Court Prods FCC In Unexpected Direction In This Week’s Verizon Ruling

Network neutrality was on the retreat shortly after the Telecom Act of 1996.

A court ruling this past Tuesday on FCC “network neutrality” regulation closes and opens a few paths in a three-way chess game that has been going on for years between the US District Court of Appeals, the FCC, and the major Internet server providers. (Four-way if you include Congress, and five-way if you include big Internet users such as Google — so, our chess game is coming closer to Chinese Checkers at this point.)

A lot of bloggers, and even news headlines, careened into histrionics (“Net neutrality is dead. Bow to Comcast and Verizon, your overlords“). The Free Press, although oversimplifying the impact, did correctly link the ruling to what they and many other network neutrality supporters consider the original sin of FCC rulings: eviscerating the common carrier regulation of broadband providers.

Even better, many commenters noted the ambiguities and double messages in the ruling. Unlike a famous earlier ruling on Comcast regulation, this week’s court ruling spends a good deal of time affirming the FCC’s right to regulate Internet providers. Notably, pp. 35-36 essentially confirm the value and validity of network neutrality (in the form of promoting innovation at the edges by placing no restraints on transmissions).

Let’s go over the efforts of Congress and the FCC to promote competition in Internet service, leading up to Tuesday’s ruling.

Two mandates handed down from the 20th century: Computer II and the Telecom Act of 1996

The major goal of the landmark 1996 Act was to promote competition. The market for Internet service was stunningly different in 1996 from what it is in the US today. There was a lot of competition — but not much reach and not much bandwidth. Many people still lacked Internet access, and those who got it from home dialed into an ISP, often a mom-and-pop operation. Few people could get Internet access over their cable TV network. More competition would presumably lead to more and faster Internet connections.

Although idealists (like me) looked forward to a teeming ecosystem of multiple ISPs, Congress was perhaps more realistic in expecting an oligopoly with a few big players in each geographic market (three companies was considered a good number for robust competition). Many expectations were placed on incumbents: there were seven “baby Bells” that came out of the breakup of the old AT&T, and although each occupied a separate geographic market, observers hoped they would enter each other’s markets. Cable companies were in most markets as well. Somehow, from all this raw material, new services were supposed to arise.

The law established interconnection points that the baby Bells had to provide to competitors. Theoretically, smaller companies could have exploited those points to find a market niche, but that hardly went anywhere (and many observers blamed the Bells for stymying competition). The seven baby Bells quickly recombined to make three (Verizon, CenturyLink, and a new AT&T), who competed for mobile phones but refrained from competing with landlines in each other’s regions. In many areas, a baby Bell and a cable company formed a duopoly.

Much of the country has enjoyed continuous Internet access (no dial-up) with increasing bandwidth, but many observers think the age of fiber expansion is over at both Verizon and AT&T. While the US remains far behind other developed countries in bandwidth.

Internet regulation (or lack thereof) goes back to 1966 with a series of “Computer inquiries” from the FCC. These have been universally praised for allowing the Internet to arise and spread, simply by announcing that the FCC would not regulate it. Computer II, in particular, distinguished the service offered by telephone companies over the line from the data service running through modems on either side. The Telecom Act enshrined this difference by defining “information services” that were separate from the “telecommunication services” that the FCC had long regulated as common carriers.

Telecommunication services (regulated under Title II of the law) have to provide equal, non-discriminitory access to all users. Information services do not. Clearly, companies will go to extreme lengths to evade being labeled a telecommunication service.

The big divide: cable versus baby Bell

Although we hear a lot about “digital divides” between urban and rural areas, rich and poor, white and minority (luckily decreasing), the divide I’m going to talk about here is a regulatory one. Cable companies are not common carriers; they have always been regulated differently. Local communities can require certain services (such as community and educational channels), but the cable companies are definitively free of the burdens of Title II.

Thanks to the Telecom Act, however, cable companies and telecom companies have come to look more and more alike. They all provide voice calls; they all provide TV channels; they all provide Internet access; and, increasingly, they all provide movies on demand and other services. The key problem the FCC faces — not blamable on Congress, the US District Court, or anybody in particular — is that for historical reasons it imposes much heavier requirements on telecom companies than on functionally identical cable companies. Cable companies offer both Internet transport and content of their own, all over the same physical channel — and now, telecom companies do the same. Something’s gotta give: either Title II regulation has to be imposed on cable companies, or it has to be removed from the baby Bells.

We should note, for historical context, that a Republican administration replaced a Democratic one in 2000, and in 2001 Michael K. Powell was appointed FCC chair. He brought with him a profound faith in the free market as a spur to competition and innovation. When the FCC announced in 2002 that cable modem service was an information service, Powell wrote a justification that reads almost like an apology:

The Commission does not have unconstrained discretion to pick its preferred definition or classification, as some imply. The Commission must attempt to faithfully apply the statutory definition to a service, based on the nature of the service, including the technology used and its capabilities, and the nature of the interactive experience for the consumer…The Commission is not permitted to look at the consequences of different definitions and then choose the label that comports with its preferred regulatory treatment.

But that, of course, is exactly what they did in their inquiry. “Even if Computer II were to apply, however, we waive on our own motion the requirements of Computer II in situations where the cable operator additionally offers local exchange service. The Commission, on its own motion or on petition, may exercise its discretion to waive such requirements on the basis of good cause shown and where the particular facts would make strict compliance inconsistent with the public interest.” (paragraph 45)

I’d like to argue that it was inevitable for them to jump off on this side of the fence. They could hardly evade the reasoning in paragraph 43: “The Commission has never before applied Computer II to information services provided over cable facilities. Indeed, for more than 20 years, Computer II obligations have been applied exclusively to traditional wireline services and facilities.” Regarding the alternative they saw, “to find a telecommunications service inside every information service,” they say, “Such radical surgery is not required.” In short, the technical reality behind Internet connections was irrelevant to the policy dilemma. This FCC decision is often called Brand X, after a court ruling that upheld the decision after a challenge led by an ISP of that name.

