“That men do not learn very much from the lessons of history is the most important of all the lessons that history has to teach.” — Aldous Huxley

Regulation of Data Transport Businesses — The Story of Bell

Network neutrality is a series of rules centered on the idea that Internet Service Providers (ISPs) must service customer requests in a way that is agnostic to data being provided. Net neutrality has a long history in American politics that predates The Internet by many years. In 1934 Franklin D. Roosevelt signed into law the aptly named Communications Act of 1934. This law replaced the Federal Radio Commission, with the new Federal Communications Commission (FCC) and gave this new regulatory body expanded powers to regulate emerging technologies of the day such as broadcast TV, and telephony. The 1934 act also established the set of “Titles” now governing communications entities (e.g. Title II: Common Carrier).

Among the powers granted to the FCC was the ability to classify a communication organization as a “common carrier” under Title II of the act. The notion of a common carrier was not new to the law in 1934, but the application of common carriage flavored laws to electronic communication was a novel idea. New Deal politicians were looking for solutions to the Great Depression and largely blamed the laissez faire policies of previous administrations for leading America into the “Gilded Age” of the 1920’s and the subsequent economic collapse. Lack of regulation had created strong monopolies and incredible consolidation of wealth (which I hope sounds familiar to you in the context of today’s Net Neutrality). Much of the New Deal was about reigning in corporate power, and the 1934 act was in part about tackling one of the most powerful companies America has ever known: The Bell System (which later became AT&T).

The last of Alexander Graham Bell’s patents related to the telephone expired in 1894. In the immediate aftermath America saw an explosion of competition between telephone companies. After a decade or so of fierce competition, Bell began buying up the independent companies and incorporating their infrastructure. In 1913 the company settled an antitrust suit. The settlement agreement — called the Kingsbury Commitment — required Bell to interconnect it’s long distance services to local independent operators; essentially allowing customers of local independent telephone companies to make long distance phone calls using Bell-owned long distance cables.

The Kingsbury Commitment didn’t force any Bell companies to interconnect their local service to local independents, nor did it require Bell companies to interconnect their long distance service with independent long distance providers. The result was that between 1913 and 1934 Bell had significantly consolidated its control in the lucrative long distance market, and in the most lucrative urban markets. Following the Willis Graham Act of 1921, which effectively repealed the Kingsbury Agreement, Bell/AT&T returned to buying up the local competitors and beefing up their monopoly.

So, back to 1934. Regulators of the New Deal era took inspiration from previous regulations that were applied to “common carriers”. A common carrier is any business entity whose main business is transporting things on behalf of people. With additional history in English common law, such entities have been regulated in the USA dating back to 1887, when congress declared railroad companies to be common carriers in the Interstate Commerce Act of 1887.

The purpose of common carrier law is to ensure that the business being paid to transport [goods/people/data] must do so in a way that is agnostic to the thing being transported. Because railroad companies are common carriers railway ticket sales cannot discriminate against people based on their race, gender, appearance, and/or sexuality. The railroad has to service anyone who wants to ride, and they cannot change their fares on a per passenger basis. Similarly, common carrier freight rail organizations cannot discriminate based on the type of good being shipped.

The 1934 communications act established that Bell/AT&T was a common carrier, and described the FCC’s rules for common carriers under Title II of the act. At the time AT&T was considered a “natural monopoly” — a service that works best when managed by a single organization rather than a competitive market. As such the act didn’t seek to end the monopoly, but instead sought to enforce similar non-discrimination rules to AT&T’s telephone service.

Roots of Neutrality — Universal Service Requirements

The cornerstone of the act was the notion of “universal service” and the act enforced this in two ways. First, AT&T would have to submit to regulation of the rates they can charge customers; the government was to ensure that all Americans were paying the same, fair, price. Second, AT&T would have to interconnect with smaller services in rural areas. AT&T, being concerned with economies of massive scale, did not consider these rural markets lucrative and was disinterested in building infrastructure to reach them. The act required AT&T to provide would-be-competitors access to their infrastructure in the interest of universal service. AT&T continued to operate as a “natural monopoly” but was subject to significant regulation between 1934 and 1984.

As an aside: Reactions to the 1934 law were almost comically similar to our current situation, with Republicans and companies being regulated claiming the act would destroy competitive markets, and warning that government control could slide into tyranny.

Similarly inspired common carrier laws were applied to freight trucks in 1935. Now, common carriage laws also apply to many other types of businesses: shipping companies, taxis, municipal transit, and even amusement park rides in some cases. In addition to businesses that transport people, businesses that transport goods have also been classified as common carriers. The common thread in common carrier laws is that carriers are required to: publish their rates in advance, not discriminate based on the goods being transported, and not discriminate based on the person to whom they are providing service.

