As Internet Shatters Middleman Role, What’s the Reason for the FCC?

With the Internet vastly undermining the role of the “middleman,” why do we accept that the FCC – one of the market’s middlemen – still has the same role (cop on the beat) that it traditionally has had for the past 75 years?  Hasn’t technology, consumer education, industry best practices, marketplace guidance and reputation management “open sourced” the “policing” function we allowed the FCC to once do?

Isn’t it time to just let the market work, and tweak – i.e., eliminate  – regulations that needlessly / dubiously place the FCC in the role as top policeman?  More specifically, if the Internet has “changed everything,” why hasn’t the role of the FCC / government regulator been similarly shattered?  Are regulators somehow immune to these dynamics?

Or, do we let them be so?

Camel Puts Nose under Tent with FCC “Wireless Model” for Internet Regulation

Julius Genachowski claims his “Third Way” approach to taking over the Internet looks a lot like the benign “wireless model” of regulation. 

If it were true, that would be a good thing. 

According to Genachowski:

In its approach to wireless communications, Congress mandated that the FCC subject wireless communications to the same Title II provisions generally applicable to telecommunications services while also directing that the FCC consider forbearing from the application of many of these provisions to the wireless marketplace. The Commission did significantly forbear, and the telecommunications industry has repeatedly and resoundingly lauded this approach as well-suited to an emerging technology and welcoming to investment and innovation. In short, the proposed approach is already tried and true.

Presumably, the “wireless model,” if applied to the Internet, would spur growth and innovation.  But I have a question.  In the FCC’s NOI, how does the wireless model of “light regulation” apply to, er, the wireless model? 

I haven’t quite figured out the circularity of that one yet. 

Oh, well.  Maybe I shouldn’t waste my time trying.  It seems more apparent than ever  that for wireless and wireline broadband service it’s not really about regulating “downward” – i.e., deregulating, as is the hallmark of the “wireless model” – but instead, regulating “upward,” thus adding regulation.      

No doubt before 1993 the wireless market was a confusing mess.  Says Verizon:   

For many years, a bifurcated federal-state regulatory system similar to telephone utility regulation existed for wireless services. Congress put an end to that system in 1993 when it preempted state regulation of wireless entry and rates, establishing a uniform federal regulatory policy for the competitive wireless industry. 

As touched on by Chairman Genachowski, after 1993 the lack of common carrier regulation – which could have been applied by the FCC – also proved integral toward building the wireless marketplace.  A November 2009 GAO Report confirms this, noting:

…[H]aving determined that exempting carriers from certain regulations will promote competition, FCC has used its authority under the 1993 Act to exempt wireless carriers from some rules that apply to other communications common carriers.  For example, in 1994, FCC exempted wireless carriers from rate regulations that apply to other common carriers.  FCC has stated that promoting competition was a principal goal of the 1993 Act under which Congress established the regulatory framework for wireless phone service oversight. As required by the 1993 Act, in exempting wireless phone service carriers from regulations in order to promote competition, as FCC has done, FCC must determine that such exemption is in the public interest and that the regulations are not necessary for the protection of consumers.

But the “Third Way” actually goes in the other direction.  

Not only does the newly  proposed regulatory regime lack specific congressional authority, the only way the agency can achieve its purposes (whatever they are) is through the addition of regulation – exactly opposite of the “wireless model.”   First, the Commission must separate the transmission element of broadband from info services – the two together being previously unregulated.  Then, as the Chairman says, it can invoke “the few provisions necessary to achieve [the FCC’s] limited but essential goals” to keep the Internet open.         

Invoke a few provisions?  That doesn’t sound like “wireless model” deregulation.  But then, all must know that the “Third Way” isn’t about deregulation anyway.  Rather, it’s about getting the camel’s nose under the regulatory tent, thereby enabling broad Internet regulation when the agency deems it’s necessary.

Ever share space with a camel before?  That smelly, expectorating beast can make even the nicest tent a place in which no one wants to rest.   Imagine what that’ll do to Internet growth and innovation?

