Archive for February, 2014
Up until the D.C. Circuit’s recent decision in Verizon v. FCC, extreme voices of the political spectrum dominated the “net neutrality” debate. The far left pressed for extensive government interference in the dealings between broadband providers and websites. And the far right questioned the FCC’s authority and need to regulate Internet services. The D.C. Circuit truncated both sides of the distribution of voices; by rejecting the left’s draconian methods, and by affirming the FCC’s authority and basis to regulate Internet services, the Court paved the way for a reasonable compromise. To satisfy the Court, however, the new regulatory regime must leave “substantial room for individualized bargaining and discrimination in terms” of special-delivery arrangements; else it would amount to an outdated mode of regulation called “common carriage.”
The solution, which Bob Hahn, Bob Litan and I have been peddling for a few years, involves the FCC making case-by-case decisions or “adjudication” in administrative law. In a nutshell, the FCC would permit special-delivery arrangements between broadband providers and websites, but the agency would police abuses of that newfound discretion through a complaint process. Adjudication would ensure consumer protections on the Internet, and it would bolster the incentives of both websites and broadband providers to invest at the edges and the core of the network, respectively, generating even more benefits to consumers.
Fortunately, the two Bobs and I are no longer the sole defenders of adjudication. In the two weeks since the decision, adjudication has been endorsed by Professor Kevin Werbach in the Atlantic, Professor John Blevins in the Washington Post, and Professor Stuart Benjamin in his blog post. Most importantly, the concept was floated by FCC Chairman Tom Wheeler in a recent speech in Silicon Valley, and made even more explicit in his speech at the State of the Net conference this week. From an economic perspective, adjudications are the most efficient and most equitable solution available to the Commission.
How would adjudications work in practice? A website (or any content or application provider) could initiate a complaint of discrimination—including claims relating to blocking, degradation of service, or equity demands—against a broadband provider pursuant to a new non-discrimination rule. Upon a quick look at the merits, the FCC could refer the case to an administrative law judge. The complainant would bear the burden of proving certain things at trial, including but not limited to (1) proof of discrimination vis-à-vis a similarly situated website; and (2) material injury flowing from the challenged conduct. The similarly-situated requirement is needed to overturn a presumption that the disparate treatment is motivated for cost differences or other efficiency reasons. The material-injury requirement would effectively shield small broadband providers from the rules. But this requirement should not be confused for a market-power test; after all, it makes no sense to import antitrust standards verbatim if we are trying to protect against harms to innovation that are not readily cognizable under antitrust law.
Adjudication would likely satisfy the D.C. Circuit’s requirement that a lawful regime must leave “substantial room for individualized bargaining and discrimination in terms.” Broadband providers would be free to enter into voluntary, special-delivery arrangements with websites; they could bargain to their hearts’ content; and they could even discriminate in the terms of priority delivery for legitimate reasons, such as differences in costs or type of application.
Indeed, in December 2012, the D.C. Circuit granted the FCC authority to impose data-roaming obligations on wireless broadband providers. In CellcoPartnership v. FCC, which is cited repeatedly in Verizon v. FCC, the Appeals Court explained why these so-called “interconnection” obligations enforced via adjudication do not amount to common carriage.
It bears noting that the duty to interconnect—beginning with Hush-a-Phone and continuing through the unbundling obligations of the 1996 Telecom Act—is part of the modern tradition of common carriage. Yet one wireless broadband carrier can challenge the terms of interconnection offered by another for being unreasonable, according to the D.C. Circuit, despite the fact that wireless carriers are not classified as common carriers. If the FCC were to embrace adjudication of the kind described here in a revised Open Internet Order, the D.C. Circuit would be hard-pressed to distinguish the two cases, particularly given that (1) both involve broadband providers, and (2) a duty to interconnect with a horizontal rival is arguably more interventionist than a duty not to discriminate for nefarious reasons vis-à-vis a content provider. And although they won’t take their legal cues from an economist, the broadband providers would have to think hard about asking the D.C. Circuit to rule that non-discrimination via adjudication amounted to per se common carriage, as the only remaining path for the FCC would be to reclassify broadband providers as common carriers.
