Archives For Restoring Internet Freedom Order

The Return of (De Facto) Rate Regulation: Title II Will Slow Broadband Deployment and Access

Geoff Manne, Kristian Stout & Ben Sperry — 8 February 2022

President Joe Biden’s nomination of Gigi Sohn to serve on the Federal Communications Commission (FCC)—scheduled for a second hearing before the Senate Commerce Committee Feb. 9—has been met with speculation that it presages renewed efforts at the FCC to enforce net neutrality. A veteran of tech policy battles, Sohn served as counselor to former FCC Chairman Tom Wheeler at the time of the commission’s 2015 net-neutrality order.

The political prospects for Sohn’s confirmation remain uncertain, but it’s probably fair to assume a host of associated issues—such as whether to reclassify broadband as a Title II service; whether to ban paid prioritization; and whether the FCC ought to exercise forbearance in applying some provisions of Title II to broadband—are likely to be on the FCC’s agenda once the full complement of commissioners is seated. Among these is an issue that doesn’t get the attention it merits: rate regulation of broadband services.

History has, by now, definitively demonstrated that the FCC’s January 2018 repeal of the Open Internet Order didn’t produce the parade of horribles that net-neutrality advocates predicted. Most notably, paid prioritization—creating so-called “fast lanes” and “slow lanes” on the Internet—has proven a non-issue. Prioritization is a longstanding and widespread practice and, as discussed at length in this piece from The Verge on Netflix’s Open Connect technology, the Internet can’t work without some form of it.

Indeed, the Verge piece makes clear that even paid prioritization can be an essential tool for edge providers. As we’ve previously noted, paid prioritization offers an economically efficient means to distribute the costs of network optimization. As Greg Sidak and David Teece put it:

Superior QoS is a form of product differentiation, and it therefore increases welfare by increasing the production choices available to content and applications providers and the consumption choices available to end users…. [A]s in other two-sided platforms, optional business-to-business transactions for QoS will allow broadband network operators to reduce subscription prices for broadband end users, promoting broadband adoption by end users, which will increase the value of the platform for all users.

The Perennial Threat of Price Controls

Although only hinted at during Sohn’s initial confirmation hearing in December, the real action in the coming net-neutrality debate is likely to be over rate regulation.

Pressed at that December hearing by Sen. Marsha Blackburn (R-Tenn.) to provide a yes or no answer as to whether she supports broadband rate regulation, Sohn said no, before adding “That was an easy one.” Current FCC Chair Jessica Rosenworcel has similarly testified that she wants to continue an approach that “expressly eschew[s] future use of prescriptive, industry-wide rate regulation.”

But, of course, rate regulation is among the defining features of most Title II services. While then-Chairman Wheeler promised to forebear from rate regulation at the time of the FCC’s 2015 Open Internet Order (OIO), stating flatly that “we are not trying to regulate rates,” this was a small consolation. At the time, the agency decided to waive “the vast majority of rules adopted under Title II” (¶ 51), but it also made clear that the commission would “retain adequate authority to” rescind such forbearance (¶ 538) in the future. Indeed, one could argue that the reason the 2015 order needed to declare resolutely that “we do not and cannot envision adopting new ex ante rate regulation of broadband Internet access service in the future” (¶ 451)) is precisely because of how equally resolute it was that the Commission would retain basic Title II authority, including the authority to impose rate regulation (“we are not persuaded that application of sections 201 and 202 is not necessary to ensure just, reasonable, and nondiscriminatory conduct by broadband providers and for the protection of consumers” (¶ 446)).

This was no mere parsing of words. The 2015 order takes pains to assert repeatedly that forbearance was conditional and temporary, including with respect to rate regulation (¶ 497). As then-Commissioner Ajit Pai pointed out in his dissent from the OIO:

The plan is quite clear about the limited duration of its forbearance decisions, stating that the FCC will revisit them in the future and proceed in an incremental manner with respect to additional regulation. In discussing additional rate regulation, tariffs, last-mile unbundling, burdensome administrative filing requirements, accounting standards, and entry and exit regulation, the plan repeatedly states that it is only forbearing “at this time.” For others, the FCC will not impose rules “for now.” (p. 325)

For broadband providers, the FCC having the ability even to threaten rate regulation could disrupt massive amounts of investment in network buildout. And there is good reason for the sector to be concerned about the prevailing political winds, given the growing (and misguided) focus on price controls and their potential to be used to stem inflation.

Indeed, politicians’ interest in controls on broadband rates predates the recent supply-chain-driven inflation. For example, President Biden’s American Jobs Plan called on Congress to reduce broadband prices:

President Biden believes that building out broadband infrastructure isn’t enough. We also must ensure that every American who wants to can afford high-quality and reliable broadband internet. While the President recognizes that individual subsidies to cover internet costs may be needed in the short term, he believes continually providing subsidies to cover the cost of overpriced internet service is not the right long-term solution for consumers or taxpayers. Americans pay too much for the internet – much more than people in many other countries – and the President is committed to working with Congress to find a solution to reduce internet prices for all Americans. (emphasis added)

Senate Majority Leader Chuck Schumer (D-N.Y.) similarly suggested in a 2018 speech that broadband affordability should be ensured:

[We] believe that the Internet should be kept free and open like our highways, accessible and affordable to every American, regardless of ability to pay. It’s not that you don’t pay, it’s that if you’re a little guy or gal, you shouldn’t pay a lot more than the bigshots. We don’t do that on highways, we don’t do that with utilities, and we shouldn’t do that on the Internet, another modern, 21st century highway that’s a necessity.

And even Sohn herself has a history of somewhat equivocal statements regarding broadband rate regulation. In a 2018 article referencing the Pai FCC’s repeal of the 2015 rules, Sohn lamented in particular that removing the rules from Title II’s purview meant losing the “power to constrain ‘unjust and unreasonable’ prices, terms, and practices by [broadband] providers” (p. 345).

Rate Regulation by Any Other Name

Even if Title II regulation does not end up taking the form of explicit price setting by regulatory fiat, that doesn’t necessarily mean the threat of rate regulation will have been averted. Perhaps even more insidious is de facto rate regulation, in which agencies use their regulatory leverage to shape the pricing policies of providers. Indeed, Tim Wu—the progenitor of the term “net neutrality” and now an official in the Biden White House—has explicitly endorsed the use of threats by regulatory agencies in order to obtain policy outcomes:

The use of threats instead of law can be a useful choice—not simply a procedural end run. My argument is that the merits of any regulative modality cannot be determined without reference to the state of the industry being regulated. Threat regimes, I suggest, are important and are best justified when the industry is undergoing rapid change—under conditions of “high uncertainty.” Highly informal regimes are most useful, that is, when the agency faces a problem in an environment in which facts are highly unclear and evolving. Examples include periods surrounding a newly invented technology or business model, or a practice about which little is known. Conversely, in mature, settled industries, use of informal procedures is much harder to justify.

The broadband industry is not new, but it is characterized by rapid technological change, shifting consumer demands, and experimental business models. Thus, under Wu’s reasoning, it appears ripe for regulation via threat.

What’s more, backdoor rate regulation is already practiced by the U.S. Department of Agriculture (USDA) in how it distributes emergency broadband funds to Internet service providers (ISPs) that commit to net-neutrality principles. The USDA prioritizes funding for applicants that operate “their networks pursuant to a ‘wholesale’ (in other words, ‘open access’) model and provid[e] a ‘low-cost option,’ both of which unnecessarily and detrimentally inject government rate regulation into the competitive broadband marketplace.”

States have also been experimenting with broadband rate regulation in the form of “affordable broadband” mandates. For example, New York State passed the Affordable Broadband Act (ABA) in 2021, which claimed authority to assist low-income consumers by capping the price of service and mandating provision of a low-cost service tier. As the federal district court noted in striking down the law:

In Defendant’s words, the ABA concerns “Plaintiffs’ pricing practices” by creating a “price regime” that “set[s] a price ceiling,” which flatly contradicts [New York Attorney General Letitia James’] simultaneous assertion that “the ABA does not ‘rate regulate’ broadband services.” “Price ceilings” regulate rates.

