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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, 185 W. Broadway, E-1016 ▪ New York, NY 10013 ▪ (212) 431-2163 ▪ [email protected] 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 Page 2 of 5 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 December 2015 Page 3 of 5 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 December 2015 Page 4 of 5 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 Page 5 of 5