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FCC’s utter incoherence on Paid Prioritization

By 29 December 2010 23 Comments

Julius Genachowscki’s FCC managed to pass their Net Neutrality ruling last week by striking a very delicate compromise.  This compromise was needed to get the necessary votes from the FCC commissioners who wanted an outright ban on Paid Prioritization or “access fees” (the existing practice of broadband providers charging businesses for direct access to their networks), and to avoid an immediate fight with the broadband providers who want to protect their existing business models and property rights.  The problem with this compromise is that it resulted in an utterly incoherent ruling that relies on arbitrary definitions and a sheer disregard of the facts and the record.

The FCC satisfied both sides enough to get its ruling passed by a 3-2 margin by declaring Paid Prioritization legal and illegal at the same time.  To pull off this amazing feat of hair splitting, the ruling gave two arbitrary names to Paid Prioritization services calling one legal and the other one not.  Almost in a strange twist of irony, the paragraph defining Paid Prioritization as legal is paragraph 67, and the paragraph declaring it illegal is paragraph 76.  I can’t think of anything that better symbolizes this massive flipflop and contradiction.

Paid Prioritization as “interconnection” or “Paid Peering” is legal

In paragraph 67 (under the footnotes), the FCC declared “existing arrangements for network interconnection, including existing paid peering arrangements” to be legal so long as they are not offered under the threat of blocking.  It’s also noteworthy that Content Delivery Networks (CDNs), which also rely on existing paid peering agreements, were also exempted from the ban on Paid Prioritization.

Nevermind the fact that paid peering and interconnection is absolutely indistinguishable from Paid Prioritization.  For a substantial re-ocurring fee, Paid Peering and settlement-based Interconnection services provide their premium customers with packet priority at the expense of non-peered and non-interconnected traffic.  Furthermore, it provides a fee based exclusive “fast-lane” access to hundreds to thousands of 10-gigabit ports while bypassing the more congested Internet transit connections.

Peering and Interconnection services will be left alone for now because the FCC probably can’t get away with breaking nearly all existing Internet streaming video services, but they’re close to doing this and giving the Net Neutrality extremists what they’ve wanted all along.

Paid Prioritization that is “enhanced or prioritized” is illegal

In paragraph 76, the FCC declared “Paid Prioritization” or “Paid Prioritization with a third party” (this concept of “third party” was never defined) to be illegal (to be more precise, the FCC declared it unlikely to be legal).  It gave the following four justifications to do this but none of them made any sense.

1. Paid Prioritization represents a departure from existing Internet practices and the record contained no examples of Paid Prioritization in practice.

But that’s clearly not the case because the entire Internet operates on reoccurring fees (for consumers and for Internet “edge” providers of content and services) that are commensurate to service levels.  CDNs for example have existed since the beginning of the broadband era at the end of the 1990s which is all most Internet users have ever known, and that represents a Paid Prioritization service since the beginning of the modern Internet.

The FCC also blatantly ignored the record of known Paid Prioritization agreements by stating that the record contained no examples of them.  AT&T this year filed official comments which became a part of the FCC’s public records stating that they had hundreds of Paid Prioritization customers.  Are all those customers and AT&T now violating FCC regulation?  I guess so long as they call it “interconnection” or “peering”, it’s legal but if it’s called a “prioritization” or “enhanced” service, it’s not.  But that’s a ludicrous regulatory position.

2. Since some Internet edge providers of content and services can’t afford these Paid Prioritization services and will be at a competitive disadvantage, these services should be illegal.

Based on this logic, we can outlaw data centers, high performance server hardware, and the systematic discrimination against job candidates who don’t come from elite universities with top grades.  While we’re at it, we should also make copyright illegal since that discriminates against companies that can’t afford them, and content licensing is a far bigger economic challenge than Internet access fees prioritized or not.

3. Non-profits can’t afford these Paid Prioritization services either, so no one else should have them.

Aside from the fact that this is just a regurgitation of rationale number two, it’s also no more valid than the previous argument.  What type of service would be legal if they all had to be free to “non-profits” which are really no different from commercial entities other than the fact that they get tax exemption privileges?  There are plenty of “non-profits” that have budgets that make startups and even the largest private companies drool.

Furthremore, non-profits and anyone else who can’t pay gets to use Paid Prioritization for free because companies like Google and their competitors see value in non-profit content or any content for that matter.  Google or companies like Vimeo will offer free video hosting and even pay the content provider for a license to use and possibly monetize that content.

4.  Broadband providers might limit the quality of their open Internet services to promote their enhanced and prioritized services, and/or to protect their existing video businesses (e.g., Cable, U-verse, or FiOS).

This is yet another broad definition that could virtually be applied to any product or service.  One could make the same argument to outlaw first class and business class flights and priority delivery on the US Postal Service or FedEX and UPS.