The 2015 Open Internet Order’s ban on paid prioritization, couched at the time in terms of “fairness,” was itself effectively a rate regulation that set wholesale prices at zero. The order even empowered the FCC to decide the rates ISPs could charge to edge providers for interconnection or peering agreements on an individual, case-by-case basis. As we wrote at the time:

[T]he first complaint under the new Open Internet rule was brought against Time Warner Cable by a small streaming video company called Commercial Network Services. According to several news stories, CNS “plans to file a peering complaint against Time Warner Cable under the Federal Communications Commission’s new network-neutrality rules unless the company strikes a free peering deal ASAP.” In other words, CNS is asking for rate regulation for interconnection. Under the Open Internet Order, the FCC can rule on such complaints, but it can only rule on a case-by-case basis. Either TWC assents to free peering, or the FCC intervenes and sets the rate for them, or the FCC dismisses the complaint altogether and pushes such decisions down the road…. While the FCC could reject this complaint, it is clear that they have the ability to impose de facto rate regulation through case-by-case adjudication.

The FCC’s ability under the OIO to ensure that prices were “fair” contemplated an enormous degree of discretionary power:

Whether it is rate regulation according to Title II (which the FCC ostensibly didn’t do through forbearance) is beside the point. This will have the same practical economic effects and will be functionally indistinguishable if/when it occurs.

The Economics of Price Controls

Economists from across the political spectrum have long decried the use of price controls. In a recent (now partially deleted) tweet, Nobel laureate and liberal New York Times columnist Paul Krugman lambasted calls for price controls in response to inflation as “truly stupid.” In a recent survey of top economists on issues related to inflation, University of Chicago economist Austan Goolsbee, a former chair of the Council of Economic Advisors under President Barack Obama, strongly disagreed that 1970s-style price controls could successfully reduce U.S. inflation over the next 12 months, stating simply: “Just stop. Seriously.”

The reason for the bipartisan consensus is clear: both history and economics have demonstrated that price caps lead to shortages by artificially stimulating demand for a good, while also creating downward pressure on supply for that good.

Broadband rate regulation, whether implicit or explicit, will have similarly negative effects on investment and deployment. Limiting returns on investment reduces the incentive to make those investments. Broadband markets subject to price caps would see particularly large dislocations, given the massive upfront investment required, the extended period over which returns are realized, and the elevated risk of under-recoupment for quality improvements. Not only would existing broadband providers make fewer and less intensive investments to maintain their networks, they would invest less in improving quality:

When it faces a binding price ceiling, a regulated monopolist is unable to capture the full incremental surplus generated by an increase in service quality. Consequently, when the firm bears the full cost of the increased quality, it will deliver less than the surplus-maximizing level of quality. As Spence (1975, p. 420, note 5) observes, “where price is fixed… the firm always sets quality too low.” (p 9-10)

Quality suffers under price regulation not just because firms can’t capture the full value of their investments, but also because it is often difficult to account for quality improvements in regulatory pricing schemes:

The design and enforcement of service quality regulations is challenging for at least three reasons. First, it can be difficult to assess the benefits and the costs of improving service quality. Absent accurate knowledge of the value that consumers place on elevated levels of service quality and the associated costs, it is difficult to identify appropriate service quality standards. It can be particularly challenging to assess the benefits and costs of improved service quality in settings where new products and services are introduced frequently. Second, the level of service quality that is actually delivered sometimes can be difficult to measure. For example, consumers may value courteous service representatives, and yet the courtesy provided by any particular representative may be difficult to measure precisely. When relevant performance dimensions are difficult to monitor, enforcing desired levels of service quality can be problematic. Third, it can be difficult to identify the party or parties that bear primary responsibility for realized service quality problems. To illustrate, a customer may lose telephone service because an underground cable is accidentally sliced. This loss of service could be the fault of the telephone company if the company fails to bury the cable at an appropriate depth in the ground or fails to notify appropriate entities of the location of the cable. Alternatively, the loss of service might reflect a lack of due diligence by field workers from other companies who slice a telephone cable that is buried at an appropriate depth and whose location has been clearly identified. (p 10)

Firms are also less likely to enter new markets, where entry is risky and competition with a price-regulated monopolist can be a bleak prospect. Over time, price caps would degrade network quality and availability. Price caps in sectors characterized by large capital investment requirements also tend to exacerbate the need for an exclusive franchise, in order to provide some level of predictable returns for the regulated provider. Thus, “managed competition” of this sort may actually have the effect of reducing competition.

None of these concerns are dissipated where regulators use indirect, rather than direct, means to cap prices. Interconnection mandates and bans on paid prioritization both set wholesale prices at zero. Broadband is a classic multi-sided market. If the price on one side of the market is set at zero through rate regulation, then there will be upward pricing pressure on the other side of the market. This means higher prices for consumers (or else, it will require another layer of imprecise and complex regulation and even deeper constraints on investment).

Similarly, implicit rate regulation under an amorphous “general conduct standard” like that included in the 2015 order would allow the FCC to effectively ban practices like zero rating on mobile data plans. At the time, the OIO restricted ISPs’ ability to “unreasonably interfere with or disadvantage”:

consumer access to lawful content, applications, and services; or
content providers’ ability to distribute lawful content, applications or services.

The FCC thus signaled quite clearly that it would deem many zero-rating arrangements as manifestly “unreasonable.” Yet, for mobile customers who want to consume only a limited amount of data, zero rating of popular apps or other data uses is, in most cases, a net benefit for consumer welfare:

These zero-rated services are not typically designed to direct users’ broad-based internet access to certain content providers ahead of others; rather, they are a means of moving users from a world of no access to one of access….
…This is a business model common throughout the internet (and the rest of the economy, for that matter). Service providers often offer a free or low-cost tier that is meant to facilitate access—not to constrain it.

Economics has long recognized the benefits of such pricing mechanisms, which is why competition authorities always scrutinize such practices under a rule of reason, requiring a showing of substantial exclusionary effect and lack of countervailing consumer benefit before condemning such practices. The OIO’s Internet conduct rule, however, encompassed no such analytical limits, instead authorizing the FCC to forbid such practices in the name of a nebulous neutrality principle and with no requirement to demonstrate net harm. Again, although marketed under a different moniker, banning zero rating outright is a de facto price regulation—and one that is particularly likely to harm consumers.

Conclusion

Ultimately, it’s important to understand that rate regulation, whatever the imagined benefits, is not a costless endeavor. Costs and risk do not disappear under rate regulation; they are simply shifted in one direction or another—typically with costs borne by consumers through some mix of reduced quality and innovation.

While more can be done to expand broadband access in the United States, the Internet has worked just fine without Title II regulation. It’s a bit trite to repeat, but it remains relevant to consider how well U.S. networks fared during the COVID-19 pandemic. That performance was thanks to ongoing investment from broadband companies over the last 20 years, suggesting the market for broadband is far more competitive than net-neutrality advocates often claim.

Government policy may well be able to help accelerate broadband deployment to the unserved portions of the country where it is most needed. But the way to get there is not by imposing price controls on broadband providers. Instead, we should be removing costly, government-erected barriers to buildout and subsidizing and educating consumers where necessary.

In Broadband, Federal Communications Commission, Net Neutrality, Telecommunications, Truth on the Market Broadband, FCC, Gigi Sohn, net neutrality, price controls, rate regulation, Restoring Internet Freedom Order, Title II

Chairman Pai Symposium: Wrap-Up and Thoughts for the Future FCC

Kristian Stout — 3 February 2021

[TOTM: The following is part of a digital symposium by TOTM guests and authors on the legal and regulatory issues that arose during Ajit Pai’s tenure as chairman of the Federal Communications Commission. The entire series of posts is available here.

Kristian Stout is director of innovation policy for the International Center for Law & Economics.]

One of the themes that has run throughout this symposium has been that, throughout his tenure as both a commissioner and as chairman, Ajit Pai has brought consistency and careful analysis to the Federal Communications Commission (McDowell, Wright). The reflections offered by the various authors in this symposium make one thing clear: the next administration would do well to learn from the considered, bipartisan, and transparent approach to policy that characterized Chairman Pai’s tenure at the FCC.

The following are some of the more specific lessons that can be learned from Chairman Pai. In an important sense, he laid the groundwork for his successful chairmanship when he was still a minority commissioner. His thoughtful dissents were rooted in consistent, clear policy arguments—a practice that both charted how he would look at future issues as chairman and would help the public to understand exactly how he would approach new challenges before the FCC (McDowell, Wright).

