Regulation is often portrayed as the use of government authority to alter market outcomes away from the interests of firms and toward those of consumers and employees. In turn, the “story” associated with deregulation is the opposite: Corporations and the powerful use their influence to eliminate public sector controls on their conduct at the expense of consumers and employees.
But if the usual narrative is true how do we explain a full-page ad that AT&T recently published in multiple newspapers, including the Washington Post and the New York Times, calling on Congress to pass new legislation to guarantee internet neutrality? The short answer is that existing companies often favor regulation that reduces competition in ways not well understood by consumers or legislators.
AT&T, one of the nation’s largest ISPs and a company that recently dedicated significant resources to support the FCC’s recent repeal of Title II net neutrality regulations, seems like an unlikely proponent of net neutrality legislation. But its position on the policy highlights why companies sometimes support regulations that would appear to harm them.
AT&T’s opposition to Title II net neutrality regulations is not based on a general hostility towards all regulations, but instead stems from the specific types of rules that Title II regulations would impose. Title II of the Federal Communications act of 1934 was originally intended to regulate telephone companies, and gave the government the ability to review and accept or reject telephone rates. During the fight for net neutrality regulation over the last ten years, the FCC sought to regulate the internet under other parts of the Communications Act, but courts continually said no, forcing the Commission to regulate under Title II. Because Title II comes with the possibility of price controls like those imposed on telephone companies, AT&T opposed that regulatory system and called for Congressional action to ensure net neutrality without the possibility of price controls.
As I’ve previously argued, net neutrality regulations are an attempt to settle fights between ISPs and content providers, like Netflix or Hulu. Both sides “need each other to satisfy consumers, but they fight each other to capture the larger share of consumers’ payments.” Title II price controls would have disadvantaged ISPs and benefitted content providers. Now that the debate over whether ISPs should be regulated under Title II is, at least temporarily, seemingly in its favor, why is AT&T continuing to call for new legislation?
Yesterday, Federal Communications Commission Chairman Ajit Pai announced his intention to reverse Obama administration "net neutrality" rules governing the internet that were put in place in 2015. Some commentators are criticizing the announcement as a give-away to large telecom companies and an attack on consumers. But the Obama rules create some serious problems for consumers—problems that Pai says he wants to correct.
Under the Obama rules, internet service providers (ISPs) are subject to "rate-of-return" regulations, which the federal government previously applied to AT&T's long-distance telephone service back when it was a monopoly more than 50 years ago. Ostensibly, rate-of-return regulation gives government officials the power to review and approve or reject ISP rates. In reality it basically guarantees ISPs government-enforced market protection and profitability, in exchange for regulators ensuring that ISPs won't be too profitable.
As explained in this 2014 post, rate-of-return regulation involves more than just telecom. It is an attempt to settle fights between "producers" and "shippers"—whether those are farms, mines, and factories on one side and railroads and shipping lines on the other, or Netflix and Hulu on one side and ISPs on the other. In all those cases, the producers and shippers need each other to satisfy consumers, but they fight each other to capture the larger share of consumers' payments. If shippers charge more, then farmers, factories, and Netflix must charge less in order to maintain the same level of sales.
The political resolution of the producer–shipper fights was the Interstate Commerce Act of 1887 and its rate-of-return regulations, which were initially written with railroads in mind. Similar efforts were later extended to trucking, air transportation, energy, and telecom. It took about 100 years for policymakers to accept that those efforts hurt consumers much more than it helped them, forcing on consumers too many bad providers with high prices and poor quality.
The United States Court of Appeals for the District of Columbia upheld on Tuesday June 14, 2016 so called “net neutrality” rules issues by the Federal Communications Commission in February 2015. Two previous attempts by the FCC to regulate the internet under different sections of the Telecommunications Act were overturned by the same court in 2010 and 2014 reflecting the traditional policy distinction between heavily regulated traditional telephone landline service and so‐called information services involving computers that were not regulated.
The rule issued by the FCC in 2015 reclassified internet services as falling under the same legal regime as traditional telephone service. Yesterday’s Appeal Court decision accepts that reclassification and the legal authority that goes with it.
Regulation has published four articles in the last two years year criticizing traditional public utility regulation of the internet. Christopher Yoo from the University of Pennsylvania argues that traditional telephone regulation envisions a monopoly service and government oversight ostensibly intended to limit prices and expand service provision. But the expansion of wireless high‐speed Internet has allowed multiple competitive providers to provide service to a large majority of American consumers while restraining capital costs. “What Hath the FCC Wrought”, by former FCC chief economist Gerald Faulhaber, argues that service quality will suffer to the extent that internet access providers can’t charge more for streams that impose greater costs on the system. Kansas State professor Dennis Weisman argues that internet regulation will likely protect competitors from competition rather than serve consumer interests just like the old telephone regulatory scheme. And Larry Downes from the Georgetown Center for Business and Public Policy argues that the movement to re‐regulate telecom is propelled by some firms’ quest for rents under new regulation, and by Federal Communications Commission attempt to regain political power and the benefits that come with it.
