Wednesday, March 25, 2015

3 Ways the “Open Internet Order” is Illegal

Now that the Federal Communication Commission’s (FCC) so-called Open Internet Order (OIO) has finally been released, we can begin to assess where we go from here. Besides the numerous reasons why the FCC’s decision is bad policy, it is also unconstitutional and a violation of the Telecommunications Act.

The Fifth Amendment

The OIO is a violation of the takings clause of the Fifth Amendment. The amendment concludes with the statement “nor shall private property be taken for public use without just compensation.” The legal history of this clause is long and complex, and the whole argument as it applies in this case is spelled out at length by Daniel Lyons. Here I will only summarize some basic principles that can be applied to the FCC’s Order. First, there is the rule, established by Loretto v. Teleprompter Manhattan CATV Corp, that a permanent occupation or regular use of private property by the government or the public is a per se taking requiring compensation. This is exactly the scenario that is created by the OIO. Internet service providers (ISPs) are now required to allow edge providers (e.g. Netflix, Amazon, Google) to use their networks without charge or face penalties for blocking and paid prioritization which the Order bans. The FCC and its allies have responded to this argument by claiming that use of a network is not physical occupation, and therefore not a per se taking, but this assertion is incorrect. The sending and receiving of information over networks takes place in physical space; the moving of content across a network with flows of electrons is not non-physical simply because the occupation is too small to see. The moving of information along a privately owned fiber or wire is not unlike the movement of people across privately owned land which the Supreme Court has already ruled falls under the Loretto rule. Furthermore, even if it does not require permanent occupation, the Order certainly requires ISPs to permit regular use of their networks, which still constitutes taking under Loretto.

The FCC acknowledges this difficulty in its Order (page 277 of the Order), but brushes them aside on the grounds that ISPs offer their services generally to the public. Since they voluntarily open their networks to occupation by customers, the Order argues, they cannot assert that regulation which prevents them from excluding certain customers is a per se takings. The Commission is correct in this argument; there is extensive legal precedent showing that regulators do have the power to enforce non-exclusion rules on firms which voluntarily offer their service to the public. The problem with the Commission’s argument is that the issue at play in the net neutrality debate, and the issue addressed by the Order, is not the relationship between last-mile ISPs and their customers but the relationship between last-mile ISPs and edge providers’ content. 

While it is true that exclusion of end users is not a per se right, exclusion of edge providers is. This important distinction can be illustrated with a non-Internet example: Walmart cannot engage in discrimination (for irrelevant reasons) against its customers; it has to let everyone shop there. Walmart does not, however, have to let everyone sell their products in its stores and it is allowed to charge a premium for things like prime shelf space. Therefore, it would be a per se taking for the government mandate that Walmart carry certain goods or all goods. In the same way, since the Open Internet Order requires ISPs to allow all edge providers to regularly use their networks, it is also a per se taking which requires just compensation. Since the OIO does not provide for such compensation, it is unconstitutional.

Mobile Broadband and Section 332

The FCC takes a new step in its Order by applying its common carrier reclassification to mobile broadband providers. Section 332 of the Telecommunications Act, however, prohibits private mobile radio services (PMRS), such as mobile broadband, from being regulated as common carriers. Indeed the D.C. Circuit in Verizon v. FCC, the case which struck down the FCC’s earlier attempt at net neutrality regulations, said “the treatment of mobile broadband providers as common carriers would violate Section 332.” 

Now the FCC is trying to get around that ruling (and its own previous rulings to the same effect) by arguing (page 15) that mobile broadband is the functional equivalent of a commercial mobile radio service (CMRS) which can be treated as a common carrier under section 332. The Commission’s argument makes a massive stretch by holding that because some Internet services, like VoIP, result in information being sent over the telephone network, they are therefore interconnected with that network which would allow them to be treated as CMRS. The illogical gymnastics of the FCC’s argument do nothing to change the clear fact that mobile broadband is PMRS; the provision of certain services that eventually link to the phone network does not mean that all mobile broadband is interconnected with that network. The stubbornness of reality means that the FCC’s classification of mobile broadband as a common carrier service is illegal.

Termination and Section 203

A stated goal of the Open Internet Order is to prevent paid prioritization of content from certain edge providers. The Commission wants to ban so-called “fast lanes” that would disadvantage smaller providers and entrepreneurs or allow ISPs to extort fees from edge providers in order to have their content delivered. The law, as Ford and Spiwak of the Phoenix Center demonstrate, makes the way the FCC goes about accomplishing this goal legally impossible. Section 203 of the Telecommunications Act requires that telecommunications firms submit positive tariffs to the FCC. This “tariff” is basically a list of how much the firm charges for each service it provides so that the FCC can judge whether the rates are too low (confiscatory) or too high (excessive). Since ISPs are now classified as telecommunications firms, they will be required to do this for their services.

The service provided by ISPs is obviously delivering to end users the content they request. But the Verizon decision indicated that ISPs also provide a service to edge providers known as termination. Termination is the service by which ISPs deliver the content of edge providers to that edge providers’ customers. For example, Comcast provides termination service to Amazon when it delivers Amazon content to Amazon’s customers who subscribe to Comcast Internet. Termination is basically the same thing as consumers’ Internet service but viewed from the edge providers’ perspective; delivery of YouTube videos to your house is as much a service to YouTube as it is to you.

