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.
Not to beat a dead horse, but take a look at the "data-driven" chart in the post addressing the consumer harms of vertical integration ignored in the subscription television market. There is considerable concentration in both the cable programming, and cable distribution markets. These facts have been documented in this blog in multiple posts (look at the tag cloud under "high subscription TV prices." Moreover, according to some of the same parties supporting the Net Neutrality NPRM, this concentration is only increasing with the recently proposed Comcast-NBC merger. Comcast is already the largest single owner of cable television programming, and, unlike Internet backbone services, there does seem to be some scarcity/exclusionary value in vertical integration through ownership of cable programming, rather than simply purchasing it through contract.
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.
Jonathan Lee is an attorney with a consulting and legal practice in Washington, D.C., specializing in advising and representing clients on FCC matters.
