Download THE COMING STORM: NET NEUTRALITY IN THE COURTS, AND BEYOND

ACLP POLICY BRIEFING
DECEMBER 2015
THE COMING STORM:
NET NEUTRALITY IN THE COURTS, AND BEYOND
By Charles M. Davidson & Michael J. Santorelli, Directors
1.
INTRODUCTION
The Federal Communications Commission
in the Order announcing the rules –
(FCC) heads back to court on Friday,
reclassification
of
broadband
as
a
“telecommunications
December 4, to defend
service”
subject
to
its most recent attempt to
AT A GLANCE
onerous Title II rules
impose
network
 On December 4, the FCC heads back to
rather than a lightly
neutrality
rules
on
court for the third time in a decade to
regulated
“information
Internet service providers
defend network neutrality rules.
service.”
(ISPs). This is the third  The newest set of rules hinges on
time in 10 years that the
reclassification of broadband as a
Much has already been
FCC will go before the
“telecommunications service” subject to
written
about perceived
common carrier regulation.
D.C. Circuit Court of
pros
and
cons
of
Appeals to argue why its  Reclassification represents a major policy
reclassification. In the
reversal by the FCC, which for more than a
rules – the most sweeping
context of the litigation
decade treated broadband as a lightly
to date by far – should be
alone, dozens of briefs
regulated “information service.”
upheld; its previous two
have been filed, each one
attempts
to
do  Why are the stakes of the case so high for
drilling down into a
consumers, the economy, and the future of
so largely failed.
discrete set of supposed
innovation?
strengths and weaknesses
Although the current
 Common carrier regulation will have
of the legal and policy
set of net neutrality rules
profound impacts on network
investment decisions.
rationales supporting the
are similar in substance
rules.
In
general,
and purpose to the ones
 Reclassification opens a Pandora’s
supporters
of
adopted in 2010 (there are
Box of regulatory uncertainty.
reclassification
notable differences of
argue
that
 Neutering the network will hinder
course, but the bottomtreating broadband like
innovation across the ecosystem.
line
outcome
of
the telephone – that is, as
 Net neutrality rules are
constraining the ability of
a common carrier subject
counterproductive to addressing
ISPs to experiment with
to
close
regulatory
perhaps the most profound and
intractable broadband problem facing
business models remains
oversight – is the best
the U.S. – closing the digital divide.
the same), the means of
path forward, especially
achieving them have
given the power that ISPs
changed completely. Indeed, the FCC invoked
can theoretically exercise over the content they
what was once considered the “nuclear option”
deliver to and from customers. Opponents,
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however, see things much more starkly, noting
that broadband in the U.S. flourished under
the light-touch regulatory regime that was
developed and implemented over the previous
two decades. In the absence of real harm –
widespread blocking of content, say, or
evidence of a clear market failure – opponents
see little need for the FCC to intervene in such
a dramatic fashion.
Regardless of viewpoint – and there are
many – all can agree that the stakes of this case
are enormous for consumers, the economy,
and the future of innovation in the United
States. The following sections identify and
discuss several specific reasons why.
2.
THE INVESTMENT RIPPLE EFFECT
Regulating any sector entails the
replacement of market forces with government
fiat. Such interventions always come at a cost
as firms are forced to comply with a new set of
rules. Ideally, the benefits of a regulation,
which are usually measured in terms of
consumer welfare gains, should outweigh any
costs incurred as a result of intervention.
Ultimately, the litmus test for evaluating the
efficacy of a particular regulation is
determining whether the new rule or policy
will generate a net benefit vis-à-vis the status
quo.
That the FCC’s net neutrality rules will
generate
more
actual
benefits
than
costs appears uncertain at best. However, it is
certain that the new rules will cost something
because the regulations amount to a significant
constraint on the ability of ISPs to develop new
products and services for consumers of all ilk.
It is axiomatic that limiting firms’ latitude to
experiment influences strategic decisions
about how and where to invest capital.
