The Net Neutrality Paradox

One of the more unfortunate wrinkles in the long debate leading up to the Federal Communications Commission’s 2015 Open Internet Order, better known as net neutrality, was its increasingly commercial focus. There were important civil liberties issues at stake, to say nothing of the interplay of engineering and regulation of critical infrastructure and the private ownership of public goods. But much of the public debate boiled down to an argument over streaming — Netflix streaming in particular.

That was due in no small part to the efforts of Netflix founder and CEO, Reed Hastings, who made himself and his company the poster-children of the net neutrality cause by loudly proclaiming Netflix’s oppression at the hands of ISPs looking to impose interconnection fees on the streaming service.

Although net neutrality proponents eagerly embraced Netflix’s cause and Hastings’ pubic advocacy they worked to color the issue as essentially a commercial dispute between different types of service providers, which, paradoxically, is actually an argument against what the FCC did. Disputes between buyers and sellers are not really the FCC’s bailiwick; that’s more a matter for the Federal Trade Commission and the antitrust division of the Justice Department.

It also, ironically, helped set the table for what is shaping up to be another pitched battle over net neutrality, this time over a new FCC chairman’s plan to turn the issue into an explicitly and exclusively commercial matter.

Chairman Aji Pai, who strongly opposed the FCC’s 2015 order while in the minority under previous chairman Tom Wheeler, is moving quickly to try to settle the score. His plan, basically, is to vacate the current rules, then ask the ISPs nicely to commit to certain net neutrality “principles” in their terms of service and turn over resolution of any commercial disputes or consumer complaints that arise to the FTC.

That will require reversing his predecessor’s decision to reclassify ISPs as “common carriers” under Title II of the Communications Act. Under the so-called “common carrier exemption” in the Federal Trade Commission Act, the FTC has no legal authority over services classified as common carriers, like telephone networks, and to give it jurisdiction Pai will have to un-reclassify ISPs.

But the new chairman could find himself looking through the other end of the net neutrality paradox this time. While he may view the issue as fundamentally a commercial matter that the government should largely stay out of, the commercial and strategic interests now at stake in the streaming economy are orders of magnitude greater than the last time around, and their resistance to any change from the current rules is likely to reflect that increase.

Consider the members of the Internet Association, the Washington, DC, lobbying group formed in 2012 by Facebook, Amazon, Google and eBay. Since the current rules went into effect Google’s YouTube has launched a paid music streaming service, YouTube Red, and this month began rolling out an over-the-top pay-TV service, YouTube TV, that competes directly with the cable TV services operated by the largest ISPs.

Amazon has emerged as a formidable competitor to Netflix in the subscription VOD business and has launched a paid music streaming service. That paid streaming service is tightly connected strategically with Amazon’s Echo voice-activated speaker, which is a pillar of the retailer’s in-home strategy. Amazon also signaled its strong interest in live video streaming earlier this month by spending $50 million for rights to the NFL’s Thursday Night Football franchise.

Facebook has made live video streaming the centerpiece of its strategy to grab a chunk of the $70 billion spent annually in the U.S. on TV advertising, some of which is currently spent with ISP owned pay-TV services. Twitter, another member of the Internet Association, is also placing big bets on live video.

This week the Internet Association sent a letter to the FCC declaring its opposition to any change in the current rules:

IA continues its vigorous support of the FCC’s OI Order, which is a vital component of the free and open internet.  The internet industry is uniform in its belief that net neutrality preserves the consumer experience, competition, and innovation online.  In other words, existing net neutrality rules should be enforced and kept intact.

New players like Roku are also thought to be eyeing the live-streaming business. Last month Roku hired a team of lobbyists in Washington specifically to focus on net neutrality.

(Ironically, Netflix, although a member of IA, is likely to sit this round out, having made its separate peace with the ISPs .)

Major media companies have also seen their direct stakes in the streaming economy grow since the current net neutrality rules were implemented. According to the RIAA, streaming now accounts for more than half the music industry’s revenue and that share is growing rapidly. The major record companies are equity investors in Spotify, the leading streaming service, which is currently valued at $8.5 billion and is preparing to go public.

