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 arelyingwhen 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.
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.)
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, butInternet 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.
On Sunday, the Wall Street Journalreported that Apple was in talks with Comcast to provide a new type of streaming TV service. The report was vague on the specific service except to note that: 1) the parties were "talking," 2) an Apple device-to-be-named-later was going to be used, 3) the service would involve a "managed" (or guaranteed bit-rate) transmission path over Comcast's ISP, and 4) would require a significant investment by Comcast.
Predictably, the Twittosphere erupted with the swift condemnations due any speculative service that whiffs of net neutrality blasphemy. If the speculation involves Comcast, then it wreaks of blasphemy.
The Meandering Meaning of Net Neutrality
But, what is the "dogma" of net neutrality? Is it the FCC's 2005 Internet "Freedoms?" Is it the Open Internet Rules that were vacated--no blocking and no unreasonable discrimination? Public Knowledge just told the FCC that the two biggest "threats" to the Open Internet are ISP data caps and "peering"/interconnection disputes. PK at pp. 6-10.
If net neutrality can be said to have any consistent premise, it is best depicted metaphorically in this 14 second, Geico commercial.
The ISPs are like "Mr. Tickles." The whole rest of the Internet stakeholders are represented as the man in the portrait holding Mr. Tickles.
Yet, firms like Cisco, who on Monday announced a 2 year and $1 billion commitment to cloud services, as well as competitive over the top companies like Amazon, Hulu, and yes, Apple TV, continue to want to invest in cloud services. In other words the leading Internet infrastructure equipment maker fully expects that--even without rules--the ISP (Mr. Tickles) will continue to "hold still" and not "git all cattywampus" on them.
The Flimsy Factual Bases for "Concerns" About the Open Internet
First, let's acknowledge one point on which everyone should be able to agree. The "open Internet" is valuable to every consumer, and every seller, that touches the Internet economy. In fact, the rise of the Internet economy seems to be proof that the "open Internet" is so important that virtually every aspect of that "openness" is already guaranteed by existing contracts between the thousands and thousands of Internet stakeholders.
But, those that think rules must be necessary to ensure the continued openness of the Internet must have some reasons, right? Well, if we look closely, the concerns that have been advanced in past FCC proceedings have been largely based on theoretical predictions that haven't really materialized.
The first FCC concerns about "peering" (i.e., settlement-free Internet interconnection) vs. "transit" (i.e., "paid" interconnection) were expressed by Internet backbone competitor GTE in the MCI/WorldCom merger. See paras. 147-150. The FCC adopted GTE's concern, which was that the combination of WorldCom's UUNet and MCI's backbone would have had no "peers." Thus, because a combined WorldCom/MCI would have been able to require "paid peering" by any other ISP or backbone seeking to use its network, the post-merger firm could raise the costs of any new entrant.
This disaster was averted when MCI agreed to divest its Internet backbone to Cable and Wireless. In fact, the divestiture to C&W was considered a huge failure, and MCI's alleged bad faith failure to satisfy the concerns of the Department of Justice was a primary concern behind the DoJ's challenge to WorldCom's proposed acquisition of Sprint 2 years later. In short, the remedy didn't work, but was apparently unwarranted, anyway.
"Net Neutrality, Broadband Discrimination"
In 2003, Professor Tim Wu argued, in the above-titled paper, that "[c]ommunications regulators over the next decade will spend increasing time on conflicts between the private interests of broadband providers and the public's interest in a competitive innovation environment centered on the Internet." With the exception of Comcast's protocol-specific BitTorrent throttling in 2007, these concerns have largely failed to materialize. Notably, Prof. Wu never mentions the FCC's previous (and PK's current) concerns about peering as a cause for concern.
Broadband ISP "Incentives" to Discriminate, Circa 2010
In the Open Internet Order, the FCC largely parrots Prof. Wu's concerns that broadband ISPs have the incentive and the ability to discriminate against "over the top" providers offering services that compete with the voice and/or subscription video services sold by the ISPs. The FCC first establishes, using the ISPs' own statements, that consumers view certain online applications as substitutes for voice and subscription TV service. Order, para 22.
Then, the FCC simply assumes from comments of groups advocating rules (and not ISPs or voice/video competitors) that, of course the ISP has incentives to discriminate against online alternatives. Yet, the record contained no data supporting the FCC's conclusion (showing, e.g., higher profits in TV/voice than broadband Internet). Order, paras 23-24.
