On Monday, April 16th, the Technology Policy Institute hosted an event on “Facebook & Cambridge Analytica: Regulatory & Policy Implications.” I was invited to deliver some remarks on a panel that included Howard Beales of George Washington University, Stuart Ingis of Venable LLP, Josephine Wolff of the Rochester Institute of Technology, and Thomas Lenard of TPI, who moderated. I offered some thoughts about the potential trade-offs associated with treating Facebook like a regulated public utility. I wrote an essay here last week on that topic. My remarks at the event begin at the 13:45 mark of the video.

With Facebook CEO Mark Zuckerberg in town this week for a political flogging, you might think that this is darkest hour for the social networking giant. Facebook stands at a regulatory crossroads, to be sure. But allow me to offer a cynical take, and one based on history: Facebook is potentially poised to score its greatest victory ever as it begins the transition to regulated monopoly status, solidifying its market power, and limiting threats from new rivals.

By slowly capitulating to critics (both here and abroad) who are thirsty for massive regulation of the data-driven economy, Facebook is setting itself up as a servant of the state. In the name of satisfying some amorphous political “public interest” standard and fulfilling a variety of corporate responsibility objectives, Facebook will gradually allow itself to be converted into a sort of digital public utility or electronic essential facility.

That sounds like trouble for the firm until you realize that Facebook is one of the few companies who will be able to sacrifice a pound of flesh like that and remain alive. As layers of new regulatory obligations are applied, barriers to new innovations will become formidable obstacles to the very competitors that the public so desperately needs right now to offer us better alternatives. Gradually, Facebook will recognize this and go along with the regulatory schemes. And then eventually they will become the biggest defender of all of it.

Welcome to Facebook’s broadcast industry moment. The firm is essentially in the same position the broadcast sector was about a century ago when it started cozying up to federal lawmakers. Over time, broadcasters would warmly embrace an expansive licensing regime that would allow all parties—regulatory advocates, academics, lawmakers, bureaucrats, and even the broadcasters themselves—to play out the fairy tale that broadcasters would be good “public stewards” of the “public airwaves” to serve the “public interest.”

Alas, the actual listening and viewing public got royally shafted in this deal. Broadcasters got billions of dollars’ worth of completely free beachfront spectrum along with protected geographic monopolies. Congressional lawmakers and the unelected bureaucrats at the FCC got power to tinker with broadcast content and received other special favors (like free airtime) from their cronies in the industry. People, money, and influence floated freely between the political and business realms until at some point there really wasn’t much distinction between them. Meanwhile, the public got stuck with bland fare and limited competition for their ears and eyes. The “public interest” ended up meaning many things during this time, but it rarely had much to do with what the public actually desired—namely, more and better options for a diverse citizenry.

Of course, much the same story played out in the U.S. telecommunications market a few decades prior to the broadcast industry making their deal with the devil. The early history of telecommunications in America was characterized by competition among a variety of local and regional rivals. But it was derailed by political shenanigans. Here are a few choice paragraphs about the cronyist origins of the Bell System monopoly from a law review article that Brent Skorup and I wrote back in 2013 [footnotes omitted]. As you read it, imagine how similar well-intentioned regulations might play out for Facebook:

… this intensely competitive, pro-consumer free-for-all would be derailed by AT&T’s brilliant strategy to use the government to accomplish what it could not in the free market: eliminate its rivals. In 1907, Theodore Newton Vail became AT&T’s president. He had a clear vision: achieving “universal service” (in the form of interconnected and fully integrated systems) by eliminating rivals and consolidating networks. Befriending lawmakers and regulators was a crucial component of this strategy. While many policymakers nominally supported the idea of competition, they were more preoccupied with achieving widespread, interconnected network coverage. Vail capitalized on that impulse. On December 19, 1913, the government and AT&T reached the “Kingsbury Commitment.” Named after AT&T vice president Nathan C. Kingsbury, who helped negotiate the terms, the agreement outlined a plan whereby AT&T agreed not to acquire any other independent companies while also allowing other competitors to interconnect with the Bell System. The Kingsbury Commitment was thought to be pro-competitive, yet it was hardly an altruistic agreement on AT&T’s part. Regulators did not interpret the agreement so as to restrict AT&T from acquiring any new telephone systems, but only to require that an equal number be sold to an independent buyer for each system AT&T purchased. Hence, the Kingsbury Commitment contained a built-in incentive for network swapping (trading systems and solidifying territorial monopolies) rather than continued competition.  “The government solution, in short, was not the steamy, unsettling cohabitation that marks competition but rather a sort of competitive apartheid, characterized by segregation and quarantine,” observe telecom legal experts Michael Kellogg, John Thorne, and Peter Huber.  Thus, the move toward interconnection, while appearing to assist independent operators, actually allowed AT&T to gain greater control over the industry. “Vail chose at this time to put AT&T squarely behind government regulation, as the quid pro quo for avoiding competition,” explains [Richard] Vietor.  “This was the only politically acceptable way for AT&T to monopolize telephony,” he notes.  AT&T’s 1917 annual report confirms this fact, stating, “[with a] combination of like activities under proper control and regulation, the service to the public would be better, more progressive, efficient, and economical than competitive systems.”

