Inside net neutrality with FCC Commissioner Robert M. McDowell

Billions of dollars are at stake in the FCC's net neutrality rule making, which could mandate rules for broadband Internet access over wireless and wireline networks.

Billions of dollars are at stake in the FCC's net neutrality rulemaking, which could mandate rules for broadband Internet access over wireless and wireline networks.

Podcast: The FCC and Net Neutrality: Now what?

To date, network operators decide on their own how to comply with voluntary net neutrality standards, which call for enabling subscriber choice when it comes to sending and receiving lawful content, running lawful applications and services, and connecting devices to their computers, laptops and mobile phones as along as those devices do not damage providers' networks.

Now, the FCC is evaluating whether to change these voluntary standards into mandatory rules, which would limit broadband network operators' discretion to do what they want.The FCC is also determining whether to restrict network operators from offering premium service options to content, application and service providers (the so-called non-discriminatory standard) and to compel network operators to disclose network management information so users can ascertain if they are getting the services they are paying for (the network management standard).

Service quality and speed differentiations are increasingly feasible due to technological innovations, and, some argue, desirable because they would stimulate investment. If the FCC were to permit differentiated service quality, network operators could enable content, application and service entrants to take on incumbents more effectively, and network equipment manufacturers could develop new ways to manage traffic and service quality.

The commission wishes to stimulate innovation and investment, and the net neutrality inquiry enables it to address network management technologies and practices and their impacts on Internet content, application and access markets, even though the inquiry formally addresses access.

A crucial part of the FCC rule-making process involves seeking comments from industry participants, public interest organizations and citizens.

For a commissioner's perspective on these complex issues, Network World asked Hugh Carter Donahue, a communications policy expert and scholar, to pose questions to Federal Communications Commissioner Robert M. McDowell about the net  neutrality proceeding.

If you'd like to follow-up, McDowell's e-mail is Robert.McDowell@fcc.gov, Donahue's e-mail is donahueh@rowan.edu.

You were a great proponent of competition in local telecommunications markets earlier on when you worked at Comptel promoting competitive communications services. What similarities exist with your policy views regarding competitive local phone markets and net neutrality?

During my career, I have always tried to find ways to ensure that consumers have choices. That was the goal in my previous job and has been my theme as a commissioner. Specifically, I have sought ways to increase last mile connections. And, looking at the current marketplace, American consumers have more choices in last mile providers now than ever before. As a commissioner, I have made it a priority to encourage the commission to adopt policies that create opportunities for the construction of new delivery platforms. More often than not, I have tried to approach these goals using deregulatory incentives. For example, over the past couple years, the FCC has classified broadband as less regulated "information services" under Title I of the Communications Act. As we move forward with proceedings emanating from the National Broadband Plan, I work towards finding ways to continue this trend.

Why is the Commission initiating a net neutrality rule making now?

Actually, this is a question that would be more appropriately addressed to the chairman since he controls the FCC's agenda. Nevertheless, I question the need to pursue such a rulemaking. First, thus far no evidence of a systemic market failure in the broadband market has been presented to the commission. For instance, in 2007, the FCC conducted an inquiry into the state of the broadband market, and did not find evidence of a systemic market failure. Furthermore, during that same year, the Federal Trade Commission (FTC) concluded a thorough market analysis and ultimately issued a bipartisan report after an unanimous vote that actually cautioned against the imposition of network neutrality regulations.

Second, pursuant to a congressional directive in the Stimulus Act, the FCC has been developing proposals for a National Broadband Plan. It might have made more sense to analyze and deliberate on the findings from the FCC's broadband team before jumping right into regulating network management.

Third, both the Department of Justice and the National Telecommunications and Information Administration recently filed comments in the National Broadband Plan proceeding, and neither agency made a case that a systemic market failure exists. To the contrary, DOJ's comments seemed virtually optimistic regarding the broadband market when it wrote:

Between the ongoing deployment of wireline broadband networks, the geographic expansion of wireless broadband services (hopefully spurred by the availability of additional spectrum to broadband wireless services), and increased transparency, the Department is hopeful that the vast majority of American households will benefit from significant competition in their local broadband markets. Put differently, most regions of the United States do not appear to be natural monopolies for broadband service.  --  Letter from Christine Varney, Assistant Attorney General, U.S. Department of Justice Antitrust Division, to Marlene H. Dortch, Secretary, FCC, GN Docket No. 09-51, at p.28 (filed Jan. 4, 2010).