For example, common carriers in the shipping industry must insure that shipping one pound of fish food, one pound of gold, and one pound of magazines in the same size container costs the same amount of money. The carrier must provide its service in a way that is agnostic to the goods being transported. Because being impartial often means not looking into the package, common carriers are typically given an exemption for shuttling illegal goods; if a package was found to contain illegal contents, the sender or receiver (and not the carrier) would be held liable under a common carrier exemption.

By the time the Communications Act of 1934 was signed into law, telephone services were already classified as common carriers (by the Mann-Elkins act) — the FCC took over regulation which was previously enforced by the Interstate Commerce Commission (ICC) for telephones and telegraphs. The 1934 act also clarified the meaning of common carrier laws as they relate to communication industries.

For industries regulated under Title II of the 1934 act being a common carrier meant (and still means) that they must be end-to-end neutral for the transportation of data; the service provider cannot change their service based on the person dialing the number, the person being dialed, or the content of the conversation. AT&T was, however, allowed to charge a different fee for long and short distance calls — but those rates were subject to regulation. Despite cries from detractors of the changes, AT&T expanded service dramatically in keeping with its obligation to provide “universal service” and remained highly profitable.

AT&T remained a heavily regulated monopoly until 1984, when the government forced the divestiture of the company into AT&T, Bell Labs, Western Electric, and the myriad “baby bells” who had been local operators of the larger bell organization. The breakup came largely as the result of a 1974 antitrust lawsuit filed by the US Department of Justice. This time regulation sought to create competition directly, rather than let AT&T keep their “natural monopoly”, and the result was indeed a significant expansion of telecom companies who were all subject to the 1934 Title II common carrier laws.

Unsurprisingly — and in keeping with the fact that history repeats itself — AT&T has all but reconstituted itself by absorbing Baby Bells and others through a series of mergers. As you can see in this infographic from the Wall Street Journal, AT&T is once again a behemoth in the American telecom industry:

The Arrival Of The Internet

This brings us to the 1980s, when The Internet first became publicly available. At the time, the existing common carrier laws were applied de facto to the fledgling Internet Service Providers (ISPs) because the only mechanism for access was a dial up modem. Information was traveling across a service that had already been classified as a common carrier, and although the type of information had changed dramatically from human voices to computer documents the mechanism for delivery had not changed at all. DSL providers, who used telephone wires to carry Internet data were classified as Title II Common Carriers and were not allowed to throttle traffic to and from any particular destination or charge an additional fee for that transmission.

By the 1990s the lessons of the Roaring Twenties had been all but forgotten. The policy de jour from 1990 to 2008 was once again deregulation, a trend that culminated in the Great Recession of 2008. Once again, private markets boomed under a series of deregulatory efforts; once again wealth consolidated into the hands of fewer Americans; once again the general public paid a heavy price for the carelessness of extravagantly wealthy corporations (and individuals) pushing for deregulation.

In 1996, the Telecommunications Act of 1996 codified a distinction that had already been essentially the practice of the FCC between 1980 and 1996. Services that rely on the existence of the network (e.g. websites and pay-per-call 900 services) were to be classified under Title I (information services); the transmission of those services over the existing telephone network would remain Title II (common carrier). This makes perfect sense: websites aren’t transporting your data anywhere — they receive your request and respond to it; the ISP transports those requests and responses. However, the 1996 act abstained from classifying the new cable broadband Internet Service Providers under Title II, leaving this new “high speed” Internet industry essentially unregulated. In addition to this lack of classification, the 1996 law sought to reduce regulatory barriers to entry in both telecom and broadband by softening the laws of the previous regime as set in the 1934 act.

And from 1997–2001 we did see a period of intense growth and competition — the dot.com bubble. In broadband Internet (and in the freshly deregulated telecom industry) there was a brief period of fierce competition followed by market consolidation (just like what we saw after Bell’s patents expired…). According to the Brookings Institute by 2001 four companies controlled 95% of telecommunications customers: Verizon, SBC, BellSouth, and Qwest.

The 1930’s effort to regulate the telephony industry came largely because the Bell corporation had become a giant monopoly. While there was a lot of competition among ISPs in the early 1990’s, the last 20 years have been defined by massive consolidation; Comcast, AT&T, and Time Warner Cable are now operating with regional monopolies in many locations. None of these are quite as powerful as Bell was at its peak (though a merger between AT&T and Time Warner is currently up in the air); nevertheless, consumers have fewer choices than ever. The FCC filed a report in April 2017 describing the status of Internet access as of June 2016 (meaning data was collected up-through June 2016 for the report). The FCC reports that for speeds above 25Mbps over 50% of households have zero or one choice of provider; for speeds above 100Mbps 89% of households have zero or one choice of provider. Hardly the competitive market the 1996 act sought to create.