By the way, it’s not fair to consider Powell a tool of large corporations, as some critics do. He was deeply committed to the principle of free markets, and articulated four “Internet freedoms” reminiscent of Richard M. Stallman’s four software freedoms.

The sin ascribed to the FCC by Free Press and other network neutrality supporters is actually an inescapable corollary to the cable decision. In 2005 — after Powell left — they decided that new lines and equipment rolled out by telecom companies would not be subject to the common carrier requirements that had been in place for some 70 years. The decision explicitly and repeatedly refers to their Brand X cable modem ruling. They claim the change will enhance competition rather than hurting it.

I think the FCC was hamstrung by the evolution of the Internet industry. The hoped-for ecosystem of small Internet competitors was stunted and scattered. Real competition existed only among the big incumbents, both in telecom and in cable. As we’ll see, this had a major impact on campaigns among Internet activists. As for the FCC, the decisions to free those companies from common carrier status stemmed from a hope that they’d put on their boxing gloves. And they did — but the punches were aimed at the FCC rather than each other.

Giving up on the substrate

Over the past few years, advocates for more competition and growth on the Internet have tacitly moved “up the stack,” complaining about ISP practices such as interfering with certain content and their plans to charge certain Internet sites for favorable treatment. For instance, Comcast was found to be secretly throttling traffic when users were downloading large files. When unmasked, Comcast claimed it was placing restrictions on downloads to be fair to all users; critics suggested it regarded the streaming downloads as competition for its own offerings since movies played a large part in the downloads.

One can imagine that, back in the 1990s, ISP practices like this would lead to an exodus by disgusted customers. Nowadays, there’s much less choice. Network neutrality advocates seem to be taking the battle to the software layer because achieving large-scale competition at lower layers seems unattainable. Indeed, real competition would require companies to compete more on the physical layer. Meanwhile, advocates for tiered service suggest it will lower costs and encourage competition.

The FCC is caught between an aroused community of network neutrality advocates and a powerful set of industries looking for ways to increase revenue. Occasionally, it tries to intervene. But the same argument the FCC makes for removing regulation, enthusiastically accepted by the industry, is bitterly opposed when used for exerting regulation. In each case, this argument is:

• The action we’re taking will promote investment and new services by Internet companies, such as the social networks and content providers.
• That innovation will stimulate demand by users for more bandwidth, along with a willingness to pay.
• That in turn leads to more investment and innovation (such as more efficient codecs for multimedia content) in Internet infrastructure.

Comcast’s secret traffic stifling led to the first court battle. In its 2010 ruling, the DC district court basically told the FCC that it had tied its own hands by refusing to regulate the cable companies as common carriers. Cable modems fall in the cracks between the various categories regulated by the Telecom Act. The FCC can’t use Title II (common carrier status). Title III (broadcasting) doesn’t permit the kinds of regulation the FCC was trying to impose. When the FCC tries to cite its mandate to regulate pricing, the court tells it that it can regulate on the basic tier.

The court essentially looked through the Telecom Act for a clause that explicitly let the FCC regulate a practice that didn’t emerge until a decade after the Act was passed, and — unsurprisingly — didn’t find one. The core of the ruling might be found on page 16: “…the Commission must defend its exercise of ancillary authority on a case-by-case basis.”

It would seem like all the players and props were on stage for the final act of the network neutrality drama. But Tuesday’s court ruling showed that the endgame is not at hand. The bottom line is the same — the FCC cannot apply its anti-discrimination and anti-blocking rules; but, as I mentioned at the beginning of the article, the court offered its own sort of encouragement.

The court essentially used a duck test. They found that the FCC regulation looked like a common carrier obligation, so they rapped its knuckles for trying to force common carrier status on companies. Because the FCC had previously removed common carrier status from these companies, the court said it couldn’t impose such regulations now.

Verizon’s lawyers started by cutting and pasting Comcast’s objections to the FCC ruling, changing section 230(b) of the Telecom Act to section 706 and adding some other distracting objections of their own. The court didn’t buy the comparison, which leaves hope for those who want the FCC to rein in ISP business practices. The court even revises the appearance of its early ruling, saying a bit snarkily, “In Comcast, we held that the Commission had failed to cite any statutory authority that justified its order, not that Comcast had never impaired Internet traffic.”

Some network neutrality advocates have reacted to the decisions and rulings I’ve discussed (as Free Press does) by asking the FCC to reverse its 2005 decision that allowed telecom companies essentially to expand as much as they want without opening up to competition. This would encounter insurmountable hurdles because government agencies have to cite compelling reasons to change any decision they’ve made, and eagle-eyed courts hold them to that high standard.

Other people trace the problem to the 1996 Telecom Act, apparently already outdated by rapid changes in the industry. I don’t have to assess the likelihood of getting Congress to take on a major revision at this time in its history, or the likelihood of Internet activists getting the result they want.

Or maybe communities will pool their resources to create their own infrastructure, a particularly bold suggestion when you consider how much it costs to string fiber between cities.

Tuesday’s ruling did not close off the FCC’s right to regulate Internet services — in fact, I think it expanded possibilities beyond the place they seemed to stand following the Comcast decision. I am not sure the current debate over things such as blocking is productive. I think much bigger forces are in play, as I discussed in my article last week about Internet centralization. However, I’ll lay odds that few, if any, lawyers will lose business as a result of Tuesday’s decision.