My friend Tim Lee has an article at Vox that argues that interconnection is the new frontier on which the battle for the future of the Internet is being waged. I think the article doesn’t really consider how interconnection has worked in the last few years, and consequently, it makes a big deal out of something that is pretty harmless.

How the Internet used to work

The Internet is a network of networks. Your ISP is a network. It connects to the other ISPs and exchanges traffic with them. Since connections between ISPs are about equally valuable to each other, this often happens through “settlement-free peering,” in which networks exchange traffic on an unpriced basis. The arrangement is equally valuable to both partners.

Not every ISP connects directly to every other ISP. For example, a local ISP in California probably doesn’t connect directly to a local ISP in New York. If you’re an ISP that wants to be sure your customer can reach every other network on the Internet, you have to purchase “transit” services from a bigger or more specialized ISP. This would allow ISPs to transmit data along what used to be called “the backbone” of the Internet. Transit providers that exchange roughly equally valued traffic with other networks themselves have settlement-free peering arrangements with those networks.

How the Internet works now

A few things have changed in the last several years. One major change is that most major ISPs have very large, geographically-dispersed networks. For example, Comcast serves customers in 40 states, and other networks can peer with them in 18 different locations across the US. These 18 locations are connected to each other through very fast cables that Comcast owns. In other words, Comcast is not just a residential ISP anymore. They are part of what used to be called “the backbone,” although it no longer makes sense to call it that since there are so many big pipes that cross the country and so much traffic is transmitted directly through ISP interconnection.

Another thing that has changed is that content providers are increasingly delivering a lot of a) traffic-intensive and b) time-sensitive content across the Internet. This has created the incentive to use what are known as content-delivery networks (CDNs). CDNs are specialized ISPs that locate servers right on the edge of all terminating ISPs’ networks. There are a lot of CDNs—here is one list.

By locating on the edge of each consumer ISP, CDNs are able to deliver content to end users with very low latency and at very fast speeds. For this service, they charge money to their customers. However, they also have to pay consumer ISPs for access to their networks, because the traffic flow is all going in one direction and otherwise CDNs would be making money by using up resources on the consumer ISP’s network.

CDNs’ payments to consumer ISPs are also a matter of equity between the ISP’s customers. Let’s suppose that Vox hires Amazon CloudFront to serve traffic to Comcast customers (they do). If the 50 percent of Comcast customers who wanted to read Vox suddenly started using up so many network resources that Comcast and CloudFront needed to upgrade their connection, who should pay for the upgrade? The naïve answer is to say that Comcast should, because that is what customers are paying them for. But the efficient answer is that the 50 percent who want to access Vox should pay for it, and the 50 percent who don’t want to access it shouldn’t. By Comcast charging CloudFront to access the Comcast network, and CloudFront passing along those costs to Vox, and Vox passing along those costs to customers in the form of advertising, the resource costs of using the network are being paid by those who are using them and not by those who aren’t.

What happened with the Netflix/Comcast dust-up?

Netflix used multiple CDNs to serve its content to subscribers. For example, it used a CDN provided by Cogent to serve content to Comcast customers. Cogent ran out of capacity and refused to upgrade its link to Comcast. As a result, some of Comcast’s customers experienced a decline in quality of Netflix streaming. However, Comcast customers who accessed Netflix with an Apple TV, which is served by CDNs from Level 3 and Limelight, never had any problems. Cogent has had peering disputes in the past with many other networks.

To solve the congestion problem, Netflix and Comcast negotiated a direct interconnection. Instead of Netflix paying Cogent and Cogent paying Comcast, Netflix is now paying Comcast directly. They signed a multi-year deal that is reported to  reduce Netflix’s costs relative to what they would have paid through Cogent. Essentially, Netflix is vertically integrating into the CDN business. This makes sense. High-quality CDN service is essential to Netflix’s business; they can’t afford to experience the kind of incident that Cogent caused with Comcast. When a service is strategically important to your business, it’s often a good idea to vertically integrate.

It should be noted that what Comcast and Netflix negotiated was  not a “fast lane”—Comcast is prohibited from offering prioritized traffic as a condition of its merger with NBC/Universal.

What about Comcast’s market power?

I think that one of Tim’s hangups is that Comcast has a lot of local market power. There are lots of barriers to creating a competing local ISP in Comcast’s territories. Doesn’t this mean that Comcast will abuse its market power and try to gouge CDNs?

Let’s suppose that Comcast is a pure monopolist in a two-sided market. It’s already extracting the maximum amount of rent that it can on the consumer side. Now it turns to the upstream market and tries to extract rent. The problem with this is that it can only extract rents from upstream content producers insofar as it lowers the value of the rent it can collect from consumers. If customers have to pay higher Netflix bills, then they will be less willing to pay Comcast. The fact that the market is two-sided does not significantly increase the amount of monopoly rent that Comcast can collect.

Interconnection fees that are being paid to Comcast (and virtually all other major ISPs) have virtually nothing to do with Comcast’s market power and everything to do with the fact that the Internet has changed, both in structure and content. This is simply how the Internet works. I use CloudFront, the same CDN that Vox uses, to serve even a small site like my Bitcoin Volatility Index. CloudFront negotiates payments to Comcast and other ISPs on my and Vox’s behalf. There is nothing unseemly about Netflix making similar payments to Comcast, whether indirectly through Cogent or directly, nor is there anything about this arrangement that harms “the little guy” (like me!).

For more reading material on the Netflix/Comcast arrangement, I recommend Dan Rayburn’s posts here, here, and here. Interconnection is a very technical subject, and someone with very specialized expertise like Dan is invaluable in understanding this issue.

Some recent tech news provides insight into the trajectory of broadband and television markets. These stories also indicate a poor prognosis for a net neutrality. Political and ISP opposition to new rules aside (which is substantial), even net neutrality proponents point out that “neutrality” is difficult to define and even harder to implement. Now that the line between “Internet video” and “television” delivered via Internet Protocol (IP) is increasingly blurring, net neutrality goals are suffering from mission creep.

First, there was the announcement that Netflix, like many large content companies, was entering into a paid peering agreement with Comcast, prompting a complaint from Netflix CEO Reed Hastings who argued that ISPs have too much leverage in negotiating these interconnection deals.

Second, Comcast and Apple discussed a possible partnership whereby Comcast customers would receive prioritized access to Apple’s new video service. Apple’s TV offering would be a “managed service” exempt from net neutrality obligations.

Interconnection and managed services are generally not considered net neutrality issues. They are not “loopholes.” They were expressly exempted from the FCC’s 2010 (now-defunct) rules. However, net neutrality proponents are attempting to bring interconnection and managed services to the FCC’s attention as the FCC crafts new net neutrality rules. Net neutrality proponents have an uphill battle already, and the following trends won’t help.

1. Interconnection becomes less about traffic burden and more about leverage.

The ostensible reason that content companies like Netflix (or third parties like Cogent) pay ISPs for interconnection is because video content unloads a substantial amount of traffic onto ISPs’ last-mile networks.

Someone has to pay for network upgrades to handle the traffic. Typically, the parties seem to abide by the equity principle that whoever is sending the traffic–in this case, Netflix–should bear the costs via paid peering. That way, the increased expense is incurred by Netflix who can spread costs across its subscribers. If ISPs incurred the expense of upgrades, they’d have to spread costs over its subscriber base, but many of their subscribers are not Netflix users.

That principle doesn’t seem to hold for WatchESPN, which is owned by Disney. WatchESPN is an online service that provides live streams of ESPN television programming, like ESPN2 and ESPNU, to personal computers and also includes ESPN3, an online-only livestream of non-marquee sports. If a company has leverage in other markets, like Disney does in TV programming markets, I suspect ISPs can’t or won’t charge for interconnection. These interconnection deals are non-public but Disney probably doesn’t pay ISPs for transmitting WatchESPN traffic onto ISPs’ last-mile networks. The existence of a list of ESPN’s “Participating Providers” indicates that ISPs actually have to pay ESPN for the privilege of carrying WatchESPN content.

Netflix is different from WatchESPN in significant ways (it has substantially more traffic, for one). However, it is a popular service and seems to be flexing its leverage muscle with its Open Connect program, which provided higher-quality videos to participating ISPs. It’s plausible that someday video sources like Netflix will gain leverage, especially as broadband competition increases, and ISPs will have to pay content companies for traffic, rather than the reverse. When competitive leverage is the issue, antitrust agencies, not the FCC, have the appropriate tools to police business practices.

2. The rise of managed services in video.

Managed services include services ISPs provide to customers like VoIP and video-on-demand (VOD). They are on data streams that receive priority for guaranteed quality assurance since customers won’t tolerate a jittery phone call or movie stream. Crucially, managed services are carried on the same physical broadband network but are on separate data streams that don’t interfere with a customer’s Internet service.

The Apple-Comcast deal, if it comes to fruition, would be the first major video offering provided as a managed service. (Comcast has experimented with managed services affiliated with Xbox and TiVo.) Verizon is also a potential influential player since it just bought an Intel streaming TV service. Future plans are uncertain but Verizon might launch a TV product that it could sell outside of the FiOS footprint with a bundle of cable channels, live television, and live sports.

Net neutrality proponents decry managed services as exploiting a loophole in the net neutrality rules but it’s hardly a loophole. The FCC views managed services as a social good that ISPs should invest in. The FCC’s net neutrality advisory committee last August released a report and concluded that managed services provide “considerable” benefits to consumers. The report went on to articulate principles that resemble a safe harbor for ISPs contemplating managed services. Given this consensus view, I see no reason why the FCC would threaten managed services with new rules.

3. Uncertainty about what is “the Internet” and what is “television.”

Managed services and other developments are blurring the line between the Internet and television, which makes “neutrality” on the Internet harder to define and implement. We see similar tensions in phone service. Residential voice service is already largely carried via IP. According to FCC data, 2014 will likely be the year that more people subscribe to VoIP service than plain-old-telephone service. The IP Transition reveals the legal and practical tensions when technology advances make the FCC’s regulatory silos–“phone” and “Internet”–anachronistic.

Those same technology changes and legal ambiguity are carrying over into television. TV is also increasingly carried via IP and it’s unclear where “TV” ends and “Internet video” begins. This distinction matters because television is regulated heavily while Internet video is barely regulated at all. On one end of the spectrum you have video-on-demand from a cable operator. VOD is carried over a cable operator’s broadband lines but fits under the FCC’s cable service rules. On the other end of the spectrum you have Netflix and YouTube. Netflix and YouTube are online-only video services delivered via broadband but are definitely outside of cable rules.

In the gray zone between “TV” and “Internet video” lies several services and physical networks that are not entirely in either category. These services include WatchESPN and ESPN3, which are owned by a cable network and are included in traditional television negotiations but delivered via a broadband connection.

IPTV, also, is not entirely TV nor Internet video. AT&T’s UVerse, Verizon’s FiOS, and Google Fiber’s television product are pure or hybrid IPTV networks that “look” like cable or satellite TV to consumers but are not. AT&T, Verizon, and Google voluntarily assent to many, but not all, cable regulations even though their service occupies a legally ambiguous area.

Finally, on the horizon, are managed video and gaming services and “virtual MSOs” like Apple’s or Verizon’s video products. These are probably outside of traditional cable rules–like program access rules and broadcast carriage mandates–but there is still regulatory uncertainty.

Broadband and video markets are in a unique state of flux. New business models are slowly emerging and firms are attempting to figure out each other’s leverage. However, as phone and video move out of their traditional regulatory categories and converge with broadband services, companies face substantial regulatory compliance risks. In such an environment, more than ever, the FCC should proceed cautiously and give certainty to firms. In any case, I’m optimistic that experts’ predictions will be borne out: ex ante net neutrality rules are looking increasingly rigid and inappropriate for this ever-changing market environment.

Related Posts

1. Yes, Net Neutrality is a Dead Man Walking. We Already Have a Fast Lane.
2. Who Won the Net Neutrality Case?
3. If You’re Reliant on the Internet, You Loathe Net Neutrality.

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.

Last week, the House held a hearing about the so-called IP Transition. The IP Transition refers to the telephone industry practice of carrying all wire-based consumer services–voice, Internet, and television–via faster, better fiber networks and not on the traditional copper wires that had fewer capabilities. Most consumers have not and will not notice the change. The completed IP Transition, however, has enormous implications for how the FCC regulates. As one telecom watcher said, “What’s at stake? Everything in telecom policy.”

For 100 years or so, phone service has had a special place in regulatory law given its importance in connecting the public. Phone service was almost exclusively over copper wires, a service affectionately called “plain old telephone service” (POTS). AT&T became the government-approved POTS national monopolist in 1913 (which ended with the AT&T antitrust breakup in the 1980s). The deal was: AT&T got to be a protected monopolist while the government got to require AT&T provide various public benefits. The most significant of these is universal service–AT&T had to serve virtually every US household and charge reasonable rates even to remote (that is, expensive) customers.

To create more phone competitors to the Baby Bells–the phone companies spun off from the AT&T break-up in the 1980s–the Congress passed the 1996 Telecom Act and the FCC put burdens on the Baby Bells to allow new phone companies to lease the Baby Bells’ AT&T-created copper wires at regulated rates. The market changed in ways never envisioned in the 1990s however. Today, phone companies face competition–not from the new phone companies leasing the old monopoly infrastructure but from entirely different technologies. You can receive voice service from your cable company (“digital voice”), your “phone” company (POTS), your wireless company, and even Internet-based providers like Vonage and Skype. Increasingly, households are leaving POTS behind in favor of voice service from cable or wireless providers. Yet POTS providers–like Verizon and AT&T (which also offer wireless service)–must abide by monopoly-era regulations that their cable and wireless competitors–Comcast, Sprint, and others–don’t have to abide by.

Understanding the significance of the IP Transition requires (unfortunately) knowing a little bit about Title I and Title II of the Communications Act. “Telecommunications services,” which are the phone companies with copper networks, are heavily regulated by the FCC under Title II. On the other hand, “information services,” which includes Internet service, are lightly regulated under Title I. This division made some sense in the 1990s. It is increasingly under stress now because burdened “telecommunications” companies like AT&T and Verizon are offering “information services” like Internet via DSL, FiOS, and U-Verse. Conversely, lightly-regulated “information services” companies like Comcast, Charter, and Time-Warner Cable are entering the regulated telephone market but face few of the regulatory burdens.

Which brings us to the IP Transition. As Title II phone companies replace their copper wires with fiber and deploy broadband networks to compete with cable companies, their customers’ phone service is being carried via IP packets. Functionally, these new networks act like a heavily-regulated Title II service since they carry voice, but they also act like the Title I broadband networks that cable providers built. So should these new fiber networks be burdened like Title II services or deregulated like Title I services? Or is it possible to achieve some middle ground using existing law? Those are the questions before the FCC and policymakers. Billions of dollars of investment will be accelerated or slowed and many firms will live or die depending on how the FCC and Congress act. Stay tuned.

There are few things more likely to get constituents to call their representative than TV programming blackouts, and the increase in broadcasting disruptions arising from licensing disputes in recent years means Congress may be forced to once again fix television and copyright laws. As Jerry Brito explains at Reason, the current standoff between CBS and Time Warner Cable is the result of bad regulations, which contribute to more frequent broadcaster blackouts. While each type of TV distributor (cable, satellite, broadcasters, telcos) is both disadvantaged and advantaged through regulation, broadcasters are particularly favored. As the US Copyright Office has said, the rule at issue in CBS-TWC is “part of a thicket of communications law requirements aimed at protecting and supporting the broadcast industry.”

But as we approach a damaging tipping point of rising programming costs and blackouts, Congress’ potential rescuer–Aereo–appears on the horizon, possibly buying more time before a major regulatory rewrite. Aereo, for the uninitiated, is a small online company that sets up tiny antennas in certain cities to capture broadcast television station signals–like CBS, NBC, ABC, Fox, the CW, and Univision–and streams those signals online to paying customers, who can watch live or record the local signals captured by their own “rented” Aereo antenna. Broadcasters hate this because the service deprives them of lucrative retransmission fees and unsuccessfully sued to get Aereo to cease operations.

Let’s back up. Broadcast television is–as my colleague Tom Hazlett says–the “killer app of 1952.” It’s an old technology featuring a few dozen channels that hasn’t fared well with the rise of subscription television offering hundreds of channels–Comcast, Dish, U-Verse, and others. Only about 10% to 15% of households rely on rabbit ears antennas to receive free broadcast TV, while the rest have a subscription.

I’m doubtful Congress will step in and make online distributors like Aereo pay for retransmission. While the laws tilt in broadcasters’ favor, Aereo gives cable and satellite companies additional leverage since–if they have a protracted fight with a broadcaster–they can direct their customers to Aereo. TWC is, in fact, doing this in its current dispute with CBS. Since customers have an online option, no one needs to miss NFL preseason football or the latest How I Met Your Mother. Aereo is not an ideal solution, but it gives a cable or satellite provider another bargaining weapon.

For several reasons, I think Congress may allow Aereo to proceed. First, with the variety of print, online, and television options consumers face today, broadcast programming is no longer a sacred cow. Congress, the FCC, and the tech and telecom industries are anxious to get more broadcasters off the air to make room for spectrum-hungry mobile technologies. That is the precise purpose of the pending incentive auctions. Broadcasters are a powerful group with compelling arguments for the status quo–they provide high-demand local news, sports, and weather, for instance–but many people are beginning to realistically imagine life without them.

Second, the primary political justification for protecting local broadcasters–local ownership and diversity–has “virtually vanished” because of industry consolidation in the 1990s and 2000s, as Harold Feld from Public Knowledge notes. It was easier in the past to defend these regulatory carve-outs for broadcasters when locally-owned operations were the beneficiaries, but today many broadcasters are owned by large media companies.

Finally, in the dynamic video marketplace, Congress may be hesitant to impose more regulations on new video technologies. Protecting a 1950s technology by enforcing 1990s laws on today’s Internet services makes little sense. Already, television laws passed in the 1990s look terribly dated and give Congress and the FCC headaches. Rewriting television and copyright laws is a huge task involving many powerful industries seeking protection from disruptive law changes. With the House and Senate controlled by different parties, this makes a grand compromise even less likely.

So Aereo and other antenna rental services represent some relief for regulators since it gives cable and satellite providers a little more leverage. The service is only in a few cities but is quickly expanding. If consumers adopt the service during future disputes, a semblance of equilibrium may return when subscription services bargain with broadcasters. For that reason, Congress may want to sit back and see how it plays out.

Gina Keating, author of Netflixed: The Epic Battle for America’s Eyeballs, discusses the startup of Netflix and their competition with Blockbuster.

Keating begins with the history of the company and their innovative improvements to the movie rental experience. She discusses their use of new technology and marketing strategies in DVD rental, which inspired Blockbuster to adapt to the changing market.

Keating goes on to describe Netflix’s transition to internet streaming and Blockbuster’s attempts to retain their market share.

Download

Related Links

• Netflixed: The Epic Battle for America’s Eyeballs, Keating
• Gina Keating’s New Book about the Rise of Netflix, Babayan
• ‘Netflixed,’ Book by Gina Keating, Describes CEO Reed Hastings As a Nasty Boss’ Liedtke

Christopher S. Yoo, the John H. Chestnut Professor of Law, Communication, and Computer & Information Science at the University of Pennsylvania and author of the new book, The Dynamic Internet: How Technology, Users, and Businesses are Transforming the Network, explains that the Internet that we knew in its early days—one with a client-server approach, with a small number of expert users, and a limited set of applications and business cases—has radically changed, and so it may be that the architecture underlying the internet may as well.

According to Yoo, the internet we use today barely resembles the original Defense Department and academic network from which it emerged. The applications that dominated the early Internet—e-mail and web browsing—have been joined by new applications such as video and cloud computing, which place much greater demands on the network. Wireless broadband and fiber optics have emerged as important alternatives to transmission services provided via legacy telephone and cable television systems, and mobile devices are replacing personal computers as the dominant means for accessing the Internet. At the same time, the networks comprising the Internet are interconnecting through a wider variety of locations and economic terms than ever before.

These changes are placing pressure on the Internet’s architecture to evolve in response, Yoo says. The Internet is becoming less standardized, more subject to formal governance, and more reliant on intelligence located in the core of the network. At the same time, Internet pricing is becoming more complex, intermediaries are playing increasingly important roles, and the maturation of the industry is causing the nature of competition to change. Moreover, the total convergence of all forms of communications into a single network predicted by many observers may turn out to be something of a myth. Policymakers, Yoo says, should allow room for this natural evolution of the network to take place.

Download

Related Links

• The Dynamic Internet: How Technology, Users, and Businesses are Transforming the Network, Yoo
• The Changing Patterns of Internet Usage, Yoo
• Network Neutrality and the Economics of Congestion, Yoo
• Cloud Computing: Architectural and Policy Implications, Yoo

Matt Yglesias today responded with a post of his own to a NYT article about sports channels and cable pricing by Brian Stelter that Yglesias believed had “bad analysis.” I’m here to defend Stelter a little bit because I think Yglesias was too harsh and that Yglesias erred in his own post about the nature of cable bundling. Yglesias’ posts on cable bundling are good, and especially valuable because his Slate and ThinkProgress audiences are not the most receptive to economic justifications for perceived unfair corporate pricing schemes. In part due to him I suspect, you rarely hear econ and business bloggers calling for a la carte pricing of cable channels.

And Yglesias is certainly right that you can’t really complain about the price of your cable package, which includes the few channels you watch plus the sports channels you don’t watch, because you obviously value the channels more than the price you pay per month, even if the sports are a “waste.” He falters when he says

So since those channels are worth $60 to you, even if unbundling happens your cable provider is going to find a way to charge you approximately $60 for them. Because at the end of the day, you’re paying your cable provider for access to the channels you do watch—not for access to the channels you don’t watch. The channels you don’t watch are just there. If the channels you do watch are worth $60 to you, then $60 is what you’ll pay for them.

It would be an amazing price discrimination scheme if it were true cable operators can figure out how to charge each subscriber the approximate price the subscriber values his favorite channels. Cable companies don’t currently have that ability. Even a la carte distributors, like Amazon Prime with their video offerings, don’t charge you exactly what you value TV shows and movies at. The efficiency of bundling cable channels arises not because cable companies are pricing everyone their reservation price, as Yglesias suggests. Bundling is efficient because in a high fixed-cost industry, like cable, cable channel bundles provide cost savings that outweigh the costs of providing “wasted” channels consumers don’t watch.

I think the main point of Stelter’s article is right and Yglesias is incorrect. It’s conceivable that most customers would actually see sustained lower cable prices if sports channels were someday offered as premium channels, like Showtime and HBO. If Stelter is faulted for anything, it’s that he mentioned the phrase “a la carte,” since it seems like his sources only alluded to a partial breakup of the current bundle–making sports a premium offering–not a wholesale a la carte offering. Stelter quoted a former DOJ antitrust lawyer and anonymous cable executives who say that increasing sports channel prices may make the cable bundle so pricey that cable operators will be forced to break up the bundle, and I see no reason to question their assessments.

I’ll attempt to illustrate what the cable executives are trying to avoid. Bundling components like cable channels lowers costs for providers. If you imagine an a la carte world, it’s plain the costs escalate. Instead of everyone picking from a menu of 3 or 4 bundles from a cable provider, every single subscriber household would have a different customized selection. Cable companies would have to ensure everyone is receiving their requested channels, frequently make corrections and updates, and incur other costs.

