FCC Says Net Neutrality Rules Have Meant More Investment in the Internet

"Subsequent to the adoption of the Open Internet Rules, investment has surged, with venture capital funding for Internet-specific companies rising 68 percent, and investment in wired and wireless network infrastructure rising by 24 percent from 2010 to 2011,” the pleading said. “By creating greater certainty that the conditions essential to Internet innovation would persist, the rules strengthen the virtuous circle.” Prior to approval of the rules, the FCC “noted ’significant uncertainty’ in the industry concerning access providers’ network practices,” the pleading said.

Openness “drives innovation,” the FCC asserted. Carriers, meanwhile, have economic incentives to limit how open their systems are. “Provider incentives to reduce openness were not merely theoretical; the record showed that broadband providers had acted to block or discriminate against disfavored applications,” the FCC said. The FCC cites, “in addition to the Comcast and Madison River incidents, Cox, another major cable modem provider, admitted to blocking file-sharing applications, and cable/telephone company RCN settled litigation alleging it had done the same thing."

In March 2005, ISP Madison River signed a consent decree with the FCC after it was accused of blocking the ports of several VoIP providers. In August 2008, the FCC found Comcast had throttled the bandwidth available to some of its customers in order to make sure that other customers had adequate bandwidth, in violation of its rules.

USTelecom said in a recent policy paper (http://xrl.us/bnpb6q) capital expenditures by all of the communications industry combined, wireline, wireless and cable, had remained the same between 2010 and 2011 at $66 billion per year.

The FCC majority uses the pleading, in effect, to “retrofit” a “faux economic analysis” on the December 2010 order, when no analysis was done at the time, said Commissioner Robert McDowell, who voted against imposing rules 21 months ago. McDowell told us he called for a “bona fide, pure economic analysis, reviewing the market,” before the FCC imposed rules. “A lot of folks, from Congress to civil society and industry, were calling for a real market analysis for months before the order emerged, but we never got one,” he said.

Free market-oriented critics, who in general opposed the net neutrality rules, were quick to pounce Tuesday. “The FCC’s argument that by adopting net neutrality rules it removed uncertainty that spurred investment is especially disingenuous,” said Free State Foundation President Randolph May. “The reality is that by proposing to alter the status quo by adopting new regulations, the FCC created the uncertainty it now suggests it removed. A neat trick, but fallacious."

Phoenix Center Chief Economist George Ford told us the net neutrality rules mean less investment because of the uncertainty they create in the market. “Essentially, the agency is arguing that converting the threat to regulate into an actual rule reduces uncertainty, and thus increases investment,” Ford said. “Of course, another option would be not to threaten the regulation, which also reduces uncertainty but has a far greater potential for stimulating investment."

Ford noted that European Union regulators decided reducing regulation would be the greater driver for investment. “The FCC’s claims about the effect of its network neutrality order on investment demonstrate once again that the agency has no problem suspending sound economic thinking to support a politically motivated decision,” he said. “Investment in communications plant is driven by many factors, and there are very strong incentives to invest in mobile networks today, including rapidly growing demand. The relevant question is not whether investment rises or falls after a new regulation is put in place, but whether investment is above or below what it would have been without the regulation, and whether or not the spending is directed to the most efficient methods to expand availability and improve service. The network neutrality rule is simply a form of price regulation that forecloses markets to the broadband providers. Such a policy reduces investment incentives and the FCC has never made anything close to a cogent argument otherwise. It’s investment claims, whether empirical or theoretical, are pure assertions."

A former FCC official said he had not read the pleading in its entirety, but noted that the FCC needs to be prepared to back up any economic claims with “substance” if it wants to be “taken seriously at the D.C. Circuit.” The former official said basing any conclusions on “one year’s change in unadjusted data ... is like a bad undergraduate paper."

"The investment figures don’t make the case for the FCC’s net neutrality rules,” said Richard Bennett of the Information Technology and Innovation Foundation. “Since the rules were adopted, investment has shifted away from the wireline networks that are most heavily regulated by the rules to the mobile broadband networks that are largely exempt. Verizon has stopped deploying FiOS in unserved areas, and AT&T U-verse is essentially on hold as well. Meanwhile, mobile carriers continue to make massive investments in new spectrum licenses, LTE deployments, and better smartphones. Nearly all the venture investment in applications today targets mobile apps, and traditional application platforms such as Facebook and Yelp devote most of their development resources to mobile users. The overall picture suggests that regulatory certainty is most valuable when the underlying regulations are modest and humble."

But John Bergmayer, staff attorney at Public Knowledge, which supported net neutrality rules, said the FCC was on the right track in its defense. “There are two components to this,” he said in an email. “First, it should be readily apparent that online services benefit from the Open Internet rules, and it makes sense that the rules would spur investment in them. But an Open Internet benefits access providers as well. Online services make broadband service more valuable, and make customers more willing to pay for fast, reliable connections.”

Free Press Policy Director Matt Wood agreed: “It’s clear to just about everyone that open networks spur demand and investment, and that this virtuous cycle is great for the Internet economy and the economy as a whole. ... Yet rules to preserve this openness and innovation are certainly necessary, as companies like Verizon, AT&T and Comcast line up to test even the minimal, common-sense protections on the books today. Those tests come in the form of legal challenges, like Verizon’s brash claim of its alleged First Amendment right to edit the Internet, and also in the form of harmful business practices like AT&T’s intent to block [Apple’s] FaceTime on its mobile network.”

'Rerun of Comcast'?