Likewise, Fox, ABC and NBC own Hulu, the subscription VOD service that is also gearing up to launch a virtual pay-TV service (NBC is barred from having a direct operational role in Hulu under the terms of its merger with Comcast).

Those examples just skim the surface of what the streaming economy has become over the past three years premised in part, at least implicitly, on the current net neutrality rules. Undoing those rules at this point, paradoxically, could represent an even greater intervention into the commercial arrangements of the internet by the FCC than implementing them in the first place.

 

Netflix Ponders Life Without Net Neutrality

Netflix CEO Reed Hastings did as much as anyone to shape the Federal Communications Commission’s net neutrality rules. CEO Reed Hastings’ aggressive public lobbying for what he termed “strong” net neutrality, after Comcast and AT&T successfully forced Netflix to pay for access to their last-mile networks, was largely responsible for putting interconnection arrangements between ISPs and edge providers at the center of the debate and helped persuade former FCC chairman Tom Wheeler to push through reclassification of broadband access as a Title II telecommunications service, which gave the commission jurisdiction over those deals.

Yet, as Republicans in Congress and on the commission sharpen their knives to disembowel Wheeler’s hard-won rules Netflix says it no longer needs the protection.

“Weakening of US net neutrality laws, should that occur, is unlikely to materially affect our domestic margins or service quality because we are now popular enough with consumers to keep our relationships with ISPs stable,” Hastings said in his Q4 letter to shareholders this week.

Translation: we’re too big now even for Comcast to push around, a point Comcast itself obliquely acknowledged in November by integrating Netflix into its flagship X1 set-top box. Read More »

America Exits The World

For all intents and purposes, Donald J. Trump will assume the presidency in January with no discernable policy agenda. Apart from a few signature flights of fancy, such as building a wall along 1,500 miles of southern border and rounding up 11 million immigrants for summary deportation, his policy pronouncements consisted largely of an ever-shifting farrago of ignorance, indifference, truculence, and personal animus boiled down into 140-character outbursts. As a general matter, we simply do not know what the Trump administration might do.

trumpGiven the enormity his election represents, speculating on the fallout for any particular industry could seem petty, if not beside the point entirely. But for what it’s worth, the media and technology industries may be among the first to feel the impact.

As a near-term matter, Trump said on the campaign trail that he would block AT&T’s pending merger with Time Warner and would look to undo already done media mergers, including Comcast’s acquisition of NBCUniversal. Setting aside the question of whether the Justice Department would have legal grounds to do either (and the perhaps more interesting question of whether a Trump Justice Department would feel constrained by established law and precedent), Trump’s rhetoric could cast a pall over M&A activity, just as the media industry seems poised for another round of it in the wake of AT&T-Time Warner. Read More »

X1 Marks the Spot for Comcast

Comcast and Netflix this week confirmed an agreement to incorporate Netflix’s streaming service into Comcast’s X1 video platform, signalling a dramatic shift in what has long been a contentious relationship between the companies.

“Comcast and Netflix have reached an agreement to incorporate Netflix into X1, providing seamless access to the great content offered by both companies,” the two said in a joint statement given to Recode.  “We have much work to do before the service will be available to consumers later this year. We’ll provide more details at that time.”

netflix_blockThat’s a far cry from a few years ago when Netflix CEO Reed Hastings was working overtime to turn Comcast into public enemy number one in the net neutrality fight and Comcast was imposing interconnection fees on Netflix for access to its last-mile network.

But the shift is more likely the result of a change in circumstances than a change of heart. Read More »

Court to ISPs: You Really Are Just Dumb Pipes

Back when the clamor began to reclassify broadband access as a Title II telecommunications service, in the wake of the DC Circuit Court’s ruling overturning the Federal Communications Commission’s effort to impose net neutrality rules under its Title I authority, there was a lot of grumbling among Verizon’s peers that the telco should have left bad enough alone instead of challenging the commission’s 2010 rules in court.

Though Verizon won the case, largely on technical legal grounds, it poked a hornet’s next that threatened the far-greater sting of reclassification. But now that the same DC Circuit Court has handed down its ruling on reclassification and the FCC’s revised net neutrality rules, many of those grumbling last time are probably wishing they’d followed their own advice.

FCC_buildingNot only did the FCC win the case this time around, but the court majority’s opinion delivers a series of roundhouse blows to most of the ISPs’ claims about the value of their services, if not yet to their market valuations.

