Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age (10 page)

The history of communications regulation in the late-twentieth and twenty-first centuries depended on one basic distinction: regulators have traditionally treated the transport of communications as a common-carriage service—open to all, subject to oversight to prevent discrimination, and bound by requirements to connect to other networks. Everything else,
including data-processing services, was treated as a non-common-carrier “information service.” When computers came into use in the 1960s and 1970s, the FCC was careful to draw a line between computer processing (information service) and the transport of data by the carriers (common-carriage service). The FCC did this as a regulatory matter to avoid giving the carriers power, in their gatekeeping role, over data processing. It would have been easy for the carriers to cross-subsidize and dominate data-processing businesses with their monopoly profits, and the FCC was trying to prevent that; it also wanted to avoid burdening the new computer services with the heavy superstructure of common-carriage regulation—rate-making, tariffs, and so on. Carriers were therefore prohibited from offering computing services. They were eventually (in 1980) allowed into this business, but only if they sold their basic transport services separately and without discrimination. The assumption was that carriers would keep selling basic transport under common-carriage rules.
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The 1984 AT&T divestiture was, in turn, designed to ensure that local phone companies would not be allowed to leverage their provision of local service into control over long distance. Under the supervision of Judge Greene, AT&T agreed to sell its Bell operating companies, which in turn agreed not to sell long-distance services, sell or manufacture telephone equipment, or—most important—get into the data-processing business. Then, in 1993, the restrictions on the RBOCs on providing data-processing services (or information services, as we now call them) ended (over Judge Greene's strong objections). This was a big victory for the carriers, and they wanted to cement it into statute. Shortly thereafter, drafting began on the 1996 act, which was aimed at removing communications-policy jurisdiction from Judge Greene's courtroom altogether and moving it to the expert agency—the FCC—while leaving in place the FCC definitions that had separated data processing from common-carriage transport during the proceedings in the 1970s and 1980s.
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From 2000 to 2002, as Powell considered how to classify cable-modem Internet access services—which seemed to have characteristics of both DSL services and traditional cable services—the courts went ahead without him. The Ninth Circuit Court of Appeals decided that cable-modem services were indeed “telecommunications service” providers under the act
and so were required to not discriminate and to interconnect; in other words, they were common carriers, similar to the old telephone companies.
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The FCC then declared—after the court had already spoken—that cable-modem service was an information service.
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A data-processing service. This meant it would not be regulated. The FCC asked the Department of Justice to appeal the Ninth Circuit Court's decision, hoping to get the ruling reversed, which led to a Supreme Court decision during the summer of 2005, the
Brand X
case. As a legal matter, the FCC took the view that the Commission had been handed an ambiguous statute and had done its best to interpret it; the FCC should not be obligated to apply common-carriage principles to all possible carriers, even those the public viewed as providing general-purpose communications-transport services.

The Supreme Court deferred to the FCC's interpretations of “information service” and “telecommunications,” as well as its deregulatory application of those interpretations to high-speed Internet access, overruling the Ninth Circuit Court's inconvenient opinion to the contrary. (This conclusion frustrated Justice Scalia, who issued a stinging dissent, possibly informed by his service as staff to the White House Office of Telecommunications Policy during the Nixon era. He contended that transmission is transmission and that it can be seen as separate from everything else.)
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Shortly thereafter, the FCC declared DSL Internet access service an information service, leaving DSL providers (like cable-modem providers) free to act as they pleased, even to discriminate in pricing and access. Only voice communications over copper telephone wires were still subject to common-carriage obligations—and those services were rapidly losing their popularity.
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The upshot was that all high-speed Internet access service was completely deregulated.

This move created a risk that the carriers would be able to price discriminate—choosing which online services to prioritize based on, say, their affiliation with the service. Carriers could thus ensure that people who wanted to pay more for particular content were able to do so (“capture consumer surplus”)—which, from the carriers’ perspective, would facilitate investment in additional high-speed Internet access facilities around the country. But consumer advocates worried that price discrimination and
prioritization could mean that the carriers would be able to decide which uses of their networks were permitted—a power that could inhibit innovation, economic growth, and competition generally. Incumbents always want to