So much for “the public interest”! If the last century’s worth of communications and media regulation teaches us anything, it’s that good intentions only get you so far in this world. Many of the lawmakers and regulators who allowed themselves to be duped by big corporations asking for protection from competition probably thought they were doing the right thing. Those policymakers may even have believed that they were actually encouraging innovation and competition through some of their regulatory actions. Alas, things did not turn out that way. We the public were denied real, meaningful choices and innovations because of these misguided policies.

And so now it’s Facebook’s turn to become part of this sordid tale. Zuckerberg has already made it clear that he is open to regulation and that his firm would also start enforcing new European data rules globally. And after this week’s political circus in Congress, the floodgates will be wide open and everyone’s regulatory pet peeve will be up for political consideration, which is exactly what happened for broadcasters and communications in past decades.

Every crackpot idea under the sun will be on the table but the most extreme versions of those proposals will be beaten back just enough to ensure that Facebook can offer up its pound of sacrificial flesh each time without running the risk of killing the patient entirely. Again, this was always part of the broadcast and communications regulatory playbook as well. So long as they were guaranteed a fairly stable market return and protection from pesky new innovators, the firms were willing to go along with the deal.

The “deal” in this case between Facebook and regulators won’t be so explicitly cronyist as it was for broadcasters and communications companies, however. The days of price controls, rate-of-return regulation, and formal line of business restrictions are likely over. Everyone now recognizes that regulations creating formal barriers to innovation and entry are a bad idea and, as a result, they are usually rejected.

But laws and regulations can sometimes create informal or hidden barriers to innovation and entry, even when they are well-intentioned. And that’s what could happen here as this latest Facebook fiasco leads to calls for seeming innocuous things like transparency and disclosures requirements, restrictions on “bad speech,” advertising and data collection regulations, “fiduciary” responsibilities, “algorithmic accountability” efforts, and so on. Facebook hasn’t wanted to adopt some of these things in the past, but now they’ll be pushed aggressively to do so by policymakers and regulatory activists. As Zuckerberg and Facebook cozy up with policymakers and regulatory activists and begin talking about a “broader view of responsibility,” the transition to the firm’s next phase as a quasi-public utility will get underway.

The rich irony of all this is that the same regulatory advocates who are cheering on this week’s developments as well as the coming regulatory avalanche will be the ones howling the loudest if and when only Facebook is left standing in the social media universe. In fact, that’s already happened in Europe where policymakers and their burdensome top-down data protection regulations have driven most digital innovators and investors to other continents, leaving only Facebook, Google, and handful of other (mostly U.S.-based) companies left to regulate. And then European policymakers have the audacity to cry foul about the market power of these firms! It boggles the mind how European policymakers and regulatory advocates see zero connection between their heavy-handed approach to the Digital Economy and the corresponding lack of enough competitors in those sectors.

But none of that will make any difference to the regulatory advocates. They want that pound of flesh, and they are going to get it. And then in Facebook they will have a regulatory plaything to toy with for years to come.

What about the public? Will we really be any better off because of any of this? How many people will want to stick with Facebook if it becomes a digital public utility or a social media version of the Post Office? That sure doesn’t sound like much fun for us. But if the new regulations imposed on Facebook do end up hurting smaller rivals more and create barriers to new entry and innovation going forward, then it’s unclear whether it makes any difference what we want because the options just won’t be there for us.

