Broadband & Neutrality Regulation

It seems to me that a lot of the angst about the Comcast-Netflix paid transit deal results from a general discomfort with two-sided markets rather than any specific harm caused by the deal. But is there any reason to be suspicious of two-sided markets per se?

Consider a (straight) singles bar. Men and women come to the singles bar to meet each other. On some nights, it’s ladies’ night, and women get in free and get a free drink. On other nights, it’s not ladies’ night, and both men and women have to pay to get in and buy drinks.

There is no a priori reason to believe that ladies’ night is more just or efficient than other nights. The owner of the bar will benefit if the bar is a good place for social congress, and she will price accordingly. If men in the area are particularly shy, she may have to institute a “mens’ night” to get them to come out. If women start demanding too many free drinks, she may have to put an end to ladies’ night (even if some men benefit from the presence of tipsy women, they may not be as willing as the women to pay the full cost of all of the drinks). Whether a market should be two-sided or one-sided is an empirical question, and the answer can change over time depending on circumstances.

Some commentators seem to be arguing that two-sided markets are fine as long as the market is competitive. Well, OK, suppose the singles bar is the only singles bar in a 100-mile radius? How does that change the analysis above? Not at all, I say.

Analysis of two-sided markets can get very complex, but we shouldn’t let that complexity turn into reflexive opposition.

Verizon v. FCC, the court decision overturning the Federal Communications Commission’s (FCC) net neutrality rules, didn’t rule directly on the First Amendment issues. It did, however, reject the reasoning of net neutrality advocates who claim Internet service providers (ISPs) are not entitled to freedom of speech.

The court recognized that, in terms of the functionality that it offers consumers and the economic relationships among industry participants, the Internet is as similar to analog cable networks as it is to analog telephone networks. As a result, the court considered most of the issues in the net neutrality case to be “indistinguishable” from those addressed in Midwest Video II, a seminal case addressing the FCC’s authority over cable systems. The court’s emphasis on the substantive similarities between analog cable services, which are clearly entitled to First Amendment protection, indicates that ISPs are likewise entitled to protection.

Net neutrality advocates argued that ISPs are not First Amendment “speakers” because ISPs do not exercise editorial discretion over Internet content. In essence, these advocates argued that ISPs forfeited their First Amendment rights as a result of their “actual conduct” in the marketplace.

Though the court didn’t address the First Amendment issues directly, the court’s reasoning regarding common carrier issues indicates that the “actual conduct” of ISPs is legally irrelevant to their status as First Amendment speakers. Continue reading →

On Saturday, C-SPAN aired a segment of The Communicators featuring me and Free Press’ Chance Williams. In the 30-minute segment, Chance and I discussed the future of net neutrality now that the FCC’s Open Internet rules are vacated. You can see the taping here or below.

The Internet is abuzz with news that Federal Communications Commission Chairman Tom Wheeler favors a case-by-case approach to addressing Internet competition issues. It is the wisest course, and perhaps the most courageous. Some on the right will say he is going too far, and some on the left will say he isn’t going far enough. That is one reason Wheeler’s approach should be commended. Staunch disagreements about net neutrality and other Internet governance issues reflect the uncertainty inherent in a dynamic market.

Chairman Wheeler’s comments this week echoed Socrates (“I’m not smart enough to know what comes next [in innovation]”) and, to my surprise, Virginia Postrel (the Chairman favors addressing Internet issues “in a dynamic rather than a static way”). He recognizes that, in a two-sided market, there is no reason to assume that ISPs will necessarily have the ability to charge content providers rather than the other way around. The potential for strategic behavior on the Internet today is radically different than in the dial-up Internet era, and the Chairman appears prepared to consider those differences in his approach to communications regulation. Continue reading →

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.

The decision to forgo distribution is referred to as a “blackout” in the cable context and “blocking” in the Internet context, but the economic considerations affecting such negotiations are substantially the same.

The American Television Alliance (ATVA), a coalition comprised primarily of cable and satellite TV operators, is using the playbook of net neutrality proponents in abid to convince the Federal Communications Commission (FCC) to regulate prices for broadcast television content. The goal of ATVA’s cable and satellite members is to increase their profit margins by convincing the government to artificially lower the cost of programming they resell to consumers. I suspect the goal of ATVA’s non-profit memberse.g.Public Knowledge and New America Foundation, is to solidify the FCC’s flawed rationale for adopting net neutrality rules in 2010, which imposed restrictions on market arrangements between Internet Service Providers (ISPs) and Internet content providers without finding a market failure.

