Broadband Capital Investment Increased Significantly from 2016 to 2017

Free State Foundation scholars have contended for years that heavy-handed regulations generally will depress investment in broadband infrastructure. After the FCC adopted Title II public utility-style regulations in the February 2015 Open Internet Order, I illustrated in a May 2017 blog and graph how broadband capital investment declined by $5.6 billion in the two years following that order.

As broadband providers anticipated the repeal of the Open Internet Order and its Title II public utility-style regulations with the December 2017 Restoring Internet Freedom Order, broadband capital investment increased significantly from 2016 to 2017. Using data collected from annual reports of thirteen large broadband providers, I estimate that total annual broadband capital investment increased by nearly 14% from the end of 2016 to the end of 2017.

The FCC’s adoption of the Restoring Internet Freedom (RIF) Order reclassified broadband as a Title I information service, thereby restoring a light-touch regulatory framework for broadband providers. While only five months have passed since the RIF Order was adopted in an open meeting, the proposal was announced back in April 2017. When FCC Chairman Ajit Pai announced the proposal, he cited the Free State Foundation’s initial estimate on broadband investment, stating that the Open Internet Order "has already cost our country $5.1 billion in broadband capital investment.” Given the voting history of the new Republican majority at the Commission, it was fairly clear then that a significant portion of the heavy-handed Title II regulations would be overturned.

Although the RIF Order will not become fully effective until June 11, 2018, broadband Internet providers have now had a year since the proposal’s announcement to prepare for a more investment-friendly regulatory environment. So, even though broadband providers needed to abide by the Obama-era rules imposed by the Open Internet Order throughout 2017, the data shows that competition in this dynamic marketplace encouraged additional investment activity. My sample of thirteen large broadband providers found that capital investment increased by 13.95% from the end of 2016 to the end of 2017. In my view, this increase is likely due, at least in part, to the prospect of a return to light-touch regulation.

USTelecom reported in October 2017 that industry-wide aggregate broadband capital investment, which is comprised of capital expenditure data for wireline telecommunications, wireless telecommunications, and cable broadband providers, totaled $76 billion in 2016. Therefore, an increase of 13.95% would mean that broadband capital investment increased throughout the industry by $10.6 billion to $86.6 billion in 2017. That is likely a high estimate for just a one-year increase. However, given that broadband providers invested $5.6 billion less than they otherwise would have in 2015 and 2016, industry-wide broadband capital investment should increase dramatically especially now that the new rules will create a more investment-friendly environment.

In fact, from the end of 2011 to the end of 2014 my sample of annual broadband capital investment grew by 14%. However, from the end of 2014 to the end of 2017, my sample of broadband capital investment grew by only 6%. Similarly, USTelecom data show that aggregate broadband capital investment for the U.S. industry grew by over 15% from the end of 2011 to the end of 2014. If industry-wide broadband capital investment totaled $86.6 billion in 2017, that would equate to a 10.5% increase from the end of 2014 to the end of 2017.

In my sample of broadband providers, I have companies like Comcast and Charter, which comprise nearly half of all wireline broadband subscriptions. I also include Verizon, AT&T, T-Mobile, and Sprint, which comprise a large majority of all wireless subscriptions. I note that the $68.8 billion in investment by these 13 companies is 79.4% of the $86.6 billion in industry investment I estimated above, so these companies account for a very large share of total industry investment. So while my estimate of a 14% increase in capital investment should be considered a fairly rough estimate of industry-wide broadband investment, I am very confident that from 2016 to 2017 broadband providers significantly increased capital investment. In fact, any increase in broadband capital investment from 2016 to 2017 is worth noting because investment declined in both 2015 and 2016.

The graph below shows broadband capital investment from 2011 to 2017 by the 13 large broadband providers in my sample.

When regulatory costs increase, as they did with the imposition of the Open Internet Order, broadband providers will invest less than they otherwise would have absent such regulatory costs because the additional costs reduce the return on investment. Although the RIF Order does not take full effect until June 2018, the mere prospect of the FCC returning to a light-touch regulatory regime, along with strong competition among many broadband providers and technologies, appears to have played an important role in encouraging additional capital investment throughout 2017.

There is little doubt that broadband capital investment will continue to increase in 2018 so long as the RIF Order is not overturned by Congress. (See this recent blog by Randolph May.)