With time, Facebook will not only become more comfortable with its new regulatory status for that reason but then in the name of ensuring a “level playing field,” the firm will simultaneously advocate that each and every new rule be applied to all its rivals. Again, this is how well-intentioned regulation ends up indirectly discouraging the very innovation and competitive options that we need. Broadcasters and communications companies played the “level playing field” card at every juncture to beat down new technologies and rivals.

Finally, at some point, don’t be surprised if all roads lead back to prices for digital services. Right now, social networking services like Facebook are free-of-charge to consumers and digital companies use advertising to support their services. Many regulatory advocates have suggested that this sort of business model is fundamentally incompatible with privacy and have wanted it strictly curtail if not ended altogether. Of course, if you ask the public how many of them would be willing to pay $19.95 a month for Facebook, you won’t get many takers.

I wrote a couple of law review articles talking about the “privacy paradox” and consumer “willingness to pay” for privacy more generally. All the evidence suggests that consumer willingness to pay for privacy is significantly lower than privacy advocates would prefer. But if in the name protecting privacy, prices get pushed or imposed as a matter of public policy, then we will have entered a truly surreal moment in the history of regulatory policy because we will have inverted the presumption that consumer welfare is better served by lower prices. Over the past century, the purpose of most public utility regulation was lower prices, higher quality, and more choice. The modern Digital Economy has largely achieved those goals without heavy-handed regulation. But now, with the emerging regulatory regime looming for Facebook and social media more generally, we might end up with a sort of bizarro policy world in which we make people pay more in the name of making them better off!

I hope I’m wrong about everything I’ve said here. It would be troubling if we enter an era of less competition, less innovation, and lower quality information services. But to borrow a quote from my favorite sci-fi show, “all of this has happened before, and all of this will happen again.” And regulatory history tends to repeat. We shouldn’t be surprised, therefore, when some forget the ugly history of public utility-style regulation or broadcast era “public interest” mandates and we find ourselves stuck right back in the hole that we’ve been trying to dig ourselves out of for so many decades.

Google’s announcement this week of plans to expand to dozens of more cities got me thinking about the broadband market and some parallels to transportation markets. Taxi cab and broadband companies are seeing business plans undermined with the emergence of nimble Silicon Valley firms–Uber and Google Fiber, respectively.

The incumbent operators in both cases were subject to costly regulatory obligations in the past but in return they were given some protection from competitors. The taxi medallion system and local cable franchise requirements made new entry difficult. Uber and Google have managed to break into the market through popular innovations, the persistence to work with local regulators, and motivated supporters. Now, in both industries, localities are considering forbearing from regulations and welcoming a competitor that poses an economic threat to the existing operators.

Notably, Google Fiber will not be subject to the extensive build-out requirements imposed on cable companies who typically built their networks according to local franchise agreements in the 1970s and 1980s. Google, in contrast, generally does substantial market research to see if there is an adequate uptake rate among households in particular areas. Neighborhoods that have sufficient interest in Google Fiber become Fiberhoods.

Similarly, companies like Uber and Lyft are exempted from many of the regulations governing taxis. Taxi rates are regulated and drivers have little discretion in deciding who to transport, for instance. Uber and Lyft drivers, in contrast, are not price-regulated and can allow rates to rise and fall with demand. Further, Uber and Lyft have a two-way rating system: drivers rate passengers and passengers rate drivers via smartphone apps. This innovation lowers costs and improves safety: the rider who throws up in cars after bar-hopping, who verbally or physically abuses drivers (one Chicago cab driver told me he was held up at gunpoint several times per year), or who is constantly late will eventually have a hard time hailing an Uber or Lyft. The ratings system naturally forces out expensive riders (and ill-tempered drivers).

Interestingly, support and opposition for Uber and Google Fiber cuts across partisan lines (and across households–my wife, after hearing my argument, is not as sanguine about these upstarts). Because these companies upset long-held expectations, express or implied, strong opposition remains. Nevertheless, states and localities should welcome the rapid expansion of both Uber and Google Fiber.

The taxi registration systems and the cable franchise agreements were major regulatory mistakes. Local regulators should reduce regulations for all similarly-situated competitors and resist the temptation to remedy past errors with more distortions. Of course, there is a decades-long debate about when deregulation turns into subsidies, and this conversation applies to Uber and Google Fiber.

