Broadband & Neutrality Regulation

Though ubiquitous in urban and rural landscapes, most people barely notice utility poles. Nevertheless, utility poles play a large role in national broadband policy. Improving pole access won’t generate the headlines like billion-dollar spectrum auctions and repeal of Title II Internet regulations, but it’s just as important for improving broadband competition and investment. To that end, the FCC is proposing to create “one-touch-make-ready” rules for FCC-regulated utility poles across the country. I was pleased to see that the FCC will likely implement this and other policy recommendations from the FCC’s Broadband Deployment Advisory Committee.*

To me, one-touch-make-ready an example of useful access regulation and I think it’s likely to succeed at its aims–more broadband competition and investment. Pole access appears to be, using former FCC chief economist Jerry Faulhaber’s phrase, an efficient market boundary. FCC pole access mandates are feasible because the “interface”–physical wires and poles–is relatively simple and regulatory compliance–did the entrant damage existing users? did they provide notice?–is pretty easy to ascertain. Typically, visual inspection will reveal damage and the liable party is usually obvious.

As the FCC says in the proposed order, these proposed modifications and one-touch-make-ready,

put[] the parties most interested in efficient broadband deployment—new attachers—in a position to control the survey and make-ready processes.

Reasonable people (even on the free-market side) will disagree about how to regulate utility pole access. One-touch-make-ready was a controversial proposal and commercial operators have been divided on the issue. In the end, it was not unanimous but the BDAC reached large consensus on the issue. In my view, the FCC struck the right balance in protecting existing companies’ equipment and promoting infrastructure construction and competitive entry.

Some utility pole basics: Utility poles are often owned by a phone company, a utility company, or a city. At the top of utility poles are electric lines. (The FCC is not talking about doing work near the electric lines on top, which is trickier and more dangerous for obvious reasons.) The rule changes here affect the “communications space,” which is midway up the poles and typically has one or several copper, coaxial, or fiber lines strung across.

For decades, the “market” for communications space access was highly regulated but stable. National and local policy encouraged monopoly phone service and cable TV provision and, therefore, entrants rarely sought access to string up lines on utility poles. In the 1990s, however, phone and cable was deregulated and competition became national policy. In the last ten years, as the price of fiber broadband provision has fallen and consumer demand for competitive broadband options has increased, new companies–notably Google Fiber–have needed access to utility poles. The FCC notes in its proposed order that, going forward, “small cell” and 5G deployments will benefit from competitive, lower-cost fiber providers.

The pre-2018 approach to pole attachments, wherein many parties had effective veto rights over new entrants, was creating too many backlogs and discouraging competitive providers from making the investments necessary. The FCC’s proposed rules streamline the process by creating tighter deadlines for other parties to respond to new entrants. The rules also give new entrants new privileges and greater control in constructing new lines and equipment, so long as they notify existing users and don’t damage existing lines.

I’m pleased to see that the Broadband Deployment Advisory Committee’s recommendations are proving useful to the agency. It’s encouraging that this FCC, by taking a weed-whacker to legacy policies regarding spectrum, pole access, and net neutrality, is taking steps to improve broadband in America.

 

*I’m the vice chair of the Competitive Access working group.

Related research and commentary:

The Importance of Spectrum Access to the Future of Innovation (pdf)

A Truly ‘Open Internet’ Would Be Free of Burdensome FCC Regulation (NRO)

Lawmakers frequently hear impressive-sounding stats about net neutrality like “83% of voters support keeping FCC’s net neutrality rules.” This 83% number (and similar “75% of Republicans support the rules”) is based on a survey from the Program for Public Consultation released in December 2017, right before the FCC voted to repeal the 2015 Internet regulations.

These numbers should be treated with skepticism. This survey generates these high approval numbers by asking about net neutrality “rules” found nowhere in the 2015 Open Internet Order. The released survey does not ask about the substance of the Order, like the Title II classification, government price controls online, or the FCC’s newly-created authority to approve of and disapprove of new Internet services.

Here’s how the survey frames the issue:

Under the current regulations, ISPs are required to:   

provide customers access to all websites on the internet.   

provide equal access to all websites without giving any websites faster or slower download speeds.  

The survey then essentially asks the participant if they favor these “regulations.” The nearly 400-page Order is long and complex and I’m guessing the survey creators lacked expertise in this area because this is a serious misinterpretation of the Order. This framing is how net neutrality advocates discuss the issue, but the Obama FCC’s interpretations of the 2015 Order look nothing like these survey questions. Exaggeration and misinformation is common when discussing net neutrality and unfortunately these pollsters contributed to it. (The Washington Post Fact Checker column recently assigned “Three Pinocchios” to similar net neutrality advocate claims.)