Internet Giants Aim to Preserve Their Regulatory Advantage

Internet giants Google, Amazon, and Facebook, among others, announced, through their trade association, the Internet Association, that they plan to join legal challenges to the FCC’s recent Restoring Internet Freedom Order (RIF Order). Internet Association President & CEO Michael Beckerman issued the following statement in conjunction with the announcement:

The final version of Chairman Pai’s rule, as expected, dismantles popular net neutrality protections for consumers. This rule defies the will of a bipartisan majority of Americans and fails to preserve a free and open internet. IA intends to act as an intervenor in judicial action against this order and, along with our member companies, will continue our push to restore strong, enforceable net neutrality protections through a legislative solution.

The recently-repealed 2015 Open Internet Order approach is not so neutral at all, however, in its practical effect. The Order had the effect of supporting the imposition of stringent privacy restrictions on Internet service providers (ISPs), like Comcast and Verizon Wireless, which did not apply to Google, Amazon, and other major Internet companies that are among the largest collectors of personal consumer data. This approach, under which the largest Internet giants are subject to less stringent privacy regulation, attracted strong bipartisan criticism, as former Federal Trade Commission Chairman Jon Leibowitz, a Democrat appointee, explained in April 2017:

By creating a separate set of regulations that bind only internet service providers — but not other companies that collect as much or more consumer data — with heightened restrictions on the use and sharing of data that are out of sync with consumer expectations, the FCC rejected the bedrock principle of technology-neutral privacy rules recognized by the FTC, the Obama administration, and consumer advocates alike. Protecting privacy is about putting limits on what data is collected and how it is being used, not who is doing the collecting, and for that reason, a unanimous FTC — that is, both Democratic and Republican commissioners — actually criticized the FCC’s proposed rule in a bipartisan and unanimous comment letter as “not optimal,” among 27 other specific criticisms of the rule (emphasis added).

The 2015 Order also imposed several strict conduct regulations on ISPs like Comcast and Verizon Wireless. These public utility-like neutrality limitations were not applied to system administrators for business networks, to cloud backup services during uploads of data from customers, or to online gaming services that may throttle bandwidth at certain times to prevent their services from overloading and crashing. It also does not apply to traffic on private networks operated by “edge providers” like Google and Amazon.

And we’ve now learned that it did not apply to Apple’s sub rosa throttling of iPhones in what Apple now claims – when the throttling was discovered – was an attempt to preserve the battery life of phones. While Apple argues that this undisclosed throttling was needed as a measure to protect iPhone owners, it could also have the effect of encouraging more iPhone owners to pay to upgrade from their older devices instead of replacing their batteries. In any event, Apple did not disclose the practice to its consumers.

Tom Evslin, former chief technology officer for the state of Vermont and former chief executive of VoIP provider ITXC Corp, described in August 2017 how Google and Amazon engage in the same throttling and prioritization behavior that they seek to prohibit ISPs from doing:

In fact, however, web giants like Google and Amazon have private networks that connect to the internet in many locations. They have data caches (think of them as content warehouses) around the world. Their websites do pop up faster than yours because their bits travel mostly on their private networks and avoid internet backbone and interchange congestion. In other words, they have their own private fast lanes. You can’t achieve this speed for your website unless you build a private network of your own (unlikely) or host your website on Amazon or Google, in which case they may share some of their private access network. I have hosted services on Amazon, and they charge me more depending on how many locations from which I want my data served. In other words, faster is more expensive on their network.

Conveniently these private fast lanes are specifically exempt from the 2015 Federal Communications Commission’s Open Internet (aka “net neutrality”) regulations, which reclassified basic internet access service in a way that lets the FCC micromanage it and prohibit public “fast lanes.” The members of the Internet Association are “edge services,” so they are unregulated by this rule.

Regardless of how much Internet Association members like Google and Amazon may claim they want to bring back “net neutrality” to protect consumers, a significant impact of their actions is to try to re-impose regulation to protect themselves from ISP competition. If they succeed, the result will be to keep more stringent regulations on their ISP competitors. To the extent that regulation of providers of services in the Internet ecosystem is needed, it at least should be a somewhat uniform enforcement regime, not one so disparate that ISPs are regulated in a much more heavy-handed manner than Internet web giants like Google and Amazon.