Are you concerned that mandating net neutrality would shift the industry focus from pleasing customers to manipulating regulators?

I have many concerns regarding imposing mandatory regulations on the Internet, so it is hard to put one at the top of the list. But, one concern is that the proposed regulations may not necessarily be structured in a way to protect consumers. The U.S. government's bipartisan policy since the Clinton-Gore administration has been to allow a competitive free market and non-governmental organizations, such as the Internet Engineering Task Force, handle Internet governance.

Broadband providers have the direct connection with the consumers, and it is in their best interest to keep their customers happy. I worry that the proposed rules could set up a "Mother-May-I" regime on top of other unintended consequences we cannot foresee, whereby new innovations could be inhibited by the uncertainty created by net neutrality rules. Consumers could suffer as a result.

What effects do you think mandatory standards will have on broadband network and equipment investment and software programming? Will these standards stimulate or freeze investment and innovation, or turn out to be neutral?

Hundreds of billions of dollars have been invested in America's broadband networks since the Internet was privatized in 1994. More investment is pouring in over the horizon. New rules, regardless of their context, always invite litigation and, therefore, uncertainty. Capital avoids uncertainty. It is not hard to envision a scenario where new investment is inhibited by new rules. Investors of all kinds told the FCC as much during our Oct.1 hearing on investment in the broadband market.

Turning to network administration, when the commission issued the Network Neutrality Notice, you pointed out that "the public interest would be better served if the debate would focus more on" the dichotomy between "anti-competitive" and "anti-discriminatory" network administration. In your view, network engineers necessarily discriminate and it's a chimera to belabor discrimination.

The practical effect of the proposed net neutrality rules would be that all broadband providers would have to treat all Internet traffic equally. But, the reality is that the Internet can function only if engineers are allowed to "discriminate," otherwise known as "network management." Discriminatory conduct, in the network management space, does not necessarily mean anti-competitive conduct.

Practically speaking, consumers will not tolerate delay or interference when it comes to certain kinds of applications. For example, for users to enjoy online video without interruption or distortion, video bits have to be given priority over e-mail bits. But if traffic must be treated equally, that will have to change and consumers could see a degradation of quality and more delay as a result.

In a voluntary net neutrality regime, how would the roles change for voluntary standards organizations such as the Internet Society (ISOC), Internet Engineering Task Force (IETF) and the Internet Architecture Board (IAB), among others?

Since the early days of the state-run ARPANET, network management and Internet governance initiatives have migrated further away from government regulation. I question whether the government would really be able to replicate the billions of decisions that are made each day in the private sector regarding the Internet. It seems to make more sense that such voluntary standards organizations continue their work in a voluntary regime as they address network issues, including network management.

They should continue to be free of government control and encourage the participation of volunteer engineers, academics and software developers, who act on their own, not on behalf of their employers. The Internet will continue to thrive if these volunteer groups are able to work collaboratively instead of within a government-mandated "top-down" model.

As for the FCC's involvement, the FCC could act as a partner with these non-governmental collaborative Internet governance bodies, and together we could collectively shine a bright light on any allegations of anti-competitive conduct. This approach could provide the benefits sought by proponents of new rules without the unexpected costs and risks that a new regulatory regime could cause.

If mandated, does net neutrality give incumbent Internet content and application providers disproportionate competitive advantages in terms of lower unit costs and flat rate end-to-end pricing, potentially making it more difficult for new entrants to compete?

The proposed net neutrality rules, as currently drafted, only apply to providers of broadband Internet access service. Some may argue that they were drafted in this manner because there was concern that the FCC lacks jurisdiction over content providers. Regardless, as to why the rules were drafted this way, they have the potential of tipping the scales, which unfortunately could have the end result of harming consumers.

For example, while currently the most common way that services are charged is through flat-rate pricing, that may not continue to be the best (or only) model in the future. And, it certainly may not be a model that benefits all consumers. The proposed rules could create a regime whereby every consumer must be treated the same regardless of their usage. In that scenario, all prices would have to rise to compensate for the costs imposed by heavy users because broadband providers would be locked into a flat rate pricing regime.

