Cleland served as Deputy United States Coordinator for Communications and Information Policy in the George H. W. Bush Administration. Eight Congressional subcommittees have sought Cleland’s expert testimony and Institutional Investor twice ranked him the #1 independent analyst in his field. Scott Cleland has been profiled in Fortune, National Journal, Barrons, WSJ’s Smart Money, and Investors Business Daily. Ten publications have featured his op-eds. For a full bio see: www.ScottCleland.com.
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Given the avalanche of misinformation and manufactured hysteria by net neutrality proponents over the FCC’s proposed rulemaking to make the FCC’s Open Internet Order comply with the Appeals Court Verizon v. FCC decision, AT&T’s FCC filing here (and below) is a welcome and much-needed total debunking of the call for Title II reclassification of broadband.
For anyone, analyst, reporter, etc. who cares to really understand how Title II common carrier law and regulation actually would play out in the real world, not in the nostalgic imaginations of people who have no real life experience in this matter, this filing eviscerates Title II proponents’ partial, over-simplified, inexperienced, and ill-informed thinking.
Beware proponents of Title II reclassification; if you read this AT&T rebuttal you will begin to comprehend the depth of vacuousness of arguments for reclassification of broadband and you will realize that manufactured-public-perception, is no match for facts, reality and real world experience.
Opponents of Title II reclassification will be heartened to read the vast amount of new strong, factual, and legally defensible arguments against this ill-conceived, ill-advised and ill-timed effort to reclassify broadband as a monopoly telephone service.
For those interested, be sure to read this filing and encourage others to read it as well.
May 9, 2014
VIA ELECTRONIC SUBMISSIONMarlene H. Dortch
Federal Communications Commission
445 12thStreet S.W. Washington, D.C. 20554
Re: Open Internet, GN Docket No. 14-28
Dear Ms. Dortch:
On May 8, 2014, Hank Hultquist, Gary Phillips,Christopher Heimann, and I, on behalf of AT&T, met separately with Daniel Alvarez,Legal Advisor to Chairman Wheeler, Priscilla Delgado Argeris, Legal Advisorto Commissioner Rosenworcel, Nick Degani, Legal Advisor to Commissioner Pai, and Amy Bender, Legal Advisor to Commissioner O’Reilly, to discuss how the Commission should proceed in response to the D.C. Circuit’s vacatur and remand of the Commission’s Open Internet rules inVerizon v. FCC, 740 F.3d 623 (D.C. Cir. 2014). Consistent with our comments in this proceeding, we explained that, the court’s decision requires only that the Commission fine-tune itsprior rules insofar as they apply to fixed broadband by narrowly tailoringthenondiscriminationrequirement to address only true threats to Internet openness and allowing ISPs to make individualized decisions whether and on what terms to deal with edge providers.1
We noted in particular that calls for reclassification of broadband Internet access services as a Title II telecommunications service would cause risks and harms that dwarf any putative benefits, all but scuttle the administration’s ambitious broadband agenda, and would not, in all events, preclude the paid prioritization arrangements that seem to be the singular focus of reclassification proponents.
As the FCC’s National Broadband Plan2recognized, the nation’s overriding communications policy objective for the 21st century is to promote universal broadband deployment and adoption. Private investment, not prescriptive regulation,is the key toachieving that goal. According to the Plan, “the American broadband ecosystemhas evolved rapidly” over the past decade, and this evolution has been “[f]ueled primarily by private sector investment and innovation.”3 Broadband providers are continuingto invest tens ofbillions ofdollars each year
1AT&T Comments,GN Docket No.14-28 (filedMarch 21,2014).
2FCC, ConnectingAmerica:TheNational BroadbandPlan(2010) (BroadbandPlan).
