May 29, 2013

Net neutrality continues to simmer as a contentions policy issue. Given the longstanding disappointment from camps both for and against it, let us review regulatory framework for the issue and which agency is better equipped to address it, the Federal Communications Commissions (FCC) or the Federal Trade Commission (FTC). We can look at these agencies by their respective missions, their approach to regulation, and their possibility for capture.

Supporters of the FCC regulating net neutrality argue that this agency understands the telecom industry and has successfully evolved policies to meet the needs of the day. They argue that antitrust regulation does go far enough to understand net neutrality concerns and that the FTC has not been responsive to public pressure to impose action on internet players with too much power, e.g. Google.

At the extreme end is academic Barbary Cherry who says that the reason net neutrality is even an issue is that telecom regulation has become so watered down that telcos no longer keep their common carriage responsibilities. Thus an entire new regime has to be invented to protect consumers. She is not confident that the FTC is up to the task and sees the job for the FCC to redouble the common carriage rules that it had before.

The FCC heretofore seems to be bipolar, issuing on the one hand, a 194 paged Open Internet order accusing internet service providers (ISPs) of discriminatory practices and proscribing traffic management practices in 200 pages, while on the other, extolling broadband quality and competition in its National Broadband project.

To be sure, there are plenty in Washington and the USA who believe that regulation takes up far too many resources and are loath to see any more costly government intervention in the economy. Further they express concern that allowing the FCC the power to create net neutrality rules opens a Pandora’s box to other unnecessary measures. It is precisely the laissez-faire approach to the internet that has made it a success, they say.

As for the supporters of the FTC taking up network neutrality instead of the FCC, they cite a number of reasons, including 121 years of history of trust-busting in cooperation with the Department of Justice (DOJ). Probably the best example of the work in the public interest as relevant for telecommunications is the breakup of AT&T in 1984. Indeed it has been observed that successive FCC rules fomented the proliferation of the AT&T monopoly for almost than 100 years.

There other notable success story for the FTC and the DOJ was the case against Microsoft. Its Internet Explorer was once dominant browser because it was bundled with Microsoft products. Post trust bust, there now five major browsers, none with an overly dominant positions and many smaller players.

Another important reason to support the FTC is that the charges of net neutrality supporters: monopoly power, market failure, and foreclosure, are exactly the kinds of things that antitrust addresses. Indeed, if net neutrality is such a pervasive problem as proponents claim, and there is such sweeping discrimination on the part of internet service providers, then there should certainly be little difficulty to demonstrate this in court.

A competition purist would argue that if competition policy were written and enforced properly, there would be no need for industrial regulation anyway. In that world, there would only be an FTC to ensure competition and consumer protection and Department of Justice to bring cases. There would be no need for an FCC.

Mission-driven agencies

The agencies have different mission statements and likely value sets and stakeholders. The mission of the FCC is to regulate ”interstate and international communications by radio, television, wire, satellite and cable”. Its mandates includes ”promoting competition, innovation, and investment in broadband services and facilities; supporting the nation’s economy by ensuring an appropriate competitive framework for the unfolding of the communications revolution; encouraging the highest and best use of spectrum domestically and internationally; revising media regulations so that new technologies flourish alongside diversity and localism; providing leadership in strengthening the defense of the nation’s communications infrastructure.” This language is about creating a powerful and efficient industry, not necessarily protecting consumers.

While it should not be dismissed that the FCC has a number of important consumer protection programs, the language of the FTC mission is undoubtedly more pro-consumer: ”prevent business practices that are anticompetitive, deceptive, or unfair to consumers”. The FTC has an entire ”Bureau of Economics” which is expert in quantifying consumer welfare. They have the tools and the expertise to evaluate the impact of net neutrality and to determine whether broadband providers are harming consumers. The FTC even hired Tim Wu, who coined the term net neutrality, as an adviser.

