The FCC’s Predictable Fiasco Of Internet Utility Regulation

REUTERS/Jonathan Ernst

Scott Cleland Contributor
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What could possibly go wrong?

On Feb. 26, the FCC plans to dictate the “strongest possible” 1934 economic regulation of the Internet — currently the most dynamic, modern, and high-functioning part of the U.S. economy — despite questionable legal authority and competence.

Detonating the Title II “nuclear option,” the FCC will assert regulatory jurisdiction over most everything involving Internet communications economy-wide for the first time.

This will trigger predictable shockwaves and spread “radioactive” fallout in many directions.

Over time, so much is likely to go wrong.

Initially, the predictable shockwave will cause broad surprise, confusion, and uncertainty.

Consider this predictably unpredictable sequence of coming events.

In the coming months, there is a coin toss chance the FCC order will be stayed in court. In 12-24 months, there is a coin toss chance the FCC will be overturned in court. In 21 months, there is a coin toss chance of a Republican being elected president and then a Republican-led FCC reversing this FCC order in 2017. In 30-48 months there is a coin toss chance of the Supreme Court overturning the FCC’s order.

Over time, the predictable “radioactive” fallout will be serious.

When the dust settles, it will become clearer how far and wide the Title II fallout has spread.

That’s because this partisan FCC decision is an abrupt, complete reversal of a highly successful bipartisan Internet policy foundation, on top of which the Internet economy has been built for the last twenty years.

This policy foundation U-turn predictably will set in motion a chaotic cascade of other supporting policy U-turns over time.

Concerning taxes, FCC Title II regulation authorizes the imposition of billions of dollars in new federal and state taxes and fees in direct conflict with Congress’ longstanding Internet tax moratorium.

Higher FCC broadband taxes and fees make broadband less affordable, prompting the need for more universal service taxes and subsidies, which in turn again makes broadband less affordable, fueling an ongoing perverse tax and fee increase spiral.

Concerning competition, the FCC’s assertion of 1934 Title II price regulation authority is at war with current law. The purpose of the 1996 Telecom Act was “to promote competition and reduce regulation.” Congress also put into law a statement of policy for an Internet “unfettered by federal or state regulation.”

This policy U-turn incentivizes the FCC to define away the existence of obvious broadband competition in order to justify the assertion of more FCC regulatory authority, further reducing competition to promote regulation. Litigation will predictably flow.

Concerning innovation, FCC Title II regulation is inherently hostile to the Internet’s “innovation without permission” dynamic, because it centralizes innovation approval authority with the FCC to decide if any new contested IP communications product or service is “just or reasonable.”

The FCC’s new Title II case by case enforcement will be based on new, vague, and untested “general conduct” standards.

Think of this as an arbitrary “make it up as one goes along” process, and a “gotcha” game, where innovators roll the FCC approval dice and FCC bureaucrats are incentivized to second-guess and overturn market-based engineering and marketing innovations in order to justify their existence.

Concerning the international implications for Internet governance and trade policy, FCC Title II regulation will predictably disintegrate much of the Internet’s global multi-stakeholder governance process and free trade dynamic over time.

The United States government position, that there should be no government or UN control of the Internet’s political governance process, is in complete conflict with President Obama’s call in November for the FCC to impose the “strongest possible” economic control of America’s Internet via Title II utility regulation.

Hypocritically telling China, Russia, the EU, Brazil, and the Arab states to “do as we say, but not as we do,” gives political cover for national “GoverNets” that seek to engage in censorship or protectionism.

This hypocrisy also accelerates foreign adoption of the UN International Telecommunications Union’s “sending party pays” economic model where countries can legally impose protectionist per-megabyte import tariffs on America’s asymmetric Internet downstream traffic from Silicon Valley.

Concerning investment and its consequent impact on growth and job creation, the FCC’s new and unexpected assertion of sweeping regulatory jurisdiction over the Internet protocol layer used by the communications, Internet and tech sectors will predictably devalue America’s Internet communications infrastructure, cloud data centers, and application platforms under a cloud of uncertainty over time.

Think of FCC Title II regulation like a sector-wide blinking yellow caution light signaling everyone to slow down because sharp turns or danger lie ahead.

