Mike Wendy and I have just released a new PFF white paper, "The Constructive Alternative to Net Neutrality Regulation and Title II Reclassification Wars." In it, we discuss the Federal Communications Commission's (FCC) misguided effort to pigeonhole the Internet and broadband networks into the regulatory regime of a bygone era. Specifically, the agency's recent efforts to impose "Net neutrality" regulations on broadband networks, or reclassify them as Title II services under the Communications Act, raises the likelihood of delayed or foregone investment, will discourage innovation at both the core and edge of networks, and increases the likely politicization and bureaucratization of high-technology policy more generally.
We believe there are constructive alternatives to such a destructive regulatory path. The better alternative would be based on (1) a new legislative framework centered on an FTC-like enforcement model of ex post adjudication grounded in antitrust law; (2) increased industry self-regulation, technical collaboration, and alternative dispute resolution mechanisms; and (3) greater reliance on community policing and expert third-party oversight.
For more details, you can read our entire paper down below the fold:
by Adam Thierer & Mike Wendy
The Federal Communications Commission (FCC) has embarked on what can only be described as a "by any means necessary" effort to pigeonhole the Internet and broadband networks into the regulatory regime of a bygone era. The ramifications of this crusade for the digital economy will be profound, as it raises the likelihood of delayed or foregone investment, discouraged innovation at both the core and edge of networks, and the increasing politicization and bureaucratization of high-technology policy.
Luckily, there are constructive alternatives to such a destructive regulatory path. As explained below, the better alternative would be based on: (1) a new legislative framework centered on a Federal Trade Commission-like (FTC) enforcement model of ex post adjudication grounded in antitrust law; (2) increased industry self-regulation, technical collaboration, and alternative dispute resolution mechanisms; and (3) greater reliance on community policing and expert third-party oversight.
Chairman Genachowski has now concocted an alternative regulatory blueprint that he describes as a "Third Way." He claims that, simply by reclassifying the transmission component of broadband services under Title II of the Communications Act and adopting "a restrained approach" to regulating it, America can have the best of both worlds: innovation and investment, as well as (government-ensured) "openness."
In reality, however, Genachowski's "Third Way" is really nothing more than the old way the agency did business for decades--and with disastrous results. The history of communications under strict Title II regulation was not a pretty one: Stagnant markets, limited consumer choices, and lackluster innovation were the hallmarks of the old regulatory era. In attempting to protect consumers, federal and state regulations perversely harmed them by preserving barriers to entry that thwarted robust (or even minimal) competition and innovation.
The Telecommunications Act of 1996 marked an important turning point in this miserable history, as Congress finally acknowledged that facilities-based competition was possible and preferable to the regulated monopoly era of the past. The purpose of the measure, as the first six words of the Act made clear, was "To promote competition and reduce regulation." Unfortunately, however, lawmakers were reluctant to completely cut ties with the past regulatory regime, and open access rules were included in the Telecom Act that forced incumbent telecommunications companies--but, importantly, not cable operators--to unbundle and share with their rivals certain elements of their networks.
Thankfully, between 2002 and 2004, the FCC gradually came back to the pro-deregulatory intent of the Act and wisely began dismantling this "forced access" regime for incumbent-provided broadband services. In doing so, it finally signaled to markets that the true era of all-out facilities-based investment and competition was to begin. For wireline and cable companies in particular, the gloves came off, unleashing a torrent of investment and growth that continues to this day. Thus, it is frequently forgotten that America's experiment with facilities-based competition in the broadband world is really less than a decade old. Before then, regulatory paralysis generally ruled the day; but since 2005, broadband providers have been able to invest with greater confidence that they could recoup the cost of their significant investments. This, in turn, has spurned heretofore unseen levels of digital innovation--at both the core and edge of digital networks.
Chairman Genachowski promises to exercise "restraint" and use a "light touch" by only applying certain provisions of Title II. Such promises are meaningless in the highly politicized world of communications policy. Regulators exist to regulate. That is their job, and where their institutional incentives direct them. As Craig Moffett of Bernstein Research predicts, the FCC's move,
very specifically opens the door to price regulation, and it makes other regulation materially more likely in the future. The FCC has voted itself a loaded gun, pointed it at the Carriers (cable and telco alike) and then promised not to shoot. The world doesn't seem like a safer place.
