Archives For net neutrality

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allows Congress to vote to repeal rules recently adopted by federal agencies; upon a successful CRA vote, the rules are rescinded and the agency is prohibited from adopting substantially similar rules in the future.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.

As the Federal Communications (FCC) prepares to revoke its economically harmful “net neutrality” order and replace it with a free market-oriented “Restoring Internet Freedom Order,” the FCC and the Federal Trade Commission (FTC) commendably have announced a joint policy for cooperation on online consumer protection.  According to a December 11 FTC press release:

The Federal Trade Commission and Federal Communications Commission (FCC) announced their intent to enter into a Memorandum of Understanding (MOU) under which the two agencies would coordinate online consumer protection efforts following the adoption of the Restoring Internet Freedom Order.

“The Memorandum of Understanding will be a critical benefit for online consumers because it outlines the robust process by which the FCC and FTC will safeguard the public interest,” said FCC Chairman Ajit Pai. “Instead of saddling the Internet with heavy-handed regulations, we will work together to take targeted action against bad actors. This approach protected a free and open Internet for many years prior to the FCC’s 2015 Title II Order and it will once again following the adoption of the Restoring Internet Freedom Order.”

“The FTC is committed to ensuring that Internet service providers live up to the promises they make to consumers,” said Acting FTC Chairman Maureen K. Ohlhausen. “The MOU we are developing with the FCC, in addition to the decades of FTC law enforcement experience in this area, will help us carry out this important work.”

The draft MOU, which is being released today, outlines a number of ways in which the FCC and FTC will work together to protect consumers, including:

The FCC will review informal complaints concerning the compliance of Internet service providers (ISPs) with the disclosure obligations set forth in the new transparency rule. Those obligations include publicly providing information concerning an ISP’s practices with respect to blocking, throttling, paid prioritization, and congestion management. Should an ISP fail to make the required disclosures—either in whole or in part—the FCC will take enforcement action.

The FTC will investigate and take enforcement action as appropriate against ISPs concerning the accuracy of those disclosures, as well as other deceptive or unfair acts or practices involving their broadband services.

The FCC and the FTC will broadly share legal and technical expertise, including the secure sharing of informal complaints regarding the subject matter of the Restoring Internet Freedom Order. The two agencies also will collaborate on consumer and industry outreach and education.

The FCC’s proposed Restoring Internet Freedom Order, which the agency is expected to vote on at its December 14 meeting, would reverse a 2015 agency decision to reclassify broadband Internet access service as a Title II common carrier service. This previous decision stripped the FTC of its authority to protect consumers and promote competition with respect to Internet service providers because the FTC does not have jurisdiction over common carrier activities.

The FCC’s Restoring Internet Freedom Order would return jurisdiction to the FTC to police the conduct of ISPs, including with respect to their privacy practices. Once adopted, the order will also require broadband Internet access service providers to disclose their network management practices, performance, and commercial terms of service. As the nation’s top consumer protection agency, the FTC will be responsible for holding these providers to the promises they make to consumers.

Particularly noteworthy is the suggestion that the FCC and FTC will work to curb regulatory duplication and competitive empire building – a boon to Internet-related businesses that would be harmed by regulatory excess and uncertainty.  Stay tuned for future developments.

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.

Today the International Center for Law & Economics (ICLE) submitted an amicus brief urging the Supreme Court to review the DC Circuit’s 2016 decision upholding the FCC’s 2015 Open Internet Order. The brief was authored by Geoffrey A. Manne, Executive Director of ICLE, and Justin (Gus) Hurwitz, Assistant Professor of Law at the University of Nebraska College of Law and ICLE affiliate, with able assistance from Kristian Stout and Allen Gibby of ICLE. Jeffrey A. Mandell of the Wisconsin law firm of Stafford Rosenbaum collaborated in drafting the brief and provided invaluable pro bono legal assistance, for which we are enormously grateful. Laura Lamansky of Stafford Rosenbaum also assisted. 

The following post discussing the brief was written by Jeff Mandell (originally posted here).

Courts generally defer to agency expertise when reviewing administrative rules that regulate conduct in areas where Congress has delegated authority to specialized executive-branch actors. An entire body of law—administrative law—governs agency actions and judicial review of those actions. And at the federal level, courts grant agencies varying degrees of deference, depending on what kind of function the agency is performing, how much authority Congress delegated, and the process by which the agency adopts or enforces policies.

