Net neutrality DOA? Here's what's next for the internet

Republicans are saying net neutrality rules are bad for business, while Democrats fear any changes will leave our internet rights vulnerable.

Just two years after adopting its net neutrality rules, the Federal Communications Commission could be on the cusp of tearing them down.

In 2015, the FCC, led by Democratic Chairman Tom Wheeler, put in place rules to ensure that broadband providers couldn't abuse their powers by charging companies for quicker access to their customers or unfairly prioritizing traffic.

The FCC is now run by Chairman Ajit Pai, appointed by President Trump in January. Two weeks ago, in a speech at the worldwide phone industry's biggest gathering, Pai laid out his argument for why net neutrality has to go, saying that, since the passage of the rules in 2015, investment in broadband infrastructure had declined for the first time outside of a recession. Republican Senator Ted Cruz of Texas, during a Senate committee hearing last week, issued his own critique, calling the rules an "illegal power grab" by the FCC.

"In my view, the biggest regulatory threat to economic growth on the internet is the FCC's open internet order," Cruz said.

Digital rights groups showed up at FCC headquarters in February to deliver more than 200,000 net neutrality petitions and "internet love letters," written since Valentine's Day by net neutrality supporters across the country.

Maria Merkulova

The comments tease out the underlying argument that the FCC and Republicans will use to dismantle the rules governing internet traffic: that the stricter regulations are just bad for business. It's a recurring theme in many of the actions that the Trump administration has taken, from slashing funds that would support President Obama's climate and water regulations to the revival of the Keystone XL and Dakota Access oil pipelines.

While it's not certain how they'll dismantle the 2015 rules -- whether it's a new rule-making process from the FCC or through legislation by Congress -- what's clear is they'll likely dangle the promise of a faster move to innovative services like 5G technology for consumers.

But Democrats and consumer advocates say the dismantling of those rules gives the broadband providers too much power, which will result in higher fees for consumers and businesses trying to access the internet. The argument about broadband investment is debatable; the rules haven't stopped wireless carriers from gabbing about 5G.

"Anecdotally, it does not appear that regulatory uncertainty has had a significant impact on new investment," said Craig Moffett, an analyst with MoffettNathanson.

Fuzzy numbers

The net neutrality rules approved by the FCC in February 2015 relied on a clause called Title II to reclassify broadband as a public utility, subjecting the internet to many of the same rules that have governed the century-old telephone network.

Big phone companies, cable operators and Republicans argue that the stringent utility-style regulation chills investment.

On Wednesday, Cruz cited a 2016 Capex report written by Hal Singer, an economist with the Washington-based firm Economists Incorporated, which does work for AT&T and Verizon. Singer's report shows that eight out of 12 domestic providers that participated in the survey reported a decline in capital expenditures since 2014, a year before the net neutrality order was passed. In total, he estimates that spending is down about 5.6 percent in the sector.

Pai used similar data from the trade group US Telecom, which also showed a $1 billion decline in total broadband spending from in 2015 compared to 2014.

But former chairman Wheeler, who also used the US Telecom data, said in a speech in January before stepping down that broadband spending had increased by $1 billion between 2013, when he took office, and 2015, when the rules went into effect.

"Network investment is up, investment in innovative services is up and ISPs' revenues -- and stock prices -- are at record levels," he said. "So, where's the fire?"

What broadband providers say

Even broadband providers are torn about the effects the regulation has had on their spending. Verizon Chief Financial Officer Matt Ellis said in January that the company's spending is affected very little by "whoever the administration is run by and the regulatory regime."

Comcast Chief Financial Officer Mike Cavanaugh in December admitted that the company had likely overstated the drag the regulation would have on its investment. The company's capital spending was up more than 30 percent in 2016 compared with 2014, the year before the FCC rules took effect, according to Singer's report.

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Ajit Pai addresses attendees at the 2017 Mobile World Congress in Barcelona.

Roger Cheng/CNET

Charter Communications Chairman and CEO Tom Rutledge last month downplayed the effects that the regulation had on its business. "It didn't really affect us."

Not everyone sees it that way, however. AT&T's CEO Randall Stephenson said on his company's fourth-quarter earnings call, "there was no way anybody can argue that [placing utility style regulation on mobility and internet businesses] is not suppressive to investment." AT&T's spending was down more than 16 percent, according to Singer's data.

The fear is real

While policy makers debate whether the FCC's rules have hampered broadband investment, smaller internet companies say a repeal of the rules would hurt them.

When Snap, the company that offers the Snapchat messaging app, decided to go public earlier this year, it said in a filing with the Securities and Exchange Commission that if the government removed the open-internet rules, that action could "seriously harm" its business. It warned if the change happens, "mobile providers may be able to limit our users' ability to access Snapchat or make Snapchat a less attractive alternative to our competitors' applications."

Without the regulation, wireless providers could make deals with Snap's competitors, like Facebook's Instagram, that could give them an advantage over Snap's service.

Other startups say that without the FCC's net neutrality protections, their businesses could be threatened. Rami Essaid, co-founder and CEO of cybersecurity startup Distil Networks, said that his company relies on fast internet connections to quickly filter malicious cyberattacks for its clients.

Essaid added that without the FCC's protections to keep the internet open, he's afraid broadband providers might take advantage of their control over consumers' access to the internet to charge companies like his extra fees to reach customers faster.

"If internet service providers could charge for fast lanes, we wouldn't exist," he said. "We wouldn't be able to afford the added expense to do business."

House of cards

Republicans and large ISPs say they support the principles of net neutrality. But consumer advocates and Democrats say stripping broadband of its classification as a utility undermines the rules' legal foundation. The result: Protections would fall like a house of cards.

Gigi Sohn, a former adviser to Wheeler, said the FCC tried twice before to impose the rules without reclassifying broadband as a utility and both times it lost in federal court. The third time, when the FCC reclassified broadband, was the charm, she said.

Congress could pass a new law ensuring those protections. Senator Thune, a Republican from South Dakota, has said he is willing to work with Democrats to draft bipartisan legislation addressing the issue. But so far no new legislation has been introduced.

More than 170 groups, including the American Civil Liberties Union and the Electronic Frontier Foundation, sent a letter Tuesday to Pai, as well as Sens. Thune and Bill Nelson, a Democrat from Florida, urging them to maintain the principles of net neutrality.

"Unless Congress acts there is no strong net neutrality without Title II," Sohn said. "It's like love and marriage. You can't have one without the other."

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