Regulatory Firewall

by on July 14, 2006 · 6 comments

Bill Herman has another long and thoughtful rejoinder to my critique of Herman’s original response to Felten’s paper, as well as the responses of Ed Felten and Brad Templeton. I’m honored to be lumped into the same category with those guys!

Herman does a thorough and fair-minded job of summarizing my concerns, so I don’t have a whole lot to add. As he says, I think the dangers of regulation outweigh the dangers of possible discrimination. He thinks the reverse. So let me just comment on the issue that I think is the crux of the matter:

If (a) telcos and cable cos are impossible to regulate, or (b) the FCC is fundamentally corrupt and/or incompetent, then we have bigger problems on our hands the net neutrality, and we certainly should not passively accept this state of affairs. But if this is the case, then there’s nothing we can do, but there’s nothing we can do to make it worse.

Oh, but we can make it worse. The important point is that right now, the FCC has absolutely no authority over the vast majority of the Internet. It has no authority over the backbone. It has no authority over the high-speed pipes that Google and Microsoft use to get on the Internet. It has no authority over high-speed dedicated lines used by medium-sized businesses. It has no authority over the WiFi connections in hotel rooms and coffee shops. Most importantly, if a serious competitor to the Bells and the cable companies come along, the FCC would have no authority over it.

That’s important, because my big fear is not so much that the FCC will screw up the regulation of the Baby Bells (it’s hard to imagine that market being any more screwed up) but that FCC regulation will metastasize into a generalized barrier to entry for offering broadband access–that the incumbents will find a way to interpret the law in a way that’s difficult for new entrants to comply with.

It happened over and over again in the 20th Century. The basis for such regulatory expansions is always “fairness.” In the 1930s, the railroads complained to the ICC and Congress that it was unfair that they were subject to common carrier regulations while the burgeoning trucking industry was not. The logical thing to do would have been to relax the common carrier rules (since trucks were effective competitors to the railroads) but instead Congress extended the rules to the trucking industry. The result was that the trucking industry’s growth was retarded, to the benefit of the railroads.

We’re seeing it now with VoIP: the Bells are complaining to the FCC that it’s unfair that they’re subject to E911 mandates, universal service fees, CALEA rules, etc and the VoIP companies aren’t. The FCC is struggling to fit a square peg into a round hole by trying to apply 20th-Century technologies to a 21st-Century technology. The net effect has been to put roadblocks in the way of smaller VoIP companies and cement the Bells’ dominant market position.

And we’re seeing it now with cable franchising: the cable guys say it’s unfair that they have to provide public access channels, pay a franchise feel, build out to all customers, and so forth while the new entrants don’t have to jump through all those hoops. (and for that matter, the Baby Bells played the same game in reverse when the cable guys wanted to offer phone service)

It’s likely there will be analogous competitors to the current broadband ISPs in the next couple of decades–perhaps WiMAX, perhaps fixed wireless, perhaps some kind of satellite or power line-based service, or maybe something no one has thought of yet. When that happens, the telcos will demand, in the name of fairness, that they be subjected to the same regulatory scheme they are–even if the new company’s technology or business model is radically different, and thus doesn’t fit the existing regulatory framework. The FCC is likely to comply, in the name of fairness. That will put the new firm at a disadvantage, because the FCC is the Bells’ home turf.

It seems to me that Herman’s example of neutrality regulation that worked proves my point:

Not only can network neutrality regulation work, it already has. Consider why network neutrality is the norm now: common carrier regulatory legacy from the dial-up era. In 1996, when the telephone lines were being congested by dial-up ISPs, a totally unregulable telco industry would have found a way to start dropping calls to competing ISPs. Not consistently, of course, but let’s say a random 20%. That behavior might be hard to prove, and it might have been in the telcos’ best interests (indirectly, through lowered system usage and somewhat greater long distance business), but it just didn’t happen. Why?

Dropping calls on purpose was and is explicitly illegal, because landline telephone companies are regulated as common carriers. Bells knew that even a cozy FCC could not ignore explicitly illegal behavior. Further, the inability to charge extra for dial-up calls greatly reduced the incentive to drop those calls. They would have angered more customers than it would have been worth, considering the threat of regulatory action.

The important point about this is that the Internet neutrality implications were entirely incidental to the regulatory scheme the FCC was enforcing. The FCC had no authority at all over the Internet, as such, it just happened to have authority over one set of “pipes” leading to the Internet. That sharply constrained the scope of the FCC’s rulemaking. The FCC was making rules about telephone lines that happened to be good for the Internet. (although I wonder if FCC rules weren’t part of the reason that data transmission speeds stayed so slow from 1985-95) So if the Bells had wanted to use FCC regulations to harass the ISPs directly, they would have had no basis for doing so.

The Snowe-Dorgan bill is very different. It defines a BSP as “a person or entity that controls, operates, or resells and controls any facility used to provide broadband service to the public, whether provided for a fee or for free.” That sounds to me like it applies to effectively the entire Internet backbone and all of the endpoint networks that provide services to the public. No matter how the specific rules of Snowe-Dorgan are interpreted, the important point is that you will have expanded the FCC’s power to regulate a lot of stuff that currently falls outside of its jurisdiction.

Given the way these things have worked out in the past, I think that’s asking for trouble.

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