Similar language can be found in the six Net Neutrality principles proposed by the FCC as part of its Open Internet / Net Neutrality Proceeding. The Court of Appeals in Comcast v. FCC said the Commission lacked the requisite authority to enact such regulations in that context, so it remains a delicate tightrope walk--if it can be accomplished at all--to do so with a Title II "sleight of hand." Moreover, it's important to recall that this regulatory regime was never applied to the cable sector as it now apparently will be. This raises additional grounds for a legal challenge, since the FCC would be unilaterally, without specific congressional authority, upending the regulatory standard (and its underlying investment assumptions) that the cable industry has operated under ever since it got into the broadband business.
Along these lines, reclassification efforts would likely end up with the imposition of common carrier status on other entities that are not operating as common carriers today. Consequently, the question of "Who gets the regulatory tar and feathers?" will now be asked about a broader array of actors, well beyond the "usual suspects." What about wireless providers of broadband? Or Broadband over Powerline (BPL) offerings (where they still exist)? And do online service providers--search and application providers such as Google, Yahoo, Microsoft, Apple, etc.-- get brought into the ambit of regulation, too? For isn't anything connected to the network actually the network itself? And, if this is so, would it be so implausible, given the nature of regulatory creep, to see these neutrality / reclassification rules expanded to cover "port neutrality," "search neutrality," "device neutrality," or "software code neutrality," among other proscriptions to keep the Internet "open" and "free"? And then there are the services yet to be developed.
This is hardly a conjectural concern. Witness the fact that Rep. Cliff Stearns (R-FL) recently introduced legislation calling for "neutral network neutrality" rules such that the FCC would be required to enforce regulation "on a nondiscriminatory basis between and among broadband network providers, service providers, application providers, and content providers." And despite Chairman Genachowski's promise that "we're not going to regulate the Internet," the reality is that, during his brief tenure, the FCC has been engaged in multiple efforts to extend the reach of its regulatory tentacles to cover the Internet and online activity. The slippery slope and regulatory creep thus becomes a very legitimate concern going forward. It could become, as the title of a recent CNN Money column put it, "Armageddon, Brought to You by the FCC."
We would expect a profoundly negative impact on capital investment. To the extent that reduced network investment increases network congestion (particularly if these regulations apply to wireless networks), then the implications for downstream equipment and applications providers are also negative, inasmuch as the user experience can be anticipated to degrade. This development is an unequivocal negative development for almost all of our coverage universe, most significantly for the cable operators and Verizon (which is nearing completion of a $23 billion investment in a new FiOS network that might conceivably now be subject to Open Access for competitors).
The damage will not be contained to primary markets; the regulatory spill-over effect also means less innovation at the edges due to fewer, and less sophisticated, platforms upon which to build new edge-based services. As Daniel Brenner of Georgetown University Law Center correctly argues:
[T]here is significant loss to innovation if the layer approach disallows those who provide the physical layer from providing services higher up the chain. Opportunity for innovation is lost if the physical layer can adopt only one form of operation as a nondiscriminatory common carrier. And a dumb-pipe mantra runs counter to the innovation-rich policy concerns of layer advocates, even while it is believed to protect innovation of the Internet's edge.
In essence, therefore, the FCC's "Third Way" proposal represents a call for the forced commoditization of broadband networks and would necessitate a return to the rate-of-return regulatory methods of the past. It would freeze network innovation in place and stop the clock on facilities-based competition--one of the great American economic success stories of the past quarter-century. Reclassification of broadband will mean a quick death for the Telecom Act's goal, "to promote competition and reduce regulation." For these reasons, this "de-competition" approach should be rejected in favor of an alternative approach that does not discourage investment, innovation, or competition.
In 2005-06, The Progress & Freedom Foundation brought together over 50 scholars--a non-partisan collection of lawyers, economists, engineers and other experts--with the ultimate aim of crafting a new regulatory framework more appropriate for a frequently-changing communications landscape. The resulting Digital Age Communications Act (DACA) project proposed scraping the old regulatory "silos" (Title II for telecom, Title III for broadcast, Title VI for cable) and replacing them all 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. Serious anticompetitive actions that lead to demonstrable consumer harm would still be policed and punished under this model. But this would be done on a limited, case-by-case basis without prejudging business models or practices or by imposing prophylactic regulatory regimes.
