Take U.S. Internet Regulations Back to the Future

  • February 24, 2015
  • 26 Stan.L.& Pol'y Rev. 36

In 1985, Michael J. Fox was speeding back in time via a DeLorean on movie screens while the U.S. government was ushering in the Internet Age on computer screens. As the Hollywood blockbuster’s 30th anniversary approaches, America is no longer the world leader when it comes to Internet service and instead finds itself lagging behind countries such as Lesotho, Belarus, and Slovenia.[1] In order to fix America’s lackluster Internet service, this essay argues we should go back to the future. President Barack Obama’s recent call on the Federal Communications Commission (FCC) to reclassify the Internet as an essential public utility provides the vehicle to accomplish that.[2] Critics claim that such regulation will make the situation worse. However, both American history and international lessons illustrate the benefits of regulating the Internet Obama’s way. FCC commissioners are scheduled to vote February 26 on whether to restore common carriage to consumer Internet service.[3] 

I.     The Internet as a Common Carrier

Common carriage is a legal concept that dates back to Roman law and medieval England, where a village’s sole dock, inn or surgeon was required to serve all customers at a reasonable price. Part of America’s English common law inheritance, common carriage evolved with new technologies to include other businesses that were considered public services, such as steamships, railroads and telephone carriers.[4] Common carrier regulations are intended to protect consumers by requiring companies to serve all customers on a non-discriminatory basis.

Common carriage applied to the Internet in its early days. Consumers connected to the Internet through a call over a telephone line to an Internet service provider (ISP). Because the local loop of telephone copper was already a common carrier, it was open to any ISP. This gave small firms equal footing with dial-up giants such as America Online. “America’s Internet flourished in the dial-up era,”[5] observed Nobel Prize-winning economist Paul Krugman in a 2007 New York Times column, “because federal regulators . . . forced local phone companies to act as common carriers, allowing competing service providers to use their lines,”[6] 

II.     The Drawbacks of Deregulation

All of that began to change in the late 1990s as deregulation (which already had been applied to transport common carriers such as railroads, airlines, and trucks) came into vogue for telecommunications.[7] Cable operating companies upgraded their distribution networks to build higher-capacity hybrid networks of fiber optic and coaxial cable. These “broadband” networks could provide multichannel video, two-way voice, high-speed Internet access, and high definition and advanced digital video services all on a single wire into the home. The upgrade to broadband networks enabled cable companies to introduce high-speed Internet access to customers in the mid-1990s, and to provide competitive local telephone and digital cable services later in the decade.[8] Cable and telephone companies assured Congress they would enter each other’s markets and compete against one another if the government would relax regulations. Lawmakers agreed to deregulation, believing the resulting competition would reduce the need for public oversight. President Bill Clinton and Congress took the first steps toward deregulation in 1996 when they overhauled telecommunications law for the first time in more than sixty years.[9] 

Under the Telecommunications Act of 1996, different forms of media were subject to varying levels of regulation. Title I of the Act applied to information services, which were not subject to any statutory rules and over which the FCC had limited regulatory authority. Title II applied to telecommunications services and allowed for far more stringent regulation.[10] The Act did not explicitly state under which categorization the Internet fell, leaving the decision up to the industry regulator. The FCC ruled, “Internet service does not meet the statutory definition of a ‘telecommunications service.’”[11] The FCC premised this distinction on the fact that at the time, ninety-eight percent of all households with Internet connections used traditional telephone wires to “dial-up” their ISP. The FCC thus treated Internet access service as an “information service” because these ISPs, such as America Online, did not own the wires over which they provided service.[12] The FCC also distinguished between “basic” service such as the telephony that dated back to Alexander Graham Bell, and “enhanced” services such as voice messaging.[13] 

When telecommunications companies such as Verizon and Comcast began to offer their own digital subscriber line (DSL) services, the transmission component of their Internet access service remained under the more strict Title II regulation. The distinction was significant because classifying Internet access as a Title I “information service” meant that the FCC did not have specific and direct authority to regulate ISPs, and instead relied on its “ancillary authority.”[14] Such power authorized the FCC to make rules and regulations for ISPs so long as the Commission demonstrated that its actions were “reasonably ancillary” or related to the effective performance of its responsibilities. Soon after, courts reaffirmed the FCC’s classification of the Internet as an information service with regards to dial-up ISPs. The courts justified their decisions by citing the 1996 Telecommunications Act and the FCC’s interpretation of it.[15] 