in America’s broadband future, creating thousands of new jobs. But achieving the next phase of broadband deployment envisioned by theNational Broadband Plan will require more— according tothe Commission’s own estimates, $350 billion more.4 The National Broadband Plan thus wisely endorsed “actions government should take to encourage more private innovation and investment,” whileemphasizingthat“therole of government is and should remain limited.”5
When the Commission last considered reclassification proposals, industry analysts warned that such proposals, even when accompanied by forbearance and portrayed as “third way” alternatives to maximal dominant-carrier regulation, would createenormous investment- deterring regulatory uncertainty. For example:
- Craig Moffett of Bernstein Research observed, on the day the Commission proposed Title
II reclassification, that: “Markets abhor uncertainty.Today we got uncertainty in spades.” He added that “it is unclear what, precisely, this means for [other]information service providers, including Google”; that he “expect[ed] aprofoundly negative impact on capital investment”; and that the “third way” was “an unequivocal negative development[.]”6
- Jonathan Chaplin of Credit Suisse explained, alsoin the aftermath of thereclassification proposal, that “[t]he biggest disconnect between Washingtonand Wall Street is on how the competitiveness of the industry isviewed. . . . Competitionis doing its job and regulations would make it very difficult for companies to get reasonable return on investment. . . . The threat of regulation could discourage investment and cost jobs[.]”7
- Mike McCormack of J.P. Morgan agreed that investors were “extremelynervous about what’s coming” out of this proceeding, and added that “[b]roadband is a very competitive place so there’s no point [in]fixingit[.]”8
- Anna-Maria Kovacs of Regulatory Source Associates noted that it would“take years to know whether [any reclassificationdecision] is upheld in court. . . . [W]e would expect the industry—telco, wireless, and cable—toassess capital investments from this point in light of the potential fornew and more extensive regulations.”9
4Staff Presentation, September 2009Commission Meeting, at 45 (Sept.29,2009),http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-293742A1.pdf.
5Broadband Plan at 5.
6Craig Moffett, QuickTake-U.S.Telecommunications,U.S.Cable&Satellite Broadcasting: TheFCC Goes
Nuclear,BernsteinResearch, May 5, 2010 (“Moffett,Quick Take”) (emphasisadded).
7Yu-TingWang& HowardBuskirk,Reclassification SaidtoPoseBroad Risk to U.S.Economy,Communications
Daily,at 1 (June 14, 2010) (someemphasisaddedandsome omitted).
9Anna-Maria Kovacs,TelecomRegulatoryNote: D.C.Circuit vacatesFCC’sComcastnetwork-managementorder, Regulatory SourceAssociates,LLC,at 2 (Apr.7, 2010) (emphasisadded).
- Stanford tech analyst Larry Downes claimed that a reclassification “would be the worst example in history of a tail wagging the dog” and perhaps “the worst ideain communications policy to emerge in the last 75 years—that is, since the [FCC] was first created in 1934.”10
- PC Magazine commentator and MarketWatch analyst John Dvorak described the proposed Title II reclassification as “the worst possible outcome” ofthe net neutrality debate and “a terrible idea” that would “destroy the Internet as we know it.”11
- Former Chairman Michael Powell, then withProvident Equity Partners, “fear[ed] a prolonged period of uncertainty and instability” in the wake ofany Title II reclassification decision that would “undermine the shared goal of intensifying our nation’s investment in broadband.”12
- The Washington Post editorial page explained that any attempted reclassification under Title II would be “a legal sleight of hand that would amount to a naked power grab” and “could damage innovation in what has been a vibrant and rapidly evolving marketplace.”13
A panel of financial experts held at New YorkUniversity law school agreed with all of these concerns:
- Height Analytics Managing Director TomSeitz warned that “the FCC could be inhibiting investment through its net neutrality andreclassifications investigations” because “[i]nvestors hate uncertainty and clearly what is being created right now is uncertainty in the marketplace[.]”
- Citigroup Managing Director Mike Rollins expressed concern that reclassification would open the door for “a later FCC to . . . limit thenumber of Title II provisions fromwhich it will forbear[.]” This risk,he added, would have aninvestment impact today, because “[w]heninvestorsarelooking at policy decisions they’re not just looking at what the FCC wants to accomplish today but what those policies can do over time.
- Wise Harbor founder Keith Mallinson notedthat “people are hungry to have more capabilities [in their broadband connections] andthe market has the capability to deliver
10Larry Downes,What’s in a title?For broadband, it’s Oz vs. Kansas, CNET News, Mar. 11, 2010,http://news.cnet.com/8301-1035_3-20000267-94.html(“Ozvs.Kansas”) (emphasisadded).