In essence, DACA stood for the proposition that an ex post approach to regulatory oversight was preferable to ex ante forms of preemptive and prophylactic regulation by the FCC. Indeed, the DACA model was based on a model we already have in place: antitrust laws and the adjudicatory process administered by the Federal Trade Commission. The DACA experts, therefore, advocated not that the FCC be abolished, but that an FTC-like enforcement model be imported into the FCC.
To be clear, this is regulation. In fact, when the DACA working group released its initial framework in June 2005, some critiqued the plan on the grounds that it did not do enough to tie the hands of regulators. Others argued that there was no need to import a competition policy regime into the FCC when the FTC and Department of Justice remain perfectly capable of enforcing antitrust laws where anti-competitive conduct can be proven. While those concerns are understandable, they're also not very practical. Scrapping the FCC is untenable, especially since the FCC still engages in some sector-specific forms of regulation (spectrum standards, interconnection mandates, universal service administration, etc.) that Congress would likely insist remain within the hands of a sector-specific regulator. Nonetheless, the DACA framework would be vastly superior to the sort of heavy-handed regulatory approach currently on the books, or the even stricter "Mother, may I?" approach that some Net Neutrality proponents favor. DACA has the added advantage of not being as susceptible to the problems of regulatory creep and regulatory capture.
Because DACA allows regulators to operate with a truly light touch, it would be the best model for the FCC to adopt going forward to ensure that consumer welfare was served and beneficial innovation was not thwarted by a cumbersome, preemptive regulatory regime at the FCC.
An excellent example of diverse Internet companies with divergent interests working together can be seen in Verizon and Google's recent joint statement to the FCC, which outlines their common-ground approach for an open Internet. While the two companies may sit at opposite ends on the Net Neutrality debate, the two businesses acknowledge that they "rely on each other," and consequently feel a shared responsibility to discuss how they can ensure that consumers get the services, products and information they want; network investment and growth can be continually boosted; and how they can work together to keep the Internet "open."
Both companies agree that the Internet has thrived primarily via an absence of regulation. Much of this growth has occurred through the cooperative efforts of many in the Internet eco-system. To this end, they have articulated seven "core values" to guide the conduct of all Internet "players," including: (1) Preserving Openness; (2) Encouraging investment and innovation in broadband networks; (3) Providing users with control; (4) Providing users with information; (5) Maintaining a balanced intellectual property policy; (6) Keeping Internet applications, content, and services free from communications regulation; and (7) Providing a leadership role for expert technical bodies. In their view, by hemming to these long-held values--which have kept government regulation largely out of the picture--the Internet eco-system can continue to innovate and grow as it has, virtually unabated, since its inception.
The InterÂnet is an adaptable system because its experimental character provides it with a built-in learning function that enables engineers to make network and protoÂcol design decisions empirically. It's fair to say that its design is dictated more by a commitment to continÂual improvement than by obedience to hard and fast rules: It was meant to be a system in which experiÂments would have the consequence of improving the network.
The joint Verizon/Google statement builds upon the strength of this well-worn model. As they suggest, self-governance should be the touchstone. To contain the occasional demand for government prophylaxis, among other things, they suggest the creation technical advisory groups to provide for quick, non-government-driven dispute resolution fora, best practices and industry-led guidance. Similar to these efforts, groups like the Net Neutrality Squad, Computer Professionals for Social Responsibility, and the Berkman Center for Internet & Society's Herdict project focus on Internet end-users "to help keep the Internet's operations fair and unhindered from unreasonable restrictions." They look to identify and address anticompetitive and discriminatory behavior on the Internet, and provide a forum for "fostering cooperation and mutually agreeable methodologies whenever possible--aimed at keeping the Internet a maximally unhindered, useful, competitive, fair, and open environment for the broadest possible range of applications and services." Meanwhile, the Internet community itself will provide millions of "watchdogs" who constantly monitor and report on carrier behavior. "The Internet culture is full of feedback and referral mechanisms," notes Brenner.