FCC Seeks to Regulate the Internet…Because It Can

As I touched on last night, I can’t say as I was surprised by today’s announcement by the FCC to move toward full-blown Internet regulation.  Voting along party lines, the three Democratic FCC Commissioners expressed their wholehearted belief that their regulation of the Internet – not de facto marketplace regulation – was the only way to protect consumers and Americans. 

The Comcast v. FCC decision should have rebooted the Commission’s discredited Net Neutrality ambitions. Yet instead, the FCC appears moving closer toward questionable new rules, using specious authority to get there.  Such an exercise in regulatory hubris is truly confounding, especially in light of the facts and a clear consensus that the Internet must remain free from stultifying regulation.

Make no bones about it, the FCC’s NOI today will work to regulate the Internet, and poorly at that.  It takes a yellowed, dog-eared page from a 19^th Century industrial policy playbook, and seeks to graft that on to the rapidly evolving Internet.  Ultimately, it will prove offensive to American consumers, as well as those innovating at the core and edge of America’s broadband networks.  

Internet regulation isn’t warranted.  It may never be.  Though the Commission appears eager to impose Net Neutrality-looking rules, the irony here is this: We already have Net Neutrality today.  The marketplace, technological innovation, industry best practices and investment, and consumer empowerment have created a de facto Net Neutrality regime well outside of FCC rule or regulation.  For this particular FCC, and the underlying politics, such a fact is seemingly unacceptable. 

For American consumers, our economy and society, it is, however. 

Over the past five years – when the Internet was officially freed from the Commission’s yoke – Americans have experience a virtually endless font of new services, applications, devices, content, and voices, all available via an ever-growing array of network providers.  Whole new industries, wealth creation and legions of jobs have ensued.  Further, American society has become more democratically engaged than at any time in our history. 

The lack of formal regulation caused this explosive growth.  It should militate strongly against heavy-handed government intervention “to make it better.”  Yet, sadly, the FCC’s regulatory OCD has reared its ugly head again.  One can only hope that the putative challenges the FCC seeks to prevent (whatever they are) will avoid preventing the ongoing growth and vitality of the Internet ecosystem. 

Some analysts believe that’s wishful thinking, though. 

According to Charles Davidson and Bret Swanson, their research concludes that the new rules will harm network investment, with this in turn hindering “capital expenditures by others in the ecosystem, particularly those at the edge.”  In their estimation, just a “10 percent decrease in investment by wireline and wireless broadband service providers, coupled with likely spillover effects, could result in the loss of 502,000 jobs across the entire ecosystem and would have a negative impact on U.S. GDP on the order of approximately $62 billion per year.”

Their reasoning makes intuitive sense.  New rules where virtually none existed before will disrupt core investment.  And this will spill over to the edge.  It’s not called the web for nothing – the ecosystem is connected to itself.  Regulators can’t be smug enough to think that costs imposed on one portion of the Net will be contained solely there. 

You know, it doesn’t need to be this way.  As FCC Commissioner Robert McDowell thoughtfully lamented in his NOI statement today –

If my colleagues feel compelled to act…let us create a new role for the FCC to spotlight allegations of anti-competitive conduct while working with non-governmental Internet governance groups and consumer protection and antitrust agencies.  In each of the small number of cases cited by proponents of network management rules, all were rectified quickly, without new rules.  The recently announced technical advisory group [to deal with network management issues such as net neutrality] could serve as a component of such an endeavor.

Clearly, less regulatory alternatives abound.  One of our favorites is PFF’s Digital Age Communications Act (DACA), an idea similar to what Senator Jim DeMint will soon introduce with his reform-minded FCC Act.  Briefly, DACA scrapes the old regulatory “silos” of the Communications Act (such as Title II for telecom, Title III for broadcast, Title VI for cable), and replaces them with a Federal Trade Commission-like “unfair competition” standard. Under DACA, the FCC would retain some baseline regulatory authority to oversee the marketplace, but this authority would be limited and based upon more settled principles of competition law and economics—essentially, streamlined antitrust regulation.  

Will this happen?  Probably not in this pro-regulatory environment.  But I wouldn’t mind the surprise. 

Neither would the Internet ecosystem.

