A Narrative of Neutrality

The FCC’s decision on net neutrality is by no means the end of the matter

In December 2017 the Federal Communications Commission (FCC), an independent regulatory agency in the United States, voted 3-2 to revoke net neutrality rules introduced in 2015. Such a decision was welcomed by the Trump administration. Sarah Sanders, the White House press secretary, said “[t]he administration supports the FCC’s efforts and…has and always will support a free and fair internet.”

Ajit Pai, the FCC’s chairman, argued that such rules posed a needless burden on internet providers, which stifled competition and innovation ultimately to the detriment of consumers. In a light-hearted attempt to mitigate the backlash, Pai also said that the revocation of the neutrality rules did not mean internet users could no longer “post photos of cute animals.”

Despite this reassurance, there were many negative responses to the decision. Barbara van Schewickof Stanford University said the decision was a “stain on the FCC” that would harm the economy. Tech companies such as Alphabet and Facebook were also disappointed after having urged the Commission not to rescind the rules. The New York Attorney General Eric Schneiderman plans to lead a multi-state legal suit challenging the decision. Several Democrat Senators also plan to introduce a resolution to undo the FCC’s vote and restore net neutrality rules.

Contrastingly, many internet service providers (ISPs), including the likes of Verizon and Comcast, were more favourable of the FCC’s decision. The 2015 rules had previously prevented these companies from being able to block, slow or charge more for certain content accessed by their customers. But while they may be free to do so as a result of the Commission’s decision, ISPs will still have to comply with transparency requirements which obligate them to make any changes known to consumers.

Try Then Try Again

This is not the first time the contentious issue of net neutrality has come to the fore. Indeed it has been constantly debated ever since the birth of the concept, with economists, technologists and even at times the courts involved in its development. Thus, the events in December are most likely the beginnings of a new chapter in the net neutrality story.

In his 2002 paper, Tim Wu, regarded as the original purporter of the concept, described net neutrality as a principles preventing “broadband operators…from restricting what users do with their internet connection while giving the operator general freedom to manage bandwidth consumption and other matters of local concern.” To expand on Wu’s definition, network neutrality essentially refers to the concept of data packets moving impartially on internet no matter their content, destination, size or sources. This concept is sometimes referred to as ‘The First Amendment of the Internet’.

It is ISPs which are considered responsible for adhering to this principle, and such was the case when the 2015 rules were in place. ISPs include those companies which take on the role of transferring data packets across the internet. American ISPs like Verizon, Comcast, Sprint and others make up what is known as ‘the internet backbone’. It is through this backbone that data packets move across the internet and this process is facilitated by ISPs exchanging packet traffic via exchanges referred to as Network Access Points. Net neutrality therefore suggests that these providers which move these data along should do so in a way which all end users can access that data equally.

This principle has been of particular prominence today since modern routers are capable of prioritising certain traffic over others. This is helped by various technologies such as “deep packet inspection” (DPI), which enables network providers to identify the kinds of data coming through its pipes. ISPs argue that these technologies help them to manage traffic more efficiently and provide the best service possible to consumers.

But the concept of net neutrality deals with the concern that ISPs may use these technologies in adverse ways. For example, some say that ISPs could potentially favour their own internet applications and services over competitors by ‘throttling’ rival content or degrading delivery of their services to ‘slow lanes’ as content travels to consumers. Thus, content providers have been keen on the imposition of net neutrality rules to ensure that their content is not subjected to this kind of treatment by ISPs, particularly those whose content can be large in size such as Netflix and other streaming services.

Such interference from ISPs was realised in an American court case from several years ago, and was the first of two major cases addressing the regulation of internet providers. In Comcast Corp. v FCC (2010)¹, subscribers to Comcast’s high speed internet service discovered that the company was interfering with their use of peer-to-peer networking applications online. These applications allow users to share large files with each other directly without the need of a central server. As such these applications require a lot of bandwidth. A complaint was made to the FCC regarding this interface by Comcast which eventually led to a legal challenge against the company. The Commission argued that Comcast’s actions contravened the FCC’s Internet Policy Statement, which entitled consumers “access the lawful Internet content of their choice…[and] to run applications and use services of their choice.”

The Commission further claimed that it had jurisdiction over Comcast’s network management practices under the Communications Act of 1934. Comcast’s response was twofold. First, it argued that its interference with peer-to-peer networks was necessary in order to properly manage scarce network capacity. Second, it suggested that the Commission did not have jurisdiction over its practices, or at least failed to show that it did under the statutory provisions at the time of the case.

The Court of Appeals for the DC Circuit addressed that second point as it was not concerned with the pros of cons of network neutrality or how companies like Comcast managed their network traffic. Rather the court was concerned with whether the Commission could impose the rules it had established on Comcast and others under the Act of 1934.