Should courts be more skeptical when an agency changes a policy position, especially if the agency is reversing prior policy without a corresponding change to the governing statute? Daniel Berninger v. Federal Communications Commission, No. 17-498 (U.S.), raises these questions. And this week Stafford Rosenbaum was honored to serve as counsel of record for the International Center for Law & Economics (“ICLE”) in filing an amicus curiae brief urging the U.S. Supreme Court to hear the case and to answer these questions.

ICLE’s amicus brief highlights new academic research suggesting that systematic problems undermine judicial review of agency changes in policy. The brief also points out that judicial review is complicated by conflicting signals from the Supreme Court about the degree of deference that courts should accord agencies in reviewing reversals of prior policy. And the brief argues that the specific policy change at issue in this case lacks a sufficient basis but was affirmed by the court below as the result of a review that was, but should not have been, “particularly deferential.”

In 2015, the Federal Communications Commission (“FCC”) issued the Open Internet Order (“OIO”), which required Internet Service Providers to abide by a series of regulations popularly referred to as net neutrality. To support these regulations, the FCC interpreted the Communications Act of 1934 to grant it authority to heavily regulate broadband internet service. This interpretation reversed a long-standing agency understanding of the statute as permitting only limited regulation of broadband service.

The FCC ostensibly based the OIO on factual and legal analysis. However, ICLE argues, the OIO is actually based on questionable factual reinterpretations and misunderstanding of statutory interpretation adopted more in order to support radical changes in FCC policy than for their descriptive accuracy. When a variety of interested parties challenged the OIO, the U.S. Court of Appeals for the D.C. Circuit affirmed the regulations. In doing so, the court afforded substantial deference to the FCC—so much that the D.C. Circuit never addressed the reasonableness of the FCC’s decisionmaking process in reversing prior policy.

ICLE’s amicus brief argues that the D.C. Circuit’s decision “is both in tension with [the Supreme] Court’s precedents and, more, raises exceptionally important and previously unaddressed questions about th[e] Court’s precedents on judicial review of agency changes of policy.” Without further guidance from the Supreme Court, the brief argues, “there is every reason to believe” the FCC will again reverse its position on broadband regulation, such that “the process will become an endless feedback loop—in the case of this regulation and others—at great cost not only to regulated entities and their consumers, but also to the integrity of the regulatory process.”

The ramifications of the Supreme Court accepting this case would be twofold. First, administrative agencies would gain guidance for their decisionmaking processes in considering changes to existing policies. Second, lower courts would gain clarity on agency deference issues, making judicial review more uniform and appropriate where agencies reverse prior policy positions.

Read the full brief here.

It’s fitting that FCC Chairman Ajit Pai recently compared his predecessor’s jettisoning of the FCC’s light touch framework for Internet access regulation without hard evidence to the Oklahoma City Thunder’s James Harden trade. That infamous deal broke up a young nucleus of three of the best players in the NBA in 2012 because keeping all three might someday create salary cap concerns. What few saw coming was a new TV deal in 2015 that sent the salary cap soaring.

If it’s hard to predict how the market will evolve in the closed world of professional basketball, predictions about the path of Internet innovation are an order of magnitude harder — especially for those making crucial decisions with a lot of money at stake.

The FCC’s answer for what it considered to be the dangerous unpredictability of Internet innovation was to write itself a blank check of authority to regulate ISPs in the 2015 Open Internet Order (OIO), embodied in what is referred to as the “Internet conduct standard.” This standard expanded the scope of Internet access regulation well beyond the core principle of preserving openness (i.e., ensuring that any legal content can be accessed by all users) by granting the FCC the unbounded, discretionary authority to define and address “new and novel threats to the Internet.”

When asked about what the standard meant (not long after writing it), former Chairman Tom Wheeler replied,

We don’t really know. We don’t know where things will go next. We have created a playing field where there are known rules, and the FCC will sit there as a referee and will throw the flag.

Somehow, former Chairman Wheeler would have us believe that an amorphous standard that means whatever the agency (or its Enforcement Bureau) says it means created a playing field with “known rules.” But claiming such broad authority is hardly the light-touch approach marketed to the public. Instead, this ill-conceived standard allows the FCC to wade as deeply as it chooses into how an ISP organizes its business and how it manages its network traffic.

