Consider This a Warning: It’s Alive! You Can’t Kill Net Neutrality.

Thomas Warns*

The Two Sides of Internet Neutrality

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In January, net neutrality was dealt a painful blow by the FCC’s defeat in the D.C. Circuit case Verizon v. FCC. At issue was the FCC’s 2010 Open Internet Order, which sought to enforce the principles of net neutrality on broadband internet providers. Supporters of net neutrality bemoan this decision as a huge loss, and fear that companies like Verizon will quickly take advantage of it; after all, why would Verizon oppose the Open Internet Order if it didn’t have something different in mind than the FCC regulations allow? Fortunately, many signs indicate that this setback is likely temporary.

Let’s start with the basics. Net neutrality is the idea that broadband providers should not be able to block or discriminate against any companies (“edge providers”) who wish to transmit information to end users; essentially all data must be treated equally. The FCC labels this the “Open Internet” principle. Net neutrality supporters fear that without a level playing field, broadband providers could throttle connection speeds to certain websites in order to extract payments in exchange for faster service. They could also wish to block competitor applications; for example, Verizon could hypothetically attempt to block Skype in order to provide more business for a rival web-calling program of its own creation. More nefariously, some fear broadband providers could try to violate free speech principles by blocking access to news websites they don’t agree with, like MSNBC or Fox News.

Supporters of net neutrality point out that the Internet’s greatest strength is the interconnectedness of the global network as a whole: users can connect to virtually anything, anywhere, and anytime. The low barrier to entry means that innovative start-ups can get off the ground and eventually become the successful companies we enjoy today like Google or Facebook. If broadband providers could discriminate, it would essentially entrench today’s successful companies; the next Google or Facebook would never get off the ground because it couldn’t pay to play in the big leagues with those two giants. An open internet by comparison would keep the internet alive as an equal opportunity pipeline for services, education, communication, and everything else we have come to rely on it for.

Critics of net neutrality counter that the internet has remained largely unregulated in the last decade, and so far no attempts at odious price discrimination have come to fruition (though there have been minor dustups). They argue that any attempts at price discrimination would drive outraged consumers into the arms of a rival. Indeed, the disastrous 2012 SOPA bill, which would have granted the government the heavy-handed power to shut down websites suspected of copyright violations, was absolutely eviscerated by a spontaneous uprising of millions of angry internet users who besieged Congress. This seems to lend credence to the idea that discerning internet users would use their diffuse market power to defeat price discrimination. A recent survey indicates that 71% of internet users would switch to a net neutral company if their internet service provider started discriminating, and 10% of users would “quit” the internet altogether if net neutrality was eliminated (if you can believe that second figure).

The ugly truth however is that most end users don’t have a lot of choice regarding their broadband provider – a majority of Americans only have one or two options to choose from. When such monopoly problems exist, the advantages of competition aren’t present. Since laying the infrastructure to reach the end users is very costly, it is almost impossible for more competitors to break into the market. Getting permission from the local governments across the entire nation to lay more cables into people’s homes is next to impossible, meaning most people can only choose between their telephone company and cable company for internet. If both companies enact discriminatory regimes without colluding in the matter, internet users would be left with no alternatives. Indeed, cable and phone companies already “bundle” internet service in a cheaper package with their phone or cable service, so that if you opted out in order to seek out a third party internet provider, the costs of service you are already buying from them would go up and erase any potential gains from using the third party.

The Zombie Lives – Internet Neutrality Will Come Back From the Grave

This brings us back to the D.C. Circuit case. It is important to note that for jurisdictional reasons, the D.C. Circuit ruled that the FCC did not have the authority to promulgate the Open Internet Order because it lacked the authority to do so under the 1996 Telecommunications Act. The FCC had designated the broadband providers as an information service, and not a common carrier; if broadband providers are designated instead as common carriers, the court would almost certainly grant them the authority to ensure net neutrality. The court expressly avoided any ruling on the merits of net neutrality as a concept, and would likely grant deference to the FCC under the Chevron doctrine if it reclassified broadband providers as common carriers. Internet neutrality is not dead.

