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How fair is equality? Recent net neutrality developments and their market context

The imposition of “rules … written in the era of the steam locomotive and the telegraph”. That was the view of Verizon of the recent approach taken by the FCC.

Meanwhile in Europe, 100 MEPs urge the telecoms council of the European Commission not to weaken telecoms provisions critical to the Digital Single Market, leaving consumers vulnerable and incumbents protected.

What is going on that is causing legislators and regulators to head down what seem such undesirable roads? This article will look at the context of net neutrality and place recent proposals in context.

What is net neutrality?

The phrase ‘net neutrality’ captures several different concepts. Part of the difficulty in the public debate, is the difficulty of defining our terms: what should be included within the meaning, and what should not. This is mixed with a healthy dose of deliberate obfuscation and lobbying.

Aspects to the term net neutrality include:

  • a network provider prioritising traffic based on the source or destination of the traffic - e.g. an ISP prioritising certain video sites (“Partner Preference”).  This would typically be done because the website in question pays the ISP to be prioritised, but could be for other reasons.
  • A network provider prioritising traffic based on the type of data that the packet contains - e.g. an ISP prioritising packets in a VoIP call over a file download (“Traffic Shaping” or “Network Management”).  This could be because the packets in question perish faster (a delayed packet on a phone call has no value), but also for other reasons.
  • A network provider charges subscribers differently for traffic depending on its source (or it does not count towards any bandwidth cap) (“Zero Rating”).  Again, this would typically be done because the website in question pays the ISP to have their data treat like this, but again be for other reasons.
  • Arrangements between different levels of data network operators as to how they will pass data between themselves (for example between a trunk operator and an ISP)(“Peering Agreement”).
  • Any other deviation from a ‘dumb pipe’ model – this could be offering a discounted service (or faster speed) to customers willing to be advertised to (as AT&T do) or other similar adjustments.

Different net neutrality proponents see menace in some or all of these. Partner Preference protects wealthy incumbents, helping them serve customers better than their boot-strapped start-up competitors. Traffic Shaping is contra to ‘deep internet principles’ of being content agnostic which has served the internet well in permitting innovations. Zero Rating, like Partner Preference allows incumbents to build moats.

The laissez-faire argument

There is no free lunch. All market regulation has consequences. The internet has been a successful experiment to date without net neutrality, so why inhibit innovative ISPs going forwards?

The amount of data on the internet is increasing rapidly (an 18 fold increase from 2005 to 2013), and this traffic now largely centres on a comparatively small group of content providers (Netflix, YouTube and the like). ISPs and root network providers are expected to service this increasing demand while keeping charges stable – this presents the trilemma at the heart of the net neutrality problem: fast, cheap, neutral – pick two.

ISPs are reluctant to raise prices on consumers, and so they seek an alternative revenue source.  Successful content creators are a great opportunity for this, by entering into Partner Preference or Zero Rating agreements with.

Moral net neutrality proponents often talk of ‘rights’. A right to the internet. A right to not have internet traffic meddled with. A right to privacy. When something is a right, it cannot be charged for and does not have a free market value. Economists and businesses do not have such trouble placing a value on a benefit.

“Consumers are not currently equipped to be able to value on not advertised to, or place a value on not being subliminally ushered towards one website versus another”

This is how net neutrality becomes a market externality problem: consumers are uncomfortable being asked to make a choice in the trilemma above, they are not prepared to answer questions such as how much internet access they want to consume, and they are not currently equipped to be able to place a value on not being advertised to, or place a value on not being subliminally ushered towards one website versus another.

Net neutrality proponents, on the whole, would argue that consumers are not able to make these choices above (price allocation is hard, and you don’t know what is missing from a curated internet), and therefore the internet must be kept neutral (with consumers making a simpler choice between speed and cost).

Net neutrality opponents, on the whole, would argue that more faith should be placed in consumers – the provision of a service over infrastructure is old hat, it is in our long term interests to give freedom to ISPs to explore different business models for providing connectivity, slicing and dicing the compromises as they see fit, with informed consumers voting with their feet.

An example of this would be AT&T offering customers a $29 discount if they opt into their “Internet Preferences” program, which it uses to gather data and track of users for marketing purposes. This places a market price on privacy, in a clear manner, that net neutrality proponents might say the market needs to explore, but may be stifled by onerous net neutrality restrictions.