Let’s break down these rules ostensibly found in the 2015 Order.

“ISPs are required to provide customers access to all websites on the internet”

This is wrong. The Obama FCC was quite clear in the 2015 Order and during litigation that ISPs are free to filter the Internet and block websites. From the oral arguments:

FCC lawyer: “If [ISPs] want to curate the Internet…that would drop them out of the definition of Broadband Internet Access Service.”
Judge Williams: “They have that option under the Order?”
FCC lawyer: “Absolutely, your Honor. …If they filter the Internet and don’t provide access to all or substantially all endpoints, then…the rules don’t apply to them.”

As a result, the judges who upheld the Order said, “The Order…specifies that an ISP remains ‘free to offer ‘edited’ services’ without becoming subject to the rule’s requirements.”

Further, in the 1996 Telecom Act, Congress gave Internet access providers legal protection in order to encourage them to block lewd and “objectionable content.” Today, many ISPs offer family-friendly Internet access that blocks, say, pornographic and violent content. An FCC Order cannot and did not rewrite the Telecom Act and cannot require “access to all websites on the internet.”

“ISPs are required to provide equal access to all websites without giving any websites faster or slower download speeds”

Again, wrong. There is no “equal access to all websites” mandate (see above). Further, the 2015 Order allows ISPs to prioritize certain Internet traffic because preventing prioritization online would break Internet services.

This myth–that net neutrality rules require ISPs to be dumb pipes, treating all bits the same–has been circulated for years but is derided by networks experts. MIT computer scientist and early Internet developer David Clark colorfully dismissed this idea as “happy little bunny rabbit dreams.” He pointed out that prioritization has been built into Internet protocols for years and “[t]he network is not neutral and never has been.” 

Other experts, such as tech entrepreneur and investor Mark Cuban and President Obama’s former chief technology officer Aneesh Chopra, have observed that the need for Internet “fast lanes” as Internet services grow more diverse. Further, the nature of interconnection agreements and content delivery networks mean that some websites pay for and receive better service than others.

This is not to say the Order is toothless. It authorizes government price controls and invents a vague “general conduct standard” that gives the agency broad authority to reject, favor, and restrict new Internet services. The survey, however, declined to ask members of the public about the substance of the 2015 rules and instead asked about support for net neutrality slogans that have only a tenuous relationship with the actual rules.

“Net neutrality” has always been about giving the FCC, the US media regulator, vast authority to regulate the Internet. In doing so, the 2015 Order rejects the 20-year policy of the United States, codified in law, that the Internet and Internet services should be “unfettered by Federal or State regulation.” The US tech and telecom sector thrived before 2015 and the 2017 repeal of the 2015 rules will reinstate, fortunately, that light-touch regulatory regime.

Years ago it looked like the Obama FCC would make broadband deployment, especially wireless service and spectrum reform, a top priority. They accomplished plenty–including two of the largest spectrum auctions to date–but, under tremendous political and special interest pressure, FCC leadership diverted significant agency resources into regulatory battles that had very little upside, like regulating TV apps and unprecedented regulation of Internet services.

Fortunately, the Trump FCC so far has made broadband deployment the agency’s top priority, which Chairman Pai signaled last year with the creation of the Broadband Deployment Advisory Committee. As part of those deployment efforts, Commissioner Carr has led an effort to streamline some legacy regulatory obstacles, like historic preservation and environmental reviews and the FCC will vote this week on an order to expedite wireless infrastructure construction.

According to the FCC, somewhere around 96% of the US population has LTE coverage from three or more wireless operators, like Verizon, AT&T, T-Mobile, and Sprint. The operators’ job isn’t done in rural areas, but much of the future investment into broadband networks will be to “densify” their existing coverage maps with “small cells” in order to provide wireless customers more bandwidth.

Since telecom companies build infrastructure, many current projects require review under the federal National Historic Preservation Act and the National Environmental Policy Act. However, unlike for the 100-foot cellphone towers in the past, the environmental checklists currently required for small cells are largely perfunctory since small cells typically use existing infrastructure, like utility poles. For Sprint’s tens of thousands of small cell site applications, for instance, the proposed order says “every single review resulted in a finding of no significant impact.”

The order under consideration will bring some structure to regulatory timelines and procedures. This should save carriers on unnecessary regulatory overhead and, more importantly, save time.