Public Knowledge expressed no concerns about data caps and peering in the 2010 docket.
The Problem with Apple TV . . .
Supposedly, Apple wants Comcast to help it deliver some kind of super-cool IPTV that will actually make you want to buy video service from Comcast (vs. get it on the Internet). As part of this service, Apple wants Comcast to offer Apple TV a guaranteed quality of Internet access, so that its video content would not be affected by general congestion issues that can otherwise cause videos to buffer. And that higher quality access, even if not exclusive to Apple, is a problem . . .
Is The Problem With "Net Neutrality"
My fear is that "net neutrality" is no longer about just a reasonable set of minimal consumer expectations designed to keep the Internet creepy enough to hold the Interest of consumers and the NSA, while at the same time keeping it wholesome enough to prevent SkyNet from becoming self-aware by 1997 (or whatever similarly-fevered nightmares the rules protect us from).
Without a presumptive tolerance for commercially-reasonable service deviations, net neutrality becomes a fetish devoid of any utility. If we can't limit proscribed conduct to only practices or agreements that unreasonably restrict Internet "output," then how do we know whether rules are serving consumers or requiring everyoneto serve a concept that may have limited benefits?
I was hoping that the Chairman would resist the temptation to open a new net neutrality rulemaking after last month's D.C. Circuit decision overturning most of the FCC's 2010 Open Internet Rules--but he didn't. The Open Internet Rules were unnecessary when they were adopted, but more importantly, they were a waste of a significant part of Chairman Genachowski's tenure.
The FCC already has to deal with the devilishly-complex, two stage spectrum incentive auction/reverse-auction. Similarly, the Commission is already lagging the market in considering what regulatory modifications may be appropriate for consumers in an "all-IP" world. The Commission is also likely to spend considerable time and resources reviewing the proposed Comcast-Time Warner Cable merger.
If the FCC really thought about whether net neutrality rules are even useful, much less necessary, it would quickly conclude that the "terminating access" theory (underpinning the arguments of net neutrality advocates) should probably be left back in the MFJ--where it came from. Making rules to thwart hypothetical problems is--at best--a distracting waste of time. But, when the putative rules will affect services that don't presently exist, the danger of real harm becomes much more likely.
Why are net neutrality rules unnecessary, and even potentially harmful to the productivity of the Internet?
1) Contracts. The Internet did not become "open" by accident. With the possible exception of P2P traffic, almost every form of traffic carried on the Internet is delivered pursuant to a contract that specifies a guaranteed level of carriage.
Think about it. Websites use a type of "ISP" called a web host, usually a data center connected to multiple backbone providers. If the website will be serving up a lot of traffic to its customers, the website will frequently use a "content delivery network" (CDN) to ensure that it's traffic is delivered in the fastest manner possible. Many large Internet backbones (like AT&T, Level 3, and Verizon) also provide CDN services.
In fact, most large ISPs also provide significant services (hosting, Internet backbone, CDN, and "cloud services" for large enterprise customers) which depend on the assumption that the consumer's ISP will carry the tendered traffic in a non-discriminatory manner. Any act of website-specific discrimination by an ISP could easily be detected, will likely put that ISP in violation of its peering contracts, and will invite an avalanche of against the offending ISP.
The bottom line is that--even if an ISP had the ability and the short-term economic incentive to discriminate against another carrier's Internet traffic--the consequences of the discrimination are neither predictable nor quantifiable. If economics is to be believed, the ISPs are extracting all the revenue the market will bear--further price increases would only reduce profits.
2) The Success of the Internet of Things Might Depend On Discrimination. Many were surprised when Google paid $3.2 billion last month to acquire smart thermostat company Nest Labs, but this type of service is a critical part of the "Internet of Things." An energy utility could realize significant benefits by receiving real-time consumption data from households. If the energy company could anticipate, and alleviate, peak period demand spikes--perhaps by remotely adjusting appliance demand for those customers willing to participate--the company could reduce its costs for expensive peak capacity.
The value of telemetry depends on the utility getting timely information from a significant number of households, but no one wants to pay for their air conditioner's bandwidth. However, your appliances--and the energy provider--can tolerate data service that is too slow or jittery to support a latency-sensitive application (like VoIP). So, if the bandwidth for appliances was cheap enough, there are probably many "win-win" applications that someone other than the Internet subscriber would be willing to subsidize.