That debate is important, but regulators and policymakers should take every chance to roll back the rules of the past–not layer on more mandates in an ill-conceived attempt to “level the playing field.” Transportation and broadband markets are changing for the better with more competition and localities should generally stand aside.

It’s my great pleasure this week to be participating in a 2-day symposium on “Competition in Online Search” that is being hosted by the Antitrust & Competition Policy Blog.  Daniel Sokol, Associate Professor of Law at the University of Florida Levin College of Law, was kind enough to invite me to join the fun. Professor Sokol is the editor of the Antitrust & Competition Policy Blog. Others participating in this symposium include: James Grimmelman (NY Law); Eugene Volokh (UCLA); Marvin Ammori (Stanford Law); Mark Jamison (Univ. of Florida); Eric Clemons (Wharton School); Dan Crane (Michigan Law); and both Marina Lao and Frank Pasquale (Seton Hall); and more.

My entry is now live. In it, I focus on how dynamically competitive and innovative the digital economy has been over the past 15 years and question to need for intervention at this time, especially of the “public utility” variety. I’ve re-posted my entry below, but make sure to head over to the Antitrust & Competition Policy Blog to read all the contributions to this excellent symposium.

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If you blink your eyes in the Information Age you can miss revolutions. Let’s take a quick walk back through our turbulent recent history:

• Just five years ago, MySpace dominated social networking and had The Guardian wondering, “Will MySpace Ever Lose Its Monopoly?” A short time later, MySpace lost its early lead and became a major liability for owner Rupert Murdoch. Murdoch paid $580 million for MySpace in 2005 only to sell it for $35 million in June 2011.
• Just six to eight years ago, the mobile landscape was ruled by Palm, BlackBerry, Nokia, and Motorola. Palm is now all but dead and BlackBerry is trying to stay afloat while Nokia and Motorola had to cut deals with Microsoft and Google respectively in order to survive.
• Just 10 years ago, AOL’s hegemony in online services was thought to be unassailable, especially after its merger with Time Warner. But the merger quickly went off the rails and AOL’s online “dominance” quickly evaporated. Losses grew to over $100 billion and the entire deal unraveled within just a few years as AOL’s old dial-up, walled-garden business model had been completely superseded by broadband and the new Web 2.0 world.
• Just 12 years ago, Yahoo! and AltaVista were the go-to companies for online search. No one turns to them first today when they go looking for information online.
• And just 15 years ago, Microsoft was on everyone’s mind. Today, the firm is struggling to remain part of cocktail party chatter when the topic of modern Tech Titans is discussed. For example, a recent Fast Company cover story on “The Great Tech War of 2012” only mentioned Microsoft in passing. The rise of search, social media, and cloud computing represented disruptive shifts that Microsoft wasn’t prepared for.

The graveyard of tech titans is littered with the names of many other once-mighty giants. Schumpeter’s “gales of creative destruction” have rarely blown harder through any sector of our modern economy. And so now we come to the question of Google’s dominance in the field of search. Should we be worried? Some say yes, and the rhetoric of public utilities and essential facilities is increasingly creeping into policy discussions about the Internet, including the search layer. A growing cabal of cyberlaw experts—Tim Wu, Dawn Nunziato, Frank Pasquale, among many others—argue that some sort of regulation is needed.

But the recent history I recounted above makes it clear that patience and humility are the more sensible policy prescriptions. Calls for regulation or public utility classification are particularly premature and problematic. As I argued in my recent white paper, “The Perils of Classifying Social Media Platforms as Public Utilities,” search and social media platforms do not resemble traditional public utilities and there are good reasons why policymakers should avoid a rush to regulate them as such.

First, there has not been any serious showing of monopoly power in the search or social media sectors in which Google operates. It’s also impossible to find any way in which consumer welfare is currently being harmed by Google. All their products are free and constantly evolving. New technologies and rivals continue to emerge. DuckDuckGo, for example, differentiates itself in search by stressing privacy above all else. Meanwhile, the contours of these markets are constantly evolving in a dynamic way, making market definition challenging. Is Facebook a search company? Signs are good that it soon could soon become a formidable one.

