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FCC Commissioner Rosenworcel penned an article this week on the doublespeak coming out of the current administration with respect to trade and telecom policy. On one hand, she argues, the administration has proclaimed 5G to be an essential part of our future commercial and defense interests. But, she tells us, the administration has, on the other hand, imposed tariffs on Chinese products that are important for the development of 5G infrastructure, thereby raising the costs of roll-out. This is a sound critique: regardless where one stands on the reasonableness of tariffs, they unquestionably raise the prices of goods on which they are placed, and raising the price of inputs to the 5G ecosystem can only slow down the pace at which 5G technology is deployed.

Unfortunately, Commissioner Rosenworcel’s fervor for advocating the need to reduce the costs of 5G deployment seems animated by the courageous act of a Democratic commissioner decrying the policies of a Republican President and is limited to a context where her voice lacks any power to actually affect policy. Even as she decries trade barriers that would incrementally increase the costs of imported communications hardware, she staunchly opposes FCC proposals that would dramatically reduce the cost of deploying next generation networks.

Given the opportunity to reduce the costs of 5G deployment by a factor far more significant than that by which tariffs will increase them, her preferred role as Democratic commissioner is that of resistance fighter. She acknowledges that “we will need 800,000 of these small cells to stay competitive in 5G” — a number significantly above the “the roughly 280,000 traditional cell towers needed to blanket the nation with 4G”.  Yet, when she has had the opportunity to join the Commission on speeding deployment, she has instead dissented. Party over policy.

In this year’s “Historical Preservation” Order, for example, the Commission voted to expedite deployment on non-Tribal lands, and to exempt small cell deployments from certain onerous review processes under both the National Historic Preservation Act and the National Environmental Policy Act of 1969. Commissioner Rosenworcel dissented from the Order, claiming that that the FCC has “long-standing duties to consult with Tribes before implementing any regulation or policy that will significantly or uniquely affect Tribal governments, their land, or their resources.” Never mind that the FCC engaged in extensive consultation with Tribal governments prior to enacting this Order.

Indeed, in adopting the Order, the Commission found that the Order did nothing to disturb deployment on Tribal lands at all, and affected only the ability of Tribal authorities to reach beyond their borders to require fees and lengthy reviews for small cells on lands in which Tribes could claim merely an “interest.”

According to the Order, the average number of Tribal authorities seeking to review wireless deployments in a given geographic area nearly doubled between 2008 and 2017. During the same period, commenters consistently noted that the fees charged by Tribal authorities for review of deployments increased dramatically.

One environmental consultant noted that fees for projects that he was involved with increased from an average of $2,000.00 in 2011 to $11,450.00 in 2017. Verizon’s fees are $2,500.00 per small cell site just for Tribal review. Of the 8,100 requests that Verizon submitted for tribal review between 2012 and 2015, just 29 ( 0.3%) resulted in a finding that there would be an adverse effect on tribal historic properties. That means that Verizon paid over $20 million to Tribal authorities over that period for historic reviews that resulted in statistically nil action. Along the same lines, Sprint’s fees are so high that it estimates that “it could construct 13,408 new sites for what 10,000 sites currently cost.”

In other words, Tribal review practices — of deployments not on Tribal land — impose a substantial tariff upon 5G deployment, increasing its cost and slowing its pace.

There is a similar story in the Commission’s adoption of, and Commissioner Rosenworcel’s partial dissent from, the recent Wireless Infrastructure Order.  Although Commissioner Rosenworcel offered many helpful suggestions (for instance, endorsing the OTARD proposal that Brent Skorup has championed) and nodded to the power of the market to solve many problems, she also dissented on central parts of the Order. Her dissent shows an unfortunate concern for provincial, political interests and places those interests above the Commission’s mission of ensuring timely deployment of advanced wireless communication capabilities to all Americans.

Commissioner Rosenworcel’s concern about the Wireless Infrastructure Order is that it would prevent state and local governments from imposing fees sufficient to recover costs incurred by the government to support wireless deployments by private enterprise, or from imposing aesthetic requirements on those deployments. Stated this way, her objections seem almost reasonable: surely local government should be able to recover the costs they incur in facilitating private enterprise; and surely local government has an interest in ensuring that private actors respect the aesthetic interests of the communities in which they build infrastructure.

The problem for Commissioner Rosenworcel is that the Order explicitly takes these concerns into account:

[W]e provide guidance on whether and in what circumstances aesthetic requirements violate the Act. This will help localities develop and implement lawful rules, enable providers to comply with these requirements, and facilitate the resolution of disputes. We conclude that aesthetics requirements are not preempted if they are (1) reasonable, (2) no more burdensome than those applied to other types of infrastructure deployments, and (3) objective and published in advance

It neither prohibits localities from recovering costs nor imposing aesthetic requirements. Rather, it requires merely that those costs and requirements be reasonable. The purpose of the Order isn’t to restrict localities from engaging in reasonable conduct; it is to prohibit them from engaging in unreasonable, costly conduct, while providing guidance as to what cost recovery and aesthetic considerations are reasonable (and therefore permissible).

The reality is that localities have a long history of using cost recovery — and especially “soft” or subjective requirements such as aesthetics — to extract significant rents from communications providers. In the 1980s this slowed the deployment and increased the costs of cable television. In the 2000s this slowed the deployment and increase the cost of of fiber-based Internet service. Today this is slowing the deployment and increasing the costs of advanced wireless services. And like any tax — or tariff — the cost is ultimately borne by consumers.

Although we are broadly sympathetic to arguments about local control (and other 10th Amendment-related concerns), the FCC’s goal in the Wireless Infrastructure Order was not to trample upon the autonomy of small municipalities; it was to implement a reasonably predictable permitting process that would facilitate 5G deployment. Those affected would not be the small, local towns attempting to maintain a desirable aesthetic for their downtowns, but large and politically powerful cities like New York City, where the fees per small cell site can be more than $5,000.00 per installation. Such extortionate fees are effectively a tax on smartphone users and others who will utilize 5G for communications. According to the Order, it is estimated that capping these fees would stimulate over $2.4 billion in additional infrastructure buildout, with widespread benefits to consumers and the economy.

Meanwhile, Commissioner Rosenworcel cries “overreach!” “I do not believe the law permits Washington to run roughshod over state and local authority like this,” she said. Her federalist bent is welcome — or it would be, if it weren’t in such stark contrast to her anti-federalist preference for preempting states from establishing rules governing their own internal political institutions when it suits her preferred political objective. We are referring, of course, to Rosenworcel’s support for the previous administration’s FCC’s decision to preempt state laws prohibiting the extension of municipal governments’ broadband systems. The order doing so was plainly illegal from the moment it was passed, as every court that has looked at it has held. That she was ok with. But imposing reasonable federal limits on states’ and localities’ ability to extract political rents by abusing their franchising process is apparently beyond the pale.

Commissioner Rosenworcel is right that the FCC should try to promote market solutions like Brent’s OTARD proposal. And she is also correct in opposing dangerous and destructive tariffs that will increase the cost of telecommunications equipment. Unfortunately, she gets it dead wrong when she supports a stifling regulatory status quo that will surely make it unduly difficult and expensive to deploy next generation networks — not least for those most in need of them. As Chairman Pai noted in his Statement on the Order: “When you raise the cost of deploying wireless infrastructure, it is those who live in areas where the investment case is the most marginal — rural areas or lower-income urban areas — who are most at risk of losing out.”

Reconciling those two positions entails nothing more than pointing to the time-honored Washington tradition of Politics Over Policy. The point is not (entirely) to call out Commissioner Rosenworcel; she’s far from the only person in Washington to make this kind of crass political calculation. In fact, she’s far from the only FCC Commissioner ever to have done so.

One need look no further than the previous FCC Chairman, Tom Wheeler, to see the hypocritical politics of telecommunications policy in action. (And one need look no further than Tom Hazlett’s masterful book, The Political Spectrum: The Tumultuous Liberation of Wireless Technology, from Herbert Hoover to the Smartphone to find a catalogue of its long, sordid history).

Indeed, Larry Downes has characterized Wheeler’s reign at the FCC (following a lengthy recounting of all its misadventures) as having left the agency “more partisan than ever”:

The lesson of the spectrum auctions—one right, one wrong, one hanging in the balance—is the lesson writ large for Tom Wheeler’s tenure at the helm of the FCC. While repeating, with decreasing credibility, that his lodestone as Chairman was simply to encourage “competition, competition, completion” and let market forces do the agency’s work for it, the reality, as these examples demonstrate, has been something quite different.

The Wheeler FCC has instead been driven by a dangerous combination of traditional rent-seeking behavior by favored industry clients, potent pressure from radical advocacy groups and their friends in the White House, and a sincere if misguided desire by Wheeler to father the next generation of network technologies, which quickly mutated from sound policy to empty populism even as technology continued on its own unpredictable path.

* * *

And the Chairman’s increasingly autocratic management style has left the agency more political and more partisan than ever, quick to abandon policies based on sound legal, economic and engineering principles in favor of bait-and-switch proceedings almost certain to do more harm than good, if only unintentionally.

The great irony is that, while Commissioner Rosenworcel’s complaints are backed by a legitimate concern that the Commission has waited far too long to take action on spectrum issues, the criticism should properly fall not upon the current Chair, but — you guessed it — his predecessor, Chairman Wheeler (and his predecessor, Julius Genachowski). Of course, in true partisan fashion, Rosenworcel was fawning in her praise for her political ally’s spectrum agenda, lauding it on more than one occasion as going “to infinity and beyond!”

Meanwhile, Rosenworcel has taken virtually every opportunity to chide and castigate Chairman Pai’s efforts to get more spectrum into the marketplace, most often criticizing them as too little, too slow, and too late. Yet from any objective perspective, the current FCC has been addressing spectrum issues at a breakneck pace, as fast, or faster than any prior Commission. As with spectrum, there is an upper limit to the speed at which federal bureaucracy can work, and Chairman Pai has kept the Commission pushed right up against that limit.

It’s a shame Commissioner Rosenworcel prefers to blame Chairman Pai for the problems she had a hand in creating, and President Trump for problems she has no ability to correct. It’s even more a shame that, having an opportunity to address the problems she so often decries — by working to get more spectrum deployed and put into service more quickly and at lower cost to industry and consumers alike — she prefers to dutifully wear the hat of resistance, instead.

