Regulation vs. Market-based Mechanisms for the Internet’s Future

1. Regulation vs. Market-based Mechanisms for the Internet’s Future A Presentation at 6th Annual University of Nebraska College of Law Washington, D.C. Space & Cyber Law Conference Washington, D.C. Nov. 5, 2013 Rob Frieden, Pioneers Chair and Professor of Telecommunications and Law Penn State Universityrmf5@psu.edu Web site : http://www.personal.psu.edu/faculty/r/m/rmf5/ Blog site: http://telefrieden.blogspot.com/

2. Options: Marketplace Self-Regulation The preferable option in the absence of market failure and public policy reasons to circumvent, or regulate market forces. The need for scale economies favors market consolidation and a few, large operators. Bigness and a high HHI number not an automatic regulatory trigger. But Congress historically has enacted market countervailing regulatory goals, e.g., probably unsustainable competition in some sectors, diversity, localism, consumer protection, compulsory cross-subsidies, cost averaging, etc. In an Internet-centric “next generation network” will sustainable competition (inter-modal and intra-modal) exist? Will competitors refrain from colluding explicitly, or implicitly? Will the marketplace foreclose other types of unfair trade practices while serving public interest objectives?

3. Risk of Self Serving, Self-Regulation? In many instances telecommunications stakeholders falsely framed self-regulatory initiatives as “win-win.” For example, when Kingsbury committed AT&T to stop acquiring rural carriers, he replaced growing market share with a “too good to refuse” deal for incumbent rural carriers: offering above market “separations and settlements” in effect co-opting them with easy money. Kingsbury achieved a lucrative and stable environment managed by a “benign monopolist.” Self-regulation in some instances can impose harmful limitations on consumers with an even greater adverse impact than government edicts. A government referee may be needed to prevent collusion, consciously parallel conduct and anticompetitive practices, etc.

4. Options: Ex Ante Regulation Ex ante regulation typically applies oversight by an expert, independent regulatory agency authorized to anticipate and prevent problems. Using an existing agency, the FCC, risks applying skills, assumptions and oversight tactics fine-tuned for previous technologies and marketplace circumstances, i.e., “fighting the last war.” The Internet currently and prospectively has areas of robust competition, but for first and last mile access, consumers typically select only one ISP. The FCC needs to remain vigilant to ensure that end users can easily shift carriers quickly and cost-effectively. Medium-specific regulatory models are becoming unsustainable, especially when market entrants can exploit (arbitrage) lesser regulatory burdens than incumbents. The FCC should enforce rules to provide consumer safeguards, but the nature of oversight should migrate toward dispute resolution and responding  to complaints; light-handed (referee-type) vs. heavy-handed regulation.

5. Options: Ex Post Regulation Ex post regulation typically applies oversight by a generalist regulatory agency after an allegedly anticompetitive practice has occurred. Note that this option does not exist in the U.S. and would require substantial legislation the prospect of which would trigger a turf war. In the U.S. ex post review occurs by reviewing courts. Could a generalist agency have sufficient expertise to resolve disputes and complaints? Are after the harm remedies too late for market entrants?

6. Options: Ex Post Litigation Ex post litigation typically examines whether the FCC engaged in rational decision making supported by the evidence. Reviewing courts often defer to agency expertise. The Chevron Doctrine supports reasonable interpretations of ambiguous laws by expert agencies. The Supreme Court has substantially limited appellate antitrust review. Verizon v. Trinko (a unanimous 2003 Supreme Ct . decision) defers to statutory safeguards and preempts appellate courts from creating remedies the FCC did not consider necessary. Pacific Bell Telephone Co. v. Linkline Communications, Inc. (2009) eliminates appellate antitrust review and additional safeguards or remedies even when the incumbent offered retail subscribers rates below the wholesale rate. A majority of the Court rejects “essential facilities” rationale and class actions even when a plausible cause of action covers all plaintiffs, e.g., similar Comcast rates across several adjacent franchise areas.

7. The Likelihood of Future Conflicts Between Carriers In the absence of a compulsory duty to deal (interconnect) as common carriers, commercially driven incentives should ensure connectivity and full cloud access. However, one can expect conflicts regarding interconnection and compensation terms and conditions, particularly when ventures migrate from telecom pricing models, such as tariffs, metering and settlements, to Internet pricing models, such as peering and transit. New models for distributing content have arisen to handle the massive volume generated by ventures such as Netflix and YouTube.  For example, Content Distribution Networks emphasize downstream delivery and may not have the capacity to accept equivalent upstream traffic.  Last mile ISPs have imposed surcharges and eliminated zero cost peering as a result of traffic imbalances.  NGN disputes will occur in the same vein as broadcaster-cable television operator “retransmission consent” battles and retail ISP surcharge demands of CDNs, e.g., Comcast-Level3

8. The Likelihood of Future Conflicts Between Carriers (cont.) Some last mile ISPs now claims that they deserve compensation from far upstream content sources, e.g., Google. This expectation deviates from the status quo that provides compensation only from directly interconnecting parties: downstream retail subscribers and upstream ISPs.   The migration to NGNs also triggers larger questions about the appropriate scope of government intervention to ensure fairness, openness and fair dealing between ventures that typically qualify for less or no regulation.  ISPs generally do not operate as telecommunications service providers and common carriers.  Disputes will arise as to what--if any--regulatory burdens they should bear.

9. Quasi-Common Carriage on the Ascent? Carriers subject to quasi-common carriage can assert that this possibility generates regulatory uncertainty and a disincentive to invest in next generation network plant. Verizon has invoked a First Amendment right for its content packaging and distribution function as an ISP. As with must carry, data roaming would trigger intermediate scrutiny and would constitute a minor burden, based on an insignificantly greater spectrum and carriage duty to handle data roaming. The data roaming decision probably does not identify a road map for the FCC to impose network neutrality/open Internet access, quasi-common carriage, because these requirements look too much like actual common carrier duties. However as incumbent carriers have begun the process of trying to convince the FCC to allow them to end basic telephone service and replace it with unregulated Internet-based services, the FCC may have a new precedent for maintaining still necessary duties to deal/interconnect.