Results tagged “Title II”

December 4, 2014 3:05 PM

Internet Interconnection: Bad Faith Is No Basis for Good Policy

A few weeks ago, President Obama, acting on some seriously bad advice, formally urged   the FCC to, among other things, consider regulating Internet interconnection agreements.  The "facts" that brought an ordinarily well-functioning market, based on two decades of voluntary agreements, into the President's regulatory cross-hairs were, of course, the highly-publicized disputes surfacing earlier this year involving Netflix, Cogent (one of Netflix's primary Internet transit vendors), and Comcast (at first, and then a series of other large ISPs).  

The only thing that is clear at this point is that there is a lot more information for the FCC to gather, especially from Netflix and Cogent.  The information that is available strongly indicates that the Comcast episode (and each subsequent ISP-specific iteration) was an anomaly, and not likely to repeat itself.  This, alone, should tell us to be wary of rushing to supplant a competitive market with regulation.

Moreover, because of the unique nature of this congestion event--and the fact that such an event had not happened before--the FCC must try to understand everything it can about this event before the Commission even thinks about adopting new rules.  Comprehensive rules are only the answer if the problem is that market participants have no ability/incentive to reach mutually-beneficial voluntary agreements.

Yet, in the present case, the parties were able to reach voluntary agreements; Netflix with Cogent, and Cogent with Comcast.  Therefore, before the Commission concludes that carrier-to-carrier agreements cannot work, it must ask: why didn't the voluntary interconnection agreements produce a timely, efficient outcome in the present instance?    

The Relevant Cogent-Comcast Congestion Facts

For our purposes, we only need to focus on a limited set of facts.  We'll take our facts exactly as presented by Netflix and Cogent (in their bid to obtain regulatory concessions in the FCC's review of the Comcast/TWC merger).  Specifically, we will refer to the Declaration of Ken Florance, Netflix's Vice President of Content Delivery, and the Declaration of Henry Kilmer, Cogent's Vice President of IP Engineering.

--In February, 2012, Netflix signed an agreement with Cogent for Internet transit service, which it would use to deliver traffic coming off CDN agreements later that year.  Cogent began transitioning traffic to Netflix in August 2012.  Florance Declaration ¶ 41.

--Cogent does not provide specific information about its settlement-free agreement with Comcast, but we can discern: 1) the agreement applies to traffic falling within a certain inbound/outbound ratio, 2) the agreement has been in place since sometime in 2008; and 3) for the first 5 years of the agreement, the parties were able to abide by the mutually-agreed-upon terms without issue.  Kilmer Declaration ¶¶ 17, 55, 61-64 and the attached Letter from Arthur Block, General Counsel, Comcast Corp. to Robert Beury, Chief Legal Officer, Cogent, dated June 20, 2013 ("Block Letter").

--Cogent also points out that: 1) it does not believe Comcast is its "peer" and that Cogent only agreed to exchange traffic with Comcast on a settlement-free basis because of Comcast's "market power," and 2) Cogent does not believe there is any reasonable basis for "in/out ratio," which defines the range of traffic volumes subject to exchange on settlement-free terms. Kilmer ¶¶ 42-45, and ¶¶ 55-60.

--According to the Block Letter, Comcast states that, in a capacity planning meeting in the fall of 2012, Cogent told Comcast it did not anticipate needing additional capacity in 2013.  Kilmer at pp. 17-18 of 18.

--In a recent ex parte letter, Cogent only disputes that it affirmatively represented that it would not need additional capacity in 2013. Here at 3.  Cogent does not dispute that it failed to provide any advance notice to Comcast that it anticipated needing additional capacity.   

Good Faith and Bad Faith in the Performance of Contracts

In contract law, there is a general presumption that parties to an agreement will perform their duties fairly and honestly, so as not to deprive the other party of the benefits of their bargain.  This presumption is a part of every contract, and is called the implied covenant of good faith and fair dealing. 

The converse of the implied covenant of good faith is, of course, bad faith.  Bad faith, however, goes beyond simply failing to perform a substantive provision in a contract.  Rather, it is defined as an "intentional dishonest act . . . misleading another, entering into an agreement without the intention or means to fulfill it, or violating basic standards of honesty in dealing with others."   

Defining bad faith in novel circumstances can be difficult, but Professor Stephen Burton, in a Harvard Law Review article in 1980, observes that parties frequently relinquish "future opportunities" to enter into contracts, and these same parties also have some discretion as to how they perform the contract.  Therefore, Professor Burton explains, "[b]ad faith performance occurs precisely when discretion is used to recapture opportunities foregone upon contracting." This test has become a widely-employed benchmark for determining bad faith by state courts. (The Burton article is not available online, but here is a great article by Prof. Robert Summers discussing the Burton test and Good Faith generally).