Any impact on investment by ISPs will
certainly be significant and will reverberate
across the entire U.S. economy. The U.S.
telecommunications industry contributes in
excess of 2% to U.S. GDP each year, far more
than most other sectors. Over the last decade,
ISPs have collectively invested well over $60
billion each year in their networks; since 1996
the cumulative total of ISP investment exceeds
$1.4 trillion. Such sustained commitment is
ACLP Briefing: Net Neutrality Litigation
indeed “heroic” given the intense economic
headwinds that have battered the economy
over the last few years. Moreover, there
is significant evidence demonstrating a clear
causal relationship between private ISP
investment and job creation – increased
investment means more jobs, less investment
means fewer jobs.
The risk to broadband investment by net
neutrality regulation is real. Some have already
observed a drop in investment; others foresee
it playing out over the longer term. Regardless
of when it might occur, the mere prospect of
regulation causing any drop in investment
should unnerve regulators given the central
role that private broadband networks play in
driving innovation, job creation, and economic
development. Moreover, from a legal
standpoint, two recent Supreme Court cases
– Michigan v. EPA and King v. Burwell –
indicate heightened judicial sensitivity to
the practical impacts of regulations, further
underscoring the very heavy burden that the
FCC bears in this round of net neutrality
litigation.
3.
TITLE II & THE PANDORA’S BOX OF
REGULATORY UNCERTAINTY
The crux of the legal challenge to the FCC’s
net neutrality rules is whether the Commission
erred in reclassifying broadband as a
“telecommunications service.” Numerous
other issues have been raised in the appeal
(e.g., whether the rules impinge ISPs’ First
Amendment rights), but whether the rules
stand will likely depend on whether the court
agrees with the FCC’s rationale for
reclassification.
The classification question was first
addressed during the dawn of the broadband
era, a time when only two platforms – DSL and
cable – existed for high-speed Internet
connectivity.
Initially,
these
disparate
platforms were subjected to a bifurcated
regulatory regime. Telephone companies
offering DSL were required to make available
the transmission component underlying those
services on a nondiscriminatory basis to
competitors, an arrangement informed by a
desire to use regulation to create competition
December 2015
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in the telephone space. Firms operating
outside the common carrier market for
telephony – notably cable companies – were
not subject to these rules.
This dual approach satisfied few. Some
pushed for bringing cable under the DSL
framework via “open access” requirements,
arguing that, without such strict oversight,
cable ISPs would exert too much control over
the content flowing through their networks.
Others, however, argued for easing the
regulatory burden on DSL providers in order
to achieve parity with cable and thus foster a
competitive environment in what quickly
became a rapidly growing market. The FCC
ultimately opted for the latter path, and
between 2002 and 2007 it developed
and successfully defended in court a lighttouch regulatory framework for every type of
broadband Internet access service – cable,
DSL, and mobile, among others. By every
measure – investment, competition, consumer
choice, speed, pricing, etc. – the results of this
light-touch approach were spectacular.
Consequently, reclassifying broadband is a
major policy reversal by the FCC, one that
imposes a fundamentally different regulatory
structure on the market in every respect.
Indeed, contrary to assertions by those who
voted in favor of the Order, the FCC has
significantly ratcheted up regulation of
broadband in the United States by bringing the
Internet under the same regulatory umbrella
as basic telephony – common carrier
regulation pursuant to Title II of the federal
telecom laws. This approach was developed to
govern a very distinct marketplace – basic
telephone service provided by a monopolist.
Is it appropriate to apply common carrier
rules to the complex and dynamic broadband
space? A bipartisan Congress answered this
question in its update to the telecom laws in
1996, clearly stating that the policy of the U.S.
is to leave the Internet “unfettered” by
regulation. The FCC Order, however,
contradicts this plain statement and goes to
great lengths in its attempt to show how the
Internet is akin to the telephone in that both
provide optimal service when they act as
passive conduits for transmitting information.
