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What's in a title? For broadband, it's Oz vs. Kansas

A push by Net neutrality advocates to reclassify ISPs as telecommunications providers has dangerous implications, argues Stanford Law Fellow Larry Downes.

Larry Downes
Larry Downes is an author and project director at the Georgetown Center for Business and Public Policy. His new book, with Paul Nunes, is “Big Bang Disruption: Strategy in the Age of Devastating Innovation.” Previous books include the best-selling “Unleashing the Killer App: Digital Strategies for Market Dominance.”
Larry Downes
9 min read

Editors' note: This is a guest column. See Larry Downes' bio below.

It was the best of times; it was the worst of times.

In 1996, Congress passed the landmark Telecommunications Act. The last major reform of communications law, the 1996 act ended Judge Harold Greene's 10-year effort to run America's telecommunications industry from his judicial chambers after the forced breakup of AT&T.

Since then, consumers have lived in two very different worlds.

One is the land of unregulated "information services." It includes, among other innovations, the World Wide Web, voice over Internet Protocol telephony, wireless applications, and cloud computing.

The other is the regulated world of "telecommunications services." It consists of traditional wireline telephones, plain and simple.

It seems pretty obvious which of these two worlds consumers prefer. In Federal Communications Commision parlance, information services are governed by Title I, while telecommunications services are regulated under Title II. If U.S. communications law were "The Wizard of Oz," Title I would be the Technicolor dream that lies over the rainbow. Title II, on the other hand, covers the bleak, black-and-white landscape of rural Kansas.

But in the last few months, D.C.-based advocacy groups such as Public Knowledge have asked the FCC to reconsider the regulatory border that today separates Title I and Title II. The groups want the commission to reclassify broadband Internet as a "telecommunications service" and regulate it under Title II.

Such a radical change in communications law, among other things, would mean that all broadband Internet access, including DSL, fiber-optic, cable modem, satellite, and wireless technologies, could be subjected to the complex web of unbundling requirements and common-carrier rules that today apply only to telecommunications. Rates and service levels would be overseen by the FCC. Support services and private networks, including Web caching and inter-network peering arrangements, could for the first time come under federal control.

The Net neutrality tail, the broadband dog
Why would anyone propose a return to the calcified world of the pre-Internet communications industry, a world dominated by the monopoly power of the former AT&T? (The old AT&T was itself a casualty of Title II regulation in the post-1996 world. Left with only its long-distance business, AT&T lost most of its value and was acquired in 2005 by some of its former local phone company subsidiaries.)

If U.S. communications law were "The Wizard of Oz," Title I would be the Technicolor dream that lies over the rainbow. Title II, on the other hand, covers the bleak, black-and-white landscape of rural Kansas.

The short answer is Net neutrality. In October, the FCC released a 107-page Notice of Proposed Rulemaking, outlining new rules that would limit how broadband Internet providers manage their private networks. Even as the agency slogs through millions of pages of public comments on the rules, however, the FCC's authority to impose any Internet regulation is now in doubt.

In a case argued before the D.C. Circuit Court of Appeals in January, a three-judge panel viewed the imposition of neutrality rules under Title I skeptically. Many analysts believe that the court will ultimately hold that the agency has no authority to regulate Internet service providers.

The case, now awaiting decision, involves sanctions levied by the FCC against Comcast in 2008 for secretly restricting some customers' access to BitTorrent and other peer-to-peer applications. On the assumption that the D.C. court will leave the commission without the power to adopt formal Net neutrality rules under Title I, pro-neutrality groups want the agency to reclassify broadband Internet as a telecommunications service subject to Title II. Under Title II, the FCC could treat ISPs as common telecommunications carriers.

FCC Chairman Julius Genachowski has refused to rule out the possibility of reclassification, when it has come up regarding the Comcast-BitTorrent case. And during a hearing over the Comcast-NBC Universal merger on Thursday, he gave a strong indication that the FCC is considering reclassification.

