|Tom Nolle says:|
The FCC Neutrality Order: It’s Not What you Think
We have at least the as-yet unvoted draft of the FCC’s new position on Net Neutrality, and as accustomed as I am to reading nonsense about developments in tech, the responses here set a new low. I blogged about the issues that the new FCC Chairman (Pai) seemed to be addressing here, and I won’t reprise all the details. I’ll focus instead on what the draft says and how it differs from the position I described in the earlier blog, starting with some interesting “two-somes” behind the order.
There are really two pieces of “net neutrality”. The first could be broadly called the “non-discrimination” piece, and this is what guarantees users of the Internet non-discriminatory access to any lawful website. The second is the “prioritization and settlement” piece, and this one guarantees that no one can pay to have Internet traffic handled differently (prioritized) or be required to pay settlement among ISPs who carry the traffic. The public debate has conflated the two, but in fact the current action is really aimed at the second.
There are also two competing issues in net neutrality. The first is the interest of the consumers and OTTs who are using the Internet, and the second the profit interest of the ISPs who actually provide the infrastructure. The Internet is almost totally responsible for declining profit per bit, and at some point this year or next, it will fall below the level needed to justify further investment. While everyone might like “free Internet”, there will be no race to provide it. A balance needs to be struck between consumer interest and provider interest.
As a practical matter, both the providers and the OTTs have powerful financial interests they’re trying to protect, and they’re simply manipulating the consumers. Stories on this topic, as I said in my opening paragraph, have been simply egregious as far as conveying the truth is concerned. The New York Attorney General is investigating whether some comments on the order were faked, generated by a third party usurping the identities of real consumers. Clearly there’s a lot of special interest here.
Finally, there are two forums in which neutrality issues could be raised. The first is the FCC and the second the Federal Trade Commission (FTC). The FCC has a narrow legal mandate to regulate the industry within the constraints of the Communications Act of 1934 as amended (primarily amended by the Telecommunications Act of 1996). The FTC has a fairly broad mandate of consumer protection. This is a really important point, as you’ll see.
So, what does the new order actually do? First and foremost, it reverses the previous FCC decision to classify the Internet as a telecommunications service (regulated under Title II of the Telecommunications Act of 1934). This step essentially mandates an FCC light touch on the Internet because the Federal Courts have already invalidated many of the FCC’s previous rules on the grounds they could be applied only to Telecommunications Services.
All “broadband Internet access services”, independent of technology, would be classified as information services. It includes mobile broadband, and also includes MVNO services. People/businesses who provide broadband WiFi access to patrons as a mass consumer service are included. It excludes services to specialized devices (including e-readers) that use the Internet for specialized delivery of material and not for broad access. It also excludes CDNs, VPNs, or Internet backbone services. The rule of thumb is this; if it’s a mass-market service to access the Internet, then it’s an information service.
The classification is important because it establishes the critical point of jurisdiction for the FCC. The FCC is now saying that it would be restrictive to classify the Internet as Title II, but without that classification the FCC has very limited authority to regulate the specific behavior of the ISPs. Thus, the FCC won’t provide much in the way of specific regulatory limits and penalties. It couldn’t enforce them, and perhaps it could never have done so. Everything they’ve done in the past, including non-discrimination, has been appealed by somebody based on lack of FCC authority, and the Title II classification was undertaken to give the FCC authority to do what it wanted. Absent Title II, the FCC certainly has no authority to deal with settlement and prioritization, and probably has insufficient authority to police non-blocking and discrimination. That doesn’t mean “net neutrality” goes away, as the stories have said.
The FCC will require that ISPs publish their terms of service in clear language, including performance, terms of service, and this is where the FCC believes that “neutrality” will find a natural market leveling. The order points out that broadband is competitive, and that consumers would respond to unreasonable anti-consumer steps (like blocking sites, slowing a competitor’s offerings, etc.) by simply moving to another provider.