The order comes at a crucial time, which is why the prior FCC’s net neutrality distractions are so regrettable. Mobile broadband has huge demands and inadequate infrastructure and spectrum. According to studies, millions of Americans are going “mobile only,” and bypassing landline Internet service. Census Bureau surveys estimated that in 2015, about 20% of Internet-using households were mobile-only. (HT to Michael Horney.) That number is likely even higher today.

The construction of higher-capacity and 5G wireless, combined with repeal of the 2015 Internet regulations, will give consumers more options and better prices for Internet services, and will support new mobile applications like remote-control of driverless cars and AR “smart glasses” for blind people. Hopefully, after this order, the agency will continue with spectrum liberalization and other reforms that will expedite broadband projects.

Internet regulation advocates lost their fight at the FCC, which voted in December 2017 to rescind the 2015 Open Internet Order. Regulation advocates have now taken their “net neutrality” regulations to the states.

Some state officials–via procurement contracts, executive order, or legislation–are attempting to monitor and regulate traffic management techniques and Internet service provider business models in the name of net neutrality. No one, apparently, told these officials that government-mandated net neutrality principles are dead in the US.

As the litigation over the 2015 rules showed, our national laissez faire policy towards the Internet and our First Amendment guts any attempt to enforce net neutrality. Recall that the 1996 amendments to the Communications Act announce a clear national policy about the Internet: Continue reading →

Last week the FCC commissioners voted to restructure the agency and create an Office of Economics and Analytics. Hopefully the new Office will give some rigor to the “public interest standard” that guides most FCC decisions. It’s important the FCC formally inject economics in to public interest determinations, perhaps much like the Australian telecom regulator’s “total welfare standard,” which is basically a social welfare calculation plus consideration of “broader social impacts.”

In contrast, the existing “standard” has several components and subcomponents (some of them contradictory) depending on the circumstances; that is, it’s no standard at all. As the first general counsel of the Federal Radio Commission, Louis Caldwell, said of the public interest standard, it means

as little as any phrase that the drafters of the Act could have used and still comply with the constitutional requirement that there be some standard to guide the administrative wisdom of the licensing authority.

Unfortunately, this means public interest determinations are largely shielded from serious court scrutiny. As Judge Posner said of the standard in Schurz Communications v. FCC,

So nebulous a mandate invests the Commission with an enormous discretion and correspondingly limits the practical scope of responsible judicial review.

Posner colorfully characterized FCC public interest analysis in that case:

The Commission’s majority opinion … is long, but much of it consists of boilerplate, the recitation of the multitudinous parties’ multifarious contentions, and self-congratulatory rhetoric about how careful and thoughtful and measured and balanced the majority has been in evaluating those contentions and carrying out its responsibilities. Stripped of verbiage, the opinion, like a Persian cat with its fur shaved, is alarmingly pale and thin.

Every party who does significant work before the FCC has agreed with Judge Posner’s sentiments at one time or another.

Which brings us to the Office of Economics and Analytics. Cost-benefit analysis has its limits, but economic rigor is increasingly important as the FCC turns its attention away from media regulation and towards spectrum assignment and broadband subsidies.

The worst excesses of FCC regulation are in the past where, for instance, one broadcaster’s staff in 1989 “was required to review 14,000 pages of records to compile information for one [FCC] interrogatory alone out of 299.” Or when, say, FCC staff had to sift through and consider 60,000 TV and radio “fairness” complaints in 1970. These regulatory excesses were corrected by economists (namely, Ronald Coase’s recommendation that spectrum licenses be auctioned, rather than given away for free by the FCC after a broadcast “beauty contest” hearing), but history shows that FCC proceedings spiral out of control without the agency intending it.

Since Congress gave such a nebulous standard, the FCC is always at risk of regressing. Look no further than the FCC’s meaningless “Internet conduct standard” from its 2015 Open Internet Order. This “net neutrality” regulation is a throwback to the bad old days, an unpredictable conduct standard that–like the Fairness Doctrine–would constantly draw the FCC into social policy activism and distract companies with interminable FCC investigations and unknowable compliance requirements.

In the OIO’s mercifully short life, we saw glimpses of the disputes that would’ve distracted the agency and regulated companies. For instance, prominent net neutrality supporters had wildly different views about whether a common practice, “zero rating” of IP content, by T-Mobile violated the Internet conduct standard. Chairman Tom Wheeler initially called it “highly innovative and highly competitive” while Harvard professor Susan Crawford said it was “dangerous” and “malignant” and should be outlawed “immediately.” The nearly year-long FCC investigations into zero rating and the equivocal report sent a clear, chilling message to ISPs and app companies: 20 years of permissionless innovation for the Internet was long enough. Submit your new technologies and business plans to us or face the consequences.