These market-definition considerations are especially important because of how long it takes to formulate regulations or impose antitrust remedies. In a market that changes this rapidly, taking several months or even years to complete rulemakings or litigate remedies will almost certainly mean that most rules will be completely out of date by the time they are implemented. And once implemented, there will be very little incentive to rework them as rapidly as the market contours change. Regulation could retard innovation in search and social media markets by denying firms the ability to evolve or innovate across pre-established, artificial market boundaries. Second, treating these digital services as regulated utilities would harm consumer welfare because public utility regulation has traditionally been the archenemy of innovation and competition. Public utility regulation has a long, lamentable history that has been well-documented by economists and political scientists. That’s why it is usually considered the last resort, not the first option. Moreover, the traditional goals of public utility regulation — universal service, price competition, and quality service — are already being achieved without intervention. And as Marvin Ammori and Luke Pelican outline in a new study, all the proposed antitrust remedies to deal with Google in particular also have serious downsides. Almost all the cures would be worse than whatever disease it is critics hope to solve with antitrust intervention.

Third, treating today’s leading search and social media providers as digital essential facilities threatens to convert “natural monopoly” or “essential facility” claims into self-fulfilling prophecies. The very act of imposing utility obligations on a particular platform or company tends to lock it in as the preferred or only choice in its sector. Public utility regulation also shelters a utility from competition once it is enshrined as such. Also, by forcing standardization or a common platform, regulation can erect de jure or de facto barriers to entry that restrict beneficial innovation and the disruption of market leaders.

Fourth, because social media are fundamentally tied up with the production and dissemination of speech and expression, First Amendment values are at stake, warranting heightened constitutional scrutiny of proposals for regulation. As Eugene Volokh noted in a recent white paper, social media providers should possess the editorial discretion to determine how their platforms are configured and what can appear on them.

Will Google meet the same fate as earlier Tech Titans? It’s impossible to know. But with the wrecking ball of creative digital destruction doing such a fine job of keeping competition and innovation thriving, we’d be smart to reject heavy-handed, top-down regulation of such a dynamic segment of our economy at this time.

That’s the question I take up in my latest Forbes column, “The Danger Of Making Facebook, LinkedIn, Google And Twitter Public Utilities.”  I note the rising chatter in the blogosphere about the potential regulation of social networking sites, including Facebook and Twitter. In response, I argue:

public utilities are, by their very nature, non-innovative. Consumers are typically given access to a plain vanilla service at a “fair” rate, but without any incentive to earn a greater return, innovations suffers. Of course, social networking sites are already available to everyone for free! And they are constantly innovating.  So, it’s unclear what the problem is here and how regulation would solve it.

I don’t doubt that social networking platforms have become an important part of the lives of a great many people, but that doesn’t mean they are “essential facilities” that should treated like your local water company. These are highly dynamic networks and services built on code, not concrete. Most of them didn’t even exist 10 years ago. Regulating them would likely drain the entrepreneurial spirit from this sector, discourage new innovation and entry, and potentially raise prices for services that are mostly free of charge to consumers.  Social norms, public pressure, and ongoing rivalry will improve existing services more than government regulation ever could.

Read my full essay for more.

Two articles of interest in today’s Wall Street Journal with indirect impact on the debate over the future of Internet policy. First, there’s a front-page story (“Facing Budget Gaps, Cities Sell Parking, Airports, Zoo“) documenting how many cities are privatizing various services — including some considered “public utilities” — in order to help balance budgets.  The article worries about “fire-sale” prices and the loss of long-term revenue because of the privatizations.  But the author correctly notes that the more important rationale for privatization is that, “In many cases, the private takeover of government-controlled industry or services can result in more efficient and profitable operations.”  Moreover, any concern about “fire-sale” prices and long-term revenue losses have to be stacked again the massive inefficiencies / costs associated with ongoing government management of resources /networks.

Of course, what’s so ironic about this latest privatization wave is that it comes at a time when some regulatory activists are clamoring for more regulation of the Internet and calling for broadband to be converted into a plain-vanilla public utility. For example, Free Press founder Robert McChesney has argued that “What we want to have in the U.S. and in every society is an Internet that is not private property, but a public utility.”  That certainly doesn’t seem wise in light of the track record of past experiments with government-owned or regulated utilities.  And the fact that we are talking about something as complex and fast-moving as the Internet and digital networks makes the task even more daunting.

