Research Notes

Breaking News: US telecom regulator FCC to vote on repeal of harmful net neutrality rules and restore free market Internet. EU falling further behind on broadband and 5G. Strand Consult Research Note

The Federal Communication Commission (FCC) announced today a propsoal to make a clean break from harmful, heavy-handed regulation of the Internet and in its place a restoration of the competition-oriented framework under the Federal Trade Commission (FTC). In contrast to 2015 when “The Obama FCC hid its heavy-handed Internet regulation plan from the public until two weeks AFTER the vote. Everyone will be able to read Chairman Pai’s plan to restore Internet freedom tomorrow, more than three weeks BEFORE the vote,” noted FCC Chair Chief of Staff Matthew Berry.

After a decade of unprecedented capture of telecom regulators by well-funded activists, Google and Netflix, the move by the FCC signals the restoration of the rule of law, freedom of choice for consumers, and a return to permission-less innovation for all Internet actors. The FCC vote will take place December 14 and if approved, restores the framework that made the US the global leader in the Internet.

Europe, on the other hand, is going the other way. It makes its net neutrality rules and guidelines behind closed doors. The Body of European Regulators for Electronic Communication (BEREC) has secret meetings with industry-funded “experts” of its own choosing. Unlike the USA, these experts are not required to post public “ex partes” to inform other stakeholders of their efforts to influence policy. Strand Consult has tried incessantly for BEREC to create transparency, but BEREC and the Norwegian Regulator Nkom which hosts the head of the Expert Working Group for Net Neutrality, refuses to disclose the contents of their meetings.

Strand Consult posed 16 Questions to BEREC President Sebastian Soriano but BEREC only responded by referring to information on its website which doesn’t answer the questions. Not only are telecom operators not privy to BEREC’s Expert Working Group, many of the EU regulators are not informed either.  BEREC will have yet another closed door meeting in Copenhagen in December where the net neutrality working group will discuss how to push the EU net neutrality legislation even further. Strand Consult supports transparency and evidence-based regulation. Its new report Net Neutrality in EU after 1 Year: Unintended Consequences for operators, content providers, and consumers describes what happens behind the closed doors in EU.

Thanks to the new approach taken by FCC Chairman Ajit Pai and approved by the other commissioners, the FCC items for consideration have full transparency. Items are provided to the public three weeks in advance of commission meetings and votes. In this way everyone can see what the FCC is doing.  Following is Strand Consult’s analysis of the proposed item for vote on December 14th and its impact for operators, content providers, and consumers.

The FCC item is based on upon four essential components: Repeal of the 2015 Open Internet Order, Reclassification of Broadband as an Information Service, Transparency Notifications, and federal preemption of states to ensure a cohesive national market.

Repeal of the 2015 Open Internet Order by FCC
The FCC will vote on whether to make a clean break from the 2015 order. This means removal of the three bright line rules: no blocking, no throttling, and no paid prioritization and vacating the general conduct standard. The Open Internet rules are effectively price controls, making end users bear the full cost of broadband while third party content providers enjoy artificially subsidized transit.

Bans on paid prioritization deter market entry from innovative services, notably the HelloDigital platform which promised to process social media comments with high definition voice. The platform founder and co-inventor of VOIP sued the FCC for violating his freedom of speech and that of his users.

The general conduct standard is an innovation-chilling, open-ended, self-affirmed capability for the FCC to investigate any practice it wants. Earlier the FCC used this standard to attempt to find harm in popular zero rating programs, but after months of investigation, the commission could find no harm in a free service that consumers love.

Many regard the 2015 Open Internet Order as the gold standard of net neutrality regulation. That illusion is utterly destroyed. The 2015 Order has proved to be vulnerable legally, politically, and economically.  The order, voted 3-2 along party lines, sewed bitter partisan resentment and invited numerous legal challenges, seven now sitting the Supreme Court. The 2015 FCC claimed that heavy handed regulation would be beneficial. But the FCC now reports that network investment fell 5.6% and 75,000 jobs were lost as a result of cancelled network deployment. The current FCC expects that removal of the regulation will have a beneficial impact. They refers to many academic and empirical reports to prove their claim.  Now that the FCC has checked the evidence and have reversed course, will the EU do the same?

Reclassification of broadband as an information service
The item will reclassify broadband as an information service under Title I of the Communication Act. This removes broadband from the wrongly-imposed status of common carriage and is consistent with the 2005 National Cable & Telecommunications Association v. Brand X Internet Services Supreme Court decision finding that broadband is an “information service” under Title I, not a “telecommunications service” under Title II. Moreover this is consistent with Congressional intent that the Internet should be free and “unfettered from Federal and state regulation.” This also restores mobile broadband to a private mobile service, not common carriage.

Importantly a favorable will restore Federal Trade Commission (FTC) jurisdiction to police broadband under Section 5 of the FTC Act, a broader, more intuitive framework which conceptualize anticompetitive practices across the entire Internet ecosystem, rather than a single focus on a single actor. This also reinvests the FTC’s authority to protect online privacy, which the 2015 Order ripped away, leaving consumers without any broadband privacy protections.

This action can again be contrasted with BEREC and the EU moving in the opposite direction, increasing regulation of the telecom industry, and experiencing the resulting decline in investments and innovation. The EU itself admits that it is not on track for 5G.  In its research note EU and BEREC celebrate the 100th anniversary of the Bolshevik Revolution with increasing “nationalization” of the telecom industry, Strand Consult describes the vicious circle.

