The FCC’s Net Neutrality Ruling: Net Gains, Net Losses

A year ago, it was far from clear that the FCC would back the idea of net neutrality — an Internet without special high-speed traffic lanes for businesses willing to pay an extra toll, which many feared could put others at a disadvantage. But strong comments from companies and consumers caused FCC chairman Tom Wheeler, a former industry lobbyist, to reverse course and lay down the deciding vote, says Kevin Werbach, Wharton professor of legal studies and business ethics.

The ruling “ensures that companies that want to provide services on the Internet — small companies, big companies, content providers, application developers — will still have an unfettered opportunity to go online and reach customers and potentially build a very big business,” Werbach says.

In this Knowledge@Wharton video, Werbach provides a detailed look at what the ruling means for businesses and consumers, including possible implications for injecting much-needed competition into the Internet service provider space.

An edited transcript of the conversation appears below. For more on the FCC’s ruling check out this interview with former FCC chairman Reed Hundt. 

Knowledge@Wharton: I’d like to welcome Kevin Werbach to Knowledge@Wharton. Kevin is a professor of legal studies and business ethics at Wharton, and we’re going to talk about the recent Federal Communications Commission (FCC) decision on net neutrality.

The idea of net neutrality was approved by a 3-2 margin by the five-member board along party lines. And what that decision means is that the big Internet service providers like Comcast and Verizon will be barred from providing high-speed services to companies that might be willing to pay an extra toll for those services.

There’s no fast-tracking under this decision, and all companies will have equal access to the Internet. That means no blocking, no throttling — slowing down — no paid prioritization, and this seems to protect the idea of an “open Internet.” On the other side of the coin, consumers can still pay extra for faster incoming service, right? This is about pushing out rather than the service that comes in. But, my question is, what are the big business implications for this decision?

Kevin Werbach: The first thing to keep in mind is the FCC adopted open Internet rules, and essentially, as you said, they prohibit certain kinds of business practices going forward. So, it’s not that your Internet service will change dramatically tomorrow because of these FCC rules, this is basically going to the possibility that broadband access companies might discriminate. They might tell certain service providers, “You can’t reach customers, or you have to pay extra to reach customers,” or they might throttle or slow them down. If that happens, the FCC is in a position to act. From a business standpoint, this ensures that companies that want to provide services on the Internet — small companies, big companies, content providers, application developers and so forth — will still have an unfettered opportunity to go online, reach customers and potentially build a very big business.

The other thing it does is it tells the broadband access providers, the companies, as you said, like Verizon, AT&T and Comcast, that certain practices are off the table. There has been a lot of talk over the last several years that this has been under discussion that somehow that will prevent them from investing or will destroy their businesses — the reality is the day after the FCC chairman announced that he was planning to adopt these particular rules, the stocks of the cable industry went up. And so, while there is a lot of concern about government regulation and so forth, now, many of the companies — Cablevision and T-Mobile and Sprint — there are executives who have come out and said, “You know what? At the end of the day, this doesn’t really affect our business that much.”

Knowledge@Wharton: If the stock went up, then does that mean that it’s actually good for business? Or does it mean that a little bit of the previous uncertainty has been alleviated and so people feel more comfortable investing?

Werbach: I think the stock went up partly for other factors, and partly just because the negative had been to the extent that investors were concerned, it had already been priced into the stocks. And also, it’s really easy to get scared that the big, bad government might do something. But, what the FCC has made very clear is that they are not going to engage in direct price regulation, they have explicitly used what’s called forbearance, which is a legal tool they have under The Communications Act, to state that they are not going to enforce certain rules, even if they’re on the books. So, ultimately, an open Internet is good for everyone, and ultimately, frankly, the broadband access providers want to see that, as well. There are going to be business disputes, there are going to be conflicts and there are going to be issues. But, most of those actually go beyond the discrimination issues that the net neutrality order is about.

“There’s an important principle here, which is that the Internet has been an extraordinary vehicle for economic activity, as well as political activity and speech and innovation, because it’s an open network.”

