Research Notes

Net neutrality on trial in the USA: What the oral arguments in the American court mean for telecom operators in the EU and the rest of the world. A report from Washington

On Wednesday 9 December 2015 the European Commission is scheduled to present legislative proposals for the Digital Single Market which include rules for net neutrality. To many it may seem yet another boring piece of paper from the European Union, but not for mobile, cable and telecom operators. Regulation can have major impact on those those which develop innovative digitally connected services.

While the Body of European Regulators for Electronic Communications (BEREC) presses forward with its net neutrality framework to be presented in September 2016, it appears that the Federal Communication Commission’s plan for the “Open Internet” is unraveling. A three panel court in Washington criticized the regulator for failing to follow instructions on how such rules should be created. Not only are its rules threatened to be disqualified for procedural reasons, much of the FCC’s Open Internet Order may be unlawful.

For the last few years Strand Consult has analyzed net neutrality and its impact on investment and innovation in some 50 countries. It has a produced a comprehensive report Understanding Net Neutrality and Stakeholders’ Arguments. In more than 450 pages, it describes what operators need to know about this issue and the key arguments that stakeholders make for and against it.

Net neutrality rules are in place or on track in 50 countries around the world, but if they are threatened in the US, the very country where they were born, it is an important moment to review the nine lawsuits against the regulation and the larger implications of the challenges. Strand Consult attended the hearing in Washington, and following is its report.

Net neutrality advocates worldwide were pleased when in November 2014 US President Barack Obama called on the FCC to adopt the toughest rules possible to ensure net neutrality. A few months later the FCC released its Open Internet Order which reclassified broadband under Title II of the US Communications Act, the same statutes that governed the telephone monopoly for 50 years. This is a sharp reversal of the historical policy which endeavored to keep the Internet free from FCC oversight and as Congress declared in 1996, “unfettered from regulation.” The rules ban blocking, throttling and paid prioritization; require enhanced transparency; and allow the FCC a broad lens to review the “general conduct” of broadband providers.

A year after the President’s announcement, the FCC’s rules are now on trial. The aggrieved parties include trade associations, large and small for cable, wireless, and telecomm; AT&T; a series of small broadband providers; and an entrepreneur who claims that the FCC’s ban on paid prioritization prohibits him from deploying a real time communication service. The nine lawsuits were bundled into a single case under US Telecom Association v. FCC. This is the FCC’s third time at bat to defend its net neutrality rules, having struck out on the two prior instances. The many charges against the FCC were aggregated into four topics: reclassification of broadband; regulation of mobile broadband; the First Amendment; and “FSN Issues”, a set of concerns related to regulatory forbearance and network access for resellers.

Key for the FCC is whether its reclassification of broadband under Title II of the US Communication Act, the statutes that subject a provider to common carriage, is legal. While it appears that one of the judges may be sympathetic to the agency (courts frequently give expert agencies deference to interpret the statutes) in its reclassification of the last mile, the decision was marred with the inconsistent and incomplete thinking on interconnection as well as a number of procedural flaws, including failing to provide adequate notice before making rules. Rules could be disqualified on procedural grounds, necessitating the process once again, but it is doubtful that the FCC would have same the favorable conditions.

The panel discussion suggests that the FCC acted outside its statutory authority; failed to follow the court’s earlier instructions on how to make rules; and denied parties the proper notice before rulemaking. Though the final court decision won’t come until next year, it is almost certain that the overzealous rules of the American regulator will be struck down in part, if not in all.

In the report Understanding Net Neutrality and Stakeholders’ Arguments we describe what has happened in the US, why, and which strategies the different stakeholders have taken in the process.

Net neutrality rules on mobile networks are likely unlawful
One of the key questions of net neutrality rules is whether and how they should apply to different networks, whether fixed, cable, wireless etc. We analyze the questions and implications for rules on different network evolutions.

