Many net neutrality advocates would prefer that the FCC return to the regulatory regime that existed during the dial-up era of the Internet. They have fond memories of the artificially low prices charged by the dial-up ISPs of that era, but have forgotten that those artificially low prices were funded by consumers through implied subsidies embedded in their monthly telephone bills.
Remember when the Internet was the “information superhighway”? As recently as 2009, the Federal Communications Commission (FCC) still referred to the broadband Internet as, “the interstate highway of the 21st century.” Highways remain a close analogy to the Internet, yet by 2010, net neutrality advocates had replaced Internet highway analogies with analogies to waterworks and the electrical grid. They stopped analogizing the Internet to highways when they realized their approach to Internet regulation is inconsistent with government management of the National Highway System, which has always required commercial users of the highways to pay more for their use than ordinary consumers. In contrast, net neutrality is only the latest in a series of government interventions that have exempted commercial users from paying for the use of local Internet infrastructure.
Vice President Gore popularized the term “information superhighway” in the 1990s as a way of garnering support for the Clinton Administration’s technology initiatives, including its Agenda for Action to promote the Internet (then dubbed the “National Information Infrastructure”). Gore believed the Internet would become the “Interstate Highway System of the 21st Century,” and he frequently analogized the Internet to a “network of highways – much like the Interstates begun in the ‘50s.” He envisioned networks as diverse as the nation’s roadways:
These are highways carrying information rather than people or goods. And I’m not talking about just one eight-lane turnpike. I mean a collection of Interstates and feeder roads made up of different materials in the same way that roads can be concrete or macadam – or gravel. Some highways will be made up of fiber optics. Others will be built out of coaxial or wireless.
Though the Administration recognized their similarities, it chose to fund the “21st Century technology infrastructure” of the Internet differently than highways. The Administration recognized the “fundamental fact” that the private sector was already investing approximately $50 billion annually in telecommunications infrastructure compared to the one to two billion the federal government was contributing. Based on this fact, the Administration determined that its first principle for government action should be to “promote private sector investment” in Internet infrastructure through tax incentives and communications reform legislation that would “encourage innovation and promote long-term investment.” The reform legislation referred to in the Agenda for Action became the Telecommunications Act of 1996.
As implemented by the FCC, however, the 1996 Act discouraged investment in local Internet infrastructure by shifting costs caused by “over the top” Internet service providers to consumers who subscribed to plain old telephone services. The 1996 Act distinguishes between:
- “Telecommunications carriers,” which provide switched voice telephone service and are subject to common carrier regulation, and
- “Information service providers,” which provide data and Internet communications services and are not subject to common carrier regulation.
The FCC concluded that these categories were equivalent to an existing FCC distinction between “basic” and “enhanced” services (with “telecommunications” equaling “basic” and “information” equaling “enhanced”) that was developed in the early 1970s when computing capabilities were new and the telephone system was still a monopoly.
When the telephone monopoly was dismantled in 1983, the FCC required that interstate carriers (e.g., long distance telephone companies and cellular carriers) pay “access charges” to local carriers to maintain the infrastructure of local telephone exchanges (which had previously been maintained through monopoly rents). The FCC temporarily exempted “enhanced service providers” from paying access charges to avoid a “bill shock” to data users. See MTS and WATS Market Structure, FCC 83-356 (1983). This “ESP exemption” was intended to be temporary, because it “forced [telephone subscribers] to bear a disproportionate share of the local [telephone] exchange costs that access charges [were] designed to cover.” See ESP Exemption Order, FCC 88-151 (1988). The FCC extended the ESP exemption permanently in the ESP Exemption Order – despite its discriminatory impact on telephone subscribers who didn’t use data services (which were mostly used by big businesses at that time) – because the market for data services was still emerging. The FCC concluded that, “to the extent the exemption for enhanced service providers may be discriminatory, it remains, for the present, not an unreasonable discrimination.”
After the 1996 Act was passed, the FCC converted the “ESP” exemption into the information service provider (or “ISP”) exemption, which exempted independent “dial-up” Internet service providers from paying access charges and the per-minute rates applicable to interstate telecommunications services (i.e., long distance telephone calls). See Access Charge Reform, FCC 97-158 (1997). The FCC treated “over the top” dial-up ISPs as local “end user” customers and permitted them to lease lines from telephone companies at the significantly lower, flat monthly rates applicable to business lines used for local calls. Because dial-up ISPs could pay a flat monthly rate for unlimited data traffic rather than the per-minute charges that were then applicable to long distance telephone calls, ISPs offered unlimited dial-up Internet access to consumers at flat monthly rates that were artificially low in comparison to the rates charged for telephone service. As a result, consumers who subscribed to telephone services paid “subscriber line charges” and higher per-minute long distance rates to cover costs to local exchange networks that were caused by dial-up ISPs and their subscribers. Even telephone subscribers who were not using Internet services were in effect required by law to subsidize dial-up ISPs.
