NetCompetition

To promote “America’s free market,” President Obama today ordered a government-wide review of regulations that “make our economy less competitive,” in order to take us “toward a 21st century regulatory system.”

Here is the case for why the FCC’s December Open Internet order deserves to be atop of the Administration’s regulations to review for abolition.

• (This regulatory review analysis is also highly relevant and applicable to Congress’ review of the FCC order under the Congressional Review Act.)

First, the FCC’s new Internet regulations violate the President’s goal of a “21st century regulatory system” by applying “outdated” 19th century common carrier regulatory thinking and approaches to the previously un-regulated, and flourishing 21st century Internet. (Para 68)

Second, the FCC rules violate the President’s goal of avoiding “excessive, inconsistent, and redundant regulation.”

• They are clearly “excessive” in that they are a preemptive solution in search of a real problem to solve. The FCC’s one-page description of “the supposed problem” is shockingly thin and weak (see paras 35-37).
• They are clearly “inconsistent” in that they claim to allow usage-based pricing (para 72) while at the same time creating a presumption that pay-for-priority usage pricing is unreasonable discrimination (para 76.)
  • Moreover, the rules only apply to a narrow competitive segment of the Internet ecosystem and do not apply to similar segments with less competition and more evidence of violations of open principles.
• They are also clearly “redundant” of antitrust laws.

Third, the FCC’s Open Internet regulations violate the President’s goal for regulations to “strike the right balance” to “protect our health, safety and environment, while promoting economic growth.”

• The supreme irony here is that the FCC has largely ignored addressing the real problems on the Internet that affect safety, i.e. cyber-security and privacy, to myopically focus on economic regulation of competitive markets exhibiting virtually no evidence of the problems that the FCC alleges it is trying to solve.
• Perversely, the FCC’s regulations will harm economic growth while doing nothing to legitimately protect the safety of consumers.

Fourth, the FCC’s Internet regulations violate the President’s goal that the costs of regulations should not outweigh the benefits. The FCC did not do a cost-benefit study, but asserted that the benefits outweigh the costs in paras 38-42.

• The FCC substantially inflated the benefits by claiming large widespread and unproven risks to Internet “openness.”
• The FCC substantially deflated the costs to industry by claiming they “are likely small,” despite enormous evidence in the record to the contrary, and by fantasizing that there is no evidence that economic regulation discourages investment, which is contrary to common sense and experience.

In addition, it will be very difficult for the FCC to defend its positive cost-benefit assertion when the FCC:

• Conducted no market power analysis whatsoever (p. 12, Ft 49);
• Conducted no assessment of the sufficiency of broadband competition; or
• Offered no persuasive evidence of a market problem in need of a solution.

Finally and most importantly, the FCC’s Internet regulations violate the President’s goal that Federal regulations should not “make our economy less competitive.”

• The evidence is overwhelming that the FCC’s unilateral abandonment of competition as the approach, mechanism and policy to benefit consumers, and promote growth, investment and innovation will “make our economy less competitive.”

The FCC Order’s opposition to competition and competition law and policy can’t help but undermine competition and America’s competitiveness.

Consider the evidence of how deeply FCC regulation now opposes competition:

A. Broadband Competition Policy Changed: In replacing the previous unanimous FCC broadband policy statement, the only part the FCC dropped entirely was the competition policy provision that said: “…consumers are entitled to competition among network providers, application and service providers, and content providers.”

• By the way, this eliminated section was the only part of that FCC policy statement that was tethered directly (by footnote) to the authority of the 1996 Telecom Act’s purpose “To promote competition and reduce regulation...”

B. Order Changes Policy Purpose: The purpose of the FCC’s Open Internet rules (8.1, p.88) is “to preserve the Internet as an open platform…” replacing the purpose in law “to promote competition.”

• The order then unilaterally resets national communications policy priorities by demoting competition to the fourth of five new “open platform” sub-purposes: “enabling consumer choice, freedom of expression, end-user control, competition and the freedom to innovate without permission.“

C. FCC Indicts Competition Policy: The main assertion the FCC uses to justify abandoning competition policy, is that “Broadband providers have the incentive and ability to limit Internet openness” (p. 11).

