In a recent op-ed in the Wall Street Journal (subscription required), Mr. Hyman urged regulators to prohibit usage-based broadband pricing and bandwidth caps. (Well, to be fair, he used a metaphor about a frog and a pot of boiling water in lieu of an express request for regulation, but strip away the metaphor, and the intent is the same.) Of course, there is nothing anticompetitive or anti-consumer about usage-based pricing: Mr. Hyman admits that usage-based pricing is a standard pricing mechanism in other contexts, e.g., electricity. So what is his real complaint?

Mr. Hyman’s real complaint is that usage-based pricing and bandwidth caps don’t maximize consumer access to the particular service his company provides. Unfortunately for Netflix, that’s not the relevant question. The government doesn’t (or rather, shouldn’t) regulate pricing to maximize the profits of particular companies or services, and it shouldn’t intervene in the market for broadband access service to maximize the profits of Netflix.

TANSTAAFL, and adding more pricing controls to the existing net neutrality regime would impose costs on everyone. As I’ve posted previously, the business case for fiber deployment already entails considerable risk. Further reducing broadband infrastructure investment incentives to boost Netflix’s profits, when millions of Americans still don’t have access to the best broadband technologies available, would be absurd. In its letter to shareholders describing its Q1 2011 results, Netflix showed 95% growth in operating income and 94% growth in net subscriber additions. That hardly sounds like a company that needs government intervention to “compete.”

At the end of the day, those who oppose net neutrality might be thanking Netflix for making its request for Internet price regulation so transparent – a transparency that often appeared lacking in last year’s net neutrality debates. Net neutrality advocates, however, might be wishing they’d gotten Mr. Hyman the memo.

Net Neutrality: Last December, the FCC adopted net neutrality regulations (see order available here). These rules shift potential Internet revenue from service providers – the companies that actually deploy broadband infrastructure – to software companies and device manufacturers. The obvious result is to discourage investment in costly broadband infrastructure.

Incentive Auction Authority: Making more spectrum available through incentive auctions would promote significant broadband deployment. The FCC is now working toward this goal, but in 2010, the FCC made net neutrality its top priority rather than incentive auctions. Had the FCC focused on the need for more spectrum in 2010, the FCC might have obtained incentive auction authority already by striking a deal with Congressional Republicans opposed to net neutrality. Instead, the FCC is fighting with broadcasters over incentive auctions in 2011, with the election cycle looming ahead.

Universal Service: Universal service reform is one of the most important regulatory actions the FCC could take to promote broadband deployment. But, while the FCC was busy working on net neutrality regulations last year, universal service reform languished, and another opportunity to promote broadband deployment now was lost.

Roaming: The FCC found in 2007 (see order here), that mobile wireless roaming regulation discourages infrastructure-based broadband deployment if roaming is required in markets in which the requesting service provider holds spectrum licenses. In 2010, however, the FCC changed its mind (see order here), and in 2011 (see order here), it imposed new roaming requirements on broadband service providers. It’s difficult to see how allowing one provider to use another provider’s infrastructure rather than build its own network will promote more infrastructure deployment.

If broadband deployment is lagging, the FCC should point the finger at itself. The FCC needs to get back to the task of implementing policies that promote broadband deployment rather than imposing heavy handed regulation. For starters, the FCC can focus on making more spectrum available and reforming the Universal Service Fund. That would go a long way toward reversing the FCC’s troubling trend of discouraging broadband deployment.

If market analysis isn’t necessary, then what is the empirical basis for imposing regulation? What provides a limiting principal for framing the debate? When asked for evidence of a problem with the Internet justifying regulation, Commissioners relied on the opinions of commenters who expressed concern in the proceeding. But nobody said whether these commenters offered any empirical evidence for their opinions (i.e., any market analysis) or whether these commenters constituted a statistically relevant sample.

This is the crux of the FCC’s existential crisis: the reliance on subjective perception to impose regulation. Reliance on anecdote is the antithesis of a data-driven approach. This is in part why nobody knows what a “net neutrality” violation looks like. “As Eliza Krigman said in a recent PoliticoPro article (no link available), “Internet service providers and consumer watchdogs disagree on what constitutes a net neutrality violation.” Without some empirical framework for analysis, it’s anybody’s guess.

1. Net Neutrality (a/k/a “Open Internet”)

This was the big one in 2010. The FCC delivered a late December Christmas present to broadband providers by imposing net neutrality obligations. Among other things, the order signaled that this FCC does not believe market analysis is necessary to impose significant regulation – regulation that will affect the very markets the FCC declined to analyze. This is a major departure from Congressional direction and FCC practice for nearly two decades. The FCC’s willingness to regulate without evidence of market failure represents a major triumph for public interest groups, who have long argued that market failure is not a prerequisite to regulation.

