"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 adoptedtwo 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. . . .
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.
You must be thinking, "[w]hat's this guy thinking (smoking?)?" I mean, a lot has happened in the last month or so--mainly the FCC's release of its long-awaited National Broadband Plan (on March 16th) and the D.C. Circuit's "Comcast" decision, released on April 5th--and I've had exactly nothing to say . . . at least not on this blog. But while I was busy not blogging, the domestication of the dog continued, unabated, and other people had lots of smart things to say--which takes the pressure off me.
Before I can defend the title of this post, I have to lay out "the status quo." For this, I am going to borrow from, and corrupt, a perfectly appropriate analogy used by Tom Tauke of Verizon in a March 24th speech. In this speech, Tauke ("Mr. Tauke", as I like to call him) opens with the wonderfully evocative image of the Winchester Mystery House in San Jose, CA--a house that started as a small farmhouse, but underwent 24/7 construction over 38 years to become a Victorian mansion that appears to have been built upon pure caprice.
To the outside observer, the construction served no practical purpose, with a hallway ending in a second story door that opened to a dead drop down, steps that lead nowhere, and other architectural anomalies. Mr. Tauke uses the Winchester House as an analogy to the evolution of regulatory statutes that are stuck in a technology-specific past, and thus appear to have no practical purpose in a world where multiple technologies, devices, and applications are all used in a similar manner--to provide consumers with access to a primarily (and trending exclusively) Internet-based, communications network.
As I said, I LOVE the Winchester House as a starting point, but, not being nearly as diplomatic and classy as Mr. Tauke, I'll take a little artistic license, add a little context, hurt a few feelings, and generally "keep it real." First, if you didn't click the Winchester House link above, you wouldn't get the full context from the Tauke speech, because, though the Winchester House is exactly as described in the speech, it only appears to have no practical purpose--but it's purpose was never to produce an object of pragmatism, or even of art or architecture. Resale value was the last thing the owner was looking to produce.
You see, the owner was the heiress of the Winchester rifle fortune. After her husband and daughter died young, and in relatively quick succession, Mrs. Winchester was told by a medium that her husband and daughter had their lives claimed by the vengeful souls of those whose lives were cut short by the invention which had made her rich. The medium advised Mrs. Winchester that if she never completed her house, she would somehow appease the spirits, and would not suffer the same premature death as her husband and daughter. Said differently, the construction of the Winchester House, while motivated by fear and superstition, was the purpose of the construction of the Winchester House. The owner wasn't moving, wasn't looking for resale value, and "completion" in any pragmatic sense of the word was, in the mind of the owner, a little scary--in that it would cause her sudden death at the hands of angry supernatural beings.
With this context in mind, it isn't too hard (even if it is a little mean) to say that the FCC and its many Notices of Proposed Rulemakings ("NPRMs")--through which it attempts to implement the directives of Congress, including some of the central recommendations in the National Broadband Plan are not a dissimilar comparison to Mrs. Winchester and the Winchester Mystery House, and are a very apt analogy to the status quo. The Commission, motivated by political fears and superstition--fears inspired by the political power of Congress, made superstitious by the contradictory, twin fears of not appearing responsive--on the one hand--and of looking foolish, or alienating the politically powerful by being responsive, but getting the "wrong" answer.
This is the status quo. It has always been the status quo. For example, Congress could not have been more clear in the Telecommunications Act of 1996 that it wanted the Commission to eliminate all implicit subsidies to high cost carriers, and to have all contributions to the Universal Service Fund made explicit. Fourteen years later, the Commission has yet to complete this relatively simple directive, despite releasing numerous unfinished NPRMs during that time. But guess what? Docket No. 96-45, the original USF Reform NPRM, is still going strong . . . despite the continuous construction of numerous issue-specific orders/remands/FNPRMs and "area code splits" (new dockets created to account for specific issues).