Such an approach is destined to undermine, rather than further, the objectives of Internet openness, as embodied in Chairman Powell’s 2005 Internet Policy Statement:

To foster creation, adoption and use of Internet broadband content, applications, services and attachments, and to ensure consumers benefit from the innovation that comes from competition.

Instead, the Internet conduct standard is emblematic of how an off-the-rails quest to heavily regulate one specific component of the complex Internet ecosystem results in arbitrary regulatory imbalances — e.g., between ISPs and over-the-top (OTT) or edge providers that offer similar services such as video streaming or voice calling.

As Boston College Law Professor, Dan Lyons, puts it:

While many might assume that, in theory, what’s good for Netflix is good for consumers, the reality is more complex. To protect innovation at the edge of the Internet ecosystem, the Commission’s sweeping rules reduce the opportunity for consumer-friendly innovation elsewhere, namely by facilities-based broadband providers.

This is no recipe for innovation, nor does it coherently distinguish between practices that might impede competition and innovation on the Internet and those that are merely politically disfavored, for any reason or no reason at all.

Free data madness

The Internet conduct standard’s unholy combination of unfettered discretion and the impulse to micromanage can (and will) be deployed without credible justification to the detriment of consumers and innovation. Nowhere has this been more evident than in the confusion surrounding the regulation of “free data.”

Free data, like T-Mobile’s Binge On program, is data consumed by a user that has been subsidized by a mobile operator or a content provider. The vertical arrangements between operators and content providers creating the free data offerings provide many benefits to consumers, including enabling subscribers to consume more data (or, for low-income users, to consume data in the first place), facilitating product differentiation by mobile operators that offer a variety of free data plans (including allowing smaller operators the chance to get a leg up on competitors by assembling a market-share-winning plan), increasing the overall consumption of content, and reducing users’ cost of obtaining information. It’s also fundamentally about experimentation. As the International Center for Law & Economics (ICLE) recently explained:

Offering some services at subsidized or zero prices frees up resources (and, where applicable, data under a user’s data cap) enabling users to experiment with new, less-familiar alternatives. Where a user might not find it worthwhile to spend his marginal dollar on an unfamiliar or less-preferred service, differentiated pricing loosens the user’s budget constraint, and may make him more, not less, likely to use alternative services.

In December 2015 then-Chairman Tom Wheeler used his newfound discretion to launch a 13-month “inquiry” into free data practices before preliminarily finding some to be in violation of the standard. Without identifying any actual harm, Wheeler concluded that free data plans “may raise” economic and public policy issues that “may harm consumers and competition.”

After assuming the reins at the FCC, Chairman Pai swiftly put an end to that nonsense, saying that the Commission had better things to do (like removing barriers to broadband deployment) than denying free data plans that expand Internet access and are immensely popular, especially among low-income Americans.

The global morass of free data regulation

But as long as the Internet conduct standard remains on the books, it implicitly grants the US’s imprimatur to harmful policies and regulatory capriciousness in other countries that look to the US for persuasive authority. While Chairman Pai’s decisive intervention resolved the free data debate in the US (at least for now), other countries are still grappling with whether to prohibit the practice, allow it, or allow it with various restrictions.

In Europe, the 2016 EC guidelines left the decision of whether to allow the practice in the hands of national regulators. Consequently, some regulators — in Hungary, Sweden, and the Netherlands (although there the ban was recently overturned in court) — have banned free data practices  while others — in Denmark, Germany, Spain, Poland, the United Kingdom, and Ukraine — have not. And 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, a state of affairs that is compounded by a lack of data on the consequences of various approaches to their regulation.

In Canada this year, the CRTC issued a decision adopting restrictive criteria under which to evaluate free data plans. The criteria include assessing the degree to which the treatment of data is agnostic, whether the free data offer is exclusive to certain customers or certain content providers, the impact on Internet openness and innovation, and whether there is financial compensation involved. The standard is open-ended, and free data plans as they are offered in the US would “likely raise concerns.”