11John Dvorak,Net neutrality becomes a dangerousissue,MarketWatch,Apr.16,2010,http://www.marketwatch.com/story/print?guid=2012C86A-55C5-4CA0-821F-F203C21E2B6E(emphasisadded).
12Michael K. Powell,MyTakeon theAppealsCourt Decision,Broadband for America, Apr.7, 2010,http://www.broadbandforamerica.com/blog/michael-powell-my-take-appeals-court-decision(“Powell, My Takeon theAppealsCourt Decision”) (emphasisadded).
13Editorial,Internetoversight is needed,but not inthe formof FCC regulation,Wash.Post,Apr.17,2010,http://www.washingtonpost.com/wp-dyn/content/article/2010/04/16/AR2010041604610.html(emphasisadded).
that, but increasing regulation has the risk of stifling that through the uncertainties but also by limiting some basic economic freedoms.”14
These concerns about the long-terminvestment deterring effects of regulatory uncertainty are, if anything, understated. First, by themselves, the threshold legal challenges to the Commission’s reclassification decision could consume muchof the next decade, depending on
the number of judicial remands. The communications industry suffered through similar regulatory chaos following the Commission’s effort in 1996 to shape the industry around the UNE-P model of intramodal “competition” for voice telephony services. That model ultimately succumbed to judicial challenges—but only eight years later, in2004, after multiple and increasinglyskeptical remands by the Supreme Court andthe courts of appeals.
Second, quite apart from direct legal challenges to the Title II regime itself, any reclassification decision would ignitemulti-year regulatory controversies on a variety ofissues, including, what portions of Title II would and would not apply to Internet service providers, and which Internet services and service providers would be subject to Title II.Title II is a comprehensive regulatory framework put intoplace in 1934 to regulate monopoly telephone companies. Additional provisions were added over the years, including in 1996, with a spate of wholesale obligations applicable to telecommunications service providers. Title II reclassification would automatically trigger application of allthese requirements to broadband Internet access services and Internet service providers.
To be sure, the Commission might attempt to minimize the disruption and calmthe markets by proposing to forbear from most statutory provisions inTitle II, as it did when it first proposed reclassification.But sorting through which of these provisions should apply and which would be subject to forbearance would itself ignite controversy, disagreement, and litigation, creating protracted regulatory uncertainty.And even if the Commission were to successfully exercise its forbearanceauthority, thenew Title IIregime would still be far more regulatory, and create far more regulatory uncertainty, than the pre-ComcastTitle I regime – as the Commission itself recognized sixteen years ago in the StevensReport. In that report, the Commission rejected a Title II classification for ISPsand, in the process, rejectedclaims that forbearance would eliminate the policy harms of such a classification. It explained:
Notwithstanding the possibility of forbearance, we are concerned that including Information service providers within the “telecommunicationscarrier” classification would effectively impose a presumption in favor ofTitle II regulation of such providers. Such a presumption would be inconsistent with the deregulatoryand procompetitive goals ofthe 1996 Act. In addition, uncertainty about whether the Commission would forbear fromapplying specific provisions could chill innovation.
Stevens Report, 13 FCC Rcd at 11525, para. 47.
14Howard Buskirk,RegulatoryUncertainty Created byFCCSeen Limiting Network Investment,Communications Daily, July15,2010 (“Buskirk, RegulatoryUncertainty”) (emphases added); seealso John Curran,Panelists: Neutrality, Title II Broadband Issues Breeding InvestorUncertainty, TR Daily, July 14,2010(“Curran,Panelists”)
Indeed, reclassification would raise a host of issues that reclassificationproponentshave completely ignored in their advocacy. For example, if broadband Internet access service is a telecommunications service, then broadband Internet access providers could be entitled to receive transport and termination fees under section 251(b)(5).15The Commission could not avoid this occurrence by establishing a bill-and-keep regime because, unlike voice traffic, Internet traffic is asymmetric. And because Internet traffic would now be subject to reciprocal compensation, virtually every settlement free peering arrangementwould have to be replaced by newly negotiated arrangements implementing the reciprocal compensation provisions of the Communications Act.Moreover,in those instances in which reciprocal compensation does not apply, ISPs would be entitled to file tariffs for the collection ofcharges for terminating Internet traffic to their customers.