At last week's Senate hearing on the National Broadband Plan, Chairman Genachowski seemed to be quite proud of the fact that, as part of implementing the National Broadband Plan, his Commission had scheduled releasing NPRM's on Universal Service Reform (contribution and distribution) and Intercarrier Compensation Reform for sometime during the 4th quarter of this year. Chairman Rockefeller seemed less happy--in his opening remarks (about 22 mins into the hearing)--he berates the Commission for its "recommendations" to numerous other agencies, and the fact that the Broadband Report says "Congress should" 139 times. Chairman Rockefeller also said that simply asking for comments is not enough. But, hey, dispensing the fear is part of his job, right?
So, how does the April 5th Comcast decision preserve the status quo? I mean, at first glance, and second glance, the Comcast decision was all about "Net Neutrality" policies. All the smart guys say so. Don't believe me? Read Hank Hultquist's posts 1 , 2, and Harold Feld's post on the decision--and be sure to click on all the links (read them all over 5 or 6 hours and then you'll know everything there is to know about Comcast, Net Neutrality, and the history of broadband Internet access service classifications).
But, who cares about Net Neutrality, right? The FCC will figure it out (Genachowski at 48, 69, and 108 mins into hearing) and preserve the "status quo" of the "open" Internet. But wait, there's more. Despite the FCC's confidence in its ability to ensure the safety of the open Internet, regretably, the Comcast decision has caused the FCC to rethink critical parts of their Broadband Plan. Even Chairman Rockefeller relents, and recognizes this tragedy (at just the 27 minute mark). The FCC's General Counsel agrees, and, by the 113 minute mark of the Senate hearing, so did Chairman Genachowski.
The thing I just can't reconcile, though, is that--even though the FCC has NEVER classified VoIP as a Title I or Title II service--the Commission has had no problems imposing public safety, and Universal Service contribution obligations on VoIP service providers. A more cynical person might say Comcast has become just another excuse to continue construction . . . because getting it right is more important than getting it done.
Fear, superstition, and action for the sake of preserving existence . . . so what did Comcast change? It doesn't look like much, except maybe making the Winchester Mystery House a little less mysterious . . .
[End Note: I watched last Wednesday's Senate Oversight Hearing at least 3 times (my penance for not blogging in six weeks). At times, it seemed the Senators were a little harsh on the FCC (albeit, in a theatrical, "Kobuki", "bad cop" kind of way). The House Hearing on the National Broadband Plan on March 25th was, in contrast, a virtual love-fest. On the issue of the National Broadband Plan, I think Congress gave the FCC too broad a mandate to criticize a good faith effort. If they wanted a "real" work plan (See Senator Begich's very good questions around the 88 minute mark), they should have specifically asked for what they wanted. Finally, I really hope the FCC doesn't let Comcast become an excuse, or some other sort of bugaboo, that hinders the expeditious resolution of some badly needed repairs that will set the foundation for further broadband deployment.]
And if you say to me tomorrow Oh, what fun it all would be then what's to stop us, pretty baby but what is and what should never be -Led Zeppelin, "What Is And What Should Never Be"
With profuse apologies to Led Zeppelin for blaspheming their iconic song title to do a telecom policy blog, this is essentially what Google announced to DC policy makers, via its corporate/policy blog, on Wednesday--except that the policymakers and the press didn't hear the last line. But, boy, did they eat up the first few . . . you can tell that Valentine's is in the air.
I say the "announcement" was targeted toward policy makers, because absolutely no relevant business information was provided in the announcement--you know . . . costs, prices, projected revenues, technology to be used, etc. No vendors, competitors, or even Google's Clearwire partners (a venture from which--according to news reports--Google has been backing away) were interviewed or consulted. No, but that's OK, because this wasn't a business "announcement."
What the "announcement" really says is how much political clout Google carries in Washington. On a day when the Gub'ment is closed for a fourth consecutive day, some of the most important Government officials involved in technology policy were intrigued enough to very quickly issue "statements" in reaction to Google's blog post.