Paid Prioritization Arrangements Improve Telemedicine Prospects

Telemedicine is an emerging Internet application that requires a very high level of end-to-end reliability. It includes telesurgery, which now allows specialized surgeons in one location to operate on patients in completely different locations. Telemedicine can offer patients in small hospitals or remote areas access to highly-skilled specialists who otherwise would not serve those areas. Telesurgery, as well as certain other telemedicine applications, can only become viable if the providers have access to extremely reliable, high-speed Internet connections.

In contrast, many other Internet uses do not require the same level of reliability or speed. Email traffic, most file downloading, and many other uses lose little of their value if their transmission is delayed somewhat, although too long a delay could diminish their value. These types of Internet applications simply do not require the same type of highly reliable, high-speed access that telemedicine and other applications require.

Telemedicine is an example of an Internet application that could benefit from receiving a prioritization arrangement. Prioritization arrangements are agreements between broadband providers and providers of content over the Internet that allow the content provider to receive priority access in a so-called “fast lane” to avoid congestion on the Internet. As FCC Commissioner Michael O’Rielly pointed out in April 2017: “Even ardent supporters of net neutrality recognize, as I've said before, that some amount of traffic differentiation or ‘prioritization’ must be allowed or even encouraged.”

The 2015 Open Internet Order contained a “bright-line” ban on paid prioritization arrangements, which was eliminated when the FCC adopted the December 2017 Restoring Internet Freedom Order (RIF Order). Free State Foundation scholars have argued that the new 2017 Order will lead to more capital investment, making better and more reliable Internet connections available to more Americans, and will also allow for innovative prioritizations and other arrangements that can have significant economic benefits. Telemedicine, with its need for highly reliable, high-speed Internet access, is likely to be one of the applications that benefits most from this increased investment and potential for more flexibility in access arrangements.

Some, however, have suggested that the 2017 RIF Order may threaten the future development of telemedicine. For example, Mei Wa Kwong, Interim Executive Director and Policy Advisor for the Center for Connected Health Policy, wrote:

At the December 14, 2017, open commission meeting of the Federal Communications Commission (FCC), commissioners will vote on whether to repeal current net neutrality rules. Such action may have wide-reaching impacts on the use of telehealth. Community health clinics, such as federally qualified health centers (FQHCs) and rural health centers (RHCs), could see higher rates for connectivity that may reduce, eliminate, or discourage them from using telehealth to deliver health care services, especially in rural areas. Additionally, telehealth in the home could be severely curtailed as consumers may face higher prices for connectivity that would be sufficient for a telehealth interaction. To allow practitioners and patients to provide and access care anywhere would require reliable and adequate connectivity that could be priced out of the users' range with removal of net neutrality. 

The concerns described above are entirely, even by their own terms, conjectural, and are unlikely to occur in any way that is harmful to the development of telemedicine. Paid prioritization was not prohibited before the 2015 Order, and in any event such arrangements were never implemented in any significant way. More importantly, however, experience with paid prioritization arrangements in other markets provides strong evidence that Internet providers will not have the incentives to engage in conduct likely to harm the emerging telemedicine market.

In my May 2017 Perspectives from FSF Scholars, I described how paid prioritization arrangements are very common throughout the economy. For example, the U.S. Post Office has long offered priority delivery, airlines make priority boarding available to customers, grocery stores allow for priority placement of certain products, and highways all offer priority toll lanes to drivers. In all of these various markets where paid prioritization arrangements have regularly been used, the result is more capital investment and more benefits for consumers. When such arrangements are put in place, the result is not to price the priority service out of the range of the users with the greatest need, but rather, to price in such a way that both the priority and non-priority customers are served, usually with both groups better off than they otherwise would have been.

Indeed, Virginia Governor Terry McAuliffe last year explained how the current I-395 expansion project in Alexandria, Virginia, is using an optional toll system to attract private investment for highway construction that would not have otherwise occurred. As McAuliffe correctly pointed out, this toll system will relieve congestion and improve access for all travelers, not just the ones who choose to pay the toll to be in the fast lane.

We can expect the same with telemedicine following the 2017 Restoring Internet Freedom Order. FCC Chairman Ajit Pai recently explained how the RIF Order will help, not harm, the prospects for telemedicine in rural areas by promoting more investment and allowing for more flexibility in priority arrangements for services like telemedicine:

One of the biggest drags on investment in faster, better, cheaper broadband has been the FCC’s 2015 decision to scrap the tried-and-true, light-touch regulation of the Internet and replace it with heavyhanded micromanagement. In two weeks, we’ll vote on a plan to restore Internet freedom and bring back the same legal framework that was governing the Internet three years ago today and that has governed the Internet for most of its existence. This will result in increased investment in infrastructure and more digital opportunity for seniors, especially in rural and low-income urban areas.