Not to mention, a la carte would eliminate many channels currently in existence because there is a cross-subsidy business model in place that makes low-demand channels available in the first place. (A la carte would especially harm religious, African-American, and other niche programming. Currently, these niche content creators have to market their channels only to a few cable and satellite companies for carriage. With a la carte, they would have to engage in nationwide and expensive marketing campaigns to all their likely customers, which is why these smaller firms typically oppose a la carte.) A la carte, then, is costly to both cable and content providers. Offering only a few bundles eliminates many costs.

However, when the price of the bundle increases with more expensive sports programming, as the Stelter piece describes, you lose customers because the bundle has become too expensive. Eventually, it becomes more cost-effective to spin off some sports channels as premium channels, charge those sports customers more, and offer a lower-priced package to everyone else and gain customers. And I suspect sports viewers have relatively inelastic demand (nothing ruins my fall weekend like a Bears black-out on the East Coast), so the losses from a sports unbundling could be minimal.

If there’s a lesson, it’s that this all goes back to Coase and his tautological but helpful theory of the firm. We know where efficient firm boundaries are based on where firm boundaries are. That is, the current cable packages could be disintegrated if it’s too costly to maintain them. In a dynamic market like cable, it may one day be efficient to break up the current bundle, charge everyone less, and make some sports channels premium channels.

By Geoffrey Manne & Berin Szoka

As Democrats insist that income taxes on the 1% must go up in the name of fairness, one Democratic Senator wants to make sure that the 1% of heaviest Internet users pay the same price as the rest of us. It’s ironic how confused social justice gets when the Internet’s involved.

Senator Ron Wyden is beloved by defenders of Internet freedom, most notably for blocking the Protect IP bill—sister to the more infamous SOPA—in the Senate. He’s widely celebrated as one of the most tech-savvy members of Congress. But his latest bill, the “Data Cap Integrity Act,” is a bizarre, reverse-Robin Hood form of price control for broadband. It should offend those who defend Internet freedom just as much as SOPA did.

Wyden worries that “data caps” will discourage Internet use and allow “Internet providers to extract monopoly rents,” quoting a New York Times editorial from July that stirred up a tempest in a teapot. But his fears are straw men, based on four false premises.

First, US ISPs aren’t “capping” anyone’s broadband; they’re experimenting with usage-based pricing—service tiers. If you want more than the basic tier, your usage isn’t capped: you can always pay more for more bandwidth. But few users will actually exceed that basic tier. For example, Comcast’s basic tier, 300 GB/month, is so generous that 98.5% of users will not exceed it. That’s enough for 130 hours of HD video each month (two full-length movies a day) or between 300 and 1000 hours of standard (compressed) video streaming.

Second, Wyden sets up a false dichotomy: Caps (or tiers, more accurately) are, according to Wyden, “appropriate if they are carefully constructed to manage network congestion,” but apparently for Wyden the only alternative explanation for usage-based pricing is extraction of monopoly rents. This simply isn’t the case, and propagating that fallacy risks chilling investment in network infrastructure. In fact, usage-based pricing allows networks to charge heavy users more, thereby recovering more costs and actually reducing prices for the majority of us who don’t need more bandwidth than the basic tier permits—and whose usage is effectively subsidized by those few who do. Unfortunately, Wyden’s bill wouldn’t allow pricing structures based on cost recovery—only network congestion. So, for example, an ISP might be allowed to price usage during times of peak congestion, but couldn’t simply offer a lower price for the basic tier to light users.

That’s nuts—from the perspective of social justice as well as basic economic rationality. Even as the FCC was issuing its famous Net Neutrality regulations, the agency rejected proposals to ban usage-based pricing, explaining:

prohibiting tiered or usage-based pricing and requiring all subscribers to pay the same amount for broadband service, regardless of the performance or usage of the service, would force lighter end users of the network to subsidize heavier end users. It would also foreclose practices that may appropriately align incentives to encourage efficient use of networks.

It is unclear why Senator Wyden thinks the FCC—no friend of broadband “monopolists”—has this wrong.

Third, charging heavy users more isn’t just more equitable, it’s actually a solution to the very problem Wyden worries about: ensuring that ISPs have an incentive to encourage Internet use. Tiered pricing means they actually benefit from heavy use. So rather than try to slow use or discriminate against bandwidth-heavy applications—which is how the Net Neutrality fight started—ISPs will continue to build out faster networks.

Now, it’s certainly possible that, if the basic tier were set low enough or if additional data were expensive enough, cable companies could discourage their subscribers from canceling a cable subscription and switching to a competing service like Netflix. But it’s hard to see how a 300 GB basic tier deters anyone, especially when users can buy additional blocks of 50 GB for just $10/month—enough for nearly two more hours a day of streamed video. If there actually were a problem here, antitrust law could address it far better than blunt pricing restrictions. Indeed, such an investigation is already ongoing.

Finally, Wyden would require that broadband providers count content download from them against your usage—fearing that a “discriminatory cap” would harm competing video providers. But if the “cap” is high enough, who cares? Under antitrust law, such “discrimination” is illegal only if it harms consumers—and it’s hard to see how consumers suffer from being able to download more video. Would they really be better off if every hour of video they streamed from their cable company meant an hour less they could stream from Netflix? That’s what Wyden’s bill would require.

The recent kerfuffle over Comcast’s decision in October to make some of its television (pay per view) content available through Xbox without counting against Internet usage limits brought this point into stark relief. While activists like Public Knowledge decried the decision for the same reasons Wyden does now, they missed the fact that by removing some of its content from usage limits Comcast was actually freeing up users to access more content at lower prices.

If Wyden’s concern is that usage-based pricing would allow ISPs to extract “monopoly profits” from users who bump up against tiers, then “preferencing” some of their own content will reduce, not increase, that risk: Users would be able to access, say, bandwidth-heavy video content just as they do television content now—without it counting against Internet usage limits. That this might “discriminate” against other Internet-based content providers does not mean that it harms consumers—quite the opposite, in fact. Again, to the extent that it might, antitrust rules are more than sufficient to discourage such practices in the first place or punish them if they arise— without restricting firms’ ability to price their content and manage their networks to ensure a reasonable return on their investments.

Pricing structures for broadband are still evolving. Just this year, Comcast moved from its original 250 GB cap—which it never enforced—to today’s 300 GB basic tier, and other broadband providers will likely follow suit. Those plans will probably continue to evolve towards pricing structures that minimize network congestion—like offering periods of unmetered use in the middle of the night, when network use plummets. That would go a long way to allaying concerns about the effect of tiered plans on competition, since Netflix could send your favorite shows and the next movies in your queue to the device of your choice while you sleep. But pricing structures also have to allow sensible, fair recovery of costs—which the Wyden bill would simply ban.

So much for not blithely regulating the Internet, Senator!

[Cross-posted at Truth on the Market]

Google’s first lesson for building affordable, one Gbps fiber networks with private capital is crystal clear: If government wants private companies to build ultra high-speed networks, it should start by waiving regulations, fees, and bureaucracy.

Executive Summary

For three years now the Obama Administration and the Federal Communications Commission (FCC) have been pushing for national broadband connectivity as a way to strengthen our economy, spur innovation, and create new jobs across the country. They know that America requires more private investment to achieve their vision. But, despite their good intentions, their policies haven’t encouraged substantial private investment in communications infrastructure. That’s why the launch of Google Fiber is so critical to policymakers who are seeking to promote investment in next generation networks.

The Google Fiber deployment offers policymakers a rare opportunity to examine policies that successfully spurred new investment in America’s broadband infrastructure. Google’s intent was to “learn how to bring faster and better broadband access to more people.” Over the two years it planned, developed, and built its ultra high-speed fiber network, Google learned a number of valuable lessons for broadband deployment – lessons that policymakers can apply across America to meet our national broadband goals.

To my surprise, however, the policy response to the Google Fiber launch has been tepid. After reviewing Google’s deployment plans, I expected to hear the usual chorus of Rage Against the ISP from Public Knowledge, Free Press, and others from the left-of-center, so-called “public interest” community (PIC) who seek regulation of the Internet as a public utility. Instead, they responded to the launch with deafening silence.

Maybe they were stunned into silence. Google’s deployment is a  real-world rejection of the public interest community’s regulatory agenda more powerful than any hypothetical. Google is building fiber in Kansas City because its officials were willing to waive regulatory barriers to entry that have discouraged broadband deployments in other cities. Google’s first lesson for building affordable, one Gbps fiber networks with private capital is crystal clear: If government wants private companies to build ultra high-speed networks, it should start by waiving regulations, fees, and bureaucracy .

That’s the policy template that worked for the residents of Kansas City. It could work for the rest of America too, but only if all broadband providers receive the same treatment. When private companies compete on a level playing field, consumers always win. When government regulations mandate a particular business model or favor a particular competitor, bureaucracy is the only winner – everyone else loses.

Maybe the silence of PIC advocates indicates they’ve had a change of heart. Although PIC has violently opposed the efforts of other broadband providers to eliminate similar regulatory barriers in the past, perhaps the success of Google Fiber has persuaded them that deregulatory policies fairly applied to all competitors are essential to meeting our nation’s shared goal of national broadband connectivity.

Google’s deployment certainly indicates the PIC would benefit from a change in their approach to policy.  The Google Fiber business model contradicts virtually every element of the PIC’s current regulatory agenda .

• PIC says restrictive regulations don’t discourage new investment. Google says it passed over proposals by cities in California due to restrictive regulations.
• PIC says the government should limit the delivery of “specialized” IP-based video services by network operators. Google says specialized video services support fiber deployment.
• PIC says that the provision of subsidized devices by network operators harms innovation and term contracts harm consumers. Google says bundling its own, vertically integrated computing devices with its fiber network services in exchange for a two-year contract commitment is part of the “Full Google Experience.”
• PIC says the “open access” model is “easy” and viable even in competitive markets. Google says it abandoned its commitment to open access because it doesn’t think anyone else can deliver service as well as it can.
• PIC says the “end-to-end” regulatory model, which severs all business relationships between “core” network infrastructure and “edge” elements of the network, promotes innovation and investment. Google says we should explore alternatives to the “end-to-end” model, including vertical integration among network operators and edge providers.

Every level of our government could benefit from a change in its policy approach as well. If we are serious about achieving affordable, ultra high-speed broadband connectivity for every American, we must question the traditional assumptions underlying our legacy regulatory approach.  Google Fiber demonstrates that the problem isn’t deregulation, a lack of competition, or an unwillingness to invest in American infrastructure. It’s the imposition of burdensome bureaucracy, unnecessary costs, and political favoritism at all levels of government . Eliminating these regulatory barriers would drive investment in America’s infrastructure, spur innovation, create jobs, and grow the economy while helping to meet President Obama’s goal of connecting every American to broadband. Google has shown the way. Is government willing to let other competitors in the marketplace follow the same path?

Introduction

The story begins two years ago, when Google announced its plans to build experimental, ultra high-speed broadband networks and operate them on an “open access” basis. Over 1,100 communities asked Google to build a network in their area, including several “desperate cities” willing to change their names and even swim with sharks. Google ultimately chose Kansas City as its broadband mecca.

So far, people in this prosperous city on the plains are embracing Google Fiber with enthusiasm. A little over a week after Google offered designated areas an opportunity to request service, 46 neighborhoods had qualified. Analysts estimate Google has already achieved approximately 4 percent market penetration. Google’s bet on an all-IP, fiber network appears poised for early success in Kansas City, which is something every tech geek should be pleased to see.

Like most new enterprises, it’s unclear whether Google Fiber will enjoy financial success in the long term. Many analysts are skeptical that Google’s business model can be replicated on a larger scale. Others believe it will deliver a “knock-out punch” to existing cable and telecom operators. Though I have my doubts, I’m content to let the market determine Google Fiber’s financial fate.

I’m more intrigued by the public policy implications of the Google Fiber business plan. Am I the only one who is baffled by the unusual response to Google’s announcement? After reviewing Google Fiber’s terms of service, I expected to hear the usual chorus of Rage Against the ISP from Public Knowledge, Free Press, and other PIC advocates who believe the Internet should be a public utility. I also expected the technology press would be critical of several elements of Google’s service. I was surprised on both counts.

Many in the tech press are offering gushing praise for Google’s new service. BGR says Google Fiber is a “ridiculously awesome value” for “lucky” Kansas City residents. CNET suggests that the Google Fiber business model offers the “rest of the broadband industry” a template for successful deployment of one Gbps networks: “Google is showing the cable companies and telecommunications providers how a broadband network should be built.”

The notion that other ISPs should mimic Google Fiber may explain why PIC advocates have been so deafeningly silent on the Kansas City deployment. The PIC narrative says that “the evil folks at cable companies and telecoms” are sabotaging fiber deployment in order to maintain their legacy businesses. Google doesn’t have a legacy network business, and its informal corporate motto is “don’t be evil.” So, according to the PIC narrative, Google’s business model shouldn’t look anything like those implemented by existing ISPs.

It turns out that Google’s business model validates a host of existing industry practices that PIC advocates seek to outlaw or regulate, and demonstrates that existing regulations are the biggest factor inhibiting the deployment of all-IP fiber networks by other service providers. Ironically, to the extent Google’s business model does differ significantly from those typical of other ISPs, it relies on an industry structure – vertical integration – PIC advocates vociferously oppose. As the following analysis of the “lessons learned” from Google Fiber demonstrates in detail, Google’s model contradicts virtually every element of the PIC regulatory agenda.

First Lesson Learned: Deregulation promotes private investment

The first lesson Google learned from its fiber project:  If government wants private companies to build ultra high-speed networks, it should start by waiving regulations, fees, and bureaucracy.

It’s no accident that Google chose to deploy its broadband network in a city subject to deregulatory statewide video franchising laws (in Kansas and Missouri). (Federal law prohibits the provision of video programming services without a “franchise”.)

Franchises were historically granted by local county or municipal governments who gave virtual monopolies to cable providers in exchange for “universal service” commitments (i.e., commitments to build the cable network to every neighborhood irrespective of cost or demand). Although federal law has prohibited monopoly video franchises since 1992, when potential new entrants asked permission to build competitive cable networks, local franchising authorities often stonewalled their applications or demanded unreasonable concessions. When new entrants challenged the legality of these tactics, PIC advocates derided the potential competitors for attempting to enter the market.

In 2006, the FCC adopted an order prohibiting local franchising authorities from unreasonably refusing to award competitive franchises for video service. The FCC found that many local franchising regulations were “unreasonable barriers to entry” in the video market and were “discourage[ing] investment in the fiber-based infrastructure necessary for the provision of advanced broadband services.” The unreasonable regulations included excessive build-out mandates, the inclusion of non-video revenue in franchise “fees” (including advertising fees), and demands unrelated to the provision of video service. The FCC has since reported that 20 states have enacted statewide video franchising laws to streamline the delivery of video service.

PIC advocates opposed this deregulatory decision when it was made and continue to oppose it. When the FCC announced its decision, Harold Feld, then Senior Vice President of the Media Access Project, said preempting local franchise regulation would “deprive the public of the best way to guarantee that cable providers and competitors meet the needs of their local communities.” When states began implementing the decision through statewide franchising laws, Sascha Meinrath, Director of the New America Foundation’s Open Technology Institute, attacked such legislation for providing build-out waivers even when developments are “inaccessible using reasonable technical solutions.” Despite evidence of significant competitive entry in the video market since the FCC preempted unreasonable local franchising regulations, many PIC advocates still believe deregulation has had no positive impact.

This brief history of video franchising isn’t merely academic. Absent deregulation of local franchising in Kansas City, Google Fiber’s business model wouldn’t have been possible. When Time Warner Cable became the principal video service provider in the Kansas City market decades ago, its franchise required that it build its network to virtually every neighborhood, including areas that pose geographic challenges and neighborhoods where residents are less likely to subscribe. A monopolist can fund (i.e., cross-subsidize) uneconomic construction by raising prices in other neighborhoods. In a competitive market, however, cross-subsidization mandates typically inhibit entry. For example, New York City delayed Verizon’s FiOS deployment for nearly a year while the city negotiated a requirement that Verizon build its network in all five boroughs of the city.

In Kansas City, Google doesn’t have a build-out requirement. It will offer service only to neighborhoods that demonstrate their potential to cover the costs of construction. Google divided Kansas City into a number of small neighborhoods and then cherry picked the areas where it would be willing to offer service. It then set preregistration goals for these neighborhoods based on their size, density, and ease of construction. Eligible neighborhoods have six weeks to meet their preregistration goals. If they don’t, Google won’t construct its network in that area. In neighborhoods that are more expensive to build,Google says it wants to make sure that enough residents want its service before committing capital to network construction. There is “no need to dispatch crews and rip up asphalt in pursuit of a handful of potential customers when Google can laser in on the most eager concentrations of subscribers.”

Although it wasn’t required to obtain a municipal franchise, Google received stunning regulatory concessions and incentives from local governments, including free access to virtually everything the city owns or controls: rights of way, central office space, power, interconnections with anchor institutions, marketing and direct mail, and office space for Google employees. City officials also expedited the permitting process and assigned staff specifically to help Google. One county even offered to allow Google to hang its wires on parts of utility poles – for free – that are usually off-limits to communications companies.

The key element for Google was that Kansas City officials promised to stay out of the way. When Google’s vice president of access services, Milo Medin, was asked why Google chose Kansas City for its fiber deployment, he said, “We wanted to find a location where we could build quickly and efficiently.” In his testimony before Congress last year, Medin emphasized that “regulations – at the federal, state, and local levels – can be central factors in company decisions on investment and innovation.” Based on his experience with Google Fiber, he concluded that government regulation “often results in unreasonable fees, anti-investment terms and conditions, and long and unpredictable build-out timeframes” that “increase the cost and slow the pace of broadband network investment and deployment.”

Second Lesson Learned: Specialized Video Services Support Fiber Deployment

The second lesson Google learned from its fiber project:  Specialized video services help support the costs of fiber deployment.

In its order preempting unreasonable local franchise regulations, the FCC found that broadband deployment and video entry are “inextricably linked,” because broadband providers require the revenue from video services to offset the costs of fiber deployment. The FCC affirmed this finding in its 2010 net neutrality order, which exempted “specialized services”, including Internet Protocol-based video offerings, from net neutrality regulations. The FCC recognized that specialized video services “may drive additional private investment in broadband networks and provide end users valued services” that support the open Internet.

The Google Fiber business model indicates the FCC was right – specialized video services do help support the costs of fiber deployment. When it initially announced its fiber project, Google did not intend to offer specialized video services at all. Little more than a year ago, Google remained focused only on Internet connectivity and still had no plans to provide video services; though it said it wanted to “hear from Kansas City residents what additional services they would find most valuable.” By the time it launched the project, Google had decided to center its highest subscription rate on a new, specialized video service (Google Fiber TV) that Google says is “designed for how you watch today and how you’ll watch tomorrow.” It appears that, after listening to Kansas City residents, Google learned that many consumers want their ISP to offer specialized video services.

PIC advocates generally oppose any form of specialized service based on IP, especially video services. Less than a week after Google launched its own, IP-based video service, Public Knowledge filed a petition at the FCC arguing that Comcast’s specialized Xfinity video service is discriminatory and illegal. Although the petition is based on conditions imposed on the Comcast/NBC-Universal merger, Public Knowledge says the service may violate the FCC’s net neutrality rules as well.

Third Lesson Learned: Equipment Subsidies Offer Benefits to Consumers

The third lesson Google learned from its fiber project:  Equipment subsidies coupled with term contracts offer benefits to consumers.

The Google Fiber business model also embraces the standard communications industry practice of offering consumers subsidized equipment in exchange for term contracts. Consumers who opt for “The Full Google Experience” will get four devices, including a set-top box, a network box, a storage box, and a new tablet for use as a “remote control”, subject to a two-year contract.

Bundling branded set-top boxes and other devices is standard practice in the video industry, but Google’s approach is new in at least one respect: The tablet is a Google Nexus 7 running Google’s Android OS, a powerful computing device that is capable of far more than controlling a television set. Google is also offering the option of buying a “Chromebook” laptop for as little as $299 – slightly less than the amount of the “construction fee” Google is waiving for premium customers. By bundling its own, vertically integrated computing devices with its premium service, Google can leverage its fiber network to gain market share from the makers of other devices, software, and operating systems, including Apple and Microsoft.

Though I think it’s a savvy move that could have a long-lasting impact on the communications marketplace, I’m surprised that the PIC has said nothing about this new wrinkle on device bundling. On March 30, 2012, Public Knowledge released a paper asserting that subsidized video devices harm innovation. The paper says innovation suffers because it’s easier to attach devices provided by the video service provider, and most consumers “just find it simpler to settle for whatever device their cable company offers.” It also contends that the subsidized device model is unusual, and notes “no one rents their computer from their ISP.” I suppose that’s still true. Google isn’t renting the Nexus 7 – it’s giving it away (and subsidizing the Chromebook by waiving the construction fee).

Fourth Lesson Learned: Open Access Isn’t Viable in Competitive Markets

The fourth lesson Google learned from its fiber project:  Open access isn’t a viable business model in competitive markets.

When Google originally announced its intention to build its fiber network and operate it on an “open access” basis, Susan Crawford said we would “learn how easy it is” to allow competitive access to fiber networks and how little such networks cost. What we actually learned from Google Fiber is that “open access” isn’t a viable business model in a competitive market. Once Google analyzed how fiber networks are financed, built, and operated, it abandoned its earlier commitment to open access and decided not to allow other ISPs on its network. According to Google Fiber project manager Kevin Lo, “We don’t think anybody else can deliver a gig the way we can.” Translation: Open access doesn’t make financial sense in a competitive environment.

It’s still possible that Google could open its network to other ISPs in the future, but I suspect that in short term, Google’s reversal will dampen, if not extinguish, the PIC dream of open access networks in competitive markets.

Fifth Lesson Learned: Vertical Integration Offers an Alternative to the End-to-End Principle

The fifth lesson Google learned from its fiber project:  Vertical integration among “edge” and “infrastructure” providers offers an alternative to the “end-to-end” principle.

The elements of Google Fiber’s business model discussed so far affirm existing industry practice (and free market regulatory theory). In one respect, however, the Google model differs significantly from industry practice. Google is offering free Internet service, albeit limited to 5 Mbps, for seven years to customers who pay the “construction fee.” That speed is just fast enough to support Google’s primary advertising business, including the delivery of video advertisements, but just slow enough to avoid cannibalizing Google Fiber’s premium Internet and video services.

Even so, some analysts predict Google will lose money on its free service. So why would Google offer it?  Because Google’s “core advertising business is so powerful, dominant and profitable that it can subsidize almost everything else the company does, using Free to get customers in new markets.” Chris Anderson, the author of “FREE: The Future of a Radical Price,” has asked whether that’s fair when Google’s competitors don’t have a similar golden goose. Google’s response: “If a company chooses to use its profits from one product to help provide another product to consumers at low cost, that’s generally a good thing” (in the absence of tying arrangements).