One of the most public instances of Chairman Pai’s consistency (and, as it turns out, his bravery) was with respect to net neutrality. From his dissent in the Title II Order, through his commission’s Restoring Internet Freedom Order, Chairman Pai focused on the actual welfare of consumers and the factors that drive network growth and adoption. As Brent Skorup noted, “Chairman Pai and the Republican commissioners recognized the threat that Title II posed, not only to free speech, but to the FCC’s goals of expanding telecommunications services and competition.” The result of giving in to the Title II advocates would have been to draw the FCC into a quagmire of mass-media regulation that would ultimately harm free expression and broadband deployment in the United States.

Chairman Pai’s vision worked out (Skorup, May, Manne, Hazlett). Despite prognostications of the “death of the internet” because of the Restoring Internet Freedom Order, available evidence suggests that industry investment grew over Chairman Pai’s term. More Americans are connected to broadband than ever before.

Relatedly, Chairman Pai was a strong supporter of liberalizing media-ownership rules that long had been rooted in 20th century notions of competition (Manne). Such rules systematically make it harder for smaller media outlets to compete with large news aggregators and social-media platforms. As Geoffrey Manne notes:

Consistent with his unwavering commitment to promote media competition… Chairman Pai put forward a proposal substantially updating the media-ownership rules to reflect the dramatically changed market realities facing traditional broadcasters and newspapers.

This was a bold move for Chairman Pai—in essence, he permitted more local concentration by, e.g., allowing the purchase of a newspaper by a local television station that previously would have been forbidden. By allowing such combinations, the FCC enabled failing local news outlets to shore up their losses and continue to compete against larger, better-resourced organizations. The rule changes are in a case pending before the Supreme Court; should the court find for the FCC, the competitive outlook for local media looks much better thanks to Chairman Pai’s vision.

Chairman Pai’s record on spectrum is likewise impressive (Cooper, Hazlett). The FCC’s auctions under Chairman Pai raised more money and freed more spectrum for higher value uses than any previous commission (Feld, Hazlett). But there is also a lesson in how subsequent administrations can continue what Chairman Pai started. Unlicensed use, for instance, is not free or costless in its maintenance, and Tom Hazlett believes that there is more work to be done in further liberalizing access to the related spectrum—liberalizing in the sense of allowing property rights and market processes to guide spectrum to its highest use:

The basic theme is that regulators do better when they seek to create new rights that enable social coordination and entrepreneurial innovation, rather than enacting rules that specify what they find to be the “best” technologies or business models.

And to a large extent this is the model that Chairman Pai set down, from the issuance of the 12 GHZ NPRM to consider whether those spectrum bands could be opened up for wireless use, to the L-Band Order, where the commission worked hard to reallocate spectrum rights in ways that would facilitate more productive uses.

The controversial L-Band Order was another example of where Chairman Pai displayed both political acumen as well as an apolitical focus on improving spectrum policy (Cooper). Political opposition was sharp and focused after the commission finalized its order in April 2020. Nonetheless, Chairman Pai was deftly able to shepherd the L-Band Order and guarantee that important spectrum was made available for commercial wireless use.

As a native of Kansas, rural broadband rollout ranked highly in the list of priorities at the Pai FCC, and his work over the last four years is demonstrative of this pride of place (Hurwitz, Wright). As Gus Hurwitz notes, “the commission completed the Connect America Fund Phase II Auction. More importantly, it initiated the Rural Digital Opportunity Fund (RDOF) and the 5G Fund for Rural America, both expressly targeting rural connectivity.”

Further, other work, like the recently completed Rural Digital Opportunity Fund auction and the 5G fund provide the necessary policy framework with which to extend greater connectivity to rural America. As Josh Wright notes, “Ajit has also made sure to keep an eye out for the little guy, and communities that have been historically left behind.” This focus on closing the digital divide yielded gains in connectivity in places outside of traditional rural American settings, such as tribal lands, the U.S. Virgin Islands, and Puerto Rico (Wright).

But perhaps one of Chairman Pai’s best and (hopefully) most lasting contributions will be de-politicizing the FCC and increasing the transparency with which it operated. In contrast to previous administrations, the Pai FCC had an overwhelmingly bipartisan nature, with many bipartisan votes being regularly taken at monthly meetings (Jamison). In important respects, it was this bipartisan (or nonpartisan) nature that was directly implicated by Chairman Pai championing the Office of Economics and Analytics at the commission. As many of the commentators have noted (Jamison, Hazlett, Wright, Ellig) the OEA was a step forward in nonpolitical, careful cost-benefit analysis at the commission. As Wright notes, Chairman Pai was careful to not just hire a bunch of economists, but rather to learn from other agencies that have better integrated economics, and to establish a structure that would enable the commission’s economists to materially contribute to better policy.

We were honored to receive a post from Jerry Ellig just a day before he tragically passed away. As chief economist at the FCC from 2017-2018, he was in a unique position to evaluate past practice and participate in the creation of the OEA. According to Ellig, past practice tended to treat the work of the commission’s economists as a post-hoc gloss on the work of the agency’s attorneys. Once conclusions were reached, economics would often be backfilled in to support those conclusions. With the establishment of the OEA, economics took a front-seat role, with staff of that office becoming a primary source for information and policy analysis before conclusions were reached. As Wright noted, the Federal Trade Commission had adopted this approach. With the FCC moving to do this as well, communications policy in the United States is on much sounder footing thanks to Chairman Pai.

Not only did Chairman Pai push the commission in the direction of nonpolitical, sound economic analysis but, as many commentators note, he significantly improved the process at the commission (Cooper, Jamison, Lyons). Chief among his contributions was making it a practice to publish proposed orders weeks in advance, breaking with past traditions of secrecy around draft orders, and thereby giving the public an opportunity to see what the commission intended to do.

Critics of Chairman Pai’s approach to transparency feared that allowing more public view into the process would chill negotiations between the commissioners behind the scenes. But as Daniel Lyons notes, the chairman’s approach was a smashing success:

The Pai era proved to be the most productive in recent memory, averaging just over six items per month, which is double the average number under Pai’s immediate predecessors. Moreover, deliberations were more bipartisan than in years past: Nathan Leamer notes that 61.4% of the items adopted by the Pai FCC were unanimous and 92.1% were bipartisan compared to 33% and 69.9%, respectively, under Chairman Wheeler.

Other reforms from Chairman Pai helped open the FCC to greater scrutiny and a more transparent process, including limiting editorial privileges on staff on an order’s text, and by introducing the use of a simple “fact sheet” to explain orders (Lyons).

I found one of the most interesting insights into the character of Chairman Pai, was his willingness to reverse course and take risks to ensure that the FCC promoted innovation instead of obstructing it by relying on received wisdom (Nachbar). For instance, although he was initially skeptical of the prospects of Space X to introduce broadband through its low-Earth-orbit satellite systems, under Chairman Pai, the Starlink beta program was included in the RDOF auction. It is not clear whether this was a good bet, Thomas Nachbar notes, but it was a statement both of the chairman’s willingness to change his mind, as well as to not allow policy to remain in a comfortable zone that excludes potential innovation.

The next chair has an awfully big pair of shoes (or one oversized coffee mug) to fill. Chairman Pai established an important legacy of transparency and process improvement, as well as commitment to careful, economic analysis in the business of the agency. We will all be well-served if future commissions follow in his footsteps.

Ajit Pai Brought the FCC’s Media Ownership Rules into the Modern Age

Geoffrey Manne — 26 January 2021

Geoffrey A. Manne is the president and founder of the International Center for Law and Economics.]

I’m delighted to add my comments to the chorus of voices honoring Ajit Pai’s remarkable tenure at the Federal Communications Commission. I’ve known Ajit longer than most. We were classmates in law school … let’s just say “many” years ago. Among the other symposium contributors I know of only one—fellow classmate, Tom Nachbar—who can make a similar claim. I wish I could say this gives me special insight into his motivations, his actions, and the significance of his accomplishments, but really it means only that I have endured his dad jokes and interminable pop-culture references longer than most.

But I can say this: Ajit has always stood out as a genuinely humble, unfailingly gregarious, relentlessly curious, and remarkably intelligent human being, and he deployed these characteristics to great success at the FCC.