Other regulators are contributing to the confusion through ambiguously framed rules, such as that of the Chilean regulator, Subtel. In a 2014 decision, it found that a free data offer of specific social network apps was in breach of Chile’s Internet rules. In contrast to what is commonly reported, however, Subtel did not ban free data. Instead, it required mobile operators to change how they promote such services, requiring them to state that access to Facebook, Twitter and WhatsApp were offered “without discounting the user’s balance” instead of “at no cost.” It also required them to disclose the amount of time the offer would be available, but imposed no mandatory limit.

In addition to this confusing regulatory make-work governing how operators market free data plans, the Chilean measures also require that mobile operators offer free data to subscribers who pay for a data plan, in order to ensure free data isn’t the only option users have to access the Internet.

The result is that in Chile today free data plans are widely offered by Movistar, Claro, and Entel and include access to apps such as Facebook, WhatsApp, Twitter, Instagram, Pokemon Go, Waze, Snapchat, Apple Music, Spotify, Netflix or YouTube — even though Subtel has nominally declared such plans to be in violation of Chile’s net neutrality rules.

Other regulators are searching for palatable alternatives to both flex their regulatory muscle to govern Internet access, while simultaneously making free data work. The Indian regulator, TRAI, famously banned free data in February 2016. But the story doesn’t end there. After seeing the potential value of free data in unserved and underserved, low-income areas, TRAI proposed implementing government-sanctioned free data. The proposed scheme would provide rural subscribers with 100 MB of free data per month, funded through the country’s universal service fund. To ensure that there would be no vertical agreements between content providers and mobile operators, TRAI recommended introducing third parties, referred to as “aggregators,” that would facilitate mobile-operator-agnostic arrangements.

The result is a nonsensical, if vaguely well-intentioned, threading of the needle between the perceived need to (over-)regulate access providers and the determination to expand access. Notwithstanding the Indian government’s awareness that free data will help to close the digital divide and enhance Internet access, in other words, it nonetheless banned private markets from employing private capital to achieve that very result, preferring instead non-market processes which are unlikely to be nearly as nimble or as effective — and yet still ultimately offer “non-neutral” options for consumers.

Thinking globally, acting locally (by ditching the Internet conduct standard)

Where it is permitted, free data is undergoing explosive adoption among mobile operators. Currently in the US, for example, all major mobile operators offer some form of free data or unlimited plan to subscribers. And, as a result, free data is proving itself as a business model for users’ early stage experimentation and adoption of augmented reality, virtual reality and other cutting-edge technologies that represent the Internet’s next wave — but that also use vast amounts of data. Were the US to cut off free data at the legs under the OIO absent hard evidence of harm, it would substantially undermine this innovation.

The application of the nebulous Internet conduct standard to free data is a microcosm of the current incoherence: It is a rule rife with a parade of uncertainties and only theoretical problems, needlessly saddling companies with enforcement risk, all in the name of preserving and promoting innovation and openness. As even some of the staunchest proponents of net neutrality have recognized, only companies that can afford years of litigation can be expected to thrive in such an environment.

In the face of confusion and uncertainty globally, the US is now poised to provide leadership grounded in sound policy that promotes innovation. As ICLE noted last month, Chairman Pai took a crucial step toward re-imposing economic rigor and the rule of law at the FCC by questioning the unprecedented and ill-supported expansion of FCC authority that undergirds the OIO in general and the Internet conduct standard in particular. Today the agency will take the next step by voting on Chairman Pai’s proposed rulemaking. Wherever the new proceeding leads, it’s a welcome opportunity to analyze the issues with a degree of rigor that has thus far been appallingly absent.

And we should not forget that there’s a direct solution to these ambiguities that would avoid the undulations of subsequent FCC policy fights: Congress could (and should) pass legislation implementing a regulatory framework grounded in sound economics and empirical evidence that allows for consumers to benefit from the vast number of procompetitive vertical agreements (such as free data plans), while still facilitating a means for policing conduct that may actually harm consumers.

The Golden State Warriors are the heavy odds-on favorite to win another NBA Championship this summer, led by former OKC player Kevin Durant. And James Harden is a contender for league MVP. We can’t always turn back the clock on a terrible decision, hastily made before enough evidence has been gathered, but Chairman Pai’s efforts present a rare opportunity to do so.

Last week the International Center for Law & Economics and I filed an amicus brief in the DC Circuit in support of en banc review of the court’s decision to uphold the FCC’s 2015 Open Internet Order.