Fortunately, by rescinding the 2015 Order and creating the new economics Office, Chairman Pai and his Republican colleagues are improving the outlook for the development of the Internet. Hopefully the Office will make social welfare calculations a critical part of the public interest standard.

The FCC released a proposed Order today that would create an Office of Economics and Analytics. Last April, Chairman Pai proposed this data-centric office. There are about a dozen bureaus and offices within the FCC and this proposed change in the FCC’s organizational structure would consolidate a few offices and many FCC economists and experts into a single office.

This is welcome news. Several years ago when I was in law school, I was a legal clerk for the FCC Wireless Bureau and for the FCC Office of General Counsel. During that ten-month stint, I was surprised at the number of economists, who were all excellent, at the FCC. I assisted several of them closely (and helped organize what one FCC official dubbed, unofficially, “The Economists’ Cage Match” for outside experts sparring over the competitive effects of the proposed AT&T-T-Mobile merger). However, my impression even during my limited time at the FCC was well-stated by Chairman Pai in April:

[E]conomists are not systematically incorporated into policy work at the FCC. Instead, their expertise is typically applied in an ad hoc fashion, often late in the process. There is no consistent approach to their use.

And since the economists are sprinkled about the agency, their work is often “siloed” within their respective bureau. Economics as an afterthought in telecom is not good for the development of US tech industries, nor for consumers.

As Geoffrey Manne and Allen Gibby said recently, “the future of telecom regulation is antitrust,” and the creation of the OEA is a good step in line with global trends. Many nations–like the Netherlands, Denmark, Spain, Japan, South Korea, and New Zealand–are restructuring legacy telecom regulators. The days of public and private telecom monopolies and discrete, separate communications, computer, and media industries (thus bureaus) is past. Convergence, driven by IP networks and deregulation, has created these trends and resulted in sometimes dramatic restructuring of agencies.

In Denmark, for instance, as Roslyn Layton and Joe Kane have written, national parties and regulators took inspiration from the deregulatory plans of the Clinton FCC. The Social Democrats, the Radical Left, the Left, the Conservative People’s Party, the Socialist People’s Party, and the Center Democrats agreed in 1999:

The 1990s were focused on breaking down old monopoly; now it is important to make the frameworks for telecom, IT, radio, TV meld together—convergence. We believe that new technologies will create competition.

It is important to ensure that regulation does not create a barrier for the possibility of new converged products; for example, telecom operators should be able to offer content if they so choose. It is also important to ensure digital signature capability, digital payment, consumer protection, and digital rights. Regulation must be technologically neutral, and technology choices are to be handled by the market. The goal is to move away from sector-specific regulation toward competition-oriented regulation. We would prefer to handle telecom with competition laws, but some special regulation may be needed in certain cases—for example, regulation for access to copper and universal service.

This agreement was followed up by the quiet shuttering of NITA, the Danish telecom agency, in 2011.

Bringing economic rigor to the FCC’s notoriously vague “public interest” standard seemed to be occurring (slowly) during the Clinton and Bush administrations. However, during the Obama years, this progress was de-railed, largely by the net neutrality silliness, which not only distracted US regulators from actual problems like rural broadband expansion but also reinvigorated the media-access movement, whose followers believe the FCC should have a major role in shaping US culture, media, and technologies.

Fortunately, those days are in the rearview mirror. The proposed creation of the OEA represents another pivot toward the likely future of US telecom regulation: a focus on consumer welfare, competition, and data-driven policy.

Internet regulation advocates are trying to turn a recent FCC Notice of Inquiry about the state of US telecommunications services into a controversy. Twelve US Senators have accused the FCC of wanting to “redefin[e] broadband” in order to “abandon further efforts to connect Americans.”

Considering Chairman Pai and the Commission are already considering actions to accelerate the deployment of broadband, with new proceedings and the formation of the Broadband Deployment Advisory Committee, the allegation that the current NOI is an excuse for inaction is perplexing.

