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.

Facebook’s challenges demonstrate it is time to level the regulatory playing field

This week’s joint senate hearing on Facebook’s privacy and transparency policies raised the question, does the public expect Facebook to act like a information utility? Reactions on Facebook to Mark Zuckerberg’s testimony before the U.S. Senate’s commerce and judiciary committees ranged from calling the 33-year old CEO a “shitbag” to praising him for confidently addressing questions from a 44 senators, a significant number of whom gave the impression that they had no clue as to what Facebook’s model is.

Consumers have been bitching and moaning about Facebook for years, expressing displeasure whenever the company changed the configuration of its pages, added or subtracted icons, or changed its algorithms in order to present what it thinks is more pertinent information to its users. Most users access Facebook’s content at no out-of-pocket cost to them and I personally know of no one who clicks on the ad links that pop up along the right hand side of our timelines. Yet, a significant number of users have expectations about how Facebook treats them, especially when they get put in “Facebook jail” for stating positions that may not be in keeping with the Facebook’s “righteousness police squad.”

If any senator yesterday came close to summarizing my personal sentiments on Facebook it was Orrin Hatch, Republican of Utah. The 42-year senate veteran, in the five minutes allotted to each senator, was able to get across that Facebook was not a utility; that if people were not satisfied with the product that they could go elsewhere on the internet. I don’t view Facebook as a necessity although I admit I probably spend too much time posting there albeit not as much eleven years ago when I was invited to join the Facebook community.  It can see where it can be addicting, but in the end it is not a utility.

With a utility there is an understanding that in exchange for a service generated with the use of natural resources purchased by the utility, you the consumer will compensate the utility for the generation and distribution of said service. And if that utility is regulated, the regulator is following a mandate to balance the consumer’s interest in fair and reasonable rates and consumer protection with the utility’s interest in maximizing its shareholders’ wealth. The senators that seemed adamant about Facebook not being considerate of its user community seemed to come very close to wanting to treat Facebook like a utility, but were very far from considering Facebook’s investor needs.

If Congress wants to regulate Facebook like a utility, it will have to come to terms with the fact that Facebook has only one set of consumers; the firms that purchase its advertising services. The users that Congress is so concerned about are the fuel for Facebook’s advertising platform, specifically the information attached to each user. The user is extracted, organized, and packaged as a fuel cell for advertisers, creating the eyeballs to which company advertising is targeted.

Unlike coal, oil, or natural gas, the fuel for Facebook delivers itself voluntarily over broadband access infrastructure. Whether by wired or wireless access, these transmission pipes are a necessary part of Facebook’s “information utility” business. No fuel, no eyeballs for advertisers. As former Federal Communications Commission chairman Tom Wheeler argued, the consumer experience on the internet should be seamless. Consumers should be able to access websites like Facebook without broadband access providers throttling speeds or otherwise determining which websites would get access to the consumer at certain speeds and vice versa. Also, to create the seamless experience, broadband access providers had to exercise a great degree of transparency regarding their management practices while protecting the privacy of data used to fuel the information utilities, such as Facebook, that deliver services on the edge.

The problem with the Wheeler approach is that the framework balkanized regulation of the internet. Wheeler and other progressives favored archaic transparency and privacy of information rules based on the Communications Act of 1934 applied to broadband access providers. Edge providers, like Facebook, Google, and Twitter, were to remain outside of this regulatory framework where they would be allowed to innovate and not have their information utility business model threatened by AT&T, Comcast, or Verizon. But Facebook’s current dilemma, Russian use of its platform and the trade in its user private data by unauthorized third-parties, demonstrates that if policy makers and elected officials want a seamless internet that projects transparency, all stakeholders will have to be placed on a level regulatory playing field.

Transparency can’t end at a broadband access provider’s point of presence and then enter an edge provider’s black hole.  If consumers want their data to stay private and advocate for policies that keep that data private along and throughout the internet, policymakers will have to ensure that privacy policies extend from the modem in the consumer’s home to the servers that store the data that social media collects on its users. If Congress cannot deliver seamless regulation, then yesterday and today’s hearings will equate to the mindless twerking we see on Instagram.