The myth of Title II ‘reclassification’
Since the DC Circuit Court of Appeals handed out a defeat to the FCC last week in its efforts to regulate Comcast, cries from the Open Internet Coalition (OIC) and other advocacy groups to “reclassify” Internet Service to Title II Common Carriers have reached a fever pitch. [UPDATE 4/16/2010 - The hysteria over the DC circuit ruling is unjustified] There are serious problems with this idea of reclassification because Internet services were never classified under Title II Common Carrier and Title II reclassification wouldn’t pertain to the Comcast issue and it wouldn’t grant the sort of powers that the OIC thinks it would.
[UPDATE 5/4/2010 - The Open Internet Coalition actually opposes the regulated wholesale "Open Access" aspect of Title II and all they care about is preventing ISP censorship and application blocking. This is the opposite of what groups like Public Knowledge, Free Press, Tim Wu, and Susan Crawford want.]
To understand why this is the case, we first need a brief history lesson. Up until 2005 when the FCC reclassified wireline transport into an “Information Service” under Title I, Title II Common Carrier requirements had only applied to the underlying DSL transport (the physical telephone wiring and the DSL head-end switches called DSLAMs) which were labeled as “Telecommunications Services”. Title II classification required the Telecoms to share their DSL transport infrastructure with competing Internet Service Providers (ISPs) and it gave the FCC the authority to regulate wholesale transport prices.
But even before the 2005 reclassification, Title II had only applied to the transport and not the Internet Services riding on top of that transport. That means the entire discussion on Title II is irrelevant to the Comcast-BitTorrent case since that was an issue at the Internet service level and not transport. Furthermore, Barbara Esbin has a really good explanation of the legal land mine that Title II reclassification involves.
Long history of opposition to Title II classification
Since Bill Kennard’s reign as FCC Chairmen during the Clinton era and the two subsequent FCC Chairmen under George W. Bush, the FCC has been determined to avoid Title II broadband classification so that they could spur investment and broadband deployment. Michael Powell recently discussed the movement away from Title II and Bill Kennard said:
“classifying Internet access services as telecommunications services could have significant consequences for the global development of the Internet. We recognize the unique qualities of the Internet, and do not presume that legacy regulatory frameworks are appropriately applied to it.”
The FCC even fought all the way to the Supreme Court in the “Brand X” case in 2005 to defend its authority to classify Cable Broadband transport under Title I under the reasoning that there was adequate facilities based competition in broadband services, and the Supreme Court agreed with the FCC’s position. Shortly after winning Brand X, the FCC also reclassified Telco DSL transport under Title I and freed it from its Common Carrier requirements although DSL providers could voluntarily act as Common Carriers and many still do.
This elimination of compulsory transport sharing under Title II was a key factor in Verizon’s commitment of over $23 billion of investment on its “FiOS” Fiber to the Home (FTTH) network. The FiOS fiber network as of the end of 2009 reached over 15 million homes which exceeds the total number of fiber connections in all of Europe. Justifying such a massive infrastructure investment might have been impossible if Verizon was required to share that infrastructure with its competitors (none of whom contributed to the building of the fiber network) at government regulated wholesale prices. Reversing Title I classification now would smack of “bait and switch” to trick companies into investing heavily under a deregulatory environment only to impose onerous limits on ROI after the infrastructure was built.
Public Knowledge hypocrisy on reclassification
Harold Feld of Public Knowledge slammed Hank Hultquist of AT&T for disseminating what he referred to as revisionist “LEC boy” history because Hultquist dared to suggest that Internet Services were never classified under Title II Common Carrier. Yet Feld essentially admitted that Hultquit was right all along because ISPs were always classified under Title I while the transport was classified as Title II. Feld goes as far as admitting in the comment section of his own blog that he doesn’t even have a problem with ISP censorship if a “Christian ISP” wanted to filter out “offensive content” so long as broadband service was competitive by way of Title II common carrier classification.
Under this line of reasoning, Feld would even tolerate Comcast the Cable ISP blocking BitTorrent due to its highly objectionable content in pirated and pornographic materials so long as Comcast the Cable Transport was unbundled under Title II Common Carrier. This is completely contradictory to Public Knowledge’s justification for the return of Title II broadband classification. Public Knowledge is arguing that Title II would give the FCC the power to regulate and prohibit Comcast’s minor interference of BitTorrent when in fact it would achieve the opposite by allowing Comcast to conduct outright blocking and censorship under the theory that blocking becomes moot if broadband transport was reclassified as Common Carriers and it spurred intramodal competition.