In 2002, the FCC ruled that “when consumers purchase cable-modem service, they are buying only an ‘information’ service, not a traditional two-way communications service like telephone service.”[16] Soon after, the FCC classified DSL services as information services. As new forms of Internet access began to emerge, including wireless and mobile services, the FCC refrained from issuing regulations to cover them on the grounds the Commission did not want to stifle innovation. In March 2007, the FCC ruled wireless Internet access service was an information service, placing it on the same largely-deregulated footing as cable and wireline Internet services. In short, all forms of Internet services—be it cable, DSL, mobile or wireless—were classified as an “information service” or “Title I” and thus not subject to common carriage regulations.[17] 

The decision to reclassify Internet service and loosen regulations exempted infrastructure owners such as Verizon and Comcast from opening their lines to competing ISPs. Thus, the decision created a roadblock for start-up ISPs who wanted to get in on the growing demand for Internet service by using cable and phone wires to offer a competing service. These start-ups challenged the FCC’s new policy, but the Supreme Court ruled in favor of the Commission.[18] 

However, while ISPs have enjoyed enormous profits, consumers have suffered.[19] Currently, the U.S. faces a duopoly problem: ninety-six percent of households have access to two or fewer broadband service providers, and the situation will only grow worse with demand for higher speeds growing and proposed ISP mergers.[20] FCC Chairman Tom Wheeler recently noted that nearly seventy-five percent of homes have no choice in providers of high-speed broadband Internet.[21] America currently ranks thirty-first in the world in terms of average download speeds and forty-second in average uploads speeds, according to a recent study by Ookla Speedtest.[22] Consumers pay much more for Internet access in the U.S. than in many other countries.[23] 

With few restrictions and little competition, ISPs have been engaging in anti-competitive practices such as slowing down or even blocking customers’ access to some websites. The FCC has attempted to stop these practices, which are antithetical to principles such as network neutrality and an open Internet, but to no avail. In 2010, the Commission handed Comcast a cease-and-desist order after discovering that Comcast was secretly hindering customers’ access to the Web service BitTorrent because it competes with Comcast’s video-on-demand services.[24] Ultimately, however, the decision was overturned by a federal appellate court,[25] dealing a major blow to the FCC’s attempts to regulate the Internet in any way. The D.C. Circuit ruled the FCC lacked the ancillary authority under Title I to regulate cable Internet services because ISPs were no longer classified as telecommunication services. The court found that the FCC had handcuffed itself in 2002 when it classified the Internet as an information service, greatly limiting the Commission’s ability to regulate Internet service providers.[26] 

III.     Going Back to the Future

President Obama proposes a drastic change to this situation. In November 2014, he called on the FCC to reclassify Internet service under Title II, allowing for much stricter regulation of ISPs. In early February, Wheeler proposed new rules to do just that, and he and his four fellow FCC commissioners will vote on the matter at the end of the month.[27] But critics contend the change could make things worse.

Several Republicans in both Congress and the Federal Trade Commission have suggested anti-competitive conduct by ISPs could be remedied through antitrust law but warned that reclassifying ISPs as common carriers would rob the FTC of its ability to regulate them.[28] 

Both of these concerns rely on false dichotomies: that Title II regulation today must happen exactly as it did in the past, and that antitrust enforcement of telecommunications can happen only as it did in the past. The restrictive regulations to which the TIA refers were those that Obama specifically said the FCC should avoid.[29] If Congress wants the FTC to retain its authority over ISPs, it can remove the special exemption for telecommunications common carriers, as the FTC previously has asked it to do.[30] Regardless, the Department of Justice can always intervene when antitrust violations occur.

