Net Neutrality – What Happens Next?

I’ve been thinking some about what happens next in the industry with the fall-out from the FCC’s decision to kill net neutrality and to eliminate Title II regulation. It seems like the big ISPs have gotten everything they ever wanted in terms of having unregulated broadband. What might happen next?

I expect there to be little change in the industry in the short run. The FCC just made the ruling and there already looks like there will be a number of lawsuits against the order. It’s not unusual for courts to put FCC orders on hold until lawsuits make it through the legal system and this probably won’t be much different.

But even without the lawsuits I don’t expect to see the big ISPs make any drastic changes in the next year. There is a huge public furor over this ruling and my guess is that the ISPs don’t want to roil the public for a while. The end of net neutrality will allow the ISPs to make all sorts of changes the public will hate, such as big price increases for broadband or the introduction of draconian data caps. But I’m guessing that the ISPs are not going to do anything too drastic until the topic has settled in the public mind.

The ISPs also still have to worry about regulatory push-back. There is a good possibility over the next few election cycles that Democrats take back part or all of Congress or the administration, and reversing what this FCC just did is probably high on the Democratic wish list. Net neutrality is popular across the political spectrum and an administration that puts it back in place will likely get lauded by the public.

I think the big ISPs really made a tactical error in pushing to totally deregulate broadband. It’s easy to think that the net neutrality rules have only been around for a few years since the latest iteration was just approved in 2015. But the FCC has been discussing net neutrality since 2005 and to a large degree the big ISPs didn’t do anything too outrageous during those many years so as to invite strict regulations they didn’t want. I think the ISPs would have been far better off to have compromised and put in place a new set of rules that a future FCC might still keep.

For instance, they could have changed the rules to give them safer pricing flexibility, which is what I think they most want. But they could have kept the three basic net neutrality principles in place to mollify the public and regulators. But honestly, I don’t think big corporations are capable of constraint. The big ISPs got a friendly FCC and it seems they are going after everything on their wish list, with Title II regulation just one item on the longer list.

But over time, if some future FCC or Congress doesn’t put some version of net neutrality back in place then I think you will see all of the many things that the public feared start to come into play. There will be a lot of zero rating with content bundled with bandwidth. The ISPs will put pressure on big content providers to pay for premium access, to the detriment of smaller players and start-ups. We’ll see significant price increases and billing practices like data caps that make the ISPs more money.

And a lot of this isn’t going to happen due to large strategic decisions by corporate management at the ISPs. That’s not how huge corporations work. A lot of changes that would have violated the previous net neutrality rules will actually come as the result of lower-level management making decisions. Marketing people will promote bundled packages if they think it will increase sales. Divisional VPs will negotiate tough terms with content providers if doing so will increase their bonuses. In the recent past one has to think that many discussions of new ideas inside of ISPs included somebody asking if the new ideas violate net neutrality. But with net neutrality out of the picture that question will no longer be asked and the desire for bonuses and profits will drive the people at the ISPs to make decisions that are good for the company while not necessarily good for the public or the industry. That’s the main reason why we regulate big companies, because they have a natural tendency to favor profit over almost everything else.

My own personal prediction is that we are not done with net neutrality and that a future administration is going to bring it back in some manner. And that is probably the worst possible outcome for the big ISPs. It’s ironic that the CEOs of all of the big ISPs said that they could live with the three principles of net neutrality – and I believed them. But, when they were given the chance, they still could not help themselves from lobbying to kill it. Uncertainty is far more costly to big corporations than regulatory rules they don’t like. And my guess is we might not be done with this topic for quite some time. I just hope we don’t get into a pattern of yoyo decisions out of each future administration.

FCC and FTC Divvy up Broadband Regulation

The FCC voted last Thursday to reverse the Net Neutrality order that had been put into place by the previous Tom Wheeler FCC. This action eliminates the use of Title II to regulate broadband. In order to get rid of Title II authority the FCC believes it has to relinquish some of its regulatory role today and to move certain regulatory functions to the Federal Trade Commission. To effectuate this shift the two Commissions have agreed to a Memorandum of Understanding (MOU) that defines the ongoing regulatory and enforcement responsibility of each agency related to broadband.

The Federal Trade Commission will renew investigating ISPs as they do other large businesses in the country. They will investigate complaints made against the companies for practices that the agency deems to be unfair or deceptive. The agency has undertaken this kind of investigation in the past and has cited and fined a few big ISPs for various deceptive pricing and billing practices. In this role the FTC could elect to tackle topics that were part of net neutrality such as anticompetitive blocking of Internet traffic, throttling customer broadband or paid prioritization practices. While the three legs of net neutrality would not explicitly be part of the FTCs responsibilities, they should be free to investigate practices that harm the public. The FTC would also take back jurisdiction over ISP privacy practices.