Did Cogent Exercise Bad Faith By Intentionally Disregarding the Terms of Its Settlement-Free Interconnection Agreement with Comcast?

As an experienced provider of Internet transit services, Cogent would have known how much Netflix traffic it could carry and still be within the terms of its settlement-free interconnection agreement with Comcast.  Instead of limiting the amount of traffic it would accept from Netflix, Cogent went ahead and agreed to accept as much as Netflix wanted to send.  Considering, as well, Cogent's expressly-stated contempt for the traffic ratio (which limited Cogent's future opportunities), it is impossible not to construe Cogent's willful disregard of the traffic ratio as an attempt to "recapture opportunities forgone upon contracting."  

While Cogent tries to insist that Comcast was being unreasonable by asking Cogent to observe the terms of the parties' agreement, the Delaware Supreme Court, not long ago, affirmed that "[a] party does not act in bad faith by relying on contract provisions for which that party bargained, where doing so simply limits advantages to another party." Here, n. 26.  The opinion of the Delaware Supreme Court is relevant because many firms, including Netflix, designate Delaware in contracts designating a choice of law.

Fool Comcast Once . . .

It seems obvious, in retrospect, that Comcast could not anticipate--and was not willing, or prepared, to deal with--Cogent's level of bad faith performance.  It is clear from Comcast's response to Cogent's escalation letter, in June 2013, that Comcast has no intention of treating Cogent's persistent disregard of a crucial term as a "total breach."  Comcast asks only that Cogent purchase transit for that amount of traffic which exceeds the parties agreed-upon ratio.

But, when Cogent refused Comcast's option for preserving the original agreement, while accommodating Cogent's demand for greater capacity, Comcast would have been within its rights to give Cogent notice of its intent to terminate direct interconnection with Cogent.  Because, if Comcast's customers were hitting The Pirate Bay a little too hard (demanding more Cogent-bound capacity), that's what Cogent would have done.  

In 2008, Cogent apparently decided that its settlement-free interconnection agreement with European ISP TeliaSonera had become unappealingly one-sided.  Cogent (probably?) provided whatever notice its agreement with Telia required, and then--fairly suddenly (according to reports)--Cogent simply stopped carrying Telia's traffic. 

In hindsight, Comcast would have best served its customers by simply terminating the agreement.  Though, this course of action would have led to a temporary disruption in service--as Cogent's customers sought other alternatives--it would not have led to the protracted degradation in service that consumers instead had to suffer.  

Nonetheless, the existence of this event will make the system of voluntary network interconnection that comprises the Internet less vulnerable to a future bad faith breach in a critical portion of the supply chain.  Parties to future voluntary interconnection agreements are now much more likely to craft agreements so as to insure against protracted periods of deteriorated service.  A few isolated instances of bad faith should not cause the FCC to abandon its faith in the fundamental structure of the Internet as we know it.  

September 16, 2014 9:00 AM

Chairman Wheeler's Broadband Competition Observations: Title II Implications

On September 4th, in a speech to the startup-focused group, 1776, Chairman Wheeler gave a speech where he discussed consumer broadband deployment and competition.  The Chairman seemed to be of two minds about the state of broadband competition.    

On the one hand, the Chairman praised the valuable benefits that competition has yielded, in terms of spurring ISPs to deploy new, and upgrade old, networks in order to increase the speed and availability of broadband Internet to more Americans.  The White House has previously recognized broadband competition as producing better networks and faster speeds.  

However, after recognizing the value of these new last mile networks, Chairman Wheeler also concludes that the present state of competition is simply not adequate to ensure that consumers can realize all the benefits of these networks,  

Looking across the broadband landscape, we can only conclude that, while competition has driven broadband deployment, it has not yet done so in a way that necessarily provides competitive choices for most Americans.

Speech at 5 (emphasis added). 

The Consumer Broadband Continuum
 
Chairman Wheeler began by introducing the graphic below.  The chart shows, by percentage of households, the number of providers offering service at not only the FCC's currently-defined "broadband" speed (4Mbps down/1Mbps up), but also 3 additional, speed-defined, categories--10Mbps, 25Mbps, and 50Mbps.
Broadband table from Wheeler speech_4.png 

The Chairman explained that 10Mbps was the minimum speed that a household would need to stream one HD movie, and allow for simultaneous Internet use from other devices.  Wheeler also proposes changing the definition of "broadband" to 10Mbps downstream for purposes of participation in the Connect America fund.