Section 222 obligations would also kick in, imposing new obligations on a host of entities and causing wholesale disruption of currentInternetbusinessmodels. ISPs at both edges of the network, as well as transit providers, content delivery networks and others would appear to be statutorily required to take reasonable measures to prevent disclosure or use of information, such as IP addresses, websites visited, customer location information and other data, and they would
be precluded fromusing this information withoutcustomer consent. Email providers and search engines, as telecommunications service providers in their own right,couldlikewisebesubjectto these requirements.
And on top of all this, entities classified astelecommunications service providers would have to assess Universal Service Fees on theircustomers. While the current 17% contribution factor wouldpresumably be reduced, this would still amount to a substantial tax on Internet use.
Moreover, sections 201 and 202 would automatically apply once the Commission classified broadband Internet access services astelecommunications services. And since the flashpoint for this debate is “paid prioritization,” it is unlikely that the Commission would forbear from applying either ofthese provisions.But both sections contain vague and self- executing prohibitions that could make Internet service providers liable for any conduct that some future Commission, bowing to the same types of political pressures and irrational hysteria that we now see, decides to deemunreasonable. ISPs would thus have toassesslitigationrisk whenever, among other things, they engage in new anti-piracy measures, network-management techniques, or commercial arrangements with particular applications and content providers. The uncertainty could deter such initiatives to thedetriment of broadband providers, application and content providers, and ultimately consumers.
Beyond all this, any forbearance decision todaycould be prone to judicialchallengeand attempted reversal by future Commissions. No issue would ever be settled, and the Internet ecosystemwould be subject to a state of perpetual regulatoryuncertainty.As Commissioner
15Inits 2011 USF/ICC Transformation Order, the Commission heldthatall telecommunications traffic exchanged withaLEC issubject tosection 251(b)(5)obligationto establishreciprocal compensationarrangements. Connect America Fund, et al.,WCDocket No. 10-90,et al.,Reportand Orderand Further Notice of Proposed Rulemaking,
26 FCC Rcd 17663,para.769 (2011) (USF/ICC Transformation Order),pets. forreview pendingsubnom.In re: FCC11-161,No.11-9900(10thCir.filed Dec. 8,2011).
McDowell has noted, this would hardly be the “environment needed to attract up to $350 billion in private risk capital to build outAmerica’s broadband infrastructure.”16
In this regard, it is no meansclear whether a decision now toforbear from particular Title II requirements could be reversedby this or a future Commission. Indeed, there have been a spate of petitions to overturn past Commission forbearance decisions, and the Commission has, conspicuously, declined to dismiss those petitionson the grounds that forbearance decisions are irreversible. Moreover, insofar as theCommission has forborne fromapplying Title II itself to Verizon’s broadband transmission services, the Commission would have to reverse that very forbearance decision in order to resurrect Title II regulation of the connectivity component of a broadband Internet access service. This action,in itself, would be inconsistent with any purportedassurancethatforbearancedecisions are not readily reversible.
Moreover, it is foolish tothink that the Commission could reclassify the provision of broadband Internet access to consumers as a telecommunications service without similarly reclassifying a broad array of other functionally analogous servicesin the Internet ecosystem. For example, there is no logicalor legally sustainable basis to distinguish between ISPs serving consumer “eyeballs” andthose serving contentand other edge providers.Likewise, transit
providers and content delivery networks (CDNs)would be telecommunications service providers subject to Title II, as would connected device customers. (The latter would be resellers of telecommunications services and thus telecommunications service providers in their own right.) Indeed, the logic behind reclassification would dictate that whena search engine connects an advertising network to a searchrequest or effectuates a connection between a search user and an advertiser, it too would be providing a telecommunications service.And so too would an email provider that transmits an email or a social network that enables a messaging or chat session.
The point is, once the Commission separates transmission from information processing, there is no way logically to limit that rationale to one segment of the Internet and not others.Every
entity that provides an over-the-top communications capability, whether it’s voice, text, or video, becomes either a facilities-based provider or a reseller (or both) of a telecommunications service.