Likewise, those big software updates and gaming patches could be delivered in a way that is cheaper for both the ISP and the consumer, if the provider or the consumer were offered a time of day/de-prioritization option. Discrimination isn't bad if it's just an option. But it's an option that "rules" tend to discourage, if not foreclose.
3) The Consumer Can Always Evade Discrimination. According to Sandvine's data for both the first and second half of 2013, one of the most significant Internet traffic trends over the last year (for fixed and mobile North American networks) has been the growth of "tunneling" traffic. Tunneling refers to customers using VPNs to obscure their content when accessing the Internet.
The VPN encrypts the customer's traffic and routes it to a server which assigns a random, or sometimes shared, IP address. Thus, all of the customer's Internet traffic originates/terminates through an "anonymous" IP address at a server remote from the customer's home computer. To the ISP, it simply looks like the customer is sending and receiving a lot of non-destination-specific traffic to a smaller number of IP addresses.
Prior to concerns over privacy, tunneling was most frequently used by consumers for online banking, and employees working from home to access their company's networks. Whether tunneling will protect your information from the government is unclear, but the existence (and forecasted) growth in tunneling traffic will serve to protect you from hypothetical fears of discrimination by your ISP--even if P2P is your thing.
So Why Are New Rules Needed?
If the content providers are protected by contracts, consumers can protect their traffic from ISP inspection through encrypted VPN tunnels, and new consumer benefits can be realized from efficient, permissive discrimination, then it wouldn't seem that there's a whole lot to be gained from a proceeding to add to the remaining disclosure rule. Given the immense opportunity costs of diluting agency focus at this moment, let's hope the chimerical fears of a few do not capture the public's scarce regulatory resources. The FCC can best protect the Internet by focusing on the IP transition and bringing more wireless spectrum to market.
I haven't posted a blog in three months, and I'd like to excuse my laziness by just saying that not a whole lot has happened; a statement I stand behind. However, in the last few days, the 2010 mid-term elections have concluded, and the most recent Net Neutrality Further Notice comment cycle closed yesterday. This post is probably a little irrelevant now--especially, in light of Scott Cleland's astute observation that the most dedicated supporters of Net Neutrality rules are no longer in Congress. Still, the issue was dead long before the elections. How do I know? Well . . .
Let Me Tell You Something Before I Tell You Something Else: Two weeks ago, Hank Hultquist of AT&T had a really clever, insightful blog post comparing the recent Cablevision/Fox public melodrama to the Commission's ongoing Net Neutrality melodrama. His reasoned conclusion: content holds the cards over distribution. Last week, Harold Feld wrote a similarly clever blog post, describing the FCC's "Learned Helplessness" when it comes to addressing the market behavior of certain media content owners.
Both are great reads, and they are somewhat related to my next point. The points are related in that if you really wanted to rationally regulate the Internet, there is no rationality behind not applying the regulations in a neutral manner, including both the content, distribution, and every provider in between. Now, I don't believe Chairman Genachowski wants to do this any more than he wants anyone to think it.
Let Me Tell You Something Else: About a month ago, the Washington Post published an article on Chairman Genachowski. In the article, the Post says, "[c]all him what you want . . . but don't call Julius Genachowski an Internet Regulator." Fair enough. If you took everything that comes into, or out of, the FCC--and the reverberations of Washington policy pundits at face value, you might kind of think that Chairman Genachowski is set on imposing some fairly specific regulations on (at least) broadband Internet service providers (however one defines that term). But, after watching all four seasons of "Mad Men" in the last four months, I learned that it's important to distinguish what people say they are going to do, from how they actually behave.
[Seriously, after living in the DC area my whole life and seeing countless scandals involving politicians, clergymen, celebrities, and all manner of other famous people . . . that observation just hit home . . . from watching a TV show.]
Kind of humbling when you really think about it, but, hey, I got it. At least 10,000 maniacs (not the band) have squandered time and untold millions on worthless electronic "paper" at the FCC on this very issue. Let me say it now: Julius Genachowski is not an Internet regulator, and he doesn't keep jackalopes, Sasquatches, or unicorns at his house. Well, maybe not a great analogy--there seems to be a lively Internet debate about whether Sasquatches or jackalopes are real--but neither unicorns nor Net Neutrality rules are real. How do I know detailed Net Neutrality rules are not real?