The Chairman further argued for changing the definition of broadband, because "only wussies use less than 10Mbps/month, and the United States will not subsidize wussy Internet usage." [citation needed]  The 25Mbps and 50Mbps levels of service, Wheeler predicts, will quickly become the standards, as households continue their inexorable march toward dedicated, fully redundant, OCn SONET service. 

Competition

Wheeler observes that, at the 4Mbps and 10Mbps tiers, most Americans have a choice of no more than 2 service providers.  Moreover, the situation only deteriorates at higher speeds, "[a]t 25 Mbps, there is simply no competitive choice for most Americans."  Speech at 4 (emphasis added).

The poor picture of broadband competition that the Chairman paints has created situations where "public policy" (read: FCC regulation) must intervene to protect consumers and "innovators" from firms with "unrestrained last mile market power."  In these situations, he says, "rules of the road can provide guidance to all players and, by restraining future actions that would harm the public interest, incent more investment and more innovation." Speech at 5.

Title II Just Got Trickier

As most are aware, the FCC is currently evaluating public comments on its "rules-of-the road-for-broadband-ISPs" NPRM, in which the Commission is also considering whether to reclassify broadband Internet service as a "telecommunications service" under Title II.  Supporters of reclassification often contend that it would not compel the FCC to impose any obligations on ISPs, beyond the general statutory duties of fair dealing imposed under Sections 201 and 202 of the Act.

Title II Is Different for Dominant Carriers.  The obligations of any specific common carrier under Title II, however, depend on that carrier's classification within Title II for the relevant telecommunications service.  Consistent with what Title II proponents argue, "non-dominant" carriers have few, if any, company-specific obligations.

On the other hand, carriers classified as "dominant" have to abide by additional obligations that stem from both the statute, as well as a more specific application of the general terms of the statute, because the FCC cannot assume compliance with its general statutory obligations for the dominant carrier service. 

Thus, dominant carriers' rates can be regulated by the Commission, and they must file tariffs, subject to FCC review, describing their terms of service.  Moreover, dominant carriers have longer review times and more stringent standards for initiating new, and retiring old, service offerings. 

Finally, once imposed, dominant carrier regulations are all but impossible to get out from under.  At the end of 2012, U.S. Telecom filed a Petition with the FCC, seeking to have its members (holding less than a 50% market share in a declining segment) declared "non-dominant" for voice service. The FCC has still not acted on U.S. Telecom's Petition.

Implications for Cable ISP's Higher Speed Services

The one thing that Chairman Wheeler could not have expressed more clearly is his belief that cable is the only alternative for broadband service at or above 25Mbps.  Thus, if the Commission were to reclassify broadband Internet service as a telecommunications service, it would be difficult for the Chairman to explain why the incumbent cable providers are not dominant in the provision of higher speeds of consumer broadband service.

The specific Title II provisions, and Commission rules (such as the Computer Inquiry rules), that would apply to the cable companies' dominant telecommunications services would depend in large part on how the Commission chose to reverse the Cable Modem Order.   Although, with respect to the Computer Inquiry rules, in particular, it seems highly unlikely that the Commission would revisit its earlier unwillingness to "in essence create an open access regime for cable Internet service applicable only to some operators." Order at � 46 (emphasis added).

Whither the Dominant Carrier ISP?
 
If we pause for even a second to consider the Commission's reasoning in refusing to apply Computer II to broadband over cable, it becomes very clear why Title II regulation is not the answer.  The easiest way to avoid the incremental hassles that come with being "the firstest with the mostest" is don't be that guy.

What's that, dear broadband network?  You could offer the fastest broadband on the market, but because some additional regulation intended to "simulate" competition means you'll earn less than you would on the "slower" speeds?  Well, the easy answer would be: don't offer the higher speeds! 

This almost seems like that classic case where rent control regulations have the paradoxical effect of creating artificial shortages for the regulated service, limiting access for the very people the laws were supposed to help.  But, I'm sure that could never happen here...

 



September 8, 2014 1:59 PM

Free Press's Misleading Theories on Title II and CapEx (Pt. 2)

In its Net Neutrality Comments, Free Press combines a limited number of less-than-ideal data points with a faulty methodology and a misleading narrative to claim that has "proven" its' reckless accusation that ISPs are lying when they express concerns that Title II reclassification/regulation may distort their incentives to invest in network improvements.  