No Such Thing As Regulatory Predictability When Built on an Illusion of Authority

Tomorrow at the FCC’s open meeting, it is expected that the Commission will release an NOI that will seek to implement Chairman Genachowski’s controversial “Third Way.”  Ostensibly, his plan will try to chart a reasonable balance to promote an open Internet, while at the same time keeping it free from regulation.  To arrive there, the Commission will likely propose to shear away the underlying transmission component of broadband telecommunications services from ISP / information services, and impose only a “handful” (like a dash of salt, I guess) of common carrier regulations on the former to keep the Internet open for applications, services, content and devices (as if it is not now already). 

We do not know what’s in the NOI, nor the process toward a rule or ruling.  That said, it probably doesn’t matter. Call me skeptical, but you don’t need to be a mind reader or have a well connected lobbyist to understand that the fix is in.  Not letting the facts get in the way of the situation, the Internet, through this NOI, is going to be regulated.

Why am I so skeptical?  Well, I was struck by a curious, if not mildly offensive, comment made the other day by the Chairman.  At a gathering of industry representatives and government officials, Genachowski causally stated:

No one really cares what section of the statute we point to except for the lobbyists and lawyers. It would be unfortunate if that process slowed us down as a country on improving our broadband infrastructure.

This somewhat glib analysis is not unique to the present Commission.  Former PFF President Ray Gifford recently pointed out that the FCC has an institutional tendency to stray ultra vires from its congressional authority.  Why?  At an event we held in May on crafting the next Communications Act, Gifford made this astute observation:

…[Y]ou can criticize [the FCC] from any number of directions, but what’s the most remarkable thing to me… is the essential lawlessness of the place…It’s a criticism to be sure, but it’s not meant to be that laden with judgment. It doesn’t follow procedures and protocols that normal, regular institutions would if industry and consumers were going to rely on it. It follows a much more political rhythm. And what you see coming out of the FCC are, so often, political documents. Which is why they have a record in front of the courts that the Detroit Lions have.

No one really cares.  Obama’s team won the ’08 election, and politics have decreed that “Net Neutrality” – through formal rules and regulations, not de facto guidance via the marketplace – will be the law of the land.  Even when there’s no law of the land to support the rule.  No matter.  The Commission is free to take portions of regulations it likes, and apply them in the manner it sees fit, sort of like dining from a pu pu platter at a Chinese restaurant.  “Ah, that looks good.  I’ll have one of those, too.  Before you go, can you hand me that dish, too?” 

Yummy stuff.

This cavalier attitude allows the agency to look past a central fact – we already have Net Neutrality rules.  How so?  Well, the marketplace, technological innovation, industry best practices and investment, and consumer empowerment have created a de facto “rules” without formal FCC intervention.   

The results have been nothing short of astounding.  Over the past five years – when the Internet was officially freed from the Commission’s yoke – Americans have experience a virtually endless font of new services, applications, devices, content, and voices, all available via an ever-growing array of network providers.  Whole new industries, wealth creation and legions of jobs have ensued.  Further, American society has become more democratically engaged than at any time in our history. 

You would think that would chasten the FCC’s action, but it won’t. 

Leading up the NOI, the FCC’s spin machine has furiously worked all 8 of its cylinders, saying, “Hey, don’t worry. You can trust us.”  Singing from the same chorus book, the Majority Commissioners (as seen here) claim the Third Way will improve “regulatory predictability”; will be  based on the popular wireless model of light regulation; and will continue the FCC’s stellar track record of forbearing from regulation when such determinations have been reached. 

I wonder about that.

The status quo seemed predictable enough for companies to inject approximately half-a-trillion dollars into broadband infrastructure over the past five years.  For network providers, those investments were made in an essentially unregulated environment, based on the assumption that that plant would remain in their possession.  What the new rules could do, however, is take valuable rights out of their hands, subjecting new and, perhaps more importantly, old plant to access by third-parties.  They’d create what looks like a regulatory takings / confiscation. 