Ajit’s tenure at the FCC was marked by an abiding appreciation for the importance of competition, both as a guiding principle for new regulations and as a touchstone to determine when to challenge existing ones. As others have noted (and as we have written elsewhere), that approach was reflected significantly in the commission’s Restoring Internet Freedom Order, which made competition—and competition enforcement by the antitrust agencies—the centerpiece of the agency’s approach to net neutrality. But I would argue that perhaps Chairman Pai’s greatest contribution to bringing competition to the forefront of the FCC’s mandate came in his work on media modernization.

Fairly early in his tenure at the commission, Ajit raised concerns with the FCC’s failure to modernize its media-ownership rules. In response to the FCC’s belated effort to initiate the required 2010 and 2014 Quadrennial Reviews of those rules, then-Commissioner Pai noted that the commission had abdicated its responsibility under the statute to promote competition. Not only was the FCC proposing to maintain a host of outdated existing rules, but it was also moving to impose further constraints (through new limitations on the use of Joint Sales Agreements (JSAs)). As Ajit noted, such an approach was antithetical to competition:

In smaller markets, the choice is not between two stations entering into a JSA and those same two stations flourishing while operating completely independently. Rather, the choice is between two stations entering into a JSA and at least one of those stations’ viability being threatened. If stations in these smaller markets are to survive and provide many of the same services as television stations in larger markets, they must cut costs. And JSAs are a vital mechanism for doing that.
The efficiencies created by JSAs are not a luxury in today’s digital age. They are necessary, as local broadcasters face fierce competition for viewers and advertisers.

Under then-Chairman Tom Wheeler, the commission voted to adopt the Quadrennial Review in 2016, issuing rules that largely maintained the status quo and, at best, paid tepid lip service to the massive changes in the competitive landscape. As Ajit wrote in dissent:

The changes to the media marketplace since the FCC adopted the Newspaper-Broadcast Cross-Ownership Rule in 1975 have been revolutionary…. Yet, instead of repealing the Newspaper-Broadcast Cross-Ownership Rule to account for the massive changes in how Americans receive news and information, we cling to it.
And over the near-decade since the FCC last finished a “quadrennial” review, the video marketplace has transformed dramatically…. Yet, instead of loosening the Local Television Ownership Rule to account for the increasing competition to broadcast television stations, we actually tighten that regulation.
And instead of updating the Local Radio Ownership Rule, the Radio-Television Cross-Ownership Rule, and the Dual Network Rule, we merely rubber-stamp them.
The more the media marketplace changes, the more the FCC’s media regulations stay the same.

As Ajit also accurately noted at the time:

Soon, I expect outside parties to deliver us to the denouement: a decisive round of judicial review. I hope that the court that reviews this sad and total abdication of the administrative function finds, once and for all, that our media ownership rules can no longer stay stuck in the 1970s consistent with the Administrative Procedure Act, the Communications Act, and common sense. The regulations discussed above are as timely as “rabbit ears,” and it’s about time they go the way of those relics of the broadcast world. I am hopeful that the intervention of the judicial branch will bring us into the digital age.

And, indeed, just this week the case was argued before the Supreme Court.

In the interim, however, Ajit became Chairman of the FCC. And in his first year in that capacity, he took up a reconsideration of the 2016 Order. This 2017 Order on Reconsideration is the one that finally came before the Supreme Court.

Consistent with his unwavering commitment to promote media competition—and no longer a minority commissioner shouting into the wind—Chairman Pai put forward a proposal substantially updating the media-ownership rules to reflect the dramatically changed market realities facing traditional broadcasters and newspapers:

Today we end the 2010/2014 Quadrennial Review proceeding. In doing so, the Commission not only acknowledges the dynamic nature of the media marketplace, but takes concrete steps to update its broadcast ownership rules to reflect reality…. In this Order on Reconsideration, we refuse to ignore the changed landscape and the mandates of Section 202(h), and we deliver on the Commission’s promise to adopt broadcast ownership rules that reflect the present, not the past. Because of our actions today to relax and eliminate outdated rules, broadcasters and local newspapers will at last be given a greater opportunity to compete and thrive in the vibrant and fast-changing media marketplace. And in the end, it is consumers that will benefit, as broadcast stations and newspapers—those media outlets most committed to serving their local communities—will be better able to invest in local news and public interest programming and improve their overall service to those communities.

Ajit’s approach was certainly deregulatory. But more importantly, it was realistic, well-reasoned, and responsive to changing economic circumstances. Unlike most of his predecessors, Ajit was unwilling to accede to the torpor of repeated judicial remands (on dubious legal grounds, as we noted in our amicus brief urging the Court to grant certiorari in the case), permitting facially and wildly outdated rules to persist in the face of massive and obvious economic change.

Like Ajit, I am not one to advocate regulatory action lightly, especially in the (all-too-rare) face of judicial review that suggests an agency has exceeded its discretion. But in this case, the need for dramatic rule change—here, to deregulate—was undeniable. The only abuse of discretion was on the part of the court, not the agency. As we put it in our amicus brief:

[T]he panel vacated these vital reforms based on mere speculation that they would hinder minority and female ownership, rather than grounding its action on any record evidence of such an effect. In fact, the 2017 Reconsideration Order makes clear that the FCC found no evidence in the record supporting the court’s speculative concern.
…In rejecting the FCC’s stated reasons for repealing or modifying the rules, absent any evidence in the record to the contrary, the panel substituted its own speculative concerns for the judgment of the FCC, notwithstanding the FCC’s decades of experience regulating the broadcast and newspaper industries. By so doing, the panel exceeded the bounds of its judicial review powers under the APA.

Key to Ajit’s conclusion that competition in local media markets could be furthered by permitting more concentration was his awareness that the relevant market for analysis couldn’t be limited to traditional media outlets like broadcasters and newspapers; it must include the likes of cable networks, streaming video providers, and social-media platforms, as well. As Ajit put it in a recent speech:

The problem is a fundamental refusal to grapple with today’s marketplace: what the service market is, who the competitors are, and the like. When assessing competition, some in Washington are so obsessed with the numerator, so to speak—the size of a particular company, for instance—that they’ve completely ignored the explosion of the denominator—the full range of alternatives in media today, many of which didn’t exist a few years ago.
When determining a particular company’s market share, a candid assessment of the denominator should include far more than just broadcast networks or cable channels. From any perspective (economic, legal, or policy), it should include any kinds of media consumption that consumers consider to be substitutes. That could be TV. It could be radio. It could be cable. It could be streaming. It could be social media. It could be gaming. It could be still something else. The touchstone of that denominator should be “what content do people choose today?”, not “what content did people choose in 1975 or 1992, and how can we artificially constrict our inquiry today to match that?”

For some reason, this simple and seemingly undeniable conception of the market escapes virtually all critics of Ajit’s media-modernization agenda. Indeed, even Justice Stephen Breyer in this week’s oral argument seemed baffled by the notion that more concentration could entail more competition:

JUSTICE BREYER: I’m thinking of it solely as a — the anti-merger part, in — in anti-merger law, merger law generally, I think, has a theory, and the theory is, beyond a certain point and other things being equal, you have fewer companies in a market, the harder it is to enter, and it’s particularly harder for smaller firms. And, here, smaller firms are heavily correlated or more likely to be correlated with women and minorities. All right?
The opposite view, which is what the FCC has now chosen, is — is they want to move or allow to be moved towards more concentration. So what’s the theory that that wouldn’t hurt the minorities and women or smaller businesses? What’s the theory the opposite way, in other words? I’m not asking for data. I’m asking for a theory.

Of course, as Justice Breyer should surely know—and as I know Ajit Pai knows—counting the number of firms in a market is a horrible way to determine its competitiveness. In this case, the competition from internet media platforms, particularly for advertising dollars, is immense. A regulatory regime that prohibits traditional local-media outlets from forging efficient joint ventures or from obtaining the scale necessary to compete with those platforms does not further competition. Even if such a rule might temporarily result in more media outlets, eventually it would result in no media outlets, other than the large online platforms. The basic theory behind the Reconsideration Order—to answer Justice Breyer—is that outdated government regulation imposes artificial constraints on the ability of local media to adopt the organizational structures necessary to compete. Removing those constraints may not prove a magic bullet that saves local broadcasters and newspapers, but allowing the rules to remain absolutely ensures their demise.

