Photo of Douglas Jarrett

The FCC’s Monthly Meeting scheduled for 26 February 2015 is both widely-anticipated and one in series of continuing events.  The FCC will likely adopt its net neutrality order and order preempting certain state restrictions on municipal broadband by 3-2 votes.  Both decisions will be appealed.

The immediate questions are whether the net neutrality rules will be stayed pending appeal (unlikely) and whether the U.S. Court of Appeals for the D.C Circuit will rule on both decisions.  In handicapping judicial review of the two orders, the odds for affirming the net neutrality order are noticeably better than those for the order pre-empting state laws limiting municipal broadband deployments.

The oral arguments on the net neutrality order may be the most interesting as the judges question the FCC’s counsel on how high speed Internet access service should now be regulated as a regulated Title II telecommunications service even though the Commission has told the court on numerous occasions that it is an information service.   To prevail, the FCC may have to push the limits on judicial deference to agency decisions under Chevron.  Whatever the outcome, the Supreme Court likely will address the net neutrality order.  The wild card is whether the Republican-controlled Congress can pass net neutrality legislation that the President will sign.

The FCC Chairman’s perspective is that net neutrality rules are essential to the “virtuous cycle” of innovation and investment (by edge providers) associated with the Internet; Title II “lite” is the best regulatory approach (with Section 706 as a back-up); and the extent of Title II regulation will be less onerous than the impact of Title II regulation on commercial mobile service.  Parties opposing Title II-based net neutrality raise a number of objections, including one variously offered by Members of Congress, Commissioner Pai, NCTA, Verizon and AT&T that Title II-based net neutrality rules will discourage investment in the broadband facilities.

In the author’s view, the adverse impact on broadband investment is among the weakest arguments raised against the FCC Chairman’s net neutrality approach.  The Chairman’s opponents cannot establish the cause and effect relationship between the proposed regulations and broadband investment.  AT&T and Verizon are not going to slow investments in their wireless broadband networks, particularly after committing $$ Billions in the AWS -3 Auction and prior spectrum auctions.

As explained in a macro-economic perspective on net neutrality by Steven Pearlstein, a contributor to The Washington Post, factors other than net neutrality regulation drive broadband infrastructure investment decisions by the major ISPs.

Pearlstein views the net neutrality debate as a disagreement over cost allocation and recovery:  the major ISPs do not want to have an open-ended obligation to accommodate increasing bandwidth demands of video streaming and gaming providers, among others, without additional charges.

The important point lost in the net neutrality debate is, according to Pearlstein, that ISP (fixed) last-mile service is neither competitive nor, when compared to other investments available to the major ISPs, sufficiently lucrative.  He notes that the major ISPs can secure better returns by buying content companies, buying competing cable companies, or investing in faster growing wireless businesses.  He singled out the per-subscriber build-out costs and modest take-rates for Verizon FiOS fiber as explaining the FiOS build-out freeze that we highlighted in a recent entry on this blog.  He also notes that even if paid prioritization were allowed, there is no guarantee that the major ISPs would use revenues to expand their wireline broadband networks.

He concludes net neutrality is an academic/regulatory debate among stakeholders that does not advance the objective of a more robust, widely-accessible Internet, and notes that the debate can be waged indefinitely by the major ISPs.  He recommends that the net neutrality debates be abandoned and policy makers/legislators  look at the issue from an antitrust law perspective and treat (regulate)  last mile Internet access service as a true public utility service, the same as retail electricity, subject to net neutrality obligations.

While it is doubtful the FCC would ever adopt and execute a true “public utility” model for regulating broadband access, Pearlstein’s article provides a compelling argument that business objectives, not neutrality rules, drive broadband infrastructure investments by the major ISPs.