2. “Bill Shock”

Another NPRM makes the list. The FCC is proposing rules that would require mobile service providers to provide usage alerts and information intended to assist consumers in avoiding unexpected charges on their bills. Like the net neutrality order, the FCC doesn’t do any market analysis here, because this FCC doesn’t believe competition is sufficient to protect consumers. (If the FCC keeps this up, there are going to be a lot of economists out of work.)

3. SkyTerra (a/k/a LightSquared)

A trio of Bureaus granted the transfer of SkyTerra’s MSS license, including its ancillary terrestrial component authority, to Harbinger Capital.  As I noted in a previous post addressing this order at length, the Bureau trio decided to accept ostensibly voluntary conditions related to Harbinger’s plans to implement a terrestrial LTE network without assessing the state of terrestrial competition. As noted above, this is part of a trend at this FCC of ignoring market analysis. Perhaps more importantly, this order paved the way for Harbinger to deploy a massive terrestrial network using un-auctioned (i.e., free) satellite spectrum. It turns out that cellular providers were right back in 2003 when they argued that ancillary terrestrial component would ultimately become ancillary satellite component.

4. Qwest

The FCC rejected Quest’s argument that it faces sufficient competition in Phoenix, Arizona to render unbundling and other wireline voice service obligations unnecessary. In reaching this conclusion, the FCC found insufficient evidence that mobile wireless service occupies the same relevant product market as wireline voice service. This finding seems arbitrary and capricious when, according to the FCC’s 14^th Mobile Wireless Competition Report, approximately 23% of households relied solely on wireless service in the first half of 2009 (and so does this blogger). Although the FCC purported to do market analysis in this order, the absurd conclusion demonstrated its disdain for market analyses that might contradict its preferred results.

This FCC seems determined to avoid any genuine market analysis, a trend that is too prominent to be anything but intentional.

5. 14^th Mobile Wireless Competition Report (“14^th Report”)

In an inexplicable departure from previous reports, the FCC declined in its 14^th Report to make a finding regarding the state of competition in the mobile market because “no single definition of effective competition” would be adequate. Given that Congress expressly defined “effective competition” in the Communications Act (see my post here), it shouldn’t be too hard to define it in the mobile context. This FCC seems determined to avoid any genuine market analysis, a trend that is too prominent to be anything but intentional.

6. Broadcast Repacking

The FCC issued a Notice of Proposed Rulemaking (“NPRM”) to repack broadcasters and free up TV spectrum for wireless broadband. This NPRM wasn’t unexpected – it follows the blueprint laid out in the National Broadband Plan – but it’s still a big deal. This is a bi-partisan issue at the FCC, and I expect they will try to move it forward in 2011. That doesn’t mean that the FCC will be auctioning the spectrum any time soon. There are several obstacles to completing this process, including the need for Congressional action to implement an incentive auction.

7. TV White Spaces

The FCC finalized its rules for the use of unlicensed devices in the TV white spaces. The most significant decision in the order is the elimination of the requirement that TV bands devices with geo-location capability must also listen (sense) to detect the signals of TV stations. This is significant because, until recently, proponents of spectrum sharing have argued that spectrum sensing would enable sharing. In this proceeding, however, some parties reversed course and argued that the sensing requirement would be uneconomic. The implication is that the database approach for TV white spaces may become the new spectrum sharing mantra.

8. 2 GHz Mobile Satellite Service (“MSS”)

In another action implementing the National Broadband Plan, the FCC issued an NPRM and Notice of Inquiry proposing to add terrestrial allocations to the 2 GHz MSS band, which is a precondition for more flexible licensing of terrestrial services within the band. The FCC also proposed to apply terrestrial secondary markets rules to all MSS bands. These actions are part of the FCC’s plan to convert MSS bands to terrestrial use.

9. Wireless Communications Service (“WCS”)

After many years of ignoring the potential for mobile broadband operations in the 2.3 GHz band, the FCC modified the rules for the band to support mobile use. The decision does a reasonable job of balancing WCS concerns with those of the adjacent satellite radio providers. The order also continued the trend of imposing more stringent build out conditions on mobile licensees.

10. Universal Service

Finally, the FCC issues yet another NPRM and NOI proposing to revise its universal service rules. For wireline services, this is probably the most important action the FCC could take. Unfortunately, the FCC has been trying to do this for years with no success. I’m skeptical that this FCC will fare any better.