The true “controversy” is much more mundane–reasonable people disagree about what congressional neologisms like “advanced telecommunications capability” mean. The FCC must interpret and apply the indeterminate language of Section 706 of the Telecommunications Act, which requires the FCC about whether to determine “whether advanced telecommunications capability is being deployed in a reasonable and timely fashion.” If the answer is negative, the agency must “take immediate action to accelerate deployment of such capability by removing barriers to infrastructure investment and by promoting competition in the telecommunications market.” The inquiry is reported in an annual “Broadband Progress Report.” Much of the “scandal” of this proceeding is confusion about what “broadband” means.

What is broadband?

First: what qualifies as “broadband” download speed? It depends.

The OECD says anything above 256 kbps.

ITU standards set it at above 1.5 Mbps (or is 2.0 Mbps?).

In the US, broadband is generally defined as a higher speed. The USDA’s Rural Utilities Service defines it as 4.0 Mbps.

The FCC’s 2015 Broadband Progress Report found, as Obama FCC officials put it, that “the FCC’s definition of broadband” is now 25 Mbps. This is why advocates insist “broadband access” includes only wireline services above 25 Mbps.

But in the same month, the Obama FCC determined in the Open Internet Order that anything above dialup speed–56 kbps–is “broadband Internet access service.”

So, according to regulation advocates, 1.5 Mbps DSL service isn’t “broadband access” service but it is “broadband Internet access service.” Likewise a 30 Mbps 4G LTE connection isn’t a “broadband access” service but it is “broadband Internet access service.”

In other words, the word games about “broadband” are not coming from the Trump FCC. There is no consistency for what “broadband” means because prior FCCs kept changing the definition, and even use the term differently in different proceedings. As the Obama FCC said in 2009, “In previous reports to Congress, the Commission used the terms ‘broadband,’ ‘advanced telecommunications capability,’ and ‘advanced services’ interchangeably.”

Instead, what is going on is that the Trump FCC is trying to apply Section 706 to the current broadband market. The main questions are, what is advanced telecommunications capability, and is it “being deployed in a reasonable and timely fashion”?

Is mobile broadband an “advanced telecommunications capability”?

Previous FCCs declined to adopt a speed benchmark for when wireless service satisfies the “advanced telecommunications capability” definition. The so-called controversy is because the latest NOI revisits this omission in light of consumer trends. The NOI straightforwardly asks whether mobile broadband above 10 Mbps satisfies the statutory definition of “advanced telecommunications capability.”

For that, the FCC must consult the statute. Such a capability, the statute says, is technology-neutral (i.e. includes wireless and “fixed” connections) and “enables users to originate and receive high-quality voice, data, graphics, and video telecommunications.”

Historically, since the statute doesn’t provide much precision, the FCC has examined subscription rates of various broadband speeds and services. From 2010 to 2015, the Obama FCCs defined advanced telecommunications capability as a fixed connection of 4 Mbps. In 2015, as mentioned, that benchmark was raised 25 Mbps.

Regulation advocates fear that if the FCC looks at subscription rates, the agency might find that mobile broadband above 10 Mbps is an advanced telecommunications capability. This finding, they feel, would undermine the argument that the US broadband market needs intense regulation. According to recent Pew surveys, 12% of adults–about 28 million people–are “wireless only” and don’t have a wireline subscription. Those numbers certainly raise the possibility that mobile broadband is an advanced telecommunications capability.

Let’s look at the three fixed broadband technologies that “pass” the vast majority of households–cable modem, DSL, and satellite–and narrow the data to connections 10 Mbps or above.*

Home broadband connections (10 Mbps+)
Cable modem – 54.4 million
DSL – 11.8 million
Satellite – 1.4 million

It’s hard to know for sure since Pew measures adult individuals and the FCC measures households, but it’s possible more people have 4G LTE as home broadband (about 28 million adults and their families) than have 10 Mbps+ DSL as home broadband (11.8 million households).

Subscription rates aren’t the end of the inquiry, but the fact that millions of households are going mobile-only rather than DSL or cable modem is suggestive evidence that mobile broadband offers an advanced telecommunications capability. (Considering T-Mobile is now providing 50 GB of data per line per month, mobile-only household growth will likely accelerate.)

Are high-speed services “being deployed in a reasonable and timely fashion”?

The second inquiry is whether these advanced telecommunications capabilities “are being deployed in a reasonable and timely fashion.” Again, the statute doesn’t give much guidance but consumer adoption of high-speed wireline and wireless broadband has been impressive.

So few people had 25 Mbps for so long that the FCC didn’t record it in its Internet Access Services reports until 2011. At the end of 2011, 6.3 million households subscribed to 25 Mbps. Less than five years later, in June 2016, over 56 million households subscribed. In the last year alone, fixed providers extended 25 Mbps or greater speeds to 21 million households.