On its own, Google’s willingness to subsidize broadband access to promote its advertising services might be unremarkable. But, when combined with its provision of a “free” Nexus 7 table and a subsidized Chromebook, it suggests that Google is willing to explore alternatives to the pure end-to-end Internet religion (practiced by PIC advocates and tech evangelists) in favor of a vertically integrated approach. The end-to-end purist believes core network infrastructure should be economically severed from the “edge” of the network, i.e., that Internet access should be offered entirely separately from the services, devices, applications that use network infrastructure. Strict adherence to this principle would prohibit the subsidization of network architecture by profits derived from services (e.g., specialized video and advertising), devices, and applications. Google was thought to be an end-to-end purist, but, assuming that were once true, it appears the company’s views have shifted.

What if large Internet “edge” companies – Google, Apple, and Microsoft – were vertically integrated with the large infrastructure providers – Comcast, Verizon, and AT&T? If the government allowed that to happen, it’s possible that the enormous profits generated by the edge companies (Apple is one of the most valuable companies in the world) would be used to rapidly drive ultra high-speed network deployment rather than fill cash coffers in offshore banks. Google is sitting on $43 billion overseas. Apple has more than $81 billion and Microsoft has $54 billion. By comparison, Verizon currently has about $10 billion in cash, which is less than one quarter of Google’s overseas holdings.

The reality of the Internet economy is that the “edge” generates more revenue than the “core”. In 2011,Comcast produced $8.7 billion in revenue from the sale of high-speed Internet access service. Google produced $37.9 billion in revenue, 96 percent of which was derived from advertising services.

While Google and other edge companies are content to let massive profits sit overseas, America’s network owners are reinvesting their capital in America. AT&T and Verizon ranked first and second, respectively, among U.S.-based companies by their U.S. capital spending in 2011, with Comcast coming in eighth. Google and Apple were ranked 24th and 25th, respectively, with approximately $2 billion in U.S. capital spending each. In 2011, AT&T alone invested ten times that much capital ($20.1 billion) in America. If companies like Comcast, Verizon, and AT&T had access to edge company capital, it could create a new broadband boom.

I’m not sure the edge companies are interested in a vertical integration model, and I’m reasonably certain the current administration wouldn’t allow it. But, now that Google has dipped its toes in the water, it might be a discussion worth having.

I’ve written several articles in the last few weeks critical of the dangerously unprincipled turn at the Federal Communications Commission toward a quixotic, political agenda.  But as I reflect more broadly on the agency’s behavior over the last few years, I find something deeper and even more disturbing is at work.  The agency’s unreconstructed view of communications, embedded deep in the Communications Act and codified in every one of hundreds of color changes on the spectrum map, has become dangerously anachronistic.

The FCC is required by law to see separate communications technologies delivering specific kinds of content over incompatible channels requiring distinct bands of protected spectrum.  But that world ceased to exist, and it’s not coming back.  It is as if regulators from the Victorian Age were deciding the future of communications in the 21 ^st century.  The FCC is moving from rogue to steampunk.

With the unprecedented release of the staff’s draft report on the AT&T/T-Mobile merger, a turning point seems to have been reached.  I wrote on CNET  (see “FCC:  Ready for Reform Yet?”) that the clumsy decision to release the draft report without the Commissioners having reviewed or voted on it, for a deal that had been withdrawn, was at the very least ill-timed, coming in the midst of Congressional debate on reforming the agency.  Pending bills in the House and Senate, for example, are especially critical of how the agency has recently handled its reports, records, and merger reviews.  And each new draft of a spectrum auction bill expresses increased concern about giving the agency “flexibility” to define conditions and terms for the auctions.

The release of the draft report, which edges the independent agency that much closer to doing the unconstitutional bidding not of Congress but the White House, won’t help the agency convince anyone that it can be trusted with any new powers.   Let alone the novel authority to hold voluntary incentive auctions to free up underutilized broadcast spectrum.

What is the Spectrum Screen Really Screening, Anyway?

One particularly disturbing feature of the report was what appears to be a calculated jury-rigging of the spectrum screen, as I wrote in an op-ed for The Hill.  (See “FCC Plays Fast and Loose with the Law…Again”)  For the first time since introducing the test as a way to simplify merger review, the draft report lowers the amount of spectrum it believes available for mobile use, even as technology continues to make more spectrum usable.  The lower total added 82 markets in which the screen would have been triggered, though the staff report in any case never actually performs the analysis of any local market.

The rationale for the adjustment is hidden in a non-public draft of an order on the transfer of Qualcomm’s FLO-TV licenses to AT&T, an order that is only now just circulating among the Commissioners.   Indeed, the Qualcomm order was only circulated a day before the T-Mobile report was released to the public and (in unredacted form) to  the DoJ.

(Keeping draft documents private is the normal course of business at the agency—the T-Mobile report being the rare and disturbing exception of releasing a report before even the Commissioners have reviewed or voted on it, here in obvious hopes of influencing the Justice Department’s antitrust litigation).

In the draft Qualcomm order, according to a footnote in the draft T-Mobile report, agency staff propose a first-time-ever reduction in the total amount of usable spectrum that forms the basis of the screen.  (Under the test, if the total spectrum of the combined entity in a market is less than a third of the usable spectrum, the market is presumed competitive and no analysis is required.)

For purposes of the T-Mobile analysis, the unexplained reduction is assumed to be acceptable to the Commission and applied to calculations of spectrum concentration in each of the local Cellular Market Areas.  (The calculation also assumes AT&T has the pending Qualcomm spectrum.)  Notably, without the reduction the number of local markets in which the screen would be triggered goes down by a third.

Asked in a press conference today about the curious manipulation, FCC Chairman Genachowski refused to comment.

The spectrum screen, by the way, never made much sense.  Its gross oversimplification of total usable spectrum, for one thing, hides a ridiculous assumption that all bands of usable spectrum are equally usable, defying the most basic physics of mobile communications.  With a wink to the apples-and-oranges nature of different bands, since 2004 the agency has decided more or less arbitrarily to increase the total amount of “usable” spectrum by including some new bands of usable spectrum and not others, with little rhyme or reason.

The manipulation of the spectrum screen’s coefficients, in fact, have no rationale other than to fast-track some preferred mergers and create regulatory headaches for others.  In truth, a screen that counted all spectrum actually being used for mobile communications, and counted it equally, would suggest that Sprint, in combination with its subsidiary Clearwire, is the only dangerously monopolistic holder of spectrum assets.  As Chart 38 of the FCC’s 15 ^th Annual Mobile Competition Report suggests, Sprint and Clearwire hold more “spectrum” than any other carrier—enough to trigger the screen in most if not all CMAs.  That is, if it was all counted.

That isn’t necessarily the right outcome either.  Much of Clearwire’s spectrum is in the >1 GHz. Bands, and, at least for now, those bands are usable but not as attractive for mobile communications as other, lower bands.

As the Mobile Competition Report notes, “these different technical characteristics provide relative advantages for the deployment of spectrum in different frequency bands under certain circumstances. For instance, there is general consensus that the more favorable propagation characteristics of lower frequency spectrum allow for better coverage across larger geographic areas and inside buildings, while higher frequency spectrum may be well suited for adding capacity.”

So not all spectrum is equal after all.  What, then, is the point or usefulness of the screen?  And what of this unmentioned judo move in the staff report, which suddenly changed the point of the screen from one that simplified merger review to a conclusive presumption against a finding of “public interest”?  The original point of the screen was to quickly eliminate competitive markets that don’t require detailed analysis.  In the AT&T/T-Mobile staff report, for the first time, it’s used to reject a proposed transaction if too many market (how many is not indicated) are triggered that would require that analysis.

But why continue to compare apples and oranges for any purpose, when the real data on CMA competition is readily available?  The only answer can be that the analysis wouldn’t yield the result that the agency had in mind when it started its review.  For in painstaking detail, the 15 ^th Mobile Competition report also demonstrates that adoption is up, usage is off the charts, prices for voice, data, and text continue to plummet, investments in infrastructure continue at a dramatic pace despite the economy, and new source of competitive discipline are proliferating, in the form of device manufacturers, mobile O/S providers, app developers, and inter-modal competitors.  For starters.

To conclude that AT&T’s interest in T-Mobile’s spectrum and physical infrastructure—an effort to overcome the failure of the FCC and local regulators to provide alternative spectrum or to allow infrastructure investments to proceed at an even faster pace—isn’t in the public interest requires the staff to ignore every piece of data the same staff, in another part of the space-time contiuum, collected and published.  But so long as HHIs and spectrum concentration are manipulated and relied on to foreclose real analysis, it all makes sense.

A Rogue Agency Slips into Steampunk

That is largely the point of Geoff Manne’s detailed critique of the substance of the report posted here at TLF, and of my own ridiculously long post on Forbes.  (See “A Strategic Plan for the FCC.”)

The Forbes piece tries to put the staff report into the context of on-going calls for agency reform that were working their way through Congress even before the release.  In it, I conclude that the real problem for the agency is that even with the significant changes of the 1996 Communications Act, the agency is still operating in a stovepipe model, where different communications technologies (cable, cellular, wire, satellite, “local”) are still regulated separately, with different bureaus and in many cases different regulations.

The model assumes that audio and video programming are different from data communications, offered by different industries using incompatible, single-purpose technologies.  A television is not a phone or a radio or a computer.  Broadcast is only for programming, cellular only for voice, satellites only for industrial use.  Cable is an inconveniently novel form of pay television, and data communications are only for large corporations with mainframe computers.

Those siloed regulations are further fragmented by attaching special regulatory conditions to individual license transfers and individual bands of spectrum as part of auctions. Dozens of unrelated and seemingly random requirements were added to Comcast-NBC Universal, for example.  At the last minute the agency added an eccentric version of the net neutrality rules to the 2008 auction for 700 Mhz. spectrum, but only for the C block.

The agency continues to operate under an anachronistic view that distinct technologies support distinct forms of communications (radio, TV, cable, data).  But the world has shifted dramatically under their feet since 1996.  The convergence of nearly all networks to the Internet’s single, non-proprietary standard of packet-switching, digital networks operating under TCP/IP protocols has been nothing short of a revolution in communications.  But it’s a revolution the agency sat out.  It has no idea what role it ought to play in the post-apocalyptic world; nor has Congress given them one.

As different kinds of communications technologies have all (or nearly all) converged on IP, communications applications have blurred beyond the ability to distinguish them.  Voice communications are now offered over data networks, data is flowing over the wires, TV is everywhere, and mobile devices that were unimaginable in 1996 now do everything.

Quite simply, the mismatch between the agency’s structure and the reality of a single digital, virtual network treating all content as bits regardless of the technology or the source that transports it has left the agency unable to cope or to regulate rationally.  Consider some of the paradoxes the agency has been forced to wrestle with in recent years:

• Is Voice over IP to be regulated as a traditional voice service, with barnacled requirements for Universal Service contribution and 911 services applied and, if so, applied how?
• Is TV on the Internet, delivered using any and every possible technology including wireless, fiber, copper, and cable, subject to the same Victorian standards of decency as broadcast TV, itself now entirely digital?
• Is the public interest served when mobile providers combine spectrum and infrastructure assets, largely to overcome the agency’s own paralysis in moving the deeply fractured spectrum map into even the 20^th century and the incompetent and corrupt local zoning agencies that hold up applications for new towers and antennae until the proper tribute is rendered?

In the face of these paradoxes, the FCC has become ungrounded; a victim of its own governing statute, which in many respects requires it to remain anachronistic.  Left without clear guidance from Congress on how or whether to regulate what applications (that’s really all we have now—applications, independent of technology), the agency increasingly improvises.

It’s like the wonderful genre of animation known as “steampunk,” where modern technology is projected anachronistically into the past, exploring what life would have been like if the 19 ^th century had robots, flight, information processing, and modern armaments, all powered by the steam engine.  (The concept of steam punk has now become a popular design genre, including some functioning devices wrapped in steampunk elements, as in the photo below.)

A Steampunk Computer

It’s cute on film, but applied to the real world it’s simply dangerous.  The FCC is required by law to keep its head in the sand with respect both to the realities of digital technology and the economics of the modern communications ecosystem.  Yet its natural desire to regulate something leaves the Commission flailing wildly in the dark for a foothold for its ancient regulatory structure in a world it doesn’t inhabit.

The Open Internet Notice of Proposed Rulemaking, for example, asked helplessly in over 80 separate paragraphs for education and update on the nature of the revolution spurred by the deployment of broadband Internet. (“We seek more detailed comment on the technological capabilities available today, as offered for sale and as actually deployed in providers’ networks.”)  Of course it had to ask these questions – the agency never regulated broadband.  Under the 1996 Act, as the 2005 Brand X case emphasizes, it never could.

Consider just a few of the absurd counterfactuals that the agency’s steampunk policies have led it in just the last few years (more examples greatly appreciated, by the way):

• Broadband isn’t being deployed  in a “reasonable and timely fashion” (2011 Section 706 Broadband Report)
• The mobile communications market is not “effectively competitive” (14^th and 15^th Mobile Competition Report)
• High concentrations of customers and spectrum, calculated using rigged HHIs and spectrum screens, are sufficient to raise presumptive antitrust concerns regardless of actual competitive and consumer welfare (AT&T/T-Mobile draft memo)
• Spectrum suitable for mobile use is decreasing (AT&T/Qualcomm memo)
• Despite a lack of any examples, broadband providers  “potentially face at least three types of incentives to reduce the current openness of the Internet” (Open Internet order)
• Encouraging competition and protecting consumer choice “cannot be achieved by preventing only those practices that are demonstrably anticompetitive or harmful to consumers.” (Open Internet order)
• The agency” expect[s] the costs of compliance with our prophylactic rules to be small”  (Open Internet order)
• Absent a mandatory data roaming regime for mobile broadband, “there will be a significant risk that fewer consumers would have nationwide access to competitive mobile broadband services….”  (Data Roaming order).

Not that there isn’t considerable expertise within the agency, and glimmers of understanding that manage to escape in whiffs from the steam pipes.  The 2010 National Broadband Plan, developed with a great deal of both internal and external agency expertise, does an admirable job of describing the current state of the broadband environment in the U.S.  More impressive, the later chapters predict with considerable vision the application areas that will drive the next decade of broadband deployment and use, including education, employment, health care and the smart grid.

The NBP, unfortunately, is the exception.  More and more of the agency’s reports, orders, and decisions instead bury the expertise, forcing ridiculous conclusions through an implausible lens of nostalgia and distortion.  The agency’s statutorily mandated hold on a never-realistic glorious communications past is increasingly threatening the health of the real communications ecosystem–an even more glorious (largely because unregulated) communications present.

I Love it When a Plan Comes Together

The FCC’s steampunk mentality is threatening to wreak havoc on the natural evolution of the Internet revolution.  It’s also turning the FCC from a respected and Constitutionally-required “independent” agency that answers to Congress and not the White House into a partisan monster, pursuing an agenda that’s light on facts and heavy on the politics of the administration and favored participants in the Internet ecosystem.  The agency relies on clichés and unexamined mantras rather than data—even its own data.  Mergers are bad, edge providers are good, and the agency doesn’t acknowledge that many of the genuine market failures that do exist are creatures of its own stovepipes.

As I note in the long Forbes piece, there was a simple, elegant way to avoid the steampunk phenomenon –an alternative that would have saved the FCC from increased obsolescence and the rest of us from its increasingly bizarre and disruptive regulatory behavior.   And in came from within the walls of FCC headquarters.

In 1999, in the midst of the first great Web boom, then-chairman William Kennard (a Democratic appointee) had a vision for the future of communications that has proven to be entirely accurate.  Kennard created a short, straightforward “strategic plan” for the agency that emphasized breaking down the silos.  It also took a realistic view of the agency’s need and ability to regulate an IP world, encouraging future Chairmen to get out of the way of a revolution that would provide far more benefit to consumers if left to police itself than with an FCC trying to play constant catch-up.

Kennard also proposed dramatic reform of spectrum policy, recognizing as is now obvious that imprinting the agency’s stovepiped model for communications like a tattoo on the radio waves was unnecessarily limiting the uses and usefulness of mobile technology, creating artificial scarcity and, eventually, a crisis.

In just a few pages of the report, the strategic plan lays out an alternative, including flexible allocations that wouldn’t require FCC permission to change uses, market-based mechanisms to ensure allocations moved easily to better and higher uses (no lingering conditions), even the creation of a spectrum inventory (still waiting).  The plan called for incentive systems for spectrum reallocation, an interoperable public safety network, and expanded use of unlicensed spectrum.  All reforms that we’re still violently agreeing need to be made.

We’ve arrived, unfortunately, at precisely the future Kennard hoped to avoid.  And we’re still moving, at accelerating speeds, in precisely the wrong direction.  Instead of working to ease spectrum restrictions and leave the “ecosystem” (the FCC’s own term) to otherwise police itself, recent NPRMs and NOIs suggest an agency determined to leverage its limited broadband authority into as many aspects of the converged world as possible.  As the Free State Foundation’s Seth Cooper recently wrote,  today’s FCC has developed a “proclivity to import legacy regulations into today’s IP world when doing so makes little or no sense.”

Fun’s fun.  I like my steampunk as well as anybody.  But I’d prefer to see it on a mobile broadband device, or over Netflix streamed through my IP-enabled television or game console.  Or anywhere else other than at the FCC.

On NPR’s Marketplace this morning, I talk about net neutrality litigation with host John Moe.

Nearly a year after the FCC passed controversial new “Open Internet” rules by a 3-2 vote, the White House finally gave approval for the rules to be published last week, unleashing lawsuits from both supporters and detractors.

The supporters don’t have any hope or expectation of getting a court to make the rules more comprehensive.  So why sue?  When lawsuits challenging federal regulations are filed in multiple appellate courts, a lottery determines which court hears a consolidated appeal.

So lawsuits by net neutrality supporters are a procedural gimmick, an effort to take cases challenging the FCC’s authority out of the D.C. Circuit Court of Appeals, which has already made clear the FCC has no legal basis here.

But Verizon’s lawsuit challenges the rules as material changes to existing licenses for spectrum, a challenge that is exclusive to the D.C. Circuit.  If the D.C. Circuit agrees that the rules can be challenged under that provision of the law, then the case stays in D.C..

Beyond the procedure, the substance of Verizon’s challenge will be formidable.  In the 2010 Comcast case, the court eviscerated the FCC’s argument that various provisions of the Communications Act give them the authority to police broadband providers.

And the Open Internet order largely repeated those arguments, a sure sign that the agency really doesn’t expect to win here.  The December vote was largely symbolic, fulfilling an Obama campaign promise to codify net neutrality and moving the noisy and messy proceeding from the agency to the courts.

The real issue here is convergence.  In 1996, when the Communications Act was last overhauled, the commercial use of the Internet was in its infancy.  Broadcast TV, radio, telephone, cable, mobile and data services were still separate technologies, and the 1996 Act gave the FCC separate and different authority over each.  For the Internet, the agency got next to no authority.

In the 15 years since President Clinton signed the 1996 act, of course, the world of communications has been revolutionized by the Internet and broadband.  The FCC’s traditional regulatory subjects have largely converged onto the TCP/IP protocol, generating a flowering of innovation and new devices and services.  Cable providers are phone companies, phone companies are content providers, and computer companies such as Apple and Google are, well, everything.

Consumers are living in a golden age of communications, but the agency has been left with little to oversee.  Wireline voice has become an unprofitable and shrinking business as consumers cut the cord.  The audience for broadcast TV is getting older and smaller at a rapid pace.  This term, the Supreme Court is likely to slap the agency again for its Victorian sensibilities with regard to TV and radio content censorship.

Perhaps Congress will someday decide that broadband services require the kind of oversight and micromanagement the FCC once had over traditional forms of communication.  Then again, wiser heads may take note of the success of the Internet in a world without much regulation, and decide to leave well enough alone.  Perhaps a great overhaul of communications law will clear the decks altogether, creating a single body of law for the converged industries.

Who can say?  But in the meantime, the FCC can’t simply grant itself new authority to regulate.  Regardless of the sincerity of its belief that “prophylactic” rules to preserve the Open Internet are important, federal agencies can’t regulate without Congressional authorization.  Whether in the courts or in Congress itself, the net neutrality rules will be struck down, first and foremost because the FCC had no power to enact them.

I can’t help but think that there might be  a big advantage of having the AT&T-T-Mobile merger go to court.  For once, the high-profile action everyone pays attention to will occur in an antitrust forum where the decision criterion is the effects of the merger on consumer welfare, period.   Regardless of what one thinks about the merger, it’s nice to see that we’ll finally have a knock-down, drag-out fight based on whether a big telecommunications merger harms consumers and competition.  That’s the antitrust standard the Department of Justice has to satisfy in order to prevent the merger. 

This will be a refreshing change from the Federal Communications Commission’s “public interest” standard, which allows the commission to object on grounds other than consumer welfare and demand all manner of concessions that have nothing to do with remedying anticompetitive effects of a deal. Case in point: Comcast must now offer broadband service for $9.95 per month to low-income households as a condition for getting approval to buy 51 percent of NBCUniversal. Now, I’m all for seeing low-income households get access to broadband, but subsidizing one subset of customers has little to do with mitigating any possible anticompetitive effects of allowing a cable company to own NBCUniversal. As FCC Commissioners McDowell and Baker said in their statement on that transaction, “Any proposed remedies should be narrow and transaction specific, tailored to address particular anti-competitive harms. License transfer approvals should not serve as vehicles to extract from petitioners far-reaching and non-merger specific policy concessions that are best left to broader rulemaking or legislative processes.” 

In short, if AT&T wins in court, the FCC should approve the merger promptly without additional conditions.

For Forbes.com this morning, I take a close look at last month’s controversial FCC order requiring facilities-based wireless carriers to negotiate data roaming agreements with other carriers.

There are business, technical, and legal reasons why the order stands on unsteady ground, which the article looks at in detail.

The order, by encouraging artificial competition in nationwide mobile broadband, could also undermine arguments against AT&T’s merger with T-Mobile USA.

How so?  If every regional, local, or rural carrier can offer their customers access to the nationwide coverage of Verizon, AT&T, or Sprint, on terms overseen for “commercial reasonableness” by the FCC, what’s the risk of consumer harm from combining AT&T and T-Mobile’s infrastructure?  Indeed, doing so would create stronger nationwide 3G and 4G networks for other carriers to use.  In that sense, it’s actually pro-competitive, and a pragmatic solution to spectrum exhaustion.

The bigger question is why the FCC seems so determined to get into the business of regulating the Internet economy, when Congress has so clearly and consistently told them to stay out of it.

(The results of that wise foresight speak for themselves:  compare the health of digital life to the health of, say, wireline telephone and over-the-air TV broadcasters, which the FCC has long-regulated to within an inch of their lives, or less.)

With its historic client base rapidly disappearing, the FCC, like any good business, is looking for new markets and new clients.  But like Harold Hill, the flim-flam artist featured in Meredith Wilson’s classic “The Music Man,” it doesn’t know the territory.

Shut out of market for digital regulation by Congress (underscored repeatedly by the courts), the agency has no expertise in dealing with the business or technical dynamics of the Internet.  To paraphrase Wilson, the market is looking for mandolin picks, but the FCC keeps selling big trombones.

The result is trouble, my friends.  Right here.

On Forbes this morning, I analyze the legislative and judicial challenges to last year’s FCC Open Internet rules, the so-called net neutrality order.