So if not for Title II, what legislative action should we ask for to stop Comcast from messing with consumers’ rights?
Albert,
I tried to make it clear that Title II had nothing to do with regulating Comcast the ISP. In fact, even Harold Feld at Public Knowledge acknowledges this fact and he even says ISP censorship (which is even more extreme than what Comcast did with BitTorrent) is OK so long as Comcast the cable modem transport provider was a Common Carrier that sold wholesale access to competing ISPs at government regulated rates.
Furthermore, it’s a myth that Comcast messed with consumer rights. They were trying to make the network better for everyone including BitTorrent users but they adopted a sub-optimal solution that may have over penalized rare torrents. Their old system didn’t touch BitTorrent downloaders or uploaders and it didn’t even stop you from seeding. What it did was prune the number of seeding connections you could have so the system was in fact was minimally invasive.
Contrast that to the new and FCC-approved system that deprioritized the heavies users below other subscribers during congestion periods which would in effect slow down all BitTorrent traffic equally but at a much greater rate than the old system.
Read http://www.digitalsociety.org/2010/04/was-the-legal-battle-over-comcast-necessary/
How many ISPs existed in 2004 and 2005? How many exist now?
“The purpose of this Title II classification was to require Telecoms to share their DSL transport infrastructure with competing Internet Service Providers (ISPs) and give the FCC the authority to regulate wholesale transport prices. Until 2005, Title II only applied to the transport and it had never applied to the Internet Services riding on top of that transport.”
This is true, but what I think is missing from your analysis is the next step. If I had seamless access to 8-12 ISPs in my town, I could assess their traffic management practices and policies and decide who to use for providing my internet access. Thus is I wanted a “Christian ISP” that would filter objectionable content, that would be kosher. If I wanted an ISP that pledged to engage in no management whatsoever that to would be A-OK. I could choose with full knowledge.
But after the 2005 decision, and by dint of the PhoneCos now being able to mingle the transport with the access, ISPs were forced out of the market. PhoneCos gamed the wholesale pricing proceedings in many States so that it is not unusual for a wholesale element to be MORE expensive then its retail counterpart. (Only in the wacky world of telecom regulation is this possible!) So in many places there is at most a duopoly and in many rural areas there is not even that. Many Americans are at the mercy of a PhoneCo that is managing traffic for any number of reasons, but the consumer has no way of knowing how or why their traffic is being throttled.
True robust and fair competition in the provision of internet access would avoid this problem. If the FCC were to bring pure transport back under a “common carriage” classification much of this problem would eliminated.
Remember that for 70-odd years, our telecom infrastructure grew enormously. This was by grace of something called “rate-of-return” regulation. Central to RoR is the notion of “common carriage.” This is not a call for a return to the days of pure RoR, but policy makers need to look at how all companies can access this infrastructure that was installed with ratepayer money.
Brian,
Thanks for at least acknowledging the main point: that Title II doesn’t apply to Internet services. At least we can have an honest starting point.
The whole discussion on ISP censorship and blockage was academic since there really aren’t any real-world examples in the US. Even the Comcast case was grossly misunderstood and could have been dealt with in a much more productive manner and it didn’t really need to go to court in the first place to get resolved. More to the point, it was resolved in a good way even *before* the FCC’s ruling on Comcast so it was mainly the procedural problems and the unnecessary characterizations of Comcast’s practices that caused Comcast to file suit.
But now that we acknowledge that Title II on transport wouldn’t affect Comcast’s behavior on the IP layer and above, the hypothetical question of ISP blocking or censorship should be dealt with. But let’s get real here, people would start screaming about censorship and blocking even if there were 10 intramodal competitors.
So the reality is that the issue of blocking and censorship needs to be addressed with or without Title II transport classification either at the regulatory level and perhaps congressional level if necessary. The FCC still has Title I authority to regulate if they follow the correct procedures, prove a link to a “statutorily mandated responsibility”. Better yet, they could avoid the fiasco of the Comcast hearings and avoid going to court in the first place. If the FCC follows the right protocol, there’s little chance of being taken to court in the first place and even if it does go to court, they would win.
[...] [...]
Hi George… I have some questions on your post… are you around at all this weekend to chat on the phone?
