Net Neutrality: What’s the Real Threat?

When Federal Communications Commission (FCC) chairman Tom Wheeler’s recent comments on soon-to-be-released proposals for preserving net neutrality slipped into public view, some critics saw the end effect as just the opposite of what was stated – that is, as an attack on net neutrality. Not so, responded the FCC, claiming it aims only to restore neutrality rules recently overturned in court rulings. 

Kevin Werbach, Wharton professor of legal studies and business ethics, says in this Knowledge at Wharton interview that the proposals most likely will not threaten net neutrality principles. But he warns that the real danger to the Internet ecosystem in the U.S. is the dearth of competition at the broadband provider level.

An edited transcript of the conversation follows.

Knowledge at Wharton: We’re going to talk about the suddenly controversial issue of net neutrality and the FCC’s proposals that could affect it. Let’s start with a thumbnail sketch of what net neutrality is.

Werbach: It’s funny you say “suddenly,” because in some ways, this has been a sudden controversy after the FCC proposals leaked a few days ago. But this controversy has been going on for the past decade. Network neutrality is basically the principle that Internet access providers – [including] companies like Verizon, AT&T and Comcast — shouldn’t discriminate in how they handle traffic on the Internet.

Knowledge at Wharton: So, whoever you are, if you want to offer information on the Internet, you get the same speed as everyone else?

Werbach: Well, exactly what it means is difficult and controversial…. But the general notion is that anyone can connect to the Internet. If I have a startup I may have very little capital, but I can get on the Internet, provide my service and reach customers. I don’t need permission from some company. I don’t have to pay them a special fee just to get online … and the customers of those broadband providers can get access to anything that’s there.

Knowledge at Wharton: Some are calling the proposals a death knell for net neutrality…. Tell us what everyone’s worried about, and whether or not they should be worried.

Werbach: The first point that’s important to understand is where we are today. At this moment in the United States, there are virtually no network neutrality rules that are legally enforceable. There are some rules that apply to Comcast uniquely because of some conditions it agreed to during a prior merger. And there’s one FCC rule that says that broadband providers have to be transparent in their network management practices. All the other rules were thrown out in court a few months ago — and that was after the FCC’s prior attempt to impose network neutrality was also thrown out in court.

But fortunately, the court in the most recent decision gave the FCC validation on the basic legal theory it used. The big question up until then was, “Does the FCC even have jurisdiction to address these issues?” The FCC regulates telephone service, television and so forth, [but] there was an argument that it couldn’t impose rules on Internet services. The court, for the first time, said, “Yes, they do [have the jurisdiction]” under the kind of legal theory they were using. They just couldn’t adopt the rules that they proposed.

Fast forward to today. FCC chairman Tom Wheeler has circulated to the Commission a set of proposals to adopt network neutrality rules, to ban blocking of traffic, to ban certain kinds of discrimination of traffic. The rules aren’t public yet. They’re going to be circulated among the Commissioners. If they are adopted by the Commission, it will become a proposal that goes out for public comment. But the concern has been from some quarters that the proposal doesn’t go far enough in restricting a certain kind of practice which is called “Paid Prioritization.” The idea is that there’s the basic Internet lane that anyone can use, but broadband providers might have more leeway to offer faster or better service for an additional fee.

Knowledge at Wharton: The possibility of a two-speed service has raised certain concerns. Some worry that while you can pay extra to get the faster speed, in the end, the main lane would be degraded in some way. And so, they worry about protections. Also, up until now, the industry and all of its stakeholders have been agreeing to certain conventions, where network neutrality has been respected. So far, that has worked — but now it seems that could change.

“At this moment in the United States, there are virtually no network neutrality rules that are legally enforceable.”

Werbach: Absolutely. It’s important to point out that we’re talking about connections on the network side. As an end-user customer — as an individual or a business — you have options for different speeds. You can go to your broadband provider and say, “I want five megabit service, 10 megabit service,” or whatever they offer. We’re not talking about fast lanes and slow lanes that way. The issue is for content and service providers – whether a company like Netflix that provides service to customers of Verizon or Comcast can be offered an enhanced delivery service.

