"House of Cards" Topples for ISPs as FCC Regulates Broadband
Brian Haven, Matt Davis
February 27, 2015
On February 26, 2015, the Federal Communications Commission (FCC) voted to bring broadband service delivery under Title II of the 1996 Telecommunications Act. Much of this action is driven by the changing role of the Internet as content providers continue to push the envelope. Netflix is one example of a content provider that spurred recent action with hit streaming shows like House of Cards (ironically premiering today on Netflix) and the pent-up demand by consumers to stream it as soon as it's available. However, with the FCC action, several broadband service providers are expected to challenge the decision and the authority of the FCC will most likely be defined when a court ruling ends the debate. In the meantime, Congress could take action to overturn the decision rendering any legal action moot, although it is unlikely any proposed legislation would pass the Senate or be signed off on by President Obama prior to a court ruling.
IDC has written several articles over the past several years questioning the potential for Title II reclassification, anticipating that the FCC would derive authority from existing authority or that Congress would pass a bill settling the matter. FCC Chairman Tom Wheeler has explored several options and changed direction several times but ultimately supported President Obama's call to regulate under Title II.
The push for reclassification can be partly blamed on the broadband ISPs themselves. Both Comcast and Verizon sued the FCC, challenging its enforcement of net neutrality policies because they were not officially "rules." This left the FCC in the untenable position of being a toothless watchdog. IDC was skeptical that the FCC would move forward with a reclassification vote, anticipating it would be preempted by a more streamlined net neutrality-specific bill gaining congressional approval. However, despite capitulating on all of the fundamental issues that the Open Internet Policy was written to address (no blocking or throttling, transparency, and nondiscrimination), a bipartisan agreement could not be brokered between Republicans and Democrats.
Mobile Broadband Impact
The fixed world broadband players have been deeply enmeshed in the net neutrality debate and the threat of Title II reclassification for years. Perhaps the most significant aspect of this FCC action is that "the new rules — in their entirety — would apply to fixed and mobile broadband alike."
For better or worse, the fact that the reclassification places mobile broadband in the same category as fixed broadband will have a significant impact on the future of the wireless industry. Mobile broadband and fixed broadband are inherently different in terms of speed, bandwidth, and capacity, among other things. The FCC's decision to broadly paint the two with the same brush could prove troublesome.
First, subjecting mobile networks to the blocking and throttling rules could negatively affect the current user experience. Because mobile networks have significantly limited bandwidths compared with fixed broadband providers, steps must be taken to deliver a baseline quality of service to all subscribers and not let high-data users clog up the networks and blocking and/or throttling are a necessary evil to protect the integrity of the service. The FCC has carved out an exception for network management, permitting practices that are "primarily used for and tailored to achieving a legitimate network management — and not a commercial — purpose." While the FCC acknowledges that situations exist where discrimination is necessary, network management and commercial purposes may not be mutually exclusive and there is certainly a fine line between the two. Moreover, it is hard to discern what exactly constitutes "legitimate network interests." The FCC ordered that broadband providers are not to engage in discriminatory practices in which they are "unnecessarily interfering with or unreasonably disadvantaging" consumers and content providers to access and of use the ISPs. However, this may complicate existing offers being enjoyed by consumers. For example, T-Mobile's Music Freedom allows users to access a limited number of music streaming services without having the content count against their monthly data allowance. While the new ruling may not apply retroactively to existing programs, Music Freedom effectively discriminates against any music streaming service not included in T-Mobile's program. Regardless of how the network providers are treating the transmission of the data, these new rules could stifle and partnerships between content providers would be disadvantageous to other parties. What's Next?
This vote was a powerful shot across the bow to Congress, broadband service providers, and mobile network operators — as well as other participants in the broadband ecosystem including technology suppliers. It is unclear what impact it will create with content distributors and other online entities. Currently, the focus of reclassification is on fixed broadband transmission, making sure there is a level playing field for established companies and start-ups to access Internet connectivity to the end user at the same rate — namely $0/month since the entire fee is currently paid by broadband end users. However, previously unregulated issues such as "transparency," "fairness," and "privacy" potentially have widespread implications to all broadband (a.k.a. "Internet") participants. For example, to protect privacy, the FCC may deem that gathering data on individual searches to recommend videos or songs or advertisements is a violation of privacy and mandate that all such activity be explicitly "opt in." To be clear, the current mandate has nothing to do with this type of oversight, but once the genie is out of the bottle, there is no telling where it will go.
In many ways, this type of speculation is what drove the entire debate. On one side, the FCC envisions all kinds of nefarious ways that unregulated service providers can harm the public good and stifle a competitive environment — even though the actual instances of these harms are negligible. That said, IDC believes some form of oversight is prudent — service providers, like all businesses, exist to make money — sometimes the pursuit of profits can lead to bad choices that can actually harm the public good or stifle competition. The larger question is whether Title II reclassification is necessary to create the appropriate oversight. The concern that service providers and other anti-Title II entities have is that, if reclassification is ultimately upheld, there are multitudes of potential policies the FCC could establish that would upset the status quo — for example, mandated universal broadband service at 25Mbps/3Mbps is a start, fiber deployment required to reach 100% of a serving area (e.g., no more "Fiberhoods" for Google), and extending consumer bandwidth non-discrimination policies to small businesses. Taking it to the next level of possibilities, perhaps in the future in the name of fairness and competition, there might be a mandate to provide space to competitors in datacenters that speed up content service delivery because they are strategically placed in the network — rules akin to telecom collocation network element unbundling policies — because where does the "broadband network" really begin and end? In the same vein, it might be asked if it is it fair that a large company takes precedence on a search engine just because it can pay more and so forth. Again, none of these actions have been proposed or even publicly discussed, but for service providers, the specter will be there, as it should be for all Internet participants.
The other potential negative that service providers warn is that heavy regulation will create a drag on future broadband investment. The pullback of broadband dedicated resources is generally discounted by net neutrality advocates as mere threats, but IDC believes that there is more to it than positioning. Looking at a similar situation approximately a decade ago, Verizon was set to curtail FiOS expansion when unbundling rules applied to last mile fiber — the FCC voted to exempt fiber broadband from unbundling in the 2003 Triennial review — and this was significantly less oversight than full-on Title 2 reclassification.
While there is potential to speculate on "what if" scenarios, IDC does not believe there will be significant short-term changes on the wireline side of the broadband world. Fiber builds might be somewhat dampened, but fiber is the clear direction of broadband deployment moving forward. Since there really has not been any throttling, blocking, or non-discrimination to speak of, it will be business as usual for fixed broadband. On the mobile side, there could be a more significant impact as some mobile network operators employ throttling and blocking as ways to manage their network quality and capacity constraints. While the decision will likely maintain the status quo in the short term, the operators are now subject to a level of scrutiny that may impact their network maintenance strategy going forward. It is more likely with imminent court challenges we will double down on the regulatory uncertainty and vacuum of FCC authority for another year or two as this precarious "house of cards" struggles to maintain its balance.
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