The FCC is not completely without guidance on this question. As part of the 2008 Broadband Data Services Improvement Act, Congress instructed the FCC to use international comparisons in its Section 706 Report. International comparisons also suggest that the US is deploying advanced telecommunications capability in a timely manner. For instance, according to the OECD the US has 23.4 fiber and cable modem connections per 100 inhabitants, which far exceeds the OECD average, 16.2 per 100 inhabitants.**

Anyways, the sky is not falling because the FCC is asking about mobile broadband subscription rates. More can be done to accelerate broadband–particularly if the government frees up more spectrum and local governments improve their permitting processes–but the Section 706 inquiry offers little that is controversial or new.

 

*Fiber and fixed wireless connections, 9.6 million and 0.3 million subscribers, respectively, are also noteworthy but these 10 Mbps+ technologies only cover certain areas of the country.

**America’s high rank in the OECD is similar if DSL is included, but the quality of DSL varies widely and often doesn’t provide 10 Mbps or 25 Mbps speeds.

It’s becoming clearer why, for six years out of eight, Obama’s appointed FCC chairmen resisted regulating the Internet with Title II of the 1934 Communications Act. Chairman Wheeler famously did not want to go that legal route. It was only after President Obama and the White House called on the FCC in late 2014 to use Title II that Chairman Wheeler relented. If anything, the hastily-drafted 2015 Open Internet rules provide a new incentive to ISPs to curate the Internet in ways they didn’t want to before. 

The 2016 court decision upholding the rules was a Pyrrhic victory for the net neutrality movement. In short, the decision revealed that the 2015 Open Internet Order provides no meaningful net neutrality protections–it allows ISPs to block and throttle content. As the judges who upheld the Order said, “The Order…specifies that an ISP remains ‘free to offer ‘edited’ services’ without becoming subject to the rule’s requirements.” 

The 2014 White House pressure didn’t occur in a vacuum. It occurred immediately after Democratic losses in the November 2014 midterms. As Public Knowledge president Gene Kimmelman tells it, President Obama needed to give progressives “a clean victory for us to show that we are standing up for our principles.” The slapdash legal finessing that followed was presaged by President Obama’s November 2014 national address urging Title II classification of the Internet, which cites the wrong communications law on the Obama White House website to this day.

The FCC staff did their best with what they were given but the resulting Order was aimed at political symbolism and acquiring jurisdiction to regulate the Internet, not meaningful “net neutrality” protections. As internal FCC emails produced in a Senate majority report show, Wheeler’s reversal that week caught the non-partisan career FCC staff off guard. Literally overnight FCC staff had to scrap the “hybrid” (non-Title II) order they’d been carefully drafting for weeks and scrape together a legal justification for using Title II. This meant calling in advocates to enhance the record and dubious citations to the economics literature. Former FCC chief economist, Prof. Michael Katz, whose work was cited in the Order, later stated to Forbes that he suspected the “FCC cited my papers as an inside joke, because they know how much I think net neutrality is a bad idea.” 

Applying 1934 telegraph and telephone laws to the Internet was always going to have unintended consequences, but the politically-driven Order increasingly looks like an own-goal, even to supporters. Former FCC chief technologist, Jon Peha, who supports Title II classification of ISPs almost immediately raised the alarm that the Order offered “massive loopholes” to ISPs that could make the rules irrelevant. This was made clear when the FCC attorney defending the Order in court acknowledged that ISPs are free to block and filter content and escape the Open Internet regulations and Title II. These concessions from the FCC surprised even AT&T VP Hank Hultquist:

Wow. ISPs are not only free to engage in content-based blocking, they can even create the long-dreaded fast and slow lanes so long as they make their intentions sufficiently clear to customers.

So the Open Internet Order not only permits the net neutrality “nightmare scenario,” it provides an incentive to ISPs to curate the Internet. Despite the activist PR surrounding the Order, so-called “fast lanes”–like carrier-provided VoIP, VoLTE, and IPTV–have existed for years and the FCC rules allow them.  The Order permits ISP blocking, throttling, and “fast lanes”–what remains of “net neutrality”?

Prof. Susan Crawford presciently warned in 2005: 

I have lost faith in our ability to write about code in words, and I’m confident that any attempt at writing down network neutrality will be so qualified, gutted, eviscerated, and emptied that it will end up being worse than useless.

