ACI’s Letter to the FCC Regarding Concerns With Internet Regulations

October 13, 2009

Ms. Sharon Gillett, Chief
Wireline Competition Bureau
445 12th St., SW
Washington, DC 20554

Regarding the Pending Net Neutrality NPRM

Dear Ms. Gillett:

This letter is motivated in large part by Chairman Genachowski’s recent announcement of his intention to launch a rulemaking to strengthen and extend the Commission’s Net Neutrality principles. Its purpose is to raise some issues and suggest specific terms of inquiry that we believe will assist the Commission in its solicitation of the facts and analyses it must have to devise consumer-centric rules.

We commend the Chairman and the Commission for undertaking to resolve issues growing out of various contentions about the value of “net neutrality,” “open networks,” “nondiscrimination” and how best to assure their attainment without imposing barriers to achievement of other Commission goals. Addressing these new, yet-to-be defined objectives in the context of other long standing, statutory goals — fostering investment and innovation, encouraging universal network availability, maintaining low rates for network services, balancing the advantages and disadvantages of markets and regulation – is a monumental undertaking that will shape the development of one of our greatest economic and social assets – the Internet.

We are delighted by the Chairman’s insistence that data and analysis be provided by all stakeholders – both defenders of the regulatory status quo and proponents of regulatory change – and hope that the Commission’s able core of staff analysts will accord no decisional significance to the rhetoric, opinion, jargon, “factoids,” historical revisionism and unsupported conjecture that frequently creeps into what purports to be policy analysis.

The Commission already has a rich record, full of reliable facts and analysis germane to “net neutrality.” The record has been compiled in the context of stakeholder responses to earlier proceedings that raised issues and posed questions that will be quite material in the new rulemaking. Notable in this respect are notices related to Commission efforts to formulate a National Broadband Policy; to explore the operation of markets for wireless services; and to gather information on investment and innovation in wireless markets. In addition, the Commission has adduced a voluminous record, much of which reaches issues likely to be raised in the context of “net neutrality”, in previous years in proceedings related to, among others, universal service, intercarrier compensation, spectrum licensing, and regulatory forbearance. Again, we urge the Commission to comb the public responses in those proceedings for data and analyses bearing on the new, proposed net neutrality rules. There is much of value there.

While there is much in the current record to inform new rules, we believe that inclusion of the following suggested terms of inquiry would be helpful in complementing and expanding the record – and do so in keeping with the Chairman’s pursuit of facts.

1. What should (will) be the specific public policy goals and figures of merit for evaluating alterative courses of Commission action in this proceeding? The FCC has enormous latitude under the Communications Act to frame the four corners and depth of the “public interest,” which it is generally obliged to advance in all its rulemakings. The expansive bounds of that latitude have been reflected in changing emphasis over the years in one rulemaking to the next as the Commission alters the elements included in the public interest, as well as the weights accorded individual ones.

The Commission should consider the impact of its proposed rule changes on our macroeconomic performance. This is especially important given a) our current macroeconomic distress, reflected in continuing loss of jobs, low growth prospects, stagnant productivity and other negative indicia of economic performance and b) government wide efforts to find ways to stimulate the economy, including providing funds to stimulate broadband deployment. In this context, it is entirely appropriate, if not obligatory, for the Commission to consider the potential impact of “net neutrality” proposals on the economic performance of the economy – economic growth, productivity in other sectors and, of course, job preservation and creation. It is well established, and frequently recognized by the Commission, that broadband networks and services have enormous potential for stimulating economic activity, including jobs, in other sectors. Whatever benefits may be attributable to FCC regulation in pursuit of “net neutrality” ought to be judged in terms of their impact on the broader economy. Relatedly, the impact of the proposed rules on closing the bothersome and highly publicized “digital divide” – reflected in millions of “unserved” or “underserved” households — should be assessed.

“Universal service” has been a goal for over seventy-five years, but within that context a variety of other objectives have been identified – investment, fairness, innovation, level playing fields, competition, efficiency, transparency, real income re-distribution, closing the “digital divide,” fostering technological advance, and eliminating rate structure subsidies to name just a few. It is critical for the Commission to be definitive and clear about the goals it is pursuing in this proceeding, while making clear how the means of assuring an “open” Internet mesh with other legacy goals.

2. Where are the specific market failures to be addressed? What role does concentrated market structure play in the case for regulation? What has been the overall record of performance of Internet access providers and relatedly what are the main elements of unsatisfactory performance that will be addressed and remedied by the new rules. Our sense is that the evidence of market failure is based largely on the concentrated structure of markets for Internet access and three or four cases of operator “misconduct”. While natural monopoly has long been a consensus rationale for rate and service conduct regulation, there is little factual basis in the record demonstrating that market concentration (a characteristic widespread among sectors of the Internet Value Cluster) is sufficient basis for regulation. At the end of the day, consumers care about market performance and the Commission’s inquiry should reflect that concern.

3. What, if any, potential “government failures” should the Commission guard against? Many advocates will call attention to the case for free markets, as they have traditionally done in a wide variety of regulatory proceedings. While the case for markets has been expressed in both empirical and theoretical terms, the infirmities of government regulation are often merely implied or mentioned in passing by reference to unanticipated or unintended consequences. Advocates often refer generally to regulatory lag, regulatory uncertainty or regulatory capture by special interests. However, the Commission could usefully insist on a full briefing by stakeholders – facts and analysis – of concerns about imperfections in regulation, potential “failure”, or costs attributable to well meaning government actions to offset whatever market failures it finds. In this context, Professor Stiglitz, formerly Chairman of the President’s Council of Economic Advisors recently wrote:

“Anyone who has watched the U.S. government in the last seven years is well aware not only of the possibility of government failure but also of its reality. In some cases it is a matter of incompetence, in others of corruption, in still others it is a result of ideological commitments that preclude taking appropriate actions. In some cases it may be hard to distinguish the relative role played by each. Government programs can be subverted.”