In this regard, any attempt to confineTitleII reclassification to owners oflast-mile transmission facilities would crash headlong into the statutory language, Supreme Court precedent, and 75 years of Title II jurisprudence.The classification of any provider as a Title II “common carrier” has never depended on whether the provider owns transmission facilities, let alone last-mile facilities.That is why standalone long-distance telephone companies, such as the legacy AT&T Corp., MCI, and Sprint, were always treated as Title IIcarriers even though they depended on local exchange carriers for their last-mile connectivity, and why even long-distance resellers are treated as Title II carriers even though they often own no facilitiesat all. Here, the retail service that ISPs offer to consumer and business users encompasses end-to-end access to all points onthe Internet,even though each user’sISP must generally relyon other providers to supply someof the links to each of those points (for example, through peering and transit arrangements among Internet backbones).
16Commissioner Robert McDowell,“TheBest BroadbandPlanforAmerica: First,Do NoHarm,” FreeState
FoundationKeynoteAddress,at 13 (Jan.29,2010), http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-
The key legal rationales for any TitleII reclassification decision would thus necessarily extend to any Internet provider that holds itself out to customers as arranging for the transmission of data from one point on the Internet to another, whether or not it owns transmission facilities. As discussed above, this category would extend to ISPs such as Earthlink and AOL that do not own last-mile transmission facilities; to content delivery networks (“CDNs”) such as Akamai that hold themselves out to the commercial public as transporters of data to distant points on the Internet; to providers of e-readers like Amazon.com, which provides Internet access through the Kindle; to companies like Google that provide advertising-supported Internet search services and, on behalf of countless commercial customers, arrange for the transmission of advertising content to end users; and to a variety of other online transport
providers ranging fromNetflix to Level 3 to Vonage. In short, Title II reclassification would be a sledgehammer, not a scalpel.
The supreme irony here is thatTitle II reclassification wouldnot even preclude the paid prioritization arrangements that are purportedlyanimating reclassification proposals.Title II does not require that all customers be treatedthe same as reclassification proponents seemto believe. Rather, by its express terms, Title II prohibits only “unjust and unreasonable” discrimination, and it is well established that Title II carriers may offer different pricing, different service quality,and different service quality guarantees to different customersso long
as the terms offered are “generally available to similarly situated customers.” For example, even telecommunications carriers considered “dominant” are permitted to negotiate contracts for special access services that include such preferential treatment as: (1) service level guarantees, (2) expedited and prioritized service installation and/or (3) expedited and prioritized repair. Such offerings may be individually negotiated withthe customer, along with the other terms on which the service is made available, and need not be provided to all customers — only those customers who execute the same contract as the first customer or who are able to negotiate the same terms
in the context of another contract. Indeed, telecommunications carriersare not even obligated under Title II to offer the same contract to every customer who might want it. Rather, the contract (including the service level guarantee or prioritizedinstallation or repair) must only be made available to “similarly situatedcustomers,” and under well-established precedent, customers are not similarly situated if, among other things, they operate in different competitive environments or if the cost of serving themis higher than the cost of serving the first customer.
Nor does Title II require uniformpricing.For example, the Commission has allowed dominant carriers to make the following types of price distinctions for years:
- Volume discounts — discounts that are available only to customers who commit to purchase services in larger volumes.
- Termdiscounts – discounts available only to customers who commit to purchase services for specified terms, with longer termcommitments commanding bigger discounts.
- Multiple service discounts – discounts available only to customers who purchase multiple services.
- Competitive necessity discounts – discounts needed to respond to competition may be
offered on a selective basis.
And it has provided nondominant carriers even broader latitude to negotiate individually tailored agreements regarding rates, terms and conditions. For example, the Commission has concluded that CMRS providers’ grant of discriminatoryconcessions to consumers that haggle was reasonable, benefitted consumers, and thus consistent with section 202’snon-discrimination clause.17
In short, reclassification of broadband Internet access services would impose a host of harms, including investment killing uncertainty,without doing anything to remedy the alleged “problem” (i.e.,paidprioritization)itpurportedlyis intended to address. Calls for reclassification are not well-thought out and should be promptly rejected.
/s/ Robert W. Quinn, Jr. cc:
Priscilla Delgado Argeris
SeeOrloff v. VodafoneAirTouch Licenses LLC d/b/a Verizon Wireless,17FCC Rcd 8987 (2002),petitionfor
Review Denied subnomOrloff v. FCC,352F.3d 415 (D.C. Cir.2003),cert. denied, 542 U.S.
[Originally published at Precursor Blog]