US Broadband: The FCC and Network Neutrality

Part 1 of a series (How US Broadband and Cellular Telecomm Got So Messed Up) on U.S. telecommunication infrastructure

Back in December, the Federal Communications Commission (FCC) voted 3-2 along partisan lines to approve network neutrality rules, rules which had not yet been made public. The proposed rules (pdf) were released on 23 December.

The proposal features three primary points: transparency (Internet Service Providers can do whatever they want, so to speak, they just have to disclose what they are doing); no blocking (if content is legal, an ISP cannot “block” it, ditto applications, services and non-harmful devices); and no “unreasonable” discrimination against lawful traffic (which means yeah, it’s OK to discriminate against spammers … but there’s no definition of “unreasonable”).

As a concept, network neutrality is simple: just like telephone companies are required to treat competitor incoming calls like they would treat their own, ISPs should be prohibited from treating “bits” differently based on point of origin. However, as with most complex topics, the devil is in the details. And, in this case, also buried in a law written in 1934.

Short Story

  • Telephone companies are common carriers; their wires into your house must be open to their competitors. Thus you can get DSL service from a company other than your local telephone utility.
  • Cable companies are not common carriers; their wires into your house are protected property and not open to competitors. Thus, you are stuck with your local cable provider as your broadband provider if you want cable speeds/service.
  • The FCC has had a hands off policy regarding mobile regulations, so it’s not surprising that it continues that arrangement with its network neutrality proposal.

Rants and Raves

Now that it’s the New Year, there are lots of analyses/commentary on the FCC proposed rules:

USA Today provides an important contextual reminder for any discussion about the Internet:

The original architecture of the Internet was created by government and universities. Its usefulness was greatly enhanced over the years by companies such as Intel, Cisco Systems, Microsoft, Apple and Google, much more so than by service providers such as AT&T, Verizon and Comcast. Yet it is now these latter types of companies that are demanding to become its gatekeepers.

There is creation and usefulfulness on the one hand and access to that wonderfulness on the other. In the US, access isn’t very competitive (see this last graph in this Economist analysis, emphasis added):

These details are important, but the noise about them only makes the omission more startling: the failure in America to tackle the underlying lack of competition in the provision of internet access. In other rich countries it would not matter if some operators blocked some sites: consumers could switch to a rival provider. That is because the big telecoms firms with wires into people’s homes have to offer access to their networks on a wholesale basis, ensuring vigorous competition between dozens of providers, with lower prices and faster connections than are available in America. Getting America’s phone and cable companies to open up their networks to others would be a lot harder for politicians than prattling on about neutrality; but it would do far more to open up the net.

Where The Economist gets it wrong is in lumping copper-wire telephone companies in with cable companies. There is competition for the telephone line entering your home; there is no competition on the “cable” line. In the US, infrastructure is bundled with service with cable and mobile telephony, due to powerful lobbying efforts.

Beltway Bandits

The telephone system rests on the concept of natural monopoly. In 1907, the head of AT&T argued that the nature of telephone technology meant that it “would operate most efficiently as a monopoly providing universal service.” For society, it made more sense to have one set of wires running alongside a street and into a building than multiple sets. Moreover, telephone service is characterized as a business with very high fixed costs (lines, switches, offices, R&D), further supporting the natural monopoly argument.

In 1913, the U.S. government and AT&T entered into a historic agreement (Kingsbury Commitment) whereby AT&T agreed to “connect non-competing independent telephone companies to its network” and divested itself of its interest in Western Union; in the process, it became a regulated monopoly.

However, the Telecommunications Act of 1996 (developed by a Republican Congress) amended the Communications Act of 1934 and opened the Public Switched Telephone Networks (aka POTS, plain old telephone service) to competition.

The Act differentiated telecommunications (“the transmission, between or among points specified by the user, of information of the user’s choosing, without change in the form or content of the information as sent and received”) from information services (“offering of a capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information via telecommunications”). These definitions are critically important to today’s mess.

The Act also “reformed” the cable industry and launched a protracted discussion about obscenity.

Title II of the Communications Act of 1934 details the responsibilities of telephone companies, which are regulated as common carriers. Common carriers must provide services without “unjust or unreasonable discrimination in charges, practices, classifications, regulations, facilities, or services.” Just as important: they have to grant other operators access to the physical network, their infrastructure.

Cable companies, however, are not considered common carriers. In 1958, the FCC ruled that Community Antenna Television (the precursor to what we know today as “cable tv”) was not a common carrier because the content was not under the control of the subscriber. As such, cable was outside of the authority of the FCC. It wasn’t until 1965 that the FCC began to write regulations for cable TV; the Agency did so to protect the monopoly held by a local TV broadcaster. (It was eventually overruled in the courts.) In HBO v FCC (1977), the D.C. District Court ruled that cable TV could not be regulated as a common carrier.

Thus it should not come as a surprise that in 2005 the U.S. Supreme Court upheld an FCC ruling that “broadband cable modem companies are exempt from mandatory common-carrier regulation.” In writing the (very short) opinion, the Court noted that cable companies “do not offer the end user telecommunications service, but merely use telecommunications to provide end users with cable modem service.” If that makes your head hurt, you’re not alone.

A Word (or Two) About Wireless

The FCC licenses the spectrum that mobile carriers use for wireless (cellular) telephony. It also regulates tower construction. The FCC has avoided involvement in service contracts. However, in 2009, the Agency briefly flirted with investigating exclusive carrier-phone contracts, with AT&T/Apple iPhone being the poster child.

Back in 1968, the FCC forced AT&T to permit other company telephone handsets to connect to its network. In other words, the FCC opened up the market for phones. It has so far declined to do something similar for mobile networks. Instead, the policy has been to foster competition between technologies, which results in a lack of interoperability: phones that run on Verizon’s CDMA network will not/cannot run on AT&T’s GSM network, for example. And vice versa.

This is not how mobile phones work in the rest of the world. Rather than compete on technology, in Europe and Asia governments picked the technology. Firms then compete on service and price. See The Economist quote, above, again.

And unlike wired telephone service, which is a regulated monopoly with regulated prices, the FCC has had a hands off policy with regard to mobile pricing plans. In 2008, the FCC began investigating carrier early termination fees; the chairman argued that a national policy would be preferable to a patchwork of 50 state laws. In July 2008, a California judge ruled that Sprint’s early termination fees were illegal and fined the firm $73 million. In November 2009, the GAO issued a report, “FCC Needs to Improve Oversight of Wireless Phone Service” (pdf). In December 2009, Verizon doubled its early termination fee on smartphones from $175 to $350. Yet in January 2010, the FCC was still investigating the issue. By October, the FCC chair revealed a policy to prevent “bill shock” but still had not acted on early termination fees.

Thus it should not come as a surprise that in December the FCC would exempt mobile broadband from any network neutrality requirement, however weak the requirement might be.

Why This Is An Important Issue

From the 2009 OECD Telecommunications Outlook executive summary:

There have been two major growth areas in telecommunication services in the previous two years — mobile and broadband. Mobile and broadband subscriptions together accounted for 74% of all communication subscriptions in 2007. Mobile alone accounts for 61% of all subscriptions while standard phone lines have dropped to 26%. This is a dramatic turnaround from the year 2000 when there were more fixed line subscribers than mobile.

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