Transparency Notification – great for consumers
The FCC’s authority allows it to police transparency, so that authority will remain in a transparency notification.  

Broadband providers can manage their traffic in efficient ways provided they include disclosures in about their practices. This is a common feature in regulation by both the FTC and FCC and the two agencies will have joint authority for transparency. Chair Ajit Pai explains,

Under my proposal, the federal government will stop micromanaging the Internet.  Instead, the FCC would simply require Internet service providers to be transparent about their practices so that consumers can buy the service plan that’s best for them and entrepreneurs and other small businesses can have the technical information they need to innovate…Additionally, as a result of my proposal, the Federal Trade Commission will once again be able to police ISPs, protect consumers, and promote competition, just as it did before 2015.  Notably, my proposal will put the federal government’s most experienced privacy cop, the FTC, back on the beat to protect consumers’ online privacy.

The virtue of the FTC is that it takes a holistic, competition-based approach to the entire Internet ecosystem with a goal to deter unfair and deceptive practices which harm consumers. In practice the FCC’s rules created a perverse form of asymmetric regulation, allowing some industries a different standard than others.  Under the FTC, there is a level playing field for all digital players.

Ensuring a national regulatory framework for broadband
Given the political polarization in the US, it is expected that some states will attempt to reimpose the Obama-era rules at the local level and contravene Communications Act. In the item, the FCC reminds the states of its pre-emptive authority and that broadband is an “interstate” telecommunication service which by statue is regulated at the federal level. The role of federalism in regulating interstate commerce was part of the founding of the US Constitution, is responsible in part for making the US a powerful, cohesive economy, and protects Americans from partisan actors which would devolve the country into fragmented fiefdoms.

What it means for Europe and the rest of the world
The order comes at a time when the EU and many other nations have enshrined net neutrality in law and continue down the path to re-regulate broadband networks. The contrast of the actions in the US versus the rest of the world demonstrate a number of lessons which Strand Consult has observed over the years.

Many in the European Union are likely furious with the events in the US. After all, it was the US that invented the concept and its richly-funded activists convinced EU policy makers to adopt the policy. Activists funded by American foundations and companies helped to popularize BEREC, giving it attention and visibility it would never get otherwise.

Many officials in the EU wanting to save face will likely dismiss the FCC effort and double-down on EU regulation.  All the while, investment and innovation will continue to exit the EU and flow to the US and other regions which support private investment and enterprise. The EU will fall further behind on broadband and 5G.

There is much to criticize in US telecom policy, but on balance, it has produced superior results for consumers, investors, and innovators compared to the EU approach. This can be explained in party by history and luck, but this does not absolve the EU for its failure.  The EU must take responsibility for its bad decisions.

At the beginning of the millennium the EU accounted for one-third of the world’s investment in broadband networks, had six makers of mobile phones, and a robust environment for research and development in mobile communications. That is no longer the case today.  EU Investment is less than 20 percent of the world’s total and the research and manufacturing based has withered away. Historically the telecom industry fertilized the larger digital ecosystem but over-regulation has killed this virtuous circle. This all happened when EU policymakers pronounced the sector competitive and converged, but they kept adding more regulation anyway.  Most recently European Parliament added misguided roaming regulation, Soviet-style price controls on the services that Europeans love. Regrettably this decision gives the professional, elite class gets a subsidy at the cost of higher mobile prices for the poorest Europeans.

The US net neutrality regulation can be removed by a mere vote of 5 commissioners because it was implemented by a mere vote of 5 commissioners. The US opted for an administrative solution rather than a legislative one. The EU net neutrality rules are more “sustainble” because they were implemented by legislation, but this does not mean that they are good rules. The European Commission will review the status of the net neutrality law in 2019. In the meantime it can remind BEREC that it should not over-interpret the law but instead make only a neutral implementation.

Strand Consult’s new report “Net Neutrality in EU after 1 Year: Unintended Consequences for operators, content providers, and consumers” describes the problems of the EU net neutrality law and its grotesque implementation. This report summarizes and analyzes the 29 reports to BEREC and the European Commission about the first year under the EU net neutrality law. It describes BEREC’s secret meetings conducted during the course of the year to implement its preferred ”hard” version of the regulation, which exceeds the EU law. Strand Consult has contacted various BEREC and national governments to obtain the contents of the secret meetings and the list of the selected participants.  In its report of over 100 pages, Strand Consult details the enforcement of net neutrality as well as the litigation again regulators across the EU. Importantly, the report identifies the key actors among BEREC, the aggressive vs. moderate regulators, and how BEREC is using its position to advance a political agenda, a violation of its statutory authority.

Strand Consult also exposes the political motivations for net neutrality and key actors such as Sebastian Soriano, head of the French telecom regulator ARCEP who serves as the 2017 BEREC president and who authorized a whopping 87 page report about France’s ambition to regulate the Internet. For ARCEP regulating telecom providers through net neutrality is just the beginning; ARCEP has extended the concept to ”platform loyalty” as a means to regulate content providers.

Strand Consult congratulates the FCC on its proposal and hopes that the action hope that the action will start a debate in EU and create more transparency, which BEREC refuses to provide presently. Contact Strand Consult to order this unique and important report.

Strand Consult Vice President Roslyn Layton joins FCC Chairman Ajit Pai in conversation about Restoring Internet Freedom at the R Street Institute in Washington DC on November 28, 2017. Register here.

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