The reality is that businesses rely primarily on their standard tier customers for the bulk of their revenue.  While the premium customers are lucrative, there aren’t enough of them to offset the standard tier customers.  So if a company degrades their standard tier below what is reasonable, they risk alienating their largest group of customers and their largest revenue market.  This explains why despite the existence of Paid Prioritization since the start of the modern Internet era, the standard service tiers have never been neglected and have improved steadily.

This last reason given by the FCC majority also contains an element of anti-trust, but was it my imagination that the FTC had to go to court to try and force Microsoft to stop bundling Internet Explorer?  When did the FCC suddenly get the power to arbitrarily and unilaterally ban an existing class of services through a stroke of a pen?  Especially when Congress wants the FCC back off, when the courts have consistently reined them in, and when the public clearly doesn’t support Net Neutrality regulation?

23 Comments »

  • Wes Felter said:

    I think the FCC is really concerned about prioritization and congestion over the last mile, since that’s where the problem appeared to be in 2007-2009. Since CDNs and peering are not prioritized over the last mile link, the FCC is not concerned about them. In the last few weeks we have learned that congestion also exists at the borders between ISPs and CDNs/peering allow content providers to bypass this congestion, but this information comes too late for the FCC to consider. But perhaps now that we’re “done” with Last Mile Neutrality, the lobbyists, pundits, and FCC can spend the next few years on Peering/CDN Neutrality.

    BTW, I think the content provider is meant to be the first party, their ISP is the second party, and any other ISP (e.g. broadband providers) would be a third party.

  • George Ou (author) said:

    @Wes Felter

    1. The FCC is talking about broadband providers and they made it certain of that. Interconnection and peering has been exempted for now, but they’ve specifically commented that anything that violates the spirit of their rules (not even the letter) will get slapped down.

    2. Prioritization at the interconnection level is where the differentiation occurs. What Net Neutrality extremists want to outlaw is differentiation, and the two Democratic commissioners made it clear they want all access fees banned. Furthermore, they’d like to force the broadband provider from allocating dedicated bandwidth to their own video services and reallocate it to broadband.

    3. CDNs do in fact provide packet prioritization on the last mile. It effectively grants a higher priority DiffServ class, by virtue of lower latency.

    4. Apparently, you’ve done more defining of “third party” than the FCC. But your definition is a stretch and it’s inconsistent with what the Net Neutrality extremists want to ban. Sounds like you’re just trying to make some sense out of the ruling, but it doesn’t make sense.

  • George Ou (author) said:

    @Wes Felter

    ” In the last few weeks we have learned that congestion also exists at the borders between ISPs and CDNs/peering allow content providers to bypass this congestion, but this information comes too late for the FCC to consider. But perhaps now that we’re “done” with Last Mile Neutrality, the lobbyists, pundits, and FCC can spend the next few years on Peering/CDN Neutrality.”

    Congestion and transactions exist at all borders and always have. They’ve also been private business transactions and always have. Now the the FCC is looking to get in the middle of things, which would distort the market leverage in favor of some companies over others, the Europeans are looking to do the same thing only in favor of European interests. That would be a very disturbing development on the once free Internet.

  • Richard Bennett said:

    The consumer is the first party, the ISP is the second party, and the content/services provider is the third party. That’s the way the FCC and all the policy wonks use these terms.

    Good post, George. There are a number of inconsistencies and errors of analysis in the Order. It’s unclear whether they’re the result of the re-writing of the facts to support the Copps compromise or simple cluelessness on the FCC’s part; I suspect a combination of the two. There are some people at the FCC who understand the Internet tolerably well, but there are far more who don’t.

  • George Ou (author) said:

    @Richard

    Thanks for your clarification. In that case, I guess the transit provider is the 4th party and the CDN the fifth? This is getting out of hand.

    The reality is that in a Paid Peering deal, the ISP and the content provider are directly dealing with each other and neither one is the “third party”. If the ISP deals with a CDN or transit/CDN provider, both are party to a direct one-to-one transaction and neither is the third party. There is no such thing as a “third party” in any direct one-to-one deal.

    I think there are plenty of people who understand what’s going on at the FCC. The problem is that it’s all political. Ask them if they actually believe the fantasy propagated by people like Barbara van Schewick that YouTube was just a poor startup that would have been priced out of the premium data delivery market and been oppressed and they’ll concur with you how silly it is. Anyone who’s ever studied this half heartily understands that YouTube used VC funding to pay millions per month in premium bandwidth during their startup days. Yet the FCC accepts this fantasy for political reasons.

  • DiRT said:

    The problem is #4 has happened and is the reason for the initial push for NN. Of course, once Washington gets their hands on something they tend to screw it up, but the idea behind NN was to stop ISPs from downgrading competing services on their networks. Downgrading Vonage and Skype so that customers would have to buy your ISP’s VoIP service instead, or throttling streaming video so customers would upgrade their cable package instead was happening and is why so many of us wanted NN to succeed in the beginning. One thing you may wish to do is show how the good ideas behind the original surge have been twisted and thwarted beyond recognition and I think you’ll see a lot of the remaining support for NN dry up.

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