Research Notes

FCC dumps the old argumentation of “innovation” and invents new reasons for the re-introduction of net neutrality in USA – What it means for rest of the world

Net neutrality is a form of regulatory capture created by Big Tech and operated for its benefit. Since the introduction of this regulation in the European Union, Big Tech companies like Alphabet, Meta, Apple, Amazon, Microsoft, Netflix, and TikTok have significantly increased market share and revenue while European broadband investment and innovation declines, a new European Commission State of the Digital Decade report indicates and observes a €200 billion gap in connectivity investment.

Strand Consult is a global leader in conducting empirical and comparative international research to measure the impact of net neutrality regulation and has tracked the issue globally for more than a decade. Strand Consult detailed that last iteration of the US policy in 2018. This note covers the latest development of the American telecom regulator Federal Communication Commission (FCC); economic, legal, and political perspectives; and what it means for the rest of the world.

Strand Consult is vindicated in that the FCC’s proposed new rules downgrade the argument that net neutrality is needed for innovation. The 2023 FCC’s assertion is contradicted in the academic literature, and empirical tests demonstrate that hard rules like FCC’s Title II reclassification do not confer an innovation advantage to local country innovators. Indeed net neutrality works in the opposite way that proponents claim: it protects Big Tech from competition. Read the pro bono amicus brief in Mozilla v. FCC based upon the academic research of Strand Consult EVP Roslyn Layton, PhD.

Takeaways on FCC´s proposed net neutrality rules.

  1. The FCC’s 2023 net neutrality regulation will supercharge broadband cost recovery and fair share. If one side of the internet market must be regulated to be open and fair, so must the other. Fair share is the logical next step to net neutrality.
  2. The FCC downgrading the innovation argument for net neutrality means nations should revisit their rules. If countries adopted rules to promote “innovation”, this is no longer necessary. Big Tech dominates the internet and needs no regulatory protection. If fact, these protections are distorting competition and deterring market entry by upstarts.
  3. The issue will gather more mindshare from the media than voters. The FCC’s notice offers potent political theatre for 2024, but it will not move the electoral needle. Voters care far more about the economy, healthcare, and education. Americans overall reject laws which empower the FCC to regulate and price control slivers of the internet. There is, however, bipartisan support for common rules for all gatekeepers on the internet.
  4. Expect litigation. The Washington DC telecom bar is laughing all the way to the bank for the fifth time. Litigation could go to Supreme Court and the rule possibly be struck down under the Major Questions Doctrine, if not other objections.
  5. General competition laws work to promote and police broadband. The US has not had a net neutrality regime since 2017. The FCC’s Restoring Internet Freedom (RIF) Order restored the oversight of broadband to Federal Trade Commission jurisdiction where it had existed since the inception of the commercial internet.  For the last 6 years in USA, there has been unprecedented broadband investment; speeds went up, and broadband prices went down. An auction for 5G spectrum brought $90 billion in gross bids. American broadband networks prevailed the pandemic with record levels of traffic. Not one net neutrality violation was reported during that period, and no meaningful or systematic harms have been shown in 20 years.

Overview of the proposed rules.

On September 28, the FCC published a Notice of Proposed Rulemaking to return to net neutrality rules adopted in 2015 under the new moniker Safeguarding and Securing the Open Internet (SSOI). Note that term “net neutrality” only appears in footnotes and still remains an uncodified legal concept.

The launch of the SSOI proceeding on October 19 with an ostensible commission vote on rules to follow in some months after is well-timed for the 2024 election and represents promises kept to Biden voters and campaign backers. Barely was the third Democrat commissioner’s seat warm before the agency dropped the 128-page door stop. Berin Szoka reviews the time clock needed for the FCC to finalize the order before a likely retake of both houses of Congress by Republicans and how to avoid a probable rejection of the FCC’s proposed rules under the Congressional Review Act.

In prior net neutrality rulemakings, we were led to believe that rules were needed to stop internet service providers (ISPs) from deterring the innovation from Big Tech “edge providers”. That argumentation has been cleansed from the SSOI notice. Today Big Tech is a policy liability; the bloom is off the rose. There is no mention of the words Google, Alphabet, Amazon, TikTok, Microsoft, or Netflix in the notice. Apple and Facebook appear in one reference each respectively.

