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On November 14, 2014, the Free State Foundation held a policy seminar,"Thinking the Unthinkable: Imposing the 'Utility Model' on Internet Providers," at the National Press Club, Washington, DC.
The Free State Foundation is now releasing a transcript of the seminar's panel session that followed the opening addresses by Rep. Bob Latta, Vice Chairman, House Communications and Technology Subcommittee, and FCC Commissioners Ajit Pai and Michael O'Rielly. (Please see the full text of Rep. Latta's speech here, Commissioner Pai's here, and Commissioner O'Rielly's here. Each one warrants re-reading as the FCC moves closer to adopting new net neutrality mandates for Internet providers under the Communications Act's Title II utility regulation model.)
The panel discussion was moderated by RANDOLPH MAY, President of the Free State Foundation, and the panel consisted of the following participants:
- MICHAEL WEINBERG - Vice President, Public Knowledge
- ROBERT CRANDALL - Nonresident Senior Fellow, Economic Studies Program, Brookings Institution, and member of FSF's Board of Academic Advisors
- GERALD FAULHABER - Professor Emeritus of Business Economics and Public Policy at the Wharton School at the University of Pennsylvania, and former Chief Economist, FCC
- DEBORAH TAYLOR TATE - FSF Distinguished Adjunct Senior Fellow and former FCC Commissioner
The transcript should be read in its entirety for an appreciation of all of the views of each panelist. Nevertheless, in the meantime, immediately below are selected excerpts presented in the order of the panelists' remarks. These excerpts provide an indication of the various perspectives presented at the session. But, again, the transcript should be read in its entirety in order to obtain a full appreciation of each panelist's views. And if you would like to watch the YouTube videos of the proceedings, the three opening addresses can be viewed here, and the panel discussion here. In light of the FCC's ongoing consideration of net neutrality mandates, including the imposition of Title II regulation, the panel's discussion remains very pertinent.
MICHAEL WEINBERG
I want to go back to first principles for a little bit and talk about why we're engaged with this policy conversation, and why we are advocating what we are advocating. First principles really are pretty basic. I can't speak for all Net Neutrality advocates, but as a representative I will do my best. We are concerned about ISP gatekeeper power. Our concern is that ISPs have the ability and the incentive to inject themselves into the Internet experience, inject themselves into the conversation, and manipulate success or failure of services and sites online. That's true in a commercial, innovation sense, which is a very important part of this conversation. And it can also have side effects on all of the non-commercial activity that really gives the Internet its richness. We talk a lot about the commercial, innovative part of this, and we're going to talk about that a lot. I think that's really important. But it is worth taking a moment and stepping back and thinking about everyone's own private Internet experience. We all use big-name services, we go to Politico or New York Times or these sites, but a lot of people also have these online communities that are not commercial. They are different for everyone, but they really give richness to the experience. Some of these communities are commercial, some of them not. The reason they exist is because of this open nature of the Internet....So once you start from there, and you say, "Okay, what does that mean, in terms of rules?" It means bright-line rules that make it clear. It means things like no blocking, things like no discrimination, that have clear lines.
The take-away, certainly from the D.C. Circuit decision, is that if you want clear, bright-line rules, you have to ground FCC authority in Title II. You can have other rules that are not grounded in Title II authority. But if you are serious about really robust open Internet rules, that's where you have to go. Now, I wish that that were not the case, honestly. If it were possible to have strong Net Neutrality rules under a 706 authority, we probably wouldn't be having this event. We would have all moved on with our lives, and we would be doing other things. But for better or worse, where we are right now is, if you really want clear, bright-line rules that strongly protect an open Internet, you have to go with Title II authority. That's why we were very encouraged that President Obama came out and said that. We were very encouraged. We were a little bit concerned when Chairman Wheeler expressed concern about President Obama's position. We were encouraged that later on in the week the FCC walked that concern back a little bit. And we hope now that they are taking a very serious look at Title II options. And we recognize that any rulemaking proceeding under 706, under Title II, or under hybrid, there are questions to be answered. We think we have answered those questions. But we will not pretend that there is simply nothing that anyone could worry about.
