Appellate court upholds net neutrality rules that will hurt U.S. consumer, stagnate Internet innovation

By Steve Brachmann
June 20, 2016

Net neutralityNet neutrality has once again grabbed media headlines after a ruling handed down Tuesday, June 14th, by the District of Columbia Court of Appeals (D.C. Cir.). The appellate court upheld the net neutrality rules put in place by the Federal Communications Commission (FCC), denying appeals on those rules in petitions from Internet service providers (ISPs) and trade groups. In the ruling, D.C. Cir. judges upheld the FCC’s classification of Internet service providers as common carriers under Title II of the Communications Act of 1934. This section of law gives the FCC regulatory authority over common carriers engaged in interstate or foreign communication to prevent them from making unreasonable charges or discriminating among consumers.

The reason why net neutrality came up in the American political discourse in late 2014 has much to do with paid prioritization. Paid prioritization is an agreement in which a broadband service provider negotiates an arrangement with a content provider that results in the content provider being given priority access at congested Internet nodes. The Obama administration came out strongly on the topic of paid prioritization, calling for it to be explicitly banned by the FCC. The White House also called for rules preventing ISPs from blocking content or intentionally throttling any kind of data transmission. By the end of September 2014, the FCC had received 3.7 million public comments on the subject of net neutrality.

While high-ranking Democrats have taken the net neutrality framework, and the subsequent upholding of the FCC’s regulatory authority in court, as a major win, Republicans have been critical of the regulatory regime. Washington political blog The Hill reported after the ruling that Congressional Republicans were interested in drafting a reform bill for net neutrality, which many on that side of the aisle believe constitutes an overreach of government authority. General counsel and representatives speaking on behalf of ISPs and trade groups indicated that they’ll be appealing the case to the U.S. Supreme Court.

We here at IPWatchdog have written on the subject of net neutrality since the topic became widely discussed in political circles a few years ago. Proponents of net neutrality rules include media celebrities like Stephen Colbert and John Oliver, figures who straddle the line between entertainment and news and whose views are largely respected by their viewers; business publication Bloomberg credited a segment on Last Week Tonight with John Oliver for inspiring 45,000 public comments to the FCC on the subject of net neutrality. However, as we’ve discussed in the past, the way net neutrality is being implemented in the United States risks stagnation to Internet services by favoring content providers over the ISPs who could create new forms of delivering Internet services.

It’s helpful at this juncture to identify exactly who benefits from net neutrality rules as they’re currently laid out. The net neutrality debate has been widely framed as a regulatory means to ensure that some of the smallest players on the Internet stand a fighting chance and aren’t forced to pay for priority distribution or risk relegation to a kind of second-class Internet. However, analysis of the decision by Fortune and 24/7 Wall St. argues that major content providers like Netflix (NASDAQ:NFLX), Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), YouTube and Hulu are clear early winners of D.C. Cir.’s decision to uphold net neutrality rules. When comparing subscriber bases and market capitalization between the content providers and ISPs, the argument that net neutrality supports the “little guy” content provider against the big bad ISP begins to lose its flavor. Consider the fact that Comcast (NASDAQ:CMCSA), the cable company with the largest U.S. broadband subscriber base including more than 20.6 million subscribers as of December 2013, has a subscriber base that pales in comparison to some of the content providers whose positions are now bolstered by net neutrality. Netflix, for example, announced in its first quarter 2016 earnings press release that it had 81.5 million subscribers worldwide, 58 percent (47.3 million) of which are in the United States. That’s more than double Comcast’s entire U.S. broadband subscriber base. To be fair, Netflix has a much lower market capitalization than Comcast, only holding $40.95 billion in total share value to Comcast’s $153.21 billion market cap, but Amazon ($334.81 billion) and Facebook ($322.68 billion) are in a different league entirely. These content providing companies can now continue to operate in market dominant positions without being charged by ISPs which are smaller in terms of subscriber base and shareholder value.

Worse, there’s the potential that the ban on paid prioritization could end up costing consumers more money out-of-pocket for Internet access. Financial magazine Forbes also published analysis on winners and losers in the recent net neutrality court decision. The author contributing the article argued that ISPs might consider a form of unit-based pricing for Internet access; instead of paying for a certain level of data transmission speed, ISPs could look at charging for the amount of data consumed. Usage-based pricing schemes have been abjured in the recent past by Time Warner (NYSE:TWX) and Charter Communications (NASDAQ:CHTR), although Comcast has shown some interest in limited trials of such pricing schemes.