The right amount of monopoly

Fixed wire internet is an unusual product in economic terms as parts of it seem to work better as a natural monopoly. Providing fibre-to-the-door involves digging up roads, and it is not practical for an ISP to serve an area if it only supplies a small fraction of the population (due to high fixed costs but low marginal costs). It is not ideal either for the road to have to be dug up for a customer to switch between two existing suppliers.  In isolation it is preferable for one [monopoly] party to run the last mile, with ISPs competing for customers who select which ISP provides them with access over that last mile of fibre.

You will note that the net neutrality proponents position above that there should be ‘laboratories of business models’ to let consumers vote with their feet on the price of different adjustments to their internet traffic does not hold water if there is no choice of supplier in a town, or if the costs of changing supplier include delays and roadworks.

You will also note that this partial monopoly preference does not manifest in the same way over mobile spectrum. 

The FCC decision

It is in this context that the FCC released its updated approach to this issues on 12 March 2015. The approach is what is colloquially known as ‘Title II classification’ which is to place high-speed internet services within the regulatory regime of being a Title II (common carrier) within the US Communications Act of 1934.

The FCC’s ‘Protecting and Promoting the Open Internet’ document is a 313 page blend of policy and rhetoric, much of it defending FCC’s authority to make this ruling and attempting to cut-off inevitable future legal challenge.

“The meat of the policy is to prohibit three key (‘bright line’) activities: blocking, throttling and paid prioritization”

The meat of the policy is to prohibit three key (‘bright line’) activities: blocking, throttling and paid prioritisation (these last two fall within the Partner Preference and Zero Rating categories above). These are to be prohibited whether on mobile or fixed line internet.  Peering is however left alone – with the FCC acknowledging it is not sure how it should proceed on this front for the time being, and will review issues on a case-by-case basis.

As you may expect given the context above, these rules are contentious. The FCC vote only passed 3-2.  Republicans and telecoms companies are rushing to state how they will challenge these rules and / or ‘sue the FCC’. A plausible starting place for this challenge is in the difficulty of drafting such a tricky set of technical ideas – to do so, the FCC left some areas to its future discretion.  One such principle is to require telecoms companies to adopt a “no unreasonable interference or unreasonable disadvantage standard for [their own] internet conduct”. This restriction applies on top of the three bright lines prohibited above, however will inevitably lead to behaviour by telecoms companies which the FCC will wish to restrict, but the telecoms company argue is reasonable. The FCC document dedicates nine pages to examples and factors to take into account to interpret this rule, but they inevitably will not address (and therefore give certainty over) all manners of future telecoms arrangements.

For example Zero Rating is not captured by the three bright lines, but one can imagine Zero Rating being used to create consumer serious preference towards incumbent content providers. While the FCC itself contemplates this (paragraphs 151 – 153), it leaves its decisions to the future. This lack of clarity, and the handing of discretion to themselves, could be a weakness in its case as they look to enforce their decisions in front of US judges in the future.

Meanwhile in Europe…

While these developments have been taking place in the US, the position has also been developing in the EU.  In March 2014 strong net neutrality provisions were proposed by the EU Parliament, prohibiting Partner Preference and Zero Rating. These provisions took a more nuanced approach to Traffic Shaping than the FCC, in particular permitting traffic shaping in relation to ‘specialised services’ for specific content, applications or services … requiring enhanced quality from end to end.

This approach has however been subject to further controversy as the policy has worked through the EU legislative machine.  Through November and December 2014 leaks from the European Commission Telecoms Council indicated that a dilution of these principles is being contemplated. These leaks indicate that the Telecoms Council is considering: (i) an ‘outcome based approach’ might be put forward, (ii) the definitions of ‘specialised services’ be deleted and replaced with an explicit right to Traffic Shape to protect network integrity, congestion, etc., and (iii) Zero Rating be permitted. On 4 March, over 100 MEPS wrote to the Telecoms Council urging them not to take such an approach.

As with anything in European legislature, nothing moves fast. The two positions in Europe (the MEP majority and the Telecoms Council) here do seem however to mirror the bitter fight and disputed view taking place in the United States between the FCC and the telecoms companies.

The control of information is valuable and controversial, and vested interests will fight bitterly to control or liberate it. While not perhaps shocking news, it is interesting to see the same dividing lines, and same tribes forming (with different flag-bearers) both in Europe and USA.  Over here it may be plus ça change, over there same old same old.

For more information, please contact Rich Folsom.