Old school regulation of internet service providers raises the threat of less broadband competition and more consolidation

Yesterday’s vote in the U.S. Senate that upended the Federal Communications Commission’s repeal of its net neutrality rules was more political grandstanding than good policymaking. S.J. Res. 52 nullified the Commission’s “Restoring Internet Freedom” rules that would have gone into effect on 11 June 2018. The Restoring Internet Freedom rules reclassified broadband access service as an information service; reinstated private mobile service classification of mobile broadband internet access service; required internet access service providers to disclose information about their network management practices, commercial terms and conditions, and performance characteristics; and eliminated the internet conduct standards and bright-line rules.

By repealing the Commission’s Restoring Internet Freedom rules, the Senate signaled its preference for the Commission’s 2015 Open Internet order. The order, based on the premise that broadband access providers posed a threat to openness on the internet and could hinder the virtuous cycle of innovation being introduced by edge providers, the Commission created a regulatory framework that classified broadband access service as a telecommunications service. The 2015 order also established what it referred to as “bright-line” rules that prohibited paid prioritization; the throttling of traffic from websites; and the blocking of consumer access to the legal online content of their choice. In addition, broadband access providers were required to provide consumers with information as to their network management practices, network performance, and commercial terms and conditions. The rationale for this transparency was the need to ensure that consumers made choices based on accurate information.

With its declaration that broadband access is a telecommunications service, the 2015 order subjects broadband access providers to certain sections of the Communications Act of 1934, specifically sections 201, 202, and 208. Although the Commission expressed an intent to not regulate the rates that broadband access providers charge consumers, including edge providers, section 201 of the Communications Act allows broadband access providers to establish different classifications of service.

For example, services may be classified into day, night, repeated, unrepeated, letter, commercial, press, government, etc. So, while no content delivery service can pay a broadband access provider a little extra in order to have their traffic placed ahead of another content provider while in the same class of service, section 201 allows broadband access providers to establish different classes of service that content providers can explore and use.

Let us assume that for some reason the resolution is also approved in the U.S. House of Representatives and President Trump fails to issue a veto. Given the application of sections 201, 202, and 208, small broadband access providers may be faced with the opportunity of being acquired. If a large broadband access provider offers various classes of broadband access, it in essence is carving out smaller markets within which it will dominate. If a broadband access provider carves out a classification that competes with a smaller broadband access provider, that smaller provider will face existential choices. Either lower its rates to where it no longer sees a profit and eventually leaves the market or be acquired which means getting to non-existence a lot faster. The 2015 Open Internet order could well be an example of how regulation stifles competition.

Lastly, I would expect that states will want to get in on the action. I have made this argument before. Under a 2015 Open Internet order regime, states will reassert themselves as the frontline for consumer protection. State public utility commissions don’t see themselves as agencies that sit around and handle consumer complaints all day. They rather those annoying complaints be addressed by their states’ respective attorneys general. State public utilities would rather flex their muscles in the pricing arena and will probably tailor state rules that align with sections 201, 202, and 208 of the federal communications act. The rules and the accompanying administrative procedures that broadband access providers would have to comply with will become burdensome on smaller players.

The result: regulation creating a less competitive market.

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