Tariffing the Internet

Since the early days of the Internet, the Federal Communications Commission (FCC) has taken a largely “hands off” regulatory approach — a light touch widely held to be a key contributor to the rapid innovation, diffusion and adoption of Internet services in the United States. Facilitating this deregulatory approach to a vibrant new sector of the communications industry was the agency’s classification of broadband Internet access as an “information service” under Title I of the Communications Act. Despite the success of this approach, and in response to the agency’s struggles to construct legally sustainable “open Internet” rules, the FCC is coming under intense political pressure to reverse course and to reclassify broadband Internet access as a common carrier telecommunications service under Title II of that act. Doing so, it is argued, is the only way to provide the agency with sufficient legal authority to prevent broadband service providers (BSPs) from engaging in anticompetitive conduct.

{mosads}As is often typical in Washington, advocates for reclassification have put forth mostly superficial arguments, suited more for political markets than for policymakers (and consumers) trying to grasp the full implications of such a significant regulatory change. While “reclassification” might make for a nice political platitude, no attention has been directed at the fine details of how reclassification will be implemented. Once these thorny details are thought through, however, the end result of reclassification will be a radical change in the economic fabric of the Internet.

Indeed, reclassification will be far from benign; to the contrary, reclassification will force all content providers — whether Netflix or a church website (or its host company) — to pay every telephone, cable and wireless BSP a positive tariffed termination fee for Internet access. More importantly, the FCC will be unable to forbear from requiring BSPs to charge this tariff for termination service. Should the FCC proceed with reclassification, therefore, such a policy will cause a fundamental shift in the way the Internet is operated today.

Why is this?

Under the plain terms of the FCC’s governing statute, current case law, and the commission’s own precedent, reclassification turns edge providers into “customers” of BSPs. This new “carrier-to-customer” relationship (as opposed to a “carrier-to-carrier” relationship) would require BSPs to create, and then tariff, a termination service for Internet content under Section 203 of the Communications Act. Because a tariffed rate cannot be set arbitrarily, and since a service cannot be generally tariffed at a price of zero, reclassification would require BSPs to charge all edge providers for termination services.

The plain terms of the FCC’s governing statute, current case law and the commission’s own precedent also prohibit the agency from using its authority under Section 10 of the Communications Act to forbear from such tariffing requirements, because the FCC has already determined that the presence of competition (a key component for forbearance under Section 10) is not a viable foundation for forbearance in the termination market. 

For example, in its 2010 Open Internet Order, the FCC states that “threats to Internet-enabled innovation, growth, and competition do not depend upon broadband providers having market power with respect to end users … [b]ecause broadband providers have the ability to act as gatekeepers even in the absence of market power with respect to end users.” The agency is very clear here — competition does not eliminate the incentive to violate the principles of the open Internet. In fact, market power is so irrelevant to the issue that the agency concluded that it “need not conduct a market power analysis.” If competition does not favorably impact incentives, then competition cannot be used as a basis for forbearance.

Moreover, the commission originally found in 2010, the D.C. Circuit in Verizon v. FCC affirmed, and the commission continues to believe, that BSPs are “terminating monopolists”  — i.e., monopolists in the terminating market. In the presence of a terminating monopoly, competition cannot be used as a basis for forbearance for “terminating service” under Section 10, which is the exact service the open Internet rules are supposed to be all about. Accordingly, given the commission’s consistent finding that all BSPs are “terminating monopolists” (i.e., each BSP is “dominant” for terminating access to their customers), the agency has boxed itself in for mandatory tariffing under Title II.

To his credit, FCC Chairman Tom Wheeler appears to understand the risks of reclassification, which is why he is proposing to move forward under the commission’s authority contained in Section 706 without pursuing the “nuclear option” of Title II. Wheeler’s approach makes sense: Not only does Title II clearly permit so-called “fast lanes” (thus rendering one of the primary arguments for reclassification moot) but the FCC has ample authority under current law to ensure that BSPs do not engage in anticompetitive conduct and does not need Title II to do it. 

The ball is now in Wheeler’s court: Will he will stick to his guns and proceed under Section 706, or he will he cave to the growing pressure to reclassify (particularly with the midterm elections rapidly approaching) and embrace the consequences to the way the Internet would operate going forward? All eyes are watching.

This piece has been corrected from a previous version.

Spiwak is the president of the Phoenix Center for Advanced Legal & Economic Public Policy Studies, a non-profit 501(c)(3) research organization that studies broad public-policy issues related to governance, social and economic conditions, with a particular emphasis on the law and economics of the digital age. A copy of the full legal and economic analysis discussed in this commentary may be downloaded from the Phoenix Center’s webpage here.