Here's how: I've been a lawyer for 20 years, and when judges really want to decide cases--even ones involving big public policy issues like abortion--they impose page limits, and, with the interests of justice in mind, limit participants. For example, in Webster v Reproductive Health Services, the Court accepted an unprecedented 78 amicus curiae briefs (briefs from non-parties in support of one side or another). The FCC, in contrast, has accepted . . . well, I don't know, how many comments by how many different parties on the Net Neutrality issue in just the past year. I don't really know because I think the FCC's electronic document search maxes out at 10,000 comments per proceeding.
Even if you eliminate the "brief comments" (usually form letters from individual citizens), the number only comes down to about 2,000. If you exclude "ex parte" notices (of meetings with Commission staff), and "brief comments", then you get down to over 1,400 filings characterized as "comments" or "reply to comments." Keep in mind, though, that these are multi-page filings, so they took at least a little time to write and file--and 39 parties filed replies just yesterday.
But let's try to keep it real, and consider that (in immortal words of Kid Rock [from Bawitdaba, 1999], ) "this [NPRM] is for the questions that don't have any answers." And, lets try to throw out some of the less substantive comments that such questions elicit from certain parties, inter alia, "the crackheads, the critics, the cynics, and all my heroes at the methadone clinic." But how many crackheads, critics, cynics, and heroes from the methadone clinic were filing "comments" and "replies to comments"? Who knows? Let's say most. So this group--not that they shouldn't be taken seriously--maybe accounts for 1000 of these multi-page comments and replies. Does anyone really expect that the FCC is going to read, understand, and assimilate well over 400 "serious" filings into a cogent set of draft rules in less than a year?
Now, think about this: after eight years of antitrust litigation, including a trial including millions (some say one billion) pages of evidence, AT&T submitted a 500 page post-trial brief. Sure, 500 pages sort of seems like a pretty big filing, but keep in mind that this was the culmination of an eight year ordeal that was/is the most important antitrust case in telecom history. The case was ultimately settled, but the trial court decision was still a relatively concise 189 pages, and was entered less than one year after the trial concluded. On the other hand, the FCC's first Notice of Proposed Rulemaking, released a little more than a year ago, was over 100 pages. And, just yesterday, the FCC accepted Reply Comments its Further Notice from September 1st of this year.
The AT&T antitrust case comparison is just one example of the point that, when a decision-maker really wants to make decisions, it might be better off by "fast-tracking." Obviously, in a Rulemaking, the Commission can't control what the public sends it, but it can impose rules--like limited comment periods, limited ex parte contact, page limits, and requiring sworn declarations as "evidence." Think about how you would handle it, if you had to make a complex decision in a short period of time. Now, after considering the alternatives, do you really think the FCC intends to regulate the Internet?
Think about that commercial for the executive search cite, where all of the fans start trying to play tennis at the same time, on the same court as two professional tennis players. Was the guy in the lifeguard chair really refereeing that "match"? Look at what you see, and ask yourself if you could "ref" this debate (and come up with anything more than the very reasonable Internet principles the Commission adopted in 2005). As for me, I stand strongly behind Chairman Genachowski--how dare he be called an "Internet Regulator"?
Last Friday, the 8th, I did a post on the reports about the Comcast v. FCC oral argument that was held before a skeptical D.C. Circuit that morning. The point of my post was that the Net Neutrality NPRM (comments are due tomorrow!) might be a "rainout", because most reports suggested the court was less than encouraging about the Commission having authority to enforce its Broadband Policy Statement, based on the two main statutory provisions the Commission relied upon in both defending the Comcast decision, and supporting the current NPRM and proposed rules. If the court did vacate the Commission's authority to enforce its Policy Statement, or any similar Title I rules, then--my post noted--the Commission would have to start again with new rules based on different statutory authority.
I also noted that, when asked if it would rather lose on "narrow" (did Comcast have adequate notice?) or "broad" (do the statues the Commission relies upon, really provide the authority to regulate specific Internet practices?) grounds, the FCC said it would prefer a narrowly-written loss. I failed to note that Comcast agreed. While I figured a "broad" loss for the FCC would be bad for cable, it seemed kind of speculative and I really didn't want to get into it.
On Monday (the 11th), though, Harold Feld waded into the topic with an excellent post, entitled Does Comcast Fear To Win Too Much? In this post, Harold confirms Comcast's fears by citing a back-pedaling post that appeared on Comcast's policy blog Monday. The post was an excessive "clarification" of Comcast's "true position" that the FCC does have the authority to regulate Internet practices under Title I. Now a Shakespeare aficionado might observe, "[Comcast] doth protest too much, methinks." But, really, who cares what Comcast thinks? The court's interpretation of the scope of the Commission's authority is going to come out sooner or later, anyway.
