Tag Archives: Ajit Pai

Regulating by the Extremes

It’s hard to describe federal telecom regulation as anything other than regulation by the extremes. We are now moving to the fourth administration that has essentially reversed the regulatory philosophy and policies of the previous administration.

It’s clear that the FCC and other parts of the federal telecom regulation agencies have fallen victim to regulatory capture. This is an economic principle that describes when regulatory agencies are dominated by the industries they are supposed to be regulating. Economic theory predicts that regulators caught by regulatory capture act in ways that protect incumbent providers instead of the public interest.

What I find odd about the back-and-forth reversal of policies is that it doesn’t seem to be benefiting the big ISPs. Let’s take a look back at the Tom Wheeler FCC that passed the first set of net neutrality rules. I recall at the time these rules were passed that the CEOs of every large ISP made public statements that the net neutrality rules weren’t going to have any real impact on their businesses.

And yet the big ISPs still went into overdrive and fought the FCC’s rulings in court. They were unsuccessful and the courts said that the FCC had the authority to regulate broadband, which clearly is a telecommunications service.

But then the Ajit Pai FCC came into power through a change of administration and instantly set to doing what the courts could not do, which was reverse net neutrality and all of the implications of regulating broadband. The courts also weighed in on this and said that Ajit Pai’s FCC has as much right to not regulate broadband as the previous FCC had to regulate it.

I’ve been watching this back and forth for more than a decade and I can’t see how this regulatory back-and-forth helps the big ISPs. I’ve come to the conclusion that the problem at the federal level is caused more by the lobbyists than by the Board rooms of the big ISPs. Regulation is at most a minor burr under the saddle of the big ISPs, and it’s hard to believe that folks in the Board rooms get too bent out of shape over most FCC actions – and yet the companies react publicly like the sky is falling.

We now have an entrenched lobbying industry that tackles issues on behalf of the big ISPs. I’ve thought for many years that some of the big trade associations drag ISPs into regulatory fights, not the other way around. It seems like overreaction to new regulation has become reflexive, which is in nobody’s best interest because it automatically makes the regulatory process adversarial.

I’ve been watching the regulatory process in a lot of states over the years – not just for telecom, but for power and other utilities. A few states are almost as dysfunctional in the regulatory area as the FCC, but many are not.

It’s worth stepping back and looking at the purpose of the regulatory process. Regulation is needed in industries where industry bad actions can harm the public. States have established a regulatory process that sits between industry and the public. In many States and in some industries, the process works like it’s supposed to. There is horse trading by regulators to give companies some of the things they want in trade for concessions that benefit the public. That’s how regulation is supposed to work. However, sane regulation is not possible when every ruling against industry is taken as a life-and-death affront.

I’m doubtful we’re ever going to see a return to sane telecom regulation. As dysfunction as regulation has been for a decade, we now have courts who also think they should be making regulatory decisions. This can only make things worse.

As I said in opening this blog, none of this back and forth benefits big ISPs. They spend far too much money and energy on lobbying. They antagonize and demonize regulators. And the public grows increasingly tired of bad corporate behavior and chooses smaller ISPs when they get the option. Who other than the lobbyists is winning this never-ending regulatory battle?

Chinese Hacking of our Networks

It seems like there is more disturbing news every day about Chinese infiltration of our telecommunications networks. A recent headline said that nine large ISPs have now been infiltrated.

Tom Wheeler, a previous Chairman of the FCC, recently wrote an article for the Brookings Institute that speculates that the ability of the Chinese to infiltrate our networks stems back to decisions made decades ago that have never been updated for the modern world of sophisticated hacking.

Wheeler points to the 30-year-old Communications Assistance for Law Enforcement Act (CALEA) that created a backdoor into telecommunications networks so that the FBI and others could wiretap suspected terrorist activity. This is not necessarily how Chinese hackers are gaining access to our networks, but having this backdoor it is an example of the neglect that has been paid to our networks over the years.

Wheeler describes how he participated in the negotiations between law enforcement and the industry while he was the head of CTIA – the Cellular Telecommunications and Internet  Association. At the time, law enforcement was concerned about the rapid evolution of the analog public switched telephone network (PSTN) to digital and wanted to make sure that it had a way to track bad actors regardless of the technology being used.