But that’s just politics, we suppose. And like any tariff, it makes us all poorer.

As has been rumored in the press for a few weeks, today Comcast announced it is considering making a renewed bid for a large chunk of Twenty-First Century Fox’s (Fox) assets. Fox is in the process of a significant reorganization, entailing primarily the sale of its international and non-television assets. Fox itself will continue, but with a focus on its US television business.

In December of last year, Fox agreed to sell these assets to Disney, in the process rejecting a bid from Comcast. Comcast’s initial bid was some 16% higher than Disney’s, although there were other differences in the proposed deals, as well.

In April of this year, Disney and Fox filed a proxy statement with the SEC explaining the basis for the board’s decision, including predominantly the assertion that the Comcast bid (NB: Comcast is identified as “Party B” in that document) presented greater regulatory (antitrust) risk.

As noted, today Comcast announced it is in “advanced stages” of preparing another unsolicited bid. This time,

Any offer for Fox would be all-cash and at a premium to the value of the current all-share offer from Disney. The structure and terms of any offer by Comcast, including with respect to both the spin-off of “New Fox” and the regulatory risk provisions and the related termination fee, would be at least as favorable to Fox shareholders as the Disney offer.

Because, as we now know (since the April proxy filing), Fox’s board rejected Comcast’s earlier offer largely on the basis of the board’s assessment of the antitrust risk it presented, and because that risk assessment (and the difference between an all-cash and all-share offer) would now be the primary distinguishing feature between Comcast’s and Disney’s bids, it is worth evaluating that conclusion as Fox and its shareholders consider Comcast’s new bid.

In short: There is no basis for ascribing a greater antitrust risk to Comcast’s purchase of Fox’s assets than to Disney’s.

Summary of the Proposed Deal

Post-merger, Fox will continue to own Fox News Channel, Fox Business Network, Fox Broadcasting Company, Fox Sports, Fox Television Stations Group, and sports cable networks FS1, FS2, Fox Deportes, and Big Ten Network.

The deal would transfer to Comcast (or Disney) the following:

  • Primarily, international assets, including Fox International (cable channels in Latin America, the EU, and Asia), Star India (the largest cable and broadcast network in India), and Fox’s 39% interest in Sky (Europe’s largest pay TV service).
  • Fox’s film properties, including 20th Century Fox, Fox Searchlight, and Fox Animation. These would bring along with them studios in Sydney and Los Angeles, but would not include the Fox Los Angeles backlot. Like the rest of the US film industry, the majority of Fox’s film revenue is earned overseas.
  • FX cable channels, National Geographic cable channels (of which Fox currently owns 75%), and twenty-two regional sports networks (RSNs). In terms of relative demand for the two cable networks, FX is a popular basic cable channel, but fairly far down the list of most-watched channels, while National Geographic doesn’t even crack the top 50. Among the RSNs, only one geographic overlap exists with Comcast’s current RSNs, and most of the Fox RSNs (at least 14 of the 22) are not in areas where Comcast has a substantial service presence.
  • The deal would also entail a shift in the companies’ ownership interests in Hulu. Hulu is currently owned in equal 30% shares by Disney, Comcast, and Fox, with the remaining, non-voting 10% owned by Time Warner. Either Comcast or Disney would hold a controlling 60% share of Hulu following the deal with Fox.

Analysis of the Antitrust Risk of a Comcast/Fox Merger

According to the joint proxy statement, Fox’s board discounted Comcast’s original $34.36/share offer — but not the $28.00/share offer from Disney — because of “the level of regulatory issues posed and the proposed risk allocation arrangements.” Significantly on this basis, the Fox board determined Disney’s offer to be superior.

The claim that a merger with Comcast poses sufficiently greater antitrust risk than a purchase by Disney to warrant its rejection out of hand is unsupportable, however. From an antitrust perspective, it is even plausible that a Comcast acquisition of the Fox assets would be on more-solid ground than would be a Disney acquisition.

Vertical Mergers Generally Present Less Antitrust Risk

A merger between Comcast and Fox would be predominantly vertical, while a merger between Disney and Fox, in contrast, would be primarily horizontal. Generally speaking, it is easier to get antitrust approval for vertical mergers than it is for horizontal mergers. As Bruce Hoffman, Director of the FTC’s Bureau of Competition, noted earlier this year:

[V]ertical merger enforcement is still a small part of our merger workload….

There is a strong theoretical basis for horizontal enforcement because economic models predict at least nominal potential for anticompetitive effects due to elimination of horizontal competition between substitutes.

Where horizontal mergers reduce competition on their face — though that reduction could be minimal or more than offset by benefits — vertical mergers do not…. [T]here are plenty of theories of anticompetitive harm from vertical mergers. But the problem is that those theories don’t generally predict harm from vertical mergers; they simply show that harm is possible under certain conditions.

On its face, and consistent with the last quarter century of merger enforcement by the DOJ and FTC, the Comcast acquisition would be less likely to trigger antitrust scrutiny, and the Disney acquisition raises more straightforward antitrust issues.

This is true even in light of the fact that the DOJ decided to challenge the AT&T-Time Warner (AT&T/TWX) merger.

The AT&T/TWX merger is a single data point in a long history of successful vertical mergers that attracted little scrutiny, and no litigation, by antitrust enforcers (although several have been approved subject to consent orders).

Just because the DOJ challenged that one merger does not mean that antitrust enforcers generally, nor even the DOJ in particular, have suddenly become more hostile to vertical mergers.

Of particular importance to the conclusion that the AT&T/TWX merger challenge is of minimal relevance to predicting the DOJ’s reception in this case, the theory of harm argued by the DOJ in that case is far from well-accepted, while the potential theory that could underpin a challenge to a Disney/Fox merger is. As Bruce Hoffman further remarks:

I am skeptical of arguments that vertical mergers cause harm due to an increased bargaining skill; this is likely not an anticompetitive effect because it does not flow from a reduction in competition. I would contrast that to the elimination of competition in a horizontal merger that leads to an increase in bargaining leverage that could raise price or reduce output.

The Relatively Lower Risk of a Vertical Merger Challenge Hasn’t Changed Following the DOJ’s AT&T/Time Warner Challenge

Judge Leon is expected to rule on the AT&T/TWX merger in a matter of weeks. The theory underpinning the DOJ’s challenge is problematic (to say the least), and the case it presented was decidedly weak. But no litigated legal outcome is ever certain, and the court could, of course, rule against the merger nevertheless.

Yet even if the court does rule against the AT&T/TWX merger, this hardly suggests that a Comcast/Fox deal would create a greater antitrust risk than would a Disney/Fox merger.

A single successful challenge to a vertical merger — what would be, in fact, the first successful vertical merger challenge in four decades — doesn’t mean that the courts are becoming hostile to vertical mergers any more than the DOJ’s challenge means that vertical mergers suddenly entail heightened enforcement risk. Rather, it would simply mean that that, given the specific facts of the case, the DOJ was able to make out its prima facie case, and that the defendants were unable to rebut it.  

A ruling for the DOJ in the AT&T/TWX merger challenge would be rooted in a highly fact-specific analysis that could have no direct bearing on future cases.

In the AT&T/TWX case, the court’s decision will turn on its assessment of the DOJ’s argument that the merged firm could raise subscriber prices by a few pennies per subscriber. But as AT&T’s attorney aptly pointed out at trial (echoing the testimony of AT&T’s economist, Dennis Carlton):

The government’s modeled price increase is so negligible that, given the inherent uncertainty in that predictive exercise, it is not meaningfully distinguishable from zero.

Even minor deviations from the facts or the assumptions used in the AT&T/TWX case could completely upend the analysis — and there are important differences between the AT&T/TWX merger and a Comcast/Fox merger. True, both would be largely vertical mergers that would bring together programming and distribution assets in the home video market. But the foreclosure effects touted by the DOJ in the AT&T/TWX merger are seemingly either substantially smaller or entirely non-existent in the proposed Comcast/Fox merger.

Most importantly, the content at issue in AT&T/TWX is at least arguably (and, in fact, argued by the DOJ) “must have” programming — Time Warner’s premium HBO channels and its CNN news programming, in particular, were central to the DOJ’s foreclosure argument. By contrast, the programming that Comcast would pick up as a result of the proposed merger with Fox — FX (a popular, but non-essential, basic cable channel) and National Geographic channels (which attract a tiny fraction of cable viewing) — would be extremely unlikely to merit that designation.

Moreover, the DOJ made much of the fact that AT&T, through DirectTV, has a national distribution footprint. As a result, its analysis was dependent upon the company’s potential ability to attract new subscribers decamping from competing providers from whom it withholds access to Time Warner content in every market in the country. Comcast, on the other hand, provides cable service in only about 35% of the country. This significantly limits its ability to credibly threaten competitors because its ability to recoup lost licensing fees by picking up new subscribers is so much more limited.

And while some RSNs may offer some highly prized live sports programming, the mismatch between Comcast’s footprint and the FOX RSNs (only about 8 of the 22 Fox RSNs are in Comcast service areas) severely limits any ability or incentive the company would have to leverage that content for higher fees. Again, to the extent that RSN programming is not “must-have,” and to the extent there is not overlap between the RSN’s geographic area and Comcast’s service area, the situation is manifestly not the same as the one at issue in the AT&T/TWX merger.

In sum, a ruling in favor of the DOJ in the AT&T/TWX case would be far from decisive in predicting how the agency and the courts would assess any potential concerns arising from Comcast’s ownership of Fox’s assets.

A Comcast/Fox Deal May Entail Lower Antitrust Risk than a Disney/Fox Merger

As discussed below, concerns about antitrust enforcement risk from a Comcast/Fox merger are likely overstated. Perhaps more importantly, however, to the extent these concerns are legitimate, they apply at least as much to a Disney/Fox merger. There is, at minimum, no basis for assuming a Comcast deal would present any greater regulatory risk.

The Antitrust Risk of a Comcast/Fox Merger Is Likely Overstated

The primary theory upon which antitrust enforcers could conceivably base a Comcast/Fox merger challenge would be a vertical foreclosure theory. Importantly, such a challenge would have to be based on the incremental effect of adding the Fox assets to Comcast, and not on the basis of its existing assets. Thus, for example, antitrust enforcers would not be able to base a merger challenge on the possibility that Comcast could leverage NBC content it currently owns to extract higher fees from competitors. Rather, only if the combination of NBC programming with additional content from Fox could create a new antitrust risk would a case be tenable.