Currently this system works fine because ISPs normally do not charge edge providers extortionate, or even any, fee for termination; they happily collect their revenue from consumers and go about their business. But with Title II reclassification, termination is now a telecommunications service, and, under section 203, ISPs must charge for it. Furthermore, the FCC cannot stop the creation of slow and fast lanes as “unreasonable discrimination” under section 202 because prioritized termination is a different service than regular termination. Discrimination cannot exist between unlike services. Ironically, the very scenario the FCC seeks to avoid is all but mandated by the reclassification.

The FCC seeks to escape this situation by forbearing from section 203 in the context of termination (page 241), but that is not legal. The Telecommunications Act allows for the Commission to forbear from certain provisions of the act or regulations if they are not necessary in order to serve the public interest. The FCC’s own argument, however, is that ISPs are “gatekeepers” for content going from edge providers to the ISPs’ customers, and they must be regulated to ensure the public interest. The D.C. Circuit agreed saying in Verizon that ISPs were “terminating monopolies.” As Ford and Spiwak observe, in all previous forbearance cases competition was cited as justification for why forbearance was consistent with the public interest. Since the FCC and the courts have already said that ISPs have a monopoly on termination, they have no legal basis for forbearing from section 203 for termination service. The FCC is aware of this problem but ignores it merely saying that they “reject the argument” (page 197).

Despite widespread enthusiasm about the FCC’s decision, the Open Internet Order sets aside both sound policymaking and the rule of law. The Order should not survive in court.

The article was originally published in two parts on Part 1 Part 2

Friday, March 13, 2015

Let the Spectrum Market Work

This article was originally published at

In modern America the airwaves are continuously flooded with waves that we cannot see. Radio waves carry signals for everything from smartphones to televisions using bands of the electromagnetic spectrum. The use of spectrum for communication has a long and thorny history going back to the first radio broadcasters. Like any form of communication, the potential for interference causes problems. You cannot easily hear what I am saying if there is a siren blaring by your ears. The same kind of interference occurs in spectrum; if multiple broadcasters try to use the same frequency or send very powerful signals, then someone’s message will not be clearly received. It did not take long for the U.S. government to recognize this problem and conclude that it needed to step in to fix it. 

By granting licenses to users of spectrum, the federal government designated particular frequencies, power levels, and types of content with the stated goal of preventing interference and ensuring that the airwaves were used for the “public interest.” The rules have often been challenged both as unconstitutional abridgements of free speech and press and as inefficient allocations of resources. The regulatory regime has adapted and changed in numerous ways as a result of these challenges until our present situation was reached.

We have come a long way in our system of distributing spectrum. Twentieth century court decisions, legislation, and FCC rulings all treated spectrum as a unique commodity because, they held, it was a scarce resource. It was Ronald Coase’s paper on the FCC which finally pointed out how vacuous this logic was. Scarcity, it turns out, is ironically common. Every economic good is scarce; gold, land, milk, and spectrum are all limited in quantity. For every other good we recognized that prices are the best way to decide who gets what, yet spectrum was guarded against the wasteful abuses of the market. It was not until 1994, 35 years after Coase’s argument, that the FCC caught on and decided to hold its first “spectrum auction.” This system is undoubtedly far superior to the previous period of error, but it still preserves much of the inefficiencies which result from compromising property rights.
Even today, spectrum licensees often buy only the right to operate equipment which uses particular bands of spectrum; the FCC still owns and regulates the use of the airwaves, and only certain “permissible operations” are allowed in each band of spectrum. This system is unnecessarily inefficient. If a licensee has unused spectrum designated for use in television broadcasting, that spectrum could be sold to other users who could use it to provide, for example, mobile internet. The FCC currently prevents him from doing so. 

The rigidity of the regulatory scheme which denies licensees any real property rights means that consumers are supplied with less bandwidth at higher prices. This is hardly allowing the market to distribute spectrum. While auctions do well to use the price system, they do not sell the right to use a section of spectrum, they sell licenses to the narrow use specified by the FCC. While Coase’s proposal gets approving lip service, Thomas Hazlett has rejected even using the term “spectrum auction” to describe the new process as a “misnomer.”

There are certain sections of spectrum in which the FCC is experimenting with more property-like licenses. Hazlett examines these, which he calls “exclusive-access, flexible-use spectrum” (EAFUS) licenses in the paper linked above and concludes that they work quite well. Licenses like those issued to mobile telephone service providers in the 800 and 900 MHz and 1.9GHz bands allow for licensees to share their spectrum with other users and keep the profits of doing so. The result has been an increase in capital investment and an increase in competition leading to better service for consumers at lower prices.

When licensees can gain revenue from sharing their spectrum, they not only have an incentive to economize and use as little as possible, they also are encouraged to develop new technologies which will allow more use of the same amount of spectrum while preventing excessive interference. As in other industries, allowing private control of resources usually creates dynamic, efficient markets which benefit all parties.

The FCC has recently recognized the enormous value of flexible use spectrum, and has made increasing flexibility a goal in the National Broadband Plan. There is hope that flexible use will become the norm in spectrum licensing. An even better option would be to establish real, robust property rights in spectrum – either through homesteading, auction, or some other method – so that all barriers to investment and innovation will be removed. The FCC has the opportunity to make these changes in the upcoming incentive auction of spectrum currently allocated for television broadcasting. As the FCC reallocates and redefines these licenses it should seek to harness the price system and market incentives to allow for maximum flexibility which benefits producers and consumers.