For example, the New York Times story actually contains a "statement" from Chairman Genachowski reacting to the Google blog post, and the statement reacts to Google's announcement like it were an "official" announcement--like a firm commitment to enter a market in a specific way, explaining product terms and prices, entry timing, costs, and projected revenues. The Hill even contains a statement from Senator John Kerry, Chairman of the Senate Commerce Committee's Subcommittee on Communications, Technology, and the Internet. Moreover, just about every story you'll read really "drank the Kool-Aid." From the articles I saw on line, only Computerworld got it right.
But what gives me the right to question Google's ambitiously-admirable, but vaguely-defined, "experiment", the belief of the bulk of the press, and some of the most important officials in Washington? Well . . . there's this small problem of the facts and the logic. First, Google's blog never says exactly how they plan to offer this 1 gigabit/sec (1,000 megabit/sec) broadband service at a "competitive price." Second, the whole theory seems to contain a pretty glaring logical flaw: wouldn't Google deciding to become a broadband ISP allow other Broadand ISPs into Google's monopoly business?
I couldn't come up with a catchy title, but, before we get totally fixated on Net Neutrality for a big news cycle, I really wanted to draw attention to a very thoughtful, very comprehensive, broadband policy post, entitled "A Sensible Broadband Policy" written by the CEO of a competitive fiber provider--Dave Rusin, CEO of American Fiber Systems ("AFS"). Dave writes the blog TelecomStraightShooter that is linked to on the right hand side of my home page. Obviously, if you read this post--and you should--you'll see that I'm mentioning it because parts of it sound a lot like some of the things I've said.
While the post is titled "a sensible broadband policy", that's a little misleading, because the description "broadband policy" is a lot broader than it sounds. If you want to face the facts--as Dave does--"broadband policy" means the FCC's telecom agenda; and that is not an understatement.
I don't agree with all of Dave's policy prescriptions, and some would probably need the law to change in order to be implemented, even if they are good ideas. On the other hand, other ideas probably seem like good regulations for "other guys." But, hey, show me a market participant in an FCC policy proceeding that hasn't advocated regulating someone else's rates to lower their own costs, or stimulate demand for their own product, and I'll show you my untouched Yeti/Loch Ness Monster/UFO photo collection. Self-interest is not a sin, among FCC commenters, which is why I sincerely believe Dave Rusin's ideas should get as much "air time" as any inside-the-beltway "policy wonk", or "academic expert" (is that an oxymoron?). Why?
Well, for starters, AFS is based in Rochester, NY--that's where the whole competitive telecom experiment started. Another factor in Dave's favor is that he's obviously seen both sides of the various telecom skirmishes over the years, but, as a wholesale transmission guy, he doesn't have a dog in a lot of the fights, but he does understand the issues really well. Finally, he's got to live under his own rules, sleep in his own bed, eat what he cooks . . . the metaphors just don't stop.
But, before I canonize Dave, keep in mind that--as I said before--like an executive with any other carrier, they sometimes equate (conflate?) their self-interest with the public interest. On the other hand, the self-interest of a wholesale carrier on the subject of broadband is interesting, because of their overriding incentive to stimulate output and fill the pipes. That said, the reader must also keep in mind that these insights are not from a telecom regulatory attorney, so they are a little "raw" (e.g., the FCC had four, not five, original net neutrality principles), and some of the USF reform ideas need a little work, but, this is being too picky.
It isn't often that a carrier without attorneys and/or lobbyists on staff (or on retainer) even bothers to offer thoughtful, comprehensive policy ideas, and we don't listen enough to these parties. This post, "raw" as it is, is also--from a policy perspective--broader, and more thoughtful, than most that I've seen from telecom executives on the operating side. To be clear, I don't endorse all parts of it, but I don't think it should be ignored either.
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.
