Be Careful What You Wish For: Thoughts on the FCC’s Net Neutrality NPRM (FCC 10-127) - Framework for Broadband Internet Service

In reviewing the FCC’s NPRM on Net Neutrality, several items caught my attention. That FCC is trying to find a legal justification to clarify and expand its control over broadband access and Internet services. I’m not going to comment on that - there are many experts who spend their whole professional lives on telecom regulation and are much better qualified to weigh in, bless their hearts.

I’m going to comment on two things:

• The FCC’s focus on finding a ‘third way’ to do this.
• Should this occur, the likelihood of success.

The appropriateness and prospective effectiveness of a ‘Third Way’. In its June 17 2010 presentation on the Legal Framework for Broadband Internet Access, the Commission cites the rapid adoption of US mobile services as a proof-point of the effectiveness and wisdom of the third way. But these are the contraindications:

1.      According to the TIA, adoption of wireless services in other countries, even developed countries, has outstripped the pace in the U.S.—for instance, between 2001 and 2009, the number of wireless subscribers outside the U.S. surged by a factor exceeding 3X, while in the U.S. adoption merely doubled.[i] In many of those countries, the regulatory approach in effect was markedly different from the one taken in the US. Thus other factors, such technology innovations, the availability and price of substitute forms of communications, demographic shifts and other factors were key contributors to wireless’ phenomenal growth. It just wasn’t the regulatory environment. I’d argue that our regulatory environment was, at best, a secondary contributor to wireless’ success.

2.      Even when considering US 3G services, the Third Way now is running into obstacles that the Commission, in this NPRM, seeks to overcome. US 3G subscribers are not able to use any mobile device on any mobile provider, and they are not able to purchase and use applications from any mobile application provider. Both of the major suppliers in the mobile environment - carriers, mobile device vendors/OSs now play significant gating roles to greater adoption and usage.  

3.      Finally, all US 3G providers have placed monthly usage caps on mobile devices (cap level often varies by type of device), and some have introduced, or suggested they will introduce tiered prices on 3G (and possibly 4G) services, so that heavy users pay more, and lighter users pay less.

The likelihood of success. There are two components:

1.      If ‘success’ is defined as meeting the goals of the NPRM, I don’t think it will be very successful, even if adopted exactly as the Commission prefers, because the proposed ‘cure’ doesn’t match the type or scale of the illness. From a big picture perspective, the entire telecommunications regulatory infrastructure has needed a complete overhaul since the late 1980s/early 1990s. This is the era during which carriers widely deployed digital (TDM) telecommunications infrastructures. I have witnessed firsthand much of the regulatory framework, methodology and pricing assumptions made at the state and federal levels. When closely examined, these still assume the continuation of an analog infrastructure. Analog-based regulatory, policy and pricing practices applied to the TDM and packet-based digital age have been outmoded for decades. Carriers have reaped some very nice returns. But the market has been distorted and has suffered accordingly—in price, availability, competition, performance and customer service/support. The country has also suffered -- from the perspective of international competitiveness. Despite the necessity of an overhaul, no Commission, Congress or President has taken the leadership position to further our country’s interests. The Commission’s approach in this NPRM is the expedient, incremental one. But it only further distorts the true underlying economics. Realistically, it is the equivalent of putting a band aid on a patient that needs quadruple bypass.

2.      In real life, the NPRM won’t be swiftly adopted and implemented. They never are. After years of contentious litigation and possibly Congressional action and even more litigation, something may be enacted. What will happen in the interim? That’s hard to say just yet. Facilities-based providers could decide the take the slow road on network improvements. In this type of environment, application service providers and application developers could take a variety of measures to improve the user experience in such an environment, but these investments would not be at the same pace or level as they wanted to make, because the anticipated return is also less robust. Overall, one highly likely outcome during the regulatory interim is less innovation, less investment, a weaker global competitive position. Outcomes that no-one in this country desires.

What is that saying, “Be careful what you wish for”? Be very, very careful.

 [i] According to the Telecommunications Industry Association, there were 41.5 M wireless subscribers in the US in 2001, and 87.1 M in 2009 (slightly more than 100% growth). Outside the US, the number of wireless subscribers was 839 M in 2001, and grew more than 3X by 2009, to 3.456 B.