In our previous amicus brief before the panel that initially reviewed the OIO, we argued, among other things, that

In order to justify its Order, the Commission makes questionable use of important facts. For instance, the Order’s ban on paid prioritization ignores and mischaracterizes relevant record evidence and relies on irrelevant evidence. The Order also omits any substantial consideration of costs. The apparent necessity of the Commission’s aggressive treatment of the Order’s factual basis demonstrates the lengths to which the Commission must go in its attempt to fit the Order within its statutory authority.

Our brief supporting en banc review builds on these points to argue that

By reflexively affording substantial deference to the FCC in affirming the Open Internet Order (“OIO”), the panel majority’s opinion is in tension with recent Supreme Court precedent….

The panel majority need not have, and arguably should not have, afforded the FCC the level of deference that it did. The Supreme Court’s decisions in State Farm, Fox, and Encino all require a more thorough vetting of the reasons underlying an agency change in policy than is otherwise required under the familiar Chevron framework. Similarly, Brown and Williamson, Utility Air Regulatory Group, and King all indicate circumstances in which an agency construction of an otherwise ambiguous statute is not due deference, including when the agency interpretation is a departure from longstanding agency understandings of a statute or when the agency is not acting in an expert capacity (e.g., its decision is based on changing policy preferences, not changing factual or technical considerations).

In effect, the panel majority based its decision whether to afford the FCC deference upon deference to the agency’s poorly supported assertions that it was due deference. We argue that this is wholly inappropriate in light of recent Supreme Court cases.

Moreover,

The panel majority failed to appreciate the importance of granting Chevron deference to the FCC. That importance is most clearly seen at an aggregate level. In a large-scale study of every Court of Appeals decision between 2003 and 2013, Professors Kent Barnett and Christopher Walker found that a court’s decision to defer to agency action is uniquely determinative in cases where, as here, an agency is changing established policy.

Kent Barnett & Christopher J. Walker, Chevron In the Circuit Courts 61, Figure 14 (2016), available at ssrn.com/abstract=2808848.

Figure 14 from Barnett & Walker, as reproduced in our brief.

As  that study demonstrates,

agency decisions to change established policy tend to present serious, systematic defects — and [thus that] it is incumbent upon this court to review the panel majority’s decision to reflexively grant Chevron deference. Further, the data underscore the importance of the Supreme Court’s command in Fox and Encino that agencies show good reason for a change in policy; its recognition in Brown & Williamson and UARG that departures from existing policy may fall outside of the Chevron regime; and its command in King that policies not made by agencies acting in their capacity as technical experts may fall outside of the Chevron regime. In such cases, the Court essentially holds that reflexive application of Chevron deference may not be appropriate because these circumstances may tend toward agency action that is arbitrary, capricious, in excess of statutory authority, or otherwise not in accordance with law.

As we conclude:

The present case is a clear example where greater scrutiny of an agency’s decision-making process is both warranted and necessary. The panel majority all too readily afforded the FCC great deference, despite the clear and unaddressed evidence of serious flaws in the agency’s decision-making process. As we argued in our brief before the panel, and as Judge Williams recognized in his partial dissent, the OIO was based on factually inaccurate, contradicted, and irrelevant record evidence.

Read our full — and very short — amicus brief here.

Netflix’s latest net neutrality hypocrisy (yes, there have been others. See here and here, for example) involves its long-term, undisclosed throttling of its video traffic on AT&T’s and Verizon’s wireless networks, while it lobbied heavily for net neutrality rules from the FCC that would prevent just such throttling by ISPs.

It was Netflix that coined the term “strong net neutrality,” in an effort to import interconnection (the connections between ISPs and edge provider networks) into the net neutrality fold. That alone was a bastardization of what net neutrality purportedly stood for, as I previously noted:

There is a reason every iteration of the FCC’s net neutrality rules, including the latest, have explicitly not applied to backbone interconnection agreements: Interconnection over the backbone has always been open and competitive, and it simply doesn’t give rise to the kind of discrimination concerns net neutrality is meant to address.

That Netflix would prefer not to pay for delivery of its content isn’t surprising. But net neutrality regulations don’t — and shouldn’t — have anything to do with it.