Over the ensuring decades, the FCC started the process several times of talking about dismantling the old PSTN, but there was never enough enthusiasm or interest among carriers to make it happen. The PSTN is still very much alive and provides an entry point into every telecom company network.

There was also not much emphasis over the years of demanding strong security measures for the newer digital technologies like VoIP. Nobody envisioned a world where foreign governments would devote significant efforts to infiltrate each other’s networks.

Wheeler also pointed to the new Open Radio Access Network (O-RAN) technology being put into place inside cellular networks. O-RAN is a new technical standard that seeks to make it possible for multiple vendors and technologies to provide equipment for the cellular industry instead of the small monopoly of vendors in this space worldwide. O-RAN is based on open-source code that will allow for cheap hardware. Wheeler points out that, while this is great for the worldwide cellular industry, it’s hard to enforce security with open-source software. A recent report from the European Union warns that O-RAN will increase the number of security risks for 5G networks.

Wheeler notes that U.S. carriers and law-enforcement seems to have been blindsided by the ability of Chinese hackers to exploit our networks. He says that his FCC started the process of creating cybersecurity standards for telecom networks, but that carriers resisted the cost of tackling the issue. The Ajit Pai FCC went so far as to cancel the effort create cybersecurity rules.

The Department of Homeland Security established the Cybersecurity and Infrastructure Security Agency (CISA) to tackle the issue, but that agency has no regulatory authority to force carriers to comply with its efforts.

The FCC and other parts of the government are now rushing to try to find a solution for the Chinese hacking, and we can expect new requirements soon from the FCC or elsewhere in the federal government. And maybe we will finally dismantle the TDM-based PSTN.

The Ability of the FCC to Issue Fines

We are definitely entering into a new era in regulation. Verizon, AT&T, and T-Mobile are disputing the FCC’s ability to levy fines on them. The fines in question all stem from an FCC action to penalize the carriers for selling customer location data to aggregators. This data allows marketers to become intimately knowledgeable about where people spend their time every day. In the majority of cases, the carriers did not get permission from customers to share their data.

The carriers have all appealed the FCC action, and as is becoming a normal practice, each carrier filed an appeal in a different court. Verizon was fined $46.9 million and filed a brief in the appeal suit in the U.S. Second Court of Appeals. AT&T was fined $57.3 million and filed a brief in the Fifth Circuit. T-Mobile (including a fine against Sprint) was fined $80.1 million and is appealing in the DC Circuit Court of Appeals.

The FCC started the process of assessing the fines under Chairman Ajit Pai, who proposed the fines and said the carriers’ actions are a violation of customer privacy. The FCC under Chairperson Jessica Rosenworcel finalized the fines. Sharing customer data came to light when a sheriff in Missouri was openly using a location-finding service to track the people’s location. The sheriff obtained the data from Securus, a telecom provider that specializes in telecom services for jails and prisons. The FCC said that even after the carriers were made aware of the violation of customer privacy, they continued to sell the location information. The facts in the cases are a bit messy due to Securus’s role in the transactions and statute of limitations.

The three carriers are making roughly the same basic arguments. Verizon claims that the FCC overstepped its authority to enforce issues related to consumer data privacy. Of more interest is that AT&T and Verizon are both arguing that the Supreme Court’s ruling in Securities and Exchange Commission v. Jarkesy means that the FCC has no ability to levy fines and that the companies are entitled to a jury trial. It’s going to take lawsuits like this to define the limit on administrative agencies like the FCC to impose fines on anybody.

There is also a chance that the FCC could stop fighting for the fines. Proposed FCC Chairman Brendon Carr originally dissented against issuing the fines. It’s possible that the FCC could drop its opposition to the suits, which could stop the legal process.

The carriers must be hoping the suits get dropped. This does not seem an issue that the carriers would ever want to take to a jury. It’s not hard to picture a jury – on which every member likely has a cellphone – imposing much larger penalties on the carriers. I suspect most people are uncomfortable with the idea of their cellular carrier selling details of their daily movements to companies they never heard of. It’s not hard to imagine numerous ways that companies could misuse location data to harm people.