The new SSOI pivots from innovation arguments to national security and public safety as justification for net neutrality. This appears to be the Chairwoman’s strategy for an “inclusive” appeal to conservatives. However, it seems to have fallen flat already. Just as the proposed rules were released, Republican leaders blasted Jessica Rosenworcel’s plan to deploy “TikTok on School Buses.” Indeed FCC “openness” offers a four-lane highway for unsafe Chinese apps. Strand Consult predicts that Chinese firms will use the FCC’s SSOI to defend themselves against American regulation.

The notice trots out the tired refrains about “ISPs’ Incentive and Ability to Harm Internet Openness” but no meaningful examples are provided over some two decades. In fact, there was only one formal complaint of a net neutrality violation admitted under the 2015 rules, and the FCC dismissed it.

Indeed, the FCC attempts to bill the SSOI effort as “light touch.” In a policy deadpan, it claims merely reestablish the 2015 framework and reassuringly forbear from 26 provisions of Title II and 700 associated rules.

The FCC now finds, after some spelunking in Title II of 1934 Communications Act as last amended in 1996, that the law gives the agency “additional authority to safeguard national security, advance public safety, protect consumers, and facilitate broadband deployment.” Note that the statute does not contain the words internet or broadband. The various reclassifications of services (for example cable and mobile are divorced from their dedicated frameworks and repackaged in the bucket with the plain old telephone network) required some reworking of the statue–technically the job of Congress.

Notably the term “brightline rule” is also cleansed from the notice and is substituted with the phrase “straightforward, clear rules.” The key provisions strike again: prohibitions on blocking, throttling, and paid or affiliated prioritization arrangements; a general conduct standard that would prohibit unreasonable interference or unreasonable disadvantage; and retainer of the RIF disclosure requirements.

Naturally the announcement was praised by Big Tech’s trade associations and affiliated think tanks and advocacies which have grown in budget and headcount with each successive net neutrality attempt. Moreover, tens of billions of dollars of federal broadband subsidies enable the buildout of networks to deliver video streaming and advertising. Unlike broadband providers which invest in middle and last mile networks and contribute to the Universal Service Fund, “edge providers” do not contribute financially to connectivity efforts. And yet Big Tech edge providers profit more than anyone, to the tune of thousands of dollars per year in average revenue per user. FCC net neutrality accords Big Tech edge providers an unfettered free ride on America’s broadband networks.

The Upside.

The silver lining of this regulatory gob smacking is that the FCC no longer claims that net neutrality is needed to protect Silicon Valley. For nations which adopted hard net neutrality rules on the premise of innovation, that justification is no longer valid. Such nations should hence modernize their net neutrality rules.

Indeed, many now realize that the FCC net neutrality is a false bill of goods. Some policymakers foolishly believed that if they mirrored the FCC’s prior rules, that “innovation” would magically emerge in their ecosystem. Instead, they find that net neutrality only entrenches the established players at the expense of upstarts. The United Kingdom’s Ofcom concluded as much. Their recent report which observed that net neutrality is great for the “innovation” of content providers, but not for broadband providers. It thus proposes to modernize rules to allow consumers to access free and premium offers and to relax provision which deter broadband innovation.

Unlike the Rosenworcel FCC, a fair regulator would assert that both edge and broadband providers deserve the chance to innovate.

Strand Consult has been at the forefront to measure innovation associated with internet regulation and has tracked global regulatory developments for more than a decade. A natural experiment has been underway globally for some time. Countries with soft regimes with guidelines, like Japan and South Korea, have lasted longer than anything pushed by FCC. Similarly the Caribbean has had long success with the CANTO Code for self-regulation. Of course, the longest running regime is competition law, which governed the US sector under FTC from internet inception to 2015 and still reigns in Australia and New Zealand which have never adopted net neutrality rules.

The FCC’s move to regulate the internet with fundamental rights principles, not for economic efficiency, signals that it adopts the approach of the European Union, today the de facto authority for global internet regulation. The move to regulate one side of the broadband market will naturally and inevitably be followed by regulation of the other side. Platform regulation follows broadband regulation. Fair share is the logical outcome of net neutrality.

The FCC’s SSOI only raises the stakes for ongoing efforts to bring Big Tech into the financial fold for the Universal Service Fund and the Affordable Connectivity Program. For if the FCC can find new authority to regulate broadband, it cannot be hard to find the justification to regulate Big Tech. FCC Commissioners have already recognized this. However, cost recovery efforts in the US will likely and properly be driven by legislation, not regulatory fiat.

Economic Perspective.

