Kevin Werbach and Christiaan Hogendorn on the Net Neutrality Ruling

A favorable court ruling the U.S. Federal Communications Commission obtained last week reaffirms its regulatory authority over broadband internet access and thereby the rules it passed last year on “open internet” or net neutrality. The court also gave the FCC powers to deal with privacy issues as they relate to broadband service providers, taking those powers away from the Federal Trade Commission. With its authority now made clear, the FCC could get down to transparently resolving various issues facing the industry, said experts at Wharton and Wesleyan University.

“A number of issues are teed up” that need regulatory intervention as broadband services providers compete in the marketplace, said Kevin Werbach, Wharton professor of legal studies and business ethics. These include a controversial feature called zero-rating where consumers get free data for sponsored content but with riders beyond that; usage-based pricing; caps imposed on data usage; and interconnection rules that govern networks connecting between one another. “The companies on either side will make their arguments before the FCC and work this through,” he added.

Werbach, a long-time expert on internet policy and digital convergence, believed that the dispute between the industry and the FCC that went to court in the latest instance was perhaps needless. “This long fight about the FCC’s legal authority hasn’t helped anyone,” he said. “There are [many] gray areas, and there are a lot of important issues where there are two sides to the argument. [Now], you’ve got an expert regulator that is going to be a fair cop on the beat to resolve them.”

According to Christiaan Hogendorn, professor of economics at Wesleyan University in Conn., the FCC’s win is significant for the endorsement it gives to net neutrality. “The main logic behind net neutrality is to provide a lower-risk environment for innovators,” he said. “You don’t have to worry that if you come up with an idea, you would be kept out of the dance by the powers that be at the [internet service provider].”

“The main logic behind net neutrality is to provide a lower-risk environment for innovators.”  –Christiaan Hogendorn

FCC chairman Tom Wheeler expressed a similar thought in a statement after the court ruling Tuesday last week. “Today’s ruling is a victory for consumers and innovators who deserve unfettered access to the entire web, and it ensures the internet remains a platform for unparalleled innovation, free expression and economic growth,” he said.

Werbach and Hogendorn discussed the main takeaways from the FCC’s court win on the Knowledge at Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

What ‘Open Internet’ Means

Essentially, the U.S. Court of Appeals for the D.C. Circuit last week upheld stricter rules in place linked to net neutrality contained in an FCC order of March 2015. In a 2-1 ruling, the court required service providers like Comcast and AT&T to avoid discriminating between users in terms of internet speed delivery, where those who can afford to pay more get higher speeds. According to the FCC, the ‘open internet’ (or net neutrality) means it must remain “open for commerce, innovation, and speech; open for consumers and for the innovation created by applications developers and content companies; and open for expansion and investment by America’s broadband providers.”

The FCC’s ability to push for that ‘open internet’ was achieved with the court upholding the regulator’s legal authority to reclassify broadband internet access as a telecommunications service, which is the same category used for telephone services. Werbach noted that the debate on net neutrality began before 2000. This was the third time the FCC has tried to adopt enforceable ‘open internet’ rules, he said. Twice before it had been challenged in court and its proposals were overturned, he added.

The latest case arose from a petition filed in May 2015 by USTelecom, the association of broadband service providers, seeking a stay on the FCC’s open internet order. This time around, expectations were mixed on the outcome of the case. Werbach said the FCC was expected to win on the basic issue of its legal authority to reclassify broadband internet access as a telecommunications service. However, it was seen as vulnerable on other aspects of its order last year, such as classifying wireless services under net neutrality and interconnection rules, he added. “The FCC won across the board; it was a sweeping victory for the FCC.”

According to Werbach, the dispute is not about whether any firm is making too much money. “This is capitalism. It’s entirely appropriate for Comcast and Verizon and AT&T to want a return for their shareholders,” he said. “The question is [about] allowing this to be done in a way where if anyone engages in some anti-competitive, unreasonable discrimination, where essentially they are using their gatekeeper control to disadvantage customers and disadvantage innovation, then there is the opportunity for the FCC to step in.”

“The FCC won across the board; it was a sweeping victory for the FCC.” –Kevin Werbach

Impact on Consumers

Werbach noted that internet service providers have said that they would have to slow down their investments — and that would be worse for consumers — if they have to adhere to the rules that prevent blocking, discrimination, prioritization and so forth. However, he did not expect service providers to follow through on that warning. The new rules on the open Internet have been in place for more than a year, but no slowdown in investment has occurred, he noted. In fact, the FCC has had some form of open internet rules for several years, he added.

Hogendorn said rapid technological advances have ensured that consumers get more bandwidth without having to pay more, and that it is possible that would continue. However, if congestion occurs and that necessitates new equipment, it raises the question of who would pay for it, he added. In specific cases involving a service such as a Netflix or a Hulu, advertisers may pick up a part of that extra cost and the consumer could actually end up paying less, in exchange for viewing some advertising, he added.

Zero-rating and Transparency

The zero-rating practice is expected to be among the most contentious in the foreseeable future. “The FCC has said that zero rating … might be a problem, but [it will] not across-the-board forbid it,” said Werbach. He noted that service providers have advanced arguments that zero-rating might be a good thing for consumers. “It might be a way to give consumers cheaper service, and is used in some low-income areas to give subsidized, free service but only to a limited subset of content,” he added.

Hogendorn noted FCC chairman Wheeler’s recent comments on the need for “instant scalability” where startups would get more server capacity and bandwidth if they need to rapidly grow their operations. In such a scenario, zero-rating without transparency in how data caps are set would be problematic, he said.

“Hopefully, this court decision means we’ve gotten beyond the point of fighting about the legal authority, and now we can have the real debates about the real issues.” –Kevin Werbach

The right way to go about resolving those issues “is to get the experts in, get the economic data in,” said Werbach. “Let’s have this all out in the open – not just some secret handshake deals behind the scenes by companies. And then we can see – if this is actually beneficial for consumers, then [it would be] great.”

Industry Will Dig In

Broadband service providers are not likely to let the latest court ruling go unchallenged. Werbach said he expected companies like Comcast and Verizon to seek a re-hearing, but added that such a move is unlikely to succeed. Next, he expected them to appeal to the Supreme Court, but they would fail there as well, he predicted.

Meanwhile, Werbach expected the industry to continue to push Congress to act in their favor. “Congress can change the FCC’s legal authority or can tell the FCC what to do,” he said. “The Republicans have done a lot of saber-rattling about net neutrality [and] about limiting the FCC’s legal authority.” He noted that President Barack Obama has threatened to veto any such move, and therefore the service providers are unlikely to get the traction they want in Congress.

“But they would keep trying,” said Werbach of the service providers pushback on net neutrality, adding that it would be in right order. “This is the infrastructure of the 21st century … [and] the platform for the internet,” he said. “You have lots of very sophisticated, very large companies on all sides as well as innovative startups in this world. There will be points of friction, and that is okay. It has happened every time before we had a transformative platform.”

According to Werbach, the challenge is to chart a path through those tough issues that is realistic. “The problem has always been on both sides,” he said. He noted that each emphasizes either “the absolutism” of black-and-white rules, or a world without rules where regulation would bring a stop to all innovation and investments. “Neither of those is reality,” he said. “Hopefully, this court decision means we’ve gotten beyond the point of fighting about the legal authority, and now we can have the real debates about the real issues.”