February 25, 2015

What the FCC's "Open Internet" Ruling REALLY Means for the Enterprise

For enterprise customers, there's no question that the FCC's net neutrality decision tomorrow will be historic.  (And no, not just because it's one of the very, very few times that the lobbying juggernaut of cable+telco hit a wall.)  The decision is a long overdue, formal acknowledgement that the Internet is the dominant means of plain old communications in today's world.  And it is way past time for Congressional leaders and D.C. policy-makers to admit that.  Much of the discussion about the FCC's proceeding has focused on two big picture, public policy issues: Title II reclassification and forbearance.  But for enterprise customers, the Order is also supposed to address two practical matters with high dollar impacts: terminating charges and universal service.

Reclassification - The Title II reclassification issue is whether the FCC should classify Internet access as a "telecommunications" service that is subject to the FCC's jurisdiction or an "information" service that is not. Classification as telecommunications does not determine whether the service will be regulated.  See the forbearance discussion below.  So in many ways, this issue really matters only to telecom nerds and the companies providing the service.  Nevertheless, the issue has been become quite the political hot potato even though it is really a factual, not policy, question - does broadband Internet access meet the definition of "telecommunications" service in the Communications Act?  Is it the transmission of content chosen by a user between points specified by the user with no net change in format?  

Back when the FCC first classified Internet access as an information service, we were still in a dial-up world.  There was no disputing that the call to an AOL server farm was regulate-able "telecommunications" and AOL's value add was a collection of un-regulatable information services.  Today, there should be no disputing that the dumb pipe connecting my device to an Internet server is similarly "telecommunications." 

That simple factual question got obfuscated by a lot of provider self-interest and craven political posturing. So it looks like the Wheeler FCC is finally doing the intellectually honest thing - acknowledging that broadband Internet falls within the definition of a telecom service in the Communications Act and then using other tools in the Act, like forbearance, to deregulate wherever marketplace forces are strong enough to protect consumers.  We can argue about whether the FCC gets the competitive analysis right but arguing that today's Internet access is not telecommunications is just denying reality. 

Forbearance - The Communications Act authorizes the FCC to "forbear" from enforcing any provision of the Act if enforcing it is not necessary.  When long distance markets are robustly competitive, for example, FCC price regulation is not necessary - competitive alternatives let consumers vote with their feet if a price is too high or service quality is too low.  That is why the FCC forbears from enforcing the Act's requirement that long distance companies file tariffs.  Tomorrow's net neutrality Order will do a lot of forbearing; it will "apply fewer sections of Title II than have applied to mobile voice networks for over twenty years," according to an FCC fact sheet about the draft Order.  The question of which provisions should get forbearance and which should be enforced was another one that only telecom nerds and the affected companies could love.  But it is also the question with the most impact on providers and will no doubt receive a lot of attention in the inevitable appeals of this order to the courts.

Terminating charges - The big, giant, huge win for enterprise customers in this order is supposed to be a "bright line" prohibition against double-dipping by Internet service providers.  Oh we've all called it "blocking," "throttling," and "paid prioritization."  But once again, let's call it what it really is: provider attempts to double-dip by charging their subscribers for connections and then charging companies trying to communicate with subscribers for the very same connection.  Because from the enterprise customer perspective, here's the scoop.  Consumers pay for their connections to the Internet.  Businesses pay for their connections to the Internet.  Why should businesses have to pay somebody else's provider for somebody else's connection?  Why should the consumer's provider be able to collect fees from its customer and from the businesses trying to communicate with that customer for the very same connection?  Here's why: because businesses would have no choice but to pay once the subscriber signs up with a provider if they want their traffic to get through to that subscriber.  Provider attempts to exploit their "terminating access monopoly" with charges to terminating content providers is exactly the kind of market failure that the FCC is supposed to regulate.  

The FCC Order will ban providers from blocking traffic, degrading traffic on the basis of content, and charging for preferential treatment (the so-called "fast lanes").  This is a huge win for enterprise customers.  Take that bull's eye off your chest.  The cable companies and telephone companies can't force you to pay them as a condition of letting your traffic (your web site, your warranty information, online banking, sales channel, insurance claim processing, product specifications, etc.) get through to their subscribers.

Universal Service - The disappointing, infuriating, politically-driven punt in this order (thanks Congress!) is the FCC's apparent decision to forbear from requiring providers to contribute to the universal service fund ("USF").  

Enterprise customers currently pay a very expensive USF surcharge on every telecommunications service.  That's because the FCC's rules require providers of telecommunications to pay into the USF based on their revenues from the sale of telecommunications.  Pretty much all of the providers pass that contribution through to pretty much all of their enterprise customers in the form of a surcharge which has been hovering at around 17%.  Seventeen percent!  That's higher than nearly every other tax, fee, or surcharge applied to telecommunications.  

The size of the surcharge depends on how big the base of telecommunications revenues is.  But that base has been shrinking for years as residential customers abandon traditional (contributing) telecommunications services for Internet-based (non-contributing) telecommunications services.  If the FCC added broadband Internet access revenue to the base, the factor would drop below 5%.  But Congress has complained that the FCC would be "taxing the Internet" so the FCC isn't going there.  As a result, the disproportionate share of USF paid by enterprise customers will continue to grow.

There's another rulemaking at the FCC that is examining the current USF contribution methodology and could be used to fix the USF problem with new rules.  Perhaps when the political firestorm around net neutrality dies down, the FCC will be able to turn its attention to the broader USF contribution proceeding and amend its rules to make them more equitable.  Savvy enterprise customers should participate in that docket.


Not a bad article, but it misses the elephant in the room by just a hair. The argument against regulation is predicated on free market economics, but there is no free market here. Go back to your Econ 101 text, a market is free when sufficient buyers and sellers exist that no one entity can influence the sale price. A free market also assumes good information distribution for informed choices, less relevant but that still has an impact.

With 1, 2 or three providers in an area the market is not free; one or more providers can significantly impact the sales price. This has a serious drag on the economy; providers are making very nice profits by choking access at the expense of potential competitors and customers. The solutions are either remove trade barriers (break up the telcos and cable providers again, a very useful strategy) or else declare them for what they are - a utility service that needs regulation in exchange for the privileged position they occupy. Frankly I would rather see breakup, but we are at least 10 years away from recognizing the anti trust laws and FTC need an update to be effective again.

The beauty of focusing on the terminating access monopoly is that it doesn't matter whether the Internet access market is competitive or whether a cable company/telco duopoly counts as a competitive market. That has somehow become a partisan political issue in D.C. instead of a fact-based economic issue. But it is irrelevant once a consumer picks a provider. No matter what side of the aisle you're on, you have to concede that the consumer's provider has a monopoly on access to that consumer over their Internet connection. And that kind of monopoly is what the FCC is supposed to regulate.

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