The question to be considered in the context of the Net Neutrality NPRM is not that the Commission is using a word--this time "neutrality"--to mean just what it chooses it to mean, but rather, how does it all add up, when layered on top of another equally "neutral" (but fundamentally discriminatory) regulatory regime such as intercarrier compensation where the same word "termination" has so many different meanings (prices)? How do the sums add up? Like Alice, I've lost count, but let me give you an example to see if you can keep better count.
On November 19th, eBay closed on its sale of Skype, eBay's large, over-the-top, VoIP subsidiary, in a transaction that valued Skype at $2.75 billion (though eBay held on to 30% of the company). This somewhat concludes eBay's rollercoaster ride into the world of telecommunications. Though the company itself valued Skype at $1.7 billion on its own books, eBay was unable to find anyone willing to pay even $1.4 billion--eBay's asking price--this spring, and even some Skype cheerleaders were speculating that, earlier this year when eBay made the decision to sell Skype, that eBay would likely get closer to $1 billion.
In 2005, eBay bought Skype (or some part of it that, curiously, did not include the central intellectual property that made the service work) for a reported $2.6 billion, but the founders stayed on to manage the Skype subsidiary, and if all had worked out, could have earned an additional $1.5 billion over the next couple of years if certain targets were met. Less than a year later, eBay ousted the founders and gave them an additional $500 million to leave early, for a real cost of acquisition of $3.1 billion. At the time of the purchase, eBay was alternately lauded for its foresight, or criticized for paying way too much for a service that is largely "free."
Subsequent to the original purchase date, most reports about the transaction were negative--suggesting that eBay's purchase was looking like a worse and worse decision with each passing year. Business Week continued to follow the operation of Skype within eBay to see how the transaction would turn out. The articles suggested the acquisition, in hindsight, was a bad idea--and getting worse all the time.
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.
Last week, a DC-based, self-described, "public interest" lobbying group--the Free Press-sent a letter to the Chairmen and Ranking Members of the House Energy and Commerce Committee and the Subcommittee on Communications, Technology, and the Internet. The gist of the letter was to complain that some announced broadband Internet pricing trials by, primarily, Time Warner Cable ("TWC") and AT&T are anti-consumer, and should be investigated by Congress. The Free Press letter criticizes pricing trials that impose higher charges on relatively high-usage customers than on relatively low-usage customers.
Before I comment, I have to make some disclosures. First, AT&T is a consulting client of mine, so readers should evaluate these comments entirely on their merits and not on the basis of any other authority a reader might assign to my comments [recommended advice for all posts, anyway]. Second, I genuinely have a lot of respect for the mission that Free Press is trying to advance. They work really hard (for little pay) to promote what they consider to be in the best interests of the public, and they are phenomenally successful at getting attention for their causes. So, I really don't want to bash them as an organization [though I admit the quote marks around "public interest" were a little mean].
Nonetheless, given Free Press's success at garnering the limited attention of public officials, they should not get a "free pass" on logically inconsistent, fact-free, and shoddily-reasoned rhetoric. This is especially true when the purpose of that rhetoric is to consume public resources to impose costs on private parties, and, on the basis of this "faith-based" reasoning, potentially inhibit broadband penetration to the many, in favor of the broadband usage habits of the few. The Free Press must explain their position in cogent terms, not just that they don't think it's fair for people who want to use more shared resources to have to pay more.
What big consumer wouldn't? With a family of six, I hate paying for six seats on an airplane when I take my family on a vacation that requires air travel. I would much rather just pay for "air transport", and let some business pick up the additional costs associated with my family (but I doubt there really are any additional costs--together, even with luggage, we probably come in at less than 1,000 pounds--which is nothing compared to the weight of the whole airplane). Nonetheless, this is a complaint, not a policy argument.
Jonathan Lee is an attorney with a consulting and legal practice in Washington, D.C., specializing in advising and representing clients on FCC matters.