Aside from some religious ISPs, ISPs don’t want to filter Internet content. But the Obama FCC, via the “net neutrality” rules, gives them a new incentive: the Order deregulates ISPs that filter. ISPs will fight the rules because they want to continue to offer their conventional Internet service without submitting to the Title II baggage. This is why ISPs favor scrapping the Order–not only is it the FCC’s first claim to regulate Internet access, if the rules are not repealed, ISPs will be compelled to make difficult decisions about their business models and technologies in the future.

There is reporting suggesting that the Trump FCC may move to eliminate the FCC’s complex Title II regulations for the Internet and restore the FTC’s ability to police anticompetitve and deceptive practices online. This is obviously welcome news. These reports also suggest that FCC Chairman Pai and the FTC will require ISPs add open Internet principles to their terms of service, that is, no unreasonable blocking or throttling of content and no paid priority. These principles have always been imprecise because federal law allows ISPs to block objectionable content if they wish (like pornography or violent websites) and because ISPs have a First Amendment right to curate their services.

Whatever the exact wording, there shouldn’t be a per se ban of paid priority. Whatever policy develops should limit anticompetitive paid priority, not all paid priority. Paid prioritization is simply a form of consideration payment, which is economists’ term for when upstream producers pay downstream retailers or distributors for special treatment. There’s economics literature on consideration payments and it’s an accepted business practice in many other industries. Further, consideration payments often benefit small providers and niche customers. Some small and large companies with interactive IP services might be willing to pay for end-to-end service reliability.

The Open Internet Order’s paid priority ban has always been short sighted because it attempts to preserve the Internet as it existed circa 2002. It resembles the FCC’s unfounded insistence for decades that subscription TV (ie, how the vast majority of Americans consume TV today) was against “the public interest.” Like the defunct subscription TV ban, the paid priority ban is an economics-free policy that will hinder new services. 

Despite what late-night talk show hosts might say, “fast lanes” on the Internet are here and will continue. “Fast lanes” have always been permitted because, as Obama’s US CTO Aneesh Chopra noted, some emerging IP services need special treatment. Priority transmission was built into Internet protocols years ago and the OIO doesn’t ban data prioritization; it bans BIAS providers from charging “edge providers” a fee for priority.

The notion that there’s a level playing field online needing preservation is a fantasy. Non-real-time services like Netflix streaming, YouTube, Facebook pages, and major websites can mostly be “cached” on servers scattered around the US. Major web companies have their own form of paid prioritization–they spend millions annually, including large payments to ISPs, on transit agreements, CDNs, and interconnection in order to avoid congested Internet links.

The problem with a blanket paid priority ban is that it biases the evolution of the Internet in favor of these cache-able services and against real-time or interactive services like teleconferencing, live TV, and gaming. Caching doesn’t work for these services because there’s nothing to cache beforehand. 

When would paid prioritization make sense? Most likely a specialized service for dedicated users that requires end-to-end reliability. 

I’ll use a plausible example to illustrate the benefits of consideration payments online–a telepresence service for deaf people. As Martin Geddes described, a decade ago the government in Wales developed such a service. The service architects discovered that a well-functioning service had quality characteristics not supplied by ISPs. ISPs and video chat apps like Skype optimize their networks, video codecs, and services for non-deaf people (ie, most customers) and prioritize consistent audio quality over video quality. While that’s useful for most people, deaf people need basically the opposite optimization because they need to perceive subtle hand and finger motions. The typical app that prioritizes audio, not video, doesn’t work for them.

But high-def real-time video quality requires upstream and downstream capacity reservation and end-to-end reliability. This is not cheap to provide. An ISP, in this illustration, has three options–charge the telepresence provider, charge deaf customers a premium, or spread the costs across all customers. The paid priority ban means ISPs can only charge customers for increased costs. This paid priority ban unnecessarily limits the potential for such services since there may be companies or nonprofits willing to subsidize such a service.

It’s a specialized example but illustrates the idiosyncratic technical requirements needed for many real-time services. In fact, real-time services are the next big challenge in the Internet’s evolution. As streaming media expert Dan Rayburn noted, “traditional one-way live streaming is being disrupted by the demand for interactive engagement.”  Large and small edge companies are increasingly looking for low-latency video solutions. Today, a typical “live” event is broadcast online to viewers with a 15- to 45-second delay. This latency limits or kills the potential for interactive online streaming services like online talk shows, pet cams, online auctions, videogaming, and online classrooms.