In the previous post, we discussed some of the problems with the methodology, reasoning, and data Free Press uses to reach its conclusion.  Today, we'll correct Free Press's misleading narrative "interpreting" the data with some relevant facts that you wouldn't know if you only read their comments.  

Ironically, Free Press concludes its misleading presentation of capex "facts" (Comments III.B and III.C) by stating, "[w]e hope that the Commission and other policymakers learn and understand this history, for this debate cannot be a legitimate one if basic historical facts are replaced by incorrect beliefs."  Comments at 111 (emphasis added).  This statement would be OK (but still too preachy), if it didn't just present the FCC with a version of history so tailored for advocacy that it exists only in Free Press's comments.  But, it's easy to forget . . .   

Excessive Investment=Excess Capacity=Loss of Investment + Jobs

Free Press speaks of the period before the Cable Modem Order (in 2002) with a level of nostalgia that would seem more appropriate to a former WorldCom executive than a group claiming "historical facts."  Free Press confidently asserts,

[common carriage], in conjunction with policies that opened up communications markets to greater competition, also was responsible for the largest period of telecommunications industry investment in U.S. history.
Comments at 90.   The only hint from Free Press that this period may not have been an unqualified success is when Free Press allows that, "[m]uch of this investment . . . was a bubble ...." Comments at 111. 

ebbers_nacchio_quote.jpg

Perceived Bandwidth Demand Drove CapEx.  Internet traffic grew at incredibly high rates in the second half of the 1990s, but the Internet was new to most people, and the subject of a lot of hype.  Thus, perceived Internet traffic growth not only outpaced actual Internet traffic growth, but it was also disproportionately affecting perceptions of total bandwidth demand.  But, where would people get these ideas?

Well, in a March 2000 report to Congress, then-FCC Chairman William Kennard stated,

Internet traffic is doubling every 100 days. The FCC's 'hands-off' policy towards the Internet has helped fuel this tremendous growth. 
(emphasis added).  Kennard's predecessor, Reed Hundt, would have none of this foolishness, and wanted people to know that "[i]n 1999 data traffic was doubling every 90 days." (emphasis added) ( Quote is from Hundt's self-congratulatory book, "You Say You Want a Revolution"at 224.)

Kennard_Hundt.jpg
The Reality.  Not everyone at the FCC was buying (or selling?) the hype.  A senior economist at the Commission, Douglas Galbi, published a paper the same year (2000), warning that total bandwidth demand was not as high as everyone seemed to think.

Growth of bandwidth in use for Internet traffic has been dramatic since 1995, but Internet bandwidth is only a small part of total bandwidth in use. . . .
(emphasis added).  Meanwhile, massive fiber deployments and innovations in optical transmission equipment meant that capacity was about to explode.  

The Reckoning. Only a year after Kennard's report to Congress, CNET reported that the U.S. was in the midst of a bandwidth glut, and that prices would likely decline much further.  
By summer 2001, the equipment companies issued clear warnings that the unraveling was well underway.  A few months later, the Enron scandal would break.  

Over the next year, what followed was the largest dislocation, in terms of job loss (500,000) and wealth destruction ($2 trillion) the telecom industry has ever seen.  See, e.g., this BusinessWeek article.  Law professor Dale Oesterle writes that the telecommunications industry in 2002 may have been the largest, most scandal-ridden, industrial meltdown in U.S. history.  Here at 1.

The Aftermath. After the telecom bubble burst, depressed Internet transport prices would continue well into the middle of the decade.  If you're wondering how low  

In 2006, Level 3 needed additional transatlantic capacity, so it purchased 600Gbps of lit capacity on another carrier's transatlantic fiber.  At the time of this purchase, though, Level 3 was carrying 480Gbps of traffic on its own transatlantic subsea cable system; a system that was scalable to 1.28Tbps.  In other words, Level 3 already owned unlit transatlantic capacity, but using its own fiber didn't make sense because wholesale prices had dropped below operational and replacement costs!

The Biggest Lie About Capital Investment

The central deception of Free Press's entire misleading capex narrative is, of course, the notion that the 2002 Cable Modem Order was the defining event for broadband Internet capital investment.  As explained above, the telecom bubble had little to do with Title II, and neither did the bust.  Moreover, broadband Internet services, in particular, benefited more from the bust (post Title I classification), than they did from the boom.

The cheap [below-cost] Internet bandwidth of the early/mid-2000s led to a lot of web application experimentation and new Internet companies.  Consumers responded quickly, and favorably, to the new, high bandwidth Internet applications, like Myspace. Xbox, and Youtube.    

