Net Neutrality Rules Remain Divisive Issue Two Years After Approval

Commissioner Robert McDowell, who voted against the rules at that Dec. 21, 2010, meeting, told us he remains convinced they aren’t needed and in the end could do more harm than good. “Thus far the net effect of the rules is uncertain at best, negative at worst, but going forward there’s a great deal of uncertainty regarding whether the net neutrality rules will be used as a competitive weapon in market warfare between rivals,” he said. “It all boils down to what three members of the FCC think is ‘reasonable’ behavior, and that ultimately becomes a political decision, not a business or engineering decision."

McDowell cited a recent policy paper (http://xrl.us/bnpb6q) by USTelecom, saying capital expenditures by all of the components of the communications industry combined -- wireline, wireless and cable -- had remained the same between 2010 and 2011 at $66 billion per year, regardless of the net neutrality rules. “We just don’t know why” investment “leveled off ... for two years in a row,” he said. “Since the outset of the net neutrality debate, which started really in 2007 with the advent of the open access mandate in the 700 MHz auction, I've been saying that competition in the last mile obviates the need for ex ante regulation,” McDowell said. “With well over 90 percent of Americans having a choice of wireless providers, plus cable, plus phone company, plus sometimes overbuilders, etc., there’s more competition in the last mile than there has ever been in American history. This has been good news for American consumers. Indeed the market has developed in a way that removes incentives for anticompetitive behavior and that means there’s no need for such rules."

Industry faces a greater threat if the order is overturned -- that the FCC could act a second time, but only after reclassifying broadband as a Title II common carrier service, several observers agreed. One government official said that possibility is raising concerns particularly among analysts who cover the telecom industry. The FCC has yet to close out a docket launched while net neutrality rules were first being debated on changing the regulatory status of broadband to Title II.

"Most lawyers believe the FCC’s open Internet rules are built on an unsound legal foundation,” said Richard Bennett of the Information Technology and Innovation Foundation. “A greater risk to investment, however, is the Title II docket that the FCC refuses to close because it gives the agency leverage if and when the courts strike down its Internet rules. The just-ended [World Conference on International Telecommunications] meeting illustrated the danger of subjecting the Internet to the traditional telecom regulatory system, which is exactly what Title II regulation would accomplish."

The FCC argued in September in a filing with the D.C. Circuit that the rules have done more to stimulate than hamper investment in the Internet (CD Sept 12 p1). Proponents of the net neutrality order said it hasn’t hurt industry.

Some industry executives see net neutrality as a less critical issue today than it was in 2010, given the changes undertaken by carriers in how their networks are structured. “I think it’s a less salient issue than it was two years ago,” AT&T Senior Executive Vice President James Cicconi said in a recent interview. “I think most of us have ... made the decisions on a going forward basis that we're going to be open platforms.”

Economists we spoke to differed on the effect of the rules, though two who often oppose regulation said the order isn’t having a positive effect on investment in Internet-related businesses. The goal of an FCC committee studying the impact of the rules is to produce a report by July on their effect, said FCC Open Internet Advisory Committee Chairman Jonathan Zittrain, a Harvard University professor. The committee is scheduled to receive a case study report from its mobile broadband working group at the January meeting, and three other working groups are at work, he said.

The impact of the open Internet principles is “less pronounced, and not nearly as deleterious as some forecasted at the time,” said Harvey Anderson, Mozilla general counsel. “Overall, I still view the rules as a net positive and directionally correct,” said Anderson, on the Open Internet Advisory Committee. “The next question is how these principles should be conformed to the mobile Internet in a way that supports both network operators’ need to manage traffic and for consistent Internet characteristics irrespective of mobile or desktop access."

Phoenix Center President Lawrence Spiwak said most companies weren’t engaging in anticompetitive behaviors in the first place. But he said the rules have definitely had an effect in three areas. First, because wireless was not subject to the rules while wireline is, “we have seen a lot more trend of investment moving toward the unregulated wireless side than the wireline side,” he said. Second, the rules have directly led to an increase in usage-based data caps: Net neutrality is “essentially zero price regulation,” he said, in that ISPs can’t charge companies that impose costs on their network. “So how do you recover your cost? By charging the consumer. ... You're not going to be able to have the all-you-can-eat simple plans anymore, and that is a clear result of net neutrality.” Spiwak also expects increased vertical integration between content and broadband providers, he said.

Duke economics Prof. Leslie Marx agreed the rules weren’t needed, and chalked up any perceived result of the rules to “a placebo effect.” There was no evidence of a significant market failure before the rules were put in place, and the market continues to work today, said the FCC chief economist under former Chairman Kevin Martin. So “it’s difficult to judge whether they have had an impact,” she said. “Broadband providers already have an incentive to provide their customers with access to the content they want.” Economic literature suggests that antitrust enforcement, or more limited regulatory mechanisms, would make a better framework for addressing competitive concerns, she said.