"It's a major issue of global competitiveness for the United States," Genachowski said, according to The Hill. "We are defending the position that Title 1 [classification] gives us the authority we need. We'll continue to assert that position and hope we will get a favorable decision. If the court does something that requires us to reassess, we'll do that."

This has provided little comfort to the communications industry. Not surprisingly, leading industry associations have reacted violently to the idea of subjecting Internet access to the full regulatory might of the FCC. In late February, a letter (PDF) signed by industry associations of the cable, wireless, and telecommunications industries, as well as leading providers AT&T, Verizon Communications, and Time Warner Cable, condemned the proposed reclassification as a "radical" move, one that "at a minimum, would plunge the industry into years of litigation and regulatory chaos."

That's a very real concern. Reclassification would put the agency squarely at odds with the 2005 Brand X case, the culmination of years of litigation over cable modem service. In Brand X, the FCC successfully argued before the U.S. Supreme Court that broadband Internet access was clearly a Title I service. Any effort to reverse that decision would, if nothing else, kick off another round of withering lawsuits.

Whatever one thinks of the wisdom of having the FCC ensure the continued openness of the Internet through the proposed Net neutrality rules, achieving that goal through reclassification would be the worst example in history of a tail wagging the dog. It may even be the worst idea in communications policy to emerge in the last 75 years--that is, since the commission was first created in 1934.

The two titles
To understand why, we need only review the parallel histories of life under Title I and Title II since the 1996 Act.

Consider life since then under the largely unregulated Title I. Internet access has improved in every measure. Data communications speeds have increased exponentially, major new technologies including fiber optics and 3G/4G wireless have emerged, and even traditional voice applications have been adapted to the nonproprietary, packet-switched protocols of TCP/IP. Consumers in all but the most remote parts of the country can choose between a variety of ISPs, including cable, wireline, wireless, and satellite providers, many of which offer bundled packages of phone, television, and Internet services.

On the assumption that the D.C. court will leave the commission without the power to adopt formal Net neutrality rules under Title I, pro-neutrality groups want the agency to reclassify broadband Internet as a telecommunications service subject to Title II.

Verizon and AT&T have spent billions of dollars to implement next-generation fiber-optic networks capable of carrying voice, data, and high-definition video services, while cable companies have upgraded their networks to remain competitive. Wireless networks have expanded as well, encouraging millions of consumers worldwide to abandon their landlines in favor of cellular technology, which offers voice and data with the convenience of an untethered connection. Satellite providers have also invested heavily to compete in the market for high-speed data communications.

Since the 1990s, standard dial-up modem speeds of 300 bits per second increased quickly to 56,000bps using the old copper network. Then came broadband. Cable modems were introduced in 1996, offering speeds up to 1.5Mbps. DSL emerged soon after, and wireless Internet over the cellular network after that. In 2000, about 5 million American homes had broadband. By 2008, that number had increased to more than 80 million. Broadband access is now available to 96 percent of American homes, according to recent FCC figures.

As bandwidth became more readily available, ISPs moved from the hourly billing model of America Online in the mid-1990s to more or less unlimited and unmetered usage, paving the way for always-on applications, video services such as YouTube, social networking, and other so-called Web 2.0 services.

Today, popular broadband speeds range from 2Mbps to 6Mbps, offered at a flat rate of about $40 per month. In addition to the Web, Internet users can watch television and movies, obsess over Twitter and Facebook, enjoy thousands of 3G and soon 4G apps, and even use public data networks for old-fashioned voice communications using Skype, Vonage, and other VoIP software. Cable companies now offer local and long-distance phone service over their networks, as well as Internet access and high-definition video.

By comparison, life under Title II has stagnated, at best. Under the 1996 Act, the FCC was required to force open local phone service to unlimited competition. With access to the legacy carriers' network and equipment guaranteed, and prices overseen by the FCC, thousands of new local phone companies emerged. These new providers had no infrastructure of their own to build or maintain, and they largely competed with the legacy carriers and each other on price. Many had no experience in the communications business, existing only to arbitrage the regulations.