On the paid prioritization front, I think there are, broadly speaking, two harms or concerns. One is this concern that it increases friction for new entrants, for start-ups. On the list of things you need to do to build a new company, for example, in addition to coming up with an idea and executing the idea, you then have to potentially fly around the country and play golf with people at ISPs, You have to find a way to cut deals with ISPs, and that's going to cost you time, it's going to cost you money. We've heard from very high-profile venture capitalists that if that additional barrier exists for start-ups, it will greatly decrease their interest in investing....The other category of concern, which also deals with the smaller entrants, is that in order to create a situation where the paid prioritization option, the paid option, is an attractive one, you have to have the non-paid option to be not that good. We can define that as a degradation of service, or an increase in the paid prioritization service, or whatever it is. There has to be a differentiation between the unpaid and the paid services. And the concern is that there will be an incentive because you make additional money for the paid prioritization to make sure that that sort of standard level of service is subpar enough to justify the increased cost. If you don't, then no one is going to pay for the prioritization.
ROBERT CRANDALL
I was surprised at the evolution of the Net Neutrality debate to this paid prioritization notion, and the notion that somehow termination of incoming Internet traffic by broadband distributors should always be priced at zero. This is a two-sided market. The distributors can collect revenues from their subscribers, or from the incoming traffic. I know of no empirical evidence that suggests that setting the termination rate at zero is beneficial, is welfare maximizing... I know of no such evidence. You can speculate about why that might be the case. But I doubt that you can find parameters that will work to tell you that that is the right price.
[T]here is no need to be worried about the distributors excluding marginally valuable content from innovative providers at the edge of the Internet. They have no incentive to do so. Indeed, if they have market power, they will erect discriminatory tariffs, and charge those guys very little, while charging very high prices to those people who distribute through Netflix and the like products that are produced in Hollywood with huge rents. And I predict that the effect of doing so would be not to reduce the market value of Netflix, not to increase the cost to subscribers, but rather, to reduce the rents of Tom Cruise and his brethren in Hollywood. That is because there are huge rents being earned in the production of those products that Netflix is distributing. Maybe that's the reason why President Obama decided to get active in this, because a large number of those people are obviously Democratic supporters.
[I]mposing Title II is going to create enormous problems. I don't see how any hearing on what the appropriate termination rates should be is going to result in any easy resolution that they should be zero for all incoming Internet traffic through now Title II-regulated distributors. In fact, I have colleagues in the economics profession who are already trying to scare up business in Europe, because they figure this is going to be a great excuse for loading on substantial fees for Google and the like in Europe. I don't see how going this direction is likely to lead to the result that the advocates want: that is, zero prices on the terminating side of Internet traffic coming in to the distributors.
Most of the discussion about how there is this threat of ISPs, broadband distributors, carriers, discriminating against content is extremely superficial and lacks any sort of empirical substance....First of all, Time Warner spun off its Time Warner Cable unit many years ago. If there is a tremendous advantage to favoring your own content, and making money from doing that, they wouldn't have done it. Disney doesn't own distributors. Comcast bought NBC. And, if you look carefully at what's happened to the market cap of Comcast, relative to other cable companies and other media companies, I would argue that, probably, they have lost money on that transaction so far. That is, the purchase price of about $30 billion for NBC was probably not worth it, because Comcast owning NBC confers no advantage on NBC, because they can't use that content in any advantageous way that they couldn't do through licensing the content themselves. In fact, there is very little evidence that there is the potential for discrimination that would increase the value of NBC. So we see lots of empirical evidence that the threat is not very great. And this anecdotal stuff may work in Washington, but I don't think it works in the real world... I'm suggesting to you that you have a few anecdotes, but it is not empirical evidence that there is a systematic tendency for these distributors to be able to, much less have the incentive to, discriminate and make money from doing it.