Ajit’s commitment to furthering competition in telecommunications markets remained steadfast throughout his tenure at the FCC. From opposing restrictive revisions to the agency’s spectrum screen to dissenting from the effort to impose a poorly conceived and retrograde regulatory regime on set-top boxes, to challenging the agency’s abuse of its merger review authority to impose ultra vires regulations, to, of course, rolling back his predecessor’s unsupportable Title II approach to net neutrality—and on virtually every issue in between—Ajit sought at every turn to create a regulatory backdrop conducive to competition.

Tom Wheeler, Pai’s predecessor at the FCC, claimed that his personal mantra was “competition, competition, competition.” His greatest legacy, in that regard, was in turning over the agency to Ajit.

Chairman Pai’s Legacy of Transparency

Daniel Lyons — 21 January 2021

Daniel Lyons is a professor of law at Boston College Law School and a visiting fellow at the American Enterprise Institute.]

For many, the chairmanship of Ajit Pai is notable for its many headline-grabbing substantive achievements, including the Restoring Internet Freedom order, 5G deployment, and rural buildout—many of which have been or will be discussed in this symposium. But that conversation is incomplete without also acknowledging Pai’s careful attention to the basic blocking and tackling of running a telecom agency. The last four years at the Federal Communications Commission were marked by small but significant improvements in how the commission functions, and few are more important than the chairman’s commitment to transparency.

Draft Orders: The Dark Ages Before 2017

This commitment is most notable in Pai’s revisions to the open meeting process. From time immemorial, the FCC chairman would set the agenda for the agency’s monthly meeting by circulating draft orders to the other commissioners three weeks in advance. But the public was deliberately excluded from that distribution list. During this period, the commissioners would read proposals, negotiate revisions behind the scenes, then meet publicly to vote on final agency action. But only after the meeting—often several days later—would the actual text of the order be made public.

The opacity of this process had several adverse consequences. Most obviously, the public lacked details about the substance of the commission’s deliberations. The Government in the Sunshine Act requires the agency’s meetings to be made public so the American people know what their government is doing. But without the text of the orders under consideration, the public had only a superficial understanding of what was happening each month. The process was reminiscent of House Speaker Nancy Pelosi’s famous gaffe that Congress needed to “pass the [Affordable Care Act] bill so that you can find out what’s in it.” During the high-profile deliberations over the Open Internet Order in 2015, then-Commissioner Pai made significant hay over this secrecy, repeatedly posting pictures of himself with the 300-plus-page order on Twitter with captions such as “I wish the public could see what’s inside” and “the public still can’t see it.”

Other consequences were less apparent, but more detrimental. Because the public lacked detail about key initiatives, the telecom media cycle could be manipulated by strategic leaks designed to shape the final vote. As then-Commissioner Pai testified to Congress in 2016:

[T]he public gets to see only what the Chairman’s Office deigns to release, so controversial policy proposals can be (and typically are) hidden in a wave of media adulation. That happened just last month when the agency proposed changes to its set-top-box rules but tried to mislead content producers and the public about whether set-top box manufacturers would be permitted to insert their own advertisements into programming streams.

Sometimes, this secrecy backfired on the chairman, such as when net-neutrality advocates used media pressure to shape the 2014 Open Internet NPRM. Then-Chairman Tom Wheeler’s proposed order sought to follow the roadmap laid out by the D.C. Circuit’s Verizon decision, which relied on Title I to prevent ISPs from blocking content or acting in a “commercially unreasonable manner.” Proponents of a more aggressive Title II approach leaked these details to the media in a negative light, prompting tech journalists and advocates to unleash a wave of criticism alleging the chairman was “killing off net neutrality to…let the big broadband providers double charge.” In full damage control mode, Wheeler attempted to “set the record straight” about “a great deal of misinformation that has recently surfaced regarding” the draft order. But the tempest created by these leaks continued, pressuring Wheeler into adding a Title II option to the NPRM—which, of course, became the basis of the 2015 final rule.

This secrecy also harmed agency bipartisanship, as minority commissioners sometimes felt as much in the dark as the general public. As Wheeler scrambled to address Title II advocates’ concerns, he reportedly shared revised drafts with fellow Democrats but did not circulate the final draft to Republicans until less than 48 hours before the vote—leading Pai to remark cheekily that “when it comes to the Chairman’s latest net neutrality proposal, the Democratic Commissioners are in the fast lane and the Republican Commissioners apparently are being throttled.” Similarly, Pai complained during the 2014 spectrum screen proceeding that “I was not provided a final version of the item until 11:50 p.m. the night before the vote and it was a substantially different document with substantively revised reasoning than the one that was previously circulated.”

Letting the Sunshine In

Eliminating this culture of secrecy was one of Pai’s first decisions as chairman. Less than a month after assuming the reins at the agency, he announced that the FCC would publish all draft items at the same time they are circulated to commissioners, typically three weeks before each monthly meeting. While this move was largely applauded, some were concerned that this transparency would hamper the agency’s operations. One critic suggested that pre-meeting publication would hamper negotiations among commissioners: “Usually, drafts created negotiating room…Now the chairman’s negotiating position looks like a final position, which undercuts negotiating ability.” Another, while supportive of the change, was concerned that the need to put a draft order in final form well before a meeting might add “a month or more to the FCC’s rulemaking adoption process.”

Fortunately, these concerns proved to be unfounded. The Pai era proved to be the most productive in recent memory, averaging just over six items per month, which is double the average number under Pai’s immediate predecessors. Moreover, deliberations were more bipartisan than in years past: Nathan Leamer notes that 61.4% of the items adopted by the Pai FCC were unanimous and 92.1% were bipartisan—compared to 33% and 69.9%, respectively, under Chairman Wheeler.

This increased transparency also improved the overall quality of the agency’s work product. In a 2018 speech before the Free State Foundation, Commissioner Mike O’Rielly explained that “drafts are now more complete and more polished prior to the public reveal, so edits prior to the meeting are coming from Commissioners, as opposed to there being last minute changes—or rewrites—from staff or the Office of General Counsel.” Publishing draft orders in advance allows the public to flag potential issues for revision before the meeting, which improves the quality of the final draft and reduces the risk of successful post-meeting challenges via motions for reconsideration or petitions for judicial review. O’Rielly went on to note that the agency seemed to be running more efficiently as well, as “[m]eetings are targeted to specific issues, unnecessary discussions of non-existent issues have been eliminated, [and] conversations are more productive.”

Other Reforms

While pre-meeting publication was the most visible improvement to agency transparency, there are other initiatives also worth mentioning.

Limiting Editorial Privileges: Chairman Pai dramatically limited “editorial privileges,” a longtime tradition that allowed agency staff to make changes to an order’s text even after the final vote. Under Pai, editorial privileges were limited to technical and conforming edits only; substantive changes were not permitted unless they were proposed directly by a commissioner and only in response to new arguments offered by a dissenting commissioner. This reduces the likelihood of a significant change being introduced outside the public eye.
Fact Sheet: Adopting a suggestion of Commissioner Mignon Clyburn, Pai made it a practice to preface each published draft order with a one-page fact sheet that summarized the item in lay terms, as much as possible. This made the agency’s monthly work more accessible and transparent to members of the public who lacked the time to wade through the full text of each draft order.
Online Transparency Dashboard: Pai also launched an online dashboard on the agency’s website. This dashboard offers metrics on the number of items currently pending at the commission by category, as well as quarterly trends over time.
Restricting Comment on Upcoming Items: As a gesture of respect to fellow commissioners, Pai committed that the chairman’s office would not brief the press or members of the public, or publish a blog, about an upcoming matter before it was shared with other commissioners. This was another step toward reducing the strategic use of leaks or selective access to guide the tech media news cycle.

And while it’s technically not a transparency reform, Pai also deserves credit for his willingness to engage the public as the face of the agency. He was the first FCC commissioner to join Twitter, and throughout his chairmanship he maintained an active social media presence that helped personalize the agency and make it more accessible. His commitment to this channel is all the more impressive when one considers the way some opponents used these platforms to hurl a steady stream of hateful, often violent and racist invective at him during his tenure.