For the new and old facilities, we have to see how the Commission allows compensation for their use.  The devil will be in the details.  For pre-NOI facilities, I’m not sure how that’ll work.  Those facilities cover 95% of American broadband access.  Sure, some costs were likely figured in by network providers when they were built in order to account for the arbitrary nature of regulation.  But, forward-looking pricing won’t allow for adequate cost recovery, and that means a substantial monetary loss for providers.  Going further, if the Commission’s rules lead to all out price control of network facilities, network providers might be better off Kelo’d out of their property than maintain it for state (ab)use.  Predictably, investment would dry up, and the rush to create facilities-based competition would evaporate with it, too.

Resorting to the wireless, “regulatory light” model has its infirmities, too.   Sure, it has worked for the wireless industry, even though, technically, carriers are subject to common carrier regulation.  Though the FCC is reluctant to admit it, data clearly shows that the wireless market is “effectively competitive,” and then some.  That said, it’s not so much that the model works.  Rather, as former PFF colleague, Barbara Esbin, notes:  

…Congress permitted the FCC to deregulate the rates of commercial mobile radio service providers and that is the key difference today. There is no act of Congress permitting the FCC to implement its Third Way. Now the wireless model might be a great basis for the next act in terms of how much regulation do you need in a competitive marketplace, but it’s hard to use that analogy today because of the lack of legislative authority.

Chairman Genachowski confidently states that the wireless “approach is already tried and true.”  Of course, one small detail has gone missing in his analysis – namely, Congressional authority.  The FCC is one powerful agency, but not so powerful as to create that authority on its own.  

Finally, as to the FCC’s forbearance track record – yes, it has been stellar.  No changes in 17 years of that authority.  That is, until one looks at the anticipated NOI.  In the Third Way proposal, the Commission claims that Internet services are really two separate services split between a Title II regulated transmission element, and a Title I regulated (albeit “lightly”) information service element.  Presently, Internet services – the two together – remain virtually unregulated.  Using the Commission’s Third Way reasoning, what we thus have is a constructive forbearance from regulation, short of a formal Section 10 finding in the public interest.  If the NOI goes through as anticipated, that will change.  The underlying transmission element will be subject to Title II formally.  And, “forbearance” gone.  So does the FCC’s stellar forbearance track record and the implicit promise to be “nice” to network providers. 

Perhaps I’m splitting hairs here and being too hard on the Commission.  But what a bad first impression for the Third Way when some of the key arguments used to sell its salient “regulatory light” aspects ring hollow from the very get-go.

The yawning gap between what we anticipate from the Commission tomorrow and what we see in, say, Section 230 (b) of the Telecommunications Act of 1996 could not be more profound. 

Among other things, Section 230(b)(2) states:

It is the policy of the United States–

(2) to preserve the vibrant and competitive free market that presently exists for the Internet and other interactive computer services, unfettered by Federal or State regulation

Does it get any clearer than that? 

Apparently not for this FCC.

AT&T’s New Wireless Pricing Plan – Good for the Net Neutrality Debate?

The Deal’s Chris Nolter believes AT&T’s new wireless data-plan pricing – i.e., billing for tiers of data consumed instead of an all-you-can-eat approach – will affect not just the wireless world, but may also affect Net Neutrality regulations in the wireline space, too.

I’m not so sure.

Though tiered pricing for wired broadband has met with little success, Nolter suggests that if it can be done successfully in the capacity-stressed wireless context, then a positive precedent can be set for similar pricing for wireline broadband providers. 

According to Nolter, “AT&T’s wireless billing plan may help draw out the FCC on its thinking, and guide the arguments of the broadband providers in the net neutrality negotiations.”  He blithely adds, “If wired broadband providers can make the case that wireless tiered pricing works, they will have evidence to sway the FCC — or ammunition to blast the agency’s rulings in court.”

Right now, wireline broadband providers can charge anything they want for service.  It’s essentially unregulated, checked by the vibrant marketplace.  The FCC’s “Third Way” – or, proposed proxy for Net Neutrality – will most certainly affect how ISPs charge for service. But, it would likely not ban “discriminatory” pricing. 