OK, first let me say, that I was NOT at the oral argument in the Comcast v. FCC case in the DC Circuit this morning. So, everything I'm going to say is based on second hand reports from people that were there or from news stories. Thus, having established only the thinnest of credentials to opine on the "near and present" dangers of the court's potential decision, I will pontificate . . . but first some background.
In 2008, the FCC (in a 3:2 decision) issued an order finding that Comcast had violated the principles in the Commission's 2005 Policy Statement regarding broadband Internet access by surreptitiously degrading customer use of peer-to-peer ("P2P") applications. ("Comcast Order"). The Policy Statement held that "consumers are entitled to run applications and use services of their choice." (Policy Stmt at ¶ 4) In its 2008 Comcast Order, the Commission said that Comcast's method of degrading P2P traffic in order to limit upstream congestion in its networks did not constitute "reasonable network management," and, therefore, violated the Commission's policy that consumers be allowed to run the applications of their choice. This policy violation, the Commission added, was compounded by Comcast's failure to candidly disclose these practices to its subscribers and the Commission.
Comcast appealed this decision to the DC Circuit, and the court held oral arguments today. Comcast made essentially 2 arguments: 1) being cited for a "policy" violation was improper, because the Commission had not adopted rules specific enough to warn Comcast that its practices might violate the Commission's application of its principles (i.e., the "narrow" argument), and 2) that the Commission, relying on only general policy statements in the Communications Act (in Sections 230 and 706), lacked any specific statutory authority over Internet practices to enforce the policy principles, which were enacted under Title I of the Communications Act--another general statement by Congress authorizing the Commission to regulate communications by wire or radio (i.e., the "broad argument").
Press reports indicate that the judges were skeptical of the Commission's authority to discipline Comcast on either the "narrow" or "broad" arguments. At least one press report had the FCC's General Counsel stating that he would rather the Commission lose on "narrow" grounds. As a taxpayer, I'm not so sure I would agree, and here's why.
[Note: Yesterday, the Department of Justice, Antitrust Division ("DoJ") filed an ex parte presentation in the National Broadband Plan proceeding, which focused on ways to increase the number of broadband service offerings and broadband competitors. Most public attention has been focused on the DoJ's spectrum recommendations, which are largely designed to promote further spectrum availability. One controversial recommendation, which was heavily caveated by the Department, was that there may be situations where the highest bidder for spectrum may not provide the most valuable use for the spectrum. In other words, in an auction model for scarce, but essential, inputs, the hypothetical monopolist is always willing to pay the highest price in order to keep supply off the market. The facts that would support such a theory as a basis for foreclosing carriers from spectrum auctions are not present now, or even imminent. For example, the largest spectrum holder in the country is a new entrant, Clearwire, and the biggest "winner" in the 700 MHz auction--Verizon--spent almost $10 billion on spectrum that it knew would be subject to an "open access" requirement. Therefore, given the attention that this one aspect of the DoJ filing has attracted, this post will not discuss the Department's spectrum recommendations.]
For a long time, opponents of "Net Neutrality" (however they chose to interpret the concept at the time) have argued that, conceptually, Net Neutrality was at odds with the national policy goal of increasing broadband deployment and penetration. The typical argument against Net Neutrality was as general, and loosely-defined, as the concept of Net Neutrality. A good example of the Net-Neutrality-Broadband Policy tradeoff is this 2004 paper by Professor Christopher Yoo for the Progress and Freedom Foundation. This is old news, and not surprising coming from a pro-business group like PFF. So, why bring up an old argument?
Well, because "Net Neutrality" is no longer an amorphous, generalized, mean-what-you-want-it-to-mean, concept. No, the FCC has now given Net Neutrality a very specific meaning in its NPRM and proposed rules. This is what makes yesterday's ex parte filing by the Antitrust Division of the Department of Justice ("the DoJ") in the FCC's Broadband Plan proceeding so interesting. The DoJ's ex parte is interesting for several reasons, but the main one is that it highlights the tension between the goals of the Broadband Plan (as seen through the "consumer welfare" eyes of the DoJ) and the policy and proposed rules set forth in the Net Neutrality NPRM.
As I walk through This wicked world Searchin' for light in the darkness of insanity.
I ask myself Is all hope lost? Is there only pain and hatred, and misery?