[...] switches called DSLAMs) which were labeled as ‘Telecommunications Services,’” Ou wrote on Wednesday. “Title II classification required the Telecoms to share their DSL transport infrastructure [...]
George, I agree with your basic premise, that only the lower-layer transport to ISPs was ever regulated, not ISPs. And also that the DC Circuit essentially invites that to be returned, but not regulating ISP content and higher-layer practices. A couple of quibbles:
> The whole discussion on ISP censorship and blockage was academic since there really aren’t any real-world examples in the US.
Sure there was, and is. A lot of block-list services exist, mostly to deter spammers, but they sometimes lead to blocking entire ISPs, and not just email, precisely because those ISPs are suspect. If you buy hosting from an ISP who also hosts spam-response servers, you can expect to become “collateral damage”. This is a Good Thing. This “mutually assured destruction” among ISPs is what stabilizes the Internet against miscreants. Personally I think BitTorrent is also a miscreant, since it cheats on TCP congestion management by creating parallel streams. “Network neutrality” at IP and above would give miscreants a chance to legally harass those who don’t pass their packets. So I’m opposed… BUT
> But now that we acknowledge that Title II on transport wouldn’t affect Comcast’s behavior on the IP layer and above, the hypothetical question of ISP blocking or censorship should be dealt with. But let’s get real here, people would start screaming about censorship and blocking even if there were 10 intramodal competitors.
Sure, there might be screaming, but at that point we’re literally dealing with The Press, not carriers. When your letter isn’t published by The Times, you don’t go to a Federal Newspaper Commission. With wide-open competition for ISPs (which requires at least one common carrier or otherwise open network below the IP layer), then the First Amendment probably kicks in. So I’d let ‘em whine, and invite their users to switch ISPs. Hell, I’d be happy to testify for ISPs on that issue. Lots of ISPs ban home file servers (like, uh, BitTorrent), but a few don’t, and those are the ones that attract (for a price) people who want to run servers. Sounds fair to me. This worked just fine until 2005.
My only major problem with your argument is that you buy the line that Verizon wouldn’t have deployed FTTH without this deregulation. I don’t buy it. Had the FCC steadfastly said that they would require a common carriage layer, per Computer II, then Verizon would almost certainly have gone ahead. The fact that the FCC was willing to overturn Computer II led Verizon to use this as an excuse. It’s just too transparent. Countries with full unbundling and common carriage (called “bitstream unbundling” in some countries) still get network upgrades. So long as Verizon got a fair price for their wholesale service, they would have no reason to not go ahead. Figure that if the wholesale price averaged 80% of retail, and they lost 20% market share, then they’d only lose 4% of revenues. (And who says it can only be 80%? I’m not calling for TELRIC here, just “just and reasonable” rates.) And they could have encouraged wholesalers to do their own marketing, raising the take rate. This would have given them an excuse to phase out the copper faster. But instead, they kept it closed. It sounds like, “Because I am a scorpion.”
Fred said: “My only major problem with your argument is that you buy the line that Verizon wouldn’t have deployed FTTH without this deregulation.”
So how much fiber is deployed in Europe? Right, not much.
How much fiber is deployed in the US? Verizon has passed about 15 million homes by end of 2009.
As I recall, Verizon almost had a shareholder revolt from the concern over the amount of money they were going to invest in fiber even without open access requirements. Do you honestly think Verizon would have been able to convince the doubters if they had to share their infrastructure with competitors who don’t have to pay for that infrastructure?
Verizon has invested about $23 billion which is an enormous amount of money. Their competitors invested nothing. So why should they be able to profit from that network at non-market price wholesale rates.
Now if you want to have Open Access requirements, wouldn’t it be fair to tell Verizon of these limitations before they decide how much money to invest? Do you think it’s honest and fair to tell them they don’t have open access obligations so that they’d invest in FiOS, and then change the rules after they build the FiOS network? Do you not have a problem with this bait and switch?
George, it’s not bait-and-switch, and it’s not use by competitors who “don’t have to pay for” it. We’ve had about a century of regulation, state and eventually federal, based on an understanding that there was a natural monopoly on some components. So if Verizon were to be required to make FiOS available on an open basis, it would not be for free! They’d have to get fair compensation. Their capital, sure, but the price reflects a fair rate of return. That’s how it always worked before price caps let them make a ridiculously high rate of return. Which, of course, FiOS doesn’t make. And because it’s closed, FiOS is less valuable to the homes it passes (including mine) than it would be otherwise. I have no interest in subscribing to Verizon’s retail services, so I have no use for FiOS. And even Comcast’s DOCSIS 3.0 is faster than I need, though the upgrade was at no charge.