There are number of prudent reasons for the Chairman to be deliberative. As the FCC’s public notice asking for additional comment on the applicability of net neutrality to mobile services highlighted, there are still a number of net neutrality issues that have received virtually no analysis from net neutrality proponents. Free Press bases its case for imposing net neutrality regulations on mobile on their belief that it would produce an “even playing field.” (Reply Comments of Free Press, GN Docket No. 09-191 (filed April 26, 2010) at 21.) But, in the same set of FCC comments, Free Press acknowledges that fixed and mobile broadband do not compete in the same product market. (Reply Comments of Free Press, GN Docket No. 09-191 (filed April 26, 2010) at 45.) There is no need to “even the playing field” if fixed and mobile don’t compete in the same product market because they aren’t playing on the same field. Free Press’ contradictory arguments are a classic case of wanting to have your cake and eat it too. They also fail to give the Chairman the type of evidence the FCC would need to act.

Another reason for the Chairman to be cautious is the potential illegality of the net neutrality regulations Free Press is seeking. For example, Free Press is pressing for reclassification of mobile broadband as a Title II, common carrier service, but, as I’ve explained previously, Congress has expressly prohibited the FCC from classifying mobile broadband as a common carrier service. As I’ve also explained previously, the strict non-discrimination rule initially proposed by the FCC is outside its legal authority. Given the high likelihood that reclassifying mobile broadband as a Title II service and imposing a strict nondiscrimination provision on mobile services would contravene the law, Chairman Genachowski has another very good reason to spend some more time vetting net neutrality issues.

Perhaps the most important reason for the Chairman to be cautious, however, is that Congress is considering resolving many of the outstanding net neutrality questions noted above. A majority of Congress does not support the net neutrality regulations initially proposed by the FCC, and Democratic House leadership recently floated legislation that would have exempted wireless from the more onerous aspects of net neutrality. When the majority of elected leaders in a democratic society are opposed to something, and have signaled their willingness to address the issue, I wouldn’t call it waffling to take time for more deliberation, I would call it wise.

The most obvious example of change sought by net neutrality advocates is their desire to eliminate prioritization of Internet packets. They want to prohibit transactions that “favor certain content on the Internet” so that the Internet can be “equally accessed by all innovators, speakers, and businesses. Like it is today.” But “popular” content is already given favored access by content delivery networks, as the FCC recently recognized in OBI Technical Paper No. 4. In Appendix 3, the FCC points out that “[c]ontent delivery networks (CDNs) are designed and deployed for the purpose of optimizing the end user Internet experience by storing and sourcing ‘popular’ content closer (by way of physical distance as well as fewer network elements) to end users.” CDNs improve network performance by reducing possible sources of network degradation such as packet loss (fewer network elements with packet buffers), packet jitter (less network connections between fewer elements), and latency (packets between the CDN servers and users have shorter distances to travel). (OBI Technical Paper No. 4, App. 3, page 23.) However, “not all content is subject to CDN distribution.” (Id.) In other words, CDNs are designed to favor popular content over less popular content – and in this context, “popular” means content provided by those who can afford to pay for CDNs to prioritize it.

Thus, to satisfy the goals of the public interest groups, the FCC would need to prohibit the use of CDNs (even though they provide consumers with a better experience). The FCC instead indicated in its Reclassification NOI that it intends to ignore this issue by refusing to address CDNs at all. (Reclassification NOI at paragraph 107.) But not addressing an issue doesn’t make it go away; it just leaves many questions unanswered. If prioritization via a CDN is permissible, how does it meaningfully differ from prioritization through other methods? Does the consumer care how prioritization is achieved? Can Internet access service providers offer CDN services? Reclassification isn’t intended to answer any of these questions.

Another way in which public interest groups want to radically change the status quo involves what the Net Neutrality NPRM calls “managed services” and what the Verizon/Google Proposal calls “additional online services.” Public Knowledge apparently believes there is only “one Internet,” and that “additional online services” aren’t currently offered over this mythical Internet. In reality, there are many services provided using Internet protocols and infrastructure that are not offered over the “public Internet.” As the FCC noted in the Net Neutrality NPRM, “AT&T offers its U-verse multi-channel, Internet-Protocol-based video service through the same network as its fiber-based broadband Internet access offering.” (Net Neutrality NPRM at paragraph 150.) Virtual private networks use the Internet, but are by definition not public. And new services on the horizon, like healthcare applications, may also use Internet protocols without being offered over the “public Internet.” As Dean Bubley so aptly put in a recent blog post, “networked services and applications are already split between [“public”] Internet and non-Internet, and they’re going to stay that way.”