One aspect of this proposal I think is worth highlighting here is the flexibility it would give for prioritizing services that could make meaningful differences in the delivery of healthcare. By ending the outright ban on paid prioritization, we hope to make it easier for consumers to benefit from services that need prioritization—such as latency-sensitive telemedicine. Now, we can’t predict exactly which innovations entrepreneurs will come up with. But by replacing an outright ban with a robust transparency requirement and FTC-led consumer protection, we will enable these services to come into being and help seniors.

As Commissioner O’Rielly summarized in his statement supporting the Restoring Internet Freedom Order:

Clearly, there are cases today and many more that will develop in time in which the option of a paid prioritization offering would be a necessity based on either technology needs or consumer welfare. I, for one, see great value in the prioritization of telemedicine and autonomous car technology over cat videos. 

In sum, the real threat to the emergence of telemedicine is not, as Mei Wa Kwong suggests, the removal of the ban on paid prioritization. Rather, the threat to telemedicine is from prohibiting innovative access arrangements and suppressing capital investment that would otherwise increase capacity, allow greater access, and improve reliability of Internet connections. Telemedicine is likely to benefit from an acceleration in capital investment and from allowing more flexible arrangements that make priority access available where it is needed the most. And, to be sure, there are other emerging innovative Internet applications that will as well.

Opposing Cost-Benefit Analysis Raises a Red Flag

In its Notice of Proposed Rulemaking (NPRM) for the Federal Communication Commission’s Restoring Internet Freedom proceeding, Chairman Ajit Pai proposes that the Commission perform a cost-benefit analysis (CBA) of the FCC’s Title II regulation of Internet service providers. Free State Foundation scholars endorsed the FCC’s proposal in their filed comments as a welcome development for improving the quality of economic analysis at the FCC. However, in the initial round of comments, some pro-regulatory organizations were skeptical of the FCC’s proposal for performing a CBA. Notably, the comments from these groups appear to have been intended to discourage the FCC from performing any cost-benefit analysis.

Requiring regulatory agencies to conduct CBAs has a history of bipartisan support. A 1993 executive order issued by President Clinton and followed by every administration since requires that executive branch agencies perform CBAs before implementing economically significant regulations. The FCC is not required to perform CBAs because it is an independent agency. However, other independent agencies, including the Federal Trade Commission and the Securities and Exchange Commission, have adopted internal rules requiring CBAs to help inform their regulatory decisions.

There should be little support for a regulation when its costs outweigh its benefits because adoption of that regulation will usually slow economic activity, destroy jobs, and often harm the parties the regulation is claimed to help. Cost-benefit analysis is an important tool that helps regulatory agencies evaluate in a systematic way whether a course of action is worth pursuing. Shortly before joining the FCC as Chief Economist, Jerry Ellig documented how the quality of SEC rulemaking improved after the agency, in the middle of the Obama Administration, adopted a requirement for conducting cost-benefit analyses.

Performing a cost-benefit analysis of a regulation requires an agency to address several important questions that it might otherwise fail to consider. Does the regulation address a market failure or systemic problem? If it does, how does it correct the perceived market failure? Are there other less intrusive regulatory approaches that would solve this market failure? And finally, do the benefits of the regulatory solution outweigh the costs of imposing new regulatory requirements? Needless to say, the FCC did not ask these important questions when it adopted the Open Internet Order in February 2015, but Chairman Pai is proposing that the Commission perform a CBA before repealing Title II regulation. Regrettably, some groups that support Title II regulation are skeptical.

In the initial round of comments of the Restoring Internet Freedom proceeding, Free Press and INCOMPAS criticized the NRPM for a lack of guidance for how the CBA should be conducted. But as we responded in our reply comments, “paragraph 106 of the Notice is clear in proposing that the FCC follow the same guidance in Section E of OMB Circular A-4, which has been used by executive branch agencies since 2003, while inviting comments on whether that is appropriate or whether the Commission should modify its approach.” Moreover, we added:

Also significant is the fact that neither INCOMPAS nor Free Press provide any guidance whatsoever to the FCC on how to better perform a cost-benefit analysis. Thus, their comments can only be interpreted as opposing the Commission performing any cost-benefit analysis at all. The FCC should not be an “economics-free zone.” Instead the Commission should improve its use of economic analyses, including cost-benefit analysis, so that it can make better regulatory decisions.

