On Neutral Ground - A Primer to Net Neutrality Legislation & an Examination of Telecom Industry Impacts

This article was written in late 2005. But the topic seems as relevant today as then, as the industry shifts strategies to cope with new technology and economic forces, in turn bringing new dimensions for policy consideration.

In a historic decision, on Feb 26, 2015, the Federal Communications Commission (FCC) voted to accept net neutrality laws proposed by its chairman Mr. Tom Wheeler. The new laws classified high-speed broadband (Internet) as a public utility under Title II of the 1934 Communications Act instead of section 706 of the 1996 Telecom Act. Importantly, the regulations were applicable to both mobile and fixed broadband networks.

The decision has far-reaching consequences not only for the end-user, but to all stake-holders in a complex and diverse eco-system of telecom service providers, that has evolved over the last decade. As communication services have come to encompass not only voice telephone calls, but messaging, data, TV, user-generated media, and other forms of streaming content that can be accessed and embedded in an ever-growing variety of “apps” and devices, several new players have emerged, taking hold and disrupting the previous status quo. The eco-system now includes:

1.   Traditional telecom service providers or CSPs, and cable companies that offer broadband or high-speed internet over fixed-line (copper, fiber) as a service to their customers, and own the infrastructure up to the last-mile

2.   Mobile network operators (MNOs) that own cellular infrastructure and wireless spectrum

3.   Mobile Virtual Network Operators – that partner with MNOs, reusing the MNO’s core infrastructure, but provide new alternative segment-specific packages to retail users

4.   And last but not least, over-the-top (OTT) “content” or “application” providers – which is a catch-all for an ever-growing category of providers inventing and introducing new business models for revenue-generating services, also leveraging the core carrier network

The above players, as well as software and service providers to this trillion-dollar ecosystem, are uniquely affected by the recent legislation. Hence this brief but apolitical thought-paper aiming to provide a primer on the existing regulation and a perspective on the challenges and opportunities that face this group. There is also deliberate reflection on unanswered questions that emerge as old laws collide with new technology.

Reading Between the “Bright” Lines

The FCC order reclassified ISPs as common carriers, regulating them under Title II of the Communications Act, the same statute that governs telephone companies. Internet providers will be common carriers in their relationships with home Internet and mobile broadband customers; they will also be common carriers in their relationships with companies that deliver content to subscribers over the networks operated by ISPs.

So what is the difference between the previous classification under Section 706 and the new one under Title II?

Looking at both documents, one might notice that Title II includes more than 100 pages of regulations that common carriers must follow to ensure they act “in the public interest.” Section 706 is two paragraphs long. Section 706 would give the FCC the authority to regulate ISPs to “promote competition in the local telecommunications market” and “remove barriers to infrastructure investment,” but it’s not totally clear how that would allow the commission to safeguard net neutrality. With Title II, the second subsection (202) clearly states that common carriers can’t “make any unjust or unreasonable discrimination in charges, practices, classifications, regulations, facilities, or services.”

Clearly, the FCC chose to use Title II authority to define a new "Open Internet”, consisting of three fundamental building blocks or “Bright Line” regulations.

-         No Blocking - Broadband providers may not block access to legal content, applications, services, or non-harmful devices.

-         No Throttling - Broadband providers may not impair or degrade lawful Internet traffic on the basis of content, applications, services, or non-harmful devices.

-         No Paid Prioritization - Broadband providers may not favor some lawful Internet traffic over other lawful traffic in exchange for consideration -- in other words, no "fast lanes." This rule also bans ISPs from prioritizing content and services of their affiliates. Notably, paid prioritization is a method through which content developers strike deals with ISPs for quick and smooth transmission of their data traffic. The FCC will closely monitor and put a check on all such deals in the future. Moreover, the FCC will also supervise interconnection deals, in which content developers pay ISPs to connect with their networks.

However the law specifically did NOT impose utility-style regulation: there would be no rate regulation, Internet service providers (ISPs) would not have to file tariffs, and there’s no un-bundling the last-mile requirement that would force ISPs to lease network access to competitors.

The rules applied only to retail Internet providers (Cable, DSL and Fiber), those that offer consumers the ability to access the Internet and to Mobile Broadband networks generally accessed with smartphones. They did not regulate Web applications or other network operators. Content delivery networks like Akamai, which improve performance by optimizing delivery of content across the Internet, would not be affected by the paid prioritization ban.

Also, some data services that don’t go over the public Internet would be largely exempt from Title II oversight. VoIP phone service offered by a cable provider is one example; another is a heart-monitoring service that doesn’t use the public Internet.

“Light-touch” Regulations

FCC Chairman Wheeler has tried to dispel concerns about overbearing federal oversight and regulatory burdens that are imposed on ISPs by virtue of the new regulations. To that effect, he has pledged that he will enforce “light-touch” regulatory oversight as embodied by the following considerations.

