Democrats kick the net neutrality can down the road again

Speaker of the House Nancy Pelosi and her fellow Democrats today announced introduction of the Save the Internet Act, legislation that would repeal the Federal Communications Commission’s 2017 Restoring Internet Freedom order and replace the 2017 order with the Commission’s 2015 Open Internet order. Speaker Pelosi’s rationale for replacing the 2017 order with the 2015 order includes:

  • Lowering costs and increasing choice for consumers;
  • Giving entrepreneurs a level playing field on which to compete;
  • Helping bring broadband to every corner of the country; and
  • Ensuring American innovation and entrepreneurialism can continue to be the envy of the world.

From a banking and trade perspective, the rationale offered by the Democrats for repealing the current set of net neutrality rules at the Commission sounds good. Lowering the cost for accessing an information trading platform provides the benefit of reducing information discovery costs. Bringing broadband to every corner does increase the chances of network effects taking hold where the value of a network increases as more traders use it. As network effects increase, more data traders and content providers will be encouraged to carve out more niches on the internet and provide data consumers more options for content sources.

But what was blatant from an economics perspective was the total lack of discussion in the bill itself about how an advanced communications infrastructure underpins the economy; its role as part of a three-layered infrastructure that has supported the exchange of value since the earliest days of trade between small communities. At issue here is, in terms of trade, does the Save the Internet Act facilitate trade? My answer is no and the failure is due in large put to a number of mistakes driven more by politics than economics.

Mistake: Believing the Internet is About Democracy. It is Not.

The classic argument from the Democrats is that a free and open internet is great for American democracy; that gateway keepers such as AT&T, Comcast, and Verizon should not be allowed to prevent citizens from expressing themselves via broadband. But is accessing content via a communications technology the same as expressing thought via voice, graphics, and text over that medium?

I can buy and read a newspaper but it is not the same as sending letters to the editor or leaving comments online. If democracy is about expression, then there are plenty of examples where expression is limited in the private sector, and we should not forget that core providers, such as AT&T and Verizon, and edge providers, such as Facebook and Netflix, are private companies providing the data collection, data distribution, and data access that creates value on the internet.

Could Americans in their zeal for unfettered access to the internet as a digital medium for exchanging value and communications be conflating corporate power with government power? Building on the earlier point, democracy is about the relationship between citizens and government. Democracy is about the limits citizen and government agree to.

Democracy recognizes, at least in theory, that the State has a resources advantage that can be used to oppress the individual, thus preventing her from trading for and consuming resources necessary for daily survival. This imbalance in power is why democracy, again in theory, allows the citizen to express herself in the ballot box by choosing the representatives that are supposed to keep government at bay.

Unless core and edge providers have some agency relationship with government that puts them in a position to bring down the power of government on the citizenry, then corporation is in no position to stifle democracy.

Mistake: Congress Does Not Understand the Relationship Between Corporation and Government.

Corporations are not chartered by governments (state or federal) to protect consumer rights. Corporations are expected by government to create taxable events. They are expected to hire labor and apply capital in order to extract and process resources in such a way that they become deliverable for end use consumption. Both wages paid to labor and purchases are taxed in order to fill government coffers. To maximize taxable events, corporations must come up with more revenue streams or innovate the packaging and sales of product in order to create additional demand.

In the case of broadband access providers, they see an information services market that they would like to play in so that they can increase shareholder wealth. Competing with Facebook and Google allows these companies to create additional revenue streams that can be used not only to increase their shareholders’ wealth but, as mentioned above, generate taxes that go into government coffers. In short, government shoots itself in the foot by disallowing broadband access providers to not enter the content market.

Conclusion

The Democrats’ two-page legislation will not bring any improvement to a communications infrastructure that provides support for trade and commerce in the United States. It keeps broadband access providers out of the information markets, eliminating incentives for broadband access providers to expand their service offerings.

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Should Comcast and Verizon be allowed to enter the information mining game? Yes.