Free State Foundation Senior Fellow Theodore Bolema published a July 2017 Perspectives from FSF Scholars entitled “An Assessment of the FCC’s Proposal to Conduct a Cost-Benefit Analysis,” which was attached to FSF’s initial comments as Appendix A. In that paper, Dr. Bolema addresses the important questions pertaining to a cost-benefit analysis of the FCC’s Open Internet Order.

Does the regulation address a market failure or systemic problem? If it does, how does it correct the perceived market failure? Dr. Bolema says:

Significantly, the Open Internet Order regulations can only pass a cost-benefit test if they are addressing a clear market failure than can only be resolved by the FCC regulation. If there is no market failure or other systemic problem, then government action will likely do more harm than good. The FCC justified the 2015 Open Internet Order in large part on conjectured harms that might occur in the future, but had not occurred to date under regulatory oversight that was considerably less heavy-handed.

Given the remarkable record of innovation, investment, and choice of new services offered to customers before the Open Internet Order regulation was imposed, it is highly unlikely that any such market failure can be found.

Are there other less intrusive regulatory approaches that would solve this market failure? Dr. Bolema contends:

If the FCC does identify a market failure, perhaps based on market power for some parties in some places at some times, then it must also consider whether less intrusive alternative approaches are sufficient to address the market failure before resorting to public utility regulation of a broadband market segment. These alternative approaches include increased antitrust enforcement, new consumer protection regulations, or minimum quality standards.

OMB Circular A-4 requires that executive branch agencies consider less intrusive regulatory approaches as part of their cost-benefit analysis. Even if the FCC concludes that a market failure exists in its baseline scenario, that does not mean that the only alternative is the full Title II regulation imposed by the Open Internet Order. Instead, the FCC must then consider other case-by-case regulatory approaches that are different from the pre-2015 regulatory environment.

Ted Bolema’s Perspectives also considers some of the regulatory uncertainty and costs imposed by the Open Internet Order, specifically opportunity costs. For example, Free Press claims in its comments that broadband investment has increased since the Open Internet Order, despite convincing evidence discussed in our initial comments and reply comments that investment has declined. But even assuming, hypothetically, that investment has increased, the relevant question is did it increase less than it otherwise would have absent the regulation? This is the premise of my May 2017 analysis which ultimately finds that broadband investment declined by $5.6 billion since the Open Internet Order was adopted.

Dr. Bolema performed an additional cost calculation in his Perspectives, following the methodology the FCC proposed in its NPRM:

Applying this multiplier to the Free State Foundation estimate by Michael Horney of a $5.6 billion reduction in broadband investment over 2015 and 2016 produces an estimate of $7.0 and $9.8 billion in lost economic activity attributable to the Open Internet Order, with a midrange estimated economic impact of negative $8.4 billion. Horney’s estimate showed that the gap between the baseline investment and actual investment was growing. If this trend continues, as is likely, the economic impact of the Open Internet Order will only become greater, in a negative direction, over time. 

It is important that the FCC perform this cost-benefit analysis, because agencies, independent or not, should analyze how new rules will impact innovation, investment, job creation, and economic activity. It is reasonable to question the methodology that an agency uses when assessing the costs and benefits of a regulation. However, if an interested party offers only criticism of an agency proposal to conduct a regulatory CBA, this is likely a signal that the interested party fears that the costs will outweigh the benefits, invalidating its policy position.

Given the persuasive evidence showing a large negative impact on broadband investment, it is likely the Open Internet Order is more costly than beneficial to consumers and entrepreneurs. For this and other reasons addressed at length in our initial and reply comments, the FCC should conduct the proposed cost-benefit analysis. And if the results from the CBA are as we expect, the FCC should repeal the Title II classification of broadband Internet service providers and return to a light-touch regulatory approach.