Forbearance

• As noted earlier, the FCC plan is to avoid imposing the strictest portions of Title II in a legal process known as “forbearance.” ISPs have complained that forbearance is too onerous a process but the FCC made it sound pretty simple: the commission simply won’t apply things like rate regulation, unbundling the last-mile, or new taxes and fees. There will also be "no burdensome administrative filing requirements or accounting standards."

Transparency?

• Though the 2010 order’s anti-blocking and anti-discrimination rules were thrown out because of a lawsuit filed by Verizon, the court did not object to requirements that ISPs tell the public about their network management practices. ISPs will face greater disclosure requirements in the new proposal, but the fact sheet didn’t say exactly how the rules will be different.

Reasonable network management

• Wheeler is allowing for “reasonable network management,” which “recognizes the need of broadband providers to manage the technical and engineering aspects of their networks.” But the rules take a hard line in defining that "reasonable network management" practices must be "primarily used for and tailored to achieving a legitimate network management--and not commercial--purpose." For example, a provider can’t cite reasonable network management to justify reneging on its promise to supply a customer with ‘unlimited’ data.

Data caps

• There’s no ban on data caps, but the proposal would let the FCC intervene when caps are used to harm consumers or competitors. Cellular providers have been experimenting with “zero-rating,” letting consumers access certain services without using up their data allotments. AT&T charges companies for the right to deliver data without counting against customers’ caps; T-Mobile exempts certain music services from caps, but without charging anyone. FCC officials on the call with reporters seemed less concerned about data exemptions that occur without payment than those that require payment, but did not commit to banning any particular type of practice. In the net neutrality order, the FCC is not taking any stance on specific programs provided today, and says the matter will be handled on a case-by-case basis.

Interconnection Tolls and Disputes

• Netflix and some other companies have complained about the prices ISPs charge for direct network connections. These connections ensure a smooth path into the network but don’t provide any priority thereafter. The net neutrality proposal doesn’t ban these agreements, but gives the FCC “authority to hear complaints and take appropriate enforcement action if necessary, if it determines the interconnection activities of ISPs are not just and reasonable, thus allowing it to address issues that may arise in the exchange of traffic between mass-market broadband providers and edge providers.” Besides companies like Netflix, content delivery networks such as Akamai or transit providers such as Cogent could bring complaints to the FCC.

Pole access

• Google asked the FCC to enforce Title II rules guaranteeing access to poles, rights-of-way, and other infrastructure controlled by utilities, making it easier for Google Fiber to enter new markets. The FCC said it would enforce the part of Title II that “ensures fair access to poles and conduits” to help new broadband providers. It’s not clear how much this will really help. Broadband providers could actually end up paying higher pole attachment rates than they did before because of the Title II Classification. But according to Reed Hundt who was FCC Chairman in the 1990s, “Hooking up homes using poles is about a tenth of the price of digging trenches across streets and sidewalks”.  If Title II gives Google pole access, then it might really rock the world with broadband access.

Unanswered Questions, in the face of Mutable Business and Technology Forces

The debate on both sides on whether the regulations will hurt or benefit the industry as well as consumers remains hot and unresolved. Ultimately, given the rapidly changing technology landscape and ever-emerging business models, the regulations leave many unanswered questions.

Will new regulation hurt network investment by ISPs?

The major argument stands that ISPs have to expend several billion dollars to install and upgrade a high-speed mobile/fixed broadband network. Disallowing discriminatory pricing policy will significantly reduce their revenues and margins, which will in turn result in lower investments in the high-speed broadband sector. Consequently, broadband equipment service providers will suffer (due to lesser investment by ISPs) and lots of jobs will be eliminated from this sector. The real issue is who pays for new Internet investment. Do big users like Netflix and Facebook bear some costs or are these left to the ISPs -- which shift them to the monthly bills of households? Promoted as protecting the "little guy," net neutrality may do the opposite.

But the FCC points to past experience to argue that this will not happen. Though Title II hasn’t applied to wireless data before, it has been applied to wireless voice, and that industry is thriving. “For 21 years the wireless industry has been governed by Title II-based rules that forbear from traditional phone company regulation,” the FCC said. “The wireless industry has invested over $400 billion under similar rules, proving that modernized Title II regulation can support investment and competition.”

Is “Forbearance” onerous?

Wheeler pledges "light-touch" regulation. But what is considered inconsistent with the "light touch" is "a general conduct rule that," as Wheeler describes it, "can be used to stop new and novel threats to the Internet."

In case ISPs come up with some new way of creating a non-neutral Internet, this “standard for future conduct” would help the FCC determine whether new practices should be allowed and whether they harm consumers or edge providers. So consumers, lobbyists, companies – last-mile or edge provider- anyone with an Internet gripe can petition for relief. Though the FCC need not comply, this creates enormous uncertainty.

How will net-neutrality affect the Internet of Things (IOT) and 5G?