We have always seen discriminatory pricing in telephone networks: business v. home plans, T-1 v. dial-up services, private line v. PSTN services, etc.  What Sections 201 and 202 of the Communications Act – i.e., the guts of the Third Way – do not allow is unreasonable discrimination in charges, practices and classifications.  So, if the Third Way were to go forward, wireline broadband providers could probably price in tiers, similar to the AT&T pricing plan.  It just has to be “reasonable.”

That said, tiered pricing for end-users, while nice, kind of misses the point.  Network providers want the market-based flexibility that they have now – true pricing flexibility.  They want to be able to “discriminate” in the manner their business judgment sees fit, guided by marketplace dynamics, not “as allowed” by FCC rule.  The Third Way would likely deprive them of that needed flexibility.  Once in the “common carrier” box, those services have a high likelihood of seeing confiscatory price controls instead.  Perhaps not immediately, but when the “public interest” demands.

Why is this bad for the network and, ultimately, consumers? Pricing flexibility creates the right economic signals to incentivize facilities-based competition (i.e., real competition).  Price controls just fake it through a politically corruptible, economically unsustainable “model” of competition (i.e., bubble competition).      

To the extent that AT&T’s tiered pricing reminds the Commission of the benefits of pricing flexibility, Nolter may have a point.  But, I don’t see that easily translating to fewer, or nicer, Net Neutrality-proxy regulations.  The Commission’s Third Way approach to wireline broadband feels different.  All the court wrangling, Agency machinations and congressional shenanigans leading up to it say as much – hey, if it were just wireless regulation placed on the wireline broadband world, no would one would care (except the lawyers, of course). 

It isn’t.  It’s more, way more.  FCC Commissioner Mignon Clyburn attempts to calm everyone’s nerves by beneficently calling the FCC’s new, 75-year-old regulatory approach some much needed “regulatory predictability.”  But broadband providers have legitimate concerns about the stultifying regulations that will inevitably ensue. 

Markets prefer the “predictability” of markets.  Elastic government rules – unless they foreclose or protect one from competition, abate costs, or enhance business line inputs / outputs – are basically deadweight losses.  Tiered pricing / reasonable network management (which broadband providers must figure they’ll be able to do anyway) represents no more than a consolation prize when viewed with the larger lens of the Third Way.  If those rules lead to price controls and thus foreclose market-guided discrimination, the only regulatory predictability one will see is 1934-style innovation and competition. 

Was there an iPhone then?

FCC’s Third Way – NPR Interview

Me, today at NPR, Washington, DC

I was interviewed this morning by NPR’s Joel Rose on the FCC’s broadband reclassification / “Third Way” proceeding (see more here & here) kicked off just today.  Listen here to the NPR interview.

The following are some notes I prepared for our talk.

• We want to see the Internet grow; we do not believe regulation as a default is the answer

 

• Though imperfect, we think the market works; it should be allowed to continue to grow via an absence of regulation

 

• We appreciate what the Commission is attempting; it is an important debate we’re having, but the devil’s in the details – the FCC’s Third Way will be looked at carefully, compromises struck in places, and disagreements in others

 

• On the whole, the FCC’s Third Way may not be the birthday cake network providers are looking for

 

• Core innovation could be harmed here – without core innovation, you don’t have innovation at the edges – it’s symbiotic; but regulation – the details – could curb incentives, facilities investment, harm ROI

 

• The Internet has thrived through lack of regulation; so why the change?

 

• By even the FCC’s own reckoning, the market is vibrant; OECD data is apples and oranges and not entirely relevant to the U.S. market; we’ve got it good here, and it’s getting better without regulation

 

• The Comcast ruling changed nothing in the marketplace – it’s vibrant, growing, checked by technology, choices, competition; network providers are following Net Neutrality principles without government intervention

 

• Any changes the FCC contemplates must hem closely to the Act’s statutory grant of authority; this includes today’s Third Way changes; the FCC can’t simply perform a mash-up of statutory authority and say they can regulate as such

 

• Title II seems inappropriate for the Internet; it is not unreasonable to take a new look at the 76-year-old law they’re going back to; Congress should get involved

 

• The Internet marketplace is tough – made tougher when viewed with the lens of congressional and other efforts to clamp down on personal data, cybersecurity, etc.