That is to say, they are going to stay that way unless regulators decide to change them through misguided attempts to “preserve” something that doesn’t exist.

First, the agreement states clearly that the FCC “would not have any authority over Internet software applications, content or services.” As I’ve noted before, Internet software applications, content, and services “have as much potential to prevent consumers from enjoying the protections of the existing Internet principals as ‘broadband Internet access service’ providers.” Indeed, Google, with over 80% of the search engine market, has much greater potential to block consumer access to the Internet sites of their choice than does Verizon, who has a paltry 3.6 million FiOS Internet subscribers and “continues to bleed landline and DSL customers.” Google was nevertheless able to get Verizon to agree that Google remain completely free from any of the net neutrality regulations to which Verizon itself would be subject. That’s a significant win in any book.

Second, the agreement’s “non-discrimination” provision presumptively prohibits the prioritization of traffic. This is a significant competitive victory for Google, because Google already prioritizes its own traffic via its own content delivery network. “If Google were an Internet service provider, it would be the fastest growing and third largest global carrier, says Craig Lebovitz, Arbor Networks chief scientist.” Google uses its extensive content delivery network to speed the delivery of its packets – like YouTube – to end users. To compete with Google, competitors would need access to similar prioritization capabilities. Fortunately for Google, Verizon just agreed not to use its resources and expertise to help even track conditions for Google’s competitors. Win number two for Google.

Third, Google agreed that only the transparency principle would apply to wireless networks. On its face, this looks like a win for Verizon Wireless. But it’s a Pyrrhic victory. Google has nothing to lose in forswearing regulation of wireless because the wireless industry is incredibly competitive – and that competition ensures that wireless service providers can’t engage in discrimination that is harmful to consumers (without risking serious subscriber losses). And, with the recent success of Android and Google’s takeover of AdMob, Google is in a better position to leverage power in the wireless market than Verizon Wireless. When your operating system is increasingly powering the smartphones consumers are using to access the Internet, you have a virtual monopoly on mobile advertising, and the market power of network operators is constrained by competition, why would you want increased federal oversight? On balance, leaving wireless out of the net neutrality race is another trip to the winner’s circle for Google.

Unlike in the wireline context, Title II has a whole doesn’t apply to wireless voice service (i.e., commercial mobile radio services (“CMRS”)), because the FCC has forborne from applying most Title II provisions to CMRS carriers. And, as the FCC said in its 2007 Classification Order classifying wireless broadband Internet access service is an information service, the FCC had “not previously considered the appropriate classification of wireless broadband Internet access service.” (2007 Classification Order at paragraph 3.) In that Order, the FCC concluded that wireless broadband Internet access service, whether offered using mobile, portable, or fixed technologies, is an “information service” under the Communications Act, and that the transmission component of wireless broadband Internet access service is properly classified as “telecommunications” and not “telecommunications service” under the Communications Act. The FCC has thus never applied Title II to wireless broadband Internet access or distinguished between the underlying transport service for wireless broadband Internet access and the access service itself. Given the FCC’s long history of “light” wireless regulation, any attempt to classify wireless broadband Internet access as a Title II service would be incredibly novel (not to mention unnecessary given the level of competition in the wireless marketplace).

As an interesting aside, those who believe Title III somehow gives the FCC more authority over wireless Internet access have misread FCC precedent on the issue. In the 2007 Classification Order, the FCC disavowed a connection between Title III and Title II classification issues: “Application of provisions governing access to and use of spectrum (and their corresponding Commission rules) is not affected by whether the service using the spectrum is classified as a telecommunications or information service under the Act.” (Id. at paragraph 36.)

I wrote in an earlier post that the FCC lacked jurisdiction to enact its proposed net neutrality rules as written. Today the D.C. Circuit issued an opinion holding that the FCC failed to justify ancillary jurisdiction “over Comcast’s network management practices.” (Comcast v. FCC, No. 08-1291 at 3 (D.C. Cir. Apr. 6, 2010).) In this post, I explain what the court did and what options remain open to the FCC in its net neutrality proceeding.

In the Comcast case, the court applied its existing two-part ancillary jurisdiction test, which is satisfied if (1) the FCC’s general jurisdictional grant under Title I of the Communications Act covers the regulated subject and (2) the regulations are reasonably ancillary to the FCC’s effective performance of its statutorily mandated responsibilities.” (Comcast v. FCC, No. 08-1291 at 7.) The parties conceded that the first part of the test had been met because Comcast’s Internet service qualifies as “interstate and foreign communication by wire” within the meaning of Title I of the Communications Act. (Id. at 7-8 (citing 47 U.S.C. § 152(a).) The case thus turned on whether the regulation of Comcast’s network management practices was reasonably ancillary to the FCC’s statutory responsibilities for “something.”

