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MEDIA ADVISORY                                  September 15, 2014

 

Contact: Randolph May at 202-285-9926

 

 

FSF Reply Comments Show Net Neutrality Regulation Threatens Internet Dynamism and Consumer Welfare 

  

Free State Foundation President Randolph May and Senior Fellow Seth Cooper submitted reply comments today in the Federal Communications Commission's Open Internet Proceeding. The reply comments respond to unjustified calls for harmful, stringent regulation of broadband Internet services, especially Title II public utility-like regulation, and they respond to unsupportable rationales offered by supporters of such regulation. 
 
The complete set of Free State Foundation reply comments, with the footnotes, are here.
 
Immediately below is the "Introduction and Summary" to the comments, without the footnotes.

 

These reply comments are offered in response to comments submitted in this proceeding that offer unjustified calls for harmful, stringent regulation of broadband Internet services or that offer unsupportable rationales for the Commission's authority to impose such regulations. The principal points raised in these reply comments are: (1) the Commission should not impose any new regulatory burdens in the form of net neutrality mandates on wireless broadband services; (2) the Commission should refrain from restricting or discouraging "paid prioritization" arrangements that offer potential benefits to consumers; (3) aside from the severe adverse consequences as a matter of policy addressed in our initial comments, reclassifying broadband Internet access as a Title II common carrier service is legally problematic; and (4) the Commission's proposals for regulating broadband Internet services are constitutionally problematic.

 

The continuing growth and dynamism of the "wireless ecosystem" would be severely threatened by applying net neutrality regulation in any form to wireless providers, including the Title II classification now urged by some commenters. Most of the innovative and in-demand components of the wireless ecosystem have never been subject to regulatory restraints. And wireless broadband Internet service has never been subject to Title II. Yet certain commenters have called for subjecting wireless broadband Internet services to Title II regulation that is considerably more heavy-handed than the Commission's Title II regulation of wireless narrowband voice services.

 

The Commission's Mobile Services Order (1994) deemed wireless voice services non-dominant "[b]ecause non-dominant carriers lacked market power to control prices." As such, they were considered "presumptively unlikely to discriminate unreasonably." Of course, the non-dominant status of wireless broadband providers is even more evident than was the case twenty years ago for wireless voice providers. According to the Commission's Sixteenth Wireless Competition Report (2013), as of October 2012, 97.8% of the population is served by 2 or more wireless broadband service providers, 91.6% by 3 or more, and 82% by 4 or more. Neither the Commission's Open Internet Order (2010) nor its Notice of Proposed Rulemaking (2014) offer any evidence of market power in the wireless segment of the broadband services market or any threat of harm to consumers of wireless broadband services.

 

These competitive conditions in the wireless broadband services market render completely unjustifiable various commenters' call for the Commission to now treat network data traffic "discrimination" by wireless broadband service providers as per se unreasonable or at least presumptively unreasonable. Technical constraints faced by wireless broadband providers in meeting high-speed, high data traffic demands by consumers also counsel against the Commission imposing new regulatory mandates on wireless broadband services. The Open Internet Order's acknowledgment that wireless broadband networks face "operational constraints that fixed broadband networks do not typically encounter" remains true, if not more so, today. Wireless broadband service providers must address technical challenges posed by spectrum scarcity, network capacity, device integration, and surging data traffic demand. According to the Cisco mobile data forecast for 2013-2018, global wireless data traffic will increase nearly 11-fold by 2018. It forecasts "a compound annual growth rate (CAGR) of 61 percent from 2013 to 2018." Accommodating surging wireless data traffic requires continued market freedom to pursue innovative network management solutions, not regulation of markets.

 

So, the Commission emphatically should reject the unfounded calls for it to impose any net neutrality regulations on wireless providers. But, assuming for the sake of argument that it wrongly takes a pro-regulatory position, the Commission should adopt a "commercially reasonable" multi-factor analytical standard that reflects competitive market realities. It should also be consistent with the Mobile Services Order's policy regarding wireless voice services. That is, a "commercial reasonableness" standard should presume wireless broadband network management practices foster competition and benefit consumer welfare. And it should permit that presumption to be rebutted only by actual evidence of anticompetitive conduct.

 

The welfare of consumers should be the focus and deciding criterion for Commission broadband policy. What economists call "two-sided" market transactions offer likely benefits to consumers of broadband Internet services. The Commission should therefore reject calls by commenters for regulatory restrictions of "paid prioritization" transactions that potentially benefit consumers. Two-sided pricing might well prove beneficial to consumers and edge providers alike, if broadband Internet service providers possessed the freedom - which other participants in a competitive marketplace possess - to experiment with various pricing models that reflect relative cost and value considerations.

 

A Commission-imposed regulatory regime, which in the name of preventing "discrimination" in effect would enforce the subsidization of heavier users by lighter users and thereby deter investment in facilities, would by no means necessarily be consumer-friendly. Such a regulatory regime would restrict an ISP's freedom to charge an edge provider for the use of the ISP's facilities as its customers access the edge provider's content and applications - even though the edge provider might willingly agree to pay the ISP for some form of premium access, such as ensured faster delivery. And it would by no means be consumer-friendly for lower-income persons who may prefer to forego faster or otherwise premium services in exchange for more affordable services.

 

Furthermore, regulatory prohibitions on network discrimination would amount to straightjackets on ISPs, preventing them from experimenting with new business models or service variations to spur or meet changing consumer demands. Likely pro-consumer innovative service offerings recently announced by AT&T, Sprint, and T-Mobile - which give consumers access to social networking, music, or other special applications at no cost to their data plans or for a small set fee - reinforce the need for the Commission to continue its policy of keeping wireless broadband Internet services free from network management and evolving business model regulatory restrictions. Those same innovations also make the case for a broader policy commitment to ensure marketplace freedom for all broadband ISPs.

