Court Ruling Bolsters Net Neutrality: Internet Can Be Regulated as a Utility


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In a May 2014 article entitled “The Stakes and FCC Options to Preserve Net Neutrality“, we looked at uncertainty facing the Internet over the issue of net neutrality. On June 14th, the United States Court of Appeals for the District of Columbia rendered a key decision that the Internet can be regulated as a public utility as opposed to a luxury. The ruling will prevent telecom firms from slowing down data transmission, imposing fast lane pricing, and blocking access to online content.

In a 2-1 decision, the Court affirmed that, like other utilities such as power and water, the Internet has evolved into  an essential service for American citizens. The Court’s 184-page opinion in Independent Telephone & Telecommunications Alliance v. FCC (No. 15-1063)

Commenting on the decision, FFC Chairman Tom Wheeler stated:

Today’s ruling is a victory for consumers and innovators who deserve unfettered access to the entire web, and it ensures the internet remains a platform for unparalleled innovation, free expression and economic growth. After a decade of debate and legal battles, today’s ruling affirms the Commission’s ability to enforce the strongest possible internet protections — both on fixed and mobile networks — that will ensure the Internet remains open, now and in the future.

The Court’s ruling, however, does not clear completely settle the dust on the net neutrality issue. The ruling paves the way for the Federal Communications Commission (FCC) to play a more active role in regulating broadband services, provoking telecom companies to file an appeal. AT&T immediately responded with it’s intention to fight the ruling. David McAtee II, senior executive vice president and general counsel noted, “We have always expected this issue to be decided by the Supreme Court and we look forward to participating in that appeal.”

Wheeler is confident that the Court’s decision will survive a review by The Supreme Court of the United States (SCOTUS).  During an appearance at an awards dinner hosted by San Jose-based Silicon Valley Forum, the Chairman cited record profits that broadband providers are making that renders the industry’s opposition to regulate untenable.

General Insights:

The Court’s opinion provides an exhaustive analysis summary of the recent history and legal cases surrounding telecommunications. One of the more intriguing discussions involved the Court’s consideration of American households’ access to broadband services. Until the Bush Administration, the term “Digital Divide” was commonplace in policy circle and the general public. It highlighted emerging social and economic inequalities rooted in disparate access to telecommunications services. During a conference in Washington, a manager inside a Federal agency conveyed to me that Bush has “sent out” and edict to stop using the term Digital Divide, suggesting that the super-information highway was ubiquitous.

Internet-Broadband-Access--DCAppealsCourt-201606Today, debates over the infamous last mile problem and advancement certain telecommunications services reflect various presuppositions about the nature of these problems. In the recent deliberations, the Court examined the extent to American homes have accessibility to  various broadband capacities. See Figure 1. The data indicate that 36% of households have 2 Providers of 10 Mbps/768 kbps services, while 39% have access to at least 2 Providers of 25 Mbps/3 Mbps services. The Court noted:

The Commission emphasizes how few people have access to 25 Mbps, but that criterion is not grounded in any economic analysis. For example, Netflix—a service that demands high speeds—recommends only 5 Mbps for its highdefinition quality service and 3 Mbps for its standard definition quality. Netflix, Internet Connection Speed Recommendations, https://help.netflix.com/en/node/306. A likely explanation for why there has not been more rollout of higher speeds is that many people are reluctant to pay the extra price for it. Indeed, the 2015 Broadband Report indicates that fewer than 30% of customers for whom 25 Mbps broadband is available actually order it. 2015 Broadband Report ¶ 41 (including Table 3 and Chart 1).

That many markets feature few providers offering service at 25 Mbps or above is hardly surprising. In a competitive world of rapidly improving technology, it’s unreasonable to expect that all firms will simultaneously launch the breakthrough services everywhere, especially in a context in which more than 70% of the potential customers decline to use the latest, priciest service.

The Commission established the 25 Mbps standard in its 2015 Broadband Report ¶ 45. Its explanations seem superficial at best. For example, it relies on the marketing materials of broadband providers touting the availability and benefits of speeds at or greater than 25 Mbps. Id. ¶ 28. Perhaps the authors of the Order have never had the experience of a salesperson trying to sell something more expensive than the buyer inquired about—and, not coincidentally, more lucrative for the salesperson. The Commission also justifies the standard by arguing that 10 Mbps would be insufficient to “participate in an online class, download files, and stream a movie at the same time” and to “[v]iew 2 [high-definition] videos.” Id. ¶ 39. This is like setting a standard for cars that requires space for seven passengers. The data seem to suggest that many American families are unwilling to pay the extra to be sure that all members can have continuous, simultaneous, separate access to high-speed connectivity (perhaps some of them read? engage in conversation?). The fact that the Commission strains so much to justify its arbitrary criterion shows how out of line with reality such a criterion is. The weakness of the Commission’s reasoning suggests that its main purpose in setting the “standard” may simply be to make it appear that millions of Americans are at the mercy of only one supplier, or at best two, for critically needed access to the modern world. All without bothering to conduct an economic analysis!

The Court’s opinion contains numerous other insights. For instance, Table 1 indicates that four provides — Comcast, Time Warner Cable, AT&T, and Verizon — account for 68.08% of all U.S. subscribers. In essence, 34 years after the landmark decision that dismantled the Bell System, consolidation has reappeared in an even more critical platform – broadband.

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