I am actually surprised that FiOS got as far as it did. I figured they’d slow it down earlier, since it did its job of giving cover for monopolization of the infrastructure. But it’s ending now, killed by bad economics of a dedicated outside plant used by only one retail provider.
The best answer, of course, is for a structurally separate LoopCo to pull the fiber for everyone, one plant, as a rate-of-return utility, prohibited from ever competing with their own customers. Australia has figured this out. The UK has too, with OpenReach, though that is opening up the old copper plant, and they still haven’t worked out how to pay for the glass.
“George, it’s not bait-and-switch, and it’s not use by competitors who “don’t have to pay for” it.”
I didn’t say they didn’t have to pay for it. I said they didn’t have to pay for the massive initial investment and under a return to Title II Open Access, they wouldn’t have to pay market rates on wholesale for it.
Regardless of how you feel about the 2005 lifting of Title II requirements, going back on it now would indeed be bait and switch to Verizon and their investors.
[...] switches called DSLAMs) which were labeled as ‘Telecommunications Services,’” Ou wrote on Wednesday. “Title II classification required the Telecoms to share their DSL transport infrastructure [...]
To be sure, George, I have no pity for Verizon investors. If the fiber is forced open, then they might have to suffer the higher rates of return that would accrue to them, given that the ISP part of the package is generally unprofitable and thus the regulated price for its use would return a higher rate of return than they get now on the “integrated” product. But then Verizon has been allowed to earn 50-150% rates of return on their legacy plant, with the highest profits on the remaining few “wholesale” services.
The monopoly is real. Competitors can’t really pull parallel fiber on the poles, since the cost (given that the poles are usually “full”) is so much higher than Verizon’s was (since they already owned the poles or at least already had space). So in order to ensure open access to information, and not regulate vertical-service ISPs (which we agree shouldn’t be done), somebody has to provide the pipe.
There are two types of “neutrality”. “Open network” neutrality, which I favor, means that any ISP has access to the (glass or copper) wire, and users can have a wide choice of ISPs. I don’t actually like using the word “neutrality” there, but it’s what the popular press and the political class understand. We had this until 2005 and it worked. It can work again. It’s Title II at the bottom. The old MCI Network Layers Framework described this well.
The other kind of neutrality is the more orthodox “network neutrality”, which makes all ISPs behave a certain way, to the benefit of antisocial applications. This is what the FCC’s “principles” are about, and what the Court rightfully struck down. I don’t think it works, or is a good alternative, but if you don’t have open networks, then the duopoly ISP role takes upon itself the role of carrier of last resort, and this type of neutrality becomes the simple answer.
With neither kind, everyone but the wire owners is necessarily screwed.
“To be sure, George, I have no pity for Verizon investors.”
I don’t doubt it. It’s always easy not to care about someone else getting screwed. It’s always easy to vilify the “shareholders” when the reality is that most Americans are shareholders directly or indirectly through 401Ks and other retirement funds. And it’s not just their shareholders that will have a problem, Verizon has nearly 300K employees.
“But then Verizon has been allowed to earn 50-150% rates of return on their legacy plant, with the highest profits on the remaining few “wholesale” services.”
This is another common myth that gets regurgitated over and over again. The major Telcos and Cable companies generally make about 60% gross profit margin and you see this as evidence of evil doing. But net profit are what really matter when it comes to keeping the lights and the nearly 300K workers employed. Typical net profit numbers for Telco and Cable companies are between 6% to 10% and Verizon in particular had a 6.6% net profit in 2008. But the kinds of profits earned by Telco and Cable companies are relatively low compared to many other industries. Google is close to 20% which is much easier when you have fewer than 20K employees and you spend less than less than 1/20th the capex on infrastructure investments as the Telcos. Apple is around 15%.
No, George, I’m not talking about gross profit margin. I’m talking about rate of return, as calculated under the old USoA rules. The FCC tracked this until recently. Return on equity is really the key number, and the Bells are in fat city here. In particular, Special Access, a $15B+ business, has triple-digit returns.