The important take-away from this is: Efficient and effective self-governance models and tools exist now to guide the expansion of the Internet. This is not to say government involvement is never warranted, but clearly, the default setting is, and has always been, a minimum of direct government regulation. Perhaps Commissioner McDowell put it more aptly:
Since [the Internet] was opened up for public use, as a free society we have worked hard to ensure that the Internet remains robust, safe and open. Also, since its inception, uncounted dedicated souls have worked to ensure that the Internet works, period. Since the early days of state-run ARPANET, network management and Internet governance initiatives have migrated further way from government regulation, not closer to it. This evolution away from government intervention has been the most important ingredient in the Internet's success.
Related PFF Publications
 See Berin Szoka & Adam Thierer, The Progress & Freedom Foundation, Net Neutrality, Slippery Slopes & High-Tech Mutually Assured Destruction, Progress Snapshot 5.11, Oct. 2009, www.pff.org/issues-pubs/ps/2009/pdf/ps5.11-net-neutrality-MAD-policy.pdf.
 Comcast Corp. v. FCC, No. 08-1291 (D.C. Cir. 2010), http://pacer.cadc.uscourts.gov/common/opinions/201004/08-1291-1238302.pdf.
 Barbara Esbin, The Progress & Freedom Foundation Blog, The Nobles Must Follow the Law, April 6, 2010, http://blog.pff.org/archives/2010/04/the_nobles_must_follow_the_law.html.
 Julius Genachowski, Federal Communications Commission, The Third Way: A Narrowly Tailored Broadband Framework, May 6, 2010, www.broadband.gov/the-third-way-narrowly-tailored-broadband-framework-chairman-julius-genachowski.html.
 Telecommunications Act of 1996, Public Law 104-104, 104th Congress.
 See generally Adam Thierer & Clyde Wayne Crews, What's Yours Is Mine: Open Access and the Rise of Infrastructure Socialism (2003).
 Scott Cleland, The Harms of a Potential New FCC De-Competition Policy, Precursor Blog, April 5, 2010, http://precursorblog.com/content/press-release-new-fcc-de-competition-policy-netcompetitions-fcc-nprm-reply-comments.
 Craig Moffett, Bernstein Research, U.S. Cable: Pulling the Plug... Regulatory Uncertainty Clouds Terminal Growth Rates, May 10, 2010, at 3.
 Federal Communications Commission, In the Matter of Preserving the Open Internet, Broadband Industry Practices, Notice of Proposed Rulemaking, Notice of Proposed Rulemaking, GN Docket No. 09-191, 07-52 (rel. Oct. 22, 2009) ("Open Internet NPRM"), at http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-09-93A1.pdf.
 Barbara Esbin, The Progress & Freedom Foundation, The Comcast Decision, the FCC's Third Way and the Next Communications Act, PFF Blog, May 7, 2010, http://blog.pff.org/archives/2010/05/the_comcast_decision_the_fccs_third_way_and_the_ne.html; Barbara Esbin, The Progress & Freedom Foundation, R.I.P. Ancillary Jurisdiction; Hello Common Carriage, PFF Blog, Jan. 15, 2010, http://blog.pff.org/archives/2010/01/rip_ancillary_jurisdiction_hello_common_carriage.html.
 Internet Investment, Innovation, and Competition Preservation Act of 2010, http://stearnsforms.house.gov/UploadedFiles/Net_Neutrality_Bill.pdf.
 Quoted in Amy Schatz, FCC Chairman on What It Means to Regulate the Internet, Wall Street Journal, Feb. 9, 2010, http://blogs.wsj.com/digits/2010/02/09/fcc-chairman-on-what-it-means-to-regulate-the-internet.
 Berin Szoka & Adam Thierer, The Progress & Freedom Foundation, FCC's Genachowski Promises He's Not Out to Regulate Net, New Media, PFF Blog, Feb. 10, 2010, http://blog.pff.org/archives/2010/02/fccs_genachowski_promises_hes_not_out_to_regulate.html.