It’s not often that a regulatory policy analyst correctly predicts a pop culture development a decade out, so…
Back in the spring of 2005, law professor Christopher Yoo (then at Vanderbilt, now at Penn) argued in Regulation that the Federal Communications Commission should liberalize its “structural regulations” — controls on such things as how the broadcast spectrum can be used, cable TV rates, ownership of different media outlets in a geograpic market, etc. He explained that those controls limit the diversity of voices and programming in mass media, making it mainstream‐directed, because such programming is most profitable under those rules.
About the time his article appeared, the now‐defunct UPN Network announced its cancellation of the series Star Trek: Enterprise, the most recent TV installment of the Star Trek franchise. The reason was low ratings; Trek fans are fervant and typically middle to upper class, but they were not a big enough market segment for UPN and its desired advertisers. However, those characteristics made the fans an ideal market for a paying‐subscriber‐supported Star Trek—something that Yoo’s reforms would have allowed, but FCC regulations prohibit.
Seeing the news hook, Yoo and I wrote an op‐ed for the San Francisco Examiner explaining all this and concluding
Hopefully, if the “Star Trek” series gets yet another revival, it will be in a mass communications environment where niche shows have a better chance to live long and prosper.
Unfortunately, the FCC hasn’t adopted the reforms we envisioned (if anything, going in the opposite direction). But human innovation — both in technology and business — often finds ways around government barriers.
This week, the CBS Network announced that a new Star Trek series will launch in January 2017, exclusively on CBS’s Internet‐delivered subscriber service All Access. The move will attempt to do exactly what Yoo and I foresaw: tap the Trek fanbase to see if it is a viable market for the show.
It can’t be said that CBS is boldly going where no one has gone before. Cable and satellite services, premium channels like HBO and Starz, and streaming services like Hulu and Netflix have already entered the final frontier of subscriber‐supported content, delivering high‐quality but niche‐audience new programming such as original series Game of Thrones and House of Cards, reboots like Battlestar Galactica, and network‐cancelled series like The Mindy Project. They can do this, in part, because they can escape many of the FCC’s diversity‐dampening regulations — for now at least.
Unfortunately, the FCC hovers as menacingly as a Romulan starship, as evidenced by the recently adopted net neutrality regulations. Still, let’s hope that CBS’s new venture lives long and prospers.
The Sunlight Foundation reports that the Federal Communications Commission has received more than 800,000 public comments on the topic of “net neutrality,” more than 60 percent of them form letters written by organized campaigns and more than 200 from law firms on behalf of themselves or their clients. That’s an impressive outpouring of public comments.
But Berin Szoka, a long‐ago Cato intern who now runs TechFreedom, argues, “This debate is no longer about net neutrality. A radical fringe has hijacked the conversation in an attempt to undo two decades of bipartisan consensus against heavy‐handed government control of the Internet.” TechFreedom has just launched DontBreakThe.Net, a web‐based campaign to expose the danger facing the internet from well‐meaning demands for something called “net neutrality.” In an open letter to FCC chairman Tom Wheeler, Szoka says:
Subjecting broadband to Title II of the 1996 Telecom Act would trigger endless litigation, cripple investment, slow broadband deployment and upgrades, and thus harm underserved communities. Al Gore may not have exactly ‘invented the Internet,’ but President Clinton’s FCC chairman Bill Kennard deserves much credit for choosing not to embroil the Internet in what he called the ‘morass’ of Title II. Kennard’s approach of ‘vigilant restraint’ unleashed over $1 trillion in private investment, which built the broadband networks everyone takes for granted today. Abandoning that approach would truly break the Internet.
Net Neutrality supporters such as Google, Facebook, and the NAACP haven’t jumped on the Title II bandwagon because they understand that Title II would threaten the entire Internet. Title II proponents claim the FCC can simply ‘reclassify’ broadband, but in truth, there’s no such thing as reclassification, only re‐interpretation of the key definitions of the 1996 Telecom Act. If the FCC re‐opens that Pandora’s Box, the bright line Chairman Kennard drew between Title II and the Internet will disappear forever. Startups and edge/content providers will inevitably be caught in the fray. And besides, the FCC has a long history of overstepping its bounds.
Invoking Title II would trigger years of litigation. It’s not clear the FCC could ultimately ‘reclassify’ broadband at all, and even less clear the FCC could, or actually would, follow through on talk of paring back Title II’s most burdensome rules, like retail price controls. Even if ‘reclassification’ stood up in court, the FCC still couldn’t do what net neutrality hardliners want: banning prioritization. The FCC would succeed only in creating a dark cloud of legal uncertainty. That would slow broadband upgrades and discourage new entrants, such as Google Fiber, from entering the market at all.