The court rejected the FCC’s reliance on Sections 230(b) and 151 of the Act because those sections are merely statements of policy, and “policy statements alone cannot provide the basis for the Commission’s exercise of ancillary authority.” (Comcast v. FCC, No. 08-1291 at 22.) The court likewise dismissed section 706 of the Telecommunications Act of 1996 as a basis for statutory jurisdiction because the FCC has previously held that section 706 does not constitute an independent grant of authority. (Comcast v. FCC, No. 08-1291 at 31.)

The court noted that other provisions that the FCC cited in support of its authority – sections 256, 257, 201, and 623, and its Title III authority over broadcasting – might include express delegations of authority, but the court held that these provisions nevertheless did not support the FCC’s exercise of ancillary authority in this case. The court concluded that section 256 could not support ancillary jurisdiction because that section disclaims any delegation of authority. (Comcast v. FCC, No. 08-1291 at 32.) Section 257 is inapplicable because there is no connection between that section’s reporting requirement and the regulation of network management. (Comcast v. FCC, No. 08-1291 at 33.) The court refused to consider the FCC’s arguments pursuant to section 201 and Title III because the FCC had not developed those bases for jurisdiction in the FCC’s order. (Comcast v. FCC, No. 08-1291 at 33-34.) And the court rejected the FCC’s exercise of jurisdiction pursuant to section 623 because that section is narrowly concerned with basic tier cable service rates and the FCC had not linked network management to basic tier cable rates. (Comcast v. FCC, No. 08-1291 at 35-36.)

Given this thorough rejection of the FCC’s asserted bases for exercise of its ancillary authority, what options does the FCC have left? Below are four possibilities, in no particular order:

Option One: The FCC could try to justify ancillary jurisdiction using new arguments. If the FCC tries this route, it’s going to need to be much more specific than the very general statements of jurisdiction contained in the net neutrality NPRM. In the Comcast case, the FCC tried to rely on a general assertion of jurisdiction based on dicta in the Brand X case, in which the Supreme Court said “the Commission remains free to impose special regulatory duties on [ISPs] under its Title I ancillary jurisdiction.” (Comcast v. FCC, No. 08-1291 at 13.) Although the D.C. Circuit court conceded that this statement might allow the FCC to impose some kinds of obligations on broadband providers, the court held that “each and every assertion of [ancillary] jurisdiction” must be “independently justified.” (Comcast v. FCC, No. 08-1291 at 15.) The FCC would thus have to find an actual, statutorily mandated responsibility for each of the six proposed net neutrality regulations. Given the court’s skepticism in Comcast, that seems like a tall order. Thus, in the short term, the net neutrality NPRM is likely going nowhere.

Option Two: The FCC could abandon its quest to regulate net neutrality. This option would certainly survive legal scrutiny, but appears to have been rejected already by the FCC majority (See statements here, here, and here (although Chairman Genachowski didn’t issue his own statement, instead relying on a media representative)). Presumably, the majority feels compelled to “do something” after issuing an NPRM on the issue.

Option Three: Classify broadband Internet access as a “telecommunications service.” This is the option favored by Free Press, among others, who believes it’s an “easy fix.” In my view, this approach would be far from “easy.” Although an agency can reinterpret a statute, it can only do so when it provides a reasoned explanation for its change in interpretation. At a minimum, this would require a notice and comment rulemaking and, presumably, new data or changed circumstances. None of that seems so easy to me – not to mention that heavy-handed Title II regulation of the Internet could very well cause chaos in the broadband access market, which has never been subject to Title II regulation as a whole.

Option Four: Finally, the FCC could ask Congress to revise the communications statutes to provide express jurisdiction over broadband. Such an approach would be legally sound and the most intellectually coherent. Agencies are supposed to act only pursuant to delegated authority. Any common-sense reading of the Telecommunications Act of 1996 clearly indicates that Congress intended that the FCC leave the Internet alone. Given that expression of Congressional intent, a change in course should be prescribed by Congress, not an agency without clear delegated authority.

[Edit] Option Five: In my initial post, I forgot to add the most immediate option – appeal to the Supreme Court. I forgot to add it because success seems so unlikely. Nevertheless, it is an option the FCC could try to pursue.

“Looks like I’m going nowhere . . . .” Luke, Star Wars (1977).