Enforcers would be unlikely to view the addition of FX and National Geographic to the portfolio of programming content Comcast currently owns as sufficient to raise concerns that the merger would give Comcast anticompetitive bargaining power or the ability to foreclose access to its content.

Although even less likely, enforcers could be concerned with the (horizontal) addition of 20th Century Fox filmed entertainment to Universal’s existing film production and distribution. But the theatrical film market is undeniably competitive, with the largest studio by revenue (Disney) last year holding only 22% of the market. The combination of 20th Century Fox with Universal would still result in a market share only around 25% based on 2017 revenues (and, depending on the year, not even result in the industry’s largest share).

There is also little reason to think that a Comcast controlling interest in Hulu would attract problematic antitrust attention. Comcast has already demonstrated an interest in diversifying its revenue across cable subscriptions and licensing, broadband subscriptions, and licensing to OVDs, as evidenced by its recent deal to offer Netflix as part of its Xfinity packages. Hulu likely presents just one more avenue for pursuing this same diversification strategy. And Universal has a history (see, e.g., this, this, and this) of very broad licensing across cable providers, cable networks, OVDs, and the like.

In the case of Hulu, moreover, the fact that Comcast is vertically integrated in broadband as well as cable service likely reduces the anticompetitive risk because more-attractive OVD content has the potential to increase demand for Comcast’s broadband service. Broadband offers larger margins (and is growing more rapidly) than cable, and it’s quite possible that any loss in Comcast’s cable subscriber revenue from Hulu’s success would be more than offset by gains in its content licensing and broadband subscription revenue. The same, of course, goes for Comcast’s incentives to license content to OVD competitors like Netflix: Comcast plausibly gains broadband subscription revenue from heightened consumer demand for Netflix, and this at least partially offsets any possible harm to Hulu from Netflix’s success.

At the same time, especially relative to Netflix’s vast library of original programming (an expected $8 billion worth in 2018 alone) and content licensed from other sources, the additional content Comcast would gain from a merger with Fox is not likely to appreciably increase its bargaining leverage or its ability to foreclose Netflix’s access to its content.     

Finally, Comcast’s ownership of Fox’s RSNs could, as noted, raise antitrust enforcers’ eyebrows. Enforcers could be concerned that Comcast would condition competitors’ access to RSN programming on higher licensing fees or prioritization of its NBC Sports channels.

While this is indeed a potential risk, it is hardly a foregone conclusion that it would draw an enforcement action. Among other things, NBC is far from the market leader, and improving its competitive position relative to ESPN could be viewed as a benefit of the deal. In any case, potential problems arising from ownership of the RSNs could easily be dealt with through divestiture or behavioral conditions; they are extremely unlikely to lead to an outright merger challenge.

The Antitrust Risk of a Disney Deal May Be Greater than Expected

While a Comcast/Fox deal doesn’t entail no antitrust enforcement risk, it certainly doesn’t entail sufficient risk to deem the deal dead on arrival. Moreover, it may entail less antitrust enforcement risk than would a Disney/Fox tie-up.

Yet, curiously, the joint proxy statement doesn’t mention any antitrust risk from the Disney deal at all and seems to suggest that the Fox board applied no risk discount in evaluating Disney’s bid.

Disney — already the market leader in the filmed entertainment industry — would acquire an even larger share of box office proceeds (and associated licensing revenues) through acquisition of Fox’s film properties. Perhaps even more important, the deal would bring the movie rights to almost all of the Marvel Universe within Disney’s ambit.

While, as suggested above, even that combination probably wouldn’t trigger any sort of market power presumption, it would certainly create an entity with a larger share of the market and stronger control of the industry’s most valuable franchises than would a Comcast/Fox deal.

Another relatively larger complication for a Disney/Fox merger arises from the prospect of combining Fox’s RSNs with ESPN. Whatever ability or incentive either company would have to engage in anticompetitive conduct surrounding sports programming, that risk would seem to be more significant for undisputed market leader, Disney. At the same time, although still powerful, demand for ESPN on cable has been flagging. Disney could well see the ability to bundle ESPN with regional sports content as a way to prop up subscription revenues for ESPN — a practice, in fact, that it has employed successfully in the past.   

Finally, it must be noted that licensing of consumer products is an even bigger driver of revenue from filmed entertainment than is theatrical release. No other company comes close to Disney in this space.

Disney is the world’s largest licensor, earning almost $57 billion in 2016 from licensing properties like Star Wars and Marvel Comics. Universal is in a distant 7th place, with 2016 licensing revenue of about $6 billion. Adding Fox’s (admittedly relatively small) licensing business would enhance Disney’s substantial lead (even the number two global licensor, Meredith, earned less than half of Disney’s licensing revenue in 2016). Again, this is unlikely to be a significant concern for antitrust enforcers, but it is notable that, to the extent it might be an issue, it is one that applies to Disney and not Comcast.

Conclusion

Although I hope to address these issues in greater detail in the future, for now the preliminary assessment is clear: There is no legitimate basis for ascribing a greater antitrust risk to a Comcast/Fox deal than to a Disney/Fox deal.

At this point, only the most masochistic and cynical among DC’s policy elite actually desire for the net neutrality conflict to continue. And yet, despite claims that net neutrality principles are critical to protecting consumers, passage of the current Congressional Review Act (“CRA”) disapproval resolution in Congress would undermine consumer protection and promise only to drag out the fight even longer.

The CRA resolution is primarily intended to roll back the FCC’s re-re-classification of broadband as a Title I service under the Communications Act in the Restoring Internet Freedom Order (“RIFO”). The CRA allows Congress to vote to repeal rules recently adopted by federal agencies; upon a successful CRA vote, the rules are rescinded and the agency is prohibited from adopting substantially similar rules in the future.

But, as TechFreedom has noted, it’s not completely clear that a CRA on a regulatory classification decision will work quite the way Congress intends it and could just trigger more litigation cycles, largely because it is unclear what parts of the RIFO are actually “rules” subject to the CRA. Harold Feld has written a critique of TechFreedom’s position, arguing, in effect, that of course the RIFO is a rule; TechFreedom responded with a pretty devastating rejoinder.

But this exchange really demonstrates TechFreedom’s central argument: It is sufficiently unclear how or whether the CRA will apply to the various provisions of the RIFO, such that the only things the CRA is guaranteed to do are 1) to strip consumers of certain important protections — it would take away the FCC’s transparency requirements for ISPs, and imperil privacy protections currently ensured by the FTC — while 2) prolonging the already interminable litigation and political back-and-forth over net neutrality.

The CRA is political theater

The CRA resolution effort is not about good Internet regulatory policy; rather, it’s pure political opportunism ahead of the midterms. Democrats have recognized net neutrality as a good wedge issue because of its low political opportunity cost. The highest-impact costs of over-regulating broadband through classification decisions are hard to see: Rather than bad things happening, the costs arrive in the form of good things not happening. Eventually those costs work their way to customers through higher access prices or less service — especially in rural areas most in need of it — but even these effects take time to show up and, when they do, are difficult to pin on any particular net neutrality decision, including the CRA resolution. Thus, measured in electoral time scales, prolonging net neutrality as a painful political issue — even though actual resolution of the process by legislation would be the sensible course — offers tremendous upside for political challengers and little cost.  

The truth is, there is widespread agreement that net neutrality issues need to be addressed by Congress: A constant back and forth between the FCC (and across its own administrations) and the courts runs counter to the interests of consumers, broadband companies, and edge providers alike. Virtually whatever that legislative solution ends up looking like, it would be an improvement over the unstable status quo.

There have been various proposals from Republicans and Democrats — many of which contain provisions that are likely bad ideas — but in the end, a bill passed with bipartisan input should have the virtue of capturing an open public debate on the issue. Legislation won’t be perfect, but it will be tremendously better than the advocacy playground that net neutrality has become.

What would the CRA accomplish?

Regardless of what one thinks of the substantive merits of TechFreedom’s arguments on the CRA and the arcana of legislative language distinguishing between agency “rules” and “orders,” if the CRA resolution is successful (a prospect that is a bit more likely following the Senate vote to pass it) what follows is pretty clear.

The only certain result of the the CRA resolution becoming law would be to void the transparency provisions that the FCC introduced in the RIFO — the one part of the Order that is pretty clearly a “rule” subject to CRA review — and it would disable the FCC from offering another transparency rule in its place. Everything else is going to end up — surprise! — before the courts, which would serve only to keep the issues surrounding net neutrality unsettled for another several years. (A cynic might suggest that this is, in fact, the goal of net neutrality proponents, for whom net neutrality has been and continues to have important political valence.)

And if the CRA resolution withstands the inevitable legal challenge to its rescision of the rest of the RIFO, it would also (once again) remove broadband privacy from the FTC’s purview, placing it back into the FCC’s lap — which is already prohibited from adopting privacy rules following last year’s successful CRA resolution undoing the Wheeler FCC’s broadband privacy regulations. The result is that we could be left without any broadband privacy regulator at all — presumably not the outcome strong net neutrality proponents want — but they persevere nonetheless.

Moreover, TechFreedom’s argument that the CRA may not apply to all parts of the RIFO could have a major effect on whether or not Congress is even accomplishing anything at all (other than scoring political points) with this vote. It could be the case that the CRA applies only to “rules” and not “orders,” or it could be the case that even if the CRA does apply to the RIFO, its passage would not force the FCC to revive the abrogated 2015 Open Internet Order, as proponents of the CRA vote hope.

Whatever one thinks of these arguments, however, they are based on a sound reading of the law and present substantial enough questions to sustain lengthy court challenges. Thus, far from a CRA vote actually putting to rest the net neutrality issue, it is likely to spawn litigation that will drag out the classification uncertainty question for at least another year (and probably more, with appeals).

Stop playing net neutrality games — they aren’t fun

Congress needs to stop trying to score easy political points on this issue while avoiding the hard and divisive work of reaching a compromise on actual net neutrality legislation. Despite how the CRA is presented in the popular media, a CRA vote is the furthest thing from a simple vote for net neutrality: It’s a political calculation to avoid accountability.

I had the pleasure last month of hosting the first of a new annual roundtable discussion series on closing the rural digital divide through the University of Nebraska’s Space, Cyber, and Telecom Law Program. The purpose of the roundtable was to convene a diverse group of stakeholders — from farmers to federal regulators; from small municipal ISPs to billion dollar app developers — for a discussion of the on-the-ground reality of closing the rural digital divide.