Abuse of the system is still rampant. In remote areas, the new local phone companies partnered with chat lines and teleconferencing services to pump incoming phone calls to areas that otherwise had little traffic, sharing the proceeds of mandatory interconnection fees imposed on the originating carrier.

Many urban carriers offer flat-rate service to customers, forcing the provider to eat the cost of the interconnection fees. (Google Voice, a Title I information service, today refuses to connect to some of these services, an option unavailable to Title II telecommunications services, which, as common carriers, must connect all calls.)

With limited demand for local phone service and little to distinguish the carriers, by 2000, most of the new phone companies had gone broke. In 2002, then-FCC Chairman Michael Powell summed up the state of telecommunications: "This is an industry suffering--there have been nearly 500,000 jobs lost, a reported $2 trillion of market value extinguished, and by some estimates, companies are laboring under $1 trillion in debt."

By and large, the business side of Title II has only gotten worse. Accounting scandals at long-distance provider WorldCom heaped further pain on the traditional phone industry, which has, by most measures, never recovered. Faced with unregulated competition from VoIP carriers and cable companies, traditional phone companies are now backing away as quickly as they can from the most unprofitable areas of their business, leaving some customers with fewer options for standard telephone services.

Unintended consequences
Given the stark contrast between life under Title I and Title II, it's no surprise that there's been little call for relocating ISPs. Until now, in fact, the FCC has led the charge to keep information services out of the hornet's nest of Title II regulation--regulation that has largely destroyed legacy phone service. The commission determined in 2002, for example, that cable modem broadband, even if it included voice communications, was an information service. In 2005, after it successfully defended that position in the U.S. Supreme Court, the FCC ruled that wireline broadband was likewise a Title I service. In 2007, the agency extended that treatment to wireless broadband (PDF).

A reclassification of information services to Title II would cast a net much wider than just ISPs.

The results speak for themselves. We now have a vibrant, expanding Internet economy, one of the few bright spots on the economic scene. Broadband providers have invested hundreds of billions of dollars in the Title I networks, even as Title II services languish and die. As the FCC prepares to issue its long-awaited National Broadband Plan next week, the agency itself acknowledges achieving its goal of 100Mbps access for 100 percent of American homes will require an additional $350 billion in infrastructure costs.

Under Title I, those investments are likely to continue being made by the private sector. Reclassified under Title II, however, infrastructure improvements will come to a screeching halt. Wall Street is already terrified. Moving broadband Internet to Title II, according to Craig Moffett of Bernstein Research, would lead investors to "run for the hills."

It's possible that Congress will choose instead to nationalize broadband provisioning and make the necessary investments out of tax revenues--a kind of federal-highways plan for the information age. But the political will for massive new government infrastructure is clearly lacking. In the current economic climate, we'd be more likely to get the money from the tooth fairy than from Congress.

Worse, a reclassification of information services to Title II would cast a net much wider than just ISPs. Companies that provide Internet backbone and caching services, including Level 3 Communications and Akamai Technologies, could likely find themselves treated as common carriers. Bandwidth-peering arrangements in which companies voluntarily connect their networks for greater redundancy and increased transmission speeds, might also be considered a "telecommunications service."

In a Title II world, Internet services from the core to the edge of the network could be swept into a regulatory regime designed in the 1930s to control the monopoly of a company that no longer exists. Services that have never before been subject to FCC regulation, including cloud computing and search, could be subjected to unbundling and rate setting, limited only by the FCC's discretion under its "forbearance" powers.

Even if it means the end of the proposed Net neutrality rules, the FCC would be foolish to heed the siren call to regulate broadband as a telecommunications service. Title II is a relic of ancient communications history, not a cure-all for real and imagined limits of our broadband future.

Let's stay on the Yellow Brick Road that's taking us happily to the digital Oz. Let's not ever go back to Kansas.