If these cases don’t make it to fruition, the courts are going to have to further test the idea in other suits that administrative agencies can’t impose fines. For now, the ability for the FCC to impose fines is in hanging in limbo.

Big ISPs Argue Against Regulation

Big ISPs have been using the same arguments against being regulated for the last decade. These arguments were used to justify killing Title II regulation under the Ajit Pai FCC and have been resurrected today to try to get Congress to override the FCC’s decision to reimpose broadband regulation. From my perspective, their arguments have gotten stale and out of touch with the way the market really operates. Consider the four major arguments big ISPs make against regulation.

Prices are Down. The big ISP trade associations have been telling the public for years that broadband prices have been falling in ‘real terms’. But anybody buying broadband from a cable company over the last decade knows otherwise. Big cable companies have raised prices year after year at a rate faster than inflation. The ISP argument rests on slight of hand that measures broadband price per megabit of speed. By that logic, when the cable companies unilaterally increased download speeds a few years ago from 100 Mbps to 200 Mbps, customers saw an instant 50% rate reduction. In ‘real terms’, that customer undoubtably got another rate increase that same year and paid more for the faster speed.

If you wonder how they can make this argument when people realize it’s not true, this argument is not aimed at the general public who pays the ever-higher rates but is a lobbying tool to give politicians a flimsy excuse for supporting large ISPs.

Broadband Investment has Accelerated. The big ISPs are peddling the story that having no broadband regulations spurs ISPs to invest more. They point to broadband investments made since Ajit Pai killed Title II regulation. The trouble is that there is no real-world evidence that lack of regulation had any impact on ISP investments. I work with or know many ISPs who are currently expanding fiber networks. I’ve never heard one of them talk about regulation or lack of regulation. Most ISPs see regulation as a minor nuisance that doesn’t cost much, and it’s not an issue that impacts how they operate the business. Carriers build last-mile fiber because they and their financial backers believe there is an opportunity to compete against cable companies and their inflated $100 broadband (oops, I thought prices were down).

Consider the big telcos that have been investing heavily in fiber. I listen to and read their announcements of quarterly earnings and track speeches given by their CEOs. These companies are investing in fiber for their survival. The copper networks are dead and dying, and fiber is their only path forward.

Cable companies are investing in faster networks far sooner than they had planned to. They are reacting to the fact that customers now believe that fiber is a better technology, and because lower-priced fiber and FWA companies are taking their customers.

Wireless companies made a sizable investment in 5G but quickly pared that back investment far below announced intentions when they realized that people like faster cellular speeds but aren’t willing to pay more for 5G features.

I don’t think there is any evidence that any of these ISPs worried about regulation when making these decisions. If they did, then investor calls and annual reports would be full of concerns about regulation – but they aren’t.

Competition Has Intensified. This is the same argument as the one above, just stated in different words. There is more competition as ISPs are building fiber and wireless networks to compete against the cable monopolies. However, it’s worth noting that the big ISP industry has overstated the case for the presence of competition. For example, FCC Commissioner Brandon Carr said earlier this year that 295 million Americans now have access to at least two high-speed ISPs. He’s relying on FCC mapping data to make that statement, but we all know the FCC broadband maps have a lot over overstated speed claims. There are a lot of ISPs claiming exactly 100/20 Mbps capability in the FCC maps that can’t deliver that speed. A huge number of broadband customers do not believe they have a choice of fast ISPs.

Internet Speeds are Up. Speeds are up for two different reasons. First, every major broadband technology has seen big improvements in the underlying technology. We’re now talking about 10-gigabit fiber speeds in the home. Fixed wireless radios have gotten much faster also aided by better bands of spectrum. Cellular speeds are way up.

One of the primary reasons for faster average broadband speeds is that the public demand for faster speeds is up. One-third of all U.S. households now subscribe to gigabit broadband, even when they have options to buy slower speeds. More than half of all homes buy broadband from cable companies. While we’re on the cusp of seeing cable companies increase network speed capacity, most of the faster speeds being delivered by cable companies come because of customers subscribing to faster speed tiers.