It appears that dropping the Title II regulatory regime allows the FTC to again regulate ISPs. Since the FCC approved Title II regulation, the big ISPs have argued that the FTC is prohibited by its charter to regulate common carriers. But since broadband providers are no longer considered to be common carriers it would seem to open the door to the FTC again.

The big difference in a shift to FTC regulation is that anything they do is done retroactively. They look at consumer complaints and then prosecute the worst abuses they find in multiple industries. But their rules often come years after abuse by companies and their rulings only generally affect one company at a time. Other ISPs might shift behavior due to an FTC enforcement action, but they are not required to do so. This is a drastic change from having a set of proactive regulations in rules in place that define acceptable ISP behavior.

The FCC will be giving up most regulatory oversight of broadband. There are still a few broadband rules that fall under FCC jurisdiction. For example, there are still rules in place that require ISPs to disclose information about their products, data speeds, etc., to customers. The FCC will still be monitoring and regulating these notices. There are also regulations that will remain in place because they were put in place by laws that can’t be reversed by the FCC. As an example, the FCC will still oversee CALEA compliance, where ISPs are required to provide access to broadband records to law enforcement.

Probably the biggest regulatory gray area left is cellular broadband. While broadband in general is now largely unregulated there are still numerous regulations about cellular service that remain in place. We’ll have to see how the FCC deals with any conflicts between old cellular rules and their desire to unregulated broadband.

To a large extent there will be little regulation of broadband and it is now an unregulated business line. This is a bit ironic in that broadband has grown to become the most important telecommunications product, while the many regulations on the waning product lines of telephone and cable TV still remain in place.

The FCC acknowledges that its technical staff best understands the ISP industry and has promised in the MOU to make FCC staff available to the FTC as needed. It will be interesting to see how that works in practice since some of the FTC investigations drag on for years. I foresee budgetary issues making major collaboration impractical.

The bottom line is that this MOU makes it clear that broadband is largely deregulated. The FTC can step in and punish ISPs that engage in fraudulent and unfair practices. But otherwise nobody will be monitoring or enforcing any regulations on broadband.

Portugal and Net Neutrality

Last week I talked about FCC Chairman Ajit Pai’s list of myths concerning net neutrality. One of the ‘myths’ he listed is: Internet service will be provided in bundles like cable television as has happened in Portugal.

This observation has been widely repeated on social media and has been used as a warning of what would happen to us Internet access without net neutrality. The social media postings have included a screen shot of the many options of ‘bundles’ available from the mobile carrier Meo in Portugal. Taken out of context this looks exactly like mobile data bundles.

Meo offers various packages of well-known web applications that customers can buy to opt the applications from monthly data caps. For example, there is a video bundle that includes Netflix, YouTube, Hulu, ESPN, Joost and TV.Com. There are a number of similar bundles like the social bundle that includes Facebook and Twitter, or the shopping bundle that contains Amazon and eBay.

But the reality is that these bundles are similar to the zero-rating done by cellular carriers in the US. The base product from Meo doesn’t block any use of cellular data. These ‘bundles’ are voluntary add-ons and allow a customer to exclude the various packaged content from monthly data caps. If a customer uses a lot of social media, for example, they can exclude this usage from monthly data caps by paying a monthly fee of approximately $5.

The last FCC headed by Tom Wheeler took a look at zero-rating practices here in the US. They ruled that the zero-ratings by AT&T and Verizon violated net neutrality because each carrier has bundled in their own content. But the FCC found that T-Mobile did not violate net neutrality when they included content from others in their zero-rating package. The current FCC has not followed through on those rulings and has taken no action against AT&T or Verizon.

The Meo bundles are similar to the T-Mobile zero-rating packages, with the difference being that the Meo bundles are voluntary while T-Mobile’s are built into the base product. The FCC is correct in pointing out that Portugal did not create mobile ‘bundles’ that are similar to packages of cable TV channels. If anything, I see these bundles as insurance – in effect, customers spend a small amount up front to avoid larger data overages later.