ACLP Briefing: Net Neutrality Litigation
Those opposed to the Order note that the
imposition of Title II is like opening a
Pandora’s Box, unleashing uncertainty on a
sector that long thrived under the certainty of
a consistently applied light-touch regulatory
framework. In this case, substantial
uncertainty stems not just from how the new
net neutrality rules might be applied –
especially via amorphous general conduct
rules – but also from the possibility of other,
more onerous and constrictive common carrier
rules being imposed in the future. This
possibility is very real since the FCC forbore
from applying dozens of common carrier rules
to ISPs in the Order. There is little preventing
the FCC, now or in the future, from “unforbearing” from these provisions and
engaging in broadband rate regulation or
requiring ISPs to unbundle their networks.
Imposing these kinds of monopoly-era rules,
which entail intrusive micromanagement by
regulators, makes little sense in a competitive
environment and would likely prove
disastrous. However, not-so-subtle advocacy
by ardent net neutrality advocates clearly
signals a desire to pursue these invasive
avenues at some point soon.
What are the odds of reclassification
surviving judicial scrutiny? In general,
agencies like the FCC can, under certain
circumstances, change their minds with
respect to how they interpret and apply their
enabling statutes. According to the Supreme
Court, many shifts in interpretation
are permissible so long as the agency puts
forward a “reasoned explanation for its
action.” However, there are numerous
instances that require a substantially more
detailed justification. According to the Court,
agencies “must” provide such an explanation
when its “new policy rests upon factual
findings that contradict those which underlay
its prior policy” or “when its prior policy has
engendered serious reliance interests that
must be taken into account.” Reclassification
likely triggers this more onerous burden of
justification given the long and successful
history of the previous light touch
“information service” regulatory framework.
In the absence of a rigorous economic analysis,
citation to actual harms (much of the Order
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discusses only hypothetical dangers), or other
evidence of a problem in need of solving, it
appears that the Commission has fallen far
short of meeting this burden.
4.
INNOVATION IMPACTS
Metaphors matter in policymaking. In the
Internet space, there has been no shortage of
metaphors used to describe this unique
platform.
“Information
superhighway,”
“cyberspace,” and “the web” have been among
the many terms used to describe this sprawling
digital infrastructure. Recently, policymakers
have shifted metaphors to more expansive
descriptors in an effort to capture the
interconnectedness of the various segments –
networks, devices, and content – that together
comprise the 21st century Internet economy. To
that end, in 2010 the FCC adopted the
“ecosystem” concept to describe just how
closely these segments work together. The
process by which these segments collaborate
and compete in the delivery of value to
consumers was described as a “virtuous cycle:”
“If networks are fast, reliable and
widely available, companies produce
more powerful, more capable devices
to connect to those networks. These
devices, in turn, encourage innovators
and entrepreneurs to develop exciting
applications and content. These new
applications draw interest among endusers, bring new users online and
increase use among those who already
subscribe to broadband services. This
growth in the broadband ecosystem
reinforces the cycle, encouraging
service providers to boost the speed,
functionality and reach of their
networks.”
According to these concepts, there is no
center of the “ecosystem” or a single driver of
the “cycle.” The broadband ecosystem is not an
assembly line that moves in one direction.
Rather, value can be generated at any point in
the cycle.
Many embraced this framing, but the FCC
quickly abandoned it during its 2010 net
neutrality rulemaking. In order to justify
imposition of net neutrality obligations solely
ACLP Briefing: Net Neutrality Litigation
on ISPs – and not other stakeholders in the
ecosystem – the Commission had to
fundamentally reconceive the metaphor in
order to reframe the network component as
dependent on the other segments of the
ecosystem. Instead of all segments working
together to generate value, as the FCC
previously acknowledged, the Commission
decided to view the “edge” – those producing
content and offering devices – as the primary
driver of innovation and value creation. Net
neutrality rules were thus positioned as a
means of protecting these entities from
theoretical harm (like blocking or prioritizing
content) at the hands of ISPs. When the 2010
rules were mostly struck down on legal
grounds (the Court largely accepted the new
“cycle” metaphor), the FCC doubled-down on
this new approach by deciding that the best
way to offer protection to those on the edge was
to truly neuter the network by reclassifying it
as a telecommunications service.