Pai deserves tremendous credit for spearheading these efforts to bring the agency out of the shadows and into the sunlight. Of course, he was not working alone. Pai shares credit with other commissioners and staff who supported transparency and worked to bring these policies to fruition, most notably former Commissioner O’Rielly, who beat a steady drum for process reform throughout his tenure.

We do not yet know who President Joe Biden will appoint as Pai’s successor. It is fair to assume that whomever is chosen will seek to put his or her own stamp on the agency. But let’s hope that enhanced transparency and the other process reforms enacted over the past four years remain a staple of agency practice moving forward. They may not be flashy, but they may prove to be the most significant and long-lasting impact of the Pai chairmanship.

Why Restoring Internet Freedom Was a Landmark Accomplishment

Randy May — 15 January 2021

Randy May is president of the Free State Foundation.]

I am pleased to participate in this retrospective symposium regarding Ajit Pai’s tenure as Federal Communications Commission chairman. I have been closely involved in communications law and policy for nearly 45 years, and, as I’ve said several times since Chairman Pai announced his departure, he will leave as one of the most consequential leaders in the agency’s history. And, I should hastily add, consequential in a positive way, because it’s possible to be consequential in a not-so-positive way.

Chairman Pai’s leadership has been impactful in many different areas—for example, spectrum availability, media deregulation, and institutional reform, to name three—but in this tribute I will focus on his efforts regarding “net neutrality.” I use the quotes because the term has been used by many to mean many different things in many different contexts.

Within a year of becoming chairman, and with the support of fellow Republican commissioners Michael O’Rielly and Brendan Carr, Ajit Pai led the agency in reversing the public utility-like “net neutrality” regulation that had been imposed by the Obama FCC in February 2015 in what became known as the Title II Order. The Title II Order had classified internet service providers (ISPs) as “telecommunications carriers” subject to the same common-carrier regulatory regime imposed on monopolistic Ma Bell during most of the 20th century. While “forbearing” from imposing the full array of traditional common-carrier regulatory mandates, the Title II Order also subjected ISPs to sanctions if they violated an amorphous “general conduct standard,” which provided that ISPs could not “unreasonably” interfere with or disadvantage end users or edge providers like Google, Facebook, and the like.

The aptly styled Restoring Internet Freedom Order (RIF Order), adopted in December 2017, reversed nearly all of the Title II Order’s heavy-handed regulation of ISPs in favor of a light-touch regulatory regime. It was aptly named, because the RIF Order “restored” market “freedom” to internet access regulation that had mostly prevailed since the turn of the 21st century. It’s worth remembering that, in 1999, in opting not to require that newly emerging cable broadband providers be subjected to a public utility-style regime, Clinton-appointee FCC Chairman William Kennard declared: “[T]he alternative is to go to the telephone world…and just pick up this whole morass of regulation and dump it wholesale on the cable pipe. That is not good for America.” And worth recalling, too, that in 2002, the commission, under the leadership of Chairman Michael Powell, determined that “broadband services should exist in a minimal regulatory environment that promotes investment and innovation in a competitive market.”

It was this reliance on market freedom that was “restored” under Ajit Pai’s leadership. In an appearance at a Free State Foundation event in December 2016, barely a month before becoming chairman, then-Commissioner Pai declared: “It is time to fire up the weed whacker and remove those rules that are holding back investment, innovation, and job creation.” And he added: “Proof of market failure should guide the next commission’s consideration of new regulations.” True to his word, the weed whacker was used to cut down the public utility regime imposed on ISPs by his predecessor. And the lack of proof of any demonstrable market failure was at the core of the RIF Order’s reasoning.

It is true that, as a matter of law, the D.C. Circuit’s affirmance of the Restoring Internet Freedom Order in Mozilla v. FCC rested heavily on the application by the court of Chevron deference, just as it is true that Chevron deference played a central role in the affirmance of the Title II Order and the Brand X decision before that. And it would be disingenuous to suggest that, if a newly reconstituted Biden FCC reinstitutes a public utility-like regulatory regime for ISPs, that Chevron deference won’t once again play a central role in the appeal.

But optimist that I am, and focusing not on what possibly may be done as a matter of law, but on what ought to be done as a matter of policy, the “new” FCC should leave in place the RIF Order’s light-touch regulatory regime. In affirming most of the RIF Order in Mozilla, the D.C. Circuit agreed there was substantial evidence supporting the commission’s predictive judgment that reclassification of ISPs “away from public-utility style regulation” was “likely to increase ISP investment and output.” And the court agreed there was substantial evidence to support the commission’s position that such regulation is especially inapt for “a dynamic industry built on technological development and disruption.”

Indeed, the evidence has only become more substantial since the RIF Order’s adoption. Here are only a few factual snippets: According to CTIA, wireless-industry investment for 2019 grew to $29.1 billion, up from $27.4 billion in 2018 and $25.6 billion in 2017. USTelecom estimates that wireline broadband ISPs invested approximately $80 billion in network infrastructure in 2018, up more than $3.1 billion from $76.9 billion in 2017. And total investment most likely increased in 2019 for wireline ISPs like it did for wireless ISPs. Figures cited in the FCC’s 2020 Broadband Deployment Report indicate that fiber broadband networks reached an additional 6.5 million homes in 2019, a 16% increase over the prior year and the largest single-year increase ever.

Additionally, more Americans have access to broadband internet access services, and at ever higher speeds. According to an April 2020 report by USTelecom, for example, gigabit internet service is available to at least 85% of U.S. homes, compared to only 6% of U.S. homes three-and-a-half years ago. In an October 2020 blog post, Chairman Pai observed that “average download speeds for fixed broadband in the United States have doubled, increasing by over 99%” since the RIF Order was adopted. Ookla Speedtests similarly show significant gains in mobile wireless speeds, climbing to 47/10 Mbps in September 2020 compared to 27/8 Mbps in the first half of 2018.

More evidentiary support could be offered regarding the positive results that followed adoption of the RIF Order, and I assume in the coming year it will be. But the import of abandonment of public utility-like regulation of ISPs should be clear.

There is certainly much that Ajit Pai, the first-generation son of immigrants who came to America seeking opportunity in the freedom it offered, accomplished during his tenure. To my way of thinking, “Restoring Internet Freedom” ranks at—or at least near—the top of the list.

The Not Neutrality of Tech Reporting: Discussing the Economics of Lifting Data Caps During a Stay-at-home Crisis

Gus Hurwitz — 20 March 2020

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Justin “Gus” Hurwitz, (Associate Professor of Law & Co-director, Space, Cyber, and Telecom Law Program, University of Nebraska; Director of Law & Economics Programs, ICLE).]

I’m a big fan of APM Marketplace, including Molly Wood’s tech coverage. But they tend to slip into advocacy mode—I think without realizing it—when it comes to telecom issues. This was on full display earlier this week in a story on widespread decisions by ISPs to lift data caps during the ongoing COVID-19 crisis (available here, the segment runs from 4:30-7:30).

As background, all major ISPs have lifted data caps on their Internet service offerings. This is in recognition of the fact that most Americans are spending more time at home right now. During this time, many of us are teleworking, so making more intensive use of our Internet connections during the day; many have children at home during the day who are using the Internet for both education and entertainment; and we are going out less in the evening so making more use of services like streaming video for evening entertainment. All of these activities require bandwidth—and, like many businesses around the country, ISPs are taking steps (such as eliminating data caps) that will prevent undue consumer harm as we work to cope with COVID-19.

The Marketplace take on data caps

After introducing the segment, Wood and Marketplace host Kai Ryssdal turn to a misinformation and insinuation-laden discussion of telecommunications policy. Wood asserts that one of the ISPs’ “big arguments against net neutrality regulation” was that they “need [data] caps to prevent congestion on networks.” Ryssdal responds by asking, coyly, “so were they just fibbing? I mean … ya know …”

Wood responds that “there have been times when these arguments were very legitimate,” citing the early days of 4G networks. She then asserts that the United States has “some of the most expensive Internet speeds in the developed world” before jumping to the assertion that advocates will now have the “data to say that [data] caps are unnecessary.” She then goes on to argue—and here she loses any pretense of reporter neutrality—that “we are seeing that the Internet really is a utility” and that “frankly, there’s no, uhm, ongoing economic argument for [data caps].” She even notes that we can “hear [her] trying to be professional” in the discussion.