The impetus behind the roundtable was, quite simply, that in my five years living in Nebraska I have consistently found that the discussions that we have here about the digital divide in rural America are wholly unlike those that the federally-focused policy crowd has back in DC. Every conversation I have with rural stakeholders further reinforces my belief that those of us who approach the rural digital divide from the “DC perspective” fail to appreciate the challenges that rural America faces or the drive, innovation, and resourcefulness that rural stakeholders bring to the issue when DC isn’t looking. So I wanted to bring these disparate groups together to see what was driving this disconnect, and what to do about it.

The unfortunate reality of the rural digital divide is that it is an existential concern for much of America. At the same time, the positive news is that closing this divide has become an all-hands-on-deck effort for stakeholders in rural America, one that defies caricatured political, technological, and industry divides. I have never seen as much agreement and goodwill among stakeholders in any telecom community as when I speak to rural stakeholders about digital divides. I am far from an expert in rural broadband issues — and I don’t mean to hold myself out as one — but as I have engaged with those who are, I am increasingly convinced that there are far more and far better ideas about closing the rural digital divide to be found outside the beltway than within.

The practical reality is that most policy discussions about the rural digital divide over the past decade have been largely irrelevant to the realities on the ground: The legal and policy frameworks focus on the wrong things, and participants in these discussions at the federal level rarely understand the challenges that define the rural divide. As a result, stakeholders almost always fall back on advocating stale, entrenched, viewpoints that have little relevance to the on-the-ground needs. (To their credit, both Chairman Pai and Commissioner Carr have demonstrated a longstanding interest in understanding the rural digital divide — an interest that is recognized and appreciated by almost every rural stakeholder I speak to.)

Framing Things Wrong

It is important to begin by recognizing that contemporary discussion about the digital divide is framed in terms of, and addressed alongside, longstanding federal Universal Service policy. This policy, which has its roots in the 20th century project of ensuring that all Americans had access to basic telephone service, is enshrined in the first words of the Communications Act of 1934. It has not significantly evolved from its origins in the analog telephone system — and that’s a problem.

A brief history of Universal Service

The Communications Act established the FCC

for the purpose of regulating interstate and foreign commerce in communication by wire and radio so as to make available, so far as possible, to all the people of the United States … a rapid, efficient, Nation-wide, and world-wide wire and radio communication service ….

The historic goal of “universal service” has been to ensure that anyone in the country is able to connect to the public switched telephone network. In the telephone age, that network provided only one primary last-mile service: transmitting basic voice communications from the customer’s telephone to the carrier’s switch. Once at the switch various other services could be offered — but providing them didn’t require more than a basic analog voice circuit to the customer’s home.

For most of the 20th century, this form of universal service was ensured by fiat and cost recovery. Regulated telephone carriers (that is, primarily, the Bell operating companies under the umbrella of AT&T) were required by the FCC to provide service to all comers, at published rates, no matter the cost of providing that service. In exchange, the carriers were allowed to recover the cost of providing service to high-cost areas through the regulated rates charged to all customers. That is, the cost of ensuring universal service was spread across and subsidized by the entire rate base.

This system fell apart following the break-up of AT&T in the 1980s. The separation of long distance from local exchange service meant that the main form of cross subsidy — from long distance to local callers — could no longer be handled implicitly. Moreover, as competitive exchange services began entering the market, they tended to compete first, and most, over the high-revenue customers who had supported the rate base. To accommodate these changes, the FCC transitioned from a model of implicit cross-subsidies to one of explicit cross-subsidies, introducing long distance access charges and termination fees that were regulated to ensure money continued to flow to support local exchange carriers’ costs of providing services to high-cost users.

The 1996 Telecom Act forced even more dramatic change. The goal of the 1996 Telecom Act was to introduce competition throughout the telecom ecosystem — but the traditional cross-subsidy model doesn’t work in a competitive market. So the 1996 Telecom Act further evolved the FCC’s universal service mechanism, establishing the Universal Service Fund (USF), funded by fees charged to all telecommunications carriers, which would be apportioned to cover the costs incurred by eligible telecommunications carriers in providing high-cost (and other “universal”) services.

The problematic framing of Universal Service

For present purposes, we need not delve into these mechanisms. Rather, the very point of this post is that the interminable debates about these mechanisms — who pays into the USF and how much; who gets paid out of the fund and how much; and what services and technologies the fund covers — simply don’t match the policy challenges of closing the digital divide.

What the 1996 Telecom Act does offer is a statement of the purposes of Universal Service. In 47 USC 254(b)(3), the Act states the purpose of ensuring “Access in rural and high cost areas”:

Consumers in all regions of the Nation, including low-income consumers and those in rural, insular, and high cost areas, should have access to telecommunications and information services … that are reasonably comparable to those services provided in urban areas ….

This is a problematic framing. (I would actually call it patently offensive…). It is a framing that made sense in the telephone era, when ensuring last-mile service meant providing only basic voice telephone service. In that era, having any service meant having all service, and the primary obstacles to overcome were the high-cost of service to remote areas and the lower revenues expected from lower-income areas. But its implicit suggestion is that the goal of federal policy should be to make rural America look like urban America.

Today universal service, at least from the perspective of closing the digital divide, means something different, however. The technological needs of rural America are different than those of urban America; the technological needs of poor and lower-income America are different than those of rich America. Framing the goal in terms of making sure rural and lower-income America have access to the same services as urban and wealthy America is, by definition, not responsive to (or respectful of) the needs of those who are on the wrong side of one of this country’s many digital divides. Indeed, that goal almost certainly distracts from and misallocates resources that could be better leveraged towards closing these divides.

The Demands of Rural Broadband

Rural broadband needs are simultaneously both more and less demanding than the services we typically focus on when discussing universal service. The services that we fund, and the way that we approach how to close digital divides, needs to be based in the first instance on the actual needs of the community that connectivity is meant to serve. Take just two of the prototypical examples: precision and automated farming, and telemedicine.

Assessing rural broadband needs

Precision agriculture requires different networks than does watching Netflix, web surfing, or playing video games. Farms with hundreds or thousands of sensors and other devices per acre can put significant load on networks — but not in terms of bandwidth. The load is instead measured in terms of packets and connections per second. Provisioning networks to handle lots of small packets is very different from provisioning them to handle other, more-typical (to the DC crowd), use cases.

On the other end of the agricultural spectrum, many farms don’t own their own combines. Combines cost upwards of a million dollars. One modern combine is sufficient to tend to several hundred acres in a given farming season. It is common for many farmers to hire someone who owns a combine to service their fields. During harvest season, for instance, one combine service may operate on a dozen farms during harvest season. Prior to operation, modern precision systems need to download a great deal of GIS, mapping, weather, crop, and other data. High-speed Internet can literally mean the difference between letting a combine sit idle for many days of a harvest season while it downloads data and servicing enough fields to cover the debt payments on a million dollar piece of equipment.

Going to the other extreme, rural health care relies upon Internet connectivity — but not in the ways it is usually discussed. The stories one hears on the ground aren’t about the need for particularly high-speed connections or specialized low-latency connections to allow remote doctors to control surgical robots. While tele-surgery and access to highly specialized doctors are important applications of telemedicine, the urgent needs today are far more modest: simple video consultations with primary care physicians for routine care, requiring only a moderate-speed Internet connection capable of basic video conferencing. In reality, literally megabits per second (not even 10 mbps) can mean the difference between a remote primary care physician being able to provide basic health services to a rural community and that community going entirely unserved by a doctor.

Efforts to run gigabit connections and dedicated fiber to rural health care facilities may be a great long-term vision — but the on-the-ground need could be served by a reliable 4G wireless connection or DSL line. (Again, to their credit, this is a point that Chairman Pai and Commissioner Carr have been highlighting in their recent travels through rural parts of the country.)

Of course, rural America faces many of the same digital divides faced elsewhere. Even in the wealthiest cities in Nebraska, for instance, significant numbers of students are eligible for free or reduced price school lunches — a metric that corresponds with income — and rely on anchor institutions for Internet access. The problem is worse in much of rural Nebraska, where there may simply be no Internet access at all.

Addressing rural broadband needs

Two things in particular have struck me as I have spoken to rural stakeholders about the digital divide. The first is that this is an “all hands on deck” problem. Everyone I speak to understands the importance of the issue. Everyone is willing to work with and learn from others. Everyone is willing to commit resources and capital to improve upon the status quo, including by undertaking experiments and incurring risks.

The discussions I have in DC, however, including with and among key participants in the DC policy firmament, are fundamentally different. These discussions focus on tweaking contribution factors and cost models to protect or secure revenues; they are, in short, missing the forest for the trees. Meanwhile, the discussion on the ground focuses on how to actually deploy service and overcome obstacles. No amount of cost-model tweaking will do much at all to accomplish either of these.

The second striking, and rather counterintuitive, thing that I have often heard is that closing the rural digital divide isn’t (just) about money. I’ve heard several times the lament that we need to stop throwing more money at the problem and start thinking about where the money we already have needs to go. Another version of this is that it isn’t about the money, it’s about the business case. Money can influence a decision whether to execute upon a project for which there is a business case — but it rarely creates a business case where there isn’t one. And where it has created a business case, that case was often for building out relatively unimportant networks while increasing the opportunity costs of building out more important networks. The networks we need to build are different from those envisioned by the 1996 Telecom Act or FCC efforts to contort that Act to fund Internet build-out.

Rural Broadband Investment

There is, in fact, a third particularly striking thing I have gleaned from speaking with rural stakeholders, and rural providers in particular: They don’t really care about net neutrality, and don’t see it as helpful to closing the digital divide.  

Rural providers, it must be noted, are generally “pro net neutrality,” in the sense that they don’t think that ISPs should interfere with traffic going over their networks; in the sense that they don’t have any plans themselves to engage in “non-neutral” conduct; and also in the sense that they don’t see a business case for such conduct.

But they are also wary of Title II regulation, or of other rules that are potentially burdensome or that introduce uncertainty into their business. They are particularly concerned that Title II regulation opens the door to — and thus creates significant uncertainty about the possibility of — other forms of significant federal regulation of their businesses.