The European situation is very different from the U.S. one. First of all, the European Commission has now admitted that it has done a very bad job in leading the regulatory process in Europe. But it's done an equally bad job of resolving how to fix it. It has done absolutely nothing in that regard. As a result, it hasn't even, apparently, enforced its own regulations on member countries. I believe that in Spain and Portugal the regulators have overtly decided to deregulate fiber, allowing both telephonic and telecom to begin to deploy fiber. They are two of the few ILECs in Europe that are doing so.
As to how Tom Wheeler gets out of his current problem, I have no idea. I don't have a JD degree, nor am I sitting close to political power. But as for the effect of regulation on investment, more and more serious economic studies are coming out showing a severe effect of various forms of telecom regulation, adverse effect, on investment. I have no reason to believe that, if we go down this road, it won't have some effect. Fortunately for the advocates, it will take 10 years for the data to arrive, and for the econometricians to go to work on it. So you've got a 10-year lull here before the evidence becomes clear that what you've done is to reduce network investment in the United States.
GERALD FAULHABER
One of the things that came out of the FCC order that eventually got overturned was the fact that, in 10 years of broadband ISPs, we had exactly two incidents that could demonstrably and provably violate Network Neutrality. One was the Madison River Telephone Company and the other was Comcast blocking a BitTorrent. Two events out of a decade of industry history seems to be a reason that you should commend the industry, not the reason you should bring them under regulation. In fact, the FCC indicated that they were adopting these regulations simply to make sure nothing happened that might happen but hadn't actually been proven to happen... These guys are in business to carry traffic. They are not in the business to stop it.
Another thing is imposing Title II restrictions now to keep the Internet as is. Come on. This worked for telephone in 1930, when it was a mature technology. This is not a mature technology. It's not even close to it.
The long-term impact of regulation is really disastrous. Now, be clear. The FCC has started to regulate the Internet after 40 years of hands off. After being very proud of hands off. Do you remember the term "unregulate," back in the '90s and 2000's? It was said, "The reason it's so successful is we're not regulating it." When did we change our mind here? What does history tell us about regulation? Now, we have heard a lot about that today. But there are two general principles I want you to think about, and think about what you've heard about today. The first thing is that regulation, when it's introduced into an industry, will eventually expand to the entire industry. You may say, "Oh, it's just ISPs today." Woops, now it's ISPs and how they interact with peering networks. Netflix doesn't realize this yet, but pretty soon they're going to be regulated. Google, I think, has kind of gotten on to the fact. They were very strong advocates of Network Neutrality and regulation. I'm beginning to believe they understand eventually they will be regulated. That will happen. If you look at the history of regulation, this is what goes on.
The second thing, it provides opportunities for "rent seeking." That is the economics phrase that is basically saying people who are in this business now no longer go to customers to get their competitive advantage. They go to regulators. They go to regulators to say, "Put some restrictions on my competitors. Give me special treatment." So, competitive success comes from going to Washington, to the regulator's office. And we've already seen this. We've seen it with LightSquared, we've seen it with Level 3, we've seen it with Nextel, we've seen it with Cogent. That's what goes on. It's well underway. Network Neutrality, which started off to be just about ISPs and customers, became the opening wedge for bringing interconnection with peering networks and others under the FCC's wing after 30 years of, basically, very successful private markets working. Interconnection amongst networks just worked fine, it all worked with contracts. Now, all of a sudden, we've expanded it. Now, this has been pointed out before. You want to see what this looks like? Look at the EU. Okay, let's name all the great innovations in the Internet that have come out of the EU.
Let's make it clear. We're going down the regulatory rat hole. It's a rat hole. And that's where we're going. We've heard about Title II and how we're going to forebear from stuff. The only difference with 706 is how fast we go down the rat hole. We will go down faster with Title II. But we're going down the regulatory rat hole, whether it's two years or five years, that's where we're going. That's where we're going. Now, I don't even want to talk about Obama's intervention. That was just embarrassing at every possible public policy level.
I loved Michael's characterization that we've really had Network Neutrality regulation for a long time, because it's always been there as a threat. We haven't actually had it, but it's been there as a threat. And if that's the story, then I would suggest we continue it as a threat, and let's not actually have it, and just have it as a threat in the background. I think all of us would be happy with that.