When these two agencies submit their budgets to Congress each year, they need to demonstrate how well they deliver on their missions. The FCC would likely be proud on how well is maximized revenue for the government on spectrum auctions. The FTC on the other hand might present a case of how much money is recovered in an antitrust lawsuit, or the measures of consumer welfare created by its rulings. With this in mind, the FTC is better positioned to ”win” as an agency that pursues net neutrality as a consumer issue.

Ex ante vs. ex post regulation

As for regulation, there is a difference in approach of each agency. The FCC takes ex-ante while the FTC takes ex-post. The ex-ante approach of regulation is pursued proactively in an attempt to eliminate harm before it happens. With ex-post, regulators take a wait-and-see position to assess whether there is even a need to intervene and then to strike with full force. Both approaches entail costs. The benefits of the ex-post approach are it is evidenced-based and regulatory costs are not incurred until there is a demonstrated need. Ex-ante regulation requires costs up front in communication, monitoring, and enforcement.

There are certainly instances, however, where an ex-ante approach is needed, e.g. prohibitions on child pornography. In the case of net neutrality, however, there is little evidence that internet broadband companies are harming their customers. The FCC 2010 order on net neutrality notes just four violations in ten years. Leading telecom economist Gerald R. Faulhaber observed that “by any standard, four complaints about an entire industry in over a decade would seem to be cause for a commendation, not for restrictive regulations.”[i]

Advocacy and the Agency

There is certainly an interplay between federal agencies and advocacy organizations. In my academic day to day, I study the impact of net neutrality among other internet policy issues. There are some 4000 articles on net neutrality. I have learned that there are dozens of political action committees and think tanks and hundreds of lawyers and professionals promoting the policy of net neutrality. They have a vested interest to see that net neutrality rules are promulgated. It has become the battle cry of far too many who equate internet freedom with net neutrality, sucking the air away from other important initatives such as consumer protection on privacy and provisions for digital literacy. The question where advocates have greater success to achieve their policy goals, the FCC or the FTC.

In 2007 the FTC convened a task force on net neutrality and while it agreed with many of the principles of the FCC’s stance on internet freedom, it found little evidence that broadband providers were harming their customers. Their report “recommends that policy makers proceed with caution in the evolving, dynamic industry of broadband Internet access, which generally is moving toward more – not less – competition. In the absence of significant market failure or demonstrated consumer harm, policy makers should be particularly hesitant to enact new regulation in this area.”

It turns out that the threat of naming-and-shaming misbehaving entities on the web is a powerful force, the threat of which seems to be enough to keep actors in line. The FTC report observes, “Consumers—particularly online consumers—have a powerful collective voice.”

The FTC also brought up an important point that net neutrality supporters too often conveniently forget to mention: when it comes to discrimination, the network is the least of our worries. There is rampant discrimination on operating systems and software platforms. If we were really serious about net neutrality, we would have to put rules across the entire internet ecosystem: devices, applications, websites and so on. When you wipe away all the rhetoric about internet freedom, one finds that net neutrality is a thinly-veiled campaign against carriers.

So when the supporters of network net found that they didn’t get traction in the FTC, they strengthened their campaign on the FCC, and succeeded. In 2010 the FCC released its order on net neutrality, which essentially equates net neutrality with the open internet.

In the meanwhile, it is possible that the FTC could pick up the issue again. From the consumer perspective, it would be helpful to have the consumer welfare analysis to put net neutrality in the appropriate place within the larger consumer agenda vis-a-vis the internet: privacy, security, transparency, and competitive practices of internet firms.

It has also been observed that there was tremendous pressure on the FTC to punish Google for its search practices during the recent inquiry, but in the end, the agency decided that there was not consumer harm that could be demonstrated, so it dropped the inquiry. The FTC has defended itself saying that it doesn’t cave to public pressure; it looks at the facts. At the same time, the agency has indicated that it will continue to go after Google on privacy.

There is no doubt the FTC has many competent and proudly pro-consumer employees on its staff. If they take up the issue of net neutrality and find no evidence of consumer harm, we should let the issue rest in peace.