Tuesday, January 27, 2015

The Net Neutrality Controversy: A Historical Perspective

I’m a history buff by late night, not unlike some others who spend most of their days involved with communications law and policy. Indeed, one of the history buffs I have in mind has written a book about the special role the telegraph played in winning the Civil War. Before this particular person came to occupy his present high government office, I highly commended his book to you in this piece, “Tom Wheeler, Historian at the FCC’s Helm.”

At the very end of the May 2013 piece, I concluded:

But it does not seem out of place to suggest that Mr. Wheeler, a Lincoln scholar and someone who has observed closely the dramatic changes in the increasingly competitive communications marketplace, may well draw inspiration from Mr. Lincoln's injunction to jettison past dogmas, and to think anew, and to act anew. Certainly the FCC could benefit from ridding itself of outdated regulatory dogmas developed in a bygone monopolistic era, and from thinking and acting anew.

Of course, history lends itself to different interpretations. Understanding the past is not the same as solving an algebraic equation.

Here are a just a few of my favorite short quotations regarding understanding history or the past:

“The past is never dead. It is not even past.” – William Faulkner

“History is indeed an argument without end.” – Pieter Geyl

“The one duty we owe to history is to rewrite it.” – Oscar Wilde

“To know nothing of what happened before you were born is to remain ever a child.” -Cicero

Now, each of these quotations, in its own way, calls to mind, at least for me, particular aspects of the decade-long fight concerning the imposition of net neutrality mandates on Internet providers. I’ll let you ponder them. I suspect that for many of you, thinking about each one – in the context of the net neutrality fight – will cause you to nod your head, perhaps even smile.

But here is another famous quote concerning history, perhaps the most famous of all:

George Santayana, the philosopher, poet, essayist, and novelist, said: “Those who cannot learn from history are doomed to repeat it.”

I was especially reminded of Santayana’s admonition while watching last week’s net neutrality hearing. Ranking House Communications Subcommittee Member Frank Pallone asked NCTA’s Michael Powell – a former FCC Chairman – how we should evaluate the argument that Title II will stifle innovation and investment. In response, Mr. Powell turned to a bit of history that, inexplicably, has been mostly absent from the net neutrality debate. Mr. Powell said, in part: “[A] careful examination historically over periods of regulatory intervention versus periods of light regulation will demonstrate a clear pattern. In the wake of the 1992 Act when cable rates were regulated, investment was depressed for several years until the prospect of the 1996 Act, which deregulated those rates again, and [investment] soared.”

Among other things, the 1992 Cable Act imposed a new rate regulation regime on cable operators. In fairly short order after the FCC began to implement it, a fairly widespread consensus formed that the new cable regulations were adversely impacting investment, service quality, and consumer choice. Even Reed Hundt, the FCC Chairman at the time, and not one otherwise lacking in pro-regulatory sentiment, quickly grew disillusioned with the new regulatory regime. In his book, “You Say You Want a Revolution,” Mr. Hundt acknowledged that whatever benefits consumers gained from the modest price reductions were outweighed by “billions in foregone capital investment” by the cable operators. By late 1994, Mr. Hundt agreed that the cable rate regulation regime that had only recently been adopted in the name of consumer welfare should be largely eliminated.

Tom Hazlett, a former FCC Chief Economist, now at Clemson University, is widely recognized as one of the nation’s foremost authorities regarding telecommunications economics, especially with regard to cable operators. Here is what he had to say in his 2003 article, “The Irony of Regulated Competition in Telecommunications,” published in the Columbia Science and Technology Law Review:

But cable rate regulation was unsuccessful. Nominal rates were suppressed by the FCC; average household bills in October 1994 were about 10 percent below where they would likely have been in the absence of controls. But service quality suffered, as cable network ratings plummeted and investment in system upgrades ground to a halt. The Commission quickly reversed course in November of 1994, allowing generous rate hikes under the “control” scheme. It was an explicit attempt to improve cable operator incentives to add new channels, to pay higher licensing fees for enhanced programming on existing networks, to expand physical infrastructure, and to improve customer service.

Mr. Hazlett declared, presciently, that “[r]etail price controls in cable offer more than an illustrative analogy; they connect directly to the substance of the broadband debate.” At bottom, he concluded, “rate regulation suppresses investment, deployment, and inter-modal competition.”

In the late 1990s and early 2000s, this deregulatory view regarding broadband policy became widely shared – and on a bipartisan basis. Indeed, it was the Clinton Administration that early on articulated a policy against subjecting the then-emerging broadband Internet providers to public utility-style regulations.

In 1999, in opting not to require a public utility-style “open access” regime for cable broadband, Clinton-appointee FCC Chairman William Kennard declared: "[T]he alternative is to go to the telephone world, a world that we are trying to deregulate and just pick up this whole morass of regulation and dump it wholesale on the cable pipe. That is not good for America."

I am surprised that there has not been more focus on the adverse effects on investment, service quality, and consumer choice that followed implementation of the 1992 Cable Act rate regulation regime because these adverse effects were widely acknowledged. In the context of the present net neutrality debate, the episode is worthy of more comment. (It won't do to suggest that the proposed Title II public utility regime for Internet providers is not primarily focused on rate regulation. Any such suggestion is wrong, as I can easily show if need be. For now, I will simply point to the proposed ban on “paid prioritization.” What is such a ban if not a form of rate regulation?)

Sadly, it now appears that the early bipartisan consensus concerning the wisdom of that light-touch broadband policy has broken down. In the words of Mr. Kennard: “This is not good for America.”

And in the words of Santayana: “Those who cannot learn from history are doomed to repeat it.”

This is true even for historians of the telegraph – which has long since been relegated to (telecom) history’s dustbin.