Critics of Obama’s plan also argue that it will stifle investment by ISPs. The Telecommunications Industry Association (TIA), which represents ISPs, cautioned in a statement, “We saw a significant negative impact on investment the last time restrictive . . . regulation was in place, and no one will benefit from returning to that failed policy.”[31] However, “it’s less clear that it will cause big changes to the economics of the Internet,” according to Bloomberg Businessweek, which asked telecomm industry officials to provide numbers to support their claim.[32] TIA provided only a 2010 report forecasting lower infrastructure development if the Federal Communications Commission were to reclassify broadband under Title II at that time. Comcast said that it could not provide concrete data “because cable networks have never been regulated under Title II”[33] and Verizon declined to discuss the matter, saying that there is no data the magazine reported.[34] Further, the telecommunications industry’s own records show ISPs have invested in infrastructure in the past during periods where it was subject to strict regulation. One study of ISP capital expenditures found that there was a spike in investment from 1998 to 2006, when Title II applied to DSL, or Internet service via telephone networks.[35] 

Examples from other countries suggest that stricter sectoral regulation may actually improve Internet service. Since 2000, almost all developed countries have extended some kind of common carrier arrangement to broadband access, according to a 2010 study by the Berkman Center for Internet & Society at Harvard University.[36] Great Britain and France, for example, required their former monopoly telecomm companies to “unbundle” and make their infrastructure available to rival ISPs, which rent it at regulated rates and compete on price and speed. The Harvard study found evidence that these common carrier policies drove prices down and speeds up for Internet users. In France, the average Internet speed is more than three times as fast as it is in the U.S. speed while the price for each megabyte per second is less than half. Meanwhile, people in the U.K. get Internet service comparable to what is available in the U.S., but for less than six dollars a month. Nor has the regulation created the disincentives for investment that American opponents of common carrier regulation fear. British Telecom has built superfast broadband now available to seventy-eight percent of all U.K. homes and businesses,[37] even as it is obligated to sell access to infrastructure wholesale to competing ISPs that repackage the Internet service for retail sale.[38] And thanks to the forced sharing of facilities, competition is thriving with several providers utilizing BT’s infrastructure to offer Internet access. The U.S., on the other hand, has a dearth of competition because ISPs lack such mandated access to infrastructure. Only the companies that have built the infrastructure can compete. Because it does not make economic sense to duplicate the same infrastructure in the same place—especially in areas with a small population—such companies rarely enter a market that is already served by another company. This results in situations such as the proposed merger between Time Warner and Comcast, in which the two ISP giants have few overlapping markets and would no longer have any reason to expand and compete with each other on price, quality of service, and capacity.[39] 

Germany, by contrast, illustrates the drawbacks of weak regulation. Until recently, Deutsche Telekom had a monopoly over Internet access, controlling ninety-seven percent of the market by refusing to open its facilities to competitors. As a result, the ISP giant was able to saddle Internet users with an overpriced service that included features many consumers did not want. Eventually, European Union officials pressured German lawmakers to put stricter regulations in place. DT now controls only forty-seven percent of the market, better Internet technologies are being implemented, and prices are going down. The Harvard study concluded: “Regulation is seen as having promoted competition in the telecommunications market and fostering investment and growth.”

Neither other countries (in the literal sense) nor the foreign country of our own past is a perfect guide to how regulation should proceed in the future. What the FCC once called an “enhanced” service has become basic to Americans’ ability to participate in their economy and democracy, and the common carrier regulation of high-speed broadband will not be the same as that of the village dock or even the old telephone monopoly AT&T. Yet the lessons of U.S. history and other developed nations’ recent experiences show that the old principle of common carriage can prevent blocking, throttling and paid prioritization, and may bring consumers higher-quality and faster services as well. This week’s FCC vote represents an opportunity to fix past mistakes and create a better future for America’s Internet service.

[1]. See generally John Aziz, Why is American Internet So Slow?, The Week (Mar. 5, 2014), http://theweek.com/articles/449919/american-internet-slow (discussing how the United States has fallen behind with respect to Internet speed).

[2]. See Press Release, White House, Statement by the President on Net Neutrality (Nov. 10, 2014), available at http://www.whitehouse.gov/the-press-office/2014/11/10/statement-president-net-neutrality (“[T]he time has come for the FCC to recognize that broadband service is of the same importance and must carry the same obligations as so many of the other vital services do. To do that, I believe the FCC should reclassify consumer broadband service under Title II of the Telecommunications Act.”).

[3]. See Steve Lohr, F.C.C. Plans Strong Hand to Regulate the Internet, N.Y. Times, Feb. 5, 2015, at B1.

