Wednesday, December 07, 2011

Stopping Regulatory Encroachment on Broadband

It's nearing year-end. Near enough in fact that I find myself already beginning to think hard about 2012, and next year's communications policy agenda.

As I look forward, it is becoming more apparent than ever that the Federal Communications Commission's pro-regulatory proclivities threaten to burden digital broadband services with public utility-style regulation that may have been appropriate in the analog age but which is not so today. Fighting to prevent broadband services from becoming engulfed in the still-prevalent legacy regulatory morass, and rolling back broadband regulation where it already has occurred, looks to dominate the communications policy agenda during 2012.

When the FCC concluded, beginning in 2002 under then-FCC Chairman Michael Powell's leadership, that broadband services are "information services" not subject to common carrier regulation, and when the agency successfully defended this determination in the Supreme Court's Brand X decision in 2005, I was somewhat hopeful that a fence had been erected that would allow newly-competitive broadband services to continue to flourish on an unregulated basis.

Alas, for the most part, the demarcation between analog telecom services and broadband information services has proved to be more a porous Maginot-like line than an effective regulatory barrier. While I may have been hopeful after Brand X, it would be wrong to say I have been totally surprised at developments over the last few years. This is because the FCC, more so even than many other administrative agencies, possesses a strong institutional bias favoring activist regulatory solutions rather than free market solutions – a bureaucratic imperative, if you will. And the current FCC majority has proven itself receptive to seeking new regulations based on highly anecdotal evidence of potential consumer harm.

The regulation of broadband services about which I am concerned comes in many forms, some more onerous than others, and some couched in rhetoric that seeks to minimize, or even conceal, the extent of the regulatory intrusiveness and burdens. Here I want to identify just a few diverse regulations or proposed regulations that show the FCC's proclivity to extend analog-era regulatory regimes into today's broadband marketplace. In each instance, such extension is unnecessary and, indeed, generally harmful to overall consumer welfare.

·   Net Neutrality Mandates. Although couched as sweet-sounding "open Internet" regulations, in essence net neutrality mandates resemble traditional common carrier regulation that prevailed in the telecom marketplace throughout the 20th Century. With its prohibition against discrimination and unreasonable rates, the common carrier regime may have been suited to the monopolistic Ma Bell circuit-switched era, but it is ill-suited to an IP world in which operators of cable, telephone, wireless and satellite digital broadband platforms compete to provide variously-configured services or bundles of services and constantly evolving applications. In this digital multi-platform marketplace, discrimination prohibitions and rate regulation put operators in a straight-jacket that inevitably inhibits the development of innovative new service offerings and new network infrastructure investment. After all, "discrimination" is the means by which providers normally seek to differentiate their services from their competitors' services in response to what they perceive to be changes in consumer demand. Most troubling of all, the Commission adopted the net neutrality mandates without a showing of demonstrable market failure or consumer harm. 

·   Network Outage Reporting Regulations. For a different type of regulation -- indeed, perhaps a seemingly benign one – in which the FCC may extend analog-era mandates into the broadband world, take, for example, the agency's network outage reporting requirements. The FCC proposes largely to extend the old circuit-switched requirements to Voice Over Internet Protocol (VoIP) and broadband Internet services providers. As my colleague, Seth Cooper, explains in detail in his just-released FSF Perspectives: "At bottom, the FCC's proposed rulemaking is a monopoly-era legacy regulatory measure. It would carry over rules initially created to address problems pertinent to analog circuit-switched telephone calls to today's diverse and competitive digital communications services marketplace. Technological innovation, including the unique characteristics of digital broadband networks, limit the occurrence and scope of outages experienced by end users in a way that renders such a carry-over ill-advised." He explains that "when it comes to 911 and e911 services, however, the FCC has not made any showing that the VoIP and broadband Internet access and backbone markets are failing to deliver reliable 911 or e911 services, or that those markets are failing to incentivize reliable provision of these services."

·   Program Carriage Regulation. For yet another type of unwarranted extension of regulation, consider the Commission's pending proposal to further expand the program carriage rules developed in the analog-era to prevent cable operators and other multichannel video programming distributors ("MVPDs") from discriminating against unaffiliated programming vendors. The existing rules, which implement Section 616 of the Communications Act, no longer make sense today. Section 616 was added in 1992 when cable operators generally still possessed market power in the multichannel video program distributor marketplace and when vertical integration was more pronounced. For example, in 1992, only 68 national programming networks existed, and 57% of those were vertically integrated with cable operators. Today, there are over 500 national programming networks, and only about 15% are vertically integrated with a cable operator. According to a recent Comcast filing, of the 25 most viewed cable networks, only two are wholly owned by cable operators. With two nationwide satellite television providers and broadband "telco" providers competing vigorously in most MVPD markets, not to mention popular Internet video sites, cable operators (and the other MVPDs) lack the incentive and the ability to discriminate against unaffiliated program providers. In the current competitive environment, with consumers having a choice of multiple providers, and with more and more video programming available on the Internet, MVPDs cannot afford to favor their own programming over that provided by unaffiliated providers. So, in reality, there is a persuasive argument the existing program carriage requirements should be eliminated, especially in light of First Amendment concerns raised by the government mandating carriage of particular programming. But rather than curtailing them, the FCC is currently proposing to expand the scope of the program carriage mandates in ways that would make the rules even more intrusive and costly, and even more problematic under the First Amendment than they already are. The Commission would be called on to make determinations regarding program genres, target audiences, program ratings, and the like, which necessarily involve judgments concerning program content.

·   Set-Top Box Regulation. In 1996, when cable operators still retained market power, Congress included a provision in the Communications Act, requiring the FCC to adopt regulations governing the availability of set-top navigation devices from unaffiliated vendors. Anyone familiar with the history of set-top box regulation after 1996 knows it is a particularly sorry saga in which very little has been accomplished at great expense. In this instance, Congress, somewhat presciently, actually directed the agency to sunset the set-top regulations when the MVPD market and the market for set-top boxes became competitive. Both are, and they have been for some time now. Yet, rather than getting out of the business of regulating video navigation devices, the FCC is proposing to double-down on this form of regulation in the IP world. It is proposing to mandate for all broadband multichannel video providers certain standardized navigation functionalities (such as access, provision, decoding, and reception features). In other words, despite the fact that MVPDs must compete against each other to satisfy and retain customers, including in the provision of navigation features, the FCC is proposing to design a set-top box that embodies the search and display capabilities it thinks are necessary to promote independent provision of these features. As with the program carriage requirements, the proposal implicates free speech interests, which we have explained here. But the FCC apparently ignores the First Amendment concerns raised by a mandate that would dictate particular content by prescribing uniform search and display functionalities.

Each of these examples, as diverse as they are, has this in common. They are instances where the FCC has either extended, or is proposing to extend, a form of legacy regulation from the analog into the broadband world. And in each instance the agency is not compelled to do so by statute, but rather it is choosing to do so as a matter of administrative discretion. And, wholly aside from the costs and burdens imposed by the new regulations, it is doing so in the face of serious legal questions concerning its statutory authority (net neutrality) and even its constitutional authority (program carriage and AllVid).

While there is no gain in giving up hope, or in failing to advocate vigorously for the adoption of market-oriented policies by the agency, it is unlikely that the FCC will meaningfully reform itself. Unfortunately, it is instead more likely that the Commission will continue on the road of attempting to impose on broadband Internet services regulations developed for narrowband analog-era services.

I have some ideas that I'll be discussing in the weeks and months to come concerning ways to stop this regulatory encroachment on broadband. In the meantime, if you have ideas too, I'd welcome hearing about them.