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.

The court wasn’t buying it:

That consumers focus on transmission to the exclusion of add-on applications is hardly controversial. Even the most limited examination of contemporary broadband usage reveals that consumers rely on the service primarily to access third party content. The “typical consumer” purchases broadband to use “third-party apps such as Facebook, Netflix, YouTube, Twitter, or, or . . . to access any of thousands of websites.”…

Indeed,  given the tremendous impact third-party internet content has had on our society, it would be hard to deny its dominance in the broadband experience. Over the past two decades, this content has transformed nearly every aspect of our lives, from profound actions like choosing a leader, building a career, and falling in love to more quotidian ones like hailing a cab and watching a movie. The same assuredly cannot be said for broadband providers’ own add-on applications.

The Commission found, moreover, that broadband consumers not only focus on the offering of transmission but often avoid using the broadband providers’ add-on services altogether, choosing instead “to use their high-speed Internet connections to take advantage of competing services offered by third parties.”… For instance, two third-party email services, Gmail and Yahoo! Mail, were “among the ten Internet sites most frequently visited during the week of January 17, 2015, with approximately 400 million and 350 million visits respectively.”  Some “even advise consumers specifically not to use a broadband provider-based email address[] because a consumer cannot take that email address with them if he or she switches providers.”

As for caching and DNS, the court agreed with the FCC that those services are merely necessarily elements of operating a telecommunications network, not discrete, value-adding information services in their own right.

The majority opinion also blows up the dam at the other end of ISPs’ networks, agreeing with the FCC that the agency has broad authority to regulate interconnection agreements under Title II:

Although [the court’s previous net neutrality ruling] does recognize that broadband providers’ delivery of broadband to end users also provides a service to edge providers, id., it does not hold that the Commission must classify broadband as a telecommunications service in both directions before it can regulate the interconnection arrangements under Title II. The problem in [the previous case] was not that the Commission had misclassified the service between carriers and edge providers but that the Commission had failed to classify broadband service as a Title II service at all. The Commission overcame this problem in the Order by reclassifying broadband service—and the interconnection arrangements necessary to provide it—as a telecommunications service.

Insofar as the leverage to create a two-sided market is baked into broadband providers’ valuations, those assumptions may need to be adjusted. While the FCC has yet to write brightline rules governing interconnection, claiming it will evaluate them on a case-by-case basis for now, it clearly has the authority to write such rules under the court’s ruling.

Netflix, for one, was not coy about what it means. “By upholding all parts of the FCC’s net neutrality approach, the appeals court settled two decades of debate and legal uncertainty by ensuring the Internet remains open to all.,” the streaming service said in a statement. “The Court went out of its way to define interconnection as a central part of Net Neutrality, ensuring that providers like Netflix will be able to reach consumers without ISP interference. Now the FCC has clear authority to hold ISPs to these openness rules and turn its attention to policies that support an affordable, faster Internet.”

ISPs have already vowed to appeal the DC Circuit’s ruling to the Supreme Court. “We have always expected this issue to be decided by the Supreme Court, and we look forward to participating in that appeal,” AT&T’s senior executive VP and General Counsel David McAtee said.

Given the high court’s currently depleted roster, however, it may decide not to hear the case, at least for now. And even if it did, a not-far fetched four-four split would leave the DC Circuit’s ruling standing.

So far the market has mostly taken the ruling in stride. But if the DC Circuit’s sweeping rejection of the value of ISP services becomes the standard analysis of their business model that may not last.