The big ISPs have been so steadfast in making these claims that I’ve taken the time every few years to see if these claims are somehow true. There is some truth in all of their claims except for lower prices – but I can’t find any evidence that regulation has anything to do with the changes over time in competition, broadband speeds, or broadband investment.

Unpacking the Net Neutrality Order

Today’s blog provides a short summary of the FCC’s new Order that reinstates Title II authority and net neutrality. It’s a monster order of 434 pages and 2,921 comments.

Following are my key takeaways from the Order:

  • A large part of the Order reinstates nearly the same Title II rules back that were vacated by the Ajit Pai FCC that killed Title II authority.
  • For those of you who need a new acronym, the Order refers to broadband as BIAS (broadband Internet Access Service). ISPs are now BIAS providers, an unfortunate acronym.
  • The Order reinstated Title II authority over BIAS services – meaning broadband is considered to be a telecommunications service, not an information service.
  • The FCC granted itself new and expanded authority to defend national security. It notes that it has taken actions related to national security in recent years that would have been stronger if based on the new authority described in this Order.
  • The FCC also described its role in addressing cybersecurity issues.
  • The FCC says Title II authority gives it more tools to deal with network resiliency and reliability related to natural disasters or malicious interference. The Order gives it authority to make ISPs participate in the Mandatory Disaster Response Initiative (DIRS).
  • The Order reinstates privacy and data security rules under Section 222 rules that have only been applied to voice services.
  • The FCC thinks the Order gives it the authority to develop rules that apply to ISPs that serve multi-dwelling units – a topic being explored in a different FCC proceeding.
  • The FCC says the Order extends opportunities to ISPs who provide broadband-only and no other services that are under FCC jurisdiction. That should help such ISPs for issues like attaching to poles. It also allows such ISPs to participate in Universal Service Fund support plans.
  • The FCC thinks the order gives it the authority to require ISPs to provide better access for people with disabilities.
  • The Order clarifies that specialized services at the networks edge are not considered to be broadband, with examples like the networks built inside a large enterprise. Broadband edge services provided by premise operators, like broadband at coffee shops, universities, bookstores, and libraries are also not regulated. Content delivery services, VPNs, web hosting, and data storage services are also not regulated.
  • The FCC says that services like peering, traffic exchange, and interconnection fall under Title II authority.
  • The FCC took on expanded authority to preempt States that want to regulate broadband. For now, the FCC is not preempting the California net neutrality rules.
  • The FCC specifically decided not to expand contributions to the Universal Service Fund to include broadband. There has been a lot of lobbying to have the FCC pick up the expiring ACP program, and this shut that door.
  • The FCC went out of its way to say that it is not going to engage in rate regulation. This is the big bogeyman that giant ISPs have said would come with regulation – and for now, the FCC is not invoking any authority over rates, but admits that it has the authority to do so.
  • Of course, the Order is adopting all of the rules referred to as net neutrality. These are the rules that prohibit ISPs from blocking or throttling traffic or engaging in paid prioritization. This is not the main thrust of the Order and didn’t get discussed until page 264.
  • The FCC is reinstating the transparency rules for ISPs that were first put into place in 2015. Under these rules, ISPs must publicly disclose accurate information to customers involving network management practices, network performance, prices, and other information that customers rely on to buy broadband. The transparency requirements go significantly beyond what is required for the broadband labels. For now, these rules will only apply to ISPs with more than 100,000 customers.
  • The Order reinstates both the informal and formal complaint process where consumers can lodge complaints against ISP practices, and ISPs can ask the FCC to intervene in carrier disputes.
  • The Order reminds ISPs that it has the ability to enforce broadband regulations using fines or other tools at its disposal.

Protecting Broadband Customer Data

At the end of July, the FCC proposed a $20 million penalty against Q Link and Hello Mobile for not complying with the Customer Propriety Network Information (CPNI). The FCC concluded that the two companies violated the CPNI rules when they failed to protect confidential user data. The companies both had security flaws in their apps that allowed outside access to customer account information.

Today’s blog is not talking about these two carriers, but their security measures must be terrible to invite fines of that magnitude. Today’s blog will use these fines to highlight that there are still stringent privacy rules in place for voice providers, but nothing similar for broadband. Other than perhaps invoking an investigation from the Federal Trade Commission for allowing leaks of broadband customer information, there are no specific prohibitions in place to stop ISPs from misusing customer data.