Government mismanagement of complex technology projects was on display in a second article in today’s Journal (“U.S. Reviews Tech Spending.”)  Amy Schatz notes that “Obama administration officials are considering overhauling 26 troubled federal technology projects valued at as much as $30 billion as part of a broader effort by White House budget officials to cut spending. Projects on the list are either over budget, haven’t worked as expected or both, say Office of Management and Budget officials.”  I’m pleased to hear that the Administration is taking steps to rectify such waste and mismanagement, but let’s not lose sight of the fact that this is the same government that the Free Press folks want to run the Internet.  Not smart.

Well, you got it!  Here’s a essay of mine that The Daily Caller ran today discussing the ramifications of the decision.

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Internet freedom got a reprieve Tuesday when the U.S. Court of Appeals for the District of Columbia slapped down a brazen attempt by the Federal Communications Commission (FCC) to ignore the rule of law and begin imposing onerous regulations on broadband network operators. The decision, Comcast v. FCC, deals with arcane matters of regulatory agency jurisdiction, but the stakes were profound and the ramifications for the future of the Internet will reverberate for years to come.

In a nutshell, the FCC argued it had the right to impose so-called “Net neutrality” regulations on a private broadband operator based merely on a handful of principles that the agency had previously said it would not be enforcing as law. Net neutrality regulations would put FCC bureaucrats in the Internet’s driver’s seat and let them determine what was “just and reasonable” of private networks. Critics have rightly feared that Net neutrality sounded all too much a Fairness Doctrine for the Internet since similar language had been used in the broadcast era to justify all sorts of FCC meddling and micromanagement.

Regardless, the FCC’s original position—that its Net neutrality principles were only principles and nothing more—made sense since even a high school civics student can tell you that only Congress can make laws. Moreover, for a brief time, even the FCC seem to realize that laws that would comprehensively regulate such an important sector of the American economy, as Net neutrality rules would, almost certainly require our elected leaders in Congress to reopen and tweak existing statutes like the Telecommunications Act of 1996. After all, Congress had never authorized wide-reaching regulation of the Net or broadband networks, and so, if the agency wanted to extend its regulatory tentacles and wrap them around the Internet it only seems reasonable they get the blessing of lawmakers before doing so. And, for a time, the FCC stuck to a “Hands Off the Net” approach.

Regrettably, the FCC decided to ignore that earlier logic, throw statutory authority to the wind, and instead concoct creative interpretations regulatory authority via something know as “ancillary jurisdiction.” To simplify things greatly, the agency has some leeway under existing laws to use various clauses of previous congressional enactments to regulate the sectors and technologies it oversees. In this case, the FCC claimed that it had “ancillary jurisdiction” to enforce amorphous Net neutrality policy principles against Comcast under past case law or, more amazingly, via some of the deregulatory-minded passages from the Telecom Act of 1996. It was an astonishing display of bureaucratic hubris that flaunted the rule of law and asked the courts to essentially look the other way while the agency magically invented its own authority to act and expand its powers.

But the U.S. Court of Appeals for the District of Columbia (the D.C. Circuit) was not about to turn a blind eye. In fact, this particular appeals court has been a near constant pain in the keister for the FCC since the agency’s regulatory shenanigans are frequently brought before the court and just as frequently struck down as over-zealous, unconstitutional exercises of power.

In yesterday’s Comcast decision, the D.C. Circuit calmly but meticulously decimated each and every twisted rational that the FCC set forth in defense of its Internet power grab. Paraphrasing an earlier Supreme Court decision, the court noted that the FCC’s decision, not only “strain[ed] the outer limits of even the open-ended and pervasive jurisdiction that has evolved by decisions of the Commission and the courts,” but sought to “shatter them entirely.” More profoundly, the court noted that “Were we to accept [the agency’s] theory of ancillary authority, we see no reason why the Commission would have to stop there, for we can think of few examples of regulations that apply to [] common carrier services, [] broadcast services, or [] cable services that the Commission… would be unable to impose upon Internet service providers.”

In other words: Stop right there FCC! This is exactly what courts should be doing when rogue regulatory agencies run well afoul of their statutorily-defined limits, but all too often agencies get a free pass instead in the name of “agency deference.” Luckily that didn’t happen this time around thanks to the D.C. Circuit.