And it’s even more limited than that, because it’s only an enhanced delivery service that is differentiating traffic on the broadband provider’s network. The FCC has said that this doesn’t address what’s called “peering,” which is how the traffic actually comes into the network over the Internet. So, you’re absolutely right — there are some very serious and reasonable concerns that people have expressed. The fact is, though, we haven’t actually seen the FCC proposal. What chairman Wheeler has suggested — in a blog post — is that there are going to be some substantial restrictions on how those paid prioritization arrangements can be adopted. I think, absolutely, if there’s too much room for the broadband providers to degrade the basic Internet pipe, that will violate the spirit and the reality of network neutrality. But my take is that’s not necessarily going to be the case if there are sufficient conditions put into place.

Knowledge at Wharton: So, why the misunderstanding? Why is this proposal — which will then have months of comment and debate — seen as such a threat by so many people?

Werbach: It’s a [sign] of just how partisan things have gotten in Washington. The reason that this is at the FCC is that Congress has refused to act. In fact, whenever the FCC has tried to act, different factions in Congress have threatened basically to grind the FCC to a standstill if it doesn’t do what those members of Congress want. It’s a very difficult and charged situation.

Again, the FCC has tried two times before and has proposed rules that generally haven’t provided what network neutrality advocates really wanted, which is what’s [referred to as] “reclassification.” They have been advocating that the FCC change the regulatory category that broadband is under in the U.S., [instead placing it] in the category called Title II, which applies to telephone service.

What people miss is that under Title II, under that telephone regulation category, you can do paid prioritization if it’s offered on the same terms to everyone. But there’s a perception that that’s the only solution that will protect network neutrality. And the fact that the FCC has now said, “We’re not going to do that, and we’re going to step back somewhat from what the previous FCC rules had said before they were overturned” — I think that’s gotten a lot of the network neutrality advocates upset because they see that President Obama and other officials have long claimed that they support an open Internet.

Knowledge at Wharton: And yet, when they see that there is going to be, again, two prices, two speeds, they see it as … the camel’s nose edging under the tent. What you’re saying is, we don’t really know that for sure but that the concern seems a bit overblown at the moment?

Werbach: Yes, it’s always unsatisfying when someone who is an academic or a policy wonk says, “It’s complicated.” But, it’s complicated, because it’s complicated in several ways. Technically it’s very complicated. What exactly these prioritization deals are, how they work, the engineering, how they compare to all the other options that those companies have is a very complex subject. It’s not that there’s just one way you get from here to there on the Internet. A company like Netflix has a whole variety of different providers it uses. It uses caching systems called “content delivery networks.” It engineers where its traffic goes. And it’s paying for all those services. So, it’s not that there’s this free Internet pipe and now for the first time there’s a paid pipe. There’s a lot more complexity on that side.

And then on the FCC side, there’s a lot of complexity. Again, what are the practices that go into effect? How does the FCC respond? What are the enforcement practices? And again, that’s always going to be the issue. Even if the FCC adopted this Title II regulation, they would still have to make distinctions and still have to engage in enforcement.

Knowledge at Wharton: What do you think is the bottom line for people who are looking at this issue from the outside? They see this might be a threat to network neutrality. The issues are complicated. What does it mean, for example, for consumers? Will it affect what they’re paying?

Werbach: Two points. One is that network neutrality is this vague concept. It’s a buzzword. It’s a slogan. But we need to walk back and break down what it actually means. What should people be concerned about? People should be concerned, on the one hand, if new innovative services can’t get off the ground, and can’t reach their customers — or you see that their service is being degraded…. And if we have evidence of that, then that’s something that should be taken to the FCC and to Congress and so forth to say this isn’t working.

Secondly, people should be concerned on the end-user side. If they find, for example, that broadband providers are creating discriminatory caps, saying, “You get 50 megabit service but you have this limit on your bandwidth and only certain services are subject to the limits. Ours aren’t. And the limits are far more restrictive than what’s necessary for network management.” Then that’s something. And frankly, those conditions aren’t covered under network neutrality. But they’re the kinds of things that might create these harms, that people are worried about….

“People should be concerned … if new innovative services can’t get off the ground, can’t reach their customers — or you see that their service is being degraded.”