There is an interesting history of regulations for the protection of broadband customer information. The FCC, under Chairman Tom Wheeler, had implemented CPNI rules for broadband in 2016 along with other broadband regulations like net neutrality. These regulations went into effect near the end of 2016 and included a provision to allow customers to opt in or out of allowing an ISP to use and share their personal data.

In 2017, Congress eliminated the CPNI protections for broadband in response to a request by FCC Chairman Ajit Pai. Pai argued that it wasn’t fair to enforce privacy rules on big ISPs that weren’t also required for web companies like Google and Facebook. He also argued that CPNI rules made no sense after the Pai FCC had eliminated Title II regulation, which had declared that broadband is considered to be an information service and not a telecommunications service. Congress passed the Congressional Rule Act that eliminated the CPNI requirement along with other broadband regulations, and the FCC implemented the change in September 2017.

This has resulted in an unusual regulatory environment where two cellular carriers can be heavily penalized for not protecting customer data while ISPs cannot.

Telephone companies routinely capture details of customer calling – who you call and who calls you. This is familiar to anybody who’s seen a TV crime show since one of the first things detectives routinely do is to ask to see telephone calling records for a suspect. Telephone companies can’t release this information without a warrant. CPNI rules also require phone companies to keep other customer data secure, such as billing records, credit card numbers, etc. Telephone companies are even prohibited from marketing their own products to customers if a customer opts out of such marketing.

The 2016 privacy rules that were in place for only a short time implemented the same sort of privacy rules as voice, but customers were also given the choice to allow or deny access to their records. ISPs gather a lot more data about customers than telephone companies. For example, an ISP knows every web page you have visited since they control the DNS routing that connects you to websites. There are numerous other things an ISP can know about a customer if they choose to look deeper into the packets between users and websites.

ISPs I know aren’t worried about these issues because they don’t share customer information. They don’t record details of customer broadband transactions, and they try hard to keep information like credit card numbers safe from hackers. But I don’t think anybody believes the largest ISPs when they say that they don’t monetize information from customer data, particularly since, with current rules, there is no restriction against them doing so. The big ISPs don’t want any restrictions on what they do with customer data and any revenue streams that might come from selling data, and in today’s regulatory world, they are largely getting what they want.

Revisiting the Impact of Killing Net Neutrality

Ajit Pai recently wrote an article in the National Review where he talks about how his decision as head of the FCC to repeal net neutrality was the right one. He goes on to claim that repealing net neutrality was the driver behind the current boom in building fiber and upgrading other broadband technologies. He contrasts the progress of broadband in the U.S. with Europe and says that the FCC’s action is the primary reason we are seeing a fiber boom in the U.S.

He points out that his opponents who wanted to keep net neutrality made all sorts of crazy claims about how killing net neutrality would mean killing most of what people like about the Internet. He’s right that the arguments for keeping net neutrality got wrapped into politics, and most of the predicted consequences of ending net neutrality were exaggerated by those in favor of net neutrality. But the claims of the benefits for killing net neutrality were also badly exaggerated by the big carriers.

Why is he writing this now? With the possibility of seating a fifth Commissioner, he knows that the issue of reinstating net neutrality and Title II authority is going to be raised at the FCC. Killing net neutrality was his crowning achievement at the FCC, and he’s defending it as a way to lobby against bringing back net neutrality. I think we’re going to see a lot of this kind of rhetoric this year about how repealing net neutrality was the right thing to do. The big ISPs will be repeating the same rhetoric being told by Pai.

But Pai is not telling the real story. Industry insiders and experts didn’t expect much change to come from repealing net neutrality. The CEOS of all of the big cable companies admitted that keeping or killing net neutrality would have almost no impact on their businesses.

The real purpose of killing net neutrality was to kill Title II authority over broadband. That is an esoteric policy wonk issue and rarely got discussed during the debate. The Ajit Pai FCC gave up all rights of the agency to regulate broadband except for a few rules that are mandated by Congress. While there was a huge noise on both sides of the argument about killing net neutrality, the big ISPs only cared about killing regulation. That was the number one agenda item for Ajit Pai, and he handed the big ISPs everything on their wish list. If you want to understand the net neutrality issue from the big ISP perspective, substitute the word regulation for net neutrality every time they talk about the topic.

