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Thursday, March 30, 2006

Adjudicating Network Neutrality: Upsides, Downsides and Practical Implications
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Much can, and no doubt will, be said about recent efforts to address "network neutrality" concerns by granting the FCC authority to adjudicate disputes relating to its Policy Statement on this issue. Certainly, these efforts can be seen as an important step forward -- at least compared to proposals that Congress mandate network neutrality immediately and in all circumstances. But there are also clear downsides to this "adjudication authority" approach and, in the final analysis, one wonders whether this kind of legislation would change the FCC's behavior as a practical matter.

On the plus side, the adjudication authority approach shows considerable progress in policymakers' thinking about the need and appropriate scope of network neutrality mandates. First, stepping away from saddling broadband network owners with this kind of regulation across the board, the adjudication authority approach would limit the FCC primarily to making fact-specific decisions about the need for network neutrality mandates. The consumer harms feared by proponents of mandates, of course, are at once speculative and poorly defined. Steering the FCC toward adjudications as the procedure for imposing network neutrality regulation forces the agency to wrestle with specific facts, rather than the "what if" scenarios that too often cloud the analysis in rulemaking proceedings. These scenarios tend to be inherently irrefutable justifications for regulation, as they challenge network owners to prove a negative, i.e., that they won't do the feared deed.

Second, the adjudication authority approach has the advantage of relying on the FCC's thoughtful and balanced Policy Statement. Although the Statement may not have been strictly necessary given the weak bases for regulating broadband at this time, the Statement codifies and underscores the Commission's historic commitment to promoting the deployment of competing broadband networks by minimizing regulation. Organizing adjudications around the Statement thus would encourage the FCC to consider how regulation might undermine network investment prior to imposing any network neutrality restrictions on specific network owners. The Policy Statement also usefully frames network neutrality as a benefit to consumers, rather than as an entitlement for content, applications and device companies. Thus, gearing adjudications around the Statement would focus the FCC on the central goal of any regulation: maximizing consumer welfare. This focus could help the agency resist being seduced by proponents' requests that it supplant the market by deciding which companies should get a bigger slice of the Internet business.

Third, to the extent the adjudication authority approach requires the FCC to study how well the competing goals of the Statement are being achieved, the approach would drive home the reality that market conditions relevant to whether network neutrality regulation will do more harm than good could vary greatly across the country. If done rigorously, this kind of study would reveal that failure to target any restrictions to specific network owners in specific markets could have disastrous consequences for consumers in other markets.

That said, the adjudication authority approach suffers clear disadvantages. Most disturbingly, the approach does not require the FCC to assess rigorously the only circumstance in which broadband network owners can undermine consumer welfare: when they first obtain and then abuse market power. This risks constraining established network owners unnecessarily in how they manage and charge for their networks. And it may discourage new networks to the extent entrants depend on business models that include arguable "discrimination" (e.g., Clearwire informing potential customers that it intends to block competing Internet voice providers on its wireless network). These potential effects seem unfortunate, if not tragic, at a time when companies throughout the Internet space are struggling to develop economically sustainable business models. The potential effects also seem troubling to the extent restrictions imposed through adjudication force network owners to "disarm unilaterally" in the collective battle against the latency, authentication and security problems that plague the Internet and its future.

Further, the adjudication approach does not expressly preclude a future, less economically-astute FCC from finding justifications outside of the Policy Statement for dictating how network owners treat content and applications companies. For example, the adjudication authority approach would not, standing alone, preclude a future FCC from using authority recognized by the courts in the NARUC cases to impose onerous common carrier regulation on broadband providers, based on murky rationales that such regulation is in the "public interest."

Most importantly, however, one must wonder whether the adjudication authority approach would change much as a practical matter. Through speeches, merger conditions and the Policy Statement itself, the FCC has made its preferences regarding network neutrality plain. The agency also has made clear that it believes it retains jurisdiction to impose network neutrality mandates even on broadband offerings classified as generally unregulated "information services." Whether or not the courts later determine that the FCC has no such authority, the FCC's claim of power (coupled with its loud thumping of the "bully pulpit") will likely deter broadband providers from engaging in any activities that cannot be squared with the Policy Statement, even in the unlikely event that providers acquire and attempt to abuse market power. This deterrent is in place regardless whether Congress adopts any network neutrality legislation.

Given this limited practical impact and the other risks posed by network neutrality regulation, pursuing an adjudication authority approach -- despite its superiority to other ways of addressing this issue -- may be ill-advised at this time. It may make more sense, instead, for Congress either to avoid addressing this issue at all or to limit any neutrality restrictions to cases in which broadband providers abuse market power to the detriment of American consumers.

posted by Kyle Dixon @ 11:47 PM | Antitrust & Competition Policy , Broadband , Cable , Capitol Hill , Communications , DACA , Innovation , Internet , Net Neutrality , The FCC , VoIP , Wireless , Wireline

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