And each time I feel like this inside, There's one thing I wanna know: What's so funny 'bout peace love & understanding? --Elvis Costello
It's a new year, and I wanted to start on a positive note. While this (unfortunately) won't be my last post on Net Neutrality, it is the last in the series of posts about the Net Neutrality NPRM that I outlined in the first paragraph of my first Net Neutrality post back on November 19, 2009.
If you read enough of the advocacy pieces from the opposing sides of the Net Neutrality debate, it's tempting to think that this is some kind of religious war that offers no hope for anything but "pain and hatred, and misery." On the other hand, if you step back for a minute and just look at what the Commission claims it wants to achieve, as a policy matter in the NPRM (at ¶ 10), it doesn't seem that impossible:
we seek to . . . identify the best means to achieve our goal of preserving and promoting the open Internet. We seek to do so in a manner that will protect the legitimate needs of consumers, broadband service providers, entrepreneurs, investors, and businesses of all sizes that make use of the Internet.
If you want to take it a step further, you might just think, "what's so funny 'bout peace, love, and understanding?" Although I've pointed out that the substantive part of the NPRM, and the proposed rules it's designed to justify, doesn't show a lot of understanding, I didn't go quite so far as to call it the "darkness of insanity." But, so what if the NPRM wasn't perfectly on point? Isn't a greater understanding by the Commission exactly what "Notice and Comment" proceedings are supposed to promote? The same Commission that wrote the terribly uniformed NPRM, might be a significantly more educated Commission after Comments, Replies, presentations, hearings, and whatever else the FCC has in store for the development of this proceeding.
Let's stay optimistic, and keep on the "peace, love, and understanding" theme. The FCC's stated goal of preserving and promoting the open Internet--that exists now--and accomplishing the goal with a minimum amount of artificial disruption in the way current and future Internet stakeholders use the Internet is laudable. Fortunately, the Commission's goal can be accomplished with much more minor, and less complicated, rules than those it initially proposed. Please note, though, that, in order to be effective, these rules would have to apply to every service provider that contributes to the customer's Internet experience. Let's look at some alternatives.
If you love something, set it free; if it comes back it's yours, if it doesn't, it never was. -Richard Bach
If the quote hasn't tipped you off yet, this is where I stop "hating on" the FCC's NPRM and proposed rules, for all their silliness, and start getting constructive. This is why I wanted to "change gears" with a quote that has been repeated enough to become a full-fledged, diabetes-cavity-inducing cliché of sweetness. Yet if the expression wasn't eloquent, or relevant, it would have never gained the popularity it has; which is why it made its way into the Net Neutrality NPRM (well sort of). So kick back a little, click on to this saccherine-sweet little ditty, and open up your NPRM. In Paragraph 81, the Commission asks one of the most--perhaps THE MOST--prescient questions in the entire NPRM.
In essence, the Paragraph asks for comment on how the adoption of Net Neutrality rules (by the Commission) would be enforced by the Commission. This is a good question, because the Commission is not really built to investigate and enforce complex fact patterns. For example, the Paperwork Reduction Act requires the Commission to seek public comment (allowing at least 30 days for public comment and replies), and obtain Office of Management and Budget approval (allowing the OMB at least 60 days to make a decision on the agency's request) before seeking information from more than 10 parties.
For a "data driven" Commission, this is more than just a hassle; it presents a real enforcement hurdle--especially for the most egregious and difficult cases. Moreover, these investigatory handicaps are further limited by the fact that the Commission can only enforce violations of its rules occurring within the last year; that's right, a one year statute of limitations. Add to that the fact that the Commission has further legal and personnel resource handicaps and it would seem to make the FCC an unlikely sole enforcer of the most anticompetitive, anti-consumer, concerns proscribed by the proposed rules.
So, this is a very real conundrum--and probably deserves a lot more explanation and consideration than given in the NPRM. The question is this: what if the Commission passes rules and the FCC is the ONLY agency (aside from private parties) that can enforce the rules? Furthermore, what if the only vehicle for private party redress were under the Communications Act? This has distinct disadvantages to the public, in that the antitrust laws allow for enforcement by the Department of Justice, the Federal Trade Commission, the state attorneys general, and private parties. Moreover, the antitrust laws allow prevailing plaintiffs--including states on behalf of their citizenry--to collect three times actual damages suffered, plus attorneys fees; additionally, the antitrust laws have a 4 year statute of limitations and broad discovery rights for plaintiffs.