More than anything else, they want to stop thinking, talking, and worrying about net neutrality regulations. Ultimately, the past decade of fights about net neutrality has meant little other than regulatory cost and uncertainty for them, which makes planning and investment difficult — hardly a boon to closing the digital divide.

The basic theory of the Wheeler-era FCC’s net neutrality regulations was the virtuous cycle — that net neutrality rules gave edge providers the certainty they needed in order to invest in developing new applications that, in turn, would drive demand for, and thus buildout of, new networks. But carriers need certainty, too, if they are going to invest capital in building these networks. Rural ISPs are looking for the business case to justify new builds. Increasing uncertainty has only negative effects on the business case for closing the rural digital divide.

Most crucially, the logic of the virtuous cycle is virtually irrelevant to driving demand for closing the digital divide. Edge innovation isn’t going to create so much more value that users will suddenly demand that networks be built; rather, the applications justifying this demand already exist, and most have existed for many years. What stands in the way of the build-out required to service under- or un-served rural areas is the business case for building these (expensive) networks. And the uncertainty and cost associated with net neutrality only exacerbate this problem.

Indeed, rural markets are an area where the virtuous cycle very likely turns in the other direction. Rural communities are actually hotbeds of innovation. And they know their needs far better than Silicon Valley edge companies, so they are likely to build apps and services that better cater to the unique needs of rural America. But these apps and services aren’t going to be built unless their developers have access to the broadband connections needed to build and maintain them, and, most important of all, unless users have access to the broadband connections needed to actually make use of them. The upshot is that, in rural markets, connectivity precedes and drives the supply of edge services not, as the Wheeler-era virtuous cycle would have it, the other way around.

The effect of Washington’s obsession with net neutrality these past many years has been to increase uncertainty and reduce the business case for building new networks. And its detrimental effects continue today with politicized and showboating efforts to to invoke the Congressional Review Act in order to make a political display of the 2017 Restoring Internet Freedom Order. Back in the real world, however, none of this helps to provide rural communities with the type of broadband services they actually need, and the effect is only to worsen the rural digital divide, both politically and technologically.

The Road Ahead …?

The story told above is not a happy one. Closing digital divides, and especially closing the rural digital divide, is one of the most important legal, social, and policy challenges this country faces. Yet the discussion about these issues in DC reflects little of the on-the-ground reality. Rather advocates in DC attack a strawman of the rural digital divide, using it as a foil to protect and advocate for their pet agendas. If anything, the discussion in DC distracts attention and diverts resources from productive ideas.

To end on a more positive note, some are beginning to recognize the importance and direness of the situation. I have noted several times the work of Chairman Pai and Commissioner Carr. Indeed, the first time I met Chairman Pai was when I had the opportunity to accompany him, back when he was Commissioner Pai, on a visit through Diller, Nebraska (pop. 287). More recently, there has been bipartisan recognition of the need for new thinking about the rural digital divide. In February, for instance, a group of Democratic senators asked President Trump to prioritize rural broadband in his infrastructure plans. And the following month Congress enacted, and the President signed, legislation that among other things funded a $600 million pilot program to award grants and loans for rural broadband built out through the Department of Agriculture’s Rural Utilities Service. But both of these efforts rely too heavily on throwing money at the rural divide (speaking of the recent legislation, the head of one Nebraska-based carrier building out service in rural areas lamented that it’s just another effort to give carriers cheap money, which doesn’t do much to help close the divide!). It is, nonetheless, good to see urgent calls for and an interest in experimenting with new ways to deliver assistance in closing the rural digital divide. We need more of this sort of bipartisan thinking and willingness to experiment with new modes of meeting this challenge — and less advocacy for stale, entrenched, viewpoints that have little relevance to the on-the-ground reality of rural America.

The paranoid style is endemic across the political spectrum, for sure, but lately, in the policy realm haunted by the shambling zombie known as “net neutrality,” the pro-Title II set are taking the rhetoric up a notch. This time the problem is, apparently, that the FCC is not repealing Title II classification fast enough, which surely must mean … nefarious things? Actually, the truth is probably much simpler: the Commission has many priorities and is just trying to move along its docket items by the numbers in order to avoid the relentless criticism that it’s just trying to favor ISPs.

Motherboard, picking up on a post by Harold Feld, has opined that the FCC has not yet published its repeal date for the OIO rules in the Federal Register because

the FCC wanted more time to garner support for their effort to pass a bogus net neutrality law. A law they promise will “solve” the net neutrality feud once and for all, but whose real intention is to pre-empt tougher state laws, and block the FCC’s 2015 rules from being restored in the wake of a possible court loss…As such, it’s believed that the FCC intentionally dragged out the official repeal to give ISPs time to drum up support for their trojan horse.

To his credit, Feld admits that this theory is mere “guesses and rank speculation” — but it’s nonetheless disappointing that Motherboard picked this speculation up, described it as coming from “one of the foremost authorities on FCC and telecom policy,” and then pushed the narrative as though it were based on solid evidence.

Consider the FCC’s initial publication in the Federal Register on this topic:

Effective date: April 23, 2018, except for amendatory instructions 2, 3, 5, 6, and 8, which are delayed as follows. The FCC will publish a document in the Federal Register announcing the effective date(s) of the delayed amendatory instructions, which are contingent on OMB approval of the modified information collection requirements in 47 CFR 8.1 (amendatory instruction 5). The Declaratory Ruling, Report and Order, and Order will also be effective upon the date announced in that same document.

To translate this into plain English, the FCC is waiting until OMB signs off on its replacement transparency rules before it repeals the existing rules. Feld is skeptical of this approach, calling it “highly unusual” and claiming that “[t]here is absolutely no reason for FCC Chairman Ajit Pai to have stretched out this process so ridiculously long.” That may be one, arguably valid interpretation, but it’s hardly required by the available evidence.

The 2015 Open Internet Order (“2015 OIO”) had a very long lead time for its implementation. The Restoring Internet Freedom Order (“RIF Order”) was (to put it mildly) created during a highly contentious process. There are very good reasons for the Commission to take its time and make sure it dots its i’s and crosses its t’s. To do otherwise would undoubtedly invite nonstop caterwauling from Title II advocates who felt the FCC was trying to rush through the process. Case in point: as he criticizes the Commission for taking too long to publish the repeal date, Feld simultaneously criticizes the Commission for rushing through the RIF Order.

The Great State Law Preemption Conspiracy

Trying to string together some sort of logical or legal justification for this conspiracy theory, the Motherboard article repeatedly adverts to the ongoing (and probably fruitless) efforts of states to replicate the 2015 OIO in their legislatures:

In addition to their looming legal challenge, ISPs are worried that more than half the states in the country are now pursuing their own net neutrality rules. And while ISPs successfully lobbied the FCC to include language in their repeal trying to ban states from protecting consumers, their legal authority on that front is dubious as well.

It would be a nice story, if it were at all plausible. But, while it’s not a lock that the FCC’s preemption of state-level net neutrality bills will succeed on all fronts, it’s a surer bet that, on the whole, states are preempted from their activities to regulate ISPs as common carriers. The executive action in my own home state of New Jersey is illustrative of this point.

The governor signed an executive order in February that attempts to end-run the FCC’s rules by exercising New Jersey’s power as a purchaser of broadband services. In essence, the executive order requires that any subsidiary of the state government that purchases broadband connectivity only do so from “ISPs that adhere to ‘net neutrality’ principles.“ It’s probably fine for New Jersey, in its own contracts, to require certain terms from ISPs that affect state agencies of New Jersey directly. But it’s probably impermissible that those contractual requirements can be used as a lever to force ISPs to treat third parties (i.e., New Jersey’s citizens) under net neutrality principles.

Paragraphs 190-200 of the RIF Order are pretty clear on this:

We conclude that regulation of broadband Internet access service should be governed principally by a uniform set of federal regulations, rather than by a patchwork of separate state and local requirements…Allowing state and local governments to adopt their own separate requirements, which could impose far greater burdens than the federal regulatory regime, could significantly disrupt the balance we strike here… We therefore preempt any state or local measures that would effectively impose rules or requirements that we have repealed or decided to refrain from imposing in this order or that would impose more stringent requirements for any aspect of broadband service that we address in this order.

The U.S. Constitution is likewise clear on the issue of federal preemption, as a general matter: “laws of the United States… [are] the supreme law of the land.” And well over a decade ago, the Supreme Court held that the FCC was entitled to determine the broadband classification for ISPs (in that case, upholding the FCC’s decision to regulate ISPs under Title I, just as the RIF Order does). Further, the Court has also held that “the statutorily authorized regulations of an agency will pre-empt any state or local law that conflicts with such regulations or frustrates the purposes thereof.”

The FCC chose to re(re)classify broadband as a Title I service. Arguably, this could be framed as deregulatory, even though broadband is still regulated, just more lightly. But even if it were a full, explicit deregulation, that would not provide a hook for states to step in, because the decision to deregulate an industry has “as much pre-emptive force as a decision to regulate.”

Actions, like those of the New Jersey governor, have a bit more wiggle room in the legal interpretation because the state is acting as a “market participant.” So long as New Jersey’s actions are confined solely to its own subsidiaries, as a purchaser of broadband service it can put restrictions or requirements on how that service is provisioned. But as soon as a state tries to use its position as a market participant to create a de facto regulatory effect where it was not permitted to explicitly legislate, it runs afoul of federal preemption law.

Thus, it’s most likely the case that states seeking to impose “measures that would effectively impose rules or requirements” are preempted, and any such requirements are therefore invalid.

Jumping at Shadows

So why are the states bothering to push for their own version of net neutrality? The New Jersey order points to one highly likely answer:

the Trump administration’s Federal Communications Commission… recently illustrated that a free and open Internet is not guaranteed by eliminating net neutrality principles in a way that favors corporate interests over the interests of New Jerseyans and our fellow Americans[.]

Basically, it’s all about politics and signaling to a base that thinks that net neutrality somehow should be a question of political orientation instead of network management and deployment.

Midterms are coming up and some politicians think that net neutrality will make for an easy political position. After all, net neutrality is a relatively low-cost political position to stake out because, for the most part, the downsides of getting it wrong are just higher broadband costs and slower rollout. And given that the unseen costs of bad regulation are rarely recognized by voters, even getting it wrong is unlikely to come back to haunt an elected official (assuming the Internet doesn’t actually end).