Pai cannot say with a straight face that there have been no repercussions about the end of broadband regulation. Consider Comcast and Charter, the two largest ISPs that together have over half of the broadband market. Since the end of Title II regulation, Comcast has raised rates for basic broadband to around $100, Charter is over $90 and is in the process of catching up to the Comcast rates.

At the same time, the FCC dropped all semblance of representing the public. The FCC complaint process for broadband customers might as well not even exist since nothing happens when a customer complains about mistreatment by an ISP.

Pai is taking credit for the boom in broadband competition. I’ve been advising ISPs on their expansion plans for decades, both before and after the death of Title II regulation, and I’ve never heard an ISP consider regulation as part of any discussion of expanding to a new market. Perhaps Pai can take credit for making it easier for others to compete against big cable companies since they have been free to raise rates at will – but I don’t think that’s something he wants to claim out loud. The real impetus for broadband competition came from the pandemic when many millions of customers found out that their broadband was inadequate. That experience has convinced people that they need fiber broadband and faster speeds, and fiber overbuilders are reacting to that market demand. The cable companies are rushing to upgrade speeds in response to the pressure from fiber competition.

None of the fiber boom is due to killing regulation. All that killing regulation did was allow big ISPs to run roughshod over customers without consequences. The FCC can’t even pull ISPs in to talk about their bad broadband behavior.

Ajit Pai’s accomplishment was not killing net neutrality – it was handing the reins of the broadband business to the big ISPs by allowing the ultimate regulatory capture of having the FCC walk away from its regulatory responsibilities. I’m sure that Pai is quite happy with that outcome, but you’ll never see Pai talking about what really happened.

Is Broadband Regulation Dead?

I ask this question after Gigi Sohn recently withdrew her name from consideration as an FCC Commissioner. It’s been obvious for a long time that the Senate was never going to approve her nomination. Some Senators tried to blame their reluctance to approve on Sohn’s history as an advocate for the public over big corporations.

But the objections to Sohn were all the kinds of smokescreens that politicians use to not admit the real reason they opposed the nomination. Gigi Sohn is not going to be the next Commissioner because she is in favor of regulating broadband and the public airwaves. The big ISPs and the large broadcasting companies (some companies which are both) have been lobbying hard against the Sohn nomination since it was first announced. These giant corporations don’t want a third Democratic Commissioner who is pro-regulation.

In the past, the party that held the White House was able to nominate regulators to the FCC and other regulatory agencies that reflected the philosophies of their political party. That’s been a given in Washington DC, and agencies like the FCC have bounced back and forth between different concepts of what it means to regulate according to which party controlled the White House.

But I think the failure to approve Sohn breaks the historical convention that lets the political party in power decide who to add as regulators. I predict this will not end with this failed nomination. Unless the Senate gets a larger majority for one of the parties, I have a hard time seeing any Senate that is going to approve a fifth FCC Commissioner. If Republicans win the next presidential race, their nominee for the fifth Commissioner slot will also likely have no chance of getting approved.

The primary reason for this is that votes for an FCC Commissioner are no longer purely along party lines. The large ISPs and broadcasters make huge contributions to Senators for the very purpose of influencing this kind of issue. That’s not to say that there will never be a fifth Commissioner, but rejecting this nomination means it’s going to be a lot harder in the future to seat FCC Commissioners who embrace the position of the political party in power, like was done by Ajit Pai and likely would have been done by Gigi Sohn.

I think we’re now seeing the textbook example of regulatory capture. That’s an economic principle that describes a situation where regulatory agencies are dominated by the industries they are supposed to be regulating. Economic theory says that it’s necessary to regulate any industry where a handful of large players control the market. Good regulation is not opposed to the large corporations being regulated but should strike a balance between what’s good for the industry and what’s good for the public. In a perfectly regulated industry, both the industry and the public should be miffed at regulators for not fully supporting their issues.