It is also worth noting that Portugal is a member of the European Union which has a strong set of net neutrality rules. But the EU is obviously struggling with zero-rating in the same way we are in the US. The real question this raises is if zero-rating is really a violation of net neutrality. It’s certainly something that customers like. As long as we have stingy monthly data caps then customers are going to like the idea of excusing their most popular apps from measurement against those caps. If cellular carriers offered an actual unlimited data then there would be no need for zero-rating.

I disagreed with the Wheeler FCC’s ruling on T-Mobile’s zero-rating. That ruling basically said that zero-rating is okay as long as the content is not owned by the cellular carrier. This ignores that fact that zero-rating of any kind has a long-term negative impact on competition. T-Mobile is like Meo in that they exclude the most popular web applications from data ca measurement. One of the major principles of net neutrality is to not favor any Internet traffic, and by definition, zero-rating favors the most popular apps over newer or less popular apps.

If enough customers participate in zero-rating the popular apps will maintain prominence over start-ups apps due to the fact that customers can view them for free. This is not the same thing as paid prioritization. That would occur if Netflix was to pay T-Mobile to exclude their app from data caps. That would clearly give Netflix an advantage over other video content. But voluntary zero-ratings by the cellular carriers has the exact same market impact as paid prioritization

None of this is going to matter, though, if the FCC kills Title II regulations. At that point not only will zero-rating be allowed in all forms, but ISPs will be able ask content payers for payment to prioritize their content. ISPs will be able to create Internet bundles that are exactly like cable bundles and that only allow access to certain content. And cellular carriers like AT&T or Comcast are going to be free to bundle in their own video content. It’s ironic that Chairman Pai used this as an example of an Internet myth, because killing net neutrality will make this ‘myth’ come true.

The Impact of the End of Net Neutrality

Charter has given us a peek at how the big ISPs are likely to take advantage of the end of net neutrality. Charter is in the middle of a lawsuit filed by New York Attorney General Eric Schneiderman. The suit attacks Charter for promising to deliver Internet speeds as part of the purchase of Time Warner that the company knew it couldn’t deliver. There are other allegations in the suit and I covered it in this earlier blog.

While the FCC won’t formally vote to end Title II regulation for another week it’s largely a foregone conclusion that they will do so. Charter is assuming that it’s a done deal and they have filed paperwork trying to dismiss the New York lawsuit based upon the assumption that the FCC will end net neutrality.

Charter has sent a letter to the courts and is making the following claims:

Federal law preempts state and local laws. Charter is arguing that the planned FCC order will preempt state and local laws concerning broadband. This is an aspect of the proposed FCC order that has not gotten much attention. The proposed FCC order contains a long discussion that talks about the role of federal versus state regulations and comes to the conclusion that federal low should override state and local broadband laws. It’s sort of an ironic position for the FCC to take since they are actually eliminating the FCC’s role in regulating broadband – but they interpret that to mean that states and localities also have no right to regulate broadband.

Charter specifically says that New York can’t criticize the company for delivering slow Internet speeds. They argue that since the FCC will no longer regulate broadband and Internet speeds that New York also does not have the right to do so.

Paid Prioritization. Charter is also arguing that New York has no right to regulate paid prioritization. This is one of the three principles of net neutrality that currently is in effect. Charter is arguing that the FCC’s proposed ‘light-touch’ regulation means that the FCC will be eliminating the net neutrality principles and this means that these principles can no longer be used to judge Charter’s products.

The New York lawsuit had attacked Charter for not maintaining a robust enough network that could deliver the speeds customers need. Specifically, New York alleged that people were unable to watch Netflix and that Charter’s network failures amount to throttling of the Netflix data stream.

The new FCC rules aren’t even in effect yet, but this tells a lot about how the big ISPs are viewing the change in rules. Charter wants to use these rules to protect themselves against any fines for not delivering advertised broadband speeds to customers. They also are openly acknowledging that they have no obligations against violations of the current net neutrality rules – and that they have no obligations to ever try to meet them.

Charter’s arguments in the case erase any doubt about how the big ISPs intend to act once they are not regulated. While they will probably generally try to deliver a decent broadband product, they feel under no legal obligation to do so. If you go back and look at the facts in this case you will see customers in New York who have been paying for clearly inferior broadband for years – broadband that is far slower than advertised and that is even too slow to deliver Netflix. Charter promised to fix the network issues that are causing the slow broadband, but it’s clear from the New York lawsuit that no upgrades have been implemented. Lack of broadband regulations might mean that the Charter customers in New York might never get good broadband – the company doesn’t think they have any obligation to provide it.