Many of ATVA’s cable members are also ISPs that have routinely argued against the imposition of net neutrality regulations in the market for Internet services. By supporting ATVA, these same companies appear to have abandoned the intellectual foundation for opposition to net neutrality. Are they now signaling their intent to embrace net neutrality regulation of the Internet? Continue reading →

Yesterday’s decision requiring AT&T to continue offering seven-year term discounts on POTS lines while the FCC conducts a meritless investigation is more than a drag – it is a government shackle on the deployment of modern IP-based infrastructure to rural and low-income consumers.

In early 2010, the Federal Communications Commission (FCC) issued the National Broadband Plan (Plan) to ensure that all people of the United States have access to broadband Internet communications. The Plan concluded that “broadband is a foundation for economic growth, job creation, global competitiveness and a better way of life” and urged that everyone “must now act and rise to our era’s infrastructure challenge.” (Plan at XI, XV) Yesterday the FCC threatened to turn its back on this call to action when it suspended revisions to AT&T tariffs that sought to stop offering term discount plans of five to seven years for 1960s era “Plain Old Telephone Service” (POTS) technology using circuit switched “special access” lines. The FCC suspended the tariff revisions for five months to investigate their “lawfulness” (even though the remaining tariff rates have already been conclusively presumed to be just and reasonable).

Ironically, at the open Commission meeting on Thursday, the Technology Transitions Policy Task Force will provide a status update on the National Broadband Plan’s recommendation that the FCC eliminate—within the next five to seven years—the requirement that AT&T and other carriers offer POTS technologies using circuit-switched networks (known as the “IP transition”).

Why would the FCC open a five-month investigation on Monday to determine whether it is “lawful” for AT&T to stop providing long-term discounts for services using outdated technologies the FCC will discuss eliminating altogether at its meeting on Thursday? Continue reading →

One year ago I wrote that conservatives were the leading voices in technology policy. Conservative leadership on tech policy issues became even more apparent last week, when House Energy and Commerce Committee Chairman Fred Upton (R-MI) and Communications and Technology Subcommittee Chairman Greg Walden (R-OR) announced plans to update the Communications Act for the Internet era (#CommActUpdate). Virtually everyone recognizes that the Act, which Rep. Walden noted was “written during the Great Depression and last updated when 56 kilobits per second via dial-up modem was state of the art,” is now hopelessly out of date. But it was conservative leadership that was willing to begin the legislative process necessary to update it.

Although the term “progressive” literally means “advocating progress, change, improvement, or reform, as opposed to wishing to maintain things as they are,” some political progressives have focused their communications advocacy on maintaining the status quo. In response to the #CommActUpdate, Free Press said, “We’re not going to get a better act than we have now.” (Communications Daily, Dec. 5, 2013 (subscription required)) Free Press, which describes itself as a “movement to change media and technology policies,” also told Comm Daily, “The IP transition should be governed by the laws on the books today.” Continue reading →

There is bipartisan agreement that the 1996 Telecom Act was antiquated only shortly after President Clinton’s signature had dried on the legislation. There is also consensus that spectrum policy, still largely grounded in the 1934 communications statute, absolutely distorts today’s wireless markets. And there is frequent criticism from thought leaders, right and left, that the FCC has been, for decades, too accommodating to the firms it regulates and too beholden to the status quo (economist Thomas Hazlett quips the agency’s initials stand for “Forever Captured by Corporations”).

For these reasons, members of Congress every few years announce their intention to reform the 1934 and 1996 communications laws and modernize the FCC. Yesterday, some powerful House members unexpectedly reignited hopes that Congress would overhaul our telecom, broadband, and video laws. In a Google Hangout (!), Reps. Fred Upton and Greg Walden said they wanted to take on the ambitious task of passing a new law in 2015.

Much depends on next year’s elections and the composition of Congress, but hopefully the announcement spurs a major re-write that eliminates regulatory distortions in communications, much as airlines and transportation were deregulated in the 1970s–an effort led by reformist Democrats.