Unpacking that mess

It’s hard to know where to start with Wood & Ryssdal discussion, such a muddled mess it is. Needless to say, it is unfortunate to see tech reporters doing what tech reporters seem to do best: confusing poor and thinly veiled policy arguments for news.

Let’s start with Wood’s first claim, that ISPs (and, for that matter, others) have long argued that data caps are required to manage congestion and that this has been one of their chief arguments against net neutrality regulations. This is simply not true.

Consider the 2015 Open Internet Order (OIO)—the net neutrality regulations adopted by the FCC under President Obama. The OIO discusses data caps (“usage allowances”) in paragraphs 151-153. It explains:

The record also reflects differing views over some broadband providers’ practices with respect to usage allowances (also called “data caps”). … Usage allowances may benefit consumers by offering them more choices over a greater range of service options, and, for mobile broadband networks, such plans are the industry norm today, in part reflecting the different capacity issues on mobile networks. Conversely, some commenters have expressed concern that such practices can potentially be used by broadband providers to disadvantage competing over-the-top providers. Given the unresolved debate concerning the benefits and drawbacks of data allowances and usage-based pricing plans,[FN373] we decline to make blanket findings about these practices and will address concerns under the no-unreasonable interference/disadvantage on a case-by-case basis.
[FN373] Regarding usage-based pricing plans, there is similar disagreement over whether these practices are beneficial or harmful for promoting an open Internet. Compare Bright House Comments at 20 (“Variable pricing can serve as a useful technique for reducing prices for low usage (as Time Warner Cable has done) as well as for fairly apportioning greater costs to the highest users.”) with Public Knowledge Comments at 58 (“Pricing connectivity according to data consumption is like a return to the use of time. Once again, it requires consumers keep meticulous track of what they are doing online. With every new web page, new video, or new app a consumer must consider how close they are to their monthly cap. . . . Inevitably, this type of meter-watching freezes innovation.”), and ICLE & TechFreedom Policy Comments at 32 (“The fact of the matter is that, depending on background conditions, either usage-based pricing or flat-rate pricing could be discriminatory.”).

The 2017 Restoring Internet Freedom Order (RIFO), which rescinded much of the OIO, offers little discussion of data caps—its approach to them follows that of the OIO, requiring that ISPs are free to adopt but must disclose data cap policies. It does, however, note that small ISPs expressed concern, and provided evidence, that fear of lawsuits had forced small ISPs to abandon policies like data caps, “which would have benefited its customers by lowering its cost of Internet transport.” (See paragraphs 104 and 249.) The 2010 OIO makes no reference to data caps or usage allowances.

What does this tell us about Wood’s characterization of policy debates about data caps? The only discussion of congestion as a basis for data caps comes in the context of mobile networks. Wood gets this right: data caps have been, and continue to be, important for managing data use on mobile networks. But most people would be hard pressed to argue that these concerns are not still valid: the only people who have not experienced congestion on their mobile devices are those who do not use mobile networks.

But the discussion of data caps on broadband networks has nothing to do with congestion management. The argument against data caps is that they can be used anticompetitively. Cable companies, for instance, could use data caps to harm unaffiliated streaming video providers (that is, Netflix) in order to protect their own video services from competition; or they could exclude preferred services from data caps in order to protect them from competitors.

The argument for data caps, on the other hand, is about the cost of Internet service. Data caps are a way of offering lower priced service to lower-need users. Or, conversely, they are a way of apportioning the cost of those networks in proportion to the intensity of a given user’s usage. Higher-intensity users are more likely to be Internet enthusiasts; lower-intensity users are more likely to use it for basic tasks, perhaps no more than e-mail or light web browsing. What’s more, if all users faced the same prices regardless of their usage, there would be no marginal cost to incremental usage: users (and content providers) would have no incentive not to use more bandwidth. This does not mean that users would face congestion without data caps—ISPs may, instead, be forced to invest in higher capacity interconnection agreements. (Importantly, interconnection agreements are often priced in terms of aggregate data transfered, not the speeds of those data transfers—that is, they are written in terms of data caps!—so it is entirely possible that an ISP would need to pay for greater interconnection capacity despite not experiencing any congestion on its network!)

In other words, the economic argument for data caps, recognized by the FCC under both the Obama and Trump administrations, is that they allow more people to connect to the Internet by allowing a lower-priced access tier, and that they keep average prices lower by creating incentives not to consume bandwidth merely because you can. In more technical economic terms, they allow potentially beneficial price discrimination and eliminate a potential moral hazard. Contrary to Wood’s snarky, unprofessional, response to Ryssdal’s question, there is emphatically not “no ongoing economic argument” for data caps.

Why lifting data caps during this crisis ain’t no thing

Even if the purpose of data caps were to manage congestion, Wood’s discussion again misses the mark. She argues that the ability to lift caps during the current crisis demonstrates that they are not needed during non-crisis periods. But the usage patterns that we are concerned about facilitating during this period are not normal, and cannot meaningfully be used to make policy decisions relevant to normal periods.

The reason for this is captured in the below image from a recent Cloudflare discussion of how Internet usage patterns are changing during the crisis:

This image shows US Internet usage as measured by Cloudflare. The red line is the usage on March 13 (the peak is President Trump’s announcement of a state of emergency). The grey lines are the preceding several days of traffic. (The x-axis is UTC time; ET is UCT-4.) Although this image was designed to show the measurable spike in traffic corresponding to the President’s speech, it also shows typical weekday usage patterns. The large “hump” on the left side shows evening hours in the United States. The right side of the graph shows usage throughout the day. (This chart shows nation-wide usage trends, which span multiple time zones. If it were to focus on a single time zone, there would be a clear dip between daytime “business” and evening “home” hours, as can be seen here.)

More important, what this chart demonstrates is that the “peak” in usage occurs in the evening, when everyone is at home watching their Netflix. It does not occur during the daytime hours—the hours during which telecommuters are likely to be video conferencing or VPN’ing in to their work networks, or during which students are likely to be doing homework or conferencing into their meetings. And, to the extent that there will be an increase in daytime usage, it will be somewhat offset by (likely significantly) decreased usage due to coming economic lethargy. (For Kai Ryssdal, lethargy is synonymous with recession; for Aaron Sorkin fans, it is synonymous with bagel).

This illustrates one of the fundamental challenges with pricing access to networks. Networks are designed to carry their peak load capacity. When they are operating below capacity, the marginal cost of additional usage is extremely low; once they exceed that capacity, the marginal cost of additional usage is extremely high. If you price network access based upon the average usage, you are going to get significant usage during peak hours; if you price access based upon the peak-hour marginal cost, you are going to get significant deadweight loss (under-use) during non-peak hours).

Data caps are one way to deal with this issue. Since most users making the most intensive use of the network are all doing so at the same time (at peak hour), this incremental cost either discourages this use or provides the revenue necessary to expand capacity to accommodate their use. But data caps do not make sense during non-peak hours, when marginal cost is nearly zero. Indeed, imposing increased costs on users during non-peak hours is regressive. It creates deadweight losses during those hours (and, in principle, also during peak hours: ideally, we would price non-peak-hour usage less than peak-hour usage in order to “shave the peak” (a synonym, I kid you not, for “flatten the curve”)).

What this all means

During the current crisis, we are seeing a significant increase in usage during non-peak hours. This imposes nearly zero incremental cost on ISPs. Indeed, it is arguably to their benefit to encourage use during this time, to “flatten the curve” of usage in the evening, when networks are, in fact, likely to experience congestion.

But there is a flipside, which we have seen develop over the past few days: how do we manage peak-hour traffic? On Thursday, the EU asked Netflix to reduce the quality of its streaming video in order to avoid congestion. Netflix is the single greatest driver of consumer-focused Internet traffic. And while being able to watch the Great British Bake Off in ultra-high definition 3D HDR 4K may be totally awesome, its value pales in comparison to keeping the American economy functioning.