In keeping with our Adventures in Wonderland approach to the Net Neutrality NPRM, it only seemed appropriate to keep the long quote from Down the Rabbit Hole (Chapter 1) intact--especially when discussing vertical integration. As noted in the last post, we'll look at real harms caused by vertical integration in one market--and not addressed by the Commission--and compare these circumstances to the empty theories posited in the NPRM.
You see, so many of the potential "threats" to the public that are postulated in the world of Internet commerce are only speculative in the NPRM . . . BUT . . . the Commission is in possession of a great deal of "data driven" information on the harms to consumer welfare resulting from unhealthy vertical integration. Where? Why in the only communications market where prices have been escalating in both real and nominal terms since Congress passed the Telecommunications Act of 1996--the market for subscription TV services. This is a market characterized by unchecked price hikes resulting from a lack of competition in the programming and distribution markets. We've been over the Commission's data before, and don't need to repeat it in this post.
Suffice it to say, though, that the Commission could look back on their previous failure to pursue a "data-driven" pro-consumer approach to much steeper prices caused by vertical integration in a real industry subject to the FCC's regulation, and (rather than sound the alarm about consumer welfare concerns related to vertical integration in any Internet-related market)--like Alice--say "[a]fter such a fall as this, I shall think nothing of tumbling down stairs!" Later on, I'll put on my Nostradamus hat and predict--but with much more specificity--why the first problem, the real, data-driven, harms to consumers in the subscription TV business--may well continue to go unaddressed, as the Commission thinks nothing of "tumbling down the stairs" of imagined vertical integration in the Internet ecosystem.
Here, we continue to explore the flawed premises, faulty reasoning (resulting from those premises), and the unintended (and frequently ironic) consequences of the proposed rules that result from this combination of either no "data", or unsupported assumptions disguised as facts. Regardless of how unsupported, though, the Commission clearly believes. Indeed, the Commission's certainty about these "facts" can be established by the lack of questions that go to central pieces of the Commission's theory. One can only hope that, at least, Commissioner Copps will stick with the principle he so eloquently articulated a little over 5 years ago, "[w]ith the international economy increasingly dependent on broadband facilities, faith-based approaches to advanced telecommunications are insufficient."
NPRM: Unsupported assertions regarding the incentives and ability of broadband service providers to use alleged market power in the broadband Internet access market to extract supracompetitive prices in less competitive retail markets. Alternatively, the Commission makes equally unsupported speculations regarding the incentives for vertically integrated broadband service providers to unfairly disadvantage firms in adjacent markets, such as the market for content delivery networks. See ¶¶ 7-9, 104-106.
Fact: First, neither theory is supported by facts, or even theoretical citations that fit the facts in a way that would support the rules the Commission wishes to impose on the broadband service providers. The reason is not that there is no set of facts upon which a firm would have the incentive and ability to act in an anticompetitive manner. To the contrary, these are well-established single-firm theories of competitive harm; the logic underpinning the theories breaks down when you have multiple firms or the inability to practice location-specific price discrimination.
The facts aren't here, because there is no evidence that any particular broadband Internet access providers: 1) have widespread market power vis-à-vis their retail customers, or potential wholesale competitors, 2) can use that market power, if it does exist, to practice price discrimination on a geographic market basis (for example, if one broadband provider faces no competition in a few small towns but offers and prices its service throughout a much larger territory, consumers of broadband Internet access services are not disadvantaged), 3) will maintain market power in the face of continued 4G expansion by incumbent wireless carriers and the new national wireless broadband provider, Clearwire, or 4) will unfairly disadvantage competitors in adjacent business or wholesale markets, because, to do so, a firm must have market power in both vertical markets--the input market and the retail market.
As I mentioned in the first Net Neutrality post, I'm going to discuss some faulty premises in the NPRM and the contradictory results we can anticipate from the proposed rules, before we get to the suggestions on how the FCC could actually make their supposed premise work. The first few will be a little hard on the Commission.
Why? Because I have to be . . . the Chairman ignored my first "rule" for living up to his potential! He "got played" and went for the "next big thing" right out of the box, rather than prioritizing policies that have slid to dangerous levels of neglect--in other words, going to the place that smart, Ivy-league guys go to find out they're not that special. I'm sorry, Mr. Chairman, but sometimes you've got to be cruel to be kind. Here's a little more in-depth discussion of an internal contradiction in the NPRM that was discussed in the previous post.
