The DC Court of Appeals has upheld the FCC’s latest neutrality order, and as is nearly always the case with these regulatory things the move has created a combination of misinformation and apocalyptic warnings. However, it’s always dangerous to think that these regulatory moves are just the usual political jostling. The telecom industry has been driven more by regulation than by opportunity, and that may still be the case.
In the Court of Appeals decision, the court cited the troubled and tangled history of regulating consumer broadband and the Internet. The FCC’s position evolved as the mechanism for connection evolved. In the beginning, we accessed the Internet over telephone connections. Today we access telephone services over the Internet, and this is the shift that more than anything justifies the FCC’s position that regulations should be changed to accommodate market reality. The order in question here was the third attempt to do that—both previous attempts failed because the courts said the FCC didn’t have the statutory authority to regulate as it wanted since it had previously classified the Internet and broadband as information services. That led to the latest order from the FCC, which classified them as common carrier utility services, and the court has now upheld that decision. There are some important points behind this, though.
First, in telecom regulation the FCC is not a legislative body but what’s called a quasi-judicial agency, meaning that in these matters the FCC is equivalent to the court of fact. An appeal from a court of fact cannot be made on facts, but must be made because there’s a possibility that the law was incorrectly applied. Thus, the court did not agree with the points the FCC took in the order, just the FCC’s right to make those points.
Second, the fact that the FCC has declared broadband Internet to be a common carrier service doesn’t mean that all the burdens of common carrier regulation will be applied to it. The Telecommunications Act of 1996, which forms the legal foundation for the FCC’s regulations, provides (in the famous Section 706) that the FCC can “forbear” from applying such regulations as needed to promote Internet availability. The FCC has already said it’s doing that in the order in question.
Third, the issue could in theory be appealed to the Supreme Court and that could change the result. There have been cases where the Supreme Court disagreed with Court of Appeals findings on telecom, and I’m not qualified to judge the fine details of these issues so I won’t comment on the chances of appeal or of success. We’ll have to wait. I do want to say that I’ve read every FCC order on the Internet and the text of every court ruling, and I think I have some understanding of the tone. In this order, the DC Court of Appeals was pretty firm.
The end result is that an order that disappoints pretty much every group in some way has been upheld, and for years the ruling of the court is likely to remain law whether there’s an appeal or not. They say that the sign of a good ruling is that everyone dislikes something about it, in which case this is a good one. The question is where it leaves us.
First, the fact that there is equal treatment for mobile and fixed broadband in virtually all neutrality matters means that there’s no value to operators to shift users to a mobile access technology just to get more favorable regulatory treatment. I think there will continue to be great operator interest in moving those wireline customers who can’t justify FTTH to fixed wireless simply for infrastructure economy, though. The deciding issue is content delivery, because fixed wireless isn’t likely a good way to deliver streaming multi-channel video to an ever-more-demanding HDTV market. Particularly competing with cable, which isn’t likely to change.
Second, the FCC is not going to force wireline or wireless ISPs to unbundle their assets so despite dire comments to the contrary, the fear of that isn’t likely to deter broadband investment. It’s also not going to spawn another stupid CLEC-type notion that reselling somebody else’s infrastructure is “competition”. The big problem with broadband investment is ROI, and that’s the next point.
Three, the big problem with the order was, and still is, the whole notion of paid prioritization and interconnect policy. I understand as much as any Internet user the personal value of having streaming video available to me at the lowest possible cost—free if possible. I also understand, as a long-standing industry/regulatory analyst, that something that drives up traffic without driving up revenue is going to put pressure on return on infrastructure investment. Having settlement for content peering and having paid prioritization could make broadband Internet access more responsive to traffic cost trends. The order removes that possibility.
So what does this all add up to? There were really two parts to the Neutrality Order and we have to look at them independently.
The first part is largely what the Court ruled on—the authority part. The FCC has finally done what it had to do (and should have done from the first) by asserting that broadband Internet was a telecommunications service, which gives it the authority to regulate it fully. The FCC seems to have navigated the “forbearance” point well, so the risks it’s created to the market by the way it established its authority is minimal.
The second part is the policy part, which is what the FCC intends to do with its authority. Here’s where I personally parted with the Commission on the Order and where I remain at odds. The Neutrality Order that was promulgated by the Genachowski FCC (the current one is the Wheeler FCC) was in my view more sensible in that it seemed to explicitly allow the FCC to address abuses of either settlement-based interconnection or paid prioritization, but didn’t foreclose either option.
The important point here is that there was a policy difference between the orders, and that nobody really said that the FCC couldn’t change its approach even though the reason for reversing prior orders was in the “authority” area. The FCC is not completely bound by its own precedent; it can adapt the rulings to the state of the market and it’s done that many times in the past. Thus, the current Neutrality Order could still be altered down the line. A new administration, no matter which party comes to power, usually ends up with a new FCC Chairman, and that new Chairman might well decide to return to Genachowski’s views, or formulate something totally different from the views of either of the two prior Chairmen.
And, of course, there’s Congress. The parties, not surprisingly, are split on the best policies, with Democrats favoring a consumeristic-and-OTT-driven vision and Republicans favoring network operators. However, since 1996 there have been many Congressional hearings on Internet policy and precious little in the way of legislation (most would say “none”). We may well see the usual political posturing on the fact that the Court didn’t reverse the FCC, but we’ll probably not see Congress really act.
There are new revenue opportunities besides things like settlement or paid prioritization, but they are either targeted at only business services (which isn’t where profit-per-bit is plummeting) or they’re above the connection layer of the network, where OTT players compete. The FCC order largely forecloses a revenue-based path out of the profit dilemma, which leaves us only with cost management. Going that way is going to continue pressure on network vendors and ultimately risks curtailing network expansion.