• This shockingly one-sided FCC analysis completely ignores the obvious, that competition also creates disincentives to limiting Internet openness — like losing a customer, additional costs/liabilities, brand damage, etc.
• The FCC’s de-competition policy bias is particularly obvious in that the FCC only imagines potential problems, while totally ignoring the actual benefits competition creates and the beneficial effect of a multi-year industry record of competition nearly universally protecting Internet openness — without FCC regulation.
• In addition, the FCC in para 78 explicitly indicts the ability of competition and antitrust law to well-serve consumers: “We reject the argument that only “anti-competitive” discrimination yielding “substantial consumer harm” should be prohibited by our rules.“

D. No Blocking Regulation Change: In establishing the no blocking rule (8.5, p. 88) for the first time, the FCC effectively concludes (without an evidentiary record) that competition cannot protect consumers from blocking despite the fact that competition has near universally prevented the blocking in the marketplace that the FCC fears.

• With this rule, the FCC effectively has mandated that FCC regulators functionally replace competition as the arbiter of market outcomes.

E. FCC Indicts Pay for Priority: Concerning pay-for-priority, the FCC openly rejects economics, market forces and competition as a system to allocate scarce resources.

• In para 76, the FCC declares its presumption that “it is unlikely that pay for priority would satisfy the ‘no unreasonable discrimination’ standard.”
• Translation: economics is discriminatory.

At core the FCC is rejecting the market and the economic mechanism of supply and demand to reach equitable prices.

• Only with a de-competition policy bias could the FCC conclude that economic pricing is a “barrier to entry.”
• Even more amazing and anti-competition, the FCC concludes in para 76 that because “fees imposed on edge providers might be excessive” the FCC is justified in banning any edge pricing for prioritization!
  • Following the FCC’s illogic here, does the FCC believe Fedex, UPS, DHL, and the USPS should no longer allow customers to pay for priority delivery of letters and packages because someone’s fees “might be excessive?”

F. FCC Indicts Two-Sided Markets: Despite decades of experience overseeing two-sided communications markets (subscription fees and advertising) in newspapers and cable, the FCC (in paras 24-34) makes clear its de-competition policy bias and opposition to any two-sided market evolution or innovation for any Internet edge market.

• Apparently, the FCC has no confidence in market-driven innovation around pricing or business models in order to enable better cost-causing cost recovery or to enable the Internet to evolve to meet the growing and differentiated demands of the future.

Amazingly, the FCC sees the legitimacy of allowing usage-based pricing (para 72) for consumers, i.e. that heavy-bandwidth users should pay more than low bandwidth users, but believes that the world’s heaviest bandwidth applications providers, like Netflix, Google-YouTube, Skype-video, etc., should have no usage-based pricing obligations (para 76).

• This arbitrary and indefensible policy distinction, where users and broadband providers must subsidize all edge providers forever, no matter what, is un-economic, anti-competition, anti-market, anti-investment, and anti-consumer.
  • (If consumers were polled about whether they supported the new FCC policy declaring that heavy bandwidth using websites don’t have to pay more for heavy bandwidth usage like consumers do, they would not like it, and they would see it for what it is –corporate welfare subsidies for well-connected Silicon Valley companies.)

G. FCC Implicitly Regulates Specialized Services: The FCC is proactively protecting the Internet from competition. In para 93, the FCC declares “There is one Internet…” which effectively establishes the assumption that there should be no competition to the Internet now or in the future.

• The FCC takes this hostility to the potential for competition to the Internet further.
• In paras 112/113 on Specialized Services, the FCC asserts “…to the extent specialized services grow as substitutes for the delivery of content, applications and services over broadband Internet access service, the Internet my wither as an open platform for competition, innovation, and free expression.”
• Simply, the FCC is summarily declaring that any non-Internet innovation is anti-competitive and contrary to the public interest.
  • Can no one imagine the possibility that innovators could possibly improve on the Internet’s approach or structure which was invented in the 1970′s?
  • Can there never be an Internet II? or Internet III in the United States?
  • Is the FCC guaranteeing that that next Internet-like network innovation must come from outside of the United States? How does that advance America’s competitiveness?

While claiming to not specifically regulate specialized services, the FCC slyly claims it already has implicitly regulated specialized services (at the end of para 113) by defining anything that is the functional equivalent of broadband Internet access service to be regulated and unable to avoid regulation.

Conclusion

I applaud President Obama for making it his Administration’s new “mission to root out regulations that conflict, that are not worth the cost, or that are just plain dumb.”

• As the copious evidence above shows, the FCC’s Open Internet regulations fit all of the President’s criteria.

The evidence is there to make the FCC’s new Open Internet regulations the poster child for both the Administration’s effort to bring Government “toward a 21st century regulatory system” and for Congress’ efforts to fulfill its responsibilities under the Congressional Review Act.