Given the FCC’s and the public’s desires to maintain internet neutrality, the Verizon v. FCC case will likely represent only a roadblock towards the goal of open internet. Despite public suspicions, the broadband companies have not yet moved to exploit the case by enacting discriminatory pricing regimes. Recently, Comcast and Netflix reached an agreement on cost sharing for the video-streaming company on Comcast’s network. This was not the first sign of the death of internet neutrality however; this was a different beast. “Backbone networks” are long haul networks that transport data from companies providing web content to the broadband providers who actually deliver it to the customers. There are portals at the gateway between the backbone networks and the broadband providers; normally if traffic is very heavy in one direction, one of the parties will open up additional portals to accommodate it (these are commonly called peering agreements). The parties essentially self-policed each other, and worked on the mutual premise that either party would open up more portals to accommodate traffic in one direction or another.

Netflix’s interests do not fit this paradigm of self-policing. Netflix requires massive data transfers downstream to the user, but almost goes back upstream. Thus, Comcast had to keep opening up portals, while the backbone providers never had to reciprocate. Comcast eventually got tired of essentially propping up Netflix’s business model, and decided to allow traffic to back up at the portals until Netflix agreed to pay extra to establish a direct connection with Comcast. The custom that had built up around the portals broke down because Netflix was not at all like previous websites. Thus, the agreement did not kill net neutrality, but rather answered the question of whether Netflix’s customers or Comcast’s customers will pay for the voracious appetite for movies and shows that Netflix customers have displayed; the rational decision prevailed, and these two private actors agreed that it should largely be Netflix’s customers. This was not discriminating data based on its content, but rather based on its volume.

Agreements of this nature would not impact start-ups, because they would not impose massive one-sided costs on broadband providers until their businesses were sufficiently built up that they could pay the broadband providers on whom they impose substantial costs. Simply put, this sort of deal does not signal the end of net neutrality. In fact, some people think it might be a good thing, as the extra payments from Netflix and other companies would encourage broadband providers to invest in improved infrastructure to increase internet speeds, which would essentially serve as a rising tide that would lift all boats.

Potential for Compromise

It is hard to trust broadband providers when they have a near monopoly on internet access for most Americans, but critics of net neutrality do have one strong argument against the FCC’s plan: the damage that a heavy-handed regulatory regime could do. To a certain extent, the supporters and critics of net neutrality fall on either side of the line depending on who they fear less: a handful of corporations, or the federal bureaucracy of the United States government. The correct balance should rely exclusively on neither.

If the FCC were to heavily regulate internet traffic with pricing schemes and burdensome paperwork requirements, they could potentially do far more harm than good. Perhaps the best solution would be to reclassify the broadband networks as common carriers and create principles for open internet that would utilize the FCC as a backstop only when necessary. It doesn’t make sense for the FCC to go poking around at Verizon and Comcast when so far neither has moved to significantly jeopardize net neutrality. If either did, it would likely be apparent when edge providers and users began complaining about it and filed complaints with the FCC. In the absence of any allegations of wrongdoing however, the FCC should keep their hands off. For almost all of its existence, the internet has been both unregulated and open; we should only change the former if there is a change in the latter.

*Thomas Warns is a J.D. Candidate, class of 2015, at NYU School of law, Staff Editor on the NYU Journal of Law & Liberty , and author of the weekly column "Consider This a Warning."





JLL's 2014 - 2015 Editor-in-Chief Thomas Warns to be on BronxNet TV

Thomas Warns, NYU Law Class of 2015 and JLL's incoming Editor-in-Chief for the 2014 - 2015 academic year, will be appearing on BronxNet TV this evening to discuss net neutrality.  

