Broadband Reclassification: Be Careful What You Wish For
September 11, 2014 - Doc #lcUS25130214 IDC Link
As the comment period for the FCC's Open Internet Proposal decision draws to a close and the industry anticipates what new rules will act as the framework for broadband traffic transmission, there has been a growing call to reclassify broadband as a telecommunications service in order for the FCC to have deep-reaching and largely uncontested authority over regulating the broadband ecosystem. This drumbeat has been most loudly sounded by companies like Netflix, which fear that, in a regulatory vacuum, broadband service providers will charge them unfair prices for efficient network transport to the last mile broadband network. Since several deals have already been established, this apprehension is not unfounded.
The question of reclassification under Title II of the 1996 Telecom Act has been discussed many times — most recently during the tenure of Chairman Martin — and it looked like reclassification was imminent. However, in a move that surprised many net neutrality watchers, Google — hitherto the most vocal supporter of net neutrality — suddenly teamed with Verizon to oppose reclassification. This effectively stripped the FCC of its backing, and congressional support evaporated.
However, nearly four years later, the issue has come to the fore again, driven not by last mile bandwidth considerations, which were always the basis for net neutrality concerns, but rather by peering agreements between service providers in the middle mile. Powerful members of Congress such as Nancy Pelosi are urging reclassification, and the matter is being seriously considered once again.
The reaction from Verizon, Comcast, AT&T, and the other facilities-based broadband operators to greater regulation is easy — no thanks. But what about Netflix and other content providers that are pushing for reclassification? They are trying to solve a specific business problem — that of paying for priority where they did not have to in the past — by inviting an incredible amount of control and oversight into their business practices. What might this new regulated regime look like? One way to anticipate it is to look back on the DSL world before the 2004 Brand X decision that established broadband as an information service. At the time, the main issue was the broadband network access given to small ISPs — they were able to use DSL lines at regulated rates but not cable modem lines. After Brand X, both DSL and cable modem providers had more freedom to determine whether or how much to charge to share last mile facilities. However, if reclassification should occur, the issue of ISPs reselling broadband at government set pricing is unlikely to be the thrust of future regulation. The major issues (beyond regulating broadband access prioritization) would likely be considerations such as universality, competition, and privacy. Universality has been one of the guiding principles of telecommunications policy since the 1930s. If broadband is reclassified, initiatives such as Google's FTTP deployments or AT&T's GigaPower service might be scrutinized and compromised under Title II oversight, causing these companies to abandon such upgrades because of the requirement to build everywhere in a community — not just in "fiberhoods" or other areas that make the best business sense from a density perspective.
For content providers such as Netflix, a much more powerful regulatory authority over broadband would likely extend to content traversing the network — thus any consumer data around usage, content preferences, and so forth could potentially be scrutinized in the act of ensuring higher levels of privacy (e.g., Netflix's affiliation with Facebook and "recommendations"). In addition, the issue of paid prioritization would become a focus, and while Netflix and other content providers may believe "zero" is the appropriate price to pay for optimized peering, the newly empowered FCC might take a different view and regulate transmission charges much as it does for current telecommunications services and as it did during the days of unbundled network elements for access to copper loops and other infrastructure. For these agreements, there are three obvious business arrangement choices: 1) no fees, 2) negotiated rates set by a free market, or 3) regulated rates. Netflix is betting the farm on zero, even though by the simple act of entering into these agreements it has already admitted there is a business arrangement to be struck - whether it thinks it is fair or not.
Scenarios involving universality, competition, and privacy are just a few that come to mind when considering Title II reclassification, as there are many other situations or interpretations that could hinder or help any of the adversaries. One IDC colleague describes it as "shooting buckshot at a moving target." This type of uncertainty was likely a strong reason why Google changed positions relative to net neutrality governing mobility — it just didn't know what to expect and had too much riding on its mobile strategy to risk potential poorly conceived government policy. Since the Open Internet rules were first discussed, the broadband community's one consistent hope has been for clarity and stability. IDC believes that reclassification under Title II may solve some of the content providers' near-term peering business arrangement issues but also could potentially create many more headaches down the road for all participants in the broadband ecosystem.
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