Antitrust Provides a More Reasonable Framework for Net Neutrality Regulation

Yesterday, the Free State Foundation published a new Perspectives from FSF Scholars entitled “Antitrust Provides a More Reasonable Framework for Net Neutrality Regulation” by Joshua Wright, a member of FSF’s Board of Academic Advisors and a former Commissioner at the Federal Trade Commission. Professor Wright discusses why using antitrust, instead of Title II regulation, would provide sufficient regulatory oversight of broadband providers by examining vertical agreements on a case-by-case basis while also encouraging investment and fostering competition.

Priority Communications Services for Governments: Lessons for Private Prioritization

The Federal Communication Commission’s 2015 Open Internet Order contains a ban on “paid prioritization,” or agreements that allow a content provider to pay an Internet service provider for priority treatment in a “fast lane” to jump around congestion on the Internet. I described in a May 2017 FSF Perspectives how paid prioritization arrangements are very common in many markets and usually lead to pro-consumer benefits.

While the Open Internet Order prohibits Internet Service Providers (ISPs) from charging for prioritization, other FCC policies encourage prioritization arrangements, so long as other government agencies are the ones given access to the fast lane. There is a lesson here for the government that it ought to recognize with regard to private sector prioritization arrangements on the Internet.

Prioritization arrangements can have benefits for consumers and the general public, and it is entirely appropriate for the FCC to provide for favorable access for government emergency and disaster responders. But the same logic applies to at least some private services on the Internet, which are likely to be delayed or deterred so long as the rigid prohibition against paid prioritization remains in place.

The FCC majority in the 2015 Open Internet Order argued that having a fast lane for those willing to pay for it would place their competitors in the “slow” lane at a disadvantage. Moreover, they asserted that without this ban, ISPs would have the incentive to make the slow lane even less attractive by avoiding investing in it, so that firms in the slow lane would eventually be forced to pay to move to the fast lane. Thus, the 2015 FCC adopted the following prohibition:

No Paid Prioritization. Paid prioritization occurs when a broadband provider accepts payment (monetary or otherwise) to manage its network in a way that benefits particular content, applications, services, or devices. To protect against “fast lanes,” this Order adopts a rule that establishes that:

A person engaged in the provision of broadband Internet access service, insofar as such person is so engaged, shall not engage in paid prioritization. “Paid prioritization” refers to the management of a broadband provider’s network to directly or indirectly favor some traffic over other traffic, including through use of techniques such as traffic shaping, prioritization, resource reservation, or other forms of preferential traffic management, either (a) in exchange for consideration (monetary or otherwise) from a third party, or (b) to benefit an affiliated entity.

As then-Commissioner Ajit Pai pointed out  at the time, the FCC adopted this blanket ban on paid prioritization even though ISPs had not adopted paid prioritization in any meaningful way. The effect on capital investment of the 2015 order, which included the paid prioritization ban, has been the opposite of what the 2015 FCC majority predicted, because broadband investment is down significantly since the Open Internet Order was implemented. Indeed, Free State Foundation Research Associate Michael Horney has estimated that in 2015 and 2016 investment declined by $5.6 billion.

On a page titled “Priority Telecommunications Services,” the FCC website explains how it views the importance of certain prioritization programs:

Often times, it is necessary to either prioritize the provisioning of new communications services or prioritize the restoration of services that have been damaged or otherwise are not functioning. This is especially true in disaster situations when numerous outages may occur at once or systems become overloaded by demand. This topic introduces three major priority service programs that have been established by the Federal government in order to provide prioritized system access for designated users or to allow for prioritized installation/restoration of services. The Federal government administers these priority communications services that are provided by the wireline and wireless telecommunications carriers and are necessary to promote the nation's security and emergency preparedness (NS/EP) functions.

One of the three programs described above by the FCC is the Telecommunications Service Priority (TSP) program, which is authorized by the FCC and administered by the Department of Homeland Security (DHS) Office of Emergency Communications. The TSP program is a paid prioritization arrangement. According to DHS:

TSP is a fee-based program and organizations pay their telecommunications vendor for the services. TSP set-up and recurring costs vary depending on 1) the type of service requested (provisioning or restoration), 2) the telecommunications vendor providing the service (e.g. AT&T, CenturyLink, Sprint, Verizon, etc.), and 3) the geographic location requested for the provisioning or restoration service.

Prioritization arrangements can have benefits for consumers and the general public, and nothing herein is intended to be criticism of the current FCC policies giving favorable access to government emergency and disaster responders. As emergency services and public safety evolve, government agencies may want to have even greater access to paid prioritization available to them for government functions such as Amber alerts, severe weather alerts, and Homeland Security warnings.