The best policy would be to maintain the ‘Hands off the Net’ approach that has otherwise prevailed for 20 years. Innovation could thrive, and regulators could still keep a watchful eye, intervening only where there is clear evidence of actual harm, not just abstract fears. As former FCC Chairman Bill Kennard put it, ‘I don’t want to dump the whole morass of Title II regulation on the cable pipe.’ If we want to maintain a free and open Internet, and encourage broadband competition, the FCC would do well to heed his advice.
TechFreedom created this catchy graphic for its campaign to encourage more people to understand what’s at stake in the so‐called “net neutrality” fight.
Do you want your Internet service provider to operate like the water company or the electric company? Internet access services will be more like these leaden public utilities if the Federal Communications Commission tries one of the more likely workarounds to a D.C. Circuit Court decision today that restricts its authority to regulate.
The story is long and involved — read it in the court’s opinion if you like — but the FCC has sought for years now to regulate broadband Internet service providers something like it used to regulate AT&T, with government mandated terms of service if not tarriffs and price controls. This doesn’t fit the technical environment of the Internet, which allows for diverse business models. Companies that experiment with network management, pricing, internal subsidy, and so on can find the configurations that serve widely varying consumers and their differing Internet needs the best. If government believes in fast lanes and slow lanes, surely Internet service providers could optimize service for movie delivery, video calling, and such, while email arrives a little less speedily.
The court found that the FCC’s plans don’t fit with its classification some years ago of broadband as an “information service,” subject to the light‐touch regulation under Title I of the Communications Act. Title II, which applies to “telecommunications carriers,” allows common carrier regulation of the type the FCC is trying to impose. So watch for the FCC to conveniently change its mind and begin pushing for treatment of broadband once again as a “telecommunications service.” This is so it can have more control over the business decisions made by Internet service providers.
We made the case more than five years ago that “ ‘Net neutrality” is a good engineering principle, but it shouldn’t be a legal mandate. Technology and markets surpassed any need for command‐and‐control regulation in this area long ago. But regulators don’t give up power without a fight. To maintain power, the FCC may try to make Internet service a public utility.
I’m perplexed by the challenge of referring neutrally to legislation moving through Congress dealing with whether or not the government should regulate Internet service. Work with me as I untangle the Standard Federal Obfuscation™ involved here.
The White House has issued a “Statement of Administration Policy” that deals with S.J. Res. 6 (House companion H.J. Res. 37 passed in April.) The bill is a “resolution of disapproval” under the Congressional Review Act. The CRA allows Congress to reject federal regulations for a period of time after they have been finalized. Resolutions like this enjoy expedited procedures in the Senate, making it harder for Senate leadership to stop them moving.
The Federal Communications Commission voted in December to apply public‐utility‐style regulation to the provision of Internet service. Congress is moving to reject the FCC’s claim of authority using the CRA, and the president has now said he will veto Congress’ resolution that does that.
Well — the obfuscation continues — actually, the Statement of Administration Policy says “[t]he administration” opposes S.J. Res. 6, and, “If the President is presented with S.J. Res. 6, which would not safeguard the free and open Internet, his senior advisers would recommend that he veto the Resolution.”
At some point, it may be an important detail that the president hasn’t promised a veto yet. His advisers have promised to advise him to veto. OK. Whatever. They work for him. It’s a veto threat.
But, but,… Would these regulations safeguard a “free and open Internet”? The statement says, “Federal policy has consistently promoted an Internet that is open and facilitates innovation and investment, protects consumer choice, and enables free speech.” In a sense, that’s true: When the engineers at the Defense Advanced Research Projects Agency created the Internet protocol and when federal policy opened the Internet to commercial use, this made for the open Internet we enjoy today.
But it’s not federal policy driving these values today. It’s the Internet itself — all of us. Tim Lee ably pointed this out some years ago in his paper, “The Durable Internet: Preserving Network Neutrality without Regulation.” The marketplace demands an open Internet. If there are deviations from the “end‐to‐end principle” that serve the public better, the market will permit them. The Internet is not the government’s to regulate.
Now, some news reporting has things a little backward. Wired’s Threat Level blog, for example, carries the headline, “Obama Pledges to Veto Anti‐Net Neutrality Legislation.” Headlines need to be short, but it could just as easily and accurately read “Obama Pledges to Veto Anti‐Regulation Legislation” because the question is not whether the Internet should be open and neutral, but who should ensure that openness and neutrality. Should neutrality be ensured by market forces — ISPs responding to their customers — or by lawyers and bureaucrats in Washington, D.C.?
S.J. Res. 6 would reject the FCC’s claim to regulate the Internet in the name of neutrality. It says nothing about whether or not the Internet should neutral, open, and free. Again, that’s not the government’s call.
Did you follow all that? If you didn’t, you don’t need to. Here’s the summary: President Obama has gone on the record: He supports Internet regulation.