The concept of regulatory capture was proposed in the 1970s by George Stigler, a Nobel prize-winning economist. He outlined the characteristics of regulatory capture that describes the broadband industry to a tee.

  • Regulated industries devote a large budget to influence regulators at the federal, state, and local levels. It’s typical that citizens don’t have the wherewithal to effectively lobby the public’s side of issues.
  • Regulators tend to come from the regulated industry, and they tend to take advantage of the revolving door to return to industry at the end of their stint as a regulator.
  • In the extreme cases of regulatory capture, the incumbents are deregulated from any onerous regulations while new market entrants must jump through high hoops.

The FCC is a textbook example of a captured regulator. The FCC under Ajit Pai went so far as to deregulate broadband and to wash the FCC’s hands of broadband as much as possible by theoretically passing the little remaining regulation to the FTC. It’s hard to imagine an FCC more under the sway of the broadband industry than the last one.

There is no real fix for regulatory capture other than a loud public outcry to bring back strong regulation. But that’s never going to happen when regulatory capture is so complete so that it’s impossible to even seat a fifth Commissioner.

Regulatory Capture

Regulatory capture is an economic principle that describes a situation where regulatory agencies are dominated by the industries they are supposed to be regulating. Economic theory predicts that regulators caught by regulatory capture act in ways that protect incumbent providers instead of the public interest. Unfortunately, the broadband industry is one of the best (or worst) examples of regulatory capture.

Economic theory says that it’s necessary to regulate any industry where a handful of large players control the market. Good regulation is not supposed to be antagonistic to large corporations but should strike a balance between what’s good for the industry and what’s good for the public. In a perfectly regulated industry, both the industry and the public should be miffed at regulators for not fully supporting their issues.

The concept of regulatory capture was proposed in the 1970s by George Stigler, a Nobel prize-winning economist. He described the characteristics of regulatory capture as follows. His list matches what’s happening in the broadband industry to a tee.

  • Regulated industries devote a large budget to influence regulators at the federal, state, and local levels. It’s typical that citizens don’t have the wherewithal to effectively lobby the public’s side of issues.
  • Regulators tend to come from the regulated industry, and they tend to take advantage of the revolving door to return to industry at the end of their stint as a regulator.
  • Regulation from the legislative process tends to become corrupt, such as when politicians vote for bills they don’t understand in return for contributions. Actual regulators can also be corrupt – but often regulators side with the industry over the public because they have an industry perspective.
  • In the extreme case of regulatory capture, the incumbents are deregulated from any onerous regulations while new market entrants have hoops to jump through.

There are many examples throughout history of economic cartels that successfully captured regulators. For example, the railroads in the 19th century ran roughshod over the economy and regulators. Unfortunately, the best current example of regulatory capture is the broadband industry, perhaps closely followed by big agriculture and big pharmaceuticals. There is no question that the power of the broadband industry is concentrated among only a few firms. Comcast, Charter, AT&T, and Verizon together serve 75% of all broadband customers in the country.

The FCC is a textbook example of a captured regulator. The FCC under Ajit Pai went so far as to deregulate broadband and to wash the FCC’s hands of broadband as much as possible by theoretically passing the little remaining regulation to the FTC. It’s hard to imagine an FCC more under the sway of the broadband industry than the last one.

But federal regulators are only the tip of the iceberg. The large ISPs have convinced most state regulators to deregulate (or never regulate) broadband. The ISPs spend an immense amount of money in state legislatures trying to get laws passed that favor the big ISPs or that disfavor any potential competitors. The surest sign of regulatory capture is that the big ISPs are also active at the local level and pressure City and County Councils to not consider local broadband projects. There is an immense lobbying effort currently underway to dissuade local politicians from using ARPA grant money for broadband.

We don’t have to look far to see how the industry has gotten its way with regulators. The U.S. has some of the most expensive broadband in the world. Tens of millions of homes have little or no broadband. The broadband industry has the worst overall customer service among all industries- and that’s saying something. The big ISPs abuse customers in other ways such as quietly monetizing customers’ private data.

There is no real fix for regulatory capture other than a loud public outcry that brings back strong regulations. That can start at the FCC, but even that isn’t going to put a dent in the influence of the ISPs at the state and local level.