Despite the urgency of Friday’s budget machinations, the House took time out to pass House Joint Resolution 37, which “disapproves” the FCC’s December rulemaking.  If passed by the Senate and not vetoed by President Obama, HJR 37 would effectively nullify the net neutrality rules, and ensure the FCC cannot pass alternate versions of them absent new authority to do so from Congress.

Most commentators believe that the House action was merely symbolic.  Passage in the Senate requires only a simple majority, but the neutrality fight has turned violently partisan since the mid-term elections and getting a few Democratic Senators on-board may be hard.  More to the point, the White House last week pre-emptively threatened to veto the resolution.

As I’ve noted before, however, net neutrality could still become a casualty of more important compromises between the White House and Congress.  Last week, Politico reported that undoing the FCC order was one of the policy riders Republicans were still pushing.  Today’s draft budget bill doesn’t mention that provision, but the budget fight isn’t over.

Still, it seems more likely that the real challenges will come in the courts.  On that front, the D.C. Circuit last week rejected lawsuits filed by Verizon and MetroPCS as premature (the new rules are still not published in the Federal Register, and the reasons for the delay are unclear).

The two companies will surely try again, though the dismissal of their first efforts means the case could wind up somewhere other than the D.C. Circuit.  Given the strong decision against the FCC in the Comcast case last year, the general consensus is that the D.C. Circuit is the court most likely to rule against the FCC’s thin arguments for authority to issue the rules in the first place.

(Follow the links for Part I, Part II, Part III and Part IV.)

In this final post on the FCC’s Dev. 23, 2010 Open Internet Report and Order, I’ll look briefly at the problematic legal foundation on which the FCC has built its new regulations on broadband Internet access.  That discussion need only be brief largely because the extended legal analysis has already been admirably detailed by FCC Commissioner Robert McDowell.  His dissent (see pages 145-177 of the Report and Order) calmly and systematically dismantles the case made by the majority (See ¶¶ 115-150).

This is no theoretical discussion of statutory interpretation.  Even before the rules have been published on the Federal Register, two broadband providers—Verizon and then MetroPCS—have already filed lawsuits in the D.C. Circuit Court of Appeals challenging the FCC’s authority to regulate.  (See Jim DeLong’s definitive deciphering of Verizon’s efforts to secure exclusive jurisdiction in the D.C. Circuit)  The arguments sketched out in Commissioner McDowell’s dissent are likely to mirror the complainants’ briefs in these and likely other Petitions for Review of the Order.

The Need for Authorization

Nate Anderson of Ars Technica, who did a great service in running side-by-side the provisions in the FCC’s final Order and the terms of Verizon-Google’s proposed legislative framework, asks the key question, “Why is Verizon suing over net neutrality rules it once supported?”

I wouldn’t and didn’t (see Part III) go as far as Anderson, who concludes that Verizon, “on substance…got exactly what it wanted.”   Both the final rules and the Verizon-Google proposal closely tracked, with important differences, the original order the FCC proposed in October, 2009.  And there are material differences between what Verizon-Google proposed and what the FCC ultimately voted on, notably in the treatment of mobile broadband.

But those details aside, there is one crucial difference that Anderson acknowledges.  As he writes, “the Verizon/Google proposal did make one other suggestion: it should be passed by Congress, not the FCC….”

That might seem like a small enough difference.  Rules are rules, what difference if the FCC passed them under its rulemaking authority or if Congress had put them into a new statute, such as the Internet Freedom Preservation Act, which would have naturally given the FCC authority to enforce them anyway?

But in fact that procedural difference embodies the principle objection not only to the Report and Order but to the process by which it was completed. Put simply, Congress alone has the power to regulate; the FCC can only act on authority delegated to it by Congress.  Any rulemaking undertaken without authority is not only dangerous, but also unconstitutional.

And Congress, it’s clear, has not delegated authority to the FCC to regulate broadband Internet access.  What Verizon and others are most concerned with is that if the FCC somehow gets away with passing new rules anyway, the agency will have established a dangerous precedent.  Any time in the future that the FCC or any other federal independent agency wants to extend its power, it need only deputize itself.

That is the feature of the Open Internet Report and Order that has most alarmed the communications industry, members of Congress, and advocates of limited government.  And that is principally why the House has promised to reverse the ruling, even as Verizon and others challenge it in court.  In short, the text of the rules aside, it very much matters that the FCC, and not Congress, took up elements of the framework proposed by Verizon-Google.

Regulatory Overreach is not a New Problem

The problem of regulatory overreach goes far beyond net neutrality.  Under a novel and somewhat fragile arrangement that was worked out during the New Deal, independent federal regulatory agencies can exercise considerable authority that the Constitution, on its face, reserves to the Legislative and Judicial branches.  Indeed, the early New Deal Supreme Court overturned much of FDR’s regulatory agenda under the so-called “nondelegation doctrine.”

After FDR threatened to “pack the court” with more sympathetic Justices, a key swing Justice changed sides, saving the Court and the New Deal.  (The so-called “switch in time that saved nine,” which few people realize is a pun on the sewing parable of a “stitch in time saves nine.”)

But even so, federal regulators operate under strict controls that ensure they do not become, to use the Supreme Court’s word for earlier FCC power grabs, “untethered” in their authority.  FCC Commissioners are appointed by the President and confirmed by the Senate, and can only be removed from office by impeachment.  At least two of the five Commissioners must be members of a party different from the President’s.

Both the rulemaking (legislative) and adjudicatory (judicial) powers of the agency are strictly limited by implementing statutes passed by Congress.  If the agency isn’t given explicit powers to regulate, regardless of the appearance or reality of significant market failures, only Congress can delegate additional powers.    And the courts, in the checks-and-balance system, are the final determinants of what powers have and have not been granted to an agency.

So the FCC has a problem.  It wants to regulate broadband Internet providers to ensure the “level playing field” it believes essential to the success of the Internet.  But Congress has never given them authority to do so, and has failed since 2004 to pass new legislation that would grant additional authority.

The FCC has actually lost ground during the rulemaking process.  An effort to enforce its Open Internet policy statement through adjudication against Comcast was rejected in April, 2010, further limiting the wiggle room the agency might have had to go forward with the formal rulemaking it began in October 2009.   (The rulemaking was, in some sense, an effort to formalize the policy statements.)

What’s the problem?  Briefly:  Under the Communications Act of 1996, and consistent with earlier versions of the FCC’s implementing statute, the agency was given broad authority over common carrier telephone service (Title II of the Act) but almost no authority over information services or what used to be known as “enhanced” or “ancillary services” (pre-Internet access, these included call waiting and other supplements to telephone service) (Title I of the Act).  The one exception was Internet access provided by dial-up modems, which of course is no longer a significant source of access.

The Comcast case, in line with several earlier D.C. Circuit and Supreme Court cases, made clear that Title I simply did not delegate authority over broadband access.

There was nothing new in that.  The FCC has made numerous efforts to attach otherwise unauthorized regulations to Title I’s so-called “ancillary jurisdiction,” but the courts frequently reject these efforts as overreaching.

For example, in 2005 the D.C. Circuit rejected regulations the FCC approved that would have required consumer products manufacturers to include “broadcast flag” technology in any device capable of receiving a television signal—a regulation that was grounded in ancillary jurisdiction over television broadcasters.  But while the agency had unquestioned authority over broadcasters, they could not require non-broadcasters to comply with rules aimed at helping the broadcasters control unauthorized home taping.

At oral argument, the judges nearly laughed the FCC out of court.  “You’re out there in the whole world, regulating. Are washing machines next?” asked Judge Harry Edwards. Judge David Sentelle added, “You can’t regulate washing machines. You can’t rule the world.”

The result in the Comcast case was much the same.  And the October, 2009 NPRM had grounded its authority to proceed solely with Title I.  With that avenue all but foreclosed to the agency by Comcast, the Chairman found himself in one of several corners he inhabited over the last year.  Congress was unlikely to move on any of the net neutrality bills floating around committees (and indeed, did not do so), but Genachowski was committed to the rulemaking.

The FCC’s “Very Smart Lawyers” Try Again

What to do?  One option was to undertake a “reclassification” of broadband Internet to categorize it as a telephone service subject to Title II, a section of the law that comes with fifty-plus years of baggage from the regulation of the former telephone monopoly.  The Commission (for now) has wisely avoided taking that step, which itself would have been subject to substantial legal challenges.

The authority stalemate seemed to doom the net neutrality proceeding.  But then in late Fall FCC Chairman Julius Genachowski told the audience at the Web 2.0 Summit that the FCC’s “very smart lawyers” had figured out a way to get around the Title I/Title II problem.  The net neutrality faithful and faithless waited, with breath held.

In the final Report and Order, however, all we really got was a rerun of the argument that had failed in the Comcast case, with only minor tweaking.  Again, Commissioner McDowell’s detailed dissent explains the weakness of the argument without the need for much added commentary.

The courts have consistently told the FCC that to invoke ancillary jurisdiction, a rulemaking must be reasonably related to a specific delegated power elsewhere in the Communications Act.  It has to be “ancillary” to some other authority the Commission already has, in other words.  Title I gives no powers on its own over “information services.”  In the Comcast case, the FCC listed off several provisions in hopes that at least one of them would stick, but the court rejected all of them.

In the Order (¶¶ 124-137), the FCC tries several new provisions.  Obviously the best bets were already exhausted in the Comcast case, so here they provide even weaker bases for ancillary authority over broadband Internet than the laundry list rejected by the court in Comcast.    Most get only perfunctory explanation.  The FCC knows it is on thin thin ice.

Instead, the Order relies principally on a new and unconvincing reading of Section 706 of the Act.  (See ¶¶ 117-123)  Section 706 had formed the principal argument in Comcast as well, but there the agency argued that Section 706 was the provision that enabled it to use ancillary authority over Title I Information Services.  The court rejected that argument.

The revised Section 706 argument is that that provision in and of itself provides sufficient authority for the FCC to implement the Open Internet rules.  Well, here it is:

SEC. 706. ADVANCED TELECOMMUNICATIONS INCENTIVES.

(a) IN GENERAL-The Commission and each State commission with regulatory jurisdiction over telecommunications services shall encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans (including, in particular, elementary and secondary schools and classrooms) by utilizing, in a manner consistent with the public interest, convenience, and necessity, price cap regulation, regulatory forbearance, measures that promote competition in the local telecommunications market, or other regulating methods that remove barriers to infrastructure investment.

(b) INQUIRY-The Commission shall, within 30 months after the date of enactment of this Act, and regularly thereafter, initiate a notice of inquiry concerning the availability of advanced telecommunications capability to all Americans (including, in particular, elementary and secondary schools and classrooms) and shall complete the inquiry within 180 days after its initiation. In the inquiry, the Commission shall determine whether advanced telecommunications capability is being deployed to all Americans in a reasonable and timely fashion. If the Commission’s determination is negative, it shall take immediate action to accelerate deployment of such capability by removing barriers to infrastructure investment and by promoting competition in the telecommunications market.

(c) DEFINITIONS- For purposes of this subsection:

(1) ADVANCED TELECOMMUNICATIONS CAPABILITY- The term `advanced telecommunications capability’ is defined, without regard to any transmission media or technology, as high-speed, switched, broadband telecommunications capability that enables users to originate and receive high-quality voice, data, graphics, and video telecommunications using any technology.

On its face, neither 706(a) nor 706(b) would appear to give the FCC power to put regulatory constraints of any kind on how broadband Internet access providers operate.  The goal of this section is to encourage the FCC to promote broadband by “regulating methods that remove barriers to infrastructure investment,” including forebearance from use of its existing powers.  The history of this provision, as Commissioner McDowell explains, was aimed at removing regulations of Title II telephone carriers that hindered their ability to provide advanced telecommunications capability.

The reliance on Section 706(b) is even stranger, and deeply cynical.  It requires the FCC to issue a regular report on broadband deployment and, if it finds such deployment is not taking place in a “reasonable and timely manner,” to take “immediate action to accelerate deployment” by “removing barriers” to investment.

Again, as Commissioner McDowell notes, the 706(b) Reports have consistently found broadband deployment to be proceeding at a rapid pace, confirming what everyone already knows.  Americans are signing on to the Internet faster than any previous information technology, whether through wireline or, increasingly, wireless broadband,

That is, until July, 2010, a few short months after the Comcast decision.  For the first time ever, the 706(b) Report found that “broadband deployment to all Americans is not reasonable and timely.”  (The Report, along with the Open Internet Order, was approved on a party-line 3-2 vote of the Commission.)  This despite the fact that broadband availability grew from 15% of Americans in 2003 to 95% in 2010 (data made available in the National Broadband Plan as well).

The negative 706(b) Report was clearly a pretext to give the agency the ability to trigger the “immediate action” language of the 706(b), but even then, see above, the action the FCC is supposed to take is in the nature of deregulating broadband, not adding additional regulations.  How will rules that limit the operational flexibility of broadband providers “accelerate deployment”?  The majority argues simply (¶ 123)  that “Section 706(b) provides express authority for the pro-investment, pro-competition rues we adopt today.”  Hardly.

The effort to connect Section 706 to the Open Internet rules is, charitably, flimsy at best.  But there’s yet another problem.  The FCC has already foreclosed that connection.  The agency has long rejected the view it now adopts that Section 706 provides any explicit authority for rulemaking, whether on its own (the new argument) or as a hook for ancillary jurisdiction under Title I.

As the D.C. Circuit noted in the Comcast case (Slip. Op. at 30-31), “In an earlier, still-binding order, the Commission ruled that section 706 ‘does not constitute an independent grant of authority.’  Instead, the Commission explained, section 706 ‘directs the Commission to use the authority granted in other provisions . . . to encourage the deployment of advanced services.’”  So Section 706 doesn’t give the agency any regulatory authority, just guidance on how to apply (or not) other provisions in the Act.  That, at least, has long been the FCC’s own view of the law, a view courts will give considerable deference.

In dispensing with the Section 706 argument in Comcast, the court concluded that “Because the Commission has never questioned, let alone overruled, that understanding of section 706, and because agencies ‘may not . . . depart from a prior policy sub silentio,’ the Commission remains bound by its earlier conclusion that section 706 grants no regulatory authority.”  (citations omitted)

That last sentence seemed to leave the door open just a crack for the FCC to “depart from its prior policy” in an explicit way.  And, it’s possible to read the Report and Order as doing just that.  (See ¶ 122 for the majority’s hilarious explanation for why it had never before noticed that Section 706 granted explicit authority.)

But not so fast.  While agencies have broad discretion to overrule earlier decisions, there must be some rational basis for doing so. There must be some changed circumstances, some evidence, some explanation that passes the sniff test. A reviewing court will look to see if there is some external evidence that justifies the changed interpretation of Section 706.

And there’s nothing here that meets even that minimal standard.  Again, to quote Commissioner McDowell (Report at 148), “This move is arbitrary and capricious and is not supported by the evidence in the record or a change of law.”  Losing the Comcast case is not reason enough, but that seems to be all that’s happened to justify this surprising new understanding of a 15 year-old provision in the FCC’s implanting statute.

Preserving which Internet again?

The rest of the FCC’s “Authority” section, as noted, throws in the rest of the kitchen sink, largely provisions of Title II, that Comcast didn’t already dispose of.  The connection between the Open Internet rules and the Commission’s regulatory powers over telephone service, television and radio broadcasting, cable TV and spectrum management are just too tenuous to be convincing to a reviewing court.  If that authority is close enough to support net neutrality, it’s close enough to support anything, including, for example, the broadcast flag rules already overturned.

There’s more.  Trying the net neutrality rules to problems of VoIP, IP-based television broadcasting, IP radio, and other video and audio services, as one of my law professors used to say, proves too much.  It actually undermines the FCC’s position by bringing into sharp focus the reality behind the agency’s real problem here.

Since Congress last reviewed the agency’s authority in 1996, the Internet’s packet-switching protocols have quickly and surprisingly taken over as the super-dominant technology for all forms of communications, traditional and new.  The world of television, radio, and computing have changed completely, leaving little of the world the 1996 Act gave the FCC authority to regulate.  Even the “Internet” as we knew it in 1996 looks little like the robust ecosystem of digital life that we enjoy today.

Which brings us squarely back to the problem of “nostalgia” I described in the previous post.  The FCC is operating under a statute that has its origins in the 1930’s, and which was lasted updated (poorly) fifteen years ago, when dial-up consumer Internet was still very much in its infancy.  The communications, computing and entertainment industries operated in silos with little overlap.  Each had its own established players and long histories of regulatory intervention.

But these and other related industries have all undergone nearly complete transformation in the intervening years, largely outside the notice or authority of the FCC to intervene.  Device and content convergence is a reality.  Consumers now use far more computing resources than do businesses.

Meanwhile, those aspects of the industry still under strict FCC control—including Plain Old Telephone Service (POTS) and over-the-air television and radio—have gone into deep decline.  They’ve become a legacy business that owners can’t even exit from, because there’s no one interested in the dwindling assets.

That’s no coincidence.  Those businesses (in some cases parts of companies whose unregulated operations are thriving), thanks to the regulatory environment in which they operate, are simply unable to respond quickly to rapidly evolving new technologies, applications, and consumer demands.   They suffer from a regulatory disease closely related to the Innovator’s Dilemma.  They can’t adapt, even if they had the will to do so.

Continued efforts, including this one, to fit round regulations into square statutory pegs underscores that the FCC has no authority over what has evolved to be our new and magical communications platform.   They have no authority because Congress hasn’t given them any.  Period.

Moreover, invocations (incantations?) of outmoded, obsolete, and inapplicable provisions of the old communications law also reminds us how much progress has been made during the period when the FCC has been unable or unwilling to intervene in the evolution of that platform.

Probably not the conclusion the FCC was hoping to have drawn from its nearly 200-page Report.  But there you have it.

At this week’s excellent State of the Net 2011 event, I participated in a panel discussion about the future of the online video marketplace.  Unsurprisingly, a great deal of time was spent discussing the Federal Communications Commission’s (FCC) recent approval of the proposed merger of Comcast and NBC Universal (NBCU). On Tuesday, the agency voted 4-1 to approve the deal with myriad conditions and “voluntary” concessions being attached.  The FCC voted on the matter and issued a short press release and late today issued its final 279-page order.

The Commission’s Comcast-NBCU order represents an unprecedented regulatory shakedown of a company that obviously would have done just about anything to gain approval of the deal.  I believe the conditions the FCC has imposed on the deal, which are to run for seven years, are tantamount to a death by a thousand cuts for the deal and, ultimately, could lead to its failure.  That’s because the requirements placed on the new entity make it practically impossible for Comcast to leverage the content it is acquiring from NBCU and profit from it such that they can recoup the significant costs associated with the deal.

In essence, Comcast-NBCU was forced to preemptively surrender much of its intellectual property rights by agreeing to share most of their content properties with others on terms someone else will determine.  That’s a recipe for disaster.  If Comcast-NBCU doesn’t have the right and ability to cut deals on terms that they find advantageous to the company and its shareholders, then why go through with this deal at all? Isn’t the whole point of such a deal with get some additional in-house content properties — something Comcast almost completely lacked previously — such that it would have some content gems to highlight and leverage in an attempt to attract new customers (or just keep old ones)? If someone else is constantly setting the terms of their deals, it will limit the inherent value of the IP owned by Comcast-NBCU and sap most of the value from the deal.

Particularly concerning in this regard is the language of the FCC’s order dealing with online video marketplace. As a condition of approval, the FCC’s plan requires that Comcast-NBCU:

• Provides to all MVPDs, at fair market value and non-discriminatory prices, terms, and conditions, any affiliated content that Comcast makes available online to its own subscribers or to other MVPD subscribers.
• Offers its video programming to legitimate OVDs [online video distributors] on the same terms and conditions that would be available to an MVPD.
• Makes comparable programming available on economically comparable prices, terms, and conditions to an OVD that has entered into an arrangement to distribute programming from one or more of Comcast-NBCU’s peers.
• Offers standalone broadband Internet access services at reasonable prices and of sufficient bandwidth so that customers can access online video services without the need to purchase a cable television subscription from Comcast.
• Does not enter into agreements to unreasonably restrict online distribution of its own video programming or programming of other providers.
• Does not disadvantage rival online video distribution through its broadband Internet access services and/or set-top boxes.
• Does not exercise corporate control over or unreasonably withhold programming from Hulu.

The first thing to note about this language is that, through a merger proceeding, the FCC has just inserted itself into the online video marketplace in a major way and began regulating it.  Not so long ago, the idea of the FCC regulating the Net and online video would have been scoffed at and rejected as outlandish.  But here we are now with the FCC knee-deep into the daily workings of the online marketplace without Congress ever having passed a law authorizing such a thing.

The second thing to note about those online video provisions is that they potentially foreshadow the rise of a compulsory license for online video distribution.  In essence, to use antitrust parlance, Comcast-NBCU has a “duty to deal” its content to others on terms that regulators will police.  Of course, we already have many compulsory licenses in place in America, including one for traditional cable television, so it will be tempting for some to say, ‘why not one for online video, too?’  But it seems like this would have been a good time to give good ol’ fashion market competition and contractual negotiations a chance instead.  After all, where is the harm here?  If NBC’s content is supposedly so valuable that Comcast will exploit it in future online video negotiations, why hasn’t NBC been exploiting that content for years already?

Of course, this exposes the real irony of all this hand-wringing about the Comcast-NBCU deal: It’s a fight about supposedly “Must See TV” that not everyone feels they must see anymore!  Don’t get me wrong, NBCU does have some wonderful content in its stable of properties, and Comcast is no doubt happy to have something better than the Golf Channel under it’s corporate umbrella now.  But, seriously, would the Earth spin of its axis tomorrow if Comcast suddenly decided to try to lock up all its new NBC content and refuse to deal with anyone else on equal terms?  That would be highly unlikely, of course, since it would be economic suicide to restrict access to a single platform. But if they did, would anyone really care?   In the modern world of content abundance and distribution platform diversity, it’s hard to image most consumers would.  Comcast has bet the farm on the opposite theory — that NBCU content is still hotly demanded and will add real value to the company — and yet, even without the onerous conditions it has been forced to agree to here, the firm must know just how risky this move is for them and their shareholders.  Those who lost their shirts on the failed AOL-TimeWarner and NewsCorp-DirecTV deals can attest to how illusive those so-called “synergies” can be when two very different media operations and cultures are merged. [Read my old paper on “A Brief History of Media Merger Hysteria” for all the grim details on those deals and how they went south so quickly.]

Finally, perhaps the most interesting provision in the FCC’s order is the requirement that Comcast-NBCU “makes comparable programming available on economically comparable prices, terms, and conditions to an [online video distributors] that has entered into an arrangement to distribute programming from one or more of Comcast-NBCU’s peers.” As I read it, what this means is that when competing content companies — such as Disney, News Corp., Viacom, etc. — cut deals with an online video distributors, it establishes a precedent for what is expected of Comcast-NBCU when they go to strike terms and prices with OVDs.  How long will it be before this provision leads to accusations of collusion among major content companies?!  Moreover, this provision is somewhat insulting since it basically assumes all content is created equal when that is most definitely not the case.  When Disney is negotiating with an OVD to carry ESPN, should that deal really have any bearing on Comcast cutting a deal with someone for the Golf Channel or Versus?