Classical telecom regulation focuses on economics and public administration. It describes steps to transition a market from monopoly to competition and to remedy market failure with discrete interventions. A regulator which does its job well should be out of a job. The final step of regulation is to decommission the regulatory authority and return the resources to the state for the next policy priority.

Net neutrality breathed new and eternal life into the regulatory enterprise. It’s the gift that keeps on giving to the policy entrepreneur. Net neutrality, which has no codified, statutory definition (on purpose), can be shaped to fit the crise du jour. The FCC does that here by claiming net neutrality is needed now for national security and public safety.

Compared to prior rulemaking, the SSOI downplays the key reason for net neutrality as defined by Tim Wu: innovation. The very purpose of prior FCC rules was to protect and preference edge providers over broadband providers. Objectively, such rules were never needed. America’s leading edge providers were well-established long before the FCC’s net neutrality rules took hold and moreover, there never was, nor is, a systematic demonstration of broadband providers blocking and throttling innovation or end users. Today the claim that Big Tech needs net neutrality to innovate is laughable. Accordingly, the prior emphasis on Big Tech is now a liability for the Biden Administration which pursues a series of lawsuits against key firms.

A key economic observation is that net neutrality rules are associated with lowered investment. This is demonstrated definitively by Briglauer, Wolfgang Briglauer, Carlo Cambini, Klaus Gugler, and Volker Stocker using a comprehensive OECD panel data set for 32 countries over 20 years and finding net neutrality regulations exert a significant and strong negative impact on fiber investments and slowed broadband deployment. Indeed the FCC recognized the connection in 2017, and following a reported 5.6 percent decline in broadband network investment, vacated the 2015 rules.

Another absence in the SSOI is the lack of evidence of harm or market failure since 2017. The FCC publishes no reports of violations during the pandemic, when the internet was ostensibly most vulnerable to purported ISP abuse. In fact, FCC reports demonstrate that the marketplace improved following the removal of the 2015 rules. Broadband prices fell as much as 60 percent; speeds more than doubled. Broadband investment and network deployment reached record highs. The digital divide has reached its most narrow point yet. There is bipartisan recognition of the importance of broadband and unprecedented policymaker to support it financially.

Accordingly, FCC Commissioner Nathan Simington issued a powerful dissent. “Free speech was just the public front for what was really a campaign of industrial lawfare.” He observed that such rules deter competition by preventing “ISPs from using their immense infrastructure to provide enhanced services, like edge computing that could compete with Big Tech cloud services.” He claims that Big Tech, not ISPs, engage the behaviors which the rules are purported to prevent. “These companies are, without a doubt, the biggest threat against freedom of speech that our country has faced in decades. I’m not surprised that some of my colleagues, moved by the hyperbole of previous net neutrality debates, feel that they have no choice but to reimpose Title II net neutrality rules, but I am disappointed that they have shown no interest whatsoever in bringing some of those same net neutrality principles to Big Tech platforms, whose control of internet infrastructure and the digital economy is in fact much greater than that of ISPs and who have a much greater demonstrated willingness to abuse it.” He called for net neutrality principles to be applied to both ISPs and Big Tech, a notion which has increasing currency.

Legal Perspective.

The key legal issue is inevitably whether the FCC has the statutory authority to issue rules. Indeed FCC Commission Brendan Carr pre-butted this point with his summary of legal analysis from President Obama’s former solicitors at the Department of Justice who called the rules utility regulation of the internet under Title II of the Communciations Act as unlawful and “serious mistake” that “would be struck down.” The analysis rejects the view that the rules are a narrowly tailored intervention to protect consumers but instead “would vastly expand the Commission’s authority and would transform the way a federal agency regulates a vitally important element of our economy and the personal and social lives of hundreds of millions of Americans.”

As such, the application Title II, utility-style regulations to the Internet “would be struck down by the Supreme Court” under the major questions doctrine, as West Virginia v. EPA makes clear. They call it a “massive waste of resources for the government, industry, and the public, as well as the lost opportunity to pursue more pressing policy goals such as deploying robust broadband service to all Americans.”

That the FCC needs to undertake for a fifth time rules which are guaranteed to be litigated reflects that there is not sufficient interest in the US electorate to adopt such rules. For if Americans truly wanted the utility style regulation proposed, it would be enabled in bipartisan legislation.

Some surveys suggest that net neutrality regulation could succeed if it was adopted in a balanced, uniform way such that Big Tech and ISPs alike were both subject to consumer protections against blocking, throttling, and prioritization as well as general conduct standards. For added effectiveness, the bill could be wrapped with information privacy rules and cost recovery to fund universal service programs and affordability vouchers. There is growing bipartisan support for such measures.