[4]. See Eli M. Noam, Beyond Liberalization II: The Impending Doom of Common Carriage, 18 Telecomm. Pol’y 435, 436-37 (1994).

[5]. Paul Krugman, The French Connections, N.Y. Times, July 23, 2007, at A19.

[6]. Id.

[7]. See generally Joseph D. Kearney & Thomas W. Merrill, The Great Transformation of Regulated Industries Law, 98 Colum. L. Rev. 1323 (1998) (discussing the deregulation of telecommunication).

[8]. History of Cable, California Cable & Telecomm. Ass’n, http://www.calcable.org/learn/history-of-cable (last visited Feb. 20, 2015).

[9]. See, e.g., Statement on Signing the Telecommunications Act of 1996, 1 Pub. Papers 188 (Feb. 8, 1996), available at http://www.presidency.ucsb.edu/ws/?pid=52289.

[10]. See Telecommunications Act of 1996, 47 U.S.C. § 1302 (1996).

[11]. In re of Fed.-State Joint Bd. on Universal Serv., 12 F.C.C.R. 87, 123-24 (1996), 1996 WL 656113.

[12]. See H.R. Rep. No. 112–51, at 18 (2011).

[13]. See In re Amendment of Section 64.702 of the Comm’ns Rules and Regulations (Second Computer Inquiry), 77 F.C.C.2d 384, 387 (1980), 1980 WL 356789.

[14]. See Kathleen Ann Ruane, Cong. Research Serv., The FCC’s Authority to Regulate Net Neutrality After Comcast v. FCC 7 (2010).

[15]. See, e.g., Howard v. America Online Inc., 208 F.3d 741, 753 (9th Cir. 2000).

[16]. Marcia Clemmitt, Controlling the Internet, 16 Cong. Q. Res., 409, 422-23 (2006).

[17]. In re of Appropriate Regulatory Treatment for Broadband Access to the Internet over Wireless Networks, 22 F.C.C.R. 5901, 5915-16 (2007), 2007 WL 1288052 (classifying mobile data services in the same order as “private mobile services,” which are not subject to Title II common-carrier services treatment). However, a provider of wired and mobile voice service is treated as a common carrier for those services. See id. at 5919; see also Cellco P’ship v. FCC, 700 F.3d 534, 538 (D.C. Cir. 2012) (indicating that “mobile-voice providers are considered common carriers”).

[18]. Nat’l Cable & Telecomm. Assn. v. Brand X Internet Services, 545 U.S. 967, 1003 (2005).

[19]. See Brian Fung, ISPs Are Spending Less on Their Networks As They Make More Money Off Them, Wash. Post, Jul. 24, 2014, http://www.washingtonpost.com/blogs/the-switch/wp/2014/07/24/isps-are-spending-less-on-their-networks-as-they-make-more-money-off-them. (arguing that, despite an increase in revenue, ISPs have devoted less money over time to capital expenditures aimed at improving their networks).

[20]. See FCC, National Broadband Plan: Connecting America (2010), available at http://download.broadband.gov/plan/national-broadband-plan.pdf.

[21]. See Press Release, FCC, FCC Chairman Tom Wheeler: More Competition Needed in High-Speed Broadband Marketplace (Sept. 4, 2014), available at https://apps.fcc.gov/edocs_public/attachmatch/DOC-329160A1.pdf (indicating high-speed broadband is defined as a minimum twenty-give MBs per second download speed and three MBs per second upload speed).

[22]. See Aziz, supra note 1, at 1.

[23]. See generally Sarah Morris et al., Open Technology Institute, Cost of Connectivity 2014 (Oct. 30, 2014), http://www.newamerica.org/oti/the-cost-of-connectivity-2014 (describing an analysis of broadband offerings in twenty-four cities across the world that found “the majority of U.S. cities included in our report lag behind their international peers”).

[24]. See Declan Mcullagh, FCC Formally Rules Comcast’s Throttling of Bit Torrent Was Illegal, CNET (Aug. 1, 2008), http://news.cnet.com/8301-13578_3-10004508-38.html.

[25]. See Comcast Corp. v. FCC, 600 F.3d 642 (D.C. Cir. 2010).

[26]. Id. at 649.

[27]. See Lohr, supra note 3.