But Netflix did something else with “strong net neutrality.” It tied it to consumer choice:

This weak net neutrality isn’t enough to protect an open, competitive Internet; a stronger form of net neutrality is required. Strong net neutrality additionally prevents ISPs from charging a toll for interconnection to services like Netflix, YouTube, or Skype, or intermediaries such as Cogent, Akamai or Level 3, to deliver the services and data requested by ISP residential subscribers. Instead, they must provide sufficient access to their network without charge. (Emphasis added).

A focus on consumers is laudable, of course, but when the focus is on consumers there’s no reason to differentiate between ISPs (to whom net neutrality rules apply) and content providers entering into contracts with ISPs to deliver their content (to whom net neutrality rules don’t apply).

And Netflix has just showed us exactly why that’s the case.

Netflix can and does engage in management of its streams in order (presumably) to optimize consumer experience as users move between networks, devices and viewers (e.g., native apps vs Internet browser windows) with very different characteristics and limitations. That’s all well and good. But as we noted in our Policy Comments in the FCC’s Open Internet Order proceeding,

In this circumstance, particularly when the content in question is Netflix, with 30% of network traffic, both the network’s and the content provider’s transmission decisions may be determinative of network quality, as may the users’ device and application choices.

As a 2011 paper by a group of network engineers studying the network characteristics of video streaming data from Netflix and YouTube noted:

This is a concern as it means that a sudden change of application or container in a large population might have a significant impact on the network traffic. Considering the very fast changes in trends this is a real possibility, the most likely being a change from Flash to HTML5 along with an increase in the use of mobile devices…. [S]treaming videos at high resolutions can result in smoother aggregate traffic while at the same time linearly increase the aggregate data rate due to video streaming.

Again, a concern with consumers is admirable, but Netflix isn’t concerned with consumers. It’s concerned at most with consumers of Netflix, while they are consuming Netflix. But the reality is that Netflix’s content management decisions can adversely affect consumers overall, including its own subscribers when they aren’t watching Netflix.

And here’s the huge irony. The FCC’s net neutrality rules are tailor-made to guarantee that Netflix will never have any incentive to take these externalities into account in its own decisions. What’s more, they ensure that ISPs are severely hamstrung in managing their networks for the benefit of all consumers, not least because their interconnection deals with large content providers like Netflix are now being closely scrutinized.

It’s great that Netflix thinks it should manage its video delivery to optimize viewing under different network conditions. But net neutrality rules ensure that Netflix bears no cost for overwhelming the network in the process. Essentially, short of building new capacity — at great expense to all ISP subscribers, of course — ISPs can’t do much about it, either, under the rules. And, of course, the rules also make it impossible for ISPs to negotiate for financial help from Netflix (or its heaviest users) in paying for those upgrades.

On top of this, net neutrality advocates have taken aim at usage-based billing and other pricing practices that would help with the problem by enabling ISPs to charge their heaviest users more in order to alleviate the inherent subsidy by normal users that flat-rate billing entails. (Netflix itself, as one of the articles linked above discusses at length, is hypocritically inconsistent on this score).

As we also noted in our OIO Policy Comments:

The idea that consumers and competition generally are better off when content providers face no incentive to take account of congestion externalities in their pricing (or when users have no incentive to take account of their own usage) runs counter to basic economic logic and is unsupported by the evidence. In fact, contrary to such claims, usage-based pricing, congestion pricing and sponsored content, among other nonlinear pricing models, would, in many circumstances, further incentivize networks to expand capacity (not create artificial scarcity).

Some concern for consumers. Under Netflix’s approach consumers get it coming and going: Either their non-Netflix traffic is compromised for the sake of Netflix’s traffic, or they have to pay higher subscription fees to ISPs for the privilege of accommodating Netflix’s ever-expanding traffic loads (4K videos, anyone?) — whether they ever use Netflix or not.

Sometimes, apparently, Netflix throttles its own traffic in order to “help” a few consumers. (That it does so without disclosing the practice is pretty galling, especially given the enhanced transparency rules in the Open Internet Order — something Netflix also advocated for, and which also apply only to ISPs and not to content providers). But its self-aggrandizing advocacy for the FCC’s latest net neutrality rules reveals that its first priority is to screw over consumers, so long as it can shift the blame and the cost to others.