Friday, June 2, 2006 - The Progress & Freedom Foundation Blog

Network Neutrality: Reflections on a "Third Way"

From Kyle Dixon:

This week's network neutrality proposal by two participants in the Digital Age Communications Act (DACA) project constitutes another thoughtful contribution to a debate plagued by rhetoric and hyperbole on all sides. Indeed, the proposal shares many of the DACA plan's strengths in addressing this thorny issue in a balanced and pragmatic way, adding creative new approaches that have substantial merit. Aspects of the new proposal, however, could yield unintended consequences that would make implementation problematic, suggesting the need for further refinement.

Professor Phil Weiser and Robert D. Atkinson, co-authors of the new plan, recommend addressing network neutrality in three primary ways. Similar to the DACA proposal, they would subject broadband providers to time-limited, antitrust-like competition enforcement.

Moreover, the new proposal would condition providers' use of the marketing label "broadband Internet access" on their provision of a "best efforts" offering (i.e., for which the network performance available for different applications and content would not be "managed" by network owners). The authors recommend designing this offering as a "basic and growing" level of service, with an initial download rate of at least 2 megabits per second that would remain as "open" as dial-up Internet access (i.e., consumers would continue to enjoy access to the content, applications and devices of their choice). This approach would augment a consumer protection regime in which providers would be required to disclose various parameters of service which government then would insist they satisfy. These features share much with the DACA plan's prohibition of "unfair trade practices," which presumably would authorize enforcement who marketed fraudulent terms of service. The labeling and disclosure requirements, however, have no analog in the DACA regime.

In addition, as a further incentive for broadband network owners to provide the open, "best efforts" service, the new proposal would allow these owners to depreciate new networks much faster than typically allowed. The proposal also would extend the current moratorium on broadband-targeted taxes, so long as network owners continued to provide the "best efforts" service in addition to any managed broadband offerings.

Even this cursory summary of the 15-page plan reveals its superiority compared to across-the-board network neutrality mandates. Notably, the new plan recognizes that, in some cases, conduct by broadband network owners that might be termed "preferential" or "discriminatory" will not thwart competition and may actually help consumers (e.g., managing networks to foster security or to improve performance of applications like streaming video or online gaming). This approach also would pressure enforcement agencies to act quickly in an effort to mirror the pace of change on the Internet.

Also welcome is the plan's recognition that, even in a competitive market, government can play a role in policing fraud, thereby empowering consumers to protect their interests in the marketplace. Whether or not the FCC is the best agency to implement this aspect of the plan is a difficult question; one could argue that this function could be carried out more effectively by the FTC, state commissions or perhaps an FCC with a dramatically improved adjudication capability. But the notion that some arm of government should provide baseline protection against consumer fraud can hardly be considered unreasonable.

In addition, although the plan's depreciation and tax incentives may not cover the full cost of providing the "best efforts" service, these incentives theoretically could defray that cost meaningfully. One can reasonably question, in an era of mounting federal budget deficits (and unrestrained spending elsewhere) whether limiting broadband taxes makes sense. But viewed as (partial) payment for helping the government assuage fears of future anticompetitive conduct, at least the proposal does not require providers to do something for nothing. And as the authors point out, if government cuts taxes, there is some appeal to directing those cuts toward providers whose networks will generate economic benefits across the economy (as opposed to "pork barrel" beneficiaries who would simply pocket the money).

That said, there are also potential downsides to the new plan. First, it leaves ambiguous how the "best efforts" service would be defined (particularly as it evolves). Granted, footnote 35 of the draft plan attempts to mitigate this by suggesting that the download speed for the "best efforts" service would be pegged to be just above average for broadband services nationwide. The proposal also would leave the "best efforts" service optional, which could reduce the pressure for regulatory gaming. Further, the proposal says nothing about upload speed, which also could make the "best efforts" service less onerous to provide. But generally, the plan punts on the definitional issue, thereby inviting uncertainties at the FCC as well as gaming of the regulatory process by interested parties.

Note that the difficulties associated with defining the "best efforts" service could extend beyond its technical parameters. Suppose, for example, a broadband provider wanted to offer the "best efforts" service for $75, but would charge only $30 for its "managed" offering. Applications and content companies would be quick to challenge the higher rate as unjustified and anticompetitive. Network owners presumably would counter that the price difference resulted from its inability to charge other companies for using the network with respect to reaching "best efforts" subscribers. An FCC faced with this dispute would be hard-pressed to resolve it without studying the network's costs or imposing accounting or other safeguards.