 

Taking into account the absence of any apparent market power or likely consumer harm, the preferred approach is for the Commission to reject calls for regulatory prohibitions or policies that discourage two-sided market transactions such as paid prioritization. Antitrust authorities could address any anticompetitive concerns that arise. Failing that, to the extent the Commission adopts some form of network management regulation, it should adopt a "commercial reasonableness" standard flexible enough to readily accommodate ISPs' differentiation of offerings. And it should presume that paid prioritization or other two-sided transactions involving broadband ISPs and edge providers benefit consumers. The burden of producing evidence of market power or consumer harm should rest on parties challenging such transactions.

 

Some commenters have made misguided calls for the Commission to subject all broadband Internet services to the same Title II public utility regulatory regime, which would have disastrous consequences for the Internet's dynamism. But Title II reclassification of broadband Internet access services - that is, classifying them as common carriers - also poses significant legal problems. Title II reclassification by the Commission would not likely survive a judicial challenge.

 

In defending its prior decision to classify broadband Internet services as information services - thereby removing them from the ambit of Title II regulation - the Commission concluded that, from a consumer's perspective, the transmission component of an information service is integral to, and inseparable from, the overall service offering. This functional analysis of ISPs' service offerings was the principal basis upon which the U.S. Supreme Court upheld the Commission's Title I classification determination in NCTA v. Brand X (2005).

 

In Brand X, the Court declared: "The entire question is whether the products here are functionally integrated (like the components of a car) or functionally separate (like pets and leashes). That question turns not on the language of the Act, but on the factual particulars of how Internet technology works and how it is provided, questions Chevron leaves to the Commission to resolve in the first instance...."

 

The Commission will have difficulty offering persuasive reasoning in support of an abrupt about-face on a point of established Commission policy that it successfully litigated all the way up to the Supreme Court. Having already resolved in the first instance the question of "the factual particulars of how Internet technology works and how it is provided," the Commission would now be hard-pressed to even reasonably argue opposite factual particulars. The integrated, inseparable nature of ISPs' service offerings - from a functional standpoint and from a consumer's perspective - has not changed since the Brand X decision. If anything, sophisticated network features and functions are even more integrated than in 2002 or 2005.

 

Constitutional problems also plague the Commission's proposals to impose net neutrality mandates on broadband Internet services. By characterizing broadband ISPs as "conduits of speech," the Commission's Open Internet Order attempted to push broadband Internet access services outside the scope of First Amendment protection. The Open Internet Order also tried to downplay the editorial decisionmaking of broadband ISPs, reducing it to a level of constitutional insignificance. Courts have recognized that First Amendment protections for editorial judgments about content apply with respect to newspapers and to modern mass media technologies. To the extent the Commission seeks to follow the approach urged by certain commenters in this proceeding and to re-adopt those aspects of the Open Internet Order, the Commission will place its new regulations on false foundations that run contrary to First Amendment protections.

 

A federal court will not readily allow an administrative agency to shrink the scope of constitutionally protected activity in order to regulate it. It will look past the Commission's relabeling attempt and look instead at the regulation's burden on speech and editorial activity.

 

Regulation that limits or infringes on broadband ISPs' editorial judgments - to the extent that such regulation dictates whether or to what extent broadband Internet service providers can or cannot block, filter, or otherwise decide what sort of content can travel through their networks - is constitutionally suspect. Yet the Commission's proposed new regulatory framework includes significant restrictions on editorial judgments by broadband ISPs.

 

Importantly, the First Amendment is a limit on government's power over private conduct. It is not a grant of power for government to regulate speech activity. The Commission's claims that it can impose net neutrality regulation in the name of promoting speech values likely will be rejected by a federal court since such claims turn the First Amendment on its head.

 

Lacking any substantial government interest to support its regulation, the Commission will have serious difficulty showing that a regulatory approach that outright prohibits data prioritization or other network management practices or places the burden on broadband ISPs of justifying such practices does not "burden substantially more speech than is necessary." The Commission could instead require a showing of anticompetitive conduct before engaging in regulatory intervention. The Commission could also clearly place the burden of proof on complainants alleging rule violations. But the Commission is proposing a more open-ended approach that gives the government expansive powers over speech in the Internet marketplace.

 

Absent the demonstration of any existing market power problem or likely consumer harm from broadband network management practices, the surest way for the Commission to ensure the broadband Internet services market's vibrancy and to avoid another legal setback is to refrain from yet another attempt to impose onerous regulations on broadband Internet services.

  

* * *

 

Randolph J. May, President of the Free State Foundation, is a former FCC Associate General Counsel and a former Chairman of the American Bar Association's Section of Administrative Law and Regulatory Practice. Mr. May is a current public member of the Administrative Conference of the United States, and a Fellow at the National Academy of Public Administration.

  

Mr. May is a nationally recognized expert in communications law, Internet law and policy, and administrative law and regulatory practice. He is the author of more than 150 scholarly articles and essays on communications law and policy, administrative law, and constitutional law. Most recently, Mr. May is the editor of the new book, "Communications Law and Policy in the Digital Age: The Next Five Years." He is the author of A Call for a Radical New Communications Policy: Proposals for Free Market Reform. And he is the editor of the book, New Directions in Communications Policy and co-editor of other two books on communications law and policy: Net Neutrality or Net Neutering: Should Broadband Internet Services Be Regulated? and Communications Deregulation and FCC Reform. 

    

The Free State Foundation is a non-profit, independent Section 501(c)(3) free market-oriented think tank.

   
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