In essence, the court concluded that as service providers, ISPs add almost no value beyond basic connectivity. And that goes for wireless as well as fixed-broadband providers.

Apart from their objections on procedural grounds to the FCC’s rulemaking, the ISPs and their trade associations argued they could not fairly be classified as utility-style telecommunications providers because the services they offer consumers include a range of complex, value-adding information-processing functions, such as email, online storage, content caching and DNS lookup. Read More »

Zero Tolerance

As the FCC awaits the fate of its open internet order (a.k.a. net neutrality) in the D.C. Circuit Court of Appeals, language that could have mooted much of the legal case by limiting the commission’s authority to regulate internet access was stripped at the last minute from the 2000-page omnibus spending bill unveiled by congressional leaders Tuesday night to keep the government running into 2016.

The removal of the rider was a blow to ISPs, which had lobbied to keep the language in the spending bill, but net neutrality advocates have found plenty of other things to complain about lately regarding the behavior of ISPs. Top of the charts: the growing number of streaming services ISPs are selectively exempting from data caps.

FCC_buildingIn just the past three months:

  • T-Mobile introduced its Binge On plan, which allows mobile users to stream video from roughly two-dozen “partner” services, including Netflix, HBO Now, Sling TV, MLB.tv, Showtime and Starz, without those bits counting against a subscriber’s data cap;
  • Comcast launched Stream TV in a handful of markets, a live and on-demand streaming service that, unlike Netflix, for instance will not count against Comcast subscribers’ data caps where those are in place (as no doubt they soon will be everywhere);
  • Verizon launched Go90, its in-house streaming service for which data usage is “sponsored” by advertisers and therefore isn’t counted toward the user’s data cap;
  • AT&T hinted broadly that it, too, will launch a mobile streaming service that, like Verizon’s Go90, would be “sponsored” by someone other than the user.

Read More »

The FCC’s Imperfect Path To Increased Video Competition

The conditions the Federal Communications Commission has attached to its approval of AT&T’s merger with DirecTV are being met with a predictably mixed response. Some groups, such as Comptel, a Washington-based lobbying group representing Netflix, Amazon, Cogent Communications, Level 3 and other network operators and service providers, praised the FCC for requiring AT&T to disclose details of its network interconnection deals. Others, such as Free Press, blasted the conditions for not going “nearly far enough” to address the problem of pay-TV consolidation.

Here’s what we know, from a statement issued Wednesday by FCC chairman Tom Wheeler:

An order recommending that the AT&T/DirecTV transaction be approved with conditions has circulated to the Commissioners. The proposed order outlines Federal Communications Commission (FCC) Chairman Tom Wheeler gestures at the FCC Net Neutrality hearinga number of conditions that will directly benefit consumers by bringing more competition to the broadband marketplace. If the conditions are approved by my colleagues, 12.5 million customer locations will have access to a competitive high-speed fiber connection. This additional build-out is about 10 times the size of AT&T’s current fiber-to-the-premise deployment, increases the entire nation’s residential fiber build by more than 40 percent, and more than triples the number of metropolitan areas AT&T has announced plans to serve.

In addition, the conditions will build on the Open Internet Order already in effect, addressing two merger-specific issues. First, in order to prevent discrimination against online video competition, AT&T will not be permitted to exclude affiliated video services and content from data caps on its fixed broadband connections. Second, in order to bring greater transparency to interconnection practices, the company will be required to submit all completed interconnection agreements to the Commission, along with regular reports on network performance.

Importantly, we will require an independent officer to help ensure compliance with these and other proposed conditions. These strong measures will protect consumers, expand high-speed broadband availability, and increase competition.