DEBORAH TAYLOR TATE
My question is, "Where is the beef?" Unless and until we really have a true complaint at the FCC, it's hard for me to understand what the exact problem is. That's what I kept saying while I was at the FCC. And not some hypothetical "what if," but what is the real problem that occurred? You could then create a rule that would address that very real problem.
Something is rotten in Silicon Valley. Sometimes, when you're at the FCC, you actually wonder: Why is somebody here, asking to be regulated? Right? I've always found it very interesting that these are the same folks that I found so difficult to try to get a meeting with. I could see that their products and their infrastructure and their competitive services at one day would intersect with consumers, with all of us, and possibly with the FCC. So, I really wanted to try to build a relationship. As you all remember, really, no one from Silicon Valley even had an office in Washington. Nor did they think they needed one. It's interesting that now they are the biggest provider of lobbying services in D.C. Under the regulatory regime that we have now, we all see the explosion, the transformation, the unbelievable opportunities that are right here, at the touch of a fingertip. So they really don't want to pay for what they use, right? They want us to both provide all of our data, which they then sell to advertisers, and now they're also wanting price regulation. As you all heard, even Tim Wu, who is a huge Net Neutrality proponent, said, "The consumer always pays."
Silicon Valley folks, or all of the Net Neutrality advocates, have you really thought about the cost that's going to be imposed when you, indeed, have to contribute to this USF program that, as one of the FCC commissioners says, is now at 16 percent?
Many of you all know that I do have a role as it relates to children with the International Telecommunications Union... I went to many countries. One of the reasons that we were out there was to talk about having an independent regulator, so that an autocrat just didn't choose their cousin or their brother to run the ministries of telecom and information. And so it is very important about our actions speaking louder than our words. We cannot go out and tell the world not to censor and not to regulate certain content, when we ourselves possibly may be doing just that.
[I]t's also interesting to see some of the people who have come out for the 706 pathway, if you want to go down the road of regulation at all. And that includes 50 civil rights organizations. They are much more concerned about the investment and the infrastructure, about reaching the underserved and the unserved, about reaching the millions of children that are not connected in their homes today. I share those concerns, as well.
The concept of transparency brings up the AT&T throttling case that the FTC has been investigating. If Title II goes into effect, then the FTC will not be able to do those investigations. They are our nation's expert agency for every sector, across all sectors. And so it's really important that, in terms of the advertising, and what consumers are being told they are going to get, and whether or not there are deceptive practices, that that needs to stay at the FTC, which is another repercussion, if you will, of Title II regulation.
DAN BERNINGER:
I want to say why Jeff Pulver has conviction about arguing against Title II. I met Jeff 20 years ago, in 1995, when I was at Bell Laboratories. This random guy came up and was working on something called Voice over IP. And we started a project that would connect PC-to-PC to the telephone network. This is before the '96 Act. And so we've talked a lot about hypothetical versus real. Jeff had the real experience of Title II in communications. The moment he connected VoIP as PC-to-PC to the PSTN, he heard nothing but: "That is illegal. You need to go ask permission of the FCC to do that."
Now, the thing that Jeff reminds us is that this is really all about communication in the end. Jeff looks at the regulatory, he looks at the technology. He says, "This is just a black box to me." All he cares about, as a super-communicator, is, "What is the communications capacity that I'm getting"? And so he will sit here today and he'll say, "Well, in 1996, before all this started, communications was, you know, a $.40 long-distance phone call, and taking an airplane flight somewhere so you could go talk to someone." Today we have many, many more ways of communicating, and that's what Jeff wants to protect. And also, Jeff had his sleepless nights. In those days, in 1995, he didn't want to be a law-breaker. And so, we told Jeff, "Well, if you make it free, Jeff, and call it free-world dial-up, they can't get you." But it still took 10 years to get the Pulver Order and to get the FCC to admit that, "Well, okay, it's not Title II." A 10-year process. Jeff left for 10 years, came back this summer, and all the sudden it's back again.
A PDF of the panel's transcript, "Thinking the Unthinkable: Imposing the 'Utility Model' on Internet Providers," is here.
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