[28]. See, e.g., Bob Goodlatte, Letter to Federal Communications Commission (Nov. 10 2014), available at http://judiciary.house.gov/_cache/files/8311d33f-705d-4ef2-8fb5-be34f7631eb4/letter-to-fcc-re-net-neutrality-11-10-14-.pdf; Maureen K. Olhausen, Net Neutrality vs. Net Reality: Why an Evidence-Based Approach to Enforcement, and Not More Regulation, Could Protect Innovation on the Web, 14 Engage: J. Federalist Soc’y Prac. Grp. 81, 81-86 (2013), available at http://www.ftc.gov/system/files/documents/public_statements/telecommunications-electronic-media-net-neutrality-vs.net-reality-why-evidence-based-approach-enforcement-not-more-regulation-could-protect-innovation-web/140204ohlhausennetneutrality.pdf.

[29]. See Statement by the President on Net Neutrality, supra 2 (stating, “To do that, I believe the FCC should reclassify consumer broadband service under Title II of the Telecommunications Act—while at the same time forbearing from rate regulation and other provisions less relevant to broadband services. . . . Importantly, network investment remained strong under the previous net neutrality regime, before it was struck down by the court; in fact, the court agreed that protecting net neutrality helps foster more investment and innovation. If the FCC appropriately forbears from the Title II regulations that are not needed to implement the principles above—principles that most ISPs have followed for years — it will help ensure new rules are consistent with incentives for further investment in the infrastructure of the Internet.”).

[30]. Reauthorization of the Federal Trade Commission: Hearing on S. 108-951 Before the S. Comm. on Com. Sci. & Transp., 108th Cong. 10-11 (2013) (statement of Thomas B. Leary, Comm’r, Federal Trade Commission), available at http://www.gpo.gov/fdsys/pkg/CHRG-108shrg81138/html/CHRG-108shrg81138.htm.

[31]. Press Release, Telecomm. Indus. Ass’n., TIA Cautions Against Reclassifying Internet as a Utility (Nov. 10, 2014), available at http://www.tiaonline.org/news-media/press-releases/tia-cautions-reclassifying.

[32]. See Joshua Brustein, Changing How the Internet Is Regulated Probably Won't Kill It, Bloomberg Bus. Wk. (Nov. 11, 2014), available at http://www.businessweek.com/articles/2014-11-11/strict-internet-rules-are-unlikely-to-dry-up-investment.

[33]. Id.

[34]. Id.

[35]. See Comments of Free Press Before the Federal Communications Commission, 100 (Jul. 17, 2014) (statement of S. Derek Turner & Matthew F. Wood), available at http://www.freepress.net/sites/default/files/resources/Free_Press_14-28_Comments_7-18-2014.pdf (displaying a chart illustrating research on ISP’s capital expenditures from 1994 to 2013 based on company SEC filings).

[36]. See generally Harv. Berkman Ctr. Internet & Soc’y, Next Generation Connectivity: A Review of Broadband Internet Transitions and Policy from Around the World (2010), available at http://cyber.law.harvard.edu/pubrelease/broadband  (detailing the international development of common carrier arrangements for broadband access).

[37]. Office of Commc’n, Facts & Figures, http://media.ofcom.org.uk/facts/ (last visited Feb. 13, 2015).

[38]. See Press Release, Office of Commc’n, Promoting Competition and Investment in Superfast Broadband (Jan. 15, 2015), available at http://media.ofcom.org.uk/news/2015/vula-margin-draft-statement (“BT is currently the largest retail provider of fibre broadband services over its network, but is required to allow other operators to use its network to sell superfast broadband to consumers under a process known as ‘virtual unbundled local access (VULA)’.”).

[39]. See Sanjay Sanghoe, Why the Feds Should Block Comcast’s Merger with Time Warner Cable, Fortune (Apr. 24, 2014), http://fortune.com/2014/04/22/why-the-feds-should-block-comcasts-merger-with-time-warner-cable (stating that, “The companies don’t directly compete—Comcast has its own markets, such as in Philadelphia and Washington, D.C., and Time Warner Cable has its own, such as in New York and North Carolina . . . . So while the merger may not be anti-competitive in terms of eliminating existing competition, it does obviate the need for both Comcast and Time Warner Cable to expand their services and aggressively compete with each other on price, quality of service, and capacity . . . .”).