Overview

Proponents of the implementation by the Federal Communications Commission of net neutrality rules have been expressing outwardly that by ensuring no throttling of traffic from websites; no blocking access to favored and lawful websites; transparency when it comes to terms and conditions of service or network management; and the prohibition of favored treatment of one content provider’s traffic over another, that consumers of broadband services will be treated fairly and that edge providers will be able to innovate on the edge of the internet while competing with core providers.

While proponents have successfully convinced millions of Americans that net neutrality is about the consumer’s ability to democratize the web or have their voices equally heard among other, especially larger corporate voices, the real issue is whether core providers should be allowed to participate in the information markets or be kept out by making an 85-year old statute a barrier to their entry.

Battle in the Information Market

The statutory approach recommended by edge providers such as Facebook and Google to ensure that core providers such as Comcast and Verizon are reigned in is to apply Title II of the Communications Act of 1934. Edge providers make their bread and butter by mining information from visitors to or users of their website services and packaging that information into advertising products that they sell to businesses that are trying to get their services before as many eyeballs on the internet as possible.

The concern that the edge provider has with the core provider is that given the core provider’s “gateway” service and the core provider’s alleged monopoly or near monopoly control of the access to the internet, the core provider will then be able to capture consumer behavioral information that the edge provider has less access to.

The core provider, the edge provider will argue, is gathering this information from its telecommunications infrastructure; therefore, to ensure fairness, the core provider should not be allowed to call the telecommunications portion of his service an information service just so that they can skirt the information or data collection requirements under Title II.

By creating a net neutrality rule that says that core providers should treat access as a telecommunications service, the edge provider gets the government to apply a barrier to entry to the information market, a barrier that the edge provider has no confidence its superior information services can erect itself.

The Content Endgame: What Would Title II Do and Not Do

If Verizon wanted to use information “that relates to the quantity, technical configuration, type, destination, location, and amount of telecommunications service used by a consumer of a telecommunications service, that information, in general, would be limited in use to services related to the provision of telecommunications services. Verizon would not be able to use information related to the provision of telecommunications services to predict consumer demand for Verizon’s video streaming services.

Interpreting and applying Title II in this manner would help Hulu and Netflix keep Comcast and Verizon at bay. What it may also do is expose Hulu and Netflix’s pricing and cost structures during any public hearing resulting from Hulu and Netflix’s new roles as consumers of telecommunications services. Sections 204 and 205 of Title II provide the Federal Communications Commission the authority to set just and reasonable charges and to have hearings on those charges or on complaints regarding charges and price schedules. What Hulu and Netflix may not understand is that regulation of a market means scrutiny of both of its sides, and challenges to rates charged by a core provider means rebuttal that could include discovery of what economic rationale underlies an edge provider’s assertions. In short, Title II opens the Pandora’s Box for edge providers, too.

What Title II doesn’t do is tell Comcast or Verizon that they couldn’t collect consumer behavioral information from their websites or information portals. This “oversight” is further evidence of how arcane Title II is. A declaration by the courts that a core provider’s services are information services, from end user through a core provider’s entire network would be indication that the State recognizes that core and edge providers equally play in the information markets. Avoiding a balkanized, bifurcated view of broadband service provision would make regulation of advanced communications more efficient because of less time spent having to look at two separated pieces of internet service versus one.

The FCC’s Constitutional Quandry

But even if regulators continued down the two-prong path of regulating core providers, the end game would still be how to treat the content portions of their services. The Federal Communications Commission should not want to be in the position where it would take a hands-off approach to Facebook’s information mining techniques while taking a heavy handed approach to Verizon’s emerging content play. It would cause a constitutional dust up were the Commission to regulate the content of one service provider but not the content of another.