There are many other provisions and conditions that I haven’t bothered detailing here, including program “localism” mandates, broadband deployment and pricing requirements, program “diversity” requirements, children’s television mandates, more “PEG” programming requirements, and more.  But wait, you ask: won’t all these provisions and the others discussed above benefit consumers?  It’d be nice to imagine that the FCC could work such magic by waving its regulatory wand and trying to mandate consumer benefits into existence by decree. And perhaps some of these requirements will help some consumers in a marginal way.  In reality, however, healthy companies are the better way to serve customers with new and better services.  Hamstringing merging entities with layers of red tape like this is particularly misguided in light of how much money is being spent to make the deal happen.  Finally, regulators should just be happy that someone out there wanted to take over NBC and help the struggling media operator rebound!  If regulators are really concerned about the future of  “localism” or the health of traditional media operators like NBC more generally, asking for a pound of flesh through a set of “voluntary” concessions like these isn’t a good way to achieve that goal.

At the last possible moment before the Christmas holiday, the FCC published its Report and Order on “Preserving the Open Internet,” capping off years of largely content-free “debate” on the subject of whether or not the agency needed to step in to save the Internet.

In the end, only FCC Chairman Julius Genachowski fully supported the final solution.  His two Democratic colleagues concurred in the vote (one approved in part and concurred in part), and issued separate opinions indicating their belief that stronger measures and a sounder legal foundation were required to withstand likely court challenges.  The two Republican Commissioners vigorously dissented, which is not the norm in this kind of regulatory action.  Independent regulatory agencies, like the U.S. Courts of Appeal, strive for and generally achieve consensus in their decisions.

So for now we have a set of “net neutrality” rules that a bi-partisan majority of the last Congress, along with industry groups and academics, strongly urged the agency not to adopt, and which were deemed unsatisfactory by four of the five Commissioners.  It’s hardly a moment of pride for the agency, which has been distracted by the noise around these proceedings since Genachowski was first confirmed by the Senate.  Important work freeing up radio spectrum for wireless Internet, reforming the corrupt Universal Service Fund, and promoting the moribund National Broadband Plan have all been sidelined.

How did we get here?  In October, 2009, the agency first proposed new rules, but their efforts were sidetracked by a May court decision that held the agency lacked authority to regulate broadband Internet.  After flirting with the dangerous (and likely illegal) idea of “reclassifying” broadband to bring it under the old telephone rules, sanity seemed to return.  Speaking to state regulators in mid-November, the Chairman made no mention of net neutrality or reclassification, saying instead that “At the FCC, our primary focus is simple: the economy and jobs.”

Just a few days later, at a Silicon Valley event, the Chairman seemed to reverse course, promising that net neutrality rules would be finalized.  He also complimented the “very smart lawyers” in his employ who had figured out a way to do it without the authorization of Congress, which has consistently failed to pass enabling legislation since the idea first surfaced in 2003.  (Most recently, Democratic Congressman Henry Waxman floated a targeted net neutrality bill days before the mid-term elections, but never introduced it.)

From then until the Commission’s final meeting before the new Congress comes to town in January, Commissioners and agency watchers lobbied hard and feinted outrage with the most recent version of the rules, which the agency did not make public until after the final vote was taken on Dec. 21.  In oral comments delivered at the December meeting, two commissioners complained that they hadn’t seen the version they were to vote on until midnight the night before the vote.  Journalists covering the event didn’t have the document all five Commissioners referenced repeatedly in their spoken comments, and had to wait two more days for all the separate opinions to be collated.

Why the Midnight Order?  FCC Commissioners do not serve at the whim of Congress or the President, so the mid-term election results technically had no effect on the chances of agency action.  Chairman Genachowski has had the votes to approve pretty much anything he wants to all along, and will for the remainder of his term.

Even with a Republican House, legislation to block or overturn FCC actions is unlikely.  The Republicans would have to get Democratic support in the Senate, and perhaps overcome a Presidential veto.

But Republicans could use net neutrality as a bargaining chip in future negotiations, and the House can make life difficult for the agency by holding up its budget or by increasing its oversight of the agency, forcing the Chairman to testify and respond to written requests so much as to tie the agency in knots.

So doing something as Congress was nearly adjourned and too busy to do much but bluster was perhaps the best chance the Chairman had for getting something—anything—on the Federal Register.

More likely, the agency was simply punting the problem.  Tired of the rancor and distraction of net neutrality, the new rules—incomplete, awkward, and without a solid legal foundation—move the issue from the offices of the FCC to the courts and Congress.  That will still tie up agency resources and waste even more taxpayer money, of course, but now the pressure of industry and “consumer advocate” groups will change its focus.  Perhaps this was the only chance the Chairman had of getting any real work done.

The Report and Order

Too much ink has already been spilled on both the substance and the process of this order, but there are a few tidbits from the documents that are worth calling out.  In this post, I look at the basis for issuing what the agency itself calls “prophylactic rules.”  In subsequent posts, I’ll look at the final text of the rules themselves and compare them to the initial draft, as well as to alternatives offered by Verizon and Google and Congressman Waxman.  Another post will review the legal basis on which the rules are being issued, and likely legal challenges to the agency’s authority.  I’ll also examine the FCC’s proposed approach to enforcement of the rules.

“Prophylactic” Rules

Even the FCC acknowledges that the “problem” these new rules solve doesn’t actually exist…yet.  The rules are characterized as “prophylactic” rules—a phrase that appears eleven times in the 87-page report.  The report fears that the lack of robust broadband competition in much of the U.S. (how many sets of redundant broadband infrastructure do consumer advocates want companies to build out, anyway?) could lead to ISPs using their market influence to squeeze content providers, consumers, or both.

This hasn’t happened in the ten years broadband Internet has been growing in both capability and adoption, of course, but still, there’s a chance.  As the report (¶ 21) puts it in challenged grammar, “broadband providers potentially face at least three types of incentives to reduce the current openness of the Internet.”

We’ll leave to the side for now the undiscussed potential that these new rules will themselves cause unintended negative consequences for the future development or deployment of technologies built on top of the open Internet.  Instead, let’s look at the sum total of the FCC’s evidence, collected over the course of more than a year with the help of advocates who believe the “Internet as we know it” is at death’s door, that broadband providers are lined up to destroy the technology that, ironically, is the source of their revenue.

To prove that these “potential” incentives are neither “speculative or merely theoretical,” the FCC cites precisely four examples between 2005 and 2010 where it believes broadband providers have threatened the open Internet (¶ 35).   These are:

1.      A local ISP that was “a subsidiary of a telephone company” settled claims it had interfered with Voice over Internet Telephony (VoIP) applications used by its customers.

2.      Comcast agreed to change its network management techniques when the company was caught slowing or blocking packets using the BitTorrent protocol (the subject of the 2010 court decision holding the agency lacked jurisdiction over broadband Internet).

3.      After a mobile wireless provider contracted with an online payment service, the provider “allegedly” blocked customers’ attempts to use competing services to pay for purchases made with mobile devices.

4.      AT&T initially restricted the types of applications—including VoIP and Slingbox—that customers could use on their Apple iPhone.

In the world of regulatory efficiency, this much attention being focused on just four incidents of potential or “alleged” market failures is a remarkable achievement indeed.  (Imagine if the EPA, FDA, or OSHA reacted with such energy to the same level of consumer harm.)

But in legal parlance, regulating on such a microscopically thin basis goes well beyond mere “pretense”—it’s downright embarrassing the agency couldn’t come up with more to justify its actions.  Of the incidents, (1) and (2) were resolved quickly through existing agency authority, (3) was merely alleged and apparently did not even lead to a complaint filed with the FCC (the footnote here is to comments filed by the ACLU, so it’s unclear who is being referenced) and (4) was resolved—as the FCC acknowledges–when customers put pressure on Apple to allow AT&T as the sole iPhone network provider to allow the applications.

Even under the rules adopted, (2) would almost surely still be allowed.  The Comcast case involved use of the BitTorrent protocol.  Academic studies performed since 2008 (when the protocol has been expanded to more legal uses, that is), find that over 99% of BitTorrent traffic still involves unlicensed copyright infringement.  Thus the vast majority of the traffic involved is not “lawful” traffic and, therefore, is not subject to the rules.  The no blocking rule (§8.5) only prohibits blocking of “ lawful content, applications, services or non-harmful devices.”  (emphasis added)

Indeed, the FCC encourages network providers to move more aggressively to block customers who use the Internet to violate intellectual property law.  In ¶ 111, the Report makes crystal clear that the new rules “do not prohibit broadband providers from making reasonable efforts to address the transfer of unlawful content or unlawful transfers of content…..open Internet rules should not be invoked to protect CR infringement….” (Perhaps the FCC, which continues to refer to BitTorrent as an “application” or believes it to be a website, simply doesn’t understand how the BitTorrent protocol actually works.)

Under the more limited wireless rules adopted, (3) and (4) would probably still be allowed as well.  We don’t know enough about (3) to really understand what is “alleged” to have happened, but the no-blocking rule (§ 8.5) says only that mobile broadband Internet providers “shall not block consumers from accessing lawful websites, subject to reasonable network management; nor shall such person block applications that compete with the provider’s voice or video telephony service, subject to reasonable network management.”

A mobile payment application wouldn’t seem to be included in that limitation, and in the case of the iPhone, it was Apple, not AT&T, that wanted to limit VoIP.

Even so, the Report makes clear that the wireless rule (¶ 102) doesn’t apply to app stores: “The prohibition on blocking applications that compete with a broadband provider’s voice or video telephony services does not apply to a broadband provider’s operation of application stores or their functional equivalent.”  So if the software involved in incidents (3) and (4) involved rejection of proposed apps for the respective mobile devices, there would still be no violation under the new rules.

And the caveat for “reasonable network management” (§8.11(d)) says only that a practice is “reasonable if it is appropriate and tailored to achieving a legitimate network purpose, taking into account the particular network architecture of the broadband Internet access service.”  Voice and video apps, depending on how they have been implemented, can put particular strain on a wireless broadband network.  Blocking particular VoIP or apps like Slingbox might be allowed, in other words.

So that’s it.  Only four or fewer actual examples of non-open behavior by ISPs in ten years.  And the rules adopted to curb such behavior would probably only apply, at best, to the single case of Madison River (1), a local telephone carrier with six hundred employees, in a case the FCC agreed to drop without a formal finding of any kind nearly six years ago.

But maybe these aren’t the real problems.  Maybe the real problem is, as many regulatory advocates argue vaguely, the lack of “competition” for broadband.  Since the first deployment of high-speed Internet, multiple technologies have been used to deliver access to consumers, including DSL (copper), coaxial cable, satellite, cellular (3G and now 4G), wireless (WiFi and WiMax), and broadband over power lines.  According to the National Broadband Plan, 4% of the U.S. population still doesn’t have access to any of these alternatives.  In many parts of the country, only two providers are available and in others, the offered speeds of alternatives vary greatly, leaving high-bandwidth users without effective alternatives.

If lack of competition is the problem, though, why not solve that problem?  Well, perhaps the FCC would rather sidestep the issue, since it has demonstrated it is the wrong agency to encourage more competition.  The FCC, for example, has supported legal claims by states that they can prohibit municipalities from offering wireless service, and has dragged its feet on approving trials for broadband over power lines—the best hope for much of the 4% who today have no broadband option, most of whom live in rural areas which already have power line infrastructure.

Indeed, if there are anti-competitive behaviors now or in the future, existing antitrust law, enforceable by either the Department of Justice or the Federal Trade Commission, provide much more powerful tools both to prosecute and remedy activities that genuinely harm consumers.

It’s hard, by comparison, to find many examples in the long history of the FCC where it has used its sometimes vast authority to solve a genuine problem.  The Carterfone decision, which Commissioner Copps cites enthusiastically in his concurrence, and (finally) the opening of long distance telephony to competition, certainly helped consumers.  But both (and other examples) could also be seen as undoing harm caused by the agency in the first place.  And both dealt with technologies and applications that were mature.  Why does anyone believe the FCC can “prophylactically” solve a problem dealing with an emerging, rapidly-evolving new technology that has thrived in the last decade in part because it was unregulated?

The new rules, which are aimed at ensuring “edge” providers do not need to get “permission to innovate” from ISPs, may have the unintended effect of requiring ISPS—and edge providers—to get “permission to innovate” from the FCC.  That hardly seems like a risk worth taking for a problem that hasn’t presented itself.

When the only tool you have is a hammer, as the old cliché goes, everything looks like a nail.

Net neutrality, as I first wrote in 2006, is a complicated issue at the accident-prone intersection of technology and policy.  But some of its most determined—one might say desperate—proponents are increasingly anxious to simplify the problem into political slogans with no melody and sound bites with no nutritional value.  Even as—perhaps precisely because—a “win-win-win” compromise seems imminent, the rhetorical excess is being amplified.  The feedback is deafening.

In one of the most bizarre efforts yet to make everything be about net neutrality, Public Knowledge issued several statements this week “condemning” Fox’s decision to prohibit access to its online programming from Cablevision internet users.  In doing so, the organization claims, Fox has committed “the grossest violations of the open Internet committed by a U.S. company.”

This despite the fact that the open Internet rules (pick whatever version you like) apply only to Internet access providers.  Indeed, the rules are understood principally as a protection for content providers.  You know, like Fox.

OK, let’s see how we got here.

The Fox-Cablevision Dispute

In response to a fee dispute between the two companies, Fox on Saturday pulled its programming from the Cablevision system, and blocked Cablevision internet users from accessing Fox programming on-line.  Separately, Hulu.com (minority owned by Fox) enforced a similar restriction, hoping to stay “neutral” in the dispute.  Despite the fact that “The Simpsons” and “Family Guy” weren’t even on this weekend (pre-empted by some sports-related programming, I guess), the viewing public was incensed, journalists wrote, and Congress expressed alarm. The blackout, at least on cable, persists.

A wide range of commentators, including Free State Foundation’s Randolph May, view the spat as further evidence of the obsolescence of the existing cable television regulatory regime.  Among other oddities left over from the days when cable was the “community antenna” for areas that couldn’t get over-the-air signals, cable providers are required to carry local programming without offering any competing content.   But local providers are not obliged to make their content available to the cable operator, or even to negotiate.

As cable technology has flourished in both content and services, the relationship between providers and content producers has mutated into something strange and often unpleasant.  Just today, Sen. John Kerry sent draft legislation to the FCC aimed at plugging some of the holes in the dyke.  That, however, is a subject for another day.

Because somehow, Public Knowledge sees the Fox-Cablevision dispute as a failure of net neutrality.  In one post, the organization “condemns” Fox for blocking Internet access to its content.  “Blocking Web sites,” according to the press release, “is totally out of bounds in a dispute like this.”  Another release called out Fox, which was said to have “committed what should be considered one of the grossest violations of the open Internet committed by a U.S. company.”

The Open Internet means everything and nothing

What “open Internet” are they talking about?  The one I’m familiar with, and the one that I thought was at the center of years of debate over federal policy, is one in which anyone who wants to can put up a website, register their domain name, and then can be located and viewed by anyone with an Internet connection.

In the long-running net neutrality debate, the principal straw man involves the potential (it’s never happened so far) for Internet access providers, especially large ones serving customers nationally, to make side deals with the operators of some websites (Google, Amazon, Microsoft, Yahoo, eBay, perhaps) to manipulate Internet traffic at the last mile on their behalf.

Perhaps for a fee, in some alternate future, Microsoft would pay extra to have search results from Bing given priority, making it look “faster” than Google.  That would encourage Google to strike a similar deal and, before you know it, only the largest content providers would appear to be worth visiting.

That would effectively end the model of the web that has worked so well, where anyone with a computer can be a publisher, and the best material has the potential to rise to the top.  Where even entrepreneurs without a garage can launch a product or service on a shoestring and, if enough users like it, catapult themselves into being the next Google, eBay, Facebook or Twitter.

What does any of this have to do with Fox’s activities over the weekend?

As Public Knowledge sees it, any interference with web content is a violation of the open Internet, even if that interference is being done by the content provider itself! Fox has programming content on both its own site and on the Hulu website, content it places there, like every other site operator, on a voluntary basis.

But, having once made that content available for viewing, according to Public Knowledge, it should be a matter of federal law that they keep it there, and not limit access to it in any way for any consumer anywhere at any time.  It’s only consumers who have rights here:  “Consumers should not have their access to Web content threatened because a giant media company has a dispute over cable programming carriage.”  (emphasis added)

On this view, it’s not content owners who have rights (under copyright and otherwise) to determine how and when their content is accessed.  Rather, it is the consumer who has an unfettered right to access any content that happens to reside on any server with an Internet connection.  Here’s the directory to everything on my computer, dear readers.  Have at it.

The “Government’s Policy” Explained

Indeed, according to PK, this remarkable view of the law has long-since been embraced by the FCC.  “We need to remember that the government’s policy is that consumers should have access to lawful content online, and that policy should not be disrupted by a programming dispute.”

Here’s how Public Knowledge retcon’s that version of “the government’s policy.”

Until this spring, the 2005 Federal Communications Commission (FCC) policy statement held that Internet users had the right to access lawful content of their choice.  There was no exception in that policy for customers who happened to have their Internet provider caught up in a nasty retransmission battle with a broadcaster.

Said policy statement that was struck down [sic] on April 6 by the U.S. Appeals Court, D.C. Circuit, when Comcast challenged the enforcement of the policy against the company for blocking users of the BitTorrent [sic].

The policy statement was based on the assumption that if there were a bad actor in preventing the consumer from seeing online content, it would be an Internet Service Provider (ISP) blocking or otherwise inhibiting access to content.  In this case, of course, it’s the content provider that was doing the blocking.  It’s a moot point now, but it shouldn’t matter who is keeping consumers away from the lawful content. (emphasis added)

Where to begin?  For starters, the policy statement was not “struck down” in the Comcast case.  The court held (courts do that, by the way, not statements of policy) that the FCC failed to identify any provision of the Communications Act that gave them the power to enforce the policy statement against Comcast.

That is all the court held.  The court said nothing about the statement itself, and even left open the possibility that there were provisions that might work but which were not cited by the agency.  (The FCC chose not to ask for a rehearing of the decision, or to appeal it to the U.S. Supreme Court.)

Moreover, there is embedded here an almost willful misuse of the phrase “lawful content.”  Lawful content means any web content other than files that users want to share with each other without license from copyright holders, including commercial software, movies, music, and documents.  None of that activity (much of what BitTorrent is still used for, by the way–the source of the Comcast case in the first place) is “lawful.”  The FCC does not want to discourage—and may indeed want to require—ISPs from interfering, blocking, and otherwise policing the access of that unlawful content.

Here, however, PK reads “lawful content” to mean content that the user has a lawful right to access, which, apparently, is all content—any file on any device connected to the Internet.

But “lawful content” does not somehow confer proprietary rights to consumers to access whatever content they like, whenever and however they like.  The owner of the content, the entity that made it available, can always decide, for any or no reason, to remove it or restrict it.   Lawful content isn’t a right for consumers—it just means something other than unlawful content.

Still, the more remarkable bit of linguistic judo is the last paragraph, in which the 2005 Open Internet policy statement becomes not a policy limiting the behavior of access providers but of absolutely everyone connected to the Internet.

The opposite is utterly clear from reading the policy statement, which addressed itself specifically to “providers of telecommunications for Internet access or Internet Protocol-enabled (IP-enabled) services.”

But that language, according to Public Knowledge, is just an “assumption.”  The FCC actually meant not just ISPs but anyone who can possibly interference with what content a user can access, which is to say anyone with a website.  When it comes to consumer access to content, it “shouldn’t matter” that the content provider herself decides to limit access.  The content, after all, is “lawful,” and therefore, no one can “[keep] consumers away” from it.

The nonsensical nature of this mangling of completely clear language to the contrary becomes even clearer if you try for a moment to take it to the next logical step.  On PK’s view, all content that was ever part of the Internet is “lawful content,” and, under the 2005 policy statement, no one is allowed to keep consumers away from it, including, as here, the actual owners of the content.

So does that mean that having put up this post (I presume the content is “lawful”), I can’t at some future date take it down, or remove some part of it?

Well maybe their objection is just to selective limitation.  Having agreed to the social contract that comes with creating a website, I’ve agreed to an open principal (enforceable by federal law) that requires my making it freely and permanently available to anyone, anywhere, who wants to view it.  I can’t block users with certain IP addresses, whether that blocking is based on knowledge that those addresses are spammers, or residents of a country with whom I am not legally permitted to do business, or, as here, are customers of a company with whom I am engaged in a dispute over content in another channel.

But of course selective limitation of content access is a feature of every website.  You know, like the kind that comes with requiring a user to register and sign in (eBay), or accept cookies that allow the site to customize the user’s experience (Yahoo!), or pay a subscription fee to access some or all of the information (The Wall Street Journal, The New York Times), or that requires a consumer see not just the “lawful content” they want but also, side-by-side, advertising or other information that helps pay for the creation and upkeep of the site (Google, everyone else).

Or that allows a user to view a file but not to copy and resell copies of it (streaming media).  Or that limits access or use of a web service by geography (banking, gambling and other protected industries).   Or that require users to grant certain rights to the site provider to use information provided by the user (Facebook, Twitter) in exchange for use of the services.

Paradise Lost by the D.C. Circuit’s Comcast Decision

Or maybe their objection is just to when Fox does it?

Under PK’s view of net neutrality, the Web is a consumer paradise, where content magically appears for purely altruistic reasons and stays forever to frolic and interact.  Fox can’t limit, even arbitrarily and capriciously, who can and cannot watch its programming on the Web.  It must make it freely available to everyone and anyone, or face condemnation by self-appointed consumer advocates who will, as prosecutor, judge and jury, convict them of having committed “the grossest violations” possible of the FCC’s open Internet policy.

That is, if only the law that PK believes represents longstanding “government policy” was still on the books.  For the real tragedy of the Fox-Cablevision dispute is that the FCC is now powerless to enforce that policy, and indeed, is powerless to stop even the “grossest violations.”

If only the D.C. Circuit hadn’t ruled against the FCC in the Comcast case, then the agency would, on this view, be able to stop Fox and Hulu from restricting access to Fox programming from Cablevision internet customers.  Or anyone else.  Ever.

That of course was never the law, and never will be.   More-or-less coincidentally, the FCC has limited jurisdiction over Fox as a broadcaster, but not to require it to make its programming available on the web, on-demand to everyone who wants to see it.

Fox aside, there is nothing in The Communications Act that could possibly be thought to extend the agency’s power to policing the behavior of all web content providers, which these days includes pretty much every single Internet user.

Nor did the Open Internet policy statement have anything to say about content providers, period.  If it had, it would have represented an ultra vires extension of the FCC’s powers that would have shamed even the most pro-regulatory cheerleader.  It would never have stood up to any legal challenge (First Amendment?  Fifth Amendment?  For starters…)

Not only does it matter but it certainly “should matter who is keeping consumers away from lawful content.”  When the “who” is the owner of the content itself, they have the right and almost certainly the need to restrict access to some or all consumers, now or in the future, without having to ask permission from the FCC.

And thank goodness.  An FCC with the power to order content providers to make content available to anyone and everyone, all the time and with no restrictions, would surely lead to a web with very little content in the first place.