Tom will be discussing the recent legal developments surrounding net neutrality on a program entitled "Today's Verdict" with host David Lesch. The program airs tonight at 6:30 and can be viewed via live stream here, Cablevision Channel 67, or Verizon Fios Channel 33.

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The Problem With Net Neutrality

Richard Epstein

Internet regulation is a losing gambit for a fast moving, innovative industry.

This past week in Verizon v. FCC, the Federal Circuit Court for the District of Columbia once again addressed the mysterious role that net neutrality plays in the Federal Communications Commission’s regulatory arsenal. The simplest definition of net neutrality stresses that a telecommunications company must treat all data on the internet equally, without allowing for any prioritization by content or price differentials among customers.

 The FCC sought to regulate the operations of broadband companies, like Verizon, that routinely speed large amounts of data across the Internet through high-speed technological devices such as cable modems. In order to implement its program, the FCC adopted certain anti-blocking, anti-discrimination, and disclosure rules that limit how these broadband companies can operate. The case thus raises tricky questions of law and profound issues social policy.

The FCC Goes to Court

Federal Circuit Court Judge David Tatel’s lengthy and meticulous decision said little or nothing about the soundness of net neutrality. But it had a great deal to say about the FCC’s tangled regulatory web, especially as it relates to the elusive distinction between a “common carrier” on the one hand and an “information service provider” on the other.

First, it is widely settled that the FCC has extensive power to regulate common carriers. Just as their name implies, these companies carry things, from passengers to telephone messages to electricity. By virtue of being common, and not private, their obligation runs to all persons who request their services. Those two principles, when taken together, form the opening wedge for an extensive system of regulation, as in the present net neutrality dispute.

If a common carrier must take all comers, it cannot be given the option to turn down individual customers: hence the FCC’s anti-blocking rules. And if the common carrier cannot exclude some customers, so too it cannot charge them rates so high that they amount to a de facto exclusion: hence the general injunction to charge only “just and reasonable rates.” It’s no surprise that affected industries often try to circumvent these regulations. Consequently, the vigilant government applies the anti-discrimination norm to all “charges, practices, classifications, regulations, facilities, or services.” Disclosure obligations then enforce these basic regulations.

Information services are said to fall outside the category of common carrier obligations. But how should we distinguish between the two classes? As far back as 1980, the FCC administratively drew a distinction between ‘basic’ and ‘enhanced’ service, whereby only the former could be regulated under common carrier rules. The supposed ground of distinction is that information services do more than transmit information. They also supply content or the processes that transform information. Hence certain “edge providers” like Google, Twitter, and YouTube indisputably fall outside the common carrier rules. But it is a lot harder to see why it is that the rapid speed of broadband should somehow exempt it from common carrier regulation.

It looks, therefore, as though Verizon has to be wrong as a matter of law. But that hasty conclusion overlooks the administrative law complexities of the case. Quite simply, the FCC’s own administrative rules have classified broadband as an information service. The Supreme Court’s usual rules of administrative deference allow the FCC to make that decision.

But like all decisions, this one has consequences. The D.C. Circuit concluded that the FCC could not have it both ways. Judge Tatel held that once the FCC refused to classify the broadband providers as common carriers, it was expressly prohibited from treating them that way. Since its anti-blocking and anti-discrimination regulations were vintage common carrier rules, the FCC could not save its regulations by appealing to broad general statements in the FCC Act holding that “the FCC shall encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans.” The particular mandate trumps the general exhortation.

Regulation in Limbo

The technical peculiarities of Verizon have vast implications for the future direction of broadband services. The fuzziness of the statutory definition leaves the FCC the option of reclassifying broadband as a common carrier service. As a matter of ordinary language, that looks to be the correct call. Thus, in the future it seems highly unlikely that the District of Columbia Circuit Court would strike down any administrative decision that brought regulation into closer concordance with the statutory language.