It also hurts the cause of net neutrality that proponents of the concept in America take a negative view of such regulatory authority elsewhere in the world. The Telecom Regulatory Authority of India (TRAI), India’s Internet regulator, began a consultation process in late May which the agency hopes will lead to a comprehensive and implementable net neutrality framework for the country. Already, however, Facebook has run into issues with telecom regulators in India for its Free Basics program, a service offering basic Internet access for free to Indian consumers. TRAI decided to ban Free Basics this February based on its authority to ban differential pricing for data services. Facebook’s Free Basics violated net neutrality, it was argued, because apps accessible on that platform constituted zero-rating, or a practice by which some Internet services are exempt from a cap on data which would affect other services.

Zero-rating can be thought of as an inverse to paid prioritization; instead of charging large content providers for so-called “fast lane” access, data transmitted by zero-rated apps don’t count against a data cap, making those apps slightly more valuable to consumers. So in America, where Facebook is the content provider, net neutrality is good for business. But in India, where Facebook is the ISP, net neutrality is bad for business.

Back in America, Republicans on Capitol Hill aren’t the only voice of dissent on net neutrality in Washington. Representatives of the Federal Trade Commission, the American regulatory agency charged with protecting consumers’ rights in this country, have noted that the FCC’s rules constitute a second rulebook for the Internet as the FTC had taken the lead in regulating ISPs up until the FCC’s common carrier reclassification. The implementation of net neutrality at the FTC would seem to make more sense, especially as it has been framed as an issue of consumer access to data services. The FCC regulates communication, not consumer access, although the Title II common carrier provisions give it some power in this arena. The FTC, however, loses its regulatory authority over consumer services providers when those providers are classified as common carriers. And if this is a legal issue about the rights of consumers to access the Internet, it makes infinitely more sense for those concerns to be adjudicated by America’s consumer rights agency.

An address delivered last December by FTC Commissioner Maureen Ohlhausen delves a bit more deeply into the conflict between the two agencies over net neutrality. As Ohlhausen notes, more enforcement is not always the best for consumers and that the two agencies approach enforcement quite differently, with the FCC more willing to issue fines for breaches of conduct. “I am concerned that what appears to be a ‘strict liability’ data security standard will actually harm consumers,” Ohlhausen stated. “The goal of consumer protection enforcement isn’t to make headlines; it is to make harmed consumers whole and incentivize appropriate practices… If an enforcement imposes costs disproportionate to the actual consumer harm, that enforcement action may make consumers worse off if prices rise or innovation slows.”

The Author

Steve Brachmann

Steve Brachmann is a writer located in Buffalo, New York. He has worked professionally as a freelancer for more than a decade. He has become a regular contributor to IPWatchdog.com, writing about technology, innovation and is the primary author of the Companies We Follow series. His work has been published by The Buffalo News, The Hamburg Sun, USAToday.com, Chron.com, Motley Fool and OpenLettersMonthly.com. Steve also provides website copy and documents for various business clients.

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

Discuss this

There are currently 6 Comments comments.

  1. A Rational Person June 20, 2016 11:53 am

    A key problem with your analysis is that in many metropolitan areas, ISPs have a virtual monopoly in providing Internet service and are among the most hated companies by consumers:

    http://www.networkworld.com/article/2930615/lan-wan/comcast-and-twc-are-still-among-the-most-hated-companies-in-america.html

    So many people have no faith that the ISPs will actually innovate to any significant extent if net neutrality goes away. Fool me once, shame on you, fool me twice, shame on me . . . .

    So if you want to convince people they should embrace ending net neutrality, you need to explain how your plan will ensure competition among ISPs in each and every major metro area.

    Further hurting your argument is the fact that in contrast to many ISPs who seem to relish providing poor customer service, content providers such as Netflix, Hulu, Amazon, etc., seem to be actively competing with each other to provide new, high quality programming:

    http://www.theguardian.com/media/2016/jun/18/netflix-streaming-tv-competition-hbo-amazon-hulu

  2. Steve Brachmann June 20, 2016 2:53 pm

    @A Rational Person – You’re not wrong on the regional monopolies that many ISPs have. However, I don’t see a consumer survey as being all that damaging to my arguments here. This has less to do with the faith of the public and more to do with the way this argument was improperly framed: companies with larger subscriber bases and greater market cap are now able to keep a market dominant position without being forced to pay for the bandwidth their services take up. Just because a wide swath of American consumers thinks, “Netflix good, ISP bad,” doesn’t make it necessarily so in this case.

    Also on the point of regional ISP monopolies, one of the issues is that utility contracts with local municipalities makes it prohibitively expensive for a new company to enter a space where a local incumbent reigns (http://www.wired.com/2013/07/we-need-to-stop-focusing-on-just-cable-companies-and-blame-local-government-for-dismal-broadband-competition/). One way that ISPs could better compete is if they had the capital to overcome those costs. And yet net neutrality undercuts that by prohibiting paid prioritization, one avenue through which these companies could have increased capital.