Who would put any content online otherwise?  Government agencies?  Not-for-profits?  Non-U.S. users not subject to the FCC?   (But since their content would be available to U.S. consumers, who on the PK view have all the rights here, perhaps the FCC’s authority, pre-Comcast, extended to non-U.S. content providers, too.)

Not much of a web there.

No one Believes This—Including Public Knowledge

The wistful nostalgia for life before the Comcast decision is beyond misguided.  No proposal before or since would have changed the fundamental principal that open Internet rules apply to Internet access providers only.

Under the detailed net neutrality rules proposed by the FCC in 2009, for example, the Policy Statement would be extended and formalized, but would still apply only to “providers of broadband Internet access service.”  Likewise the Google-Verizon proposed legislative framework.  Likewise even the ill-advised proposal to reclassify broadband Internet access under Title II to give the FCC more authority—it’s still more authority only over access providers, not just anyone with an iPhone.

(Though perhaps PK is hanging its hopes on some worrisome language in the Title II Notice of Inquiry that might extend that authority, see “The Seven Deadly Sins of Title II Reclassification.”)

Public Knowledge has never actually proposed its own version of net neutrality legislation.  So I guess it’s possible that they’ve imagined all along that the rules would apply to content providers as well as ISPs.

Well, but the organization does have a “position” statement on net neutrality.  And guess what?  It doesn’t line up with their new-found understanding of the 2005 FCC Policy statement either.   Public Knowledge’s own position on net neutrality addresses itself solely to limits and restrictions on “network operators.”   (E.g., “Public Knowledge supports a neutral Internet where network operators may offer different levels of access at higher rates as long as that tier is offered on a nondiscriminatory basis to every other provider.”)

So apparently even Public Knowledge is among the sensible group in the net neutrality debate who reject the naïve and foolish idea that “it shouldn’t matter who is keeping consumers away from the lawful content.”

Did the rhetoric just get away from them over there, or are those who support Public Knowledge’s push for net neutrality really supporting something very different–different even than what the organization says it means by that phrase?  Something that would extend federal regulatory authority to every publisher of content on the web, including you?

I’m not sure which answer is more disturbing.

My article for CNET News.com this morning analyzes the “leaked” net neutrality bill from Rep. Henry Waxman, chair of the House Energy and Commerce Committee.  I put leaked in quotes because so many sources came up with this document yesterday that its escape from the secrecy of the legislative process hardly seems dramatic.  Reporters with sources inside Waxman’s office, including The Hill and The Washington Post, expect Waxman to introduce the bill sometime this week.

The CNET article goes through the bill in some detail, and I won’t duplicate the analysis here.  It is a relatively short piece of legislation that makes limited changes to Title I of the Communications Act, giving the FCC only the authority it needs to implement “core” regulations that would allow the agency to enforce violations of the open Internet principles.

With a few notable exceptions, the Waxman bill mirrors both the FCC’s own proposed rulemaking from last October (still pending) as well as the Google-Verizon legislative framework the two companies released in July.  All three begin with the basic open Internet rules that originate with the FCC’s 2005 policy statement, with some version of a content nondiscrimination rule and a transparency rule added.    (There’s considerable controversy over the wording of the nondiscrimination rule; none about transparency.)

The Waxman draft would sunset at the end of 2012.  And it asks the FCC to report to Congress sooner than that if any additional provisions are required to implement key features of the National Broadband Plan, which has sadly been lost to the tempest-in-a-teapot wrangling over net neutrality before and since it was published.

Many commentators who are already condemning Waxman for selling out “real” net neutrality are upset over provisions—including the sensible call for case-by-case adjudication of complaints rather than the fool’s errand of developing detailed rules and regulations in advance—that appear in all three documents.  They either don’t know or don’t care that in that regard Waxman’s bill breaks no new ground.

Where the bill differs most is its treatment of wireless broadband.  The FCC’s October NPRM, albeit with reservations, ultimately concluded that wireless should not be treated any differently than wireline broadband.  Google-Verizon reached the opposite conclusion, encouraging lawmakers to leave wireless broadband out of any new rules, at least until the market and the infrastructure that supports it become more stable.

Waxman’s draft calls for limited application of the rules to wireless broadband, in particular prohibiting carriers from blocking applications that compete with their voice or video offerings.  But it isn’t clear if that prohibition refers to voice or video offerings over wireless broadband or extends to products (digital voice, FIOS, UVerse) that the wireless carriers offer on their wireline infrastructures.

And the draft also carves out an exception to that rule for app stores, meaning carriers can still control what apps its customers download onto their wireless devices based on whatever criteria (performance, politics, prudery) the app store operator uses.

If net neutrality needs federal legislation and federal enforcement (it does not), then this bill is certainly not the worst way to go about it.  The draft shows considerable evidence of horse-trading and of multiple cooks in the kitchen, leaves confusing holes and open questions, and, so far, doesn’t even have a name.  But at least it explicitly takes Title II reclassification of broadband Internet access, the worst idea to surface in the course of this multi-year debate, off the table.

Reading the draft makes me nostalgic for the “legislative process” course I took in law school with long-time Washington veteran Abner Mikva, who has served in all three branches over his career.  There was the official version of the legislative process—the “Schoolhouse Rock” song, for people of a certain generation—and then there was what really happened.  (See also the classic Simpsons episode featuring a helpful janitor who “resembled” Walter Mondale, “Mr. Spritz Goes to Washington.”)

Beyond the text, in other words, is the shadow theater.  Why is Waxman, a strong net neutrality supporter, leading the charge for a bill that gives up much of what the most extreme elements have demanded?  (Watch for the inevitable condemnation of Waxman that will follow the introduction of the bill, and for Tea Party opposition to any Republican support for it.)  Why has FCC Chairman Julius Genachowski expressed appreciation that Congress is working on a solution, when his own agency has in theory already developed the necessary record to proceed?  Why introduce a bill so close to adjournment, with election results so uncertain?

I have my theories, as does every other policy analyst who covers the net neutrality beat.  But predicting what will happen in politics, as opposed to technology, is a losing proposition.  So I’ll just keep watching, and trying to point out the most egregious misstatements of fact along the way.

The Progress and Freedom Foundation has just published a white paper I wrote for them titled “The Seven Deadly Sins of Title II Reclassification (NOI Remix).”  This is an expanded and revised version of an earlier blog post that looks deeply into the FCC’s pending Notice of Inquiry regarding broadband Internet access. You can download a PDF here.

I point out that beyond the danger of subjecting broadband Internet to extensive new regulations under the so-called “Third Way” approach outlined by FCC Chairman Julius Genachowski, a number of other troubling features in the Notice indicate an even broader agenda for the agency with regard to the Internet.

• Pride: As the FCC attempts to define what services would be subjected to reclassification, the agency runs the risk of both under- and over-inclusion, which could harm consumers, network operators, and content and applications providers.
• Lust: The agency is reaching out for additional powers beyond its reclassification proposals — including an effort to wrest privacy enforcement powers from the Federal Trade Commission and putting itself in charge of cybersecurity for homeland security.
• Anger: The “Third Way” may dramatically expand the scope of federal wiretapping laws, requiring law enforcement “back doors” for a wide range of products and services.
• Gluttony: Reclassifying broadband opens the door to state and local government regulation, which would overwhelm Internet access with a deluge of conflicting, and innovation-killing, laws, rules and new consumer taxes.
• Sloth: As the FCC looks for a legal basis to defend reclassification, basic activities — such as caching, searching, and browsing — may for the first time be included in the category of services subject to “common carrier” regulation.
• Vanity: Though wireless networks face greater challenges from the broadband Internet than wireline networks, the FCC seems poised to impose more, not less, regulation on wireless broadband.
• Greed: Reclassification of broadband services could vastly expand the contribution base for the Universal Service Fund, adding new consumer fees while supersizing this important, but exceedingly wasteful, program.

I’m grateful to PFF, especially Berin Szoka, Adam Marcus, Mike Wendy and Adam Thierer, for their interest and help in publishing the article.

The release of a joint policy framework from Google and Verizon this week touched off even more activity in the never-ending saga of Net Neutrality than the rumors about the possibility such an agreement was in the works did the week before.

Op-ed pages, business and technology news programs, and public radio’s precious moments were overrun with anxious talking heads denouncing or praising the latest developments, or even a few of us trying just to explain what was and was not actually being said and done.

That’s not how August is supposed to be in policyland, when Washington reverts to the swamp from which it came.  (John Adams left early one summer during his Presidency and refused to return long after the heat had broken.)  I had hoped at long last to get around to finalizing last year’s tax return or maybe fixing my perennially-broken irrigation system, but oh well.

In case you’re not yet exhausted by the debate that dares not stop speaking its name, I offer some additional content, all of it of the shamelessly self-promoting variety. I won’t even insult your intelligence by pretending to apologize.   Not that my publisher seems to remember this, but I still have a book to hawk.  (See “The Laws of Disruption”)

• American Public Media “Future Tense,” August 13, 2010 (five minutes)

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• “Give Technology a Chance,” The San Francisco Chronicle, August 13, 2010
• CNET, “Reporters Roundtable, August 13, 2010 (thirty-five minutes)

http://www.cnet.com/av/video/embed/player.swf And more to come. By the way, for a view of the current state of the net neutrality non-crisis by someone other than me, I highly recommend Steven Pearlstein’s editorial in today’s Washington Post.  This is simply the best summary of the real issues in a short space I’ve seen yet. And, alas, I’ve seen a lot. Next week:  Seattle and the Privacy, Identity and Innovation conference, followed by family duties in the Midwest for a a few days.  So please, no more net neutrality or Title II developments.

I’ve just published a long analysis for CNET of the proposed legislative framework presented yesterday by Google and Verizon.

The proposal has generated howls of anguish from the usual suspects (see quotes appearing in Cecilia Kang, “Silicon Valley criticizes Google-Verizon accord” in The Washington Post; Matthew Lasar’s “Google-Verizon NN Pact Riddled with Loopholes” on Ars Technica and Marguerite Reardon’s “Net neutrality crusaders slam Verizon, Google” at CNET for a sampling of the vitriol).

But after going through the framework and comparing it more-or-less line for line with what the FCC proposed back in October, I found there were very few significant differences.  Surprisingly, much of the outrage being unleashed against the framework relates to provisions and features that are identical to the FCC’s Notice of Proposed Rulemaking (NPRM), which of course many of those yelling the loudest ardently support.

At the outset, one obvious difference that many reporters and commentators keep missing (in some cases, intentionally), is that the Google-Verizon framework has absolutely no legal significance.  It’s not a treaty, accord, agreement, deal, pact, contract or business arrangement—all terms still being used to describe it.  It doesn’t bind anyone to do anything, including Google and Verizon.

All that was released yesterday was a legislative proposal they hope will be taken up by lawmakers who actually have the authority to write legislation.  But you’d think from some of the commentary that this was the Internet equivalent of the secret treaty between Germany and Russia at the start of World War II.  Some commentators sound genuinely disappointed that something more nefarious, as had been widely and wildly reported last week, didn’t emerge.

Summary – Compare and Contrast

Let’s start with the similarities, described in more detail in the CNET piece:

• Both propose neutrality rules that are nearly identical, including the no blocking for lawful content, no blocking lawful devices, network management transparency, and nondiscrimination.  Of these, only the wording of the nondiscrimination rule is different (more on that below).

• Both limit the application of the rules to principles of reasonable network management.

• Both exclude from application of the rules certain IP-based services that may run on the same infrastructure but which are offered to business or consumer customers as paid services, such as digital cable or digital voice today and others perhaps tomorrow.  The NPRM calls these “managed or specialized services,” the framework refers to them as “differentiated services.”

• Both propose that the FCC enforce the rules by adjudicating complaints on a “case-by-case” basis.

• Both recognize that some classes of Internet content (e.g., voice and video) must receive priority treatment to maintain their integrity, and don’t consider such prioritization by class to be a violation of the rules.

• Both encourage the resolution of network management and other neutrality related disputes through technical organizations, engineering task forces, and other kinds of self-regulation, much as the Internet protocols have always been developed and maintained.

• Both exclude from application of the net neutrality rules any content or applications or devices that are not “lawful.”  This means that network operators can block, throttle, or otherwise constrain user activities that involve, notably, copyright infringement.  Unlicensed file sharing of movies and music, in other words, will not be insulated by neutrality rules.  (Ironically, Comcast’s blocking of the BitTorrent protocol started the current round of neutrality unrest, even though nearly all of BitTorrent uses at the time were not “lawful.”)  See EFF’s concerns on this point.

Again, much of the ire raised at the framework relates to aspects for which there is no material difference with the NPRM.

Now let’s get to the differences:

• The Google-Verizon framework would exclude wireless broadband Internet from application of the rules, at least for now.  Though the NPRM recognized there were significant limits to the existing wireless infrastructure (spectrum, speed, coverage, towers) that made it more difficult to allow customers to use whatever bandwidth-hogging applications they wanted, the NPRM came down on the side of applying the rules to wireless.  This was perhaps the most contentious feature of the NPRM, judging from the comments filed.

Google has notably changed its tune on wireless broadband.  In the joint filing with the FCC on the NPRM, the companies acknowledged this was an area where they held opposite views—Google believed the rules should apply to wireless broadband, Verizon did not.  Now both agree that applying the rules here would do more harm than good, if only until the market and technology evolve further.

• The framework would deny the FCC the power to expand or enhance the rules through further rulemakings.  Though the framework is admittedly not at its clearest here, what Google and Verizon seem to have in mind is that Congress, not the FCC, would enact the neutrality rules into law and give the FCC the power to enforce them.

But the FCC would remain unable to make its own rules or otherwise regulate broadband Internet access, the current state of the law as was most recently affirmed by the D.C. Circuit in the Comcast case.  The framework, in other words, joins the chorus arguing against the FCC’s effort to reclassify broadband under Title II and also imagines the NPRM would not be completed.

Reasonable Network Management

Let me just highlight one area of common wording that has received a great deal of negative feedback as applied to the framework and one area of difference.

Consider the definitions of “reasonable network management” that appear in both documents.

First, the NPRM:

Subject to reasonable network management, a provider of broadband Internet access service must treat lawful content, applications, and services in a nondiscriminatory manner.

We understand the term “nondiscriminatory” to mean that a broadband Internet access service provider may not charge a content, application, or service provider for enhanced or prioritized access to the subscribers of the broadband Internet access service provider, as illustrated in the diagram below. We propose that this rule would not prevent a broadband Internet access service provider from charging subscribers different prices for different services.

Reasonable network management consists of: (a) reasonable practices employed by a provider of broadband Internet access service to (i) reduce or mitigate the effects of congestion on its network or to address quality-of-service concerns; (ii) address traffic that is unwanted by users or harmful; (iii) prevent the transfer of unlawful content; or (iv) prevent the unlawful transfer of content; and (b) other reasonable network management practices.

Now, the Google-Verizon framework:

Broadband Internet access service providers are permitted to engage in reasonable network management. Reasonable network management includes any technically sound practice: to reduce or mitigate the effects of congestion on its network; to ensure network security or integrity; to address traffic that is unwanted by or harmful to users, the provider’s network, or the Internet; to ensure service quality to a subscriber; to provide services or capabilities consistent with a consumer’s choices; that is consistent with the technical requirements, standards, or best practices adopted by an independent, widely-recognized Internet community governance initiative or standard-setting organization; to prioritize general classes or types of Internet traffic, based on latency; or otherwise to manage the daily operation of its network.

Note here that the “unwanted by or harmful to users” language, for which the framework was skewered yesterday, appears in nearly identical form in the NPRM.

Nondiscrimination

Here’s how the FCC’s “nondiscrimination” rule was proposed:

Subject to reasonable network management, a provider of broadband Internet access service must treat lawful content, applications, and services in a nondiscriminatory manner.

And here it is from the framework:

In providing broadband Internet access service, a provider would be prohibited from engaging in undue discrimination against any lawful Internet content, application, or service in a manner that causes meaningful harm to competition or to users.  Prioritization of Internet traffic would be presumed inconsistent with the non-discrimination standard, but the presumption could be rebutted.

That certainly sounds different (with the addition of “undue” as a qualifier and the requirement of a showing of “meaningful harm”), but here’s the FCC’s explanation of what it means by nondiscrimination and the limits that would apply under the NPRM:

We understand the term “nondiscriminatory” to mean that a broadband Internet access service provider may not charge a content, application, or service provider for enhanced or prioritized access to the subscribers of the broadband Internet access service provider….We propose that this rule would not prevent a broadband Internet access service provider from charging subscribers different prices for different services..

We believe that the proposed nondiscrimination rule, subject to reasonable network management and understood in the context of our proposal for a separate category of “managed” or “specialized” services (described below), may offer an appropriately light and flexible policy to preserve the open Internet. Our intent is to provide industry and consumers with clearer expectations, while accommodating the changing needs of Internet-related technologies and business practices. Greater predictability in this area will enable broadband providers to better plan for the future, relying on clear guidelines for what practices are consistent with federal Internet policy. First, as explained in detail below in section IV.H, reasonable network management would provide broadband Internet access service providers substantial flexibility to take reasonable measures to manage their networks, including but not limited to measures to address and mitigate the effects of congestion on their networks or to address quality-of-service needs, and to provide a safe and secure Internet experience for their users. We also recognize that what is reasonable may be different for different providers depending on what technologies they use to provide broadband Internet access service (e.g., fiber optic networks differ in many important respects from 3G and 4G wireless broadband networks). We intend reasonable network management to be meaningful and flexible.

Second, as explained below in section IV.G, we recognize that some services, such as some services provided to enterprise customers, IP-enabled “cable television” delivery, facilities-based VoIP services, or a specialized telemedicine application, may be provided to end users over the same facilities as broadband Internet access service, but may not themselves be an Internet access service and instead may be classified as distinct managed or specialized services. These services may require enhanced quality of service to work well. As these may not be “broadband Internet access services,” none of the principles we propose would necessarily or automatically apply to these services.

In this context, with a flexible approach to reasonable network management, and understanding that managed or specialized services, to which the principles do not apply in part or full, may be offered over the same facilities as those used to provide broadband Internet access service, we believe that the proposed approach to nondiscrimination will promote the goals of an open Internet.

Though the FCC doesn’t use the words “undue” and “meaningful harm,” the qualifying comments seem to suggest something quite similar.  So are the differences actually meaningful in the end?  Meaningful enough to generate so much sturm and drang?  You make the call.

At ten A.M. Pacific this morning, CNET News.com asked if I could write an article unraveling the legal implications of a rumored deal between Google and Verizon on net neutrality. I didn’t see how I could analyze a deal whose terms (and indeed, whose existence) are unknown, but I thought it was a good opportunity to make note of several positive developments in the net neutrality war this summer.

Just as I was finishing the piece a few hours later, another shocker came when the FCC announced it was concluding talks it had been holding since June with the major net neutrality stakeholders. It’s possible the leaked story about Google and Verizon, and the feverish response to it, whipped up by the straggling remnants of a coalition aimed at getting an extreme version of net neutrality into U.S. law by any means necessary, soured the agency on what appeared to be productive negotiations. Or maybe they’ve just gone as far as they can for now.

So I started over, and added emphasis to the outside-the-beltway developments that, in the end, may offer the best hope for a resolution to what is, after all is said and done, a technical problem requiring a technical solution.

I’ll let the piece speak for itself, in part out of necessity–I’m pooped. (I now have renewed sympathy and appreciation for the work of real journalists, which I am not.) But had I had more time and more column inches, I would have emphasized one point I hope comes across in the story. And that is that the politicization of problems of network management has done nothing to solve them. It has done the opposite.

What’s become even clearer in the last 24 hours is how the extremists in this largely-choreographed fight are determined not to have it end. They don’t care about free enterprise, consumers, or respect for the rule of law–though these are the principles they make the most noise about. But that’s just what it is, noise.

Memo to Silicon Valley: you’re wise to avoid as much as possible the politics of technology. But the best way to take issues away from politicians is to solve them with engineering.

The White House and the Federal Communications Commission have painted themselves into a very tight and very dangerous corner on Net Neutrality.  To date, a bi-partisan majority of Congress, labor leaders, consumer groups and, increasingly, some of the initial advocates of open Internet rules are all shouting that the agency has gone off the rails in its increasingly Ahab-like pursuit of an obscure and academic policy objective.

Now comes further evidence, none of it surprising, that all this effort has been a fool’s errand from the start.  Jacqui Cheng of Ars Technica is reporting today on a new study from Australia’s University of Ballarat that suggests only .3% of file sharing using the BitTorrent protocol is something other than the unauthorized distribution of copyrighted works.  Which is to say that 99.7% of the traffic they sampled is illegal.  The Australian study, as Cheng notes, supports similar conclusions of a Princeton University study published earlier this year

Remember how we got here

What does that have to do with Net Neutrality?

Let’s recall how we got into this mess.

When it became clear in 2007 that Comcast was throttling or blocking BitTorrent traffic without disclosing the practice to consumers, the FCC held hearings to determine if the company had violated the agency’s 2005 Internet policy statement.  The Framework for Broadband Access to the Internet included the principle that “consumers are entitled to access the lawful Internet content of their choice . . . [and] to run applications and use services of their choice,” and many argued that Comcast’s behavior violated that principle.

In the interim, Comcast changed its method of managing high-volume activities and achieved a peaceful resolution with BitTorrent.  Still, the FCC concluded that Comcast had violated the policy and issued a non-financial sanction against the cable provider in 2008.

Comcast challenged the order to the U.S. Court of Appeals for the D.C. Circuit, which hears all appeals of FCC adjudications.  Comcast argued that the FCC lacked authority to enforce its policy, and the D.C. Circuit agreed.

While the D.C. Circuit case was pending, however, the FCC in October of last year issued its Notice of Proposed Rulemaking for “Preserving the Open Internet.”  The goal of this NPRM, still pending, is to codify and enlarge the 2005 Internet policy statement and transform it into enforceable net neutrality rules.

Why change the policy into rules?  In explaining the “Need for Commission Action,” the NPRM noted that “Despite our efforts to date, some conduct is occurring in the marketplace that warrants closer attention and could call for additional action by the Commission, including instances in which some Internet access service providers have been blocking or degrading Internet traffic, and doing so without disclosing those practices to users.”  (¶50)  The NPRM added to the four principles laid out in the 2005 policy a new requirement that ISPs make their network management practices more transparent to consumers.

But the NPRM premised the FCC’s authority to issue net neutrality rules on the same jurisdiction it used to issue the sanctions against Comcast, so-called “ancillary jurisdiction” under Title I of the Communications Act.

Once the D.C. Circuit ruled in April of this year that “ancillary jurisdiction” was insufficient, the FCC’s ability to complete and defend the NPRM was called into doubt.  The FCC couldn’t sanction Comcast under the policy statement, and may not be able to enforce the proposed rules either.  There may be no legal authority, the agency believes, to prohibit Comcast’s interruption of BitTorrent transfers.

So the FCC is now pursuing perhaps the most extreme option for shoring up its authority, and that is the reclassification of broadband Internet access to be a Title II “telecommunications” service subject to a dizzying array of potential new rules and regulations at the federal, state, and local level.

It is that leap of madness that has splintered the net neutrality coalition, and united Congress in calling for the FCC to step back from the brink.