The question now is whether the FCC learns its lesson — that it should seek the proper authority from Congress before it imposes new regulations like Net neutrality rules — or if the agency instead engages in another effort to concoct regulatory authority via regulatory re-classification. If the agency takes that latter approach and tries to pigeonhole the Internet and broadband services into the public utility regulatory models of the past, it will set the stage for Regulatory World War III. Lawsuits will fly. Some carriers have already promised as much.

When will the agency accept the fact that it is not above the law and that there is a right way in a democracy to go about changing policies that have such a profound impact on our economy? Regardless of what one thinks of the recent health care bill, imagine if the Department of Health and Human Services would have tried to ram it through as a regulatory scheme instead of having Congress debate it and vote on it. People would have been outraged. And yet that’s exactly what the FCC is proposing to do when it comes to Net neutrality regulation and regulatory reclassification of the Internet as sleepy public utility. You know, because public utility regulation has worked soooo well in other contexts!

The D.C. Circuit’s decision yesterday should encourage the Commission to pause and reconsider its current approach. Unfortunately, it’s more likely that the agency will instead retrench and fight on in a futile attempt to take the law into its own hands and ignore the will of Congress. For the sake of Internet freedom, we have to hope the courts will continue to hold the line against such shameless regulatory overreach. And if Congress does use this as an opportunity to reopen the Telecom Act, they should tightly limit the powers of the FCC and make a strong stand in defense of Internet freedom.

Yesterday I engaged in a lively luncheon debate about Net neutrality regulation with Ben Scott of Free Press at a Catholic University Law School event on “Implementing the National Broadband Plan.” To open the debate, I made a very quick 5-Part Case against Net Neutrality Regulation. I argued that the the objections to a Net neutrality regulatory regime can be grouped into 5 major categories: (1) Legal; (2) Economic; (3) Engineering; (4) Practical; and (5) Philosophical / Principled. Down below you will find my working notes to see how I then elaborated on each objection in a bit more detail. And then Ben and I engaged in some spirited banter for the next 45 minutes.

Unfortunately, it doesn’t appear that the video of our debate is online just yet, but once it is I will post it here. However, the folks from NextGenWeb asked me to shoot a short 2 1/2 min video clip after the debate summarizing my remarks. If you can stand the sight of my big fat head in your browser for that long, here ya go:

The 5-Part Case against Net Neutrality Regulation

The objections to a Net neutrality regulatory regime can be grouped into 5 major categories: (1) Legal; (2) Economic; (3) Engineering; (4) Practical; and (5) Philosophical / Principled. Each objection will be briefly summarized below:

(1)   The Legal Case

• The FCC utterly lacks the authority to regulate in this way: The Commission’s current effort, which is tantamount to throwing stuff at wall to see what sticks, is troubling. They should go to Congress for authority.
• Importantly, Sec. 230 & 706 of the Telecom Act cannot be the hook: They were deregulatory in nature & aimed at keeping govt’s hands off the Net.
• Litigation nightmare : Regardless of how the FCC or Congress plows forward, we’re going to get tied up in the courts for years if we continue down the regulatory path. It will become “full employment” for telecom lawyers.

(2)    The Economic Case

• NN will likely create substantial disincentives to invest and innovate: At a time when we’re trying to build out broadband infrastructure the last thing we should be doing is disincentivizing network investment.
• NN could regress into old fashion rate or return / price control regime. In the history of network regulation, price and rate controls have always accompanied service regulations.
• Sharing is not competing: If this is all just greasing the skids for a new line-sharing or forced access regime, well, we’ve been there before and it didn’t end well. Creating networks built on paper is a worthless endeavor.
• Facilities-based competition, not infrastructure sharing is the path forward if we want truly robust & competitive networks and markets.
• Contestability counts: This is a contestable market. Threats of new entry at margins keep incumbents on their toes.

(3)   The Engineering Case

• We shouldn’t be freezing networks in stone: (Can you imagine if we would have frozen 1999 walled garden model in place?) The Net was “designed for change” (Richard Bennett) and it should be allowed to adapt to changing circumstances.
• Flexibility is crucial for fast-moving technologies & networks: In particular, we need to grant network managers the flexibility to deal with congestion, latency, malware & other unforeseen problems.
• Innovation at the core of networks is every bit as important as innovation at the edge: We don’t want stagnation at the core or networks, and the applications that ride on them, will suffer.