There is no great conspiracy afoot. Everyone thinks that we need federal legislation to finally put the endless net neutrality debates to rest. If the FCC takes an extra month to make sure it’s not leaving gaps in regulation, it does not mean that the FCC is buying time for ISPs. In the end simple politics explains state actions, and the normal (if often unsatisfying) back and forth of the administrative state explains the FCC’s decisions.

This week the FCC will vote on Chairman Ajit Pai’s Restoring Internet Freedom Order. Once implemented, the Order will rescind the 2015 Open Internet Order and return antitrust and consumer protection enforcement to primacy in Internet access regulation in the U.S.

In anticipation of that, earlier this week the FCC and FTC entered into a Memorandum of Understanding delineating how the agencies will work together to police ISPs. Under the MOU, the FCC will review informal complaints regarding ISPs’ disclosures about their blocking, throttling, paid prioritization, and congestion management practices. Where an ISP fails to make the proper disclosures, the FCC will take enforcement action. The FTC, for its part, will investigate and, where warranted, take enforcement action against ISPs for unfair, deceptive, or otherwise unlawful acts.

Critics of Chairman Pai’s plan contend (among other things) that the reversion to antitrust-agency oversight of competition and consumer protection in telecom markets (and the Internet access market particularly) would be an aberration — that the US will become the only place in the world to move backward away from net neutrality rules and toward antitrust law.

But this characterization has it exactly wrong. In fact, much of the world has been moving toward an antitrust-based approach to telecom regulation. The aberration was the telecom-specific, common-carrier regulation of the 2015 Open Internet Order.

The longstanding, global transition from telecom regulation to antitrust enforcement

The decade-old discussion around net neutrality has morphed, perhaps inevitably, to join the larger conversation about competition in the telecom sector and the proper role of antitrust law in addressing telecom-related competition issues. Today, with the latest net neutrality rules in the US on the chopping block, the discussion has grown more fervent (and even sometimes inordinately violent).

On the one hand, opponents of the 2015 rules express strong dissatisfaction with traditional, utility-style telecom regulation of innovative services, and view the 2015 rules as a meritless usurpation of antitrust principles in guiding the regulation of the Internet access market. On the other hand, proponents of the 2015 rules voice skepticism that antitrust can actually provide a way to control competitive harms in the tech and telecom sectors, and see the heavy hand of Title II, common-carrier regulation as a necessary corrective.

While the evidence seems clear that an early-20th-century approach to telecom regulation is indeed inappropriate for the modern Internet (see our lengthy discussions on this point, e.g., here and here, as well as Thom Lambert’s recent post), it is perhaps less clear whether antitrust, with its constantly evolving, common-law foundation, is up to the task.

To answer that question, it is important to understand that for decades, the arc of telecom regulation globally has been sweeping in the direction of ex post competition enforcement, and away from ex ante, sector-specific regulation.

Howard Shelanski, who served as President Obama’s OIRA Administrator from 2013-17, Director of the Bureau of Economics at the FTC from 2012-2013, and Chief Economist at the FCC from 1999-2000, noted in 2002, for instance, that

[i]n many countries, the first transition has been from a government monopoly to a privatizing entity controlled by an independent regulator. The next transformation on the horizon is away from the independent regulator and towards regulation through general competition law.

Globally, nowhere perhaps has this transition been more clearly stated than in the EU’s telecom regulatory framework which asserts:

The aim is to progressively reduce ex ante sector-specific regulation progressively as competition in markets develops and, ultimately, for electronic communications [i.e., telecommunications] to be governed by competition law only. (Emphasis added.)

To facilitate the transition and quash regulatory inconsistencies among member states, the EC identified certain markets for national regulators to decide, consistent with EC guidelines on market analysis, whether ex ante obligations were necessary in their respective countries due to an operator holding “significant market power.” In 2003 the EC identified 18 such markets. After observing technological and market changes over the next four years, the EC reduced that number to seven in 2007 and, in 2014, the number was further reduced to four markets, all wholesale markets, that could potentially require ex ante regulation.

It is important to highlight that this framework is not uniquely achievable in Europe because of some special trait in its markets, regulatory structure, or antitrust framework. Determining the right balance of regulatory rules and competition law, whether enforced by a telecom regulator, antitrust regulator, or multi-purpose authority (i.e., with authority over both competition and telecom) means choosing from a menu of options that should be periodically assessed to move toward better performance and practice. There is nothing jurisdiction-specific about this; it is simply a matter of good governance.

And since the early 2000s, scholars have highlighted that the US is in an intriguing position to transition to a merged regulator because, for example, it has both a “highly liberalized telecommunications sector and a well-established body of antitrust law.” For Shelanski, among others, the US has been ready to make the transition since 2007.

Far from being an aberrant move away from sound telecom regulation, the FCC’s Restoring Internet Freedom Order is actually a step in the direction of sensible, antitrust-based telecom regulation — one that many parts of the world have long since undertaken.

How antitrust oversight of telecom markets has been implemented around the globe

In implementing the EU’s shift toward antitrust oversight of the telecom sector since 2003, agencies have adopted a number of different organizational reforms.

Some telecom regulators assumed new duties over competition — e.g., Ofcom in the UK. Other non-European countries, including, e.g., Mexico have also followed this model.

Other European Member States have eliminated their telecom regulator altogether. In a useful case study, Roslyn Layton and Joe Kane outline Denmark’s approach, which includes disbanding its telecom regulator and passing the regulation of the sector to various executive agencies.

Meanwhile, the Netherlands and Spain each elected to merge its telecom regulator into its competition authority. New Zealand has similarly adopted this framework.

A few brief case studies will illuminate these and other reforms:

The Netherlands

In 2013, the Netherlands merged its telecom, consumer protection, and competition regulators to form the Netherlands Authority for Consumers and Markets (ACM). The ACM’s structure streamlines decision-making on pending industry mergers and acquisitions at the managerial level, eliminating the challenges arising from overlapping agency reviews and cross-agency coordination. The reform also unified key regulatory methodologies, such as creating a consistent calculation method for the weighted average cost of capital (WACC).

The Netherlands also claims that the ACM’s ex post approach is better able to adapt to “technological developments, dynamic markets, and market trends”:

The combination of strength and flexibility allows for a problem-based approach where the authority first engages in a dialogue with a particular market player in order to discuss market behaviour and ensure the well-functioning of the market.

The Netherlands also cited a significant reduction in the risk of regulatory capture as staff no longer remain in positions for long tenures but rather rotate on a project-by-project basis from a regulatory to a competition department or vice versa. Moving staff from team to team has also added value in terms of knowledge transfer among the staff. Finally, while combining the cultures of each regulator was less difficult than expected, the government reported that the largest cause of consternation in the process was agreeing on a single IT system for the ACM.

Spain

In 2013, Spain created the National Authority for Markets and Competition (CNMC), merging the National Competition Authority with several sectoral regulators, including the telecom regulator, to “guarantee cohesion between competition rulings and sectoral regulation.” In a report to the OECD, Spain stated that moving to the new model was necessary because of increasing competition and technological convergence in the sector (i.e., the ability for different technologies to offer the substitute services (like fixed and wireless Internet access)). It added that integrating its telecom regulator with its competition regulator ensures

a predictable business environment and legal certainty [i.e., removing “any threat of arbitrariness”] for the firms. These two conditions are indispensable for network industries — where huge investments are required — but also for the rest of the business community if investment and innovation are to be promoted.

Like in the Netherlands, additional benefits include significantly lowering the risk of regulatory capture by “preventing the alignment of the authority’s performance with sectoral interests.”

Denmark

In 2011, the Danish government unexpectedly dismantled the National IT and Telecom Agency and split its duties between four regulators. While the move came as a surprise, it did not engender national debate — vitriolic or otherwise — nor did it receive much attention in the press.

Since the dismantlement scholars have observed less politicization of telecom regulation. And even though the competition authority didn’t take over telecom regulatory duties, the Ministry of Business and Growth implemented a light touch regime, which, as Layton and Kane note, has helped to turn Denmark into one of the “top digital nations” according to the International Telecommunication Union’s Measuring the Information Society Report.

New Zealand

The New Zealand Commerce Commission (NZCC) is responsible for antitrust enforcement, economic regulation, consumer protection, and certain sectoral regulations, including telecommunications. By combining functions into a single regulator New Zealand asserts that it can more cost-effectively administer government operations. Combining regulatory functions also created spillover benefits as, for example, competition analysis is a prerequisite for sectoral regulation, and merger analysis in regulated sectors (like telecom) can leverage staff with detailed and valuable knowledge. Similar to the other countries, New Zealand also noted that the possibility of regulatory capture “by the industries they regulate is reduced in an agency that regulates multiple sectors or also has competition and consumer law functions.”

Advantages identified by other organizations

The GSMA, a mobile industry association, notes in its 2016 report, Resetting Competition Policy Frameworks for the Digital Ecosystem, that merging the sector regulator into the competition regulator also mitigates regulatory creep by eliminating the prodding required to induce a sector regulator to roll back regulation as technological evolution requires it, as well as by curbing the sector regulator’s temptation to expand its authority. After all, regulators exist to regulate.

At the same time, it’s worth noting that eliminating the telecom regulator has not gone off without a hitch in every case (most notably, in Spain). It’s important to understand, however, that the difficulties that have arisen in specific contexts aren’t endemic to the nature of competition versus telecom regulation. Nothing about these cases suggests that economic-based telecom regulations are inherently essential, or that replacing sector-specific oversight with antitrust oversight can’t work.

Contrasting approaches to net neutrality in the EU and New Zealand

Unfortunately, adopting a proper framework and implementing sweeping organizational reform is no guarantee of consistent decisionmaking in its implementation. Thus, in 2015, the European Parliament and Council of the EU went against two decades of telecommunications best practices by implementing ex ante net neutrality regulations without hard evidence of widespread harm and absent any competition analysis to justify its decision. The EU placed net neutrality under the universal service and user’s rights prong of the regulatory framework, and the resulting rules lack coherence and economic rigor.

BEREC’s net neutrality guidelines, meant to clarify the EU regulations, offered an ambiguous, multi-factored standard to evaluate ISP practices like free data programs. And, as mentioned in a previous TOTM post, whether or not they allow the practice, regulators (e.g., Norway’s Nkom and the UK’s Ofcom) have lamented the lack of regulatory certainty surrounding free data programs.

