Takeaways from FCC’s Proposed Open Internet Regs

-By Scott Cleland

The FCC’s proposed Open Internet regulations (NPRM) are sweeping and audacious.

First, the FCC proposed rules are audaciously attempting to implement the introduced-but-never-passed Markey bill (HR 3458) entitled: the “Internet Freedom Preservation Act of 2009.” The purpose, premises, language and core positions are nearly identical for anyone willing to forensically compare the NPRM and HR 3458.

This presents a substantial legal problem for the FCC in that the premises and justifications undergirding their current NPRM can be found nowhere in existing law as the FCC’s own thin 28 line legal justification confirms (paras 83-87).

It is hard to comprehend how such uncertain FCC legal authority somehow can be transformed by the FCC into more regulatory and investment certainty as the FCC declares (para 50).

Second, the sweeping premises undergirding the NPRM are asserted as givens, but are unsupported or unproven in the NPRM. These implicit premises are: facilities-based competition is a failure and can’t succeed; competition can not serve or protect consumers’ interests, because facilities owners have profit motives; broadband providers must be regulated; ISPs discriminate in “socially inefficient ways;” and FCC regulators can produce superior outcomes to a competitive market. (paras 67-74).

This presents another substantial legal problem for the FCC. Just this summer the D.C. Circuit Court of Appeals rejected the FCC’s cable cap rule because of the FCC’s unsupported and not credible assertions about insufficient market competition.

Third, the new proposed fifth nondiscrimination principle is transparently a de facto public utility principle (para 105).

The FCC believes a “bright-line rule against discrimination” (para 109) is necessary. Which exceptions or kinds of discrimination the FCC proposes to permit and not permit (paras 135-137) speak volumes about the real purpose behind what I call the FCC’s new public utility principle.

Of course the FCC has to permit discrimination for the governmental purposes of emergency communications, law enforcement, public safety, homeland and national security. And of course the FCC knew it would be untenable to not allow reasonable network management for network congestion mitigation, quality-of-service and blocking unwanted or harmful traffic.

What’s left to regulate is the real purpose behind the NPRM: economic regulation of managed and specialized services (paras 148-153) and network design/engineering micromanagement though a “Technical Advisory Process” (para 177). What’s most telling about the real purpose here is the FCC’s definition of “nondiscriminatory” as not charging anyone “for enhanced of prioritized access to subscribers.”

The transparent intent of this fifth principle is to use economic regulation to de facto impose a “dumb-pipe” technical model and a public utility economic/business model, where little to no normal competitive practices — of differentiation, customization, prioritization and diversity of choice — would be permitted.

The FCC’s stated reason for this is that ISPs “may attempt to extract some of the profit earned by content, application, and service providers by charging them fees for providing access or prioritized access” (para 68).

The real purpose here is to ban normal two-sided business models and prohibit ISPs from vertically-integrating content, applications, and services with their broadband service — which are currently normal, legal, sound and profit-enhancing business practices that happen today in most every segment of the broadband industry to one extent or another.

The FCC apparently has no appreciation of the systemic risk and economic disruption/damage to growth, jobs, innovation, and the Internet that such unnecessary and unjustified heavy-handed regulation could cause.

Fourth, the FCC’s modified fourth principle appears to be a new broadband un-bundling principle.

The FCC claims that its change of this fourth net neutrality principle makes “no substantive difference” (para 98). However, the FCC’s tortured change of the principle’s predicate from “consumers are entitled to competition” (para 5) to ISPs “may not deprive users of the user’s entitlement to competition among network providers…” is easy to interpret as the pretext for the FCC to force competitive broadband providers to wholesale unbundle their network’s elements to create new broadband resellers/”competitors,” in a re-do of the disastrous telco unbundling micromanagement of the late 1990’s i.e. line-sharing, pick and choose, TELRIC pricing and UNE-P.

Watch to see if the FCC’s expected special access proposed rule-making signals that it may unbundle competitive broadband special access services.

Fifth, also pay attention to the proposed metamorphosis of the first net neutrality principle.

“Indeed to further this interest in encouraging freedom of expression, we propose that the first rule make explicit that users can both send and receive the content of their choice.” (Para 95). This is a major change, and has big implications for First Amendment freedom of speech, given that the FCC/Government is proposing new regulatory oversight/monitoring of what consumers send and receive over the Internet to ensure the Internet is “open.”

In conclusion, the omni-takeaway from these proposed Internet regulations is that they would dramatically shift the Internet from being user-centric and user-governed to being more FCC-centric and FCC-governed.

The ultimate irony of this Open Internet NPRM is that the supposed goal was to empower “innovation without permission,” but what the proposed rules would actually do is set up a new labyrinthian process for network operators to ask the government for permission to make any substantive changes in the design, management, operation or business of their broadband network.

At core, this NPRM could aptly be named the “Mother may I” NPRM.
Scott Cleland is one of nation’s foremost techcom analysts and experts at the nexus of: capital markets, public policy and techcom industry change. He is widely-respected in industry, government, media and capital markets as a forward thinker, free market proponent, and leading authority on the future of communications. Precursor LLC is an industry research and consulting firm, specializing in the techcom sector, whose mission is to help companies anticipate change for competitive advantage. Cleland is also Chairman of NetCompetition.org, a wholly-owned subsidiary of Precursor LLC and an e-forum on Net Neutrality funded by a wide range of broadband telecom, cable and wireless companies. He previously founded The Precursor Group Inc., which Institutional Investor magazine ranked as the #1 “Best Independent” research firm in communications for two years in a row. His latest op eds can be seen at www.precursorblog.com.

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