    I’m also not saying that net neutrality shouldn’t be embraced. I’m saying that it’s being implemented improperly. Paid prioritization and other related issues are consumer rights concerns. Those concerns should be addressed by the Federal Trade Commission, not the Federal Communications Commission. There’s also a lot of fear mongering over public access to data that doesn’t appear to be borne out in truth anywhere other than the pro-net neutrality arguments.

    That’s great that Netflix, Hulu, etc. are competing with each other for high quality programming. And if you think the Internet should continue to become a platform solely for movie and television production, that looks like that will continue. Netflix could produce a thousand blockbuster sitcoms or dramas, it won’t make consumer access to those shows any easier if ISPs are forced to consider usage-based charging in response to consumer demand of bandwidth exceeding supply. In the future your data might not be throttled, but you might have to pay extra for every show you watch on Netflix or Hulu. It will make the ISPs look worse to consumers but, in actuality, it would have been the fault of net neutrality rules.

    I get that people like Amazon more than they like Time Warner. I just think that those same people are kidding themselves to think their consumer interest is best served by supporting larger companies over smaller ones, regardless of how nice it is to have an Amazon Prime subscription.

    Also, I can’t imagine that there’s a single business out there that would “relish providing poor customer service.” I understand if that’s the perception, but I have a hard time envisioning Time Warner execs patting themselves on the back because they just frustrated another customer. Maybe if they were able to charge reasonable rates of the content providers choking up their bandwidth, they could provide better service. I doubt we’ll see if that’s true any day soon.

  3. Anon June 20, 2016 7:53 pm

    Sorry, but your imagining needs to be stretched just atad:

    Also, I can’t imagine that there’s a single business out there that would “relish providing poor customer service.”

    Think instead of “relishing poor [] service” that optimizing the return is valued more than excellent service.

    This of course is a natural result of a true monopoly.

    Throw in that the larger scale efforts to devalue patents, and those landed entities who only want to compete based on what they have now (and want to shutter the possible innovation of others) is only far far far too easy to “imagine.”

  4. John Willkie June 21, 2016 2:51 am

    If it is “virtual monopoly” that means that it isn’t a monopoly. “Monopoly”, like “pregnant” is an absolute. I live in a suburban area of a major city, but a dozen miles from the core. I have no issue with my cable company (aside from the bill) and they seem to have no real plans to impose the feared data caps or usage-based pricing.

    But, even were they to do so, I could just switch to AT&T’s U-Verse product, (fiber to the neighborhood) which is offered at the same price point or so (competition) as the incumbent cable company.

    I find that most people who complain about the cable company being a monopoly live in areas where there are more than two fixed-line internet service providers available. They are “very much more pregnant” than am I.

    The FCC’s recent Internet order, by my reading, appears to be within at least one reading of their congressionally-granted ambit. I also believe that it will stifle innovation and will come to hurt Netflix, the company that very unwisely asked for the rules.

    The big problem here is that the FCC violated the administrative procedures act (5 USC 101 et seq) and the general provisions of the Communications Act (47 USC 101, et seq) where part 0 provides for an independent regulatory agency. At the last moment, the FCC ignored its notice of proposed rulemaking (NPRM) and instead imposed the “solution” that, unwisely, was favored by the Obama administration and which had not been addressed in the NPRM or any substantial commenter. “‘Twas ever thus” as goes the current administration.

  5. Steve Brachmann June 21, 2016 11:58 am

    @Anon – I see your point. What may seem like poor service from one perspective could very likely be dollars saved from another perspective.

    However, I think there’s a good point to be made here about what kind of monopolies we’re seeing in this issue. ISPs tend to engage in regional monopolies, from what I’ve seen. Wherever most Americans live, there’s typically only one good choice for broadband Internet services to the home. While ISPs have a good hold on regional monopolies, it could be argued that Netflix, Amazon, Facebook and others hold Internet monopolies that are stronger than what ISPs have (i.e., Comcast, Time Warner or Charter will let you stream House of Cards, but you can only get House of Cards from Netflix). And, as I’ve pointed out in previous comments, the ISP regional monopoly issue has more to do with local municipal utility contracts than it does with FCC oversight, so there’s very little that’s being accomplished in that regard with net neutrality the way that it’s currently set up.

  6. John Willkie June 21, 2016 1:16 pm

    @Steve; US (and other) intellectual property laws are intended to create a monopoly on content for the creator or owner. As a general rule, the only true monopolies are created by governments.

    As a practical matter, exclusive franchise agreements have been banned since the Communications Act rewrite of 1996. That doesn’t mean that many companies have opted to “overbuild” an existing franchise, but Google Fiber has certainly done so, as well as others, and Charter will be required to do so as a condition of it’s merger with TWC and Bright House.