The order also points out that the “premier consumer protection” body, the FTC, has authority to deal with situations where anti-competitive or anti-consumer behavior arise and aren’t dealt with effectively by competitive market forces. Thus, the FCC is eliminating the “code of conduct” that it had previously imposed, and is shifting the focus of consumer protection to the FTC. As I noted earlier, it’s never been clear whether the FCC had the authority to impose “neutrality” except through Title II, and so the fact is that we’ve operated without strict FCC oversight for most of the evolution of the Internet.
The FTC and the marketplace are probably not enough to prevent ISPs from offering paid prioritization and for requiring settlement to deliver high-volume traffic. In fact, one of the things I looked for in the order was the treatment of settlement among ISPs, the latter topic being particularly dear to my heart since I’ve opposed the current “bill and keep” practice for decades, and even co-authored an RFC on the topic. The order essentially says that the FCC will not step in to regulate the way that ISPs settle for peering with each other or through various exchanges. Again, the FCC says that other agencies, including DoJ antitrust and the FTC, have ample authority to deal with any anti-competitive or unreasonable practices that might arise.
Paid prioritization is similarly treated; the FCC has eliminated the rules against it, so ISPs are free to work to offer “fast-lane” behavior either directly to the consumer or to OTTs who want to pay on behalf of their customers to improve quality of experience. This may encourage specific settlement, since the bill-and-keep model can’t compensate every party in a connection for the additional cost of prioritization. We should also note that paid prioritization could be a true windfall for SD-WAN-type business services, since the economics of high-QoS services created over the top with paid prioritization would surely be a lot better than current VPN economics. You could argue that SD-WAN might be the big winner in the order.
The OTTs will surely see themselves as the big losers. What they want is gigabit broadband at zero cost for everyone, so their own businesses prosper. Wall Street might also be seen as a loser, because they make more money on high-flyers like Google (Alphabet) or Netflix than on stodgy old AT&T or Verizon. VCs lose too because social-media and other OTT startups could face higher costs if they have to pay for priority services. That might mean that despite their grumbling, players like Facebook and Netflix could face less competition.
It will be seen as an improvement for the ISPs, but even there a risk remains. Network operators have a very long capital cycle, so they need stability in the way they are regulated. This order isn’t likely to do that for two reasons. First, nobody believes that a “new” administration of the other party would leave this order in place. Second, only legislation could create a durable framework, and Congress has been unable to do even major things. They’ve avoided weighing in on Internet regulation for 20 years now. Thus, realizing the full benefits of the order may be illusive because operators might be reluctant to believe the changes will persist long enough to justify changing their plans for investment in infrastructure.
The long-term regulatory uncertainty isn’t the only uncertainty here. The Internet is global, and its regulation is a hodgepodge of competing national and regional authorities, most of whom (like the FCC) haven’t had a stable position. “We brought in one side and gave them everything they wanted, then we brought in the other side and gave them everything they wanted,” is how a lawmaker in the US described the creation of the Telecom Act in 1996. That’s a fair statement of regulatory policy overall; the policies favor the firms who favor the current political winners.
My view, in the net? The FCC is taking the right steps with the order, and that view shouldn’t surprise those who’ve read my blog over the last couple of years. Net neutrality is not being “killed”, but enforcement of the first critical part of it (what consumers think neutrality really is) is shifted to the FTC, whose power of enforcement is clear. There is no more risk that ISPs could decide what sites you could visit than there has been—none, in other words. It’s not a “gift to telecom firms” as one media report says, it’s a potential lifeline for the Internet overall. This might reverse the steady decline in profit per bit, might restore interest in infrastructure investment. “Might” if the telcos believe the order will stand.
It’s not going to kill off the OTTs either. There is a risk that the OTTs will be less profitable, or that some might raise their rates to cover the cost of settlement with the ISPs. Will it hurt “Internet innovation?” Perhaps, if you believe we need another Facebook competitor, but it might well magnify innovation where we need it most, which is in extending broadband at as high a rate and low a cost as possible.
If the ISPs are smart, they’ll go full bore into implementing the new position, offering paid prioritization and settlement and everything similar or related, and demonstrating that it doesn’t break the Internet but promotes it. That’s because there could be only about three years remaining on the policy before a new FCC threatens to take everything back. The only way to be sure the current rules stay in place is to prove they do good overall.