If the FTC takes back oversight of ISPs and the Internet it should, as with any industry, permit any business practice that complies with competition law and consumer protection law. The agency should disregard the unfounded belief that consideration payments online (“paid priority”) are always harmful.

Federal Communications Commission (FCC) Chairman Ajit Pai today announced plans to expand the role of economic analysis at the FCC in a speech at the Hudson Institute. This is an eminently sensible idea that other regulatory agencies (both independent and executive branch) could learn from.

Pai first made the case that when the FCC listened to its economists in the past, it unlocked billions of dollars of value for consumers. The most prominent example was the switch from hearings to auctions in order to allocate spectrum licenses. He perceptively noted that the biggest effect of auctions was the massive improvement in consumer welfare, not just the more than $100 billion raised for the Treasury. Other examples of the FCC using the best ideas of its economists include:

  • Use of reverse auctions to allocate universal service funds to reduce costs.
  • Incentive auctions that reward broadcasters for transferring licenses to other uses – an idea initially proposed in a 2002 working paper by Evan Kwerel and John Williams at the FCC.
  • The move from rate of return to price cap regulation for long distance carriers.

More recently, Pai argued, the FCC has failed to use economics effectively. He identified four key problems:

  1. Economics is not systematically employed in policy decisions and often employed late in the process. The FCC has no guiding principles for conduct and use of economic analysis.
  2. Economists work in silos. They are divided up among bureaus. Economists should be able to work together on a wide variety of issues, as they do in the Federal Trade Commission’s Bureau of Economics, the Department of Justice Antitrust Division’s economic analysis unit, and the Securities and Exchange Commission’s Division of Economic and Risk Analysis.
  3. Benefit-cost analysis is not conducted well or often, and the FCC does not take Regulatory Flexibility Act analysis (which assesses effects of regulations on small entities) seriously. The FCC should use Office of Management and Budget guidance as its guide to doing good analysis, but OMB’s 2016 draft report on the benefits and costs of federal regulations shows that the FCC has estimated neither benefits nor costs of any of its major regulations issued in the past 10 years. Yet executive orders from multiple administrations demonstrate that “Serious cost-benefit analysis is a bipartisan tradition.”
  4. Poor use of data. The FCC probably collects a lot of data that’s unnecessary, at a paperwork cost of $800 million per year, not including opportunity costs of the private sector. But even useful data are not utilized well. For example, a few years ago the FCC stopped trying to determine whether the wireless market is effectively competitive even though it collects lots of data on the wireless market.

To remedy these problems, Pai announced an initiative to establish an Office of Economics and Data that would house the FCC’s economists and data analysts. An internal working group will be established to collect input within the FCC and from the public. He hopes to have the new office up and running by the end of the year. The purpose of this change is to give economists early input into the rulemaking process, better manage the FCC’s data resources, and conduct strategic research to help find solutions to “the next set of difficult issues.”

Can this initiative significantly improve the quality and use of economic analysis at the FCC?

There’s evidence that independent regulatory agencies are capable of making some decent improvements in their economic analysis when they are sufficiently motivated to do so. For example, the Securities and Exchange Commission’s authorizing statue contains language that requires benefit-cost analysis of regulations when the commission seeks to determine whether they are in the public interest. Between 2005 and 2011, the SEC lost several major court cases due to inadequate economic analysis.

In 2012, the commission’s general counsel and chief economist issued new economic analysis guidance that pledged to assess regulations according to the principal criteria identified in executive orders, guidance from the Office of Management and Budget, and independent research. In a recent study, I found that the economic analysis accompanying a sample of major SEC regulations issued after this guidance was measurably better than the analysis accompanying regulations issued prior to the new guidance. The SEC improved on all five aspects of economic analysis it identified as critical: assessment of the need for the regulation, assessment of the baseline outcomes that will likely occur in the absence of new regulation, identification of alternatives, and assessment of the benefits and costs of alternatives.

Unlike the SEC, the FCC faces no statutory benefit-cost analysis requirement for its regulations. Unlike the executive branch agencies, the FCC is under no executive order requiring economic analysis of regulations. Unlike the Federal Trade Commission in the early 1980s, the FCC faces little congressional pressure for abolition.

But Congress is considering legislation that would require all regulatory agencies to conduct economic analysis of major regulations and subject that analysis to limited judicial review. Proponents of executive branch regulatory review have always contended that the president has legal authority to extend the executive orders on regulatory impact analysis to cover independent agencies, and perhaps President Trump is audacious enough to try this. Thus, it appears Chairman Pai is trying to get the FCC out ahead of the curve.