where EONOs get content providers
    like Netflix to pay a portion of the bandwidth internet subscribers
    consume through a complex web of fees. On the face this may look
    appealing because it keeps EONOs internet subscriber rates down.
    Subscribers beware though because it will certainly raise the cost of
    the content you want. Netflix rates will surely rise. Youtube and other
    streaming content services may have to charge users for usage.
    Net-NON-neutrality will also stifle the development of bandwidth
    intensive applications.

    We’re still a long way from this Internet Armageddon day, but that’s
    the path the EONOs have been marching down since they took on
    net-neutrality.

    If EONOs are successful you might want to dust off your separations
    accounting manuals and your 90s TELRIC (Total Element Long Run
    Incremental Costs) and TSLRIC (Total Service Long Run Incremental Costs)
    studies because content providers will have to march into the FCC with
    their own cost studies to push down the SPAR rates EONOs will seek to
    charge.

    While I don’t necessarily think EONOs will do anything radical immediately, I suspect they will be far more subtle in actions they take. Think of the boiled frog parable where the frog is put into a pot of room temperature water and the temperature
    is turned up one degree at a time until our friendly frog is boiled.
    If the frog were put into boiling water it would jump right out.

    EONOs will try to do same by finding ways to gradually
    assess costs on content providers — e.g., charges for time-sensitive packet delivery — without them launching a huge legal and PR war that could derail EONOs’ win.

    (You might ask why the EONOs would want to boil the frog. The answer
    of course is to create their own — content that is. By raising the
    cost of content production through SPAR fees EONOs can build their own
    or charge more for the content they produce.)

    It is really critical that requlators make explicit any and all
    subsidies from a Switched Packet Access Regime (SPAR). Of course just
    as ILECs did with switched access, EONOs will seek to make those access
    costs as obtuse as possible.

    Possible new ISP entrants must know the size of the subsidy EONOs
    enjoy so they can determine the potential revenue stream from entering
    the market to compete against Incumbent EONOs (I-EONOs). The New
    Entrant EONOs (NE-EONOs) would do this by underpricing I-EONOs
    subscriber rates and, simultaneously, charging content providers a lower
    SPAR.

    CLECs first enterered the ILEC’s space in the early 90s as
    Competitive Access Providers (CAPs) by providing special access to the
    IXCs (or long distance providers) which enabled the IXCs to avoid
    originating access charges from the ILECs (or baby bells) for large IXC
    enterprise customers, e.g., Merrill Lynch, IBM, Fidelity and so on.

    If regulatory rules and subsidies permit it, NE-EONOs may first enter
    this market by establishing interconnections with I-EONOs deep into
    I-EONOs networks and deliver content packets at those points.

    This may be an arbitrage for content providers like Netflix and
    Youtube between the I-EONO SPAR rates and the NE-EONO transport rates.

    The parallels between the switched (voice) access structure and a
    potential switched packet access regime or SPAR are very disturbing
    when you understand how the baby bells played this game.

    ATT and VZ have institutional history and regulatory power to usher a SPAR through.

    The biggest difference between the establishment of the switched
    (voice) access structure and the SPAR is the I-EONO’s opposition —
    content providers — is pretty powerful too.

    In the 80s when Ma Bell was broken into 7 companies, MCI was an
    upstart with little power and influence in DC. By the time MCI entered
    the game, the rules were already set. MCI looked more like a law firm
    than an IXC.

    Today, the content providers (the equivalent of the 80s IXCs and 90s
    CLECs) have deep deep pockets to fight this battle. So far, they really
    haven’t done it very well, but maybe this is a wake-up call.

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