It will take time, but responsible investors naturally will increase their due diligence into if and how the FCC’s assertion of sweeping Title II authority could make their investments directly or indirectly more risky and speculative than they were before.

As with any major investment uncertainty, responsible investors on the margin naturally will shift their portfolios from investments infected with unquantifiable uncertainty to investments uninfected by unquantifiable uncertainty.

Less investment due to uncertainty over long term returns on investment naturally means a lowered growth outlook and a reduced demand for new employees.

Concerning cloud computing, the FCC’s assertion of end to end regulatory jurisdiction over the Internet protocol layer necessarily puts cloud providers on the slippery slope of Title II common carrier obligations for the first time.

When the FCC redefines Internet protocol packet transmissions to be “telecommunications” in order to gain Title II authority over ISPs, the agency’s functional definition naturally could capture cloud providers, which communicate via the same Internet protocol packet transmissions.

Think of the packet transmitting functions of large cloud providers as a mirror image of an ISP’s packet transmitting functions. It could take years for the courts to settle this legally.

Concerning privacy, Internet advertising and the free content that it funds, the FCC’s assertion of Title II jurisdiction over the Internet protocol layer, combined with the FCC’s stated intent to enforce Section 222 to protect “customer private network information,” puts a cloud of uncertainty over whether the Internet advertising business model under Title II is legal or not.

Under FTC jurisdiction, the free and open Internet’s advertising model need only abide by its disclosures to use customers’ private information in order to advertise and monetize content based on a user’s private information.

However, under FCC common carrier jurisdiction, which legally trumps FTC privacy jurisdiction via an exemption in law, Internet advertisers that use “customer private network information,” i.e. personal information that identifies who and where one is at any given time, can only use such intimate private identifying information with a users’ explicit consent.

At a minimum, the FCC’s power grab here could have the unintended consequence of creating the appearance of outlawing permission-less Internet advertising.

Even if the FCC indicates it does not intend to interpret the Title II privacy law to apply to Internet edge providers, privacy advocates can sue in court to try and have a court compel the FCC to enforce Title II privacy law against unauthorized use of private customer information under Title II.

It could take years for the courts to resolve this legally.

Concerning content and free expression, the FCC’s Title II power grab includes stated plans for a “general open Internet conduct standard” which would allow for anyone to complain about any network practice that has an adverse effect on freedom of expression, among other issues.

This vague “standard for future conduct” opens the door for the FCC to unilaterally create a de facto “Internet fairness doctrine” to try and ensure that Internet traffic, and the content it comprises, are treated equally.

This could be modeled after the FCC’s controversial content regulation of broadcasters, called the “Fairness Doctrine,” which the FCC applied from 1949-1987.

Concerning the IP transition, FCC assertion of Title II authority will predictably transmogrify the previous IP transition of applying modern light touch regulation to the obsolescing Title II regulated telephone network to the exact opposite — applying 1934 telephone utility regulations to the modern Internet.

Concerning the pace of the FCC’s decision-making processes, FCC Title II regulation will predictably decelerate Internet infrastructure and operational decision-making, from the fast speed of business to the slow speed of government over time.

That’s because Title II is “mother may I?” regulation, where consumers and competition do not ultimately decide market outcomes — the FCC does, because 1934 Title II regulations assume businesses are monopolies that will ill serve consumers unless the FCC ultimately decides prices, terms and conditions.

Whatever one calls this seminal moment in the Internet’s American history — a debacle, disaster, or fiasco — it is predictably very bad.

Hopefully, a court will order a stay to contain some of the radioactive fallout from this destructive FCC decision.

The supreme tragedy here is that this predictable fiasco is totally unnecessary.

Congressional Republicans have an open offer for a legislative compromise, which for the first time would give the FCC the actual direct legal authority to address all their currently identified potential net neutrality concerns — blocking, throttling and paid prioritization — just no unbounded blank check authority to address yet-identified issues which Congress has yet to determine are a problem.

Only a bipartisan Congress can resolve this predictable fiasco legitimately for the benefit of the American people and Internet users.

Scott Cleland served as Deputy U.S. Coordinator for International Communications & Information Policy in the George H. W. Bush Administration. He is President of Precursor LLC, a research consultancy for Fortune 500 companies, and Chairman of NetCompetition, a pro-competition e-forum supported by broadband interests.