The FCC and the Digital Divide

The current FCC Chairman Ajit Pai talks a lot about his commitment to solving the digital divide and to bring broadband to everybody in the country. Chairman Pai has now made numerous visits to rural America and to poor communities and has repeatedly promised that this FCC is on board with finding broadband solutions for everyone. Yet there are numerous actions by this FCC that tell a different story.

Redefining Broadband. Last year the FCC considered changing the definition of broadband – a change which would have drastically lowered the count of households without good broadband The FCC suggested that 10/1 Mbps cellular broadband is equivalent to a 25/3 Mbps landline connection. This change would have reclassified millions of homes as having access to broadband and would have instantly ‘solved’ a huge portion of the digital divide without changing anybody’s broadband. The FCC is required by Congressional edict to set policies that bring broadband to all, and their solution was to unilaterally declare that millions of homes served with only cellular broadband needed no further FCC assistance.

The public and the industry rebelled against this suggestion and the FCC backed down. However, the FCC is required by Congress to examine the availability of broadband every year and they will have annual opportunities to redefine broadband and recalibrate the way we count those on the wrong side of the digital divide. One has to only talk to a rural household trying to run their home broadband from a tethered cellphone to understand the ridiculousness of this idea. The high cost, low data caps, slow speeds and high latency make cellular broadband an extremely expensive and unsatisfactory substitute for landline broadband. There are many people who elect to use only cellular data, but that’s not the same thing as assuming that a cellphone connection can provide enough broadband for the typical home.

Lifeline Program. This FCC seems to be trying to eliminate or greatly restrict the Lifeline program. It’s clear that Chairman Pai would like the program to go away completely and the FCC has been whittling away at the program.

First, they stopped accepting new applications for carriers that want to join the Lifeline program. I know of two municipalities that planned to expand their broadband networks to thousands of low-income homes and offer $10 – $20 broadband that would have been enabled by the $9.95 monthly Lifeline subsidy. They were dissuaded when the FCC made it clear they were not likely to approve new Lifeline providers.

The FCC also changed the rules making it hard or impossible for MVNOs (wireless resellers) from receiving the Lifeline subsidies. These companies were the primary proponents and sellers of low-cost cellular phones and data plans for low-income customers. For example, there are MVNOs that provide a low-function phone, and a limited amount of voice and data to the homeless for the $9.95 reimbursement from the Lifeline fund. There have been numerous testimonials how these phones have improved the quality of life for the homeless by providing them with access to social services and allowing them to make phone calls or texts. Blocking these carriers from Lifeline kills this kind of initiative.

The FCC also eliminated the additional $25 per month from the lifeline program that was available to low-income natives living on tribal land. Eliminating this subsidy and also restricting the Lifeline funds to only facility-based carriers is having the effect of making cellphones unaffordable in some of the poorest places in the country. Even the big cellular companies like AT&T and Verizon opposed this change to the Lifeline fund.

Eliminated Title II Regulation. Perhaps the most damaging change the FCC made was to eliminate all FCC regulation of broadband by eliminating Title II regulation. This FCC order is referred to as the net neutrality order, but there are a number of aspects of the order that have nothing to do with net neutrality.

The FCC removed itself as the watchdog on all aspects of broadband including pricing, data caps, disclosure of practices and policies, etc. The FCC instead shuttled broadband issues to the Federal Trade Commission – an agency that can punish companies which badly abuse the public, but which cannot set proactive policies.

We are poised to see big future increases in broadband prices. That’s the only way that the big monopoly ISPs can continue their historic revenue growth. The big ISPs have hit a wall with slowing numbers of new broadband customers and sinking cable TV and telephone revenues. Rising broadband prices will do more harm to universal service than any other policy. One Wall Street analyst last year suggested that Comcast’s basic broadband price ought to be $90 – something that would drive millions of homes from landline broadband. The FCC has removed themselves as broadband regulators, meaning that the big cable monopolies are going to be free to do what monopolies do and raise rates to maximize profits. Even if the FCC never directly regulates broadband prices they have many other ways to pressure big ISPs to act responsibly – but they’ve given away their regulatory authority and any regulatory leverage is gone.