But the same logic applies to at least some other services on the Internet, which are less likely to be widely available so long as the rigid prohibition against paid prioritization remains in place.

For example, telemedicine is an emerging private application that may require prioritization in order to become widely available and accepted as reliable. Telesurgery now allows specialized surgeons in one location to operate on patients in completely different locations. The emerging market for telesurgery can give patients in small hospitals or remote areas access to highly-skilled specialists who otherwise would not serve those areas. According to a recent medical journal article:

The ultimate goal of telerobotic surgery is to replicate the normal process of surgery from a distance. The success of telesurgery (or any aspect of telemedicine for that matter) depends largely on how faithfully and without incident remote activities duplicate their on-site equivalents. Because of its direct impact on surgeon performance, a frequent metric in real-time telesurgery research is that of system delay (citations omitted).

Autonomous vehicles and interactive e-learning are other examples of applications in their early stages of development that require a high level of end-to-end reliability. Investors may be unwilling to take the risk of investing in these applications if they cannot be assured of reliable prioritized broadband connections. The FCC’s prohibition against charging for paid prioritization may well prevent these services from developing, as well as other new applications that no one is yet anticipating.

As FCC Commissioner Michael O’Rielly recently stated, “Even ardent supporters of net neutrality recognize, as I've said before, that some amount of traffic differentiation or ‘prioritization’ must be allowed or even encouraged.” Moreover, to the extent the Open Internet Order is suppressing capital investment broadband infrastructure, that is infrastructure that is not available for government first responder needs. 

Whatever policy the FCC adopts as part of its present proceeding, it should not be a rigid ban against paid priority arrangements for private Internet uses, which precludes arrangements that offer tremendous potential health, safety, and economic benefits. The government actually authorizes priority arrangements, and recognizes their value, in various emergency, public safety and related contexts. It should not adopt a blanket ban on such arrangements that would prevent their development in other contexts that would prove valuable to consumers.

FSF Files Comments to Restore Internet Freedom

Yesterday, the Free State Foundation filed comments regarding the FCC's proposal to restore Internet freedom and remove the Title II classification of broadband Internet access services. At 90 pages, these are the longest comments ever filed by FSF. If you do not have time to read every word, please refer to the introduction and summary on the first nine pages. Thank you!

Why the FTC Should Oversee Broadband Internet Service Providers

The Free State Foundation hosted its Ninth Annual Telecom Policy Conference on May 31. Knowledgeable speakers offered policymakers forward-looking insights befitting the Conference’s title: “A New Direction in Communications Policy: Less Regulation, More Investment and Innovation.”

As explained below, insights offered by Conference speakers reinforce two critical ways that communications policy ought to be made more conducive to fostering innovation and investment by Internet service providers. First, the Federal Communications Commission should cede jurisdiction over broadband privacy practices back to the Federal Trade Commission because the FTC is better suited to the task. Second, to the extent the FCC retains any regulatory authority at all over Internet service providers, the agency generally should adopt only the fact-specific, complaint-based ex post approach of the FTC. Public utility-like regulation of Internet service providers should be repealed. To the extent that the FCC retains any regulatory authority at all over Internet providers, which we do not here concede, any replacement regulatory framework adopted should be tied to market power analysis and target specific instances of claimed consumer harm or anticompetitive conduct.

The remarks of the panelists at the Conference session, “The View from the FTC: Overseeing Internet Practices in the Digital Age,” as detailed below, are very instructive, as well as very timely.

Return Oversight of Broadband Privacy to the FTC

The FCC’s Title II Order (2015) declared broadband Internet access services to be a “telecommunications service” subject to public utility regulation. The Title II Order thereby effectively stripped the FTC of jurisdiction over broadband Internet access service providers’ (ISP) privacy practices. Onerous, one-sided privacy regulation adopted in the FCC’s Broadband Privacy Order (2016) was repealed by Congress in March 2017. Now the FCC’s proposed Restoring Internet Freedom rulemaking would declare broadband Internet access services to be a Title I “information service.” In effect, this would repeal public utility regulation and return broadband privacy jurisdiction to the FTC.