Notably, while BEREC has not provided clear guidance, a 2017 report commissioned by the EU’s Directorate-General for Competition weighing competitive benefits and harms of zero rating concluded “there appears to be little reason to believe that zero-rating gives rise to competition concerns.”

The report also provides an ex post framework for analyzing such deals in the context of a two-sided market by assessing a deal’s impact on competition between ISPs and between content and application providers.

The EU example demonstrates that where a telecom regulator perceives a novel problem, competition law, grounded in economic principles, brings a clear framework to bear.

In New Zealand, if a net neutrality issue were to arise, the ISP’s behavior would be examined under the context of existing antitrust law, including a determination of whether the ISP is exercising market power, and by the Telecommunications Commissioner, who monitors competition and the development of telecom markets for the NZCC.

Currently, there is broad consensus among stakeholders, including a local content providers and networking equipment manufacturers, that there is no need for ex ante regulation of net neutrality. Wholesale ISP, Chorus, states, for example, that “in any event, the United States’ transparency and non-interference requirements [from the 2015 OIO] are arguably covered by the TCF Code disclosure rules and the provisions of the Commerce Act.”

The TCF Code is a mandatory code of practice establishing requirements concerning the information ISPs are required to disclose to consumers about their services. For example, ISPs must disclose any arrangements that prioritize certain traffic. Regarding traffic management, complaints of unfair contract terms — when not resolved by a process administered by an independent industry group — may be referred to the NZCC for an investigation in accordance with the Fair Trading Act. Under the Commerce Act, the NZCC can prohibit anticompetitive mergers, or practices that substantially lessen competition or that constitute price fixing or abuse of market power.

In addition, the NZCC has been active in patrolling vertical agreements between ISPs and content providers — precisely the types of agreements bemoaned by Title II net neutrality proponents.

In February 2017, the NZCC blocked Vodafone New Zealand’s proposed merger with Sky Network (combining Sky’s content and pay TV business with Vodafone’s broadband and mobile services) because the Commission concluded that the deal would substantially lessen competition in relevant broadband and mobile services markets. The NZCC was

unable to exclude the real chance that the merged entity would use its market power over premium live sports rights to effectively foreclose a substantial share of telecommunications customers from rival telecommunications services providers (TSPs), resulting in a substantial lessening of competition in broadband and mobile services markets.

Such foreclosure would result, the NZCC argued, from exclusive content and integrated bundles with features such as “zero rated Sky Sport viewing over mobile.” In addition, Vodafone would have the ability to prevent rivals from creating bundles using Sky Sport.

The substance of the Vodafone/Sky decision notwithstanding, the NZCC’s intervention is further evidence that antitrust isn’t a mere smokescreen for regulators to do nothing, and that regulators don’t need to design novel tools (such as the Internet conduct rule in the 2015 OIO) to regulate something neither they nor anyone else knows very much about: “not just the sprawling Internet of today, but also the unknowable Internet of tomorrow.” Instead, with ex post competition enforcement, regulators can allow dynamic innovation and competition to develop, and are perfectly capable of intervening — when and if identifiable harm emerges.

Conclusion

Unfortunately for Title II proponents — who have spent a decade at the FCC lobbying for net neutrality rules despite a lack of actionable evidence — the FCC is not acting without precedent by enabling the FTC’s antitrust and consumer protection enforcement to police conduct in Internet access markets. For two decades, the object of telecommunications regulation globally has been to transition away from sector-specific ex ante regulation to ex post competition review and enforcement. It’s high time the U.S. got on board.

Just in time for tomorrow’s FCC vote on repeal of its order classifying Internet Service Providers as common carriers, the St. Louis Post-Dispatch has published my op-ed entitled The FCC Should Abandon Title II and Return to Antitrust.

Here’s the full text:

The Federal Communications Commission (FCC) will soon vote on whether to repeal an Obama-era rule classifying Internet Service Providers (ISPs) as “common carriers.” That rule was put in place to achieve net neutrality, an attractive-sounding goal that many Americans—millennials especially—reflexively support.

In Missouri, voices as diverse as the St. Louis Post-Dispatch, the Joplin Globe, and the Archdiocese of St. Louis have opposed repeal of the Obama-era rule.

Unfortunately, few people who express support for net neutrality understand all it entails. Even fewer recognize the significant dangers of pursuing net neutrality using the means the Obama-era FCC selected. All many know is that they like neutrality generally and that smart-sounding celebrities like John Oliver support the Obama-era rule. They really need to know more.

First, it’s important to understand what a policy of net neutrality entails. In essence, it prevents ISPs from providing faster or better transmission of some Internet content, even where the favored content provider is willing to pay for prioritization.

That sounds benign—laudable, even—until one considers all that such a policy prevents. Under strict net neutrality, an ISP couldn’t prioritize content transmission in which congestion delays ruin the user experience (say, an Internet videoconference between a telemedicine system operated by the University of Missouri hospital and a rural resident of Dent County) over transmissions in which delays are less detrimental (say, downloads from a photo-sharing site).
Strict net neutrality would also preclude a mobile broadband provider from exempting popular content providers from data caps. Indeed, T-Mobile was hauled before the FCC to justify its popular “Binge On” service, which offered cost-conscious subscribers unlimited access to Netflix, ESPN, and HBO.

The fact is, ISPs have an incentive to manage their traffic in whatever way most pleases subscribers. The vast majority of Americans have a choice of ISPs, so managing content in any manner that adversely affects the consumer experience would hurt business. ISPs are also motivated to design subscription packages that consumers most desire. They shouldn’t have to seek government approval of innovative offerings.

For evidence that competition protects consumers from harmful instances of non-neutral network management, consider the record. The commercial Internet was born, thrived, and became the brightest spot in the American economy without formal net neutrality rules. History provides little reason to believe that the parade of horribles net neutrality advocates imagine will ever materialize.

Indeed, in seeking to justify its net neutrality policies, the Obama era FCC could come up with only four instances of harmful non-neutral network management over the entire history of the commercial Internet. That should come as no surprise. Background antitrust rules, in place long before the Internet was born, forbid the speculative harms net neutrality advocates envision.

Even if net neutrality regulation were desirable as a policy matter, the means by which the FCC secured it was entirely inappropriate. Before it adopted the current approach, which reclassified ISPs as common carriers subject to Title II of the 1934 Communications Act, the FCC was crafting a narrower approach using authority granted by the 1996 Telecommunications Act.

It abruptly changed course after President Obama, reeling from a shellacking in the 2014 midterm elections, sought to shore up his base by posting a video calling for “the strongest possible rules” on net neutrality, including Title II reclassification. Prodded by the President, the supposedly independent commissioners abandoned their consensus that Title II was too extreme and voted along party lines to treat the Internet as a utility.

Title II reclassification has resulted in the sort of “Mother, may I?” regulatory approach that impedes innovation and investment. In the first half of 2015, as the Commission was formulating its new Title II approach, spending by ISPs on capital equipment fell by an average of 8%. That was only the third time in the history of the commercial Internet that infrastructure investment fell from the previous year. The other two times were in 2001, following the dot.com bust, and 2009, after the 2008 financial crash and ensuing recession. For those remote communities in Missouri still looking for broadband to reach their doorsteps, government policies need to incentivize more investment, not restrict it.

To enhance innovation and encourage broadband deployment, the FCC should reverse its damaging Title II order and leave concerns about non-neutral network management to antitrust law. It was doing just fine.

As I explain in my new book, How to Regulate, sound regulation requires thinking like a doctor.  When addressing some “disease” that reduces social welfare, policymakers should catalog the available “remedies” for the problem, consider the implementation difficulties and “side effects” of each, and select the remedy that offers the greatest net benefit.

If we followed that approach in deciding what to do about the way Internet Service Providers (ISPs) manage traffic on their networks, we would conclude that FCC Chairman Ajit Pai is exactly right:  The FCC should reverse its order classifying ISPs as common carriers (Title II classification) and leave matters of non-neutral network management to antitrust, the residual regulator of practices that may injure competition.

Let’s walk through the analysis.

Diagnose the Disease.  The primary concern of net neutrality advocates is that ISPs will block some Internet content or will slow or degrade transmission from content providers who do not pay for a “fast lane.”  Of course, if an ISP’s non-neutral network management impairs the user experience, it will lose business; the vast majority of Americans have access to multiple ISPs, and competition is growing by the day, particularly as mobile broadband expands.

But an ISP might still play favorites, despite the threat of losing some subscribers, if it has a relationship with content providers.  Comcast, for example, could opt to speed up content from HULU, which streams programming of Comcast’s NBC subsidiary, or might slow down content from Netflix, whose streaming video competes with Comcast’s own cable programming.  Comcast’s losses in the distribution market (from angry consumers switching ISPs) might be less than its gains in the content market (from reducing competition there).

It seems, then, that the “disease” that might warrant a regulatory fix is an anticompetitive vertical restraint of trade: a business practice in one market (distribution) that could restrain trade in another market (content production) and thereby reduce overall output in that market.

Catalog the Available Remedies.  The statutory landscape provides at least three potential remedies for this disease.

The simplest approach would be to leave the matter to antitrust, which applies in the absence of more focused regulation.  In recent decades, courts have revised the standards governing vertical restraints of trade so that antitrust, which used to treat such restraints in a ham-fisted fashion, now does a pretty good job separating pro-consumer restraints from anti-consumer ones.

A second legally available approach would be to craft narrowly tailored rules precluding ISPs from blocking, degrading, or favoring particular Internet content.  The U.S. Court of Appeals for the D.C. Circuit held that Section 706 of the 1996 Telecommunications Act empowered the FCC to adopt targeted net neutrality rules, even if ISPs are not classified as common carriers.  The court insisted the that rules not treat ISPs as common carriers (if they are not officially classified as such), but it provided a road map for tailored net neutrality rules. The FCC pursued this targeted, rules-based approach until President Obama pushed for a third approach.

In November 2014, reeling from a shellacking in the  midterm elections and hoping to shore up his base, President Obama posted a video calling on the Commission to assure net neutrality by reclassifying ISPs as common carriers.  Such reclassification would subject ISPs to Title II of the 1934 Communications Act, giving the FCC broad power to assure that their business practices are “just and reasonable.”  Prodded by the President, the nominally independent commissioners abandoned their targeted, rules-based approach and voted to regulate ISPs like utilities.  They then used their enhanced regulatory authority to impose rules forbidding the blocking, throttling, or paid prioritization of Internet content.