The obvious observation is that Title II of the Communications Act of 1934 is not the right instrument to deliver internet regulation. That the FCC offers to forbear from two dozen provisions of the statue and some 700 hundred illustrates the point. There is essentially zero cost to create a 1-page bill which authorizes the FCC to implement net neutrality rules from Congress. However, it takes an army of telecom lawyers to draft a 129-page rulemaking with legal argumentation as to why Title II is the needed vehicle. This itself is telling.

Rosenworcel gave the point away in her National Press Club remarks, admitting that FCC actions “can require duct tape and bailing wire to jerry-rig the justifications to make sure our actions are on solid legal footing. It doesn’t always work.”

Carr, a former General Counsel of the FCC, did not mince words in a supplementary statement opposing what he called the “Plan for Government Control of the Internet.” He declared that utility-style regulation of the Internet entails sweeping new government controls and opening the door to broadband rate regulation. This reference is meaningful to Americans who remember the Ma Bell monopoly under Title II, a collusion between the FCC and a regulated entity which took a decade to dismantle following DOJ claims on price inflation and tying the phone purchase to the telephony provider. He said the rules will slow down rural broadband builds, citing the experience from small providers following the 2015 rules.

Carr warned that the rules would increase prices from new taxes and fees added. He added that since 2017, utility-regulated services like electricity, water, and gas have increased while broadband prices have fallen. He called the plan “a big gift to Big Tech,” companies which have engaged in a discriminatory pattern of gatekeeper conduct and which are the longest and deepest-pocketed backers of “net neutrality” rules. “Title II regulations apply only to Big Tech’s competitors, distract regulators’ attention from actual problems, and leave Big Tech companies free to continue operating in a biased and non-neutral manner,” he said.

For a deep dive on the legal issues, see the new article by Randolph May in the Yale Journal of Regulation. Under the explanation of the Major Questions Doctrine, Congress does not delegate to executive agencies issues of major political or economic significance. In other words, if Congress wanted the FCC to regulate the internet, it would instruct it to do so. That the FCC deputizes itself to this task is an illegal overreach. Then Judge Kavanaugh at the DC Circuit (now a Supreme Court justice) noted that the rules violate the First Amendment and constitute a “major question,” which requires Congress to be explicit about its intent.

A related issue is the emergence of state level rules and the important issue of pre-emption. Rosenworcel suggested that her proposed rules would resolve this government failure. “Because if you think that nothing has happened since the FCC retreated from net neutrality and are asking yourself what is the big deal, think again. Then look harder. Because when the FCC stepped back from having these policies in place, the court said states could step in,” she said.

It is unlikely that one opinion of a DC Circuit court judge amounts to authorization for the state of California to regulate the internet. What states can and cannot regulate is a major area of jurisprudence covered under the Commerce Clause of the Constitution. It is unlikely that California’s regulation is legal; a better explanation is that litigants and the state agreed to a stalemate rather than bring the issue to the Supreme Court. In any event, there is nothing to stop a state in future from adopting “internet freedom” in protest to FCC’s net neutrality rules.

The section of the SSOI on free speech will give First Amendment scholars a field day. Many believe that because net neutrality rule prohibit blocking and throttling that they automatically promote speech and expression, but that is a facile interpretation. The First Amendment of the US Constitution states the government cannot regulate speech. An FCC rule requiring that internet transmissions flow “neutrally” violates the Amendment. Similarly, the effective net neutrality price control demanding that all data be priced and treated equally further violates the free speech rights of end users who are forced to value all content the same—that is, they must pay for advertising equally as the content that they actually want.

The FCC suggests that because its rules classify broadband common carriage that they will avoid such Constitutional scrutiny. Brent Skorup of Mercatus disagrees, “The legal problem for net neutrality proponents has always been that ISPs are protected by the First Amendment and Section 230. So the Obama FCC had to concede in the Order and in litigation that ISPs are free to filter “curate the Internet,” filter content, and “drop out of” the common carrier designation.”