NY Times LTE – FCC, Let’s Avoid Internet Regulation

I was fortunate enough to get a letter-to-the-editor published in the NY Times this weekend, responding to the paper’s call for broad Net Neutrality rules which would regulate broadband services.

____________

Regulate the Internet?

To the Editor:

In “The F.C.C. and the Internet” (editorial, April 19), you ignore two important facts to arrive at your sweeping conclusion that the Federal Communications Commission must regulate the Internet to ensure its health and growth.

Over the last five years alone, American companies — incentivized by the absence of Internet regulation — have invested more than half a trillion dollars to build broadband infrastructure. Consequently, this has exploded broadband choice and access, boosting jobs, productivity and commerce, as well as other important societal-civic benefits, for more than 90 percent of America. This growth will continue, fostered by vibrant competition among cable, wireless, wire line and other evolving means.

It is understandable that you ignore the second fact: it reveals an inconvenient truth. The Telecommunications Act of 1996, which put Internet services outside of 75-year-old telephone regulations, was passed by a Republican Congress and signed into law by a Democratic president, in an overwhelmingly bipartisan manner. The Bush-era regulatory changes, which ensure that Internet services get treated in accord with the law, only followed through on the pro-deregulatory, pro-marketplace intent of the law.

America’s Internet thrives. It does so because of less regulation, not more. The F.C.C.’s plan to regulate the Internet will hurt average Americans by limiting choice and thwarting expansion of new services and options.

Mike Wendy
Washington, April 19, 2010

The writer is vice president of the Progress and Freedom Foundation, a think tank that takes support from the information technology, telecom, wireless, media, cable and content industries.

FTC Seeks (even)Broad(er) Internet Regulation Powers

FTC Hunts for New ‘Net Nanny Powers

My colleague at PFF, Berin Szoka, talks about new Congressional efforts to make the FTC our Internet Nanny (even more than it already is).

Call your Senator today!

To nudge, kick or neither?

Should the Administration “nudge” policy, or impose heavy-handed regulation when confronting public policy challenges?

The WSJ has an interesting story on same today; noting:

A little more than a year into its ascendancy at the White House, behavioral economics as a key policy-making tool may be on the wane.

The opening weeks of the Obama administration were a coming-out party for economists who hold that incomplete information, subtle obstacles to participation and confusion tend to make people act in economically irrational ways. Economic policy can “nudge” people and institutions into more efficient, economically beneficial behavior without heavy-handed command-and-control measures in regulation and legislation, they argue.

http://online.wsj.com/article/SB20001424052748704869304575103980232739138.html

The idea of a “policy nudge” is not new.  If I had to choose between the heavy-hand or a pointer, I’d take the latter.  Ideally, however, I’d prefer that the morality of individual accountability and free markets do the “regulating” instead.

Sadly, this thinking runs contretemps to Washington’s present desires.  Federal agencies need to do stuff. And, we’ve got some big problems which need “solving” by bureaucrats.  In their view, regulation, and reams of it, is the key.

I’m not foolish enough to suggest that there’s no place for regulation in our world.  In many cases, it has made our lives safer and better.  But the fundamental idea that regulatory tinkering / social engineering must continually occur through bloated, behemoth agencies – that that’s acceptable and is primarily what Washington’s for – well, that sub-strata of unelected bureaucracies, and its resulting regulatory scat, sorely needs addressing.

When was the last time you saw a story on the Administrative Procedure Act (APA) in a national news outlet?  Probably never.  The Act guides how the agencies can, through congressional delegation, make law (which is reserved to Congress alone).

“Limited government” has become unlimited through these agencies (and abuse of “congressional intent”), which touch every aspect of our lives.  “There oughta’ be a law” – well there is, with more daily.

It has a significant cost.

If we cannot control this, and the associated spending, we’re going to be nudged out of something more important – individual liberty. That’s the real story.  Not whether to “nudge” or big-foot policy. But, rather, whether policy makers should reflexively default to regulation in the first place to “solve” problems.

There are other ways.  The gumption in today’s pro-regulatory environment to say “no” to regulation, and the agency beasts that create it, is one of them.

How ’bout that nudge for you?