The FCC, however, is not obliged to undertake that step, and political pressures currently are mounting on all sides of that reclassification effort. People eagerly ask whether potential losers, like Netflix, will have the power to turn things around. This unfolding spectacle is in itself a strong condemnation of the entire system of telecom regulation, which leaves too much space for destructive political manipulation. One advantage of a strong system of property rights is that the state’s role is limited to enforcing the exclusivity of the property rights, so that millions of dollars are not wasted in trying to shift ceaselessly from one regime to another.

The question then arises, what kind of property regime? In this regard, it is necessary to go back to the first principles of common carrier regulation, starting with the famous work of Sir Matthew Hale, de Portis Maribus, which was incorporated into English law in Allnut v. Inglis in 1810. Under the banner of businesses “affected with the publick interest,” these venerable authorities held that a requirement that a party provide services, to use the modern phrase, on reasonable and nondiscriminatory terms, worked as an offset to monopoly power that arose for some “essential facility” that has no close substitutes.

Note this profound reversal. In competitive markets, a refusal to deal is what makes the economy work, because it prevents any forced interactions that could prove disastrous for one side or the other—hence the sensible rule that the customer who was refused service from one merchant could just do business with another. But in the monopoly setting, there is no other rival merchant next door; rate regulation was intended to reduce monopoly rates to competitive levels. This enterprise of rate regulations poses serious compensation risks, so that the American cases have, for close to 125 years, imposed judicial review to see that the rates imposed allow the firm in question to make a reasonable return on invested capital.

Of course, the entire regulatory process is fraught with abuses that in individual cases could leave the established rates either too high or too low. It follows therefore that with the first whiff of competition a strong case arises for dispensing with the rate regulation process altogether. In the short run, this might lead to higher rates, but, in the long-run, innovation from new entrants will tend to drive rates down to a competitive level that is likely unattainable under sclerotic rate regulation systems.

So in the end, the key substantive decision should not turn on whether broadband providers transmit or create information. It should turn on whether or not they can exert any form of monopoly power in some relevant market. As a general matter, the faster the technological transformation, the less desirable the monopoly regulation. Firms like AOL and Blackberry, once thought to possess monopoly power are now footnotes in modern policy debates. The great danger of regulation is that those intended to foster competition will further entrench the position of incumbent players.

A Defense of Net Neutrality?

Many critics of net neutrality argue that the power to exclude is fraught with the risk of abuse. Writing on Slate,Marvin Ammori raises this concern to a fever pitch, by insisting that only net neutrality prevents Comcast from blocking Facebook or Bing, or Verizon from offering better terms of service to the Huffington Post than Slate. One purported consequence of this high-handed action is that the delay could “stifle innovation.” What is striking about this one-sided account is that it does not address any possible efficiency advantages from rejecting net neutrality.

The first of these efficiency considerations is that it is a lot cheaper to operate a system that makes no pretense of putting in place the elaborate scheme of regulation that now applies to common carriers. Second, we have already had extensive experience with systems, like the internet and cell phone networks, that are not subject to direct rate regulation and we have not seen any of the odious practices that Ammori predicts.

Most importantly, however, he does not attribute any social gains to the ability of carriers to prioritize and price information as they choose. But that cannot be right in light of how firms operate in competitive industries.

Federal Express does not have a monopoly in the shipping business. In order to bolster its service, it engages in extensive forms of price discrimination. It lets its customers decide whether they want same-day, one-day, or two-day delivery, and then charges them in accordance with their preferences, with rate differentials that it sets for itself. The upshot is a wide array of services that is only possible when government does not stand between the conception and execution of a planned program. Product and price differentiation improve consumer welfare.

Similar practices have driven success in hotels and airlines. Indeed, the forces of innovation are so great, that it may well be the case that it is better, especially in rapidly evolving industries, to forget the idea of rate regulation altogether, given that future competitors, sensing opportunity, will attack first those market niches where monopoly power still exists.