Assess the Remedies’ Limitations, Implementation Difficulties, and Side Effects.   The three legally available remedies — antitrust, tailored rules under Section 706, and broad oversight under Title II — offer different pros and cons, as I explained in How to Regulate:

The choice between antitrust and direct regulation generally (under either Section 706 or Title II) involves a tradeoff between flexibility and determinacy. Antitrust is flexible but somewhat indeterminate; it would condemn non-neutral network management practices that are likely to injure consumers, but it would permit such practices if they would lower costs, improve quality, or otherwise enhance consumer welfare. The direct regulatory approaches are rigid but clearer; they declare all instances of non-neutral network management to be illegal per se.

Determinacy and flexibility influence decision and error costs.  Because they are more determinate, ex ante rules should impose lower decision costs than would antitrust. But direct regulation’s inflexibility—automatic condemnation, no questions asked—will generate higher error costs. That’s because non-neutral network management is often good for end users. For example, speeding up the transmission of content for which delivery lags are particularly detrimental to the end-user experience (e.g., an Internet telephone call, streaming video) at the expense of content that is less lag-sensitive (e.g., digital photographs downloaded from a photo-sharing website) can create a net consumer benefit and should probably be allowed. A per se rule against non-neutral network management would therefore err fairly frequently. Antitrust’s flexible approach, informed by a century of economic learning on the output effects of contractual restraints between vertically related firms (like content producers and distributors), would probably generate lower error costs.

Although both antitrust and direct regulation offer advantages vis-à-vis each other, this isn’t simply a wash. The error cost advantage antitrust holds over direct regulation likely swamps direct regulation’s decision cost advantage. Extensive experience with vertical restraints on distribution have shown that they are usually good for consumers. For that reason, antitrust courts in recent decades have discarded their old per se rules against such practices—rules that resemble the FCC’s direct regulatory approach—in favor of structured rules of reason that assess liability based on specific features of the market and restraint at issue. While these rules of reason (standards, really) may be less determinate than the old, error-prone per se rules, they are not indeterminate. By relying on past precedents and the overarching principle that legality turns on consumer welfare effects, business planners and adjudicators ought to be able to determine fairly easily whether a non-neutral network management practice passes muster. Indeed, the fact that the FCC has uncovered only four instances of anticompetitive network management over the commercial Internet’s entire history—a period in which antitrust, but not direct regulation, has governed ISPs—suggests that business planners are capable of determining what behavior is off-limits. Direct regulation’s per se rule against non-neutral network management is thus likely to add error costs that exceed any reduction in decision costs. It is probably not the remedy that would be selected under this book’s recommended approach.

In any event, direct regulation under Title II, the currently prevailing approach, is certainly not the optimal way to address potentially anticompetitive instances of non-neutral network management by ISPs. Whereas any ex ante   regulation of network management will confront the familiar knowledge problem, opting for direct regulation under Title II, rather than the more cabined approach under Section 706, adds adverse public choice concerns to the mix.

As explained earlier, reclassifying ISPs to bring them under Title II empowers the FCC to scrutinize the “justice” and “reasonableness” of nearly every aspect of every arrangement between content providers, ISPs, and consumers. Granted, the current commissioners have pledged not to exercise their Title II authority beyond mandating network neutrality, but public choice insights would suggest that this promised forbearance is unlikely to endure. FCC officials, who remain self-interest maximizers even when acting in their official capacities, benefit from expanding their regulatory turf; they gain increased power and prestige, larger budgets to manage, a greater ability to “make or break” businesses, and thus more opportunity to take actions that may enhance their future career opportunities. They will therefore face constant temptation to exercise the Title II authority that they have committed, as of now, to leave fallow. Regulated businesses, knowing that FCC decisions are key to their success, will expend significant resources lobbying for outcomes that benefit them or impair their rivals. If they don’t get what they want because of the commissioners’ voluntary forbearance, they may bring legal challenges asserting that the Commission has failed to assure just and reasonable practices as Title II demands. Many of the decisions at issue will involve the familiar “concentrated benefits/diffused costs” dynamic that tends to result in underrepresentation by those who are adversely affected by a contemplated decision. Taken together, these considerations make it unlikely that the current commissioners’ promised restraint will endure. Reclassification of ISPs so that they are subject to Title II regulation will probably lead to additional constraints on edge providers and ISPs.

It seems, then, that mandating net neutrality under Title II of the 1934 Communications Act is the least desirable of the three statutorily available approaches to addressing anticompetitive network management practices. The Title II approach combines the inflexibility and ensuing error costs of the Section 706 direct regulation approach with the indeterminacy and higher decision costs of an antitrust approach. Indeed, the indeterminacy under Title II is significantly greater than that under antitrust because the “just and reasonable” requirements of the Communications Act, unlike antitrust’s reasonableness requirements (no unreasonable restraint of trade, no unreasonably exclusionary conduct) are not constrained by the consumer welfare principle. Whereas antitrust always protects consumers, not competitors, the FCC may well decide that business practices in the Internet space are unjust or unreasonable solely because they make things harder for the perpetrator’s rivals. Business planners are thus really “at sea” when it comes to assessing the legality of novel practices.

All this implies that Internet businesses regulated by Title II need to court the FCC’s favor, that FCC officials have more ability than ever to manipulate government power to private ends, that organized interest groups are well-poised to secure their preferences when the costs are great but widely dispersed, and that the regulators’ dictated outcomes—immune from market pressures reflecting consumers’ preferences—are less likely to maximize net social welfare. In opting for a Title II solution to what is essentially a market power problem, the powers that be gave short shrift to an antitrust approach, even though there was no natural monopoly justification for direct regulation. They paid little heed to the adverse consequences likely to result from rigid per se rules adopted under a highly discretionary (and politically manipulable) standard. They should have gone back to basics, assessing the disease to be remedied (market power), the full range of available remedies (including antitrust), and the potential side effects of each. In other words, they could’ve used this book.

How to Regulate‘s full discussion of net neutrality and Title II is here:  Net Neutrality Discussion in How to Regulate.

Unexpectedly, on the day that the white copy of the upcoming repeal of the 2015 Open Internet Order was published, a mobile operator in Portugal with about 7.5 million subscribers is garnering a lot of attention. Curiously, it’s not because Portugal is a beautiful country (Iker Casillas’ Instagram feed is dope) nor because Portuguese is a beautiful romance language.

Rather it’s because old-fashioned misinformation is being peddled to perpetuate doomsday images that Portuguese ISPs have carved the Internet into pieces — and if the repeal of the 2015 Open Internet Order passes, the same butchery is coming to an AT&T store near you.

Much ado about data

This tempest in the teacup is about mobile data plans, specifically the ability of mobile subscribers to supplement their data plan (typically ranging from 200 MB to 3 GB per month) with additional 10 GB data packages containing specific bundles of apps – messaging apps, social apps, video apps, music apps, and email and cloud apps. Each additional 10 GB data package costs EUR 6.99 per month and Meo (the mobile operator) also offers its own zero rated apps. Similar plans have been offered in Portugal since at least 2012.

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These data packages are a clear win for mobile subscribers, especially pre-paid subscribers who tend to be at a lower income level than post-paid subscribers. They allow consumers to customize their plan beyond their mobile broadband subscription, enabling them to consume data in ways that are better attuned to their preferences. Without access to these data packages, consuming an additional 10 GB of data would cost each user an additional EUR 26 per month and require her to enter into a two year contract.

These discounted data packages also facilitate product differentiation among mobile operators that offer a variety of plans. Keeping with the Portugal example, Vodafone Portugal offers 20 GB of additional data for certain apps (Facebook, Instagram, SnapChat, and Skype, among others) with the purchase of a 3 GB mobile data plan. Consumers can pick which operator offers the best plan for them.

In addition, data packages like the ones in question here tend to increase the overall consumption of content, reduce users’ cost of obtaining information, and allow for consumers to experiment with new, less familiar apps. In short, they are overwhelmingly pro-consumer.

Even if Portugal actually didn’t have net neutrality rules, this would be the furthest thing from the apocalypse critics make it out to be.

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Net Neutrality in Portugal

But, contrary to activists’ misinformation, Portugal does have net neutrality rules. The EU implemented its net neutrality framework in November 2015 as a regulation, meaning that the regulation became the law of the EU when it was enacted, and national governments, including Portugal, did not need to transpose it into national legislation.

While the regulation was automatically enacted in Portugal, the regulation and the 2016 EC guidelines left the decision of whether to allow sponsored data and zero rating plans (the Regulation likely classifies data packages at issue here to be zero rated plans because they give users a lot of data for a low price) in the hands of national regulators. While Portugal is still formulating the standard it will use to evaluate sponsored data and zero rating under the EU’s framework, there is little reason to think that this common practice would be disallowed in Portugal.

On average, in fact, despite its strong net neutrality regulation, the EU appears to be softening its stance toward zero rating. This was evident in a recent EC competition policy authority (DG-Comp) study concluding that there is little reason to believe that such data practices raise concerns.

The activists’ willful misunderstanding of clearly pro-consumer data plans and purposeful mischaracterization of Portugal as not having net neutrality rules are inflammatory and deceitful. Even more puzzling for activists (but great for consumers) is their position given there is nothing in the 2015 Open Internet Order that would prevent these types of data packages from being offered in the US so long as ISPs are transparent with consumers.

This week, the International Center for Law & Economics filed an ex parte notice in the FCC’s Restoring Internet Freedom docket. In it, we reviewed two of the major items that were contained in our formal comments. First, we noted that

the process by which [the Commission] enacted the 2015 [Open Internet Order]… demonstrated scant attention to empirical evidence, and even less attention to a large body of empirical and theoretical work by academics. The 2015 OIO, in short, was not supported by reasoned analysis.

Further, on the issue of preemption, we stressed that

[F]ollowing the adoption of an Order in this proceeding, a number of states may enact their own laws or regulations aimed at regulating broadband service… The resulting threat of a patchwork of conflicting state regulations, many of which would be unlikely to further the public interest, is a serious one…

[T]he Commission should explicitly state that… broadband services may not be subject to certain forms of state regulations, including conduct regulations that prescribe how ISPs can use their networks. This position would also be consistent with the FCC’s treatment of interstate information services in the past.

Our full ex parte comments can be viewed here.