Wood suggests that ISPs’ decision to lift data caps is of relevance to the network neutrality debate. It isn’t. But the impact of Netflix traffic on competing applications may be. The net neutrality debate created unmitigated hysteria about prioritizing traffic on the Internet. Many ISPs have said outright that they won’t even consider investing in prioritization technologies because of the uncertainty around the regulatory treatment of such technologies. But such technologies clearly have uses today. Video conferencing and Voice over IP protocols should be prioritized over streaming video. Packets to and from government, healthcare, university, and other educational institutions should be prioritized over Netflix traffic. It is hard to take anyone who would disagree with this proposition seriously. Yet the net neutrality debate almost entirely foreclosed development of these technologies. While they may exist, they are not in widespread deployment, and are not familiar to consumers or consumer-facing network engineers.

To the very limited extent that data caps are relevant to net neutrality policy, it is about ensuring that millions of people binge watching Bojack Horseman (seriously, don’t do it!) don’t interfere with children Skyping with their grandparents, a professor giving a lecture to her class, or a sales manager coordinating with his team to try to keep the supply chain moving.

The Mozilla oral arguments and the ongoing hell of the “net neutrality” debate

Gus Hurwitz — 4 February 2019

In the opening seconds of what was surely one of the worst oral arguments in a high-profile case that I have ever heard, Pantelis Michalopoulos, arguing for petitioners against the FCC’s 2018 Restoring Internet Freedom Order (RIFO) expertly captured both why the side he was representing should lose and the overall absurdity of the entire net neutrality debate: “This order is a stab in the heart of the Communications Act. It would literally write ‘telecommunications’ out of the law. It would end the communications agency’s oversight over the main communications service of our time.”

The main communications service of our time is the Internet. The Communications and Telecommunications Acts were written before the advent of the modern Internet, for an era when the telephone was the main communications service of our time. The reality is that technological evolution has written “telecommunications” out of these Acts – the “telecommunications services” they were written to regulate are no longer the important communications services of the day.

The basic question of the net neutrality debate is whether we expect Congress to weigh in on how regulators should respond when an industry undergoes fundamental change, or whether we should instead allow those regulators to redefine the scope of their own authority. In the RIFO case, petitioners (and, more generally, net neutrality proponents) argue that agencies should get to define their own authority. Those on the other side of the issue (including me) argue that that it is up to Congress to provide agencies with guidance in response to changing circumstances – and worry that allowing independent and executive branch agencies broad authority to act without Congressional direction is a recipe for unfettered, unchecked, and fundamentally abusive concentrations of power in the hands of the executive branch.

These arguments were central to the DC Circuit’s evaluation of the prior FCC net neutrality order – the Open Internet Order. But rather than consider the core issue of the case, the four hours of oral arguments this past Friday were instead a relitigation of long-ago addressed ephemeral distinctions, padded out with irrelevance and esoterica, and argued with a passion available only to those who believe in faerie tales and monsters under their bed. Perhaps some revelled in hearing counsel for both sides clumsily fumble through strained explanations of the difference between standalone telecommunications services and information services that are by definition integrated with them, or awkward discussions about how ISPs may implement hypothetical prioritization technologies that have not even been developed. These well worn arguments successfully demonstrated, once again, how many angels can dance upon the head of a single pin – only never before have so many angels been so irrelevant.

This time around, petitioners challenging the order were able to scare up some intervenors to make novel arguments on their behalf. Most notably, they were able to scare up a group of public safety officials to argue that the FCC had failed to consider arguments that the RIFO would jeopardize public safety services that rely on communications networks. I keep using the word “scare” because these arguments are based upon incoherent fears peddled by net neutrality advocates in order to find unsophisticated parties to sign on to their policy adventures. The public safety fears are about as legitimate as concerns that the Easter Bunny might one day win the Preakness – and merited as much response from the FCC as a petition from the Racehorse Association of America demanding the FCC regulate rabbits.

In the end, I have no idea how the DC Circuit is going to come down in this case. Public Safety concerns – like declarations of national emergencies – are often given undue and unwise weight. And there is a legitimately puzzling, if fundamentally academic, argument about a provision of the Communications Act (47 USC 257(c)) that Congress repealed after the Order was adopted and that was an noteworthy part of the notice the FCC gave when the Order was proposed that could lead the Court to remand the Order back to the Commission.

In the end, however, this case is unlikely to address the fundamental question of whether the FCC has any business regulating Internet access services. If the FCC loses, we’ll be back here in another year or two; if the FCC wins, we’ll be back here the next time a Democrat is in the White House. And the real tragedy is that every minute the FCC spends on the interminable net neutrality non-debate is a minute not spent on issues like closing the rural digital divide or promoting competitive entry into markets by next generation services.

So much wasted time. So many billable hours. So many angels dancing on the head of a pin. If only they were the better angels of our nature.

Postscript: If I sound angry about the endless fights over net neutrality, it’s because I am. I live in one of the highest-cost, lowest-connectivity states in the country. A state where much of the territory is covered by small rural carriers for whom the cost of just following these debates can mean delaying the replacement of an old switch, upgrading a circuit to fiber, or wiring a street. A state in which if prioritization were to be deployed it would be so that emergency services would be able to work over older infrastructure or so that someone in a rural community could remotely attend classes at the University or consult with a primary care physician (because forget high speed Internet – we have counties without doctors in them). A state in which if paid prioritization were to be developed it would be to help raise capital to build out service to communities that have never had high-speed Internet access.

So yes: the fact that we might be in for another year of rule making followed by more litigation because some firefighters signed up for the wrong wireless service plan and then were duped into believing a technological, economic, and political absurdity about net neutrality ensuring they get free Internet access does make me angry. Worse, unlike the hypothetical harms net neutrality advocates are worried about, the endless discussion of net neutrality causes real, actual, concrete harm to the people net neutrality advocates like to pat themselves on the back as advocating for. We should all be angry about this, and demanding that Congress put this debate out of our misery.

In Net Neutrality, Telecommunications, Truth on the Market, Wireless FCC, mozilla v. FCC, net neutrality, prioritization, Restoring Internet Freedom Order, Verizon v. FCC

The net neutrality CRA may be the most tedious piece of political theater ever

Geoffrey Manne & Kristian Stout — 16 May 2018

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.

In Administrative Law, Broadband, Net Neutrality, Platforms, Telecommunications, Truth on the Market, Twitter administrative law, Congressional Review Act, net neutrality, Restoring Internet Freedom Order, telecommunications

Closing the Rural Digital Divide Requires Understanding the Rural Digital Divide

Gus Hurwitz — 9 May 2018

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.

In Broadband, Facebook, Intellectual Property, Net Neutrality, Patent, Platforms, Telecommunications, Truth on the Market, Twitter, Wireless agriculture, Congressional Review Act, digital divide, digital farming, net neutrality, Restoring Internet Freedom Order, telecommunications

Net Neutrality Paranoia

Kristian Stout — 27 April 2018

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.

In Broadband, Constitutional Law, Federal Communications Commission, Net Neutrality, Telecommunications, Truth on the Market common carrier, net neutrality, network management, preemption, Restoring Internet Freedom Order, telecommunications

The destiny of telecom regulation is antitrust

Geoffrey Manne & Allen Gibby — 13 December 2017

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.

This doesn't change the fact that @FTC has neither the expertise nor the legal tools 2 protect consumers & competition adequately. @FCC is abdicating this role. #netneutralityِ https://t.co/CQRPeTxExu

— Gigi Sohn (@gigibsohn) December 11, 2017

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.

FCC-FTC Plans for Welfare-Enhancing Cooperation on Online Consumer Protection

Alden Abbott — 12 December 2017

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.

Archives For Restoring Internet Freedom Order

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Rate Regulation by Any Other Name

The Economics of Price Controls

Conclusion

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Draft Orders: The Dark Ages Before 2017

Letting the Sunshine In

Other Reforms

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The Marketplace take on data caps

Unpacking that mess

Why lifting data caps during this crisis ain’t no thing

What this all means

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The CRA is political theater

What would the CRA accomplish?

Stop playing net neutrality games — they aren’t fun

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Framing Things Wrong

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The problematic framing of Universal Service

The Demands of Rural Broadband

Assessing rural broadband needs

Addressing rural broadband needs

Rural Broadband Investment

The Road Ahead …?

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The Great State Law Preemption Conspiracy

Jumping at Shadows

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The longstanding, global transition from telecom regulation to antitrust enforcement

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

The Netherlands

Spain

Denmark

New Zealand

Advantages identified by other organizations

Contrasting approaches to net neutrality in the EU and New Zealand

Conclusion

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