Charter’s response to this lawsuit largely validates all of the consumer fears that have been expressed as part of the net neutrality debate. The FCC is washing their own hands of anything having to do with broadband regulation, and are also preempting states and localities for doing anything. This leaves the consumer with no place to go to remedy, or even protest bad ISP behavior.

One hopes that the big ISPs want to deliver a decent broadband product – but the facts in this case show a blatant disregard for both customers and regulators. Charter has promised to improve the condition of the Time Warner networks as part of the merger but then failed to do so. The sad fact is that many of the customers with the shoddy Charter service have no real alternative. DSL is dying and the cable companies are becoming virtual monopolies in most of the markets in the country. If Charter prevails with these arguments it will show that there is no regulatory body with the ability to police the ISPs.

The Net Neutrality Furor

It seems pretty clear now that the FCC is going to reverse the net neutrality decision of a few years ago at their upcoming December meeting. They mechanism they will use to reverse the order is by reversing the decision to place broadband under Title II regulation. That move will take the FCC out of the business of regulating broadband, meaning that not only would net neutrality rules be reversed, but the FCC would no longer regulate things like broadband privacy. The FCC expects that washing their hands of broadband sends privacy and other issues to the Federal Trade Commission.

A lot of the public is up in arms over this FCC direction and the topic is all over the news and social media. But unfortunately, I think the public is fighting to maintain net neutrality for the wrong reasons. People seem to fear that without net neutrality that the ISPs will begin abusing their customers in dreadful ways. I’ve seen social media warnings that the end of net neutrality means that the ISPs will block or throttle any web site that is not under their economic control. People fear that the ISPs will block content they don’t like such as porn or political content they disagree with.

I have a hard time buying these arguments. The ISPs have no economic incentive to badly antagonize customers. Removing the net neutrality rules now does not mean that ISPs can’t be regulated again in the future. Congress always has the power to regulate them in any manner desired, and if the ISPs start doing crazy things some future Congress will likely react. The net neutrality rules have only been in place for a few years and the ISPs didn’t abuse customers in these feared ways before these rules. I find it unlikely that would do the extreme things that people are warning about.

But I still think people are right to support net neutrality. But the issue they should care about is not net neutrality, but the basic Title II regulation. That is the framework the FCC used as the basis for passing the net neutrality rules. These rules largely allow the FCC to regulate broadband in the same manner they have regulated telephone service. The ISPs challenged the FCC’s Title II regulations in court and the courts have upheld the FCC’s right to regulate broadband.

The ISPs hate Title II regulation, but not because it imposes the net neutrality principles. Their real fear is that the FCC will use these rules to regulate broadband prices. A lot of analysts think that the big ISPs are planning on significant rate increases over the next few years. While the Wheeler FCC said they would not regulate rates, the Title II rules grants the FCC authority to do so at any future time. And the FCC can regulate more than just prices and has the authority to regulate things like data caps.

The big ISPs have been working hard to repeal the Title II regulation due to the threat of price regulation – not because they don’t want the net neutrality principles. There are numerous quotes from the CEOs of the big ISPs saying that they could live with the net neutrality principles – and I largely believe them.

Interestingly there is already at least one ISP that is completely flouting the net neutrality rules. T-Mobile now includes Netflix for free with its cellular plans. This practice is called zero rating and is in violation of the paid prioritization principle of net neutrality. It’s likely that many T-Mobile customers won’t buy other video content since they are already getting Netflix for ‘free’. This practice clearly puts other OTT providers at a disadvantage on the T-Mobile network. And yet, I don’t hear any public outcry about T-Mobile’s practice and suspect their customers really love this feature. This is what zero net neutrality rules looks like – ISPs are likely to bundle in features that a large percentage of their customers like. But the negative consequence to this is not to directly disadvantage customers, but rather to pick winners and losers among web companies. But my guess is that the ISPs will bundle with platforms a lot of people already like and that this bundling will be largely popular, like the T-Mobile bundling of Netflix.

I honestly believe that the big ISPs are largely laughing at the public on this issue. The ISPs understand that the public has badly interpreted their real reason for attacking Title II regulation. The ISPs want the unfettered ability to raise prices. Without regulation it’s true that the ISPs could probably do the sorts of things the public is so stirred up about – but it would be bad business to do so. Can you imagine the furor if AT&T started blocking web sites? Since the ISPs and the FCC understand the real game they can brush off the public hysteria that is concentrating on the wrong issues, and they can now get down to the business of raising rates.

Industry Shorts, June 2017

Following are some topics I found of interest but which don’t justify a whole blog.

