How Net Neutrality Will Fare Under Trump’s FCC

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Wharton's Kevin Werbach and Wesleyan's Christiaan Hogendorn discuss changes at the FCC.

Donald Trump’s Federal Communications Commission is expected to roll back hard-fought rules on network neutrality — specifically the decision to make broadband as heavily regulated as landline phone service — but it will most likely take an act of Congress to do so, according to Wharton experts.

The new FCC chairman, Ajit Pai, is a noted critic of regulations on net neutrality — the idea that all internet traffic should be treated equally — preferring to rely on competition to put curbs on the industry. Already, he has ended investigations into companies technically in violation of net neutrality because they let their customers stream digital content exempt from their data caps.

At the heart of the fight is the 2015 classification of broadband as a common carrier service under Title II of the Communications Act of 1934. The reclassification of broadband was an Obama-era decision that drastically shifted longstanding U.S. policy because of the view that high-speed internet access is becoming as important as basic phone service.

Under Trump, “it’s unlikely that the FCC’s classification of broadband as a Title II service will survive. But I think that’s going to change not from FCC action but from congressional action,” says Kevin Werbach, Wharton professor of legal studies and business ethics who was an adviser to the FCC and tapped to serve on the Obama technology transition team.

Due to the FCC’s internal procedures, it’s not easy to revoke Obama’s regulations — the 2015 Open Internet Order — which also was upheld by the courts. “The FCC can’t just change its mind every time there’s a new party in office,” Werbach explains. “For them to put out another order saying we’ve changed our mind, they would have to come up with a reason why circumstances have changed again so much [in a short time] other than there’s a new party in charge.”

Congress, however, can change the law at any time and there are bills in circulation to do just that. “The real question is, how far do they want to pull things back?” says Werbach, who spoke on the Knowledge@Wharton show, which airs on SirisXM’s channel 111 (Listen to the full podcast using the player at the top of this page.) “Pretty much all of the major companies — Comcast, Verizon, the broadband companies — are on record saying they’re OK with a no-blocking rule, they’re OK with some kind of discrimination rule. They may even be OK with a [paid] prioritization rule,” which creates internet fast lanes for parties willing to pay for it.

“They just don’t want the agency to have any prospective rule-making authority to implement going forward,” Werbach adds. If Congress does act, he sees legislators rolling back the tougher provisions of the Internet Order but also doing a long-needed update of the rules and adopting “some basic net neutrality principles in the statute, which is not the case today.”

“It’s unlikely that the FCC’s classification of broadband as a Title II service will survive.”–Kevin Werbach

Gerald Faulhaber, Wharton professor emeritus of business economics and public policy, agrees with Werbach that broadband will not stay under Title II. “I guarantee you either Ajit Pai or congress is going to roll that back,” he says. “That’s a really good thing.” Faulhaber, a former FCC chief economist, says that people “got very worked up about it” fearing an abuse of power, “but the fact is, it almost never happened.” His point: Why add more rules when broadband isn’t broken?

If more regulation is needed for broadband, it is better to invoke section 706 of the Telecoms Act instead of Title II, which the industry has long seen as a scorched earth approach, Faulhaber notes. Under former FCC chair Tom Wheeler, broadband was initially going to come under 706. “Then they got the word [from the White House] to do it as strongly as possible,” meaning evoking Title II, Faulhaber says.

In the Telecommunications Act, section 706 is a one-page section that gives the FCC and state regulators the power to oversee advanced telecommunications providers when it comes to price caps, measures to promote competition and removing barriers to infrastructure investment, among others. In contrast, Title II spans dozens of pages and regulates the charges, practices and classification of common carriers, among other provisions.

Origins of Net Neutrality

Clouding the discussion is that today’s definition of net neutrality encompasses much more than what it originally meant. When U.S. residential broadband service emerged in the late 1990s, people were accessing the internet either through a service that traveled over phone lines (DSL) or cable lines (broadband), according to a white paper by Faulhaber titled, “Economics of Net Neutrality: A Review.”