That is partly why this is actually important. The reason, I think, that the broadband access companies were so strongly opposed to this legal theory the FCC used, which is basically to reclassify broadband access under the same provisions that apply to telecommunications services, is that their long-term strategy is to transition, as they should, to being Internet-based companies, and ultimately, that would get them totally out from under the FCC, unless the FCC applied this set of rules.

Knowledge@Wharton: Does that make them regulated monopolies under Title II? What does that mean?

Werbach: A lot of words get thrown around, people talk about whether this is a regulated Internet. It’s not — people talk about this as turning the Internet into a utility, and that’s not right. These companies aren’t monopolies, there is competition for broadband [although] there’s not enough competition for broadband in the United States, especially for high speed broadband — it’s very concentrated market. And there are opportunities for that to change at the margins. One of the other things the FCC did in the same meeting was overturn some state laws that actually got in the way of cities competing where there wasn’t sufficient broadband competition [by] building their own municipal networks — the FCC is now trying to break down barriers so there’s more competition.

But, for the moment, the competition is limited. And even when there is some level of competition — it’s true, I can choose between Verizon, Fios or Comcast for my broadband where I live — even where that’s the case, they are big companies that have a lot of control. And once I sign up for [service], any company, whether it is Google or Netflix or Facebook or Etsy or any of these companies that want to reach me, they have to go through that broadband company. So, the Communications Act has regulations for these companies, because they’re in a strong, bottleneck position over a fundamental input for the information economy.

Knowledge@Wharton: What about the implications of the ruling for consumers?

Werbach: Well, again, nothing is going to be fundamentally different because of these decisions. The question is: What business models might get adopted? What kinds of pricing policies might get adopted — and what kinds of practices might happen in the future? And the argument against these rules is that broadband companies won’t invest to speed up their networks, that only if companies can pay to get faster service, will there be faster service. That hasn’t been shown, and it stands to reason that if people want to get access to this content and these services and applications, that the companies will provide access to let that happen, people can still pay for faster broadband service. None of this is saying that everything has to be exactly the same; it just has to do with discrimination.

At the end of the day, the issues that consumers, I think, are most concerned about [is] the perception that prices are too high, that there is bad customer service — and there have been lots of incidents with Comcast, in particular. These rules don’t address that directly. But, what they do is provide jurisdiction for the FCC. So, for example, there’s been discussion of what’s called zero rating, or different pricing practices that exempt certain services from price and from usage caps. The FCC will now have jurisdiction to address those practices if and when they are adopted. But, right now, the way broadband works today is the way broadband is going to work tomorrow.

Knowledge@Wharton: This also affects mobile services. What are the implications?

Werbach: In the FCC’s 2010 Rules, which were the prior net neutrality rules that were overturned in court, it basically cut a deal, and it said other than the blocking rule, which says you just can’t completely block traffic, the discrimination rules don’t apply to mobile. And there was really no good policy reason for that. It was — again, it was a deal to get some support from the industry. The FCC has now gone back and said, “Look, technically, mobile and wireless Internet service are different, there are more congestion issues for mobile,” but, the idea that you can’t unreasonably discriminate, that you can’t throttle or slow something down just because you don’t like the company or you want to prevent them from competing, that doesn’t make sense, whatever the platform is. So, that’s what the FCC has said. They’ve said that mobile and the fixed Internet are now in the same, basic bucket.

“The reality is there is no way anyone can wave a magic wand and say, “Poof, there’s another high speed broadband provider across the entire United States.” It’s an incremental process….”

Knowledge@Wharton: There will be court cases, what are going to be the big challenges? How long is this going to take before it’s actually settled?

Werbach: The industry has already said it’s going to sue — there will be litigation. In all likelihood, we’re looking at two to three years before this gets through the first court. And then, in all likelihood, whoever loses, [will go to the] the Supreme Court. So, this is not something that we will have certainty on for a while.

