Net Neutrality Legislation

In late July, Senators Edward Markey and Ron Wyden, along with Representative Doris Matsui introduced a short bill titled the Net Neutrality and Broadband Justice Act that would classify broadband as a telecommunications service under Title II of the FCC rules.

It’s an interesting concept because this bill would stop the see-saw battle between democrats and republicans about regulating broadband. The Tom Wheeler FCC implemented net neutrality and related broadband regulation using Title II authority in 2015, and the Ajit Pai FCC completely killed Title II regulation in 2017. It’s clear that the current FCC under Jessica Rosenworcel intends to reinstate the Title II authority. If Congress was to enact this law, it would make it impossible for future FCC’s to flip flop on the issue.

What is almost comical about the issue is that both parties make this appear to be a fight over net neutrality, which it is not. All of the public discussions of the issue have been couched as a discussion of whether we need federal net neutrality rules. However, the real fight is about whether broadband should be regulated. When the Ajit Pai FCC stripped away Title II authority for broadband, most of the FCC’s ability to regulate broadband in any meaningful way disappeared. It seems crazy not to have a national policy to regulate an industry where the two biggest ISPs control over 55% of the national market, where the four largest ISPs control over 75% of the market, and where fifteen ISPs control 95% of the market. Beyond the market power of a handful of ISPs, most consumers will say they have only one choice of fast broadband.

Net neutrality has never been the issue. The big ISPs have only violated the principles of net neutrality in a serious way a few times, like when the biggest ISPs restricted Netflix traffic in 2013 and 2014 to get the company to pay more for using the Internet. Soon after the Ajit Pai FCC killed net neutrality, the State of California introduced nearly identical rules, which have subsequently been affirmed by the courts. The biggest ISPs are largely following net neutrality since doing so everywhere except California would be nearly impossible to manage.

The real fear the big ISPs have of Title II authority is that the FCC could theoretically implement rate regulation. This is the underlying issue for the continuing fight. The big ISPs also understand that the FCC will enact other restrictions if the agency has the authority to do so. But it is the fear of putting any restrictions on rates that draws heavy lobbying from the industry. The big ISPs have been using the term light-touch regulation to describe the current state of affairs – which in real life translates to practically no regulations at all.

I can’t imagine a time when the FCC would try to put a cap on ISP rates, but the agency could still restrict what ISPs charge. For example, it’s not hard to imagine the FCC putting curbs on data caps, where ISPs charge customers a lot extra for using too much broadband in a month. Everybody who knows how ISPs operate understands that there is almost no extra cost to an ISP for serving a heavy broadband user – data cap fees verge on the edge of fraud.

It doesn’t look likely that this bill has any chance of making it through the current Congress. The bill is unlikely to draw any Republican votes and may not even gain a positive vote from all of the Democrats. The only way to ever get this passed would be to somehow find a way to do so with a simple majority vote rather than the needed 60 votes to pass.

It’s a shame because there should be regulatory oversight over such a vital industry that is operated by oligopolies. While a few cities seem to be finding a way to bring multiple ISPs to complete, most of the country still only has one or two ISPs that offer fast broadband. Because of the huge barrier to market entry due to the cost of building a new network, most of the country is not likely to see price competition for broadband. At a bare minimum, we ought to have the FCC fulfilling one of its prime regulatory responsibilities, which is to make sure that ISPs don’t overreach too badly with the public.

Sometimes the Numbers Tell the Story

Math_equation_dice_d6Statistics can sometimes tell a powerful story. I don’t know that I have ever seen a more striking set of statistics than the following, which compares the retail price of various telecom products when compared per megabit of bandwidth used:

Text $1,000
Cellular Voice $1.00
Wireline Voice $0.1
Residential Internet $0.01
Backbone Internet $0.0001

The statistic comes from professor Andrew Odlyzko, a mathematics professor at the University of Minnesota, and I will cover more of his analysis in another blog. But what is striking about these simple statistics is how much we pay for various services compared to the bandwidth each uses

It’s always been well-known that text-messaging is almost all profit, but these statistics really make that obvious. Text messages use nearly no bandwidth and yet even today there are cell phone plans that charge $0.10 per text message when a user goes over their base allotment. There has never been a telcom product that is priced so amazingly higher than its cost (which is really tiny). It’s not a stretch to talk about text messaging plans having 99% profit margins.

But the chart also shows that cellular voice is priced about ten times higher, on a bandwidth basis, than landline voice. There is a really simple statistic that I have recently used when talking about how profitable cellphone plans are for the carriers. AT&T and Verizon together have roughly 70% of the cellphone market in the US, and each of them makes roughly $1 billion per month in profits from that business. With roughly 100 million total cellphone users now in the US that means that the average cellphone customer of these carriers is contributing roughly $27 in profits to one of them every month, or $325 per year.

The above table also tells the story well for about the profitability of Internet service. The last two numbers show that the cost of residential Internet, on a per megabit of usage is 100 times more expensive than the cost of the Internet backbone (or the price that carriers pay for the raw Internet usage). This is why Comcast and other large cable companies are not upset to be transitioning to becoming mostly ISPs, because residential data is where the profits are.

There is one simple reason that some of these products are so expensive and the profits are so out of line with costs – and that is the lack of competition that we have in the US market where the vast majority of telecom products are sold by oligopoly providers. That lack of competition let’s these companies keep the profits on test messaging, cellular phone service and residential Internet service much higher than is reasonable. It has been shown in the US that in those handful of places where there is competition that prices end up significantly lower.

I have been reading a lot lately about how the US has both the most expensive residential Internet and the lowest average data speeds of any of the western nations. This is due almost entirely to lack of competition. But interestingly there are countries like South Korea that have even less competition than here that still have much better Internet pricing because the government there understands that Internet is a driver of the overall economy. The other countries with lower cost Internet have policies in place that foster competition and that promote the construction of fiber networks. Here, we let all of this up to the very profitable oligopoly providers who constantly cry that they can’t afford to invest in broadband infrastructure.

If there is any one proof that there is an oligopoly in the country it’s the fact that Comcast and Verizon have a joint marketing agreement to sell each other’s products in their business offices. That fact alone ought to be enough evidence that Comcast should not be allowed to merge with Time Warner. The FCC doesn’t really need to be spending a ton of money to analyze the proposed merger and they could use this one fact to just say no to Comcast. The short and simple table above shows the effect of oligopoly competition in this country. Sometimes the numbers tell the story better than words.