The provision which the Commission cited to justify its jurisdiction over Comcast authorised it to “perform any and all acts, make such rules and regulations, and issue such orders, not inconsistent with this chapter, as may be necessary in the execution of its functions.” Applying the findings of previous cases, the court emphasised that the Commission could exercise this “ancillary” authority only if it demonstrated that its action were “reasonably ancillary to the…effective performance of its statutorily mandated responsibilities.”

Using this standard, the court was unconvinced that the Commission had demonstrated this and thus ruled in favour of Comcast. In essence, the court found that the Commission did not have “explicit” statutory authority over the company and so could not exercise its “ancillary authority” provided by the Act of 1934.

The court explained that whilst “Congress gave the [Commission] broad and adaptable jurisdiction so that it can keep pace with rapidly evolving communications technologies…the allowance of wide latitude in the exercise of delegated powers is not the equivalent of untrammelled freedom to regulate activities over which the statute failed to confer.” Thus, the Commission, by imposing its net neutrality rules on Comcast, was acting beyond its powers as it did not have the authority to intervene in the network and traffic management of companies like Comcast.

The Comcast case was a blow to the FCC’s efforts at the time to impose net neutrality rules on ISPs. But it pursued nevertheless with its mission. The Comcast case had only established that the Commission could not impose its broadband rules through the legal mechanisms it cited, and did not assess the merits of the rules themselves. Thus, after Comcast, the Commission adopted the Open Internet Order, which included net neutrality policies. The Order imposed disclosure, anti-blocking and anti-discrimination requirements on broadband providers. Inevitably this led to another legal dispute, initiated by Verizon and others, and was the subject of the second court case looking at the FCC’s imposition of net neutrality rules.

In Verizon Communications Inc. v FCC (2014)², the Commission argued that section 706 of the Telecommunications Act of 1996 granted it authority to enact measures concerning broadband infrastructure. The principle question for the court in this case was whether the Order being contested by Verizon was within the scope of the Commission’s statutorily provided authority.

The court here once again vacated the Commission’s Order, but only in part. The court thus ruled in favour of Verizon in declaring that the net neutrality rules could not apply to it and other ISPs alike. The reasoning the court gave was that since the Commission “has chosen to classify broadband providers in manner that exempts them from treatment as common carriers, the Communications Act expressly prohibits the Commission from nonetheless regulating them as such.” Furthermore, as the Commission had failed “to establish that the anti-discrimination and anti-blocking rules do not impose per se common carriers obligations” the court vacated those parts of the Order.

Following the decision made in Comcast and other authorities, the court came to the conclusion that because the Commission had defined broadband providers like Verizon as “information services” as opposed to “telecommunications services”, such providers were not subject to the regulation of common carriers under Title II of the Communications Act of 1934. Yet, as in Comcast, the court was not concerned with the merits of the rules, but whether they could be imposed on ISPs.

After the Verizon case, considerable political pressure was exerted on the FCC to continue in its efforts to establish, as well as successfully subject ISPs to, net neutrality rules. This eventually led to the FCC issuing the 2015 Open Internet Rules and Order. This included four basic open internet rules which broadband providers were required to follow; no blocking, no throttling, no paid prioritisation and no unreasonable inference or unreasonable disadvantage standard for Internet conduct.

The Order dealt with the definition problems identified in Verizon and reclassified broadband internet access service as a telecommunications service under Title II of the Act of 1934. The Commission stated that by doing so it could “regulate, consistent with the Communications Act, broadband providers to the extent they are ‘engaged’ in providing the broadband Internet access service.” Since broadband providers conveyed information about their download speeds and network security when advertising to consumers, they were presenting themselves as common carriers responsible for delivering internet content. This essentially was the Commission’s justification for the reclassification in its 2015 Order.

Such action by the FCC was of course contested by many. The Order would have most likely been challenged on the basis that while the Commission changed its own definition of a broadband provider, it could not change the true nature of what they are. The United States Telecom Association (USTA) made the point at the time that Congress defined an information service as “a service…that provides access to the internet.” It could therefore be easy to see how the 2015 rules may have been vacated by the courts again. Alas, in the end, there was no need for the courts to step in, as a change in the US presidency would confirm the Order’s fate.

Rules Are Made to be Trumped

Even before his appointment as chairman of the FCC, Ajit Pai was not a fan of net neutrality. In December 2016, soon after being appointed, he wrote a letter to broadband providers and interest groups signalling his intention to address the net neutrality issue “as soon as possible.” Then, as promised, in April 2017 Pai put forward proposals to scrap the Title II rules and replace them with “light touch regulation” specifically designed for information providers.

The new policy makes three main changes to the rules regulating broadband providers in America. Firstly, it scraps the previous definition of a broadband internet service and reclassifies it as an “information service” under Title I of the Act of 1934. Secondly, it “[r]einstates the classification of mobile broadband Internet access service as a private mobile service.” Thirdly, it re-establishes the Federal Trade Commission’s authority to protect consumers “against unfair, deceptive, and anticompetitive practices” by broadband networks.