4. What are the costs and benefits of alternative courses of Commission action? Numerous regulatory scholars, analysts and practitioners favor cost-benefit analyses as means to evaluate regulations. No Commission action, or inaction, is neutral inasmuch as the exercise of any policy alternative will create both costs and benefits. These will fall unequally on different supply-side stakeholders; on different classes of users and types of consumers; and be realized in a variety of ways. Focus on costs and benefits makes imperative a clear statement of goals and purposes which can provide frames of reference for assessing costs and benefits – innovations encouraged or foregone, jobs created or lost, investment incented or discouraged, broadband network diffusion accelerated or delayed, consumer welfare destroyed or created. Any rule change imposed by the Commission will do some of each and the Commission’s analysis will, hopefully, reasonably assess all appreciable costs and benefits – particularly those to consumers as a whole and to different demographic categories — attributable to its actions.

5. How should “openness,” neutrality,” “nondiscrimination,” and other notions reflected in concerns expressed by Internet stakeholders and policy advocates be defined? How can the definitions be made operational in ways that draw bright lines between what is permitted and what is not permitted? The Commission’s new rules will likely mandate certain operator behaviors while forbidding others. The record of controversy to date makes it is almost certain that whatever new rules the Commission adopts will be challenged in Court and that final resolution of the rules as guides to firm behavior, investment and innovation and other critical management decisions, will during that period be subject to considerable uncertainty. Such regulatory uncertainty can be particularly costly in this dynamic sector in which technology, tastes, market structures, and other technoeconomic conditions are changing so rapidly. Given the technological dynamism and rate of change in the marketplace, regulatory uncertainty is a barrier to consumer and economic welfare-enhancing innovation. Clarity in definition, intent and applicability of any new rules is needed to minimize these potential costs.

6. What impact will the new rules have on the growth rate of penetration of broadband Internet usage? What impact will they have on the rate of diffusion of innovations made by applications and content providers or on the goals set forth in the Commission’s NOI in re: constructing and national broadband policy? The Commission has made clear its concerns about innovation and the diffusion/market penetration of Internet technologies in previous notices, in particular those regarding a National Broadband Policy, the state of competition in wireless, and investment/innovation in wireless. Any new rules implemented in the name of net neutrality, open networks or related objectives will very likely have a significant impact on innovation, investment, and the pace and overall character of broadband deployment. The record to date is deficient and can usefully be improved with more facts and disinterested analysis.

7. What impact will alternative rules have on rates paid for Internet access by consumers in the aggregate; on prices paid by different classes of consumers; and, on the rate of penetration? These questions are raised in the context of the Commission’s pursuit of a National Broadband Strategy or Plan, but can usefully be put in the more specific context of discussion of the net neutrality regulations.

8. What have been the major Internet-related innovations in recent years? Are these in the core or on the edge? What (level of) benefits have accrued from each? How if at all have they been encouraged or hampered by regulation? What effect will the proposed rules have on this aspect of sector performance? So far as we can discern, there is insufficient evidence in the record to date in support of various claims about the source of innovation, its value to consumers, and the impact of regulation on incentives and likely performance of different members of the Internet Value Cluster (providers of networks and components, applications, and content). Given the importance of innovation to Internet users and to other sectors of the economy via external stimulus from the Internet, it is imperative for the Commission to develop a strong factual and analytical record on this point.

9. What specific wireless market failures require regulatory remedies? To what extent will evolution of the wireless market place either magnify or ameliorate those concerns? What if any costs to the consumers related to rates, options, service quality, innovation or other regulatory objectives might reasonably be expected to offset the expected benefits of regulation to the wireless sector. The Commission has ongoing a separate proceeding designed to address current performance of the wireless sector. It is well known that the principal innovations in wireless networks take the form of, and have the practical impact of, utilizing scarce bandwidth more efficiently. As bandwidth scarcity becomes more acute as a result of booming growth in demand for bandwidth intensive services coupled with lagging availability of new spectrum, it is imperative for the Commission to understand fully the impact of any restrictions, in the name of net neutrality, on the ability of wireless operators to manage their networks in ways to assure maximum throughput and efficiency.

10. What role do price discrimination, service discrimination and, more generally, differential treatment of different customers play in other IT sectors; in other sectors of the economy? What are the costs and benefits to consumers in the aggregate; to individual consumers? What makes the Internet access provider sector worthy of discriminatory regulatory treatment among firms in the Internet Value Cluster in this regard? A key question in this context is the extent to which consumers or users in general place equal value on all content and the extent to which carriage of all content occasions the same costs – conclusions clearly implied by a requirement to treat all traffic and content the same. In the event of excess demand for bandwidth – that is in circumstances where there is a shortage of bandwidth – what are the alternative means for allocating available bandwidth and what are the (de)merits of each?

It may well be that the Commission would specify these points of inquiry in its impending Notice of Proposed Rulemaking. However, given their importance, in our view, we believed it worth the effort to spell them out and suggest their inclusion.

Respectfully submitted,

Larry F. Darby, Senior Fellow
The American Consumer Institute
Center for Citizen Research
1701 Pennsylvania Avenue, NW
Washington, DC 20006
[email protected]

CC: Chairman Julius Genachowski
       Commissioner Michael J. Copps
       Commissioner Robert M. McDowell
       Commissioner Mignon Clyburn
       Commissioner Meredith Attwell Baker
       Ms. Ruth Milkman, Wireless Bureau Chief
       William T. Lake, Media Bureau Chief
       Paul de Sa, OSP Chief

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