The FCC is loathe to let network operators extract service quality pricing from content providers lest so doing lead to walled gardens that erode the public Internet and suppress originator and user innovation and investment. However, the notice indicates the commission could favorably consider varieties of service quality levels for managed or specialized services and applications. Is this a vehicle for industry peace? Do you see this approach developing for retail access services?

Just as the term "net neutrality" means different things to different people, the same can be said for the term "managed services". Additionally, if some companies view that as a regulatory regime will favor certain services, they could have incentives to focus more of their resources on developing such services at the expense of other services. Additionally and conversely, if the rules lock in a certain definition for such services, companies could be less creative in the future in developing new technologies.

Switching to wireless, you often point out that open access mandates in 700Mhz auctions constituted the initial steps toward network management regulation of wireless. Will mandating these standards or sustaining them as voluntary standards stimulate or freeze network investment and innovation, or turn out to be neutral?

As an initial matter, I have long advocated application and device portability as well as free and open networks. Consumers want these features, and the market started working on delivering them years before unnecessary, counterproductive and after-the-fact Commission mandates. In the absence of regulatory mandates, U.S. wireless carriers have -- and continue to --  ring consumers the mobile Internet services they demand.

In 2007, I cast the only dissenting vote against auction rules for the 700MHz band because they included "open access" mandates concerning devices and applications for some, but not all, blocks of that spectrum. I dissented partly because evidence in the record convinced me that new rules were unnecessary. Marketplace forces, otherwise known as consumer demand, were moving network providers in that direction anyway.

I also feared that the open access mandates would undermine the commission's goal of encouraging entry of new providers into wireless services. I was especially concerned that larger carriers would avoid the nationwide, encumbered spectrum and outbid smaller players for the regional, unregulated spectrum blocks. It gives me no joy to report that my fears proved to be correct -- the smaller providers did indeed lose out.

Here's how: the price for the "open access" C Block was 77 cents per megahertz by population in the license area (known as "megahertz pop"), and it was purchased not by a new entrant, but by Verizon Wireless. On the other hand, the average price of the unencumbered B Block was an unprecedented $2.65 per pop. AT&T Wireless was the largest winner of B Block spectrum. Even the A Block, unencumbered, but which some had argued was "less desirable" because it neighbors with higher-powered broadcast operations and thus might be susceptible to harmful interference, went for an average of $1.13 per pop.

The bottom line is that the smaller unencumbered blocks sold for up to three times more than the larger, more regulated block. Large and small players have already commented that the encumbrance on the C Block had an effect on pricing because bidders put a premium on the clean spectrum. Acting in an economically rational manner, large incumbents outbid many smaller players in smaller blocks. Smaller players had nowhere else to go, all while no new broadband provider emerged. In short, the open access regulation not only failed to deliver on what was promised, but it actually harmed competition.In order to mandate net neutrality, the commission employs a rationale to regulate telecommunications services, which entail no information processing, as a means to regulate Internet services, which depend on information processing. This seems anomalous. This approach will not survive judicial scrutiny, your comments indicate. Why?

Another possible unintended consequence of the open access mandate has recently been brought to our attention. This issue pertains to design and manufacture of equipment for operating in the 700MHz Band. A coalition of A Block auction winners has complained to the FCC because: (1) Verizon Wireless, the C Block auction winner, is allegedly contracting to purchase equipment capable of operating only in the C Block; and (2) AT&T, which won the largest share of B Block spectrum, is allegedly contracting to purchase equipment capable of operating only in the B and C Blocks. These A Block auction winners argue that their customers will be left without viable and widely operational equipment options. They have requested that the FCC suspend the authorization of any equipment not capable of operating over all commercial 700MHz Band spectrum.

Here again, it appears that the encumbrance on the C Block may be having an effect on equipment design and purchasing decisions.

Since 2002, the Commission has continued on a path of classifying broadband services as less regulated information services under Title I of the Communication Act. As such, proponents of net neutrality rules have had to argue that the commission has jurisdiction to impose these rules through its ancillary authority under Title I -- rather than directly through Title II. But, some question whether the commission can use its ancillary authority for network management regulations.

That specific jurisdictional question is currently before the U.S. Court of Appeals for the District of Columbia in the Comcast/BitTorrent case. Oral arguments have already been held in that case, and it will be interesting to see how the court rules regarding the commission's ancillary jurisdiction. If the court rules that the commission does not have jurisdiction, the proposed rulemaking will be on a shaky legal foundation.

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