Read More »

FCC Unloads, Releases 313-page Report and Order on Net Neutrality

The full text of the FCC’s open internet order has now been released, along with 305 additional pages of exegetical elaboration and 79 pages of formal dissents from the two Republican commissioners.

ppcommissioners-nov-2013-webFrom an OTT perspective, there isn’t much in the full text that wasn’t already known from what the FCC released last month when it voted to approve the rules: The order’s “bright-line” rules against blocking, throttling and paid prioritization do not apply to commercial interconnection arrangements. However, the FCC will consider complaints regarding those arrangements and will take (unspecified) enforcement action if an ISP’s behavior is determined to violate the order’s “general conduct standard,” prohibiting actions that “unreasonably” interfere with or damage consumers or edge providers. Read More »

Finger-pointing over interconnection

When a consumer’s OTT video stream starts rebuffering, or suffers packet losses resulting in degraded quality, it’s often hard to know where to direct blame. The problem is typically caused by congestion somewhere between the content’s originating server and the consumer’s receiving device. But exactly where in the chain of transit that congestion is occurring, and more importantly who is responsible and why, can be difficult even for engineers — and virtually impossible for consumers — to ascertain.

045448280-maclean-d-deshler-m-baldwinBack when it appeared the FCC was poised to classify interconnection arrangements between last-mile ISPs and third-party transit and content providers as a new, distinct type of Title II service the question of liability for congestion in the chain of transit suddenly became urgent for those involved in wholesale traffic exchanges. Read More »

Net Neutrality: Interconnection Covered, But Not By ‘Bright Line’ Rules

After a flurry of last-minute lobbying and internal debate the FCC ultimately backed off its plan to define interconnection arrangements between ISPs and third-party content and applications providers as distinct service separate from last-mile internet access service in its Open Internet order, which it approved today by a 3-2 party line vote. But the commission asserted its authority under Title II of the Communications Act to hear complaints and take appropriate enforcement action if it determines that specific interconnection practices by ISPs are not “just and reasonable.”

ppcommissioners-nov-2013-webThe decision to drop the separate classification of the service that ISPs make available to edge providers marks an apparent shift from the proposal outlined in the Feb. 4 fact sheet released by FCC chairman Tom Wheeler, which referred to interconnection and last-mile service separately. But it eliminates the potential legal problem for the commission’s authority to review interconnection arrangements that separate classification could have created. Read More »

For OTT providers, ‘strong’ Net Neutrality may be losing its strength

Don’t look now OTT fans but the net neutrality rules expected to be enacted Thursday by the FCC may turn out to be not as OTT-friendly as it originally appeared they would be.

FCC Commissioner Mignon Clyburn

FCC Commissioner Mignon Clyburn

When FCC chairman Tom Wheeler unveiled his “fact sheet” on the upcoming rules on Feb. 4, it looked as if the commission was poised to adopt the “strong” version of net neutrality pushed by Netflix and others. According to the fact sheet, the rules would treat interconnection arrangements between ISPs and third-party edge providers as a Title II service subject to the same “just and reasonable” standard that will apply to ISPs’ management of their last-mile networks. Read More »

The next OTT battleground: Zero-rating

The FCC this week is expected to approve on a party-line vote chairman Tom Wheeler’s long-gestating plan to impose new net neutrality rules by reclassifying internet access as a telecommunications service under Title II of the Communications Act, setting in motion a process by which the world will finally get to see the full text of the 308-page Memorandum and Order and begin fighting — almost certainly in court — over its particulars.

TMO1-1149_Baracuda_ALL_R13_03-03One thing that apparently will not be in the order, however, is any bright-line rule banning so-called “zero-rated” data plans offered by wireless operators and ISPs under which particular applications are not counted toward a user’s monthly data cap. Read More »

Net neutrality disconnection?

As ISPs, both large and small, gear up to sue the FCC over its forthcoming net neutrality order, even strong supporters of net neutrality have begun pointing to potential legal problems with the proposal outlined by FCC chairman Tom Wheeler earlier this month. One of biggest we-can-haz-net-neutralitypotential problems, as far as OTT providers are concerned, was flagged by Free Press policy director Matthew Wood. Read More »

Title II, Round 2

Now that we know the broad outlines of the FCC’s forthcoming open internet order the next phase of the battle over net neutrality rules is getting under way. It will be fought out on at least three fronts: in the courts, on Capitol Hill and within the FCC itself.

The main front will be in the courts, where litigation is all but certain to be filed challenging the commission’s decision to reclassify broadband access as a Title II telecommunications service, probably by AT&T, just as soon as the new rules are formally published in the Federal Register. AT&T has already telegraphed its litigation plans, as well as the legal arguments it’s likely to make. Read More »