This led to strong consumer broadband Internet adoption, which could not have been possible if the broadband ISPs had under-invested in their networks.  The FCC data show broadband Internet services increased by a factor of about 4.5 between 2002 and 2008; from 17 million customers in 2002 (see Table 3) vs. around 75 million telco and cable broadband customers in 2008 (see Table 1). 

Indeed, this 400-500% increase in demand for broadband Internet service compares favorably with total bandwidth demand growth of around 300% during last half of the 1990s. See Galbi at Table 2.  In fact, the success of the broadband Internet economy (Internet companies, backbones, metro fiber providers, and broadband ISPs) from 2002-2008 would finally end the bandwidth glut, and bring back demand for new "Title II" Internet transport capacity, including transatlantic capacity.

Free Press tries to prove that broadband ISPs are lying about their concerns with potential new, and undefined, rules under a Title II reclassification.  But, if the FCC is tempted to change its regime based on erroneous cause-effect propositions that ignore historical facts, then it would seem the broadband ISPs have every reason to fear the unintended effects that will accompany a new regulatory classification.













September 2, 2014 3:50 PM

Free Press's Mistaken (and Misleading) Theory on Title II and Investment (Pt. 1)

It's no secret that Net Neutrality pressure group Free Press would like the FCC to revisit the 2002 Cable Modem Order, in which the FCC classified broadband Internet service over cable as an "information service."  Nor is it a secret that the largest broadband ISPs oppose such a reclassification.  

The ISPs often contend that a reclassification of broadband Internet service as a Title II, or "common carrier" service, would open the door to a range of regulations that could dampen or distort their incentives to invest in network improvements.  But, in its comments on the FCC's Net Neutrality NPRM, Free Press intends to conclusively vanquish the "investment fear" arguments of the ISPs once and for all.  

Free Press believes it can "debunk" the "myth" that Title II discourages regulated firms from investing in their networks if it can show that the broadband ISPs invested heavily in their networks at a time when the ISPs' broadband services were (pretty much) subject to Title II classification.  Free Press relies on revenue and capital expenditures from the annual reports of a cross-section of large, publicly-traded, telecom and cable companies to tell the Commission a fairy tale.

Perhaps everything that could be wrong with Free Press's facts and theory about ISP network investment over the last 20 years is wrong--starting with the theory itself.  This blog will focus on the problems with Free Press's theory, and its limited set of "facts" in support of its theory.  Tomorrow, we'll explain what really happened (using Free Press's data, along with other relevant historical facts), and why Free Press's narrative is so misleading.
 
Investment Itself Is Never an Appropriate Regulatory Goal

Free Press seems to equate periods of rising capital investment as a "good" outcome, and periods of falling investments as a "bad" outcome.  However, regardless of whether the investment was efficient or not (it isn't), the FCC should never try to assume the role of central economic planner.  The FCC's only interest in investment should be to make sure that consumer interests are served in the manner that least distorts company investment incentives.

CapEx from Financial Statements Doesn't Show What Free Press Thinks It Does

Even if stimulating investment was the right focus for the Commission, the capex information Free Press presents does not prove that Title II is the answer.  If Free Press is trying to show that the regulatory classification of consumer broadband service affects how much a firm invests in that service, then aggregate, firm-wide network investment wildly overstates mass-market broadband investment in any period.  

In Fig. 1 (Comments p.100), Free Press tracks capex for a number of telecom carriers over time.  But, by using aggregate enterprise capex, Free Press is primarily tracking capex for Title II services in all relevant periods.  Notwithstanding the regulatory classification of one residential service, the majority of the revenue produced by these firms' networks still comes from Title II services (e.g., both AT&T and CenturyLink reported record numbers of residential broadband customers in 2Q 2014, but this service only comprised ~16.5% of total firm revenues for both firms). 

A more accurate estimate of the capex devoted to the Title I service would focus on correlations between significant broadband subscriber growth and increased (decreased) capital investment over the same period of time.  For example, CenturyLink has tripled its broadband subscribers (from ~2m to ~6m) over the last 5 years; during this same period, capex has grown at a CAGR of over 60%. See here (figures are from 2013 Annual Report, and the 2Q 2014 Earnings Supp. spreadsheet).  A more careful review of the companies' data, however, may not support the story that Free Press wants to tell.

Investment and Revenue Figures from the Late '90s Are Not Entirely Accurate

Even if we accept that "investment" is a worthy regulatory goal, Free Press paints a misleadingly "rosy" picture of the era.  Free Press concludes its recasting of the "golden age of investment under Title II" by simply stating that, "the 2001 recession and the economic impact of the September 11th attacks took their toll on the U.S. economy, and the telecom sector wasn't spared." (Comments at 101) 

Free Press neglects to mention the devastating accounting scandals that would surface right after 9/11, or the massive layoffs, bankruptcies, and distress sales that would follow, and cascade through the industry over the next two years.