Knowledge@Wharton: In the past you talked about competition, the fact that there isn’t enough competition in this space. You also said some competition could come from municipalities and from wireless services. Has there been any movement on that or is that still an interesting possibility that remains to mature?

Werbach: The FCC has finally taken action on municipal competition, which for a long time, was an issue that they didn’t act on. There are all sorts of state laws that had been passed that really hamstring cities from competing. There is also something that the FCC chairman has said that he intends to pursue, which is making it easier for private companies that want to build, say, competing fiber optic networks like Google is starting to do in some areas,… to make it easier for them to get access to telephone polls and conduits, these sort of nitty gritty issues that actually have a huge amount to deal with the viability of competition.

There’s another set of issues that would seem not to be related, but, it’s the price of getting to video. So, if you want to offer a competing fiber broadband service, you have to offer a bundle. You’ve got to offer the so-called triple play [i.e., phone, cable and Internet], because that’s what people expect. But, it actually is far more expensive for a new entrant to get access to the programming, all the channels, than it is for an established player. So, that’s also something that the agency hasn’t acted on, but, I think they may act on [in the future]. We’ve seen Google enter a number of new markets with fiber, so, I think in the last year, we’ve seen movement in that direction. But, the reality is there is no way anyone can wave a magic wand and say, “Poof, there is another high-speed broadband provider across the entire United States.” It’s an incremental process; city-by-city, wireless keeps getting better, but it’s never going to be exactly the same as wire line service. So there certainly are ways we could have more competition. One thing the FCC has not done, and has not given any indication that it wants to do, is require the incumbent network operators to share in their networks. That’s how competition works almost everywhere else in the world – it’s not the direction we’ve gone here, and it’s not the direction we’re likely to go here. So, yeah, the competition issue is going to be with us for a long time.

Knowledge@Wharton: What about this is important for viewers to know?

Werbach: You hear a lot of hyperbole on both sides of this, and it really is important for people to calm down. There’s an important principle here which is that the Internet has been an extraordinary vehicle for economic activity, as well as political activity and speech and innovation, because it’s an open network. And when this debate started years ago, the broadband companies would say, “Look, we built the pipes, we control [them], if we want to discriminate, we should be able to discriminate.” Now, if you listen to executives at companies like Comcast and Verizon, what they say is, “We don’t agree with these rules, we think they’re too regulatory, we’re concerned about what the FCC might do with price regulation. But we agree the Internet should be open, we agree that discrimination — unreasonable discrimination — doesn’t have a place.” We can debate about certain practices, where a company wants to pay for better service, as opposed to service being reduced, but the basic notion now is widely accepted. And so, neither outcome here was going to dramatically change the Internet.

The other piece that’s important for people to realize is this was a pretty shocking reversal by the FCC from where they started a year ago. This idea of classifying broadband as telecommunications under Title II of The Communications Act was something the FCC chairman was not inclined to do, and I and other experts said, “Not going to happen.” It did happen. And it happened partly because lots and lots of individuals, as well as lots and lots of innovative companies, wrote to the FCC, went in and met with the FCC and, with the support of lots of very affected advocates, convinced the FCC to change its mind. So, I think it’s important for people to realize that public input does matter, input from small companies and start-ups does matter. Twitter 

Knowledge@Wharton: I think there were four million comments.

Werbach: Well, there were four million comments, but, it wasn’t just the rubber stamp comments of people clicking a button. There were VCs and start-ups and lots of companies that spent their time going to Washington or meeting with the FCC elsewhere. I was at the FCC almost 20 years ago, when we were first looking at the Internet. I fly out to Silicon Valley and get this reaction of, like, “Who are you? Stay away from us.” And I would say, “You know what? You’d be much better off talking to us, you’d be much better off telling us what you want, telling us how we can avoid making mistakes than saying, ‘Stay away from us, we don’t want to talk to you.'” So, it’s gratifying to see that starting to happen. And I think it is important for people to realize that the government can work and can actually listen to people. But, as I said, the issue is not over. This is something that’s going to be going on for some time.

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