Although
many
supporters
of
reclassification and expansive neutrality
regulation celebrate this new paradigm as
critical to supporting continued innovation,
marginalizing the network as the FCC has done
is extremely risky. Eliminating the ability of
ISPs to manage their networks and experiment
with models of service delivery in valueenhancing ways and otherwise constraining
their ability to innovate create disincentives to
invest in their infrastructure. As discussed
above, any dip in investment levels will have
broad ramifications across the U.S. economy.
More generally, though, viewing the “cycle”
as only moving in one direction – from the
edges, in – dismisses entirely the role of the
network as a driver of innovation. Without
innovation at the network level, in the form of
faster, more reliable, and more affordable
connections, much of the innovation on the
edge would never have occurred, or would have
happened at a much slower pace. In addition,
limiting the ability of ISPs to engage in
business model experimentation deprives
consumers of innovative offerings. Prohibiting
prioritization of content, for example,
undermines innovation in digital healthcare. If
real time delivery of sensitive patient data is
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not guaranteed, healthcare providers will be
unwilling to use these tools due to significant
liability concerns. A similar chilling effect will
be evident in many other sectors
(like education and energy).
In short, favoring one segment of the
ecosystem over another artificially skews the
forces that, up until the 2015 Order, shaped the
broadband market into a vibrantly innovative
and competitive space. Consumers are the
ultimate losers here because they will
be deprived of services and products that meet
their demands for more personalized and realtime connectivity.
5.
CONNECTIVITY IMPACTS
Often overlooked in the heated debates
around net neutrality is the impact that these
paradigm-shifting rules will have on
broadband connectivity. Supporters of the new
rules are quick to argue that the new rules may
positively impact broadband adoption rates by
helping to make Internet connections more
affordable to non-users. However, this simple
notion of connectivity – that it is a nothing
more than a basic cause-and-effect revolving
around the price of a broadband connection –
signifies a much deeper misunderstanding and
lack of appreciation by advocates and
policymakers about its true complexity.
want to wait years to see results. Hence the
supply side myopia.
Opponents
of
reclassification
have
highlighted other reasons for being skeptical of
the impact of new neutrality rules on
broadband connectivity. For example, some
worry that the rules will create disincentives
for ISPs to invest in networks available in
communities with low take-rates, areas that
tend to have disproportionately large minority
and low-income populations. Adoption is
impossible if a broadband connection is
unavailable. Others worry that the rules will
preclude the emergence of new service
offerings that might be effective in bringing
non-adopting minorities online by providing a
compelling value proposition for investing in a
connection.
In short, the FCC’s net neutrality rules will
do nothing to close the digital divide. On the
contrary, the rules will likely detract from
efforts to address connectivity gaps by
diverting attention and resources away from
problems that sorely need more of both.
Moreover, continuing to frame broadband
policy around the supply side will impede
broader recognition and understanding of the
true
complexity
of
connecting
the
unconnected.
The digital divide remains a problem in the
United States. Far too many seniors, people
with
disabilities,
African
Americans,
Hispanics, and low-income households remain
unconnected. The reasons why are indeed
complex and varied, but they often boil down
to relevance – the perception that broadband
is not necessary or useful. If a person does not
see broadband as a relevant and important
tool, then they will be less likely to invest scarce
resources in it. In many cases, non-adopters
will choose not to purchase a broadband
connection at any price, including zero. This
dynamic is not intractable, though. There
are proven methods for providing non-users
with compelling value propositions for going
online. This typically entails hands-on training
at the community level, a time-consuming and
resource-intensive approach that oftentimes is
not politically attractive to those who do not
ACLP Briefing: Net Neutrality Litigation
December 2015
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