NPRM: The NPRM "builds" on the FCC's 2005 Internet Policy Statement, but the proposed rules are only intended to "address user's ability to access the Internet." ¶¶ 14, 5-6 (emphasis in original)
Fact: The Commission's 2005 Internet Policy Statement asserts "that the Commission has jurisdiction necessary to ensure that providers of telecommunications for Internet access or Internet Protocol-enabled (IP-enabled) services are operated in a neutral manner." [emphasis added]
Unintended Consequence: As mentioned in the last post, the Commission has moved from the original, consumer-oriented, principles it established in 2005. Instead, the new rules, by distinguishing between providers of IP-enabled services on the Internet, have created a set of obligations from one group of businesses to another group of businesses, and, in doing so, placed the Commission's judgment above the choices of consumers.
Among the companies newly "off the hook" from the 2005 Internet Policy Statement are firms like Google, that own plenty of network--just not last mile broadband--and that can offer "free" applications to "manage" and generate telecommunications. These services are not regulated, but yet are inserted between PSTN to PSTN calls, allowing their CLEC partner(s) to collect access charges where none would otherwise be due. Other companies newly freed from the obligation to enhance consumer welfare simply provide "free" telecommunications-centric applications as pervasive as VoIP. How providers of free IP-enabled services pay for these services is a subject that is not explained in the NPRM, but we can guess, for at least some of the companies.
As I mentioned in my last post--my "relapse" post--I have never been comfortable with the term/concept/policy of "net neutrality", and here's why: as a term, a concept, or proposed policy, it had no definition. There was nothing to discuss, because if you asked 10 people what it meant, you might get 10 different answers; "net neutrality" was a religion without a dogma. This is no longer the case. On October 22nd, the FCC defined "Net Neutrality" and it truly is neither "fish nor fowl" in that the Commission's proposed rules, and their explanation for them, create a sui generis regulatory framework. Given a tangible form, Net Neutrality can now be discussed on its own merits as a public policy, rather than fought over on religious terms. Because this subject has been defined, and articulated as a proposed set of rules, let's first consider this definition: what is "Net Neutrality?"
The Net Neutrality NPRM is complex, partly because the Commission misapprehends what it is regulating, how it works, and how the proposed rules will achieve the purported outcome. So it is not possible to cover the NPRM in just one or two posts. Instead, we'll look at Net Neutrality, as proposed, over a series of posts, starting with the definition. In the next few posts we'll look at some of the unintended, paradoxical results that would obtain if the proposed rules, produced by the incomplete understanding of how the Internet works, as explained in the NPRM, were adopted. Then, we'll consider whether the proposed rules are written in a manner that makes them likely to be enforced by the Commission in a timely manner. Finally, we'll look at whether there might be some other, more reasonable rules to ensure that the Internet remains accessible to all users on fair terms, which is supposedly the goal of the "Net Neutrality" advocates.
Indeed, the Commission states its own characterization of the proposed rules as purportedly consistent with prior policies, "government action, where needed, should support a "predictable, minimalist, consistent and simple legal environment" for online activity. Nothing we have done over the past several years or that we propose today alters that commitment." NPRM, at para. 47. There is no reason to doubt the Commission's sincerity, or good intentions. However, in order to believe that the proposed rules are necessary, one has to believe that the Internet, which can act as an economic, social, and political "equalizer", cannot perform this role unless the Internet, itself, becomes subject to some "equalization." Yet, this notion itself is a paradox; if the virtue of the Internet is its dynamic, evolving nature, then rules that cement the status quo, are only good for the largest firms that benefit from the status quo. Thus, the Commission's perception of the Internet--and the need for the "cure" of the proposed rules, even the very term "Net Neutrality"--should invite some healthy skepticism.
The first thing that stands out is that this NPRM does not propose rules that would reinstate some form of "common carrier" regulation on some portion of broadband Internet access. In fact, the Commission supports the decision of previous Commissions to treat high speed Internet access as one integrated service. So, while the NPRM does not seek a return to "Title II" or "common carrier" regulation--which requires service providers to offer services to the public on terms that are just, reasonable, and not unreasonably discriminatory--the NPRM curiously seeks to impose stricter burdens on access providers [than are imposed by Congress under Title II of the Communications Act ("the Act"]. The Commission seems to believe that the broad, plenary grant of regulatory authority over communications by wire or radio that Congress grants in Title I of the Act supersedes the more specific, limited authority that Congress grants the Commission in the subsequent sections of the Act. A regulatory framework built on this premise is almost certainly illegal, and it is definitely irrational to believe that such rules would end up having any practical relevance.