Ammori does note, correctly, that there are certain markets in which some service providers may well possess monopoly power. But for those incursions, net neutrality is still not the answer. Even in the short run, rival plays will seek to steal market share from the monopolist. In the long run, the rapid movement of technology has already left us with a new and vibrant landscape that is light years removed from a generation ago when the major premise of the Telecommunications Act of 1996 was that landlines would continue to hold a monopoly position for years to come—about two years, in fact. That false premise led to extensive regulatory battles over all the interchange relations between local exchange carriers and long line carriers. But the rise of cell phones and VoIP technology changed all that, so that the regulation did much to hamper innovation, but virtually nothing to protect consumers.

The lessons apply here. It is always a desperate mistake to allow hypothetical horror stories to set the intellectual stage for evaluating regulatory proposals. Quite simply, Slate will be able to access all major networks because no broadband carrier wants to face the consumer wrath and defections that would surely accompany high-handed and intrusive interventions.

The correct approach therefore is to do nothing. The FCC need not implement any regulations. For now, it should sit back and relax. If some crisis occurs that merits new forms of internet regulations, we can address that situation when it comes. But for the moment, innovation on the internet is doing great. Let’s keep it that way.

Taking Sides on Net Neutrality

Thomas Warns

Last week the D.C. Circuit Court of Appeals heard a case that could have massive reverberations for the millions of Americans that use the internet. The litigants are the Federal Communication Commission and Verizon.  The New York Times characterizes the fight thusly:

“Verizon and a host of other companies that spent billions of dollars to build their Internet pipelines believe they should be able to manage them as they wish. They should be able, for example, to charge fees to content providers who are willing to pay to have their data transported to customers through an express lane…The F.C.C., however, believes that Internet service providers must keep their pipelines free and open, giving the creators of any type of legal content — movies, shopping sites, medical services, or even pornography — an equal ability to reach consumers.”
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One factor to keep in mind, however, is that the D.C. Circuit Court ruled in favor of Comcast in similar litigation in 2010. In that case, the Court ruled that the F.C.C. did not have the authority to regulate and punish an Internet Service Provider for blocking access to a website; the Court could rule once more that the F.C.C. overstepped its bounds with its “Open Internet Order,” which the agency published in December 2010.

But how should the internet be regulated? On the one hand, Verizon and other telecom giants do have a point: if they built the highway, it seems right to let them decide who can drive on it and how fast. Moreover, companies like Verizon do not have a history of conducting the type of internet blocking that the F.C.C. fears. Only 4 such incidents of internet blocking have been documented in the last 6 years. For its part, Verizon has even argued that the F.C.C.'s current internet regulatory scheme implicates the First Amendment. Verizon argues that it has the right to pick and choose what to provide along its pipeline, like a newspaper editor picks stories to print (though it is unclear how Verizon would exercise its editorial power in a broad way, and it could even leave it liable for illegal websites that use Verizon as a conduit).

Allowing the F.C.C. the authority to regulate the internet, and thus the massive scope of activity that occurs in the web, would be a tremendous expansion in the agency’s power. But advocates say the agency is best equipped to defend net neutrality, which is important for many reasons. First, without net neutrality the large corporations with well-established access to capital markets would be in a strong position to prevent new start-ups from disrupting the telecom market. Net neutrality advocates fear that companies like Google and Facebook  would have the upper-hand over start-up competition in an arm's race over faster internet service. Further, if Verizon could choke off certain avenues of its network, it would actually have an incentive to throttle bandwidth for everyone in order to reap the benefits of charging premiums for faster access. With most Americans having only one or two broadband options to choose from, there is little besides the F.C.C. to stop telecom giants from acting as internet overlords.

Although government regulation often creates more problems than solutions, it might be best to expand the F.C.C.’s powers in this case. Given the monopolistic nature of internet’s infrastructure and its current unique platform as the ultimate conduit of free speech, it doesn’t seem prudent to leave all that power in the hands of a few corporations.

 

*Thomas Warns is a J.D. Candidate at the New York University School of Law, Class of 2015, and a Staff Editor on the Journal of Law & Liberty .