The big thing that people should think about, the reason this is such a concern, is that we don’t have enough competition for broadband in the United States. We do have multiple providers in many places, but typically [there are] very few. And in much of the U.S. there aren’t multiple providers for truly high speed service. So … the FCC and Congress need to do everything possible to promote more competition. And frankly, the FCC and Chairman Wheeler have a lot of that on the agenda. The question is, can the FCC get to that agenda or is network neutrality going to be such a controversy that that’s the only thing the FCC focuses on for the rest of the Obama Administration?

Knowledge at Wharton: How could we get more providers and increase that competition level?

Werbach: The U.S. made a choice — and I think, frankly, a wrong choice — about 10 or 15 years ago, which is different than just about every other country in the world. I did a bench-marking study on fixed broadband for the OECD [Organisation for Economic Co-operation and Development], which is about 40 countries around the world. And the U.S. was one of the only ones that didn’t require what’s called “open access,” that didn’t require the high speed broadband providers to share their networks. So, we didn’t go down that path and at this point politically it’s very unlikely we will.

We need to think about alternate physical platforms. One of them is municipalities, cities or organizations going in and getting access to city capacity, polls and conduits and so forth in municipalities to provide their own broadband network. It’s a huge source of broadband competition in certain parts of the world, especially Scandinavia. Here in the U.S., we have laws that prohibit that in many states and cities.

The second one, the big one, is wireless. Right now wireless service isn’t a one-to-one competitor for high speed broadband. But as technology advances, in particular for what’s called “unlicensed share access to wireless” there is the potential, at least for a chunk of the broadband market — that wireless could provide a viable competitor.

Knowledge at Wharton: So, one big hot spot.

Werbach: One or many big hot spots. And that requires the FCC to make spectrum available. It requires the FCC to promote unlicensed technology. And it requires ability of all those networks to interconnect with the existing broadband infrastructure. Again, the FCC’s looking at doing all those things. I think we should push it to continue.

Knowledge at Wharton: Is it reasonable for people to be skeptical about this post-decision enforcement that happens? If we see a squelching of competition as you mentioned, or if we see some degradation, then we go back to Congress or we go to the FCC. And yet people have a sense that a lot of times … you’re up against a brick wall. Once certain practices get under way, it’s very difficult to go back and change them. There’s a lot of power and money on one side that would like to prevent change. Are people right to be skeptical? We can say we’re going to do this and if it doesn’t work, we’ll fix it. But can we fix it really?

Werbach: I’m more optimistic. First of all, there is a lot of power and money on both sides. Microsoft, Apple, Google, Facebook — these are not tiny little companies. The companies in the Internet economy, frankly, are much bigger and certainly much more profitable in aggregate than the access providers. The point is, once you go to a certain customer, you have to go through that access provider. But if you look at the history here, every time there has been a major example of a network neutrality violation — for example, there was a company called Madison River that blocked voiceover IP service — the FCC intervened, and told them to stop doing it. They changed their practice.

Comcast a few years ago was degrading [the peer-to-peer file sharing service] BitTorrent’s traffic. The FCC imposed rules, and even though the rules were overturned in court, Comcast retreated and agreed not to engage in the practices. Once they had gone through that complaint process and the public scrutiny, they didn’t want to have it happen again.

So, it’s right to say, “Hold the FCC’s feet to the fire.” But something important to remember is the additional requirement in that neutrality that I alluded to earlier — the transparency requirement, which the FCC apparently is going to beef up. If the light of day shines on the practices of broadband providers, then there are opportunities for pressure. And we’ve seen the effects of this.

“…The big thing that people should think about is [that] we don’t have enough competition for broadband in the United States.”

It’s not network neutrality, but Netflix has a chart that shows broadband performance from their streams from all providers and they’ve made a lot of hay by showing that companies like Comcast, which are out there all the time advertising how fast their service is and how great it is, are actually way below a lot of providers…. I think that has an impact on companies like Comcast. And if there is more disclosure, that will help with enforcement.

Knowledge at Wharton: Could this announcement — well, the FCC Chairman’s blog and those kinds of proposals have an effect on the proposed Comcast-Time Warner merger?