Amazon Bringing Alexa to Settop Boxes. Amazon has created a develop kit that would allow any settop box maker to integrate their voice service Alexa. The Alexa voice platform is currently supporting the popular Echo home assistant device. It’s also being integrated into some new vehicles and Amazon has made it available for integration into a whole range of home automation devices. The Amazon Alexa platform is currently ahead of the competitors at Apple, Google and Microsoft mostly due to having made the product open to developers who have already created over 10,000 applications that will work on the platform. Adding Alexa to a settop box could make it a lot easier to use the settop box as the hub for a smart home.

Comcast Tried to Shut Down anti-Comcast Website. LookingGlass Cyber Security Center, a vendor for Comcast, sent a cease-and-desist letter to the advocacy group Fight for the Future. This group is operating a website called comcastroturf.com. The advocacy group claims that Comcast has used bots to generate over a half million fake filings to the FCC in the network neutrality docket. These comments were all in favor of killing net neutrality and the group claims that Comcast used real people’s names to sign the filings, but without their permission. The website allows people to see if their name has been used. The cease-and-desist order was withdrawn after news of it got a lot of coverage in social media.

Net Neutrality Wins in Court. Not that it probably makes much difference now that the FCC is trying to undo Title II regulation, but the challenge filed by Verizon and other large ISPs against the FCC’s net neutrality decision was rejected at appeal. This affirms the ability of the FCC to use Title II rules for regulating broadband. The full U.S. Court of Appeals for the D.C. Circuit upheld an earlier court ruling that affirmed the FCC had the needed authority to implement the net neutrality decision.

Altice Buys Ad-Tech Company. Altice joins other big ISPs that want to take advantage of the end of the new FCC rules that allows ISPs to monetize customer’s private data. Altice, which is now the fourth largest US cable company after the acquisition of Cablevision, now joins the other big ISPs who have added the expertise to slice and dice customer data. Altice paid $300 million for Teads, a company specializing in targeting advertising based upon customer specific data.

Other large ISPs are already poised to take advantage of the new opportunity. For example, Verizon’s purchase of AOL and Yahoo brings this same expertise in-house. It has been widely speculated that the ISPs have been gathering customer data for many years and so are sitting on a huge treasure trove detailing customers web browsing usage, on-line purchasing habits, email and text information, and for the wireless ISPs the location data of cellphones.

Charter Rejects $100 Billion offer from Verizon. The New York Post reported that Charter rejected a purchase offer from Verizon. The Post reports that Charter thought the offer wasn’t high enough. It also came with some tax implications that would complicate the deal. Whether this particular offer is real or not, it points to the continuing consolidation of the industry ISPs, cable providers and cellular companies. The current administration is reportedly not against large mergers, so there’s no telling what other megadeals we might see over the next few years.

Top 7 Media CEOs made $343.8 Million in 2016. The CEOs of CBS, Comcast, Discovery Communications, Disney, Fox, Time Warner and Viacom collectively made a record salary last year, up 21.1% from 2015. It’s interesting in a time when the viewership of specific cable networks is dropping rapidly that the industry would be rewarding their leaders so handsomely. But all of these companies are compensating for losses of customers with continuing rate hikes for programming and most are having banner earnings.

Frontier Lays Off WV Senate President. Frontier just laid off Mitch Carmichael, the President of the Senate in West Virginia. This occurred right after the Senate passed a broadband infrastructure bill that was aimed at bringing more broadband competition to the state. The bill allows individuals or communities to create broadband cooperatives to build broadband infrastructure in areas with poor broadband coverage. Frontier is the predominant ISP in the state after its purchase of the Verizon property there. The West Virginia legislature is a part-time job that pays $20,000 per year and most legislators hold other jobs. West Virginia is at or near the bottom in most statistics concerning broadband speeds and customer penetration rates.

Net Neutrality and the Digital Divide

There is an interesting idea floating around the industry that is bound to annoy fans of net neutrality. The idea comes from Roslyn Layton who does telecom research at Aalborg University in Denmark. She served on the FCC Transition team for the new administration.

She envisions zero-rating as the best way to solve the digital divide and to finally bring Internet access to everybody. She says that after decades of not finding any other solutions that this might the only reasonable path to get Internet access to people that can’t afford a monthly subscription.

The idea is simple – there are companies who will provide an advertising-driven broadband connection for free to customers, particularly on a cellphone. It’s not hard to envision big companies like Facebook or Google sponsoring cellphone connections and providing data access to customers who would be a captive audience for their ads and content.