Taking the spotlight at Mobile World Congress, top wireless industry executives said that while they support an open Internet, they think wireless carriers should be able to prioritize data traffic of certain kinds of services, whether it is for first-responders, streaming video or driver-less cars. Repeatedly, the theme from international Telecom giants and device manufacturers like Nokia was that certain kinds of paid prioritization were necessary, that operators should be allowed to provide faster connections to customers who wish to pay for them and that some services simply require a different level of connectivity and a different level of service.

Net neutrality and 5G may also be on a collision course, as the mobile industry tries to prepare for a wide range of mobile applications with differing needs - Industrial sensors, self-driving cars, home power regulators, security & health appliances, etc. to name a few applications for the Internet of Things. Such emerging uses of the Internet have needs that can't be met by a general-purpose network where “fast-lanes” are banned, driving a global discussion on a so-called "industrial Internet" alongside the regular Internet that's grown up around the Web.

While the US FCC mandate does not clarify how it will we handle different classes of services dictated by the urgency, privacy or importance of the data communicated (e.g. driver-less cars, medical device information, m-Health, first-responder services, etc.) on Mar 7, EU member states reversed course on a prior net neutrality decision voted in 2014 that included the same strong safe-guards as the FCC proposal. A new EU majority now voted in favor in favor of “prioritization of specialized services” that required high quality Internet access to function. The exact types of services were not defined, but it's possible they might include connected cars. The EU specified that if service providers did prioritize such services, they would have to ensure a good standard of Web access for consumers.

Will this foster innovation?

The argument many economists make in favor of the FCC decision is that somewhere in the OTT world, lurk the small innovators; the future Googles and Facebooks, and that this is the innovation engine that net-neutrality protects and fosters. New innovative companies that “live” on the Internet rely on a level competitive playing field. While Google or Microsoft could afford an Internet tax charged by telecom and cable companies for preferential treatment, the “next Google” won’t be able to afford the payments demanded by telecom and cable. Paid prioritization would allow telecom and cable TV companies to defend their products more effectively, but the absence of the FCC open-internet protections may hinder innovation and consumer choice.

Not a Zero Sum Game, and Definitely Not a “dumb” pipe

In the short term, it seems inevitable that OTT application and content developers, as well as consumer groups will benefit from the net neutrality regulation. Netflix, Google, Amazon, Hulu, Facebook, Twitter, YouTube and Apple – who is actively building out its private own Content-Delivery-Network - are some of the companies poised to take advantage from the change. For those companies that pay a special charge to ISPs for speedy transmission, the new rule will alter online access charges for all types of content including video, music, email, photos, social networks and maps for consumers.

Meanwhile, the reality of diminishing voice revenues and increasing demands for data will see an acceleration of the introduction of new business models for communication service providers. The need to lower costs is likely to accelerate investment into a converged all-IP infrastructure and leaner operations. The existing multi-siloed operations may come under review, and CSPs may start looking at structural and/or functional separation of the operations.

But the notion that ISPs will provide a dumb-pipe is a myth that ignores the industries’ long-term consumer outreach, track record of ingenuity and survivability. At the heart of the debate and consumer value proposition is “data”, and dynamic personalized “data context” such as location, presence, reach ability, channel preference, usage and financial history is integral to creating & delivering sticky omni-channel services for the Facebook generation.

It is the broadband fixed ISP and mobile service provider that purveys the ability to provide the lion’s share of these core data attributes with real-time accuracy. High-value data-centric services and their applications whether in a B2C or B2B or even government, security or regulatory-compliance context are just being unleashed; add to this the unstoppable momentum of the “internet of things”, 5G and IP convergence and we are on the cusp of a new wave of “super-smart” broad-band ISP consumer and business services.   

Becoming a wholesale “smart pipe” with a high-volume, low-margin business model will begin to look very attractive to CSPs and will allow network operators to do what they do best. International interconnect will see monumental growth in data along-side voice, as applications that connect markets across borders become ubiquitous. Furthermore the latent demand for private-internets, or IPX inteconnections, content-delivery networks and other specialized delivery channels -fulfilling an ever-growing set of broadband services that cannot be serviced over the public internet for reasons of security, stability or reliability - are just beginning to penetrate untapped markets.

And of course, consider that service providers will also be scouting the market for content and user-base ownership; consolidations that control the end to end eye-ball value chain are going to emerge as dominant.

In an era, where in the short-span of 10 years, new business models defying all precedent have shown commercial viability, where services can be offered at zero charge to consumers, but yet bring in profitability and share-holder value, where big-iron application infrastructure can be served up as on-demand services on the cloud and a new digital economy connects people, places and things - bringing life to inanimate objects & augmented realities – in such a world, there is little doubt that the internet and the stake-holders in the ecosystem it has fostered will eventually face both paradoxes - the opportunity to grow and innovate, introduce new business models and exceed commercial expectations, while also facing the very real specter of extinction. A competitive advantage in the short term will be rendered net-net neutral perhaps, in the final analysis.

Sources: Many publicly available articles were researched; Images are all sourced by internet search.