About ten years ago, more than fifty scholars and technologists crafted reports which constituted the Digital Age Communications Act (or DACA) that is largely deregulatory (a majority of the group had served in Democratic administrations, interestingly enough). In 2005, then-Sen. Jim DeMint proposed a bill similar to the working group’s proposals. The working group’s recommendations aged very well in eight years–which you can’t say about the 1996 Act–and represents a great starting point for future legislation.

As Adam has said the DACA reports have five primary reform objectives:

- Replacing the amorphous “public interest” standard with a consumer welfare standard, which is more well-established in field of antitrust law

- Eliminate regulatory silos and level the playing field through deregulation

- Comprehensively reform spectrum not just through more auctioning but through clear property rights

- Reform universal service by either voucherizing it or devolving it to the States and let them run their own telecom welfare programs; and

- Significantly reforming & downsizing the scope of the FCC’s power of the modern information economy

DACA redefines the FCC as a specialized competition agency for the communications sector. The FCC largely sees itself as a competition agency today but the current statutes don’t represent that gradual change in purpose. The FCC is slow, arbitrary, Balkanizes industries artificially, and attempts to regulate in areas it isn’t equipped to regulate–the agency has a notoriously bad record in federal courts. These characteristics create a poor environment for substantial investments in technology and communications infrastructure. The DACA proposals aren’t perfect but it is a resilient framework that minimizes the effect of special interests in communications and encourages investments that improve consumers’ lives.

Both parties of Congress has been increasingly critical of federal agencies’ inefficient use of spectrum in the past few years and it seems like agencies are getting the message. The NTIA, which is the official manager of federal agency spectrum, released a letter yesterday announcing that the Department of Defense would be relocating some of its systems. Defense had reached an agreement with broadcasters that Defense systems will share spectrum in the Broadcast Auxiliary Service (BAS) band.

The soon-to-be vacated band held by Defense will eventually be auctioned off–hopefully in 2014–for billions of dollars and likely used for mobile broadband provided by wireless carriers like AT&T, Verizon, Sprint, and T-Mobile. These carriers face serious congestion problems because of government-created scarcity of spectrum.

The carriers actually had targeted some of BAS spectrum because they weren’t convinced Defense would be willing to move their systems. The broadcaster deal reached with Defense means everyone’s apparently happy–the broadcasters can keep their BAS spectrum, the feds get new equipment and Congress off their back (temporarily), and the carriers get new spectrum for auction.

The deal is welcome news because the spectrum will be put to a higher-valued use once auctioned. The federal government pays almost nothing for its own spectrum and is a poor steward of the resource. Transferring spectrum from agencies to carriers means lower phone bills and more mobile broadband coverage. Government agencies are notoriously resistant to moving their systems or sharing with others, so entering into a sharing pact with the broadcasters indicates some of the resistance is thawing.

It’s not unequivocal good news, though.

The government is clearing out from a 25 MHz band of spectrum and occupying the larger, 85 MHz BAS band that will be shared with broadcasters. The military will need a larger band because sharing imposes some capacity constraints necessitating new, agile systems that search the airwaves to make sure they don’t interfere with existing broadcast users. Dynamic sharing like this only adds to the cost and complexity and may imperil next years’ planned auction.

Further, the BAS band is unavailable for auction only because of the antiquated command-and-control regime the FCC uses to award spectrum licenses. BAS is mostly used for electronic news gathering, which relays local and national newscasts from reporters on the scene to broadcast studios. Broadcasters have used BAS spectrum since the 1960s when it was allocated to them for free.

In a market, broadcasters likely would not have as much BAS spectrum as they currently have. In fact, because of technology changes and squeezed newsroom budgets, broadcasters are finding cheaper alternatives. Increasingly, journalists are using carriers’ LTE technology to transmit their breaking newscasts since the technology costs a fraction of the cost of news vans and equipment needed for BAS transmissions. That is to say, there are alternative business models in the absence of Soviet-style allocations.

So despite these industry changes, BAS spectrum cannot be auctioned for its highest-valued use (probably mobile broadband) under current FCC rules. Further, it will be even more difficult to bring the benefits of auctions to the airwaves if federal users are intermingling with existing users, broadcasters in this case. It’s a trend to be wary of. Let’s just hope that next year’s planned auctions occur on time so that more consumers can benefit from mobile broadband.