Back in the 1990s, even as competition was developing for local exchange telecommunications services, Level 3 was the most persistent advocate of what it called "Loopcos". The idea was that the then-Bell Companies should be broken into two completely separate companies, one whose only function would be to own and make available local loops on a wholesale basis. (Hence, a "Loopco"). The other a firm, which would lease lines from the Loopco, would be allowed to sell local and all other services on a retail basis.
The theory was that the Loopco would have no incentive to discriminate in favor of itself vis-à-vis competitive carriers because its business would be strictly limited to selling wholesale loops. The problem with the theory is that the FCC had concluded a decade earlier in its Computer III proceeding that the costs imposed by such government-mandated separation outweighed the benefits to consumers. Especially with the development of competitive alternatives providing a check on the incumbent's actions, the FCC determined the economic efficiencies realized from integration of activities would be lost through forced separation. The result: higher prices and/or lower service quality for end user consumers.
Level 3 mounted a sustained campaign during the '90s to get policymakers in Washington and in the states to mandate "Loopcos" through forced structural separation or divestiture. Although some states dabbled with the notion in proceedings that ran on for years, at the end of the day, policymakers – and certainly almost all regulatory economists – rejected the idea as a backwards-looking retro vision.
It was downright loopy.
I bring up Level 3's Loopco advocacy now because the company's current campaign to get the FCC to regulate heretofore unregulated Internet peering arrangements under a reconceived version of net neutrality calls to mind its unreconstructed pro-regulatory corporate bent. Readers of this space are familiar with the Comcast-Level 3 controversy in which Level 3 is invoking the FCC's new net neutrality regulations to argue the agency should intervene to set a price for the exchange of Level 3's long-haul Internet traffic with Comcast. This, even though the FCC's net neutrality rules generally have been understood not to apply to interconnection arrangements involving the hand-off of Internet backbone transit traffic.
Suffice it to say by way of brief recap that the exchange of Internet backbone traffic through commercially negotiated peering arrangements is often done on a "free" basis when the traffic exchange is roughly in balance. But when Level 3 signed a so-called "Content Delivery Network" agreement with the hugely popular Netflix, which is estimated to generate about 20% of all on-peak Internet traffic, this meant Level 3 would now be delivering about five times more traffic to Comcast than Comcast would be sending to Level 3. In other words, with the traffic exchange no longer roughly in balance, in accordance with usual commercial practice, Comcast proposed to negotiate a price with Level 3 that would permit Comcast to be compensated for carrying Level 3's significantly increased amount of traffic.
In its latest missive to the FCC (there is a steady stream), Level 3 suggests its dispute with Comcast must be viewed within the construct of the FCC's net neutrality rules because what is at stake is the FCC's "prohibition on charging content providers for delivery of content requested by subscribers." It says that if Commission doesn't review the dispute, then the Commission's new net neutrality rules will be eviscerated because Level 3's service is arbitrarily labeled a "backbone service."
Putting aside for now my well-known legal and policy objections to the Commission's net neutrality rules, what Level 3 is now arguing, in terms of its backwardness, is as loopy, if not loopier, than its '90s Loopco advocacy.
In essence, Level 3 argues that, because a Comcast subscriber requests Netflix content that happens to be carried long-haul by Level 3 and handed off to Comcast for last-mile delivery, the Commission should regulate this traffic exchange. But if the Commission were to accept Level 3's theory, this would inevitably lead to the FCC's regulation of all Internet backbone traffic because all Internet traffic is ultimately destined for some requesting subscriber, whether a residential or business customer of the Internet access provider.
In other words, the necessary effect of what Level 3 is arguing is to obliterate the distinction between last-mile Internet access service understood to be within the contemplation of the FCC's new net neutrality rules and heretofore unregulated long-haul Internet backbone traffic understood not to be. Level 3 may suggest that the distinction between the two is now arbitrary, perhaps thinking with some justification that the current Commission majority, having evidenced its pro-regulatory mindset, will be receptive to extending its reach to the carriage of all Internet traffic, wherever such traffic may be found in the Internet's network of networks.
Hopefully, the Commission will not be inclined to adopt such an ill-advised extension of its new Internet regulations beyond what many already consider, on present terms, to be counterproductive regulation. Based on FCC Chairman Julius Genachowski's remarks at the February 16 House hearing, it appears he understands the agency's new rules ought to apply to Internet access service and not to peering arrangements for backbone traffic that have always been negotiated on a commercial basis without government intervention. He probably understands the market for transporting Internet traffic over the backbone is competitive, and that Level 3 is one of the very largest carriers of Internet backbone traffic.
As I have said many times before, assuming the FCC's net neutrality rules become effective, despite challenges in court and in Congress, there will be ongoing litigation at the agency which, over time, will determine whether the regulations are interpreted in a more or less regulatory way -- in other words, a more or less harmful fashion. Unless Chairman Genachowski continues to make clear that Level 3 should take its dispute with Comcast back to the bargaining table, he will ensure that the Commission will see an unending string of such frivolous "why not give it a try" complaints in the agency' inbox.
For its part, Level 3's retro-minded advocacy is going from loopy to loopier.
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