And puh-leez let’s not go down that “widows and orphans” trail again. I’m sure that many retirement funds own Goldman Sachs too. That doesn’t excuse their behavior.
The ideal solution, structural separation, lets the “widows and orphans” buy a stable, rate-of-return regulated stock (LoopCo), while the more speculatively-inclined could invest in the ServiceCo, which would be subject to little regulation, and thus be free to make high profits, or lose their shirts.
When a company like Verizon spends $17B capex in 2009 and employs well over 235K workers, I don’t have a problem with them earning ~6% net profit margin. All the other numbers of “triple digit” returns aren’t really relevant.
George, it’s your blog, not mine, so I won’t belabor the point. My point is that Verizon built its network (as did the other ILECs) with the help of a de jure monopoly, under rate of return regulation. In exchange, they were supposed to be a common carrier. They should either be one, or spin off the outside plant to someone else who will open it up, either as unbundled facilities or common carriage. There is only one street in front of the house and we can’t tell competing newspapers that if they want to deliver papers, they should build their own streets. And that’s what you are essentially advocating for.
Fred, there’s one major flaw in your thinking and the past three FCC chairman before the current one all disagree with you. Verizon is not a monopoly and that street in front of your house accommodates cable, Copper, and fiber not to mention the wireless network which is a valid substitute for a small but growing percentage of users. The FCC has argued no fewer than four times in five years before the court that Title II should not apply. If the FCC tries to reverse course, they’re going to have a hell of a time proving their own previous assertions wrong without looking like they’re trying to end-run the courts and without facing a judicial estoppel.
George, Rove and Cheney ruled for eight years, so they could have argued their patrons’ wishes a hundred times and it would all be as one. And a duopoly is not open competition: Both traditional American HHI analysis and the somewhat stricter EU standards recognize that. For one thing, it’s pretty well understood that wholesale markets don’t really open up until there are four players. So no, there is not real competition. Pravda and Izvestia are not competition, and the possibility that Gazeta be seen as competition doesn’t make it so.
Estoppel is not a problem if changed circumstances, or errors of fact or law in the original position, can be shown. After all, Powell and Martin directly contradicted positions of previous Commissions. What makes them the final canon?
I’ve made it clear that I agree that regulation of ISPs per se is not a good idea, but that only withstands scrutiny when regulation of infrastructure allows open entry into the ISP market. And no, Verizon Wireless is not competition for Verizon-ILEC. Nor is CMRS of any kind a competitor. You’re just repeating Republican talking points.
But Powell was pointed by Clinton, and so was Kennard. Both of them oppose Title II classification and Reed Hundt also came out in that interview along with Powell and opposed Title II classification.
It’s also worth nothing that back in those days, you actually had Republicans like Sen. Stevens in favor of Title II classification while Senator Kerry opposed Title II. So your over simplification that this is just some W/Rove/Cheney plot doesn’t really fly.
[...] [...]
The old chestnut about Clinton’s appointing Powell is a truly weak argument. Minority-party members of the FCC are selected by their own party’s Congressional leadership, usually ratified in pairs with the President’s own-party appointee. Clinton thus did not select Powell or Furtchgott-Roth; he went along with them. That’s just how the process really works. I think you know that.
Hundt and Kennard maintained fairly strict unbundling requirements on the ILECs, which go beyond Title II in their potential effect, and also maintained Title II carriage and the Computer II/III rules, but of course only on physical transport, not ISPs.
The key question, then, boils down to this: Who plays post office in the era of electronic publication? The USPS carries all newspapers on a nondiscriminatory basis. It is the parcel common carrier of last resort. IIRC Ben Franklin created it in order to promote the free press.
If there is no compulsion for ISPs per se to carry any and all content (as we agree there shouldn’t be), then what prevents the one or two ISPs that reach a given customer from censoring the electronic press? Apple already does this on its iPhone app store. I suggest that the mere threat of such regulation has held the Bells at bay so far, so if the threat were lifted by, say, regulatory certainty (not something we’re used to…), then their behavior could change rather dramatically. And of course they could try man-in-the-middle attacks on ecommerce, via the IMS concept. AT&T liked that idea too.
The simple answer is to concede common carriage at the bottom of the stack, at just and reasonable prices that return a fair profit.
[...] to regulate broadband Internet service and prevent another Comcast-BitTorrent situation is a myth, yet the reclassification advocates continue to attack anyone who dares to question their faith in [...]
[...] [...]
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