Back to BitTorrent

Back to the BitTorrent studies.  The Australian and Princeton research makes clear what everyone already knows.  Despite the technical merits of the BitTorrent protocol and the best efforts of the company that manages the protocol, the vast majority of users availing themselves of this technology are using it for activities that violate U.S. and foreign copyright laws.

Here’s the problem.  The FCC’s Internet policy statement, the proposed rules, and the effort to ensure authority to enforce those rules under Title II are all premised on the sensible limitation that consumers should have the right to access the “ lawful Internet traffic” of their choice.  (See ¶ 1 of the Title II Notice of Inquiry, e.g.) (emphasis added)

They don’t apply at all to unlawful activities, whether of consumers or content providers.  Which is to say, they don’t apply to the vast majority of BitTorrent file transfers.

Not clear?  Let’s keep going.  According to the NOI, the FCC reads the Comcast decision as holding “the Commission lacked authority to prohibit practices of a major cable modem Internet service provider that involved secret interruption of lawful Internet transmissions, which the Commission found were unjustified and discriminatory and denied users the ability to access the Internet content and applications of their choice.” (emphasis added)

The proposed net neutrality rules are equally emphatic:  they apply only to lawful Internet activity.  (The NPRM refers to “lawful content” nearly 50 times.)

If there’s any doubt about the intent of the old policy, the proposed new rules, or Title II to protect illegal file sharing, the FCC dispels it over and over in the NPRM.  “The draft rules would not prohibit broadband Internet access service providers from taking reasonable action to prevent the transfer of unlawful content,” according to the Executive Summary of the NPRM, “ such as the unlawful distribution of copyrighted works . ” (emphasis added)

This is a fine how-do-you do.  Comcast limited its arguments in the D.C. Circuit to jurisdictional and procedural flaws in the FCC sanctions.  But assuming Comcast had made the argument, now supported by ample evidence, that it was not blocking any or nearly any “lawful content” in the first place, neither the old Internet policy nor the proposed Net Neutrality rules would actually apply to Comcast’s interference with BitTorrent transfers–the “practice” that started this catastrophe and which has led us to the verge of policy warfare.

Indeed, under the Digital Millennium Copyright Act and other copyright laws, it’s very likely that Comcast could be compelled by the Department of Justice or affected copyright holders to stop the vast majority of BitTorrent transfers, on pain of large civil or even criminal penalties.  Which is yet another reason (if the FCC had needed another reason) that none of the proposed rules, regulations, or reclassifications would actually correct the only problem the FCC claims it is trying to address.

So neither the NPRM nor the Title II Notice of Inquiry, in the end, have anything to do with Comcast’s network management practices or the D.C. Circuit’s decision.  The sad irony here is that assuming the Commission goes ahead with reclassification and then completes the net neutrality rulemaking, there would be nothing to stop Comcast from going right back to blocking BitTorrent traffic.  There might even be legal authority compelling them to do so.

Meanwhile, the National Broadband Plan, the Commission’s stand-out achievement under Chairman Julius Genachowski, has taken a back-seat to hyperventilating over a non-event and a non-problem.

Please, can we get back to making the Internet better for more Americans?

Better late than never, I’ve finally given a close read to the Notice of Inquiry issued by the FCC on June 17^th.  (See my earlier comments, “FCC Votes for Reclassification, Dog Bites Man”.)  In some sense there was no surprise to the contents; the Commission’s legal counsel and Chairman Julius Genachowski had both published comments over a month before the NOI that laid out the regulatory scheme the Commission now has in mind for broadband Internet access.

Chairman Genachowski’s “Third Way” comments proposed an option that he hoped would satisfy both extremes.  The FCC would abandon efforts to find new ways to meet its regulatory goals using “ancillary jurisdiction” under Title I (an avenue the D.C. Circuit had wounded, but hadn’t actually exterminated, in the Comcast decision), but at the same time would not go as far as some advocates urged and put broadband Internet completely under the telephone rules of Title II.

Instead, the Commission would propose a “lite” version of Title II, based on a few guiding principles:

• Recognize the transmission component of broadband access service—and only this component—as a telecommunications service;
• Apply only a handful of provisions of Title II (Sections 201, 202, 208, 222, 254, and 255) that, prior to the Comcast decision, were widely believed to be within the Commission’s purview for broadband;
• Simultaneously renounce—that is, forbear from—application of the many sections of the Communications Act that are unnecessary and inappropriate for broadband access service; and
• Put in place up-front forbearance and meaningful boundaries to guard against regulatory overreach.

The NOI pretends not to take a position on any of three possible options – (1) stick with Title I and find a way to make it work, (2) reclassify broadband and apply the full suite of Title II regulations to Internet access providers, or (3) compromise on the Chairman’s Third Way, applying Title II but forbearing on any but the six sections noted above—at least, for now (see ¶ 98).  It asks for comments on all three options, however, and for a range of extensions and exceptions within each.

I’ve written elsewhere (see “Reality Check on ‘Reclassifying’ Broadband” and  “Net Neutrality and the Inconvenient Constitution”) about the dubious legal foundation on which the FCC rests its authority to change the definition of “information services” to suddenly include broadband Internet, after successfully (and correctly) convincing the U.S. Supreme Court that it did not.  That discussion will, it seems, have to wait until its next airing in federal court following inevitable litigation over whatever course the FCC takes.

This post deals with something altogether different—a number of startling tidbits that found their way into the June 17 ^th NOI.  As if Title II weren’t dangerous enough, there are hints and echoes throughout the NOI of regulatory dreams to come.  Beyond the hubris of reclassification, here are seven surprises buried in the 116 paragraphs of the NOI—its seven deadly sins.  In many cases the Commission is merely asking questions.  But the questions hint at a much broader—indeed overwhelming—regulatory agenda that goes beyond Net Neutrality and the undoing of the Comcast decision.

Pride:  The folly of defining “facilities-based” provisioning – The FCC is struggling to find a way to apply reclassification only to the largest ISPs – Comcast, AT&T, Verizon, Time Warner, etc.  But the statutory definition of “telecommunications” doesn’t give them much help.  So the NOI invents a new distinction, referred to variously as “facilities-based” providers (¶ 1) or providers of an actual “physical connection,” (¶ 106) or limiting the application of Title II just to the “transmission component” of a provider’s consumer offering (¶ 12).

All the FCC has in mind here is “a commonsense definition of broadband Internet service,” (¶ 107) (which they never provide), but in any case the devil is surely in the details.  First, it’s not clear that making that distinction would actually achieve the goal of applying the open Internet rules—network management, good or evil, largely occurs well above the transmission layers in the IP stack.

The sin here, however, is that of unintentional over-inclusion.  If Title II is applied to “facilities-based” providers, it could sweep in application providers who increasingly offer connectivity as a way to promote usage of their products.

Limiting the scope of reclassification just to “facilities-based” providers who sell directly to consumers doesn’t eliminate the risk of over-inclusion.  Some application providers, for example, offer a physical connection in partnership with an ISP (think Yahoo and Covad DSL service) and many large application providers own a good deal of fiber optic cable that could be used to connect directly with consumers.  (Think of Google’s promise to build gigabit test beds for select communities.)  Municipalities are still working to provide WiFi and WiMax connections, again in cooperation with existing ISPs.  (EarthLink planned several of these before running into financial and, in some cities, political trouble.)

There are other services, including Internet backbone provisioning, that could also fall into the Title II trap (see ¶ 64).  Would companies, such as Akamai, which offer caching services, suddenly find themselves subject to some or all of Title II?  (See ¶ 58)  How about Internet peering agreements (unmentioned in the NOI)?  Would these private contracts be subject to Title II as well?  (See ¶ 107)

Lust:  The lure of privacy, terrorism, crime, copyright – Though the express purpose of the NOI is to find a way to apply Title II to broadband, the Commission just can’t help lusting after some additional powers it appears interested in claiming for itself.  Though the Commissioners who voted for the NOI are adamant that the goal of reclassification is not to regulate “the Internet” but merely broadband access, the siren call of other issues on the minds of consumers and lawmakers may prove impossible to resist.

Recognizing, for example, that the Federal Trade Commission has been holding hearings all year on the problems of information privacy, the FCC now asks for comments about how it can use Title II authority to get into the game (¶ 39, 52, 82, 83, 96), promising of course to “complement” whatever actions the FTC is planning to take.

Cyberattacks and other forms of terrorism are also on the Commission’s mind.  In his separate statement, for example, Chairman Genachowski argues that the Comcast decision “raises questions about the right framework for the Commission to help protect against cyber-attacks.”

The NOI includes several references to homeland security and national defense—this in the wake of publicity surrounding Sen. Lieberman’s proposed law to give the President extensive emergency powers over the Internet.  (See Declan McCullaugh, “Lieberman Defends Emergency Net Authority Plan.”)  Lieberman’s bill puts the power squarely in the Department of Homeland Security—is the FCC hoping to use Title II to capture some of that power for itself?

And beyond shocking acts of terrorism, does the FCC see Title II as a license to require ISPs to help enforce other, lesser crimes, including copyright infringement, libel, bullying and cyberstalking, e-personation—and the rest?  Would Title II give the agency the ability to impose its content “decency” rules, limited today merely to broadcast television and radio, to Internet content, as Congress has unsuccessfully tried to help the Commission do on three separate occasions?

(Just as I wrote that sentence, the U.S. Court of Appeals for the Second Circuit ruled that the FCC’s recent effort to craft more aggressive indecency rules, applied to Janet Jackson’s nipple, violates the First Amendment.  The Commission is having quite a bad year in the courts!)

Anger:  Sharing the pain of CALEA – That last paragraph is admittedly speculation.  The NOI contains no references to copyright, crime, or indecency.  But here’s a law enforcement sin that isn’t speculative.  The NOI reminds us that separate from Title II, the FCC is required by law to enforce the Communications Assistance for Law Enforcement Act (CALEA). (¶ 89) CALEA is part of the rich tapestry of federal wiretap law, and requires “telecommunications carriers” to implement technical “back doors” that make it easier for federal law enforcement agencies to execute wiretapping orders.  Since 2005, the FCC has held that all facilities-based providers are subject to CALEA.

Here, the Commission assumes that reclassification would do nothing to change the broader application of CALEA already in place, and seeks comment on “this analysis.”  (¶ 89)  The Commission wonders how that analysis impacts its forbearance decisions, but I have a different question.  Assuming the definition of “facilities-based” Internet access providers is as muddled as it appears (see above), is the Commission intentionally or unintentionally extending the coverage of CALEA to anyone selling Internet “connectivity” to consumers, even those for whom that service is simply in the interest of promoting applications?

Again, would residents of communities participating in Google’s fiber optic test bed awake to discover that all of that wonderful data they are now pumping through the fiber is subject to capture and analysis by any law enforcement officer holding a wiretapping order?  Oops?

Gluttony:  The Insatiable Appetite of State and Local Regulators – Just when you think the worst is over, there’s a nasty surprise waiting at the end of the NOI.  Under Title II, the Commission reminds us, many aspects of telephone regulation are not exclusive to the FCC but are shared with state and even local regulatory agencies.

Fortunately, to avoid the catastrophic effects of imposing perhaps hundreds of different and conflicting regulatory schemes to broadband Internet access, the FCC has the authority to preempt state and local regulations that conflict with FCC “decisions,” and to preempt the application of those parts of Title II the FCC may or may not forbear.

But here’s the billion dollar question, which the NOI saves for the very last (¶ 109):  “Under each of the three approaches, what would be the limits on the states’ or localities’ authority to impose requirements on broadband Internet service and broadband Internet connectivity service?”

What indeed?  One of the provisions the FCC would not apply under the Third Way, for example, is § 253, which gives the Commission the authority to “preempt state regulations that prohibit the provision of telecommunications services.” (¶ 87)  So does the Third Way taketh federal authority only to giveth to state and local regulators?  Is the only way to avoid state and local regulations—oh, well, if you insist–to go to full Title II?  And might the FCC decide in any case to exercise their discretion, now or in the future, to allow local regulations of Internet connectivity?

What might those regulations look like?  One need only review the history of local telephone service to recall the rate-setting labyrinths, taxes, micromanagement of facilities investment and deployment decisions—not to mention the scourge of corruption, graft and other government crimes that have long accompanied the franchise process.  Want to upgrade your cable service?  Change your broadband provider?  Please file the appropriate forms with your state or local utility commission, and please be patient.

Fear-mongering?  Well, consider a proposal that will be voted on this summer at the annual meeting of the National Association of Utilities Commissioners.  (TC-1 at page 30)  The Commissioners will decide whether to urge the FCC to adopt what it calls a “fourth way” to fix the Net Neutrality problem.  Their description of the fourth way speaks for itself.  It would consist of:

“bi-jurisdictional regulatory oversight for broadband Internet connectivity service and broadband Internet service which recognizes the particular expertise of States in: managing front-line consumer education, protection and services programs; ensuring public safety; ensuring network service quality and reliability; collecting and mapping broadband service infrastructure and adoption data; designing and promoting broadband service availability and adoption programs; and implementing  competitively neutral pole attachment, rights-of-way and tower siting rules and programs.”

The proposal also asks the FCC, should it stick to the Third Way approach, to add in several other provisions left out of Chairman Genachowski’s list, including one (again, § 253) that would preserve the state’s ability to help out.

Or consider a proposal currently being debated by the California Public Utilities Commission.  California, likewise, would like to use reclassification as the key that unlocks the door to “cooperative federalism,” and has its own list of provisions the FCC ought not to forbear under the Third Way proposal.

Among other things, the CPUC’s general counsel is unhappy with the definition the FCC proposes for just who and what would be covered by Title II reclassification.  The CPUC proposal argues for a revised definition that “should be flexible enough to cover unforeseen technological [sic] in both the short- and long-term.”

The CPUC also proposes the FCC add to the list of those regulated by Title II providers Voice over Internet Protocol telephony, which is often a software application riding well above the “transmission” component of broadband access.

California is just the first (tax-starved) state I looked for.  I’m sure there are and will be others who will respond hungrily to the Commission’s invitation to “comment” on the appropriate role of state and local regulators under either a full or partial Title II regime.  (¶ 109, 110)

Sloth:  The sleeping giant of basic web functions – browsers, DNS lookup, and more – The NOI admits that the FCC is a bit behind the times when it comes to technical expertise, and they would like commenters to help them build a fuller record.  Specifically, ¶ 58 asks for help “to develop a current record on the technical and functional characteristics of broadband Internet service, and whether those characteristics have changed materially in the last decade.”

In particular, the NOI wants to know more about the current state of web browsers, DNS lookup services, web caching, and “other basic consumer Internet activities.”

Sounds innocent enough, but those are very loaded questions.  In the Brand X case, in which the U.S. Supreme Court agreed with the FCC that broadband Internet access over cable fit the definition of a Title I “information service” and not a Title II “telecommunications service,” browsers, DNS lookup and other “basic consumer Internet activities” were crucial to the analysis of the majority.  Because cable (and, later, it was decided, DSL) providers offered not simply a physical connection but also supporting or “enhanced” services to go with it—including DNS lookup, home pages, email support and the like—their offering to consumers was not simple common carriage.

Justice Scalia disagreed, and in dissent made the argument that cable Internet was in fact two separable offerings – the physical connection (the packet-switched network) and a set of information services that ran on top of that connection.  Consumers used some information services from the carrier, and some from other content providers (other web sites, e.g.).  Those information services were rightly left unregulated under Title I, but Congress intended the transmission component, according to Justice Scalia, to be treated as a common carrier “telecommunications service” under Title II.

The Third Way proposal in large part adopts the Scalia view of the Communications Act (see ¶ 20, 106), despite the fact that it was the FCC who argued vigorously against that view all along, and despite the fact that a majority of the Court agreed with them.

By asking these innocent questions about technical architecture, the FCC appears to be hedging its bets for a certain court challenge.   Any effort to reclassify broadband Internet access will generate long, complicated, and expensive litigation.  What, the courts will ask, has driven the FCC to make such an abrupt change in its interpretation of terms like “information service” whose statutory definitions haven’t changed since 1996?

We know it is little more than that the Chairman would like to undo the Comcast decision, of course, and thereafter complete the process of enrolling the open Internet rules proposed in October.  But in the event that proves an unavailing argument, it would be nice to be able to argue that the nature of the Internet and Internet access have fundamentally changed since 2005, when Brand X was decided.  If it’s clear that basic Internet services have become more distinct from the underlying physical connection, at least in the eyes of consumers, so much the better.

Or perhaps something bigger is lumbering lazily through the NOI.  Perhaps the FCC is considering whether “basic Internet activities” (browsing, searching, caching, etc.) have now become part of the definition of basic connectivity.  Perhaps Title II, in whole or in part, will apply not only to facilities-based providers, but to those who offer basic Internet services essential for web access.  (Why extend Title II to providers of “basic” information service?  See below, “Greed.”)   If so, the exception will swallow the rule, and just about everything else that makes the Internet ecosystem work.

Vanity:  The fading beauty of the cellular ingénue – Perhaps the most worrisome feature of the proposed open Internet rules is that they would apply with equal force to wired and wireless Internet access.  As any consumer knows, however, those two types of access couldn’t be more different.

Infrastructure providers have made enormous progress in innovating improvements to existing infrastructure—especially the cable and copper networks.  New forms of access have also emerged, including fiber optic cable, satellite, WiFi/WiMax, and the nascent provisioning of broadband over power lines, which has particular promise in remote areas which may have no other option for access.

Broadband speeds are increasing, and there’s every expectation that given current technology and current investment plans, the National Broadband Plan’s goal of 100 million Americans with access to 100 mbps Internet speeds by 2010 will be reached without any public spending.

The wireless world, however, is a different place.  After years of underutilization of 3G networks by consumers who saw no compelling or “killer” apps worth using, the latest generation of portable computing devices (iPhone, Android, Blackberry, Windows) has reached the tipping point and well beyond.  Existing networks in many locations are overcommitted, and political resistance to additional cell tower and other facilities deployment is exacerbating the problem.

Just last week, a front page story in the San Francisco Chronicle reported on growing tensions between cell phone providers and residents who want new towers located anywhere but near where they live, go to school, shop, or work.  CTIA-The Wireless Association announced that it would no longer hold events in San Francisco, after the city council, led by Mayor Gavin Newsome, passed a “Cell Phone Right to Know” ordinance that requires retail disclosure of a phone’s specific adoption rate of emitted radiation.

Given the likely continued lagging of cellular deployment, it seems prudent to consider less stringent restrictions on network management for wireless than for wireline.  Under the open Internet rules, providers would be unable to limit or ban outright certain high-bandwidth data services, notably video services and peer-to-peer file sharing, that the network may simply be unable to support.  But the proposed open Internet rules will have none of that.

The NOI does note some of the significant differences between wired and wireless (¶ 102), but also reminds us that the limited spectrum for wireless signals affords them special powers to regulate the business practices of providers. (¶ 103)  Under Title III of the Communications Act, which applies to wireless, the FCC has and makes use of the power to ensure spectrum uses are serving a broad “public interest.”

In some ways, then, Title III gives the Commission powers to regulate wireless broadband access beyond what they would get from a reclassification to Title II.  So even if the FCC were to choose the first option and leave the current classification scheme alone, wireless broadband providers might still be subject to open Internet rules under Title III.  It would be ironic if the only broadband providers whose network management practices were to be scrutinized were those who needed the most flexibility.  But irony is nothing new in communications law.

One power, however, might elude the FCC, and therefore might give further weight to a scheme that would regulate wireless broadband under Title III and Title II.  Title III does not include the extension of Universal Service to wireless broadband (¶ 103).  This is a particular concern given the increased reliance of under-served and at-risk communities on cellular technologies for all their communications needs.  (See the recent Pew Internet & Society study for details.)

While the NOI asks for comment on whether and to what extent the FCC ought to treat wireless broadband differently and at a later time from wired services, the thrust of this section makes clear the Commission is thinking of more, not less regulation for the struggling cellular industry.

Greed:  Universal Service taxes – So what about Universal Service?  In an effort to justify the Title II reclassification as something more than just a fix to the Comcast case, the FCC has (with some hedging) suggested that D.C. Circuit’s ruling also calls into question the Commission’s ability to implement the National Broadband Plan, published only a few weeks prior to the decision in Comcast.

At a conference sponsored by the Stanford Institute for Economic Policy Research that I attended, Chairman Genachowski was emphatic that nothing in Comcast constrained the FCC’s ability to execute the plan.

But in the run-up to the NOI, the rhetoric has changed.  Here the Chairman in his separate statement says only that “the recent court decision did not opine on the initiatives and policies that we have laid out transparently in the National Broadband Plan and elsewhere.”

Still, it’s clear that whether out of genuine concern or just for more political and legal cover, the Commission is trying to make the case that Comcast casts serious doubt on the Plan, and in particular the FCC’s recommendations for reform of the Universal Service Fund (USF).  (¶¶ 32-38).

Though the NOI politely recites the legal theories posed by several analysts for how USF reform could be done without any reclassification, the FCC is skeptical.  For the first and only time in the NOI, the FCC asks not for general comments on its existing authority to reform Universal Service but for the kind of evidence that would be “needed to successfully defend against a legal challenge to implementation of the theory.”

There is, of course, a great deal at stake.  The USF is fed by taxes paid by consumers as part of their telephone bills, and is used to subsidize telephone service to those who cannot otherwise afford it.  Some part of the fund is also used for the “E-Rate” program, which subsidizes Internet access for schools and libraries.

Like other parts of the fund, E-Rate has been the subject of considerable corruption.  As I noted in Law Four of “The Laws of Disruption,” a 2005 Congressional oversight committee labeled the then $2 billion E-Rate program, which had already spawned numerous criminal convictions for fraud, a disgrace, “completely [lacking] tangible measures of either effectiveness or impact.”

Today the USF collects $8 billion annually in consumer taxes, and there’s little doubt that the money is not being spent in a particularly efficient or useful way.  (See, for example, Cecilia Kang’s Washington Post article this week, “AT&T, Verizon get most federal aid for phone service.”)  The FCC is right to call for USF reform in the National Broadband Plan, and to propose repurposing the USF to subsidize basic Internet access as well as dial tone.  The needs for universal Internet access—employment, education, health care, government services, etc.—are obvious.

But what has this to do with Title II reclassification?  There’s no mention in the NOI of plans to extend the class of services or service providers obliged to collect the USF tax, which is to say there’s nothing to suggest a new tax on Internet access.  But Recommendation 8.10 of the NBP encourages just that.  The Plan recommends that Congress “broaden the USF contributions base” by finding some method of taxing broadband Internet customers.  (Congress has so far steadfastly resisted and preempted efforts to introduce any taxes on Internet access at the federal and state level.)

If Congress agreed with the FCC, broadband Internet access would someday be subject to taxes to help fund a reformed USF.  The bigger the category of providers included under Title II (the most likely collectors of such a tax), the bigger the USF.  The temptation to broaden the definition of affected companies from “facilities based” to something, as the California Public Utilities Commission put it, more “flexible,” would be tantalizing.

***

Other than these minor quibbles, the NOI offers nothing to worry about!