In 2002 (8 years after the Telecommunications Act of 1996) the FCC decided to classify these new broadband Internet providers as weakly regulated Title I Information Services, solidifying broadband’s position as a largely unregulated industry. It was within the FCC’s authority to classify such entities under Title II (which was done in 2015 by Tom Wheeler’s FCC) but the George W. Bush’s administration was continuing to relax regulations across industries.

Following the 2002 decision by the FCC, University of Virginia professor Tim Wu coined the term “Network Neutrality” for the first time in this paper. Among other things, Wu argued that:

“The promotion of network neutrality is no different than the challenge of promoting fair evolutionary competition in any privately owned environment, whether a telephone network, operating system, or even a retail store. Government regulation in such contexts invariably tries to help ensure that the short-term interests of the owner do not prevent the best products or applications becoming available to end-users. The same interest animates the promotion of network neutrality: preserving a Darwinian competition among every conceivable use of the Internet so that the only the best survive.”

And the debate about “Network Neutrality” on the Internet began in earnest.

Throttling, Consolidation, and Lawsuits

At its heart, the debate about network neutrality regulations is centered around the competing interests of private sector profit, and public sector access. Tim Wu initially argued that it was in the long term fiscal interests of ISPs to operate in a neutral way — it would create the best environment for competition among Internet services (Websites, VOIP, so on) which would drive consumers to purchase Internet access. However, citing tale-as-old-as-time rulings such as AT&T vs Hush-a-Phone Wu argued that ISPs would likely preference their short term interests (squashing competition) to the long term benefits an “open Internet” would provide.

In 2005 the FCC quietly released a policy related to network neutrality, promising to incorporate these 4 principles into their ongoing policy making activities. While this policy was not a change to any specific rules, it was a marked change in tone from the philosophy of the 1996 act.

Consumers are entitled to access lawful Internet content of their choice. Consumers are entitled to run applications and services of their choice, subject to the needs of law enforcement. Consumers are entitled to connect their choice of legal devices that do not harm the network. Consumers are entitled to competition among network providers, application and service providers, and content providers.

In that same year, Ed Whitacre (then CEO of SBC) gave away the strategy and desire of major ISPs by saying:

“[…] Why should they be allowed to use my pipes? The Internet can’t be free in that sense, because we and the cable companies have made an investment and for a Google or Yahoo! or Vonage or anybody to expect to use these pipes [for] free is nuts!”

The friction between Whitacre’s desire to maximize the investment on “his pipes” and the “four freedoms” introduced by Michael Powell (then FCC chairman) in 2005 resulted in a series of lawsuits and legal challenges in the following years.

In 2007 Comcast was caught throttling traffic using the BitTorrent protocol. BitTorrent had earned a bad reputation for being the protocol of choice for pirating software, movies, and other media, although there are plenty of legitimate uses for the protocol. Cox Communications was later found doing the same thing. In 2008 the FCC orders Comcast to stop; Comcast appealed the decision and won the appeal in 2010. Later in 2010, the FCC passed new net neutrality regulations in an attempt to win the next lawsuit. Many at the time saw these rules as ‘weak’ and ‘full of loopholes’.

Nevertheless, not wanting to be subject to any regulation, Verizon then sued the FCC in 2011 claiming that the FCC didn’t have the authority to enforce it’s new rules. That particular legal battle was quite long, but the result was that in 2014 a judge found in Verizon’s favor. In response, the FCC under Tom Wheeler reclassified broadband providers under Title II in 2015 — creating the authority necessary to enforce net neutrality rules against broadband providers. In 2016 the D.C. Court of Appeals upheld the 2015 rules “in full” against a petition from major broadband providers.

One year later, Ajit Pai (a former Verizon lawyer) is trying a new tactic for dismantling net neutrality rules; this time as an insider. Pai’s plan would not only return us to the 1996 Title I classification of broadband, but is recognized broadly as a framework for further deregulation. Despite the fact that a 77% bipartisan majority of Americans favor net neutrality rules, Pai is moving ahead with repealing those rules with no strategy to replace them. As if this were not proof enough that the FCC is a captured entity under Pai’s leadership, another FCC chair is accusing Pai of ignoring fraud that occurred during the process of collecting public comments on his plan. The (allegedly) fraudulently made comments support the ISP-backed dismantling of Title II.

Regardless of how the vote shakes out on Dec. 14th, net neutrality will continue to be a flashpoint in debates about the future of the Internet and its associated regulatory policy. Future articles in this series will explore other regulated industries, the impacts of those regulations, as well as the competing interests of the various parties impacted by net neutrality regulation. Perhaps by looking at the past, we can craft better legislation for the future of the Internet.