Ev Ehrlich's Everyday Economics

Way 2.1

On April 6, a federal appeals court ruled that the Federal Communications Commission did not have the legal authority to implement “net neutrality,” meaning that it could not require Internet service providers to treat all traffic the same – meaning that everything on the Internet – whether a cardiac monitor or a video of a cat playing the xylophone – would have to travel at the same speed.

The ruling was a blow to the FCC and its Chairman, Julius Genachowski, who argued that the Commission’s broad mandate to promote public welfare (under Title I of its enabling legislation), gave it all the fishing license it needed to impose this principle, consumers and entrepreneurs be damned.

As I discussed back then (April 7, “You Bet Your Life”), the FCC and its Chairman had two options – they could acquiesce to the ruling and define a new role as an honest broker in the Internet’s development, or they could go back to court and argue that Title II of its enabling legislation, which gives them the explicit authority to regulate the prices and terms of telecommunications services, applies to the myriad of content and services offered by the Internet today.

The problem with the second strategy is the risk.  Many if not most courts would quickly laugh off the argument that the Internet is really just another phone system.  In fact, the proponents of “neutrality” have made a living pronouncing that the Internet is so special, and so multifunctional, and so historically unique that it requires this bizarre mandate to have only one flavor – it’s like a law requiring all mail to travel at one speed, or Sears to offer “Better,” but get rid of “Good” and “Best.”

But now those very same proponents must resort to argue that “the Internet is just like the phone company” and that it should be regulated under the same laws that congress first passed to regulate phones almost eighty years ago.  I can’t see it washing, and when the Courts decide that it’s hooey, the FCC will have nothing on which to base its relationship to broadband.  It would be out of the game for good.

Which is why it’s just amazing to me that Chairman Genachowski has gone for Plan B – he’s decided to argue that the telecommunications provisions of Title II apply to the Internet, but he vows – like the Iranian nuclear power program -- not to use his omniscience to bad ends.  That is, he’ll argue that he has the authority to regulate the Internet, but  won’t apply this authority to a variety of purposes that many “neutrality” advocates also champion, notably, “unbundling,” the idea that companies who build broadband infrastructure have to sell space on it to their competitors at subsidized rates.  But he will apply certain sections of Title II  to broadband transmission, and only, in essence, to implement “neutrality.”  He refers to this as a “third way,” but it’s really “Way 2.1” – a repackaged Option Two, and it’s going to end in disaster.

I pride myself on not being a lawyer.  When I was a senior in college  I took the law boards in a stately room at Columbia’s Law School and decided, looking around the room, that I couldn’t hack fifty years with these people as my colleagues.  (Contrast this to the hundreds of people in the lecture hall taking the Graduate Record Exam a few weeks later, where the attendees were as delightfully aimless and immature as I was.)  So take whatever I say with a grain of salt – after all, as a non-attorney, all I can do is tell you what words say as opposed to what they mean.  But here’s what Section 201 of the Communications Act of 1934 – a section specifically cited by the Chairman as part of his “limited authority” – says:

                “All charges, practices, classifications, and regulations for and in connection with such communications service shall be just and reasonable…” and now get this “communications by wire or radio subject to this Act may be classified into day, night, repeated, unrepeated, letter commercial, press, Government, and such other classes as the Commission may decide to be just and reasonable, and different charges may be made for different classes of communications…”

So Section 201 of the Act specifically says that the FCC can permit different charges for different types of traffic and levels of service – the exact opposite of net “neutrality.”   The reason the law mentions day and night, and repeated and unrepeated, and so on, is because “day” and “repeated” meant high-volume, peak loads, while “night” and “unrepeated” meant less congestion on the system.  But that’s exactly what the “neutrality” guys oppose – their position is that when there’s congestion on the system, everybody has to sit and languish together.  The only way to avoid this faux-egalitarian traffic jam is to do what Google and the other Big Websites already do – cache their content all over the web.  It’s a revisit of Orwell’s famous dictum that “all of the animals are equal, but some are more equal than others.”

Moreover, Section 202 – also specifically cited by the Chairman – says it will be unlawful to “make any unjust or unreasonable discrimination inc charges, practices, classifications, regulations, facilities, or service for or in connection with like communications service…” and a carrier can’t give “undue or unreasonable preference” to anyone or subject anyone to “undue or unreasonable prejudice or disadvantage…” 

What I just read doesn’t say that you can’t put prices on the wall for different classes of service.  For example, if the Post Office were operated under this language, would different prices and conditions for regular mail, “express mail,” and “priority mail” be regarded as “undue or unjust?”  In fact, what the language says to me is that it’s perfectly fine to have a “non-neutral” world, so long as the prices you charge are “just and reasonable,” and not “undue or unreasonable” – that is, so long as the prices are posted on the wall and “you pays your money and you takes your choice.” 

Now imagine that the FCC decides to follow this route and argue to a judge that this very language is what allows it to implement “neutrality,” meaning that one day it will specifically prohibit a deal between Verizon, or Comcast, or ATT and a hospital, or an up-market version of Skype, or an on-line gaming provider, or a live, high-def concert program and claim that this language justifies its actions.  The companies involved will go to court and argue that their deal was “just and reasonable,” because anybody who wants that treatment can come get it – the prices are posted on the wall.  The FCC is going to lose, just as it lost last month.

The “neutrality” camp argues that, absent this kind of enforcement, you’ll see stuff like Comcast only showing NBC programs and slowing down traffic from other entertainment providers.  But, first, if they did, would you subscribe to them?  Did they really just spend billions of dollars buying NBC only to piss off their customer base?  And second, if they did, there’s a whole history of anti-trust law that applies.

And this is where it all comes together.  The FCC, by abandoning everything (starting with price regulation and unbundling) except its commitment to “neutrality,” is pretty much admitting that the broadband market is pretty competitive and structurally sound.  Their agenda is now built around one principle – preserve the advantages and the low costs now held by the Big Websites.  In a non-neutral world, Big Website would face greater competition and might have to pay more – YouTube uses as much bandwidth as the entire Net did in 2000, and Google owns YouTube.  Hence, Google is the driving force behind net “neutrality,” because in a “neutral” world, sites like YouTube won’t have to pay for the congestion they create.  Should they travel the Internet under the same terms as your e-mail to Grandma or a start-up company?

And that’s the great tragedy.  Chairman Genachowski can talk about the aspects of regulation he doesn’t want to embrace, but by insisting that he has the authority to do so, he creates uncertainty about the future that will preclude the kinds of investment needed to achieve his goals for the broadband Internet.  His Third Way is really Way 2.1.  The real “third way” for the FCC and Genachowski would be to accept the court’s ruling, keep the nuclear option in his pocket, and then position himself as a honest broker between two camps with different business models – the Big Websites who want a low-cost ride on somebody else’s infrastructure and the broadband providers who, in essence, want to do what newspapers do – charge the reader and then allow some content (advertising) to pay the going rate for premium space.  That kind of settlement – stripped clean of the Orwellian rhetoric about a “neutral” Internet -- would produce a real resolution to the neutrality question, eliminate the regulatory risk that could impede investment, and realize the Internet’s true potential.  Ultimately, the choice isn’t between the First Way and the Second Way, but the Right Way and the Wrong Way.  And Way 2.1 doesn’t get us there.