This idea is already working elsewhere. Facebook offers this same service in other countries today under the brand name “Free Basics.’ While it certainly costs Facebook to buy the wholesale data connections they must have done the math and figured that having a new customer on their platform is worth more than the cost. Facebook’s stated goal is to serve most of the billions of people on earth and this is a good way to add a lot of customers. With Free basics customers get full use of the Facebook platform along with the basic ability to surf the web. However, the free basic service does not allow a user to freely watch streaming video or to do other data-intensive activities that are not part of the Facebook universe – it’s not an unlimited data plan. I can remember similar products in the US back in the dial-up days when several dial-up providers that gave free connections as long as the customers didn’t mind being bombarded by ads.

There are certainly upsides to this. Such a service would provide enough bandwidth for people to use the web for the basics like hunting for a job or doing school work. And users would get unlimited use of the Facebook platform for functions such as messaging or watching Facebook-sponsored video and content. There are still a substantial number of people in the US who can’t afford a broadband subscription and this would provide a basic level of broadband to anybody willing to deal with the ad-heavy environment.

But there are downsides. This idea violates net neutrality. Even if the current FCC does away with net neutrality one has to think that a future FCC will institute something similar. But even with net neutrality rules in place the FCC could make an exception for a service that tackles the digital divide.

The real downside is that this is not the same as the real internet access that others enjoy. Users would be largely trapped inside whatever platform sponsors their product. That could be Facebook or Google, but it could also be an organization with a social or political agenda. Anybody using this kind of free platform would have something less than unfettered Internet access, and they would be limited to whatever the platform sponsor allows them to see or do outside the base platform. At best this could be called curated Internet access, but realistically it’s a platform to give sponsors unlimited access to users.

But I think we have to be realistic that nobody has yet found a solution to the digital divide. The FCC’s Lifeline program barely makes a dent in it. And I’m not aware of any major ISP who has ever found any mechanism to solve the digital divide issue.

While Facebook offers this in many countries around the globe they received massive pushback when they tried to bring this to India. The Indian government did not want a class of people given a clearly inferior class of Internet connectivity. But in India the government is working hard themselves to solve the digital divide. But there is nobody in the US giving the issue any more than lip service. The issue has been with us since the dial-up days and there has been little progress in the decades since then.

I read some persuasive articles a few years ago when the net neutrality debate was being discussed about this kind of product. There were arguments made that there would be long-term negative ramifications from having a second-class kind of Internet access. The articles worried about the underlying sponsors heavily influencing people with their particular agenda.

But on the flip side, somebody who doesn’t have broadband access probably thinks this is a great idea. It’s unrealistic to think that people have adequate broadband access when they can only get it at the library or a coffee shop. For broadband to benefit somebody it needs to be available when and where they need to use it.

I lean towards thinking this as an idea worth trying. I would hope that there would be more than one or two companies willing to sponsor this, in which case any provider who is too obnoxious or restrictive would not retain customers. People who go to sites like Facebook today are already voluntarily subjected to ads, so this doesn’t seem like too steep of a price to pay to get more people connected to the Internet.

What is ‘Light Touch’ Regulation?

The new FCC Commissioner Ajit Pai has made several speeches in the last month talking about returning to ‘light-touch regulation’ of the big ISPs. He is opposed to using Title II regulation to regulate ISPs and wants to return to what we had in place before that.

His argument is that the Internet has grown and thrived under the prior way that it was regulated. And he has a point – the Internet has largely been unregulated since its inception. And in many ways the industry has even received preferential regulatory treatment such as the way that Congress has repeatedly exempted broadband services from taxes.

It’s certainly hard to argue with the fact that the Internet has thrived. It’s a little harder to draw the conclusion that light regulation was the cause for this, as the Internet has primarily grown because people love the online content they find there.

But we are now at a different point in the broadband industry than we were when it was in its infancy. Consider the following:

  • The vast majority of homes now have broadband. While the industry is still adding customers there aren’t that many more households that can get broadband that don’t have it.
  • Look back just ten years ago and there was a lot more competition for broadband. In 2007 cable modems and DSL served roughly the same number of customers with similar products in terms of speed. But today cable broadband has become a near-monopoly in most markets.
  • One of the drivers towards implementing net neutrality was the explosive growth of video. Just a few years ago there were many reports of the big ISPs slowing down Netflix and other video traffic. The ISPs were trying to force video providers to pay a premium price to gain access to their networks.
  • While broadband prices have held reasonably stable for a decade, both the cable TV and voice products of the large ISPs are under fire and it’s widely expected that the ISPs will have to start raising broadband rates every year to meet earnings expectations.
  • The ISPs have changed a lot over the last decade and all of the big ones now own content and are no longer just ISPs. This gives them competitive leverage over other competitors.
  • The Internet has become a far more dangerous place for consumers. Hacking and viruses run rampant. And the ISPs and web services like Google and Facebook routinely gather data on consumers for marketing purposes.