Not surprisingly, FCC Commissioners voted 3 to 2 today to open a Notice of Inquiry on changing the classification of broadband Internet access from an “information service” under Title I of the Communications Act to “telecommunications” under Title II.  (Title II was written for telephone service, and most of its provisions pre-date the breakup of the former AT&T monopoly.)  The story has been widely reported, including posts from The Washington Post, CNET, Computerworld, and The Hill.

As CNET’s Marguerite Reardon counts it, at least 282 members of Congress have already asked the FCC not to proceed with this strategy, including 74 Democrats.

I have written extensively about why a Title II regime is a very bad idea, even before the FCC began hinting it would make this attempt.  I’ve argued that the move is on extremely shaky legal grounds, usurps the authority of Congress in ways that challenge fundamental Constitutional principles of agency law, would cause serious harm to the Internet’s vibrant ecosystem, and would undermine the Commission’s worthy goals in implementing the National Broadband Plan.  No need to repeat any of these arguments here.  Reclassification is wrong on the facts, and wrong on the law.

What is Net Neutrality?

Instead, I thought it would be useful to return to the original problem, which is last fall’s Notice of Proposed Rulemaking on net neutrality.  For despite a smokescreen argument that reclassification is necessary to implement the NBP, everyone knows that today’s NOI was motivated by the Commission’s crushing defeat in Comcast v. FCC, which held that “ancillary authority” associated with Title I did not give the agency jurisdiction to enforce its existing net neutrality policy.

Rather than request an en banc rehearing of Comcast, or appeal the case, or follow the court’s advice and return to Congress for the authority to enforce the net neutrality rules, the FCC has chosen in the name of expediency simply to rewrite the Communications Act itself.

Many metaphors have been applied to this odd decision.  I liken it to setting your house on fire to light your cigarette.  (You shouldn’t be smoking in the first place.)

Let me be clear, once again, that I am all for an open and transparent Internet.  I believe the packet-switching architecture is one of the key reasons TCP/IP has become the dominant data communications protocol (and will soon dominate voice and video).

Packet-switching isn’t the only reason the Internet has triumphed.  Perhaps the other, more important secrets to TCP/IP’s success are that it is a non-proprietary standard –so long SNA, DECNet and OSI and the corporate strategies their respective owners tried to pursue through them–and simple enough to be baked in to even the least-powerful computing devices. The Internet doesn’t care if you are an RFID tag or a supercomputer.  If you speak the language, you can participate in the network.

These features have made the Internet, as I first argued in 1998 in “Unleashing the Killer App,” an engine for remarkable innovation over the last ten years

The question for me, as I wrote in Chapter 4 of “The Laws of Disruption,” comes down most importantly to one of institutional economics.  Who is best-suited, legal authority aside, to enforce the features of the Internet’s architecture and protocols that make it work so well?  The market?  Industry self-regulation?  A global NGO?  The FCC?  Or put another way, why is a federal government agency (limited, by definition, to enforcing it authority only within the U.S.) such a poor choice for the job, despite the best intentions of its leadership and the obviously strong work ethic of its staff?

To answer that, let’s back all the way up.  Net neutrality is a political concept overlayed on a technical and business architecture.  That’s what makes this debate both dangerous and frustrating.

For starters, it’s hard to come up with a concise definition of net neutrality, largely because it’s one of those terms like “family values” that means something different to everyone who uses it.  For me it’s become something of a litmus test—people who use it positively are generally hostile to large communications companies.  People who use it negatively are generally hostile to regulatory agencies.  A lot of that anger, wherever it comes, seems to get channeled into net neutrality.

In fact the FCC doesn’t even use the term—they talk about the “open and transparent” Internet instead.

But here’s the general idea.  The defining feature of the Internet is that information is broken up into small “packets” of data which are routed through any number of computers on the world-wide network and then are reassembled when they reach their destination.

Up until now, with some notable exceptions, every participating computer relays those packets without knowing what’s in them or who they come from.  The network operates on a packet-neutral model—when one computer receives it, it looks only to see where it’s heading and sends it, depending on traffic congestion at the time, to some other computer along the way just as quickly as it can.

That’s still the model on which the Internet works.  The FCC’s concern is not with current practice, but of future problems.   Increasingly, they see a few dominant providers controlling the outgoing and incoming packets to and from consumers—the first and last mile.  So while the computers between my house and Google headquarters all treat my packets to Google and Google’s packets back to me in a neutral fashion, there’s no law that keeps Comcast (my provider) from opening those packets on their way in or on their way out and deciding to slow or speed up some or all of them.

(Well, the law of antitrust and unfair trade could in fact apply here, depending on how the non-neutral behavior was expressed and by whom.  See below.)

Why would they do that?  Perhaps they make a deal with Google to give priority to Google-related packets in exchange for a fee or a share of Google’s ad revenues.  Or, maybe they want to encourage me to watch Comcast programming instead of YouTube videos, and intentionally slow down YouTube packets to make those videos less appealing to watch.

Most of this is theoretical so far.  No ISP offers the premium or “fast lane” service to individual applications.  Comcast, however, was caught a few years ago experimenting with slowing down the BitTorrent peer-to-peer protocol.  Some of Comcast’s most active customers were clogging the pipes sending and receiving very large files (mostly illegal copies of movies, it turns out).

When they were caught, the company agreed instead to stop offering “unlimited” access and to use more sophisticated network management techniques to ensure a few customers didn’t slow traffic for everyone else.  Comcast and BitTorrent made peace, but the FCC held hearings and sanctioned Comcast after-the-fact, leading to the court case that made clear the FCC has no authority to enforce its neutrality policies.

The simple-minded dichotomy of the ensuing “debate” leaves out some important and complicated technical details.  First, some applications already require and get “premium” treatment for their packets.  Voice and video packets have to arrive pretty much at the same time in order to maintain good quality, so Voice over IP telephone calls (Skype, Vonage, Comcast) get priority treatment, as do cable programming packets, which, after all, are using the same connection to your home that the data uses.

Google, as one of the largest providers of outbound packets, has deals with some ISPs to locate Google-only servers in their hubs to ensure local copies of their web pages are always close by, a service offered more generally by companies such as Akamai and LimeLight, which offers caching services to paying customers.  In that sense, technology is being used to give priority even to data packets, about which no one should complain.

Fighting over the Future

So the net neutrality fight, aside from leaving out any real appreciation either for technological or business realities, is really a fight about the future.  As cable and telephone companies invest billions in the next generation of technology—including fiber optics and next-generation cellular services–application providers fear they will be asked to shoulder more of the costs of that investment through premium service fees.

Consumer groups have been co-opted into this fight, and see it as one that pits big corporations against powerless customers who need outside advocates to save them from dangers they do not understand.  That increasingly quaint attitude, for one thing, grossly underestimates the growing power of consumers to effect change using the Internet itself (see:  Facebook et al.). Consumers can save themselves, thanks very much.

What is true is that consumers do not and aren’t likely to be asked to pay the true costs of broadband access given the intense competition in major markets between large ISPs such as Comcast, AT&T, Verizon and others.  That is the source of anxiety for the application providers–they are seen as having more elasticity in pricing than end-users.

The existence of provider competition, however, also weighs heavily against the need for government intervention.  If an ISP interferes with the open and transparent Internet, customers will know and they will complain. Ultimately they will find a provider that gives them full and unfettered access.   (There are plenty of interested parties who help consumers with the “know” part of that equation, but still, I fully support the principle of ISP transparency with regard to network management principles.  Few consumers would actually read them, and fewer still understand them, but it’s still a good practice.)

If the market really does fail, or fails in significant local ways (rural or poor customers, for example), then some kind of regulatory intervention might make sense.  But it’s a bad idea to regulate ahead of a market failure, especially when dealing with technology that is evolving rapidly.  In the last ten years, as I argue in The Laws of Disruption, the Internet has proven to be a source of tremendous embarrassment for regulators trying to “fix” problems that shift under their feet even as they’re legislating.  Often the laws are meaningless by the time the ink is dry or—worse—inadvertently make the problems worse after the fact.

Nevertheless, in October of last year the FCC proposed—in a 107-page document—six net neutrality rules that would codify what I described above and a number of peripheral, perhaps unrelated, ideas.  Right now the agency has only a net neutrality policy, and that policy, the D.C. Circuit Court of Appeals ruled, doesn’t constitute enforceable law.  Implicit in that rulemaking was the assumption that someone needed to codify these principles, that the FCC was that someone, and that the agency had the authority from Congress to be that someone.  (The court’s ruling made clear that the latter is not the case.)

There are good reasons to be skeptical that the FCC in particular is the right agency to solve this problem even if it is a problem.  Through most of its existence the agency has been fixed on regulating a legal monopoly—the old phone company—and on managing what were very limited broadcast spectrum—now largely supplanted by cable and more sophisticated technologies for managing the spectrum.

The FCC, recall, is the agency that watches broadcast (but not cable) television and issues fines for indecent content—an activity they do more, rather than less, even as broadcast becomes a trivial part of programming reception.  Congress has three times tried to give the FCC authority to regulate indecency on the Internet as well, but the U.S. Supreme Court has stopped all three.

So if the FCC were to be the “smart cop on the beat” as Chairman Genachowski characterized his view of net neutrality, how would the agency’s temptation to shape content itself be curbed?

Worse, no one seems to have thought ahead as to how the FCC would enforce these rules.  If I complain that my access is slow today and I believe that must mean my ISP is acting in a non-neutral fashion, the agency would have to look at the traffic and inside the packets in order to investigate my complaint.  Again, the temptation to use that information and to share it with law enforcement under the name of anti-terrorism or other popular goals would be strong—strong enough that it ought to worry some of the groups advocating for net neutrality laws as a placebo to keep the ISPs in line.

The Investment Effect

It should be obvious that the course being followed by the FCC – the enactment of net neutrality rules in the first place and the increasingly desperate methods by which it hopes to establish its authority to do so—will cast a pall over the very investments in infrastructure the FCC is counting on to achieve the worthy goals of the NBP.  If nothing else, the reclassification NOI will invariably end in some heavy-duty litigation, which is likely to take years to resolve.  Courts move even more slowly than legislators, who move more slowly than regulators, all of whom aren’t even moving compared to the speed of technological innovation.

How serious a drag on the markets will regulatory uncertainty prove to be?  For what it’s worth, New York Law School’s Advanced Communications Law & Policy Institute today issued an economic analysis of the Commission’s proposed net neutrality rules, arguing that as many as 604,000 jobs and $80 billion in GDP loss would result from their passage.  Matthew Lasar at Ars Technica summarizes the report, which I have not yet read.

But one doesn’t need sophisticated economic analysis to understand why markets are already reacting poorly to the FCC’s sleight-of-hand.  The net neutrality rules the FCC proposed in October would, depending on how the agency decided to enforce them, greatly limit the future business arrangements that broadband providers could offer to their business customers.

Application providers worry that the offer of “fast lane” service invariably means everything else will become noticeably slower (not necessarily true from a technical standpoint).  But in any case the limitation of future business innovations by providers is bound to discourage, at least to some extent, up-front investments in broadband, which are characterized by high fixed costs and a long payback.

Worse, the proposed rules would also apply to Internet access over cellular networks, which is still in a very early stage of development and has much more limited capacity.  Cellular providers have to limit access to video and other high-bandwidth applications just to keep the networks up and running.   (Some of those limits are the result of resistance from local regulators to allow investments in cell towers and other infrastructure.)  The proposed rules would require them not to discriminate against any applications, no matter how resource-intensive.  That simply won’t work.

Investors are worried that the hundreds of billions they’ve spent so far on fiber optics, cellular upgrades and cable upgrades and the amount left to be spent to get the U.S. to 100 mbps speeds in the next ten years are going to be hard to recover if they don’t have flexibility to innovate new business models and services.

To Wall Street, the net neutrality rules are perceived not as enshrining a level playing field for the Internet so much as a land grab by content providers to ensure they are the only ones who can innovate with a free hand, pushing the access providers increasingly to a commodity business as, for example, long distance telephony has become.  Why should investors spend hundreds of billions to upgrade the networks if they won’t be able to make their money back?

Investors are also concerned more generally that the FCC will implement and enforce the proposed neutrality rules in unpredictable ways, bowing to lobbying pressure by the content companies even more in the future.  Up until now, the FCC has played no meaningful role in regulating access or content, and the Internet has worked brilliantly.  The networks the FCC does regulate–local telephone, broadcast TV–are increasingly unprofitable.

How would the FCC proceed if the rules are enrolled and upheld?  The NPRM says only that the Commission would investigate charges of non-neutral behavior “on a case-by-case basis.”  That approach is understandable when technology is changing rapidly, but at the same time it introduces even more uncertainty and more opportunities for regulatory mischief.  Better to wait until an identifiable problem arises, one that has an identifiable solution a regulatory agency can implement more efficiently than any other institution.

It’s possible of course that access providers, especially in areas where there is little competition, could use their leverage to make bad business decisions that would harm consumers, content providers, or both.  But that that risk could be adequately covered by existing antitrust law, or, if necessary, by FCC action when the problem actually arises.

The problem isn’t here yet, other than a handful of anecdotal problems dealt with quickly and without the need for federal intervention.  Again, the danger of rulemaking ahead of an actual failure of the market is acute, especially when one is dealing with an emerging and fast-changing set of technologies.

The more the FCC pushes ahead on the net neutrality rules, even in the face of a court decision that it has no authority to do so, the more irrational the agency appears to the investor community.  And given the almost complete reliance for the broadband plan on private investment, this seems a poor choice of battles for the FCC to be spending its political capital on now.

Preserving the Ecosystem

There’s a forest among all these trees.  So far, the Internet economy has thrived on a delicate balance today between infrastructure and the innovation of new products and services that Internet companies build on top of it.  If the infrastructure isn’t constantly upgraded in speed, cost, and reliability, entrepreneurs won’t continue to spend time and money building new products.

At the same time, if infrastructure providers don’t think the applications will be there, there’s no reason to invest in more and better capacity.  So far, consumers have shown a voracious appetite for both capacity and applications, in part because there’s been little to make them doubt more of both are always coming.

Given the long lead time for capital investments, the infrastructure providers have to bet pretty far into the future without a lot of information.  Sometimes they overbuild, or build ahead of demand (this has happened at least twice in the last ten years); sometimes (in the case of cellular), the applications arrive faster than the capacity after a long period of relative quiet.   3G support was an industry embarrassment until the iPhone finally put it to good use.

By and large the last decade has seen remarkable success in getting the right infrastructure to the right applications at the right time, as evidenced by the fact that the U.S. is still the leader by far in Internet innovation.   The U.S., despite its geography and economic diversity, is also still the leader in broadband access, with availability to over 96% of U.S. residents.  According to the latest OECD data, the U.S. has twice the number of broadband subscribers as the next-largest market.  Our per capita adoption is lower, as are our broadband speeds—both sources of understandable concern to the authors of the NBP.

The larger issue here is that regulatory intervention, or even the looming possibility of it, can throw a monkey wrench in all that machinery, and make it harder to make quick adjustments when one side gets too far ahead of the other.  Once the machine stalls, restarting it may be difficult if not impossible.   The Internet ecosystem works remarkably well.  By contrast, even regulatory changes intended to smooth out inefficiencies can wind up having the opposite effect, sometimes disastrously so.

That above all else should have given the FCC pause today in its vote.  Apparently not.

The announcement yesterday from key Congressional Democrats of an effort to reform the Communications Act put me in a nostalgic mood. Here follows one of my longest efforts yet to bury the lede.

One of my favorite courses in law school was Abner Mikva’s “Legislative Process” course, which he taught while serving on the D.C. Circuit Court of Appeals and before his tenure as White House counsel to President Clinton. Mikva had previously served in Congress; indeed, one of the first votes I ever cast was for Mikva while an undergraduate at Northwestern University.

(It was a remarkable period at the law school. The year Mikva signed on as a lecturer was also the first year on the faculty for three professors just starting their academic careers: Larry Lessig, Elena Kagan, and Barack Obama. I took two classes with Lessig, including an independent study on the impact of technology on the practice of law, but regrettably none from the other two.)

There were two versions of the legislative process, Mikva made clear. The one we were learning–the one specified in the Constitution and the standing rules of the House and Senate—and the other kind, made up of byzantine posturing and back-room dealing.

I don’t consider myself an expert in either, but especially not the second kind, which seems to require living inside the Beltway just to follow.  And even then, I suspect, the participants always imagine themselves to be like Josef K in Kafka’s “The Trial,” where everyone believes they are the only ones who understand what is really going on.  (I read “The Trial” in another law school course, “Law and Literature,” taught by my future employer Richard Posner.)

“You know that there are so many various opinions about the procedure that they form into a great big pile and nobody can make any sense of them,” one character tells K.  “This judge, for instance, sees proceedings as starting at a different point from where I do.  A difference of opinion, nothing more.  At a certain stage in the proceedings tradition has it that a sign is given by ringing a bell.  This judge sees that as the point at which proceedings begin.  I can’t set out all the opinions opposed to that view here, and you wouldn’t understand it anyway, suffice it to say that there are many reasons to disagree with him.”

Bi-Partisan, Issue-Focused

Yesterday began one of the second kind of legislative processes, with the announcement from Senator Rockefeller and Rep. Waxman that they will soon begin a series of “bipartisan, issue-focused meetings” to evaluate changes to the Communications Act.

This announcement followed on the heels of a letter from 37 Republican Senators to FCC Chairman Julius Genachowski urging him to abandon his plans to reclassify broadband Internet access as a Title II telecommunications service, which Genachowski first proposed on May 6. Also on Monday, 74 Democratic Congressmen likewise urged the FCC to abandon its “third way” reclassification efforts. “The significant regulatory impact of reclassifying broadband service is not something that should be taken lightly and should not be done without additional direction from Congress,” the Democrats wrote. “We urge you not to move forward with a proposal that undermines critically important investment in broadband and the jobs that come with it.”

(It didn’t take a crystal ball to predict pushback from Congress on the FCC’s effort to end-run both Congress and the D.C. Circuit’s conclusion in Comcast v. FCC that the agency lacked jurisdiction to implement net neutrality rules, the major incentive behind the “third way” proposal. But for the record, I did predict it.)

My Complements to the Source

To recap, yesterday saw letters from Republic and Democratic lawmakers urging the FCC not to proceed with its “third way” efforts, and announcements from key Committee Chairmen of a plan to update the FCC’s organic statute, with an eye toward bringing it into line with a communications landscape greatly altered since 1996, the year the law was last overhauled.

One might imagine these maneuvers to be something other than a coincidence. Are they part of a coordinated effort by Congress to signal to the FCC a desire not to have the reclassification proposal brought to a vote by the full Commission? It certainly sounds like this is the end of the “third way.”

Well, maybe not. As Cecilia Kang notes in The Washington Post, the FCC had no comment about yesterday’s developments. But an article by Gauthem Nagesh in The Hill included this coda:

Update: A spokesperson for Sen. Kerry sends the following:

“Senator Kerry believes that this process is complimentary to the efforts at the FCC, not a substitute for them. The deliberative process, both here and at the agency, will help inform and enhance our respective responsibilities to write and execute law and regulation that encourages innovation, inclusion, and consumer protections.”

Kang’s article included a similar statement:

“A Senate staffer, who was not authorized to speak on the record, said the announcement is a recognition that current law doesn’t reflect the changing landscape of the Web- and mobile-centric communications landscape. The staffer said the move was meant to complement the FCC’s broadband reclassification proposal. The lawmakers don’t intend, as proposed by some network operators, to preempt the FCC’s plan.”

A bit of linguistic forensics suggests that the “Senate staffer” cited by Kang was almost certainly the same person as the “spokesman” for Sen. Kerry quoted by Nagesh. Note that the spokesman commits the common error of using “complimentary” (with praise) when he or she actually meant “complementary” (supplying mutual needs). The original posting of Kang’s article repeated the error in paraphrasing the staffer, though that paragraph was later corrected.

So at the very least Senator Kerry is signaling that the Congressional effort to review the Communications Act isn’t meant to block Genachowski’s moves at reclassifying broadband. Those statements came, however, after the original announcement. Was Kerry trying to clarify the day’s events or spin them?

At the end of the day (literally), I’m left with more questions than answers from what seemed like straightforward legislative process: Who is Sen. Kerry trying to communicate with here, and what is the real message? Is the “third way” dead on arrival? Is Congress hedging its bets? What kind of reform does the Senate have in mind?

Two more questions: Did anyone hear a bell ring? And does it matter?

Update:  see Declan McCullaugh’s excellent analysis of the day’s events at CNET.

I appeared this afternoon on the inaugural edition of TechCrunch TV to talk about–what else?–Net Neutrality.

http://c.brightcove.com/services/viewer/federated_f9/63890987001?isVid=1&isUI=1 Multiple media sources are now reporting that the FCC, contrary to reports from earlier this week, has decided to go ahead with an effort to change the classification of broadband Internet service from a Title I “information service” to a Title II “telecommunications service,” if only to salvage the proposed rulemaking on the open and transparent Internet.  (See stories on The Wall Street Journal and The Washington Post as well as Ars Technica.) Those of us who aren’t on the FCC’s official leak list will have to wait with the rest of the rabble to get a look at just how the FCC proposes to effect this radical change in communications law.  Will it apply to all broadband Internet–including cable, fiber, DSL, satellite, wireless and broadband over power lines?  Will the FCC propose to regulate only as much as needed to get the jurisdiction the D.C. Circuit says it doesn’t have under Title I to implement the NPRM, or will they throw in some additional provisions to achieve other goals–such as the reform of the Universal Service Fund?  Will state and local regulators get to share in the fun of telling ISPs how best to run their business? And, what about Naomi?  (A cultural reference only Jim Harper will get.) The TechCrunch discussion included Richard Bennett of the Information Technology and Innovation Foundation, Gigi Sohn of Public Knowledge and Mike Masnick, CEO of TechDirt.  Andrew Keen, author of “The Cult of the Amateur,” moderated.

A recent study by Cecil Bohanon and Michael Hicks at Ball State University’s Digital Policy Institute found that statewide cable franchising has increased broadband deployment.

Half of the US states have now enacted legislation that creates statewide cable franchising. These laws allow new entrants into the video business (principally the phone companies) to get permission to offer video from the state, instead of having to deal with local governments to get cable franchises. Previous research, much of it cited here, found that cable competition reduces cable rates and expands the number of channels available to subscribers. Local franchising often delayed or prevented new competitors from entering the market.

Since the same wires get used to transmit video, telephone, and broadband, Bohanon and Hicks reasoned that opening up entry into cable would also increase competition in broadband and hence increase broadband subscribership. And that’s precisely what their econometric study finds. After controlling for other factors, broadband subscribership is 2-5 percent higher in states that have statewide video franchising. Based on this finding, Bohanon and Hicks estimate that statewide video franchising increased broadband subscribership by about 5 million.

Their study covers the years 1999-2008. Maybe some of these 5 million would eventually have gotten broadband anyway. At worst, this study shows that 5 million subscribers got broadband sooner than they otherwise would have.

The study does not test whether the increase in broadband subscribership occurred because statewide video franchising sped up investment and deployment of infrastructure, or if it simply spurred competition in places where phone and cable companies already had the relevant infrastructure deployed.  I don’t know how one would get the confidential data on broadband investment in order to test this.  But given the large amount of new investment related to broadband, I’d be willing to bet that statewide franchising encouraged both new broadband deployment and more intense competition where infrastructure was already in place.