Second, and rather ironically, it is quite possible that the labeling aspect of the proposal will lead to more, rather than less, consumer confusion. Suppose a provider declines to provide a "best efforts" service and thus (under the plan) cannot call any of its services “broadband”? On the one hand, the provider could call its offerings “high-speed” or “the fastest.” The provider’s competitors, however, could contend that such offerings are “not broadband.” What would consumers make of this marketing dispute? Probably not much, and thus the labeling requirement would not help (and could hurt) consumers' efforts to make wise choices in the marketplace. In so doing, the plan might reprise some of the confusion and policy failures that arose when the FCC sought to use "truth-in-billing" requirements as a back-door attempt to force phone companies to bury the cost of universal service programs, rather than flagging those costs as line items at the end of their customers' bills.

Third, the new plan does not appear to credit the existence or absence of "best efforts" offerings when the FCC analyzes the market to consider antitrust-like remedies with respect to managed offerings. Some content and applications, such as those that can tolerate latency in transmission, may work just or almost as well over a "best efforts" service as over a "managed service." Thus, leaving the former out of the competitive analysis for the latter ignores the fact that, in many respects, consumers would enjoy a meaningful choice between the two comparable offerings.

Fourth, although the proposal suggests that technical limitations or other “legitimate business arrangements” could be potential bases for network owners to justify preferential arrangements, it is unclear how the plan would determine which practices are not “legitimate.” Some of this squishiness may be unavoidable, however; the alternative might be imposing a one-size-fits-all conception of legitimate business practices that fails to keep pace with unique and unpredictable developments in technology and economic considerations in specific markets.

Of course, some of these shortcomings could be diminished somewhat if (like aspects of the DACA proposal) the new plan is subsequently amended. For example, a future version could graft in a more precise definition for "best efforts" service, perhaps mirroring the language the Telecommunications Act of 1996 uses to determine the evolving level of basic phone services that will be supported by universal service funds. In particular, section 254(c) attempts to provide rough, outer limits on how quickly the service definition can evolve, instructing the FCC to consider what services are "essential to education, public health, or public safety" that also "have, through the operation of market choices by customers, been subscribed to by a substantial majority of residential customers." There may be language preferable to this, but the point would be to minimize the risk of regulatory uncertainty and gaming in defining the service, while ensuring that the "best efforts" service is no more burdensome than necessary.

An analytically "cleaner" version of the plan also might eliminate the labeling requirement and rely primarily on the depreciation and tax benefits as incentives for providing the "best efforts" service. If the plan's main point is to encourage the availability of a basic, "open" broadband offering, that can be achieved without incurring the potential problems associated with the labeling requirement (or, for that matter, the disclosure requirement). Competitive choices, after all, are the best way to promote consumers' interests, which the plan might expand by enticing networks to provide "best efforts" offerings in exchange for depreciation and tax incentives.

Finally, the plan could be improved by clarifying that "best efforts" offerings should be factored into competitive analyses. Specifically, the plan could note that expanding competitive analyses in this manner may make it harder to prove that a network owner has abused market power, at least with respect to the many applications (e.g., e-mail, file downloads) that will work comparably well over either a "best efforts" service or a "managed" service. This approach would not preclude a finding of market power in all circumstances; providers theoretically could be found to possess market power with respect to services that function appreciably better in the “managed” context than in the “best efforts” context. Admittedly, the change I suggest would not eliminate the underlying issue of whether the FCC is well-suited to police anticompetitive conduct. But, as with consumer protection, this implementation concern takes little away from the plan's advantages if policymakers are open either to reforming the agency or assigning the task of competition policy to another agency like the FTC.

The most important point here is that we should avoid making the perfect the enemy of the good. In order to make meaningful progress in resolving the debate surrounding network neutrality, experts like Weiser and Atkinson must continue to put forth concrete and thoughtful proposals like this one that give neither network owners nor other Internet companies a free ride. The authors have given birth to a plan with clear advantages over efforts to prohibit networks from treating content and applications companies differently, even when such treatment does not thwart competition or otherwise harm consumers. So even those of us who oppose network neutrality regulation at this time should consider this "baby" closely before throwing it out with the bath water.

posted by Amy Smorodin @ 9:10 AM | Net Neutrality