Public Knowledge Senior Vice President Harold Feld remains convinced approval of the rules was a good thing, he said. “I think they have been useful in providing a way for questions about specific conduct to be resolved without a lot of uncertainty or resorting to mass Internet protests,” Feld told us. “What happened with AT&T and Facetime is a classic example. Without rules, it would have needed to be a big fight as AT&T totally asserted its right to do whatever it wanted and concerned parties needing to raise holy Hell to try to get either AT&T to move its position voluntarily or to get the FCC to act. Instead, we and other public interest groups concerned filed a required notice, the rules forced us and AT&T into a discussion where a satisfactory resolution was reached. Having an actual process made this happily routine and boring for everyone.” In November, following the complaints of public interest groups including Public Knowledge, AT&T said it will no longer block use of the FaceTime video calling application on its network for at least some of its customers who haven’t subscribed to its “Mobile Share” data plan (CD Nov 9 p5).

Feld questioned whether the regulations could have a negative effect on investment. He paraphrased a question Fox News anchor Megyn Kelly asked Republican political strategist Karl Rove: “Is this math you do as a Libertarian to make yourself feel better or is this actually real?” Evidence points in the other direction, Feld said. “I will point to $25 billion in capital investment by [Deutsche Telekom] and Softbank combined with AT&T’s $14 billion in announced new investment to upgrade its wireline and wireless network in the last 6 months,” he said. “As demonstrated by AT&T’s Facetime misadventure, having actual regulatory certainty and a process saves everyone money. If carriers think it is a meaningless security blanket to keep consumers happy, then good. I have my security blanket, they have their business, and everyone is happy."

"The open Internet rules maintain the status quo, at least on wireline networks,” said public interest lawyer Andrew Schwartzman, a net neutrality supporter. “They do not have a significant impact on day-to-day operations. Their main value is in protecting against future actions, which might undermine the openness of the Internet. It is hard to imagine how they would stifle investment, since the successful business models have always been predicated on openness."

But net neutrality opponent Randolph May said he remains concerned about the total effect of the regulations on investment. “Because the commission recognized the Internet was open when it adopted the rules, there is no basis to conclude they were necessary to preserve openness,” said May, president of the Free State Foundation. “I suspect that over time the rules will put a damper on investment and innovation as providers act cautiously trying to figure out how the Commission might react to new services and products. Of course, it is much easier to measure investments made and innovations brought to market than investments never made or innovations never brought to market. And, assuming for the sake of argument, that the rules are ultimately upheld, one thing we know for sure is that their net effect will depend on whether the agency interprets ‘discrimination’ more or less stringently. The more stringent the interpretation, the greater the likely harm to investment."

The rules have been “so gutted by loopholes, vague language, statutory uncertainty, and FCC timidity that they haven’t had much of an impact,” said New America Foundation Vice President Sascha Meinrath. He said the net effect of the FCC’s “temerity” has been “uncertainty for businesses, a lack of consumer protections, continuing price-gouging, anti-competitive behavior, discrimination against applications and services, high prices, and a weak broadband focus.” The unnecessary bifurcation of wireless and wireline rules leads to further confusion, he said. AT&T’s blocking Facetime was “blatantly disallowable,” and “clearly anticompetitive behavior,” Meinrath said. NAF is finding evidence of much more complex issues it thinks are related to net neutrality having to do with deep packet inspection and ongoing traffic discrimination, he said: A number of protocols have been “systematically degraded over wireless networks.” Carriers have introduced latency into the buffering system used for mobile video, he said. ISPs are “continually testing the waters to see how far they can push this,” he said. Because the FCC only has in place a process for case-by-case review, consumers will “systematically, always, be facing an unknown number of new discriminatory practices over various protocols,” he said. “You'll never really have certainty that it won’t happen."

American Cable Association Government Affairs Vice President Ross Lieberman said the rules have had a “chilling effect” on the rollout of “specialized services.” The FCC provided “so little useful guidance on what is permitted and prohibited that broadband providers are concerned about launching these types of services to their customers,” he said. “The rules are harming potentially innovative services.” Danielle Coffey, Telecommunications Industry Association vice president-government affairs, agreed that uncertainty is the “biggest challenge” facing manufacturers. TIA member companies aren’t necessarily for or against the rules, but simply want to know what they will be so they can make long-term business decisions in the marketplace, she said.

Medley Global Advisors analyst Jeff Silva said it’s very hard to gauge the effect of the rules. “Attempting to assess or quantify the effect of net neutrality guidelines seems like a tricky proposition, given all the variables and unknowns at work,” he said. “The bottom line is views on net neutrality have likely changed little, if at all, since the rule was adopted and therefore such mindsets can’t help but color perspectives on the rule’s impact to date.”