On October 16, 2001, Enron announced it would have to restate its earnings for the prior 2 years.  This statement, and the subsequent SEC investigation, would uncover widespread accounting fraud throughout America's largest companies.

When you look at this list of the accounting scandals that were exposed in the 11 months after 9/11, don't focus solely on the telecom and cable companies.  Keep in mind that every energy company on this list also owned significant telecom network assets.  (See this 2002 study at p. 21/38).

Bandwidth trading.  If you're wondering why most of the accounting scandals involved telecom or energy firms, that's because they had a common thread.  Most of the telecom-related accounting fraud was related to "bandwidth trading."  If you don't know what bandwidth trading is, just listen to Enron explain it. 



The idea of bandwidth trading was just a few years ahead of its time.  In practice, it would take BitTorrent and The Pirate Bay to make using someone else's capacity while they were sleeping a reality. 

Early bandwidth traders, like the modern P2P thieves users, did not actually exchange money.  Rather, if you had bandwidth on one route, and another company had capacity on a route you wanted, you could just swap capacity--but that's boring.  Instead, each party would "pretend pay" the other for the prevailing value of the capacity (which still seems kind of dull). 

The real fun came with the accounting.  Both parties could record each other's pretend payment as real revenue, and record the capacity they were giving up as a capital expenditure; winning!  For more, see this 2002 Wall Street Journal article.  Oh, and when I say "could record," I mean literally; not legally.

As you can see, Free Press makes a number of mistakes in its attempt to prove that their Net Neutrality opponents could never justifiably fear Title II regulation--from trying to prove that a fear of undefined future regulations is unwarranted, to a misunderstanding of what their data actually show.  Tomorrow, we'll explain what actually happened in the golden age of Title II and why Free Press's narrative is so deceptively misleading.
 
June 29, 2010 5:34 PM

Regulate. Rinse. Repeat. Three Steps to the Third Way

"I can't believe that!" said Alice.
"Can't you?" the Queen said in a pitying tone. "Try again: draw a long breath, and shut your eyes."
Alice laughed. "There's no use trying," she said: "one can't believe impossible things."
"I daresay you haven't had much practice," said the Queen. "When I was your age, I always did it for half-an-hour a day. Why, sometimes I've believed as many as six impossible things before breakfast." 
  --Lewis Carroll, Through the Looking Glass, Chapter 5  

The quote is apropos of almost nothing.  I just saw it recently, and I liked it.  I suppose if you substituted "contradictory" for "impossible" you might get some meaning out of it by the end of this post.

The title should probably say: regulate, forbear, repeat.  But, here's what's got me thinking in circles.  Less than two weeks ago, under the color of protecting consumers and broadband deployment in an Internet age, the FCC released an NOI (Notice of Inquiry) proposing to classify some part of broadband Internet service as a "telecommunications service."  OK, so far, so good . . . I mean, I understand.  If you're the FCC, and you classify some type of broadband Internet service as a Title II service, then you have broad powers to regulate the service (however it is defined) and ensure that consumers are protected through wholesale and retail rate regulation, regulation of terms of sale, etc.  

But, here's the hitch: the FCC is talking about applying only a fraction of Title II regulations to broadband Internet related service . . . and then applying a type of "blanket" forbearance under Section 10 of the Act.  Forbearance means that enforcement of a particular rule or regulation is not necessary to protect consumers, because the market is competitive enough to protect consumers without regulation with respect to that particular rule or regulation.  This is where it starts to get a little weird.

You see, this whole "telecommunications service" classification idea is a response to the Comcast decision, in which the D.C. Circuit said that the FCC lacked authority under Title I to impose "net neutrality" principles/rules on providers of broadband Internet access service.  So, a classification of some part of broadband Internet service as a "telecommunications service" would allow the FCC to impose its own consumer protection rules--in the form of "net neutrality" rules--on providers of broadband Internet access service.  

To make things more clear, here's what's going on:  the FCC thinks consumers and competition for broadband Internet connectivity services need protection.  Only, the thing is that the FCC doesn't think the regulations that Congress established for the protection of consumers of "telecommunications services" are quite right--maybe a little too much consumer protection, or not quite the right mix of "heavy-handed" and "light touch" regulation?  Or maybe the FCC just likes their proposed regulations for "telecommunications services" better than the regulations written by Congress.  Weirder, still.