Conclusion

Core providers have the technical knowledge and desire to enter information markets and for that reason alone they should be allowed to profit from the development of content and the extraction and packaging of data that drives a modern economy. Core providers shouldn’t be punished because their basic business model includes the conveyor belts that information is placed on when being extracted. Imagine telling a coal miner that in order to foster competition, they will have to forego their conveyor belt and, like a firm that entered the market late and poorly capitalized, will have to use their hands and wheel barrel to move coal out of the mine. That is not competition but favoritism.

Atlanta should avoid the net neutrality debate. It’s not good for business

Internet Innovation Alliance co-founder Bruce Mehlman posted an article yesterday discussing the positive impact relaxed regulatory requirements can have on investment in and deployment of broadband networks. According to Mr. Mehlman, investment in broadband rose by $1.5 billion to $76.3 billion.  He contrasts this to the $3.2 billion decline in investment between 2015 and 2016.

What made the difference? According to Mr. Mehlman it was the decision last year by the Federal Communications Commission to repeal their 2015 open internet order, a decision that put into regulatory code a number of net neutrality principles.  The 2015 order treated broadband access providers as telephone companies by applying consumer and telephone network management rules that were based on communications law from the 1930s.  That approach, according to Mr. Mehlman, just can’t fly in the 21st century.

Unfortunately, Washington has been embroiled in a debate over how net neutrality principles should be applied.  There is a consensus among opponents to and proponents of net neutrality principles that consumers should be able to access web content of their choice; that content providers should not have their traffic speeds throttled by broadband access providers; and that broadband access providers should be transparent about the terms and conditions of their services.  Whether a rule by a regulatory agency is the best approach to ensuring these policy goals is an issue.

Getting to yes on net neutrality may be best brought about by an action of Congress.  Defining net neutrality in the law and laying out the components of its meaning will give content providers and broadband access providers definitive guideposts that help settle any conflicts in the future.  Without a congressional action, the industry and consumers run the risk of a back and forth regulatory battle driven by changes in political power, particularly when a new presidential administration takes over and a new chairman is appointed.  That type of uncertainty every four years is not good for consumers or business.

As more people and businesses move to Atlanta, regulatory certainty becomes an asset for the person who telecommutes; for the financial technology company that needs to maintain connection to its app subscribers; to the student who relies on distance learning to complete assignments.

Treating a broadband provider facing competition from three or four more broadband providers as if they were a monopoly local telephone company in 1934 won’t contribute to Atlanta’s continued growth.

Net neutrality challenges the affordability of information

Last weekend, the State of California upped the ante in the net neutrality debate when Governor Jerry Brown signed into law SB 822, a bill that put into California law net neutrality requirements that were contained in the Federal Communications Commission’s 2015 Open Internet Order, a set of rules that were later repealed by the FCC in its 2017 Restore Internet Freedom Order.  Section 3101(a) and Section 3101(b) of SB 822 provide the core element of the legislation and reads as follows:

“3101. (a) It shall be unlawful for a fixed Internet service provider, insofar as the provider is engaged in providing fixed broadband Internet access service, to engage in any of the following activities:
(1) Blocking lawful content, applications, services, or nonharmful devices, subject to reasonable network management.
(2) Impairing or degrading lawful Internet traffic on the basis of Internet content, application, or service, or use of a nonharmful device, subject to reasonable network management.
(3) Requiring consideration, monetary or otherwise, from an edge provider, including, but not limited to, in exchange for any of the following:
(A) Delivering Internet traffic to, and carrying Internet traffic from, the Internet service provider’s end users.
(B) Avoiding having the edge provider’s content, application, service, or nonharmful device blocked from reaching the Internet service provider’s end users.
(C) Avoiding having the edge provider’s content, application, service, or nonharmful device impaired or degraded.
(4) Engaging in paid prioritization.
(5) Engaging in zero-rating in exchange for consideration, monetary or otherwise, from a third party.
(6) Zero-rating some Internet content, applications, services, or devices in a category of Internet content, applications, services, or devices, but not the entire category.
(7) (A) Unreasonably interfering with, or unreasonably disadvantaging, either an end user’s ability to select, access, and use broadband Internet access service or the lawful Internet content, applications, services, or devices of the end user’s choice, or an edge provider’s ability to make lawful content, applications, services, or devices available to end users. Reasonable network management shall not be a violation of this paragraph.
(B) Zero-rating Internet traffic in application-agnostic ways shall not be a violation of subparagraph (A) provided that no consideration, monetary or otherwise, is provided by any third party in exchange for the Internet service provider’s decision whether to zero-rate traffic.
(8) Failing to publicly disclose accurate information regarding the network management practices, performance, and commercial terms of its broadband Internet access services sufficient for consumers to make informed choices regarding use of those services and for content, application, service, and device providers to develop, market, and maintain Internet offerings.
(9) Engaging in practices, including, but not limited to, agreements, with respect to, related to, or in connection with, ISP traffic exchange that have the purpose or effect of evading the prohibitions contained in this section and Section 3102. Nothing in this paragraph shall be construed to prohibit Internet service providers from entering into ISP traffic exchange agreements that do not evade the prohibitions contained in this section and Section 3102.
(b) It shall be unlawful for a mobile Internet service provider, insofar as the provider is engaged in providing mobile broadband Internet access service, to engage in any of the activities described in paragraphs (1), (2), (3), (4), (5), (6), (7), (8), and (9) of subdivision (a).”

Political actors that favor the FCC’s implementation of net neutrality rules have managed in the past to endear their position to the public by describing efforts opposing the rules as a barrier to freedom of expression.  Net neutrality rules proponents argue that internet service providers have a financial incentive to use their positions as gateways to internet access to favor their content over that of edge providers.  Favoring ISP content may take the form of throttling data coming from a favored website or blocking a consumer’s access to their favorite website.

Net neutrality rules proponents would also argue that even if their access to a website was not blocked or data from their favorite website not slowed down, the receipt by an ISP of compensation in exchange for giving an edge provider higher priority of their traffic may mean that smaller content providers are put at a disadvantage compared to larger content providers with deeper pockets.

Opponents of putting net neutrality into an agency rule would agree that the principles of net neutrality should be adhered to.  However, as network operators, ISPs argue that they cannot afford to devalue their networks by frustrating consumer access to internet content.  The internet has grown in use and popularity as a result of the “network effect” where as more consumers use the internet, the demand for and supply of content and other services increases thus increasing the value of an operator’s network.  In the end, blocking, throttling, or prioritizing content would only work against the network operator.

Often overlooked in the net neutrality debate is the global nature of the internet.  Facebook users, for example, take for granted that most of the social network’s subscribers are not located in the United States and that we all access a network of interconnected computers located in multiple countries. The traffic you receive can come from a number of jurisdictions before landing on your computer.

Ironically, California leads the way in North America when it comes to internet traffic density.  According to data from Akami, California accounts for 5.1% of traffic flows in North America.  Statista.com reports that internet traffic in North America amounts to  1,411,021 terabytes a month. This means that California’s approximate share is 71,962 terabytes a month.

And the amount of internet traffic flowing is expected to continue increasing.  According to findings by Cisco, internet traffic is expected to increase by 278 exabytes a month by 2021.  As gateways for internet traffic, ISPs concerned about managing congested networks may want to employ a time honored method of congestion management: price, and this method of determining where resources flow is what is really being kept in check by SB 822.

SB 822 prohibits ISPs from charging content providers for the handing off of edge provider traffic.  It is ironic that proponents of these rules on the one hand support the notion of regulating broadband providers like telephone companies, but prohibit the very practice telephone companies have used to recover a portion of their network costs. As internet traffic increases along with the costs for delivering traffic, would proponents prefer ISPs increase the prices the end use consumer pays while providing edge providers with free content? If this is the case, then net neutrality proponents in California, many of whom are unwittingly support keeping edge provider costs low, may find accessing information on the internet less affordable.