Verizon argued in July that the commission had “conjured a role” for itself as a regulator of broadband Internet (CD July 3 p3). The telco’s attack rests on two “fundamentally flawed” premises, the commission said. First, the assertion that the commission “inserted itself” into broadband “cannot be squared with multiple indications to the contrary: the FCC’s congressionally assigned role in communications, the history of oversight of computer-based services, the agency’s discretion, confirmed by the Supreme Court, to classify broadband as an information or telecommunications service, the specific commands of Section 706, the Commission’s established authority to issue and modify spectrum licenses in the public interest, and the Commission’s longstanding authority to craft policy for information services to further its numerous other functions."

Second, Verizon’s argument that the FCC passed its rules “without any evidence of a systematic problem in need of a solution” ignores the “multiple incidents of broadband providers interfering with their customers’ ability to use Internet services, from file sharing services to Internet-based telephony,” the agency said. Regardless, “the law does not demand the Commission to wait until harm has already occurred."

Nor is this case simply “a rerun of Comcast,” the FCC wrote. In Comcast the court said the FCC lacked ancillary jurisdiction over the Internet when it censured Comcast for interfering with peer-to-peer software run over its network. The court’s decision there was because the commission “had not tied its authority to specific substantive statutes,” the FCC wrote. In contrast, the FCC “rooted its authority to promulgate the Open Internet Rules in the specific statutory mandates of Sections 706(a) and (b), Title III, Section 201, Section 628, and others."

"The commission made its best attempt yet at responding to the Comcast criticisms,” said Steven Augustino, co-chair of the telecom practice group at Kelley Drye. “It does a good job of tying the regulation of broadband to internet telephony and to IP video, which in turn ties to competition and telephony and cable TV."

Section 706 ‘Requires’ Action

"In July 2010, the Commission concluded in the Sixth Broadband Deployment Report … that ‘broadband deployment to all Americans is not reasonable and timely,’ thus triggering Section 706(b) ‘as a consequence of that conclusion,'” the commission wrote in its brief to the court. “In light of that finding, Section 706(b) authorizes -- indeed requires -- the Commission to accelerate deployment of broadband and promote competition in telecommunications markets. The Open Internet Rules serve both of those goals."

The FCC said its reading of Section 706 is bolstered by Section 230(b), which says it’s U.S. policy to “promote the continued development of the Internet,” to promote “technologies which maximize user control over what information is received” over the Internet, and to “preserve the vibrant and competitive free market that presently exists for the Internet."

The commission found more authority sprinkled throughout the Act. Section 201(b), which gives the Commission power to ensure reasonable telephone rates, comes into play because VoIP is increasingly being used a substitute for traditional telephone service, the commission said. Title VI, which governs cable programming, supports its net neutrality rules because broadband providers could hinder competition by “interfering with the strategies of competing video providers,” who increasingly use the Internet for content delivery, the commission argued.

Title III gives authority to make rules to ensure the “orderly development” of local TV broadcasting -- and local broadcasters use the Internet to distribute their content, the commission said. “Broadband video providers offer video services and have the incentive and ability to interfere with broadcasters’ delivery of competing video programming,” the commission wrote. “The Open Internet Rules are within the Commission’s authority to regulate over-the-air broadcasting under Title III in the same way that cable television regulation was within the Commission’s authority in Southwestern Cable,” the 1968 Supreme Court case that confirmed the agency’s ancillary authority over cable TV.

The FCC also defended its authority to impose rules on wireless broadband. “Title III gives the Commission ‘expansive powers’ and a ‘comprehensive mandate’ over spectrum licenses,” the pleading said. The Commission’s plenary authority over spectrum licenses allows the Commission to place public interest conditions not only on newly issued licenses, but also on existing licenses, whenever doing so ‘will promote the public interest, convenience and necessity,'” the FCC said. “Verizon would interpret Title III of the Communications Act as a straitjacket that grants only ’specific authority relating to issues such as preventing interference and assigning classes of stations to particular frequency bands.’ That limitation has no basis in the statutory language, and Verizon cites none."

"It’s a very creative brief,” said Doug Jarrett, a telecom lawyer at Keller and Heckman. “They tried really hard to make a case, and they were smart -- I think they made a good decision to rely on Chevron, to assert the broad discretion to interpret their own statute.” Combining Chevron deference with Section 706(a) was their best argument, Jarrett said. “If they're going to win, that’s where they're going to win.” Jarrett is less impressed with the agency’s argument that Section 201(b) allows it to ensure “just” and “reasonable” common carrier rates and practices. That argument is “out of sync with the fact that Brand X was intended to say information services -- the Internet -- is not telecommunications. ... To rely on 201(b) -- however indirectly -- is just a tough row to hoe in my book."

Penn State University Professor Rob Frieden said he’s not confident the FCC will prevail. “Section 706 provides a mandate to encourage Internet access and to promote rural/urban parity,” he said. “It’s quite a stretch to convert promotion into mandatory set of access rules.” Medley Global analyst Jeff Silva said there were “no real surprises” in the FCC’s legal theory. The commission relied on several titles of the Communications Act when it passed the order, “knowing full well that it was going to be appealed. ... It’s very much an uphill battle to sustain the rules,” Silva said, although he thinks the commission is better off than it was going into Comcast.

"The biggest problem is the D.C. circuit, over the last few years, has been a pretty tough audience for the FCC,” said Augustino. The FCC acknowledged that it has changed its interpretation of Section 706, and “when an agency reverses course, courts are typically skeptical. So that makes it harder for the FCC to succeed.”