Nearly all FCC decisions are litigated as a matter of course, but net neutrality represents the Super Bowl for K Street. Dozens of lawyers have put their kids through the Ivy League by litigating the FCC’s flipflops. Together with net neutrality advocacy and fundraising, the effort remains a reliable and lucrative enterprise in the Beltway. A lasting legislative solution would turn off a tap, so don´t not expect to see legislation soon. This will come as a surprise to many outside the USA who think that net neutrality is a bona fide endeavor, not an exercise in political theatre. In practice, each net neutrality petition comes with a donation request. In 2017, nearly every member of Congress benefited. Of the 535 members of Congress, 495 received campaign contributions from groups that lobbied the FCC on net neutrality. Those members include 265 Republicans, 228 Democrats, and two independents.

Policymakers outside the USA should consider whether they will dignify the FCC’s opportunistic shift of reasoning. It is unfortunate for America’s presumed global leadership before the World Radio Conference to see such partisanship. Sadly, the notice distracts from important and legitimate FCC accomplishments like the spectrum auction, recognized by the Nobel Prize committee. Imagine if Rosenworcel brought the same energy to restoring the FCC’s spectrum authority. The FCC could action solutions to the real problem of an empty spectrum pipeline and flagging wireless leadership to China.

Political Perspective.

Net neutrality in the USA is a quintessential example of symbolic politics. This means that the ideas behind the policy proposals and the audiences to which they are directed frequently matter more than the policies themselves. Key components of symbolic politics include communication as a form of political theater, milestones for the media narrative, and support from well-funded, professional advocacy organizations. These campaigns emphasize drama over analysis with simplistic, good-versus-evil narratives and a binary, all-or-nothing framing of the issues. These efforts are funded lavishly by major foundations and corporations. They exemplify astroturfing, the practice of masking a sponsor’s message with the appearance of grassroots support.

The SSOI notice politicizes an incident which appears to have been cultivated and premeditated for this moment. When Santa Clara, California firefighters experienced reduced cellular speeds on a single modem in a firetruck (among hundreds of modems deployed to fight the fire), net neutrality advocates pounced on the incident to claim that the provider was deliberating throttling the connection because there were no FCC rules to check its behavior, even though the 2015 rules allowed the traffic management practice.

In response to this incident, the Santa Clara County fire chief was enjoined to file a brief in a suit against the FCC for its 2017 Restoring Internet Freedom Order filed by 23 state attorneys general, the California Public Utility Commission, California’s Santa Clara County, and the Santa Clara County Fire District. The suit was a premeditated claim that the FCC did not consider how the repeal would affect the subscriptions for public safety providers, even though the 2015 FCC rules applied to only mass-market retail services for consumers, not subscriptions purchased by government and first responders. The petition even asserted, “Government Petitioners do not contend that this throttling would have violated the 2015 Order.” Indeed, public safety communications networks and subscriptions are predicated on prioritization and service-level agreements, the antithesis of the idea of a neutral network that treats all data equally.

Rosenworcel teed up the forthcoming symbolic politics in her remarks, smiling as she described the notice and comment process as a “rodeo” that can get “ugly” and “messy.” It was appalling how she appeared to welcome the inundation of the FCC’s public comment system by trolls who took the system offline the last time around.

In 2017-2018 Rosenworcel was generally silent in the face of repeated violence against FCC Chair Ajit Pai while he, his wife, and children were terrorized in their suburban Virginia home. A bomb threat disrupted an FCC meeting. A New York Congressman and his family received death threats from a net neutrality supporter. Vicious, racist online attacks and harassment proliferated against the Indian American chair. Pai needed 24/7 security, and FCC staff were also put at risk.

Now that the shoe is on the other foot, Rosenworcel recognizes that net neutrality zealots can fuel their rage against Democrats and block and throttle them in their driveways, she declared the behavior “completely unacceptable, and I am grateful to law enforcement for bringing the individual behind these threats to justice.”

Strand Consult’s knowledge.

Strand Consult maintains a leading knowledge center on net neutrality, open internet, and broadband regulatory rulemaking. Much is said and written about net neutrality, but most claims are devoid of facts. Strand Consult is one of the few which has studied net neutrality empirically, and its research is tapped by regulators and operators around the world. Strand Consult’s team includes leading international experts on policy, and they perform empirical analysis and international comparisons on this issue.

Strand Consult’s reports provide measurements, international comparison, analyses of stakeholders’ arguments, and importantly, transparency to transnational funding and global strategy of the policy effort. Its signature reports include Understanding Net Neutrality and Stakeholders’ Arguments, Follow the Money – Net Neutrality Activism Around the Globe, and an empirical review of the policy in the United Kindgom and Europe.

Strand Consult conducts workshops on the issue and speaks on this subject around the world. Check out Strand Consult’s library of research notes and reports.