(4)   The Practical Case

• The FCC just isn’t very good at regulating fast-moving industries & technologies: And its track record is poor when it comes to incentivizing new things (remember Video Dialtone? Open Video System rules?)
• No such thing as a “simple rule” when it comes to Net neutrality or network regulation in general: Consider the paperwork burden generated by just three major “competition” rules the FCC issued in an attempt to implement the Telecom Act and define the “cost” of unbundled network elements (“UNEs”):

o   Local Competition Order (1996): 737 pages, 3,283 footnotes o   UNE Remand Order (1999): 262 pages, 1,040 footnotes o   UNE Triennial Review (2003): 576 pages; 2,447 footnotes o   That’s 1,575 pages and 6,770 footnotes worth of regulation in just three orders! o   This was all implemented following the passage of a bill (The Telecom Act) that was supposed to be deregulatory in character! And this doesn’t even begin to cover the tens of thousands of pages of legal filings, economic studies, consultant reports and other filings submitted to the FCC and state agencies by groups and individuals looking to have a say in the matter. That’s an enormous deadweight loss.

• The potential for industry capture grows in proportion to size of the regulatory regime: Alfred Kahn, author of the seminal Economics of Regulation said it best long ago: “Responsible for the continued provision and improvement of service, [the regulatory commission] comes increasingly and understandably to identify the interest of the public with that of the existing companies on whom it must rely to deliver goods.”
• Markets need not be perfect to be preferable to government regulation: That’s especially true in light of the inefficiencies associated with bureaucratic regulation.
• Community policing can help: Any deviations from “neutrality” will be policed by the watchful eyes of the digital world (and the press) and the white hot spotlight of public attention will scrutinize every carrier move (and already is). Plus, experts and technical bodies (ex: Net Neutrality squad) will be watching.

(5)   The Philosophical/Principled Case

• Whatever happened to “Hands Off the Net”? Do we believe in markets or not? And are we willing to let the experiment we started with the Telecom Act continue or not?
• NN is a declaration of surrender and a call to return to the era of public utility-style regulation. We should not give up so easily on the idea of facilities-based competition. Even just two major rivals per region is better than one regulated monopoly.
• The slippery slope of regulation is real: Neutrality mandates will gradually spread to other layers of the Net and cover content and applications. (FCC is already hinting at interest in regulating in the cloud and other Net services and content). Google and Apple’s necks will be on the neutrality chopping block next.
• There are some First Amendment concerns in play here, but not those raised by regulatory advocates (Net Neutrality is not the Internet’s First Amendment as the regulatory advocates claim; the First Amendment is the Internet First’s Amendment).

Richard Bennett and Matt Sherman explain why it’s a bad idea. (And here are a few of my old rants on the issue.)

Bennett:

If we’ve learned anything at all about from the history of Internet-as-utility, it’s that this strained analogy only applies in cases where there is no existing infrastructure, and probably ends best when a publicly-financed project is sold (or at least leased) to a private company for upgrades and management. We should be suspicious of projects aimed at providing Wi-Fi mesh because they’re slow as molasses on a winter’s day. I don’t see any examples of long-term success in the publicly-owned and operated networking space. And I also don’t see any examples of publicly-owned and operated Internet service providers doing any of the heavy lifting in the maintenance of the Internet protocols, a never-ending process that’s vital to the continuing growth of the Internet.

Sherman:

Pursuing a public utility model while also desiring competition are fundamentally contradictory goals. Utilities are designed not to compete. Do you, or does anyone you know, have a choice of providers for water, sewage or electricity? My second question would be: is there anyone in the technology world who sees public utilities as a model for innovation? A 1.5 megabit connection (T1) was an unimaginable luxury when I started in tech in the mid-90’s. It was for well-funded companies only. Today, it is a low-end consumer connection and costs around 80% less. Has your sewage service followed a similar trajectory? A public utility is designed to be “good enough” and little more. There is no need, and little room, for differentiation or progress. Your electricity service is essentially unchanged from 20 years ago, and will look the same 10 years from now. Broadband, on the other hand, requires constant innovation if we are to move forward — and it has been delivering it, even if we desire more.