Although treating dial-up Internet traffic as “local” meant that ISPs didn’t have to pay access charges (which apply only to interstate calls), the 1996 Act introduced a new payment type – “reciprocal compensation” – that was designed to apply to the exchange of local calls. The states, which have jurisdiction only over local calls, interpreted this provision as requiring that dial-up ISPs pay reciprocal compensation for their share of the costs involved in maintaining local telephone exchanges. The FCC quickly issued an order preempting the states on jurisdictional grounds by concluding that dial-up ISP-bound traffic is inherently interstate. See Inter-Carrier Compensation for ISP-Bound Traffic, FCC 99-38 (1999). The FCC concluded that the Internet could not be separated into an “intrastate telecommunications service” (the call from the consumer to the dial-up ISP’s local server) and an “interstate information service” (the Internet access provided by the ISP’s local server), because the definition of “information services in the 1996 Act recognizes the inseparability, for purposes of jurisdictional analysis, of the information service and the underlying telecommunications.” The FCC thus required states to treat dial-up ISP traffic as local for pricing purposes and as interstate (i.e., long distance) for jurisdictional purposes. The FCC justified this absurd result by noting the “strong federal interest in ensuring that regulation does nothing to impede the growth of the Internet – which has flourished to date under our ‘hands off’ regulatory approach – or the development of competition.” Of course, dictating that local telephone companies lease their lines at regulated prices to dial-up ISPs was not a “hands off” approach that any free market economist would recognize.
The FCC didn’t adopt a truly “hands-off” regulatory approach to the Internet until it classified broadband Internet access services as information services during the Bush Administration, a classification that prevented or eliminated mandatory wholesale requirements and government price regulations on cable modem (2002), DSL and Fiber (2005), broadband over power line (2006), and wireless broadband (2007). In its Cable Modem Order, the FCC relied on the same rationale used during the Clinton Administration to preempt the states from imposing reciprocal compensation on dial-up ISPs: The FCC concluded that broadband Internet access was an integrated service with “no separate offering of telecommunications service.” Although this rationale was consistent with the jurisdictional premise adopted by the FCC when it preempted the states to preserve the ISP exemption (not to mention the FCC’s tentative conclusion in the 1980s that enhanced service providers should be required to pay access charges), the transition of the Internet to a free market in which “over the top” Internet companies might have to pay their fair share for the use of local Internet infrastructure became the rallying cry for “net neutrality.”
Although the FCC claimed that the net neutrality rules it adopted in 2010 were intended to protect consumers, net neutrality is actually the intellectual descendant of the ESP exemption – a “temporary” exemption that became a permanent subsidy paid by consumers for the benefit of “over the top” Internet companies. Many net neutrality advocates would prefer that the FCC return to the regulatory regime that existed during the dial-up era of the Internet. They have fond memories of the artificially low prices charged by the dial-up ISPs of that era, but have forgotten that those artificially low prices were funded by consumers through implied subsidies embedded in their monthly telephone bills. Due to the drastic decline in telephone subscriptions, that subsidy model is no longer viable, which in part explains why the FCC issued a policy statement embracing net neutrality principles on the same day it deregulated broadband Internet access provided by telephone companies: Net neutrality became the alternative mechanism for forcing consumers to subsidize “over the top” providers of Internet services.
In many ways, the FCC’s net neutrality proceeding in 2010 was a replay of earlier proceedings involving the ESP exemption. In the ESP exemption proceeding, telephone companies, state public utility commissions and attorneys general (with the notable exception of California), and consumer groups (e.g., National Consumers League) generally supported eliminating the ESP exemption, whereas enhanced service providers, device manufacturers (e.g., Apple), and data users (primarily large enterprises at that time) opposed paying access charges to use local telephone networks. States and consumer groups argued that all users of the local telephone network should “pay a fair share of the costs of the local network,” including Internet companies, and that the ESP exemption resulted in telephone consumers subsidizing big data companies. Enhanced service providers argued that the exemption was necessary to promote further development of the “fragile” data services market that was still in its “infancy.” Similar players made similar arguments in the net neutrality proceeding (with the exception that many consumer groups switched sides), and the FCC used the same rationale for adopting net neutrality rules that it relied on in the ISP exemption proceeding. And, similar to the impact of the ESP and ISP exemptions, the FCC’s net neutrality rules have had the effect of spreading costs caused by some “over the top” Internet services to all Internet access subscribers – including those who don’t use the most data intensive services – by prohibiting the owners of local Internet infrastructure from charging fees to content and application providers that use local Internet infrastructure to reach consumers.
Although the Interstate Highway System is user funded, it has no analog to the consumer-funded commercial subsidy model that has supported US-based Internet companies since 1983. When the federal government funded the Interstate Highway System, it embraced the principle that all users of a shared resource should pay for its use and that heavy users should pay the most. This contradiction between the funding policies of the Internet and the Interstate Highway System is why net neutrality advocates had to abandon the “information superhighway” analogy.
Part 2 of this post describes the funding mechanisms used to build and maintain the Interstate Highway System and compares them to net neutrality in more detail.
The Technology Liberation Front is the tech policy blog dedicated to keeping politicians' hands off the 'net and everything else related to technology.