I would be the first to agree that hands-off regulation probably contributed to the growth of the Internet. But this is no longer the same industry and it’s hard to think that any of the big ISPs or transport providers need any further protection. These are huge companies with big profits.

It seems to me that the Chairman’s use of the term ‘light-touch regulation’ is code for basically having no regulations at all. And since that was the state of the industry just a few years ago we don’t have to stretch the imagination very far to know what that means.

Before Title II regulation the FCC had almost no power over the big ISPs. The most they could do was to encourage them to do the right thing. Interestingly, in the two or three years leading up to the Title II order it was the threat of coming regulation that kept the ISPs in line more than anything else. The FCC tried to intercede in disputes between the ISPs and video providers and found that they had no leverage on the ISPs. The FCC also didn’t like data caps but they had no power to do anything about them. However, since the ISPs feared price regulation under Title II most of them raised data cap limits to defuse the public outcry over the issue.

So my recollection of the past five years is that it was the threat of coming regulation that kept the big ISPs in line. Because at the end of the day a big ISP could challenge the FCC on broadband issues in court and win every time. So the FCC’s best way to influence the ISPs was to hold the threat of regulation over their heads.

If we go back to that same regulatory place (which is what would happen if Title II is reversed) then there will no longer be any leverage at the FCC. ISPs will be free to do almost anything they want in the broadband arena. The FCC has already let them off the hook for consumer privacy, and that is just the beginning.

You can expect without regulation that the ISPs will do all of those things that net neutrality was supposed to protect against. They all say today that will never happen, and that they believe in the core tenets of net neutrality. But I think we all know that is public relations talk and that the big ISPs will pursue anything that will make them money. That means discriminating against traffic and demanding payments from video providers to get unimpeded broadcasts. It means the ISPs favoring their own content over content of others. And it means a return of price caps and broadband price increases with no fear of FCC intervention. I have a hard time thinking that ‘light-touch’ means anything other than ‘no-touch.’

The FCC’s Plan for Net Neutrality

This is already stacking up to be the most disruptive year for telco regulations that I can remember in my career. While 1996 and the Telecom Act brought a lot of changes, it looks like it’s possible that many of the regulations that have been the core of our industry for a long time might be overturned, re-examined or scrapped. That’s not necessarily a bad thing – for example, I think a lot of the blame for the condition of the cable TV market for small providers can be blamed on the FCC sticking with programming rules that are clearly obsolete. 

We now know for sure that one of our newest regulations, net neutrality, is going to largely be done away with at the FCC. FCC Chairman Ajit Pai has now told us about his plans for undoing net neutrality. His plan has several components. First, he proposes to undo Title II regulation of ISPs. Without that form of regulation, net neutrality naturally dies. It took nearly a decade for the FCC to find a path for net neutrality, and Title II was the only solution that the courts would support to give the FCC any authority over broadband.

However, Pai says that he still supports the general concepts of net neutrality such as no blocking of content and no paid priority for Internet traffic. Pai proposes that those concepts be maintained by having the ISPs put them into the ISP’s terms of service. Pai also doesn’t think the FCC should be the one enforcing net neutrality and wants to pass this responsibility to the Federal Trade Commission.

It’s hard to know where to start with that suggested solution. Consider the following:

·         I’m concerned as a customer of one of the big cable companies that removing Title II regulation is going to mean ever-increasing broadband rates, in the same way we’ve seen with cable rates. While the FCC said they didn’t plan to directly regulate data rates, they’ve already put pressure on the big ISPs over the last few years to ease up on data caps. Since the big ISPs have tremendous pressure from Wall Street to always make more, they have little option other than increasing data rates as a way to increase the bottom line.

·         Unless some federal agency proscribes specific and unalterable net neutrality language, every ISP is going to come up with a different way to describe this in their terms of service. This means that the topic can never really be regulated. For example, if somebody was to sue an ISP over net neutrality, any court ruling would be specific to only that ISP since everybody else will be using different language. Regulation requires some level of consistency and if every ISP tackles this in a different way then we have a free for all.