The revelations of the oral arguments are good news for the world’s mobile providers. It appears that American mobile operators will succeed in their challenge to thwart inappropriate regulation. Documents submitted by petitioners recognize the necessity that mobile operators have the flexibility to manage their networks under a variety of constraints. Recognition of this very fact led the FCC to exempt mobile broadband from its 2010 rules. At the time 4G/LTE had just been introduced, and there was a concern that regulation would kill the nascent technology in the cradle. To be sure, mobile is a continually evolving technology, especially with 5G, which turns the assumptions of a neutral network on its head. It is most probable that this part of the FCC’s rules will be struck down, making a substantive case that operators in other countries could roll back some of their net neutrality rules.

Wireline providers have a more difficult burden to convince the court, but even if just one judge dissents, likely the senior Judge Williams whose opinion carries great weight, the issue will be teed up for the Supreme Court. Indeed wireline petitioners have already indicated that they are ready to appeal. To be sure, should the FCC be overturned on their key argument, they too may appeal the decision. So the litigation is sure to continue, meaning the fate of net neutrality in the US will be uncertain for the time to come, pending a legislative solution by Congress.

Bans on paid prioritization are overkill. Harmful practices are better addressed with antitrust enforcement rather than flat bans.
The FCC claims to have been studying the issue of paid prioritization for some 5 years, but has yet to establish any concrete examples of harm. The agency was harshly criticized by Judge Williams on this point. Not only does the agency give no examples of the harm its presumes, no operators are deploying paid prioritization as described. The judge declared that differently types of traffic require different levels of service and that this is “utterly reasonable”, liking a prioritized network to no different than “refrigerated cars on a railroad”.

The judge also censured the agency for ignoring the record in which three former FCC economists criticized the prohibitions, something to which the agency is obliged to respond. He claimed that harm can be addressed in a “much less damaging way” through antitrust. The judge believed it significant that the only “edge provider” that was party to the case is a VOIP entrepreneur who is suing the FCC for its ban on paid prioritization. In fact five of the nine petitioners represent small operators and entities.

In the report, Understanding Net Neutrality and Stakeholders’ Arguments Strand Consult reviews paid prioritization and the arguments for and against it.

Zero rating probably does not violate net neutrality.
Zero rating, the practice of exempting certain data from a mobile subscription, has been used by at least half of the world’s mobile operators for more than a decade. Primarily it is a means to stimulate user demand for mobile data and drive adoption among mobile subscribers. However a number of net neutrality activists claim that it violates net neutrality and harms consumers and competition, even though the flat rate, no data cap plans they advocate are themselves forms of price discrimination. In the report Strand Consult addresses this issue in detail and research on the purported harms before and after the practice was banned in Chile, Netherlands, and Slovenia.

Zero rating on mobile networks has the battleground of net neutrality activists in the EU and around the world, but DC Circuit court did not appear to be concerned about the practice. This is significant because the future of the Internet, especially in developing countries, is likely mobile. Having the flexibility to offer a variety of products, services and prices in the marketplace is necessary for operators to recover the costs of their investment. Operators need the freedom to make partnerships with content and application providers as well as competitive offers in the marketplace. The ability of telecom providers to offer flexible prices is enshrined in America’s communication laws, even for common carriers.

T-Mobile’s zero rated plans for music and video were mentioned in the arguments in the court. In fact, FCC Chairman has called the plans pro-innovative and pro-competitive. As such, if the US can uphold such agreements, it is difficult to justify why they should be banned in other countries. This is also good news for Facebook Free Basics, a service which is succeeded to help drive mobile adoption in developing countries.

Judge Williams described how MetroPCS used its editorial discretion to offer a low-budget mobile service with exclusive, zero rated access to YouTube. He implied that this was not a harmful practice, even though it was found illegal by an earlier FCC. That set of net neutrality rules were struck down by the same DC Circuit, but by then it was too late for MetroPCS; it had been acquired.