The immediate concern of critics was that ISPs would begin to wreck the internet people know and enjoy. But as Kevin Werbach, a former FCC lawyer and an advocate and net neutrality rules, points out, such companies are “not going to intentionally be so stupid as to realise the worst fears that are out there” and start hiking prices. But such a concern may be more legitimate in the long-run. Since the FTC’s capacity to regulate ISPs will be considerably narrower than the FCC’s under the new policy, some worry that broadband providers that enjoy monopolies may be particularly troublesome. Such companies, while no longer subject to neutrality rules, could be tempted raise prices for certain content whilst not having to worry about competition from other providers to bring prices down. Nor, in theory, would they be incentivised to improve infrastructure. None of this is would be to the benefit of the consumer.

But the arguments presented by broadband providers in favour of this new policy are also reasonable and should be acknowledged too. In the Comcast case, Comcast emphasised that its interference with the peer-to-peer sites was a necessary part of sound network traffic management. ISPs would argue that content which requires more bandwidth can hamper its ability to offer quality services to other less bandwidth-hungry users. By being able to charge more for access to sites like Netflix, which uses more bandwidth for streaming movies, ISPs would be able to internalise the additional costs imposed by Netflix and others like it, which would in turn discourage its excessive use. As a result, ISPs can cut congestion and costs and pass on the savings it accrues to consumers in the form of lower prices for other users. Thus, the freedom to charge different price levels for different kinds of content gives ISPs the ability to offer a better service for more users.

Alternatively, under net neutrality rules, users who were less bandwidth-hungry were essentially subsidising users who were more so. ISPs would ideally have to set a price which covers the cost of those more bandwidth-hungry users which would mean a higher overall cost for all users. Thus, any efficiency argument for net neutrality would appear to be lacking.

Equally, differentiation in pricing may allow ISPs to invest more in its services to improve them, even where there may be a lack of competition in a particular geographic area. Pai reckons that under net neutrality rules, investment by the largest ISPs in the US fell 5.6% between 2014 and 2016, at the cost of 75,000-100,000 jobs. Charging higher prices may allow ISPs to invest in various technologies and methods to create better experiences for its consumers. This may even be the case with monopolies since it would seem undesirable to not improve network infrastructure to incentivise more consumers to pay higher prices for better services.

There is also the worry that ISPs may favour its own intent services and applications by putting those in ‘fast lanes’ and subjecting rivals to ‘slow lanes’. Some claim that ISPs may even be tempted to block rival content altogether. Two arguments can be made in response to this. The first is that such actions would be illegal whether there are neutrality rules in place or not. The FTC will have the role of protecting against such anti-competitive behaviour in a more specific manner than the broad approach afforded to the FCC under the 2015 rules. Secondly, it would make little sense for ISPs to prevent users accessing popular content. By doing so it may lose out on potentially higher revenues from more users being more willing to pay more for better access to Netflix or other popular content providers. Attempting to exclude rivals could thus impose a costly economic own-goal on those ISPs doing so.

However, while the likes of Netflix or Facebook may be able to cope with paying more to access more users, smaller businesses or younger start-ups may be less capable. Thus, without neutrality rules, it may be possible that the higher prices may filter out those smaller upcoming firms, squashing innovation and stifling choice for consumers. But under neutrality rules, the prices these content providers may be paying would all be higher regardless so as to compensate for the heavier content, and so smaller firms could still be priced out.

It would seem, therefore, that the principle of net neutrality is a desirable one: encouraging more innovation and choice is hardly ever frowned upon. Yet, the net neutrality rules which have existed so far may come up short in achieving this in a truly effective manner. Crucially, a balance should be struck between preventing anti-competitive and unfair behaviour by ISPs, especially by monopolies, whilst ensuring and maintaining the efficiency and quality of the internet services market. Such a fine balance would be of the greatest benefit to consumers but could be difficult to achieve. The FCC’s latest decision at least opens up the debate once again, and Pai has said the Commission is open to consultations for further proposals. But the decision in December is not necessarily the end of net neutrality. If ever brought back, such rules may look quite different from the ones in place in 2015. The FCC vote may end up being more of a signal for change to neutrality rules rather than a declaration of its permanent demise.

Sources:

1. Comcast Corp. v FCC, 600 F. 3d 642, 661 (2010)

2. Verizon Communications Inc. v FCC 740 F.3d 623 (D.C. Cir. 2014)

Murray A, ‘Information Technology Law: The Law and Society’ (3rd Edition, OUP 2016)

Greenstein S, Peitz M and Valletti T, ‘Net Neutrality: a Fast Lane to Understanding the Trade-Offs’ (2016) 30 Journal of Economic Perspectives 127

Hylton KN, ‘Law, Social Welfare, and Net Neutrality’ (2016) 50 Review of Industrial Organization 417