The phone companies’ DSL lines were regulated under common carriage laws, which means, among other things, letting rival internet service providers (ISPs) use the network to offer competitive internet service. But this “open access” privilege was not extended to cable broadband, because the service was classified as an information service.

“The idea of zero-rating is itself a violation of the principle of net neutrality.”Michael Sinkinson

Since cable operators did not compete with each other and were not required to give rivals access to their lines, fear arose that this would “lead to monopolistic constraints on internet access, destroying the very freedom which made the internet such a valued resource and fountain of innovation,” the paper said. The 2005 “Brand X” case challenged the FCC’s decision to classify cable broadband as an information service, but lost. That’s when the supporters of “open access” came up with network neutrality.

Originally, net neutrality advocated that internet service providers take a hands-off approach to online traffic. “The initial principle was that the transmission and routing of internet traffic should be ‘dumb’ and all intelligence in the network should be lodged at the end-points” such as computers or other devices, the paper said. The job of cable broadband was to “simply deliver bits” and will not have the power to alter or control any content.

Now, the meaning of net neutrality has expanded to include “paid prioritization” and “zero rating,” which lets companies exempt their service from a customer’s data buckets. Net neutrality also has been invoked in the case of disputes about interconnection fees between ISPs — or an ISP and a content provider — as they connect to each other to route online traffic.

Faulhaber says the expansion of net neutrality’s scope has plunged the FCC into areas it should not be in, such as interconnection fees. In 2015, Netflix complained to the FCC that Comcast violated net neutrality because it wanted to charge for routing massive amounts of video traffic on its network. The two companies eventually reached a settlement, but “the downside was the FCC was now in the game,” he says. The case of Netflix and Comcast underscores the ability of companies to use the FCC against their rivals. “They will lobby for it.”

But Werbach argues that due to fast technological advances, the FCC does need broader powers to regulate instead of waiting for Congress. “The whole structure of having a sophisticated agency in a fast-moving area like the internet is that they are best situated to consider facts as they evolve, and markets as they evolve,” he says. “I think that’s a sensible approach to take.”

Another industry objection is that Title II will hamper investments in future innovation because of its many rules. Faulhaber’s paper cites empirical evidence from a 2008 FCC experiment: In an open auction of the A, B and C blocks in the 700 MHz spectrum, the winner of the C block would have to abide by the rules of open access network neutrality. The A and B blocks did not have these limits. The result? The mean winning bid of the A and B blocks was $1.89 per MHz-Pop compared with 76 cents for the C block. “Net neutrality rules reduce investment incentives, thereby lowering investment in broadband capacity,” the paper said.

However, Werbach is concerned that when broadband providers get a freer hand, they will become self-dealing. “The more freedom that the broadband providers have to innovate, the more risk they’ll innovate in ways” to benefit themselves. As such, he contends, “innovation is putting a positive spin on certain policies which someone else might call discrimination.”

Consumers and Zero Rating

Faulhaber counters that businesses should have the freedom to offer different products and services as they see fit. “In every industry, companies can offer multiple levels of service. The post office can do it — [you can send packages via] express mail or first class mail,” he says. Like the internet, “the mail service is important. We have various levels and no one’s upset about it. If service has to be the same for everybody, how is that fair?”

“If you offer something consumers like better, your competitors are going to get hurt. Well, too bad.”–Gerald Faulhaber

But zero-rating cases tend to favor the company offering the service, says Michael Sinkinson, Wharton professor of business economics and public policy. For example, T-Mobile’s subscribers who watch videos through its Binge On service are not charged for data usage. That makes consumers choose its service over others, giving T-Mobile an advantage.

And while zero-rating of digital content can spur adoption of new services by consumers, “the concern is that it can also give a strong advantage to an incumbent firm, or a favored partner, over an upstart, which has the potential to harm innovation,” Sinkinson says. Moreover, “the idea of zero-rating is itself a violation of the principle of net neutrality.”

Faulhaber points out, though, that such innovative new services are what make T-Mobile more competitive against its much larger rivals, Verizon and AT&T. “If you offer something consumers like better, your competitors are going to get hurt. Well, too bad,” he adds. “The end result should be, are consumers better off? That’s what you need to focus on.”

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