·         Probably the most contentious issue that brought about net neutrality was the big fights between ISPs and companies like Netflix over the interconnection of networks. I recall the FCC saying during some of those cases that they were one of the most challenging technical issues they had ever tackled. It’s hard to think that the FTC is going to have the ability to intercede in disputes of this complexity.

·         The proposed solution presupposes that the FTC will have the budget and the staff to take on something as complex as net neutrality. From what I can see it’s more likely that most federal agencies are going to have to deal with smaller budgets in coming years. And we know from long experience that regulations that are not enforced might as well not exist.

Interestingly, the big ISPs all say that they are not against the general principles of no paid priority and no blocking of content. Of course, they have a different interpretation of what both of those things mean. For example, now that a lot of the big ISPs are also content providers they think they should be able to offer their own content on a zero-rating basis. But overall I believe that they were okay with the net neutrality rules. They don’t like the Title II regulation because they fear rate regulation, but I think they mostly see that an open Internet benefits everybody, including them.

The one thing that big ISPs have always said is that the thing they want most from regulation is consistency and predictability. All of the changes that the FCC are making now are largely due to a change in administration – and in the long run the ISPs know this is not to their benefit. Of course, they have always complained about whatever rules are in place, and frankly that’s part of the industry game that has been around forever. But the last the thing the big ISPs want is for the rules to swing wildly back the other way in a future administration. That creates uncertainty. It’s hard to design products or to devise a 5-year business plan if you don’t know the rules that govern the industry.

A Year of Changes

fast fiberI can’t recall a time when there were so many rumors of gigantic changes in the telecom industry swirling around at the same time. If even half of what is being rumored comes to pass this might be one of the most momentous years in the history of telecom. Consider the following:

Massive Remake of the FCC.  Ajat Pai has been named as the interim head of the FCC, but it’s been said that the president is already referring to him as the Chairman. We know that Pai was against almost every initiative of the Wheeler FCC and there are expectations that things like net neutrality and the new privacy rules will be reversed or greatly modified.

There are also strong rumors in the industry that the new administration is going to follow the advice of the transition telecom team of Jeff Eisenach, Roslyn Layton and Mark Jamison. That team has proposed the following:

  • A reapportionment of ‘duplicative’ functions at the FCC. Functions like fostering competition and consumer protection, for example would be moved the Federal Trade Commission.
  • A remake of telecom rules to remove ‘silos.’ For as long as I can remember we’ve had separate rules for telcos, cable companies, wireless companies and programmers. That probably made sense when these were separate industries, but today we see all of these business lines about to converge within the same corporation like Comcast or AT&T. The transition team says it’s time to change the rules to reflect the reality of technology and the marketplace.

At this point I’ve not seen any specific proposals on what those streamlined rules might be. And Congress will have to take an active role in any changes since the current FCC responsibilities are the results of several major telecom and cable acts.

Verizon Looking to Buy a Cable Company. It’s been reported that Lowell McAdams, the CEO of Verizon, has told friends that the company will be looking for a cable acquisition to boost demand for its wireless data. McAdams also talked to analysts in December and described how Charter might be a natural fit with Verizon. There is also speculation on Wall Street that Comcast could be the target for Verizon.

Mergers of this size are unprecedented in the industry. Charter has over 20 million residential data customers and is second behind Comcast’s 23 million data customers. And both companies now have a significant portfolio of business customers.

I remember a decade ago when AT&T started buying back some of the RBOCs that had splintered off during divestiture back in 1984. We all joked that they were slowly putting Ma Bell back together. But I don’t think anybody ever contemplated that the biggest telcos would ever merge with the cable companies. That would remove the last pretense that there is any competition for broadband in urban areas.

More Merger Mania. At one point it looked like the new administration would be against the AT&T and Time Warner merger. But Wall Street now seems to be convinced the merger will happen. The merger will likely come with the typical list of conditions, but we know from past experience that such conditions are only given lip service. AT&T has already taken a strong position that the merger doesn’t need FCC approval. That would mean that most of the government analysis would come from the Justice Department. Just like with the rumored Verizon acquisitions, this merger would create a giant company that operates in all of the FCC-controlled silos. We don’t really have an effective way today to regulate such giant companies.

Verizon might need to hurry if it wants to buy a giant cable company since there is a rumor that Comcast, Charter and Cox plan to go together and buy T-Mobile. That makes a lot more sense than for those companies to launch a wireless company using the Verizon or AT&T platform. Such an arbitrage arrangement would always allow the wireless companies to dictate the terms of using their networks.