Werbach: It’s an interesting question. Legally, they’re separate issues. The merger gets reviewed by the Justice Department and it gets reviewed by the FCC. As I said, Comcast is already subject to network neutrality rules. And they’ve already said, “Sure, we’ll put Time Warner Cable under those, too.” But in the court of public opinion, people are concerned that the big broadband providers are getting bigger. And that a company like Comcast, if it acquires Time Warner, will have even more leverage in this market. And frankly, if the FCC puts into place network neutrality rules that are less than what advocates want, that’s only going to redouble the pressure to say, “Well, if you’re not going to do that, then the least you can do is kill this merger.” So, I think there is some risk for Comcast, but as a formal matter, it is two separate issues.

Knowledge at Wharton: You referred to possible municipal competition. Do you think that the government will ever view broadband as a public utility?

Werbach: It’s hard to know what that means. At some level, it should. And I wrote a paper a few years ago called “The Network Utility,” talking about how Internet access essentially is a utility. But it’s a different kind of utility. The problem when people use the term “public utility” is they’re talking about the Title II regulation I described. And that itself is not too problematic. But people need to understand that its not a panacea. People think, “Well, once it’s a public utility then all of a sudden those companies have to change all their business practices.” No, not necessarily, it’s just a different category of regulation. And the reality is that it is probably not going to get adopted in the U.S.

When you think about a public utility, people think about the pervasive regulation of either governmental or very slow, highly regulated industries like the old AT&T telephone network and energy utilities. And while there are some benefits of that, I don’t think most people feel like those were dynamic, innovative companies.

If we want broadband providers to invest in new technology, to give us higher speeds and more capabilities, then I think it’s fair to say that these are private companies and they should have the incentives of the free market. We shouldn’t just say, “Well, let’s essentially make this a government run monopoly,” which is what we’re moving away from in every other sector of the economy. I don’t think that is the solution. But I think we need to understand that [broadband providers are] so important to the economy, to daily life, to free expression, that it is appropriate to have different requirements for them than for other companies.

Knowledge at Wharton: What are the next steps for this whole procedure and argument?

Werbach: The FCC proposal has been circulated to the five commissioners. Three of them have to vote for it, which is not a sure thing because the Republican commissioners have suggested they’re not going to vote for any network neutrality rules. And the other two Democrats want something stronger. So, assuming the commission votes for it — they have a meeting scheduled in mid-May — it will go out for public comment, typically for two to three months. Anyone can weigh in. The FCC’s already set up an e-mail box for public comment, but there will be an opportunity for anyone who wants to, to go on the web and make a comment that goes in the formal docket.

Then the FCC will review all those comments and will issue an order which adopts final rules. That would probably happen sometime later this year. But again, there are a number of ways that this could get blocked. Congress could intervene. I think it’s most likely that some version of this proposal will go into effect. And then we’ll be in the realm of potentially more legal challenges, unfortunately….

Knowledge at Wharton: More broadly, what does the future of broadband look like in the U.S.?

Werbach: Again, the fact that there is not more competition is a drag on broadband in the U.S. The U.S. is the world center for Internet innovation, Internet economic value creation and Internet freedom. But that’s been weakened in recent years, partly because of some of the revelations about government surveillance, which have caused companies and governments to no longer trust the U.S. on that front, and partly because we don’t have the level of broadband connectivity by some measures that they do in other places.

That will be a drag. We’ve talked to companies like Comcast and Verizon and so forth. They say, “Look, we are investing, we are providing these high speed services, we are putting fiber networks into the ground” — which by some measures we have more widely than other countries.

But I think if you look at the potential, we haven’t gone far enough. So, I’m worried … even though Silicon Valley is here, and even though Wall Street, which funds so much of this, is here, and even though we have this extraordinary innovation culture. The smartest and best entrepreneurs and technologists want to come here from around the world — that’s not going away. But I think there is some risk, if we don’t have a true national policy of promoting advances in broadband and more competition at every turn, that the U.S. falls behind, and also that we lose some of this potential that the Internet has and that broadband has for catalyzing both economic benefit as well as all these great social benefits.