The FTC’s expertise and analytical approach toward privacy issues were discussed during the Conference’s panel: “The View from the FTC: Overseeing Internet Practices in the Digital Age.” Thomas Pahl, Acting Director of the FTC’s Bureau of Consumer Protection, critiqued the FCC’s Broadband Privacy Order and contrasted it with his agency’s privacy policy:

[T]he FCC chose a more rigid and prescriptive approach to broadband data security and privacy issues than the FTC’s traditional case-by-case approach to these topics. The FCC’s rules also set standards for broadband providers separate and apart from standards applicable to others in the online space, eschewing the FTC’s more comprehensive approach. 

Mr. Pahl described what the public could expect if the FCC adopts its Restoring Internet Freedom proposal and thereby returns jurisdiction over broadband ISP privacy practices to the FTC:

The FTC is ready, willing, and able to protect the data security and privacy of broadband subscribers . . . .  We have a wealth of consumer protection and competition experience and expertise, which we will bring to bear on online data security and privacy laws. We will apply data security and privacy standards to all companies that compete in the online space regardless of whether the companies provide broadband services, data analysis, social media, or other services. Our approach would ensure the standards the government applies are comprehensive, consistent, and pro-competitive. 

The FTC’s Case-by-Case Approach Is Preferred for ISP Oversight

Tad Lipsky, Acting Director of the FTC’s Bureau of Competition, also participated on the panel. Drawing on his expertise in antitrust and competition law and policy, he described case-by-case enforcement by the FTC and private litigation as ready means to address any anticompetitive practices that might arise in the broadband Internet access services market. Mr. Lipsky rejected “the idea that a lessening of the regulatory burden on the FCC side would lead to a situation in which anticompetitive conduct was free to occur without fear of further consequence.” According to Mr. Lipsky: “That is demonstrably false. The FTC is waiting” and able to address anticompetitive concerns that might arise.

Characterizing himself as a “light touch regulator” and as “a fan of antitrust as the way of ensuring that dynamic free competition gives the consumer what he wants,” Mr. Lipsky also criticized the public utility model of regulation embodied in the 1887 Interstate Commerce Act, stating: “[I]t is a fact that the FCC Title II regulation is a direct descendant of that form of regulation.” Mr. Lipsky added:

[T]he temptation to look at the problems of a dynamic and quickly developing industry and to immediately apply this structure of economic regulation as a way of anticipating and making sure that future problems don’t arise has largely been a failure. 

Of course, the FCC’s Title II Order succumbed to such temptation. The order imposed public utility regulation on broadband Internet access services with no evidentiary findings of market failure or consumer harm. Indeed, the Title II Order dismissed market power’s relevance.

Professor Daniel Lyons, a member of FSF’s Board of Academic Advisers, also characterized broadband Internet access service regulation as “an antitrust and a consumer protection issue.” Recounting the FTC’s antitrust analytical tools, including its test for market power, Professor Lyons stated:

The FTC is well equipped to evaluate on a case-by-case basis whether a particular agreement is one that might harm consumers. Using robust law that’s been developed from a number of different cases elsewhere in the economy… they have a broader scope informed by a lot more history than the Federal Communications Commission. I agree that the ex post review and flexibility the FTC brings is a lot better in a dynamic marketplace than the more rigid FCC ex ante rulemaking. 

Thus, the FTC’s institutional competencies and case-by-case approach to anticompetitive conduct – as attested by Messrs. Pahl and Lipsky and Professor Lyons – bolster the basic direction set out in the FCC’s Restoring Internet Freedom proposal. The FTC has wide-ranging experience in addressing privacy practices and should be empowered to apply that experience to all online services alike. The FCC should follow through on its proposal and return jurisdiction over broadband ISP privacy practices to the FTC.

Going forward, the FCC should repeal its Title II public utility regulation of broadband Internet access services. To the extent the FCC determines in its Restoring Internet Freedom proceeding that it retains any regulatory authority at all over Internet service providers, which we do not here concede, the agency should adopt only the fact-specific, complaint-based ex post approach of the FTC. To the extent any replacement regulatory framework is retained, it should be tied to market power analysis and target specific instances of claimed consumer harm or anticompetitive conduct.

The C-SPAN video of the conference session, “The View from the FTC: Overseeing Internet Practices in the Digital Age,” is here.

[Note: The quotations by the panel speakers included in this post were taken from the C-SPAN transcription of the Conference, with minor edits made for purposes of correcting obvious syntax, grammar, and punctuation errors. None of the meaning was changed.]