Adjudication is vastly different from the FCC’s non-discrimination rule that was rejected by the D.C. Circuit. The FCC’s now-vacated rule made anyarrangements between broadband providers and websites presumptively illegal, and placed the burden on broadband providers to prove that such an arrangement was procompetitive to reverse that presumption. The Court correctly recognized that the FCC’s non-discrimination rule effectively barred pay-for-priority agreements—unless they were offered for free—and thereby eliminated the potential for individual bargaining among Internet service providers and websites.
Some might question whether adjudications can work in practice. As it turns out, the FCC uses a similar process to adjudicate discrimination complaints in the video space brought against largely the same set of providers. There, an independent cable network can challenge a vertically integrated cable operator for giving preference to its own cable network. A handful of independent cable networks have availed themselves of this protection, including NFL Network, MASN, and Tennis Channel. (Disclosure: I was the economic expert for the complainant in these matters.) Under the program-carriage rules, an independent cable network must show, among other things, that (1) it is similarly situated to the affiliated network in product space, (2) it is treated worse than the affiliated, similarly situated network, and (3) the inferior treatment has materially harmed its ability to compete. Sound familiar? Due to differences in the types of “carriage” arrangements in the Internet and video space, there likely would be a different evidentiary burden for websites. But the evidentiary burdens in the video space are a good place to start when designing a non-discrimination regime for the Internet.
In an age of budget-consciousness, adjudication smartly relieves the FCC of administrative cost, and instead shifts the cost of investigation to the parties in the dispute. Contrast this with the FTC’s recent investigation of Google for search discrimination, where rival search engines shifted most of the investigative costs onto the agency. In a perfect world, adjudications would be infrequent, further reducing administrative costs: If broadband providers perceive the adjudication regime as having “real teeth,” then the likelihood of conduct leading to a complaint will be diminished.
In addition to ensuring consumer protection, adjudication would encourage broadband deployment. Investment in the core and edges of the network is interdependent, as correctly recognized by the D.C. Circuit. A 2013 study byMichael Mandel of PPI found that nearly three-quarter of a million Americans owe their jobs to the app economy, which highlights the importance of getting these investment incentives just right. Permitting special-delivery arrangements—while policing potential abuses with adjudication—could spur investment by developers of applications that depend on real-time delivery. This investment at the edges could in turn spur investment by broadband providers to support real-time applications. And a swift and potent adjudication regime would provide assurances to websites that such arrangements would be made on a non-discriminatory basis, thereby bolstering their incentives to invest even more.
Adjudication would encourage broadband investment in a more subtle way. Special-delivery arrangements that were policed after the fact would permit Internet access providers to raise incremental revenues on the side of the two-sided market that is less price sensitive (content), justifying even greater investment in their networks and putting downward pressure on access prices. These investments at both the edges and the core could spur another round of innovation, which in turn could increase incomes and spur economic growth for future generations of Internet consumers.
Finally, adjudication would not represent a significant departure from the status quo, particularly compared with the alternatives of reclassification or laissez faire. Although procompetitive arrangements between websites and broadband providers would be encouraged under adjudication, the market for priority arrangements could be small in the near term given that most applications do not require real-time delivery. The notion that broadband providers will use this opportunity to shake down certain websites just to preserve access to their customers is farfetched in light of market circumstances, and if it happens, adjudication would provide the backstop to prevent any abuses.
Because extreme voices are perversely amplified in This Town, adjudications were given short shrift in the original Open Internet Order. With Chairman Wheeler’s fresh backing, bolstered with endorsements by mainstream law professors and economists, here’s hoping that we can finally solve the net neutrality quagmire and move on to other pressing communications issues.