 Berin Szoka & Adam Thierer, The Progress & Freedom Foundation, Net Neutrality, Slippery Slopes & High-Tech Mutually Assured Destruction, Progress Snapshot 5.11, Oct. 2009, www.pff.org/issues-pubs/ps/2009/ps5.11-net-neutrality-MAD-policy.html.
 David Goldman, Armageddon, Brought to You By the FCC, CNN Money, March 13, 2010, http://money.cnn.com/2010/05/13/technology/net_neutrality/index.htm.
 Brad Reed, What You Need to Know about the FCC's Broadband Plan, Network World, May 7, 2010, www.networkworld.com/news/2010/050710-fcc-broadband-plan.html.
 Craig Moffett, Bernstein Research, Quick Take - U.S. Telecommunications, U.S. Cable & Satellite Broadcasting: The FCC Goes Nuclear, May 5, 2010, at 1.
 Id. at 2. Similarly, Anna-Maria Kovacs argues, "What is inevitable is a lengthy period of uncertainty, first about the precise shape of the order, then about its fate in court, and then about the ways it will be implemented, and then about the fate of the implementation orders in court..." Anna-Maria Kovacs, Regulatory Source Associates, Telecom Regulatory Note, May 6, 2010.
 Id. (emphasis original).
 Early stock market reaction to the FCC's new "Third Way" plan hasn't been encouraging. "Since announcing that the FCC will reclassify broadband as a Title II... service a week or so ago, Genachowski has placed a cloud over cable stocks. Cablevision, Comcast, and Time Warner Cable are down anywhere from 6%-11% as the government's heavy hand of regulation moves closer to reality." Bob Faulkner, The Cloud Hanging Over Cable Stocks, Minyanville, May 17, 2010, www.minyanville.com/businessmarkets/articles/cable-stocks-networks-fcc-fcc-chairman/5/17/2010/id/28324?page=1.
 Cable Companies: Bargains or FCC Targets? May 11, 2010, Seeking Alpha, http://seekingalpha.com/article/204415-cable-companies-bargains-or-fcc-targets.
 Net Neutrality Regulation: The Economic Evidence, April 12, 2010, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1587058.
 Coleman Bazelon, The Brattle Group, The Employment and Economic Impacts of Network Neutrality Regulation: An Empirical Analysis, April 23, 2010, at ii, http://mobfut.3cdn.net/8f96484e2f356e7751_f4m6bxvvg.pdf.
 Daniel L. Brenner, Creating Effective Broadband Network Regulation, 62 Federal Communications Law Journal 1, 45 (Jan. 2010), www.law.indiana.edu/fclj/pubs/v62/no1/8-BRENNER_FINAL.pdf.
 Barbara Esbin, The Progress & Freedom Foundation, Ancillariness, the Definition Wars, and the Next Communications Act, Progress on Point 17.8, May 2010, http://www.pff.org/issues-pubs/pops/2010/pop17.8-next_communications_act.pdf; Tom Tauke, Prepared Remarks of Verizon EVP Tom Tauke New Democrat Network Keynote, Verizon Policy Blog, March 24, 2010, http://policyblog.verizon.com/BlogPost/714/RemarksVerizonEVPTomTaukeatNewDemocratNetwork.aspx.
 Statement of Robert McDowell, Open Internet NPRM, supra note 12 at 96.
 Google and Verizon Joint Submission on the Open Internet, GN Docket No. 09-191; WC Docket No. 07-52, Jan. 14, 2010, www.scribd.com/doc/25258470/Google-and-Verizon-Joint-Submission-on-the-Open-Internet.
 Richard Bennett, The Information Technology & Innovation Foundation, Designed for Change: End-to-End Arguments, Internet Innovation, and the Net Neutrality Debate, Sept. 25, 2009, at 2, www.itif.org/files/2009-designed-for-change.pdf.
 Brenner, supra note at 67.
 Statement of Robert McDowell, Open Internet NPRM at 96.
 As Bennett notes, "Steady improvement, punctuated by brief periods of radical disruption, is the normal state of afÂfairs in evolving technical systems and should not be feared. It is likely that the only principle of the Internet that should survive indefinitely is the principle of conÂstant change." Bennett, supra note 33.