The freedom to make a price in the market is as fundamental as free speech. For the entrepreneur challenging the FCC, the ability to buy prioritization for traffic is essential for his service, his right to speak. That is to say banning the service quality category is akin to banning a kind of speech. The judges gave the issue only its allotted time and no more, suggesting that they prefer the issue of free speech and the First Amendment to be addressed on appeal in the Supreme Court.

Net neutrality rules on interconnection are likely unlawful.
In Verizon v. FCC, the FCC’s second time in court for net neutrality, the decision defined broadband to be made up of two distinct services: a last-mile component (i.e. operators selling access to their subscribers), and a sender-side component (i.e. operators selling transit to edge providers, commonly referred to as interconnection). The FCC’s new Open Internet rules clearly place the last mile under Title II but do not do the same for interconnection. US Telecom counsel explained that the FCC had intended to classify interconnection under Title II but reversed their intentions at Google’s behest, as the search engine realized Title II reclassification could be detrimental to its business. The counselor said the FCC is attempting to impose common carriage obligations on interconnection without the proper jurisdiction, an approach he termed the “Cheshire cat” – in which the body of the animal disappears while the smile remains.

Judge Tatel appeared to be sympathetic to the deference that the FCC achieves by classifying the last mile as common carriage, but the judges’ probing questions about the treatment of the sender side indicates that they might feel the FCC was arbitrary and capricious in its reasoning. Judge Srinivasan observed that if interconnection is an “information service”, then it can’t be treated under common carriage, concluding that the FCC had a “Verizon obstacle” in its argumentation. The court’s dim view of the agency’s treatment of interconnection does not bode well for the FCC.

In essence the Verizon decision of 2014 established the Internet as a two-sided market, affirming a broadband providers’ right to make transactions with both sides of the market, both end users and edge providers. The notion that an operator is somehow “double-dipping” by transacting with both sides of the market is not found in the Verizon court. That net neutrality activists want interconnection to be priced is zero is not just and reasonable under US law. Moreover such a rate regulation obliges all end users to pay a higher price for broadband, when the particular edge providers which deliver a disproportionate amount of traffic to networks should be obliged to pay for it.

The FCC opened its remarks by saying it was proud for having worked on net neutrality rules for the last decade. On the one hand, this could be seen as determination, but it is more likely desperation. There is no doubt that convergence threatens the relevance of telecom regulators. The oral arguments revealed an agency with an overzealous view of its authority and took a number of actions that invite legal scrutiny.

There is no sense in having a strong net neutrality rule if it cannot withstand judicial review. Indeed for those unsatisfied with the EU rules, they can at least take heart in the fact that they are more legally sustainable. The European rulemaking process succeeded to incorporate a broad swath of political parties and all the branches of government. In the US on the other hand, the President instructed an independent regulatory agency to make rules. This is not only improper, it may have resulted in rules that are illegal.

Given the risky path taken by the FCC, the US may wind up with no net neutrality rules at all, leading to the suggestion that activists really don’t care about an Open Internet, but require the construction of a political theatre in which to raise money for their efforts. The issue could be resolved if the FCC accepted a legislative solution. In fact Congress has made a number of proposals which the FCC rebuffed. Legislation would save taxpayers and petitioners $1 billion in litigation fees, a lot of money that could go to broadband investment and service innovation.

But make no mistake. The growth of net neutrality rules around the world is the result of activism, not bad behavior of operators. Even the Circut court judges remarked on the lack of a record of abuse. It’s telling that the term “net neutrality” was never mentioned in the arguments. In fact the court case has little with Internet openness, but rather with the regulatory process and legality of FCC’s actions. Above all, the case demonstrates that operators should be more aggressive to defend their constitutional rights.

To learn more about the status of net neutrality rules around the world and why activists succeed to make rules even with an absence of harm, order Strand Consult’s report Understanding Net Neutrality and Stakeholders’ Arguments.

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