Only, here's where we go from weird to weirder to weirdest.  Last week--only four days after the Commission came out with the NOI on Title II, replete with suggestions for blanket forbearance, the FCC comes out with its Order on Qwest's Petition for Forbearance from certain wholesale requirements imposed under Title II for the Phoenix MSA.  The Qwest Phoenix Order was released four days after the NOI was released, but it was adopted two days before the NOI was adopted and released.  So why is this so weird?

Well, the Qwest Phoenix Order adopts a very thorough analytical framework that must be satisfied before the Commission grants forbearance from certain requirements imposed on providers of telecommunications services.  The Commission's analysis is "market power" based--meaning the FCC must assure itself that the market for the service for which forbearance is being considered must be a competitive market.  A significant factor in the Commission's market power analysis is the concentration level of the market being analyzed.  Said differently, the Commission will take a careful look at product and geographic markets, how many firms are in the market, and the relative market share, of the firms in the market for which forbearance is sought.  

Stay with me now . . . we're almost there.  So, in the Qwest Phoenix Order, even though cable providers are large and growing providers of mass market telephone service, even though many customers use over-the-top VoIP service, and even though as many as 25% of all households use only wireless service (Qwest Phoenix Order, 55, n.164), Qwest was unable to demonstrate the requisite level of competition and lack of concentration to justify forbearance from certain requirements of Title II for the mass market for retail telecommunications services.  Given the fact that broadband Internet access services are almost always (approximately 91% of the time, according to the Qwest Phoenix Order, 53, n.159) bundled with, at a minimum, telephone service, it seems hard to reconcile the "blanket forbearance" suggested in the NOI with the analytically rigorous "market power based" analytical framework introduced in the Qwest Phoenix Order.  

I'm not being critical of the Commission's methodology in Qwest Phoenix, but it does sort of strain credibility to pretend that the FCC can turn its new framework on and off--classifying broadband Internet connectivity as a type of telecommunications service, but then "looking the other way" on every exercise of forbearance from most of the requirements of Title II . . . especially not for incumbent LECs . . . and certainly not for Qwest . . . in Phoenix.  Will a court buy the Jekyll/Hyde forbearance analysis necessary to implement the Third Way?  Does the Third Way really bring regulatory certainty?

In a way, the reasoning is so circular that it reminds me of that old anti-drug PSA where a guy is trapped in a small stark room, which he paces around, faster and faster.  He says that using cocaine helps him work hard . . . to make more money . . . to buy more cocaine, and he keeps pacing around the room, and repeating that phrase faster and faster, and, well . . . you get the point.  In this case, it seems like the Commission is justifying classifying more services as being subject to more extensive regulatory classifications in order to protect consumers, so they can apply "lighter touch" regulations in order to protect more consumers, but, not to worry the Commission will subject more regulations to forbearance so they can promote more investment for the benefit of consumers, but, not to worry, the Commission will adopt more thorough forbearance standards so more regulations will remain available to protect more consumers. . . .

June 16, 2010 2:43 PM

Straight Outta Comstock

Last week, one of my former bosses from COMPTEL--Earl Comstock (on behalf of his client, Data Foundry) --had a discussion with the FCC, including FCC General Counsel Austin Schlick, regarding the FCC's proposed "Third Way" approach to reclassifying broadband Internet transmission service as a "telecommunications service" under Title II of the Communications Act.  Here is a link to the ex parte materials Data Foundry filed with the Commission.  So, aside from the irony associated with two of the major protagonists in the Brand X decision (Austin Schlick from the FCC, and Earl Comstock for Brand X and Earthlink), almost 5 years from the date of the decision (June 27, 2005), now taking somewhat different positions than they took at the time, what's so interesting?

Well, first, if you know Earl at all, then you know better than to get into a discussion with him about Internet access classification, and you know that he has historically been one of the biggest champions of (his version of) net neutrality in the industry.  Seriously, Earl is the "Count of Classification"--he owns that subject.  Whether you agree with his policy conclusions (I don't, but will explain in a later post), you have to respect Earl's encyclopedic knowledge of the history and meticulous explanations of the current state of broadband Internet classification.  This is no joke.  If FCC General Counsel Austin Schlick had been offered a free trip to Cabo, on the condition that he only had to sit through a "presentation" on broadband Internet classification with Earl, Computer II would be the "Only Way"!

But this interesting personality piece aside, the Comstock/Data Foundry ex parte is so relevant because it is analytically correct.  What does this mean?  Quite simply, it means that one of the leading advocates of net neutrality, and Title II classification for broadband Internet access transmission services, believes the "Third Way," as described by the Commission thus far, is no way at all.  Why?

While most ex parte meetings are deadly boring, I would love to have been a fly on the wall for this one. Reading between the lines of what was filed, I'm guessing that Earl made clear, in his inimitable way, exactly what he thinks about what the Commission seems to be up to. In a nutshell, Earl probably told them that they're screwing things up. In Earl's view, the Commission can put broadband under Title II in one of two ways - a "wholesale path," or an "end user path." And the end user path, that the Commission appears to have set its sights on based on Justice Scalia's dissent in Brand X, is the wrong way. Earl correctly identifies the fatal weaknesses in the end user path (whether his analysis of the virtues of the wholesale path is valid is another matter). Those weaknesses are: (1) the Commission would likely have to conclude that all the layers of the OSI stack constitute "telecommunications": (2) that absent such a conclusion ISPs would be able to escape the classification simply by acting at the higher layers of the stack; and (3) that the end user path risks the extension of common carrier regulation to all providers of information services.

This last point probably deserves a little more explication. For the last forty years, the Commission has classified services that combine transmission with information processing as "enhanced" or "information services" subject to Title I. Earl's point is that if the Commission were to find here that such services in fact may constitute the offering of two services - an information service and a telecommunications service, this approach would potentially implicate all information services, which by definition are offered via telecommunications. Indeed if the Commission were to break Internet access up in this way via the end user path, all content providers that purchase Internet access in order to distribute digital goods (eBooks, music, movies, etc.) could be treated as "resellers" of the common carrier service that they purchase.

To further elaborate, let's consider a hypothetical.  Assume there is some source of cheap or free video content (maybe those now-goofy public safety/hygiene films from the '40s, '50s, and '60s).  You acquire a non-exclusive license to use these films, and create your own cool, funny, retro website.  You get a lot of hits, and want to ensure a good quality experience to your customer, but you aren't quite ready or willing to build/buy your own content delivery network.  But, why worry?  Because, under the interpretation that every information service contains a separable telecommunications service, any member of the public will be free to use the content delivery network (nothing more than transmission by another name) of a Netflix, Google Voice, eBay, or any other provider of Internet content--on just and reasonable terms.

Thus, to summarize, given all the things the FCC says it won't do in its "Third Way" reclassification, the only "telecommunications services" that can be delivered with a "light touch" are those services--which can be combined with computer processing--that the broadband ISPs feel like offering to the public.  This seems like simply replacing the prior "Title I" services with a "Title II" label.  Will a court really buy this "no regulation, re-regulation?"

So on the one hand, the label "telecommunications service" could be nothing more than just that--a different classification without a distinction from the previous classification.  On the other hand, if the Commission really wants to assert that each broadband Internet service has both an "information service" component, and a "telecommunications service" transmission component, then this classification will--if applied evenly--potentially be a Pandora's box, and every Internet service that relies on Internet access will, to some degree, be subject to common carrier regulation. 

In some respects, the Third Way might not be all bad.  Excessively regulatory?  To be sure.  Confiscatory?  Maybe . . . sometimes . . . but probably only for the politically weak or unpopular.  On the plus side, though, the USF contribution factor would drop to next to nothing.  Intercarrier termination rates would almost have to be set at zero across the board.  And, such an outcome might provide a little more certainty in the "real world" of telecommunications commerce. 

In the General Counsel's detailed justification of the "Third Way" as a necessary departure from the Commission's current Title I classification of broadband Internet access services, Mr. Schlick explains that, even if the FCC were successful at defending Title I ancillary jurisdiction, it would involve piecemeal regulation, protracted litigation, and "[t]he extended uncertainty would deprive investors, innovators, and consumers of needed clarity about the rules of the road." (p.3)  Huh?

Did the FCC find religion?  The logic of the "why" makes sense, but why should the FCC start now?  Given the Commission's persistent "non-classification" of VoIP, it's hard to get used to the idea that, all of a sudden, the Commission considers extended uncertainty over the regulatory treatment of an Internet service to be a bad thing.  I'm not criticizing the sentiment, or the effort, it's just that it might be a little misplaced. In fact, I'd be willing to bet that the Commission's unblemished, 14 year record of not even attempting to classify VoIP, while constantly saddling VoIP with new piecemeal regulations (E911, USF contribution obligations, CALEA, etc.), has given rise to countless more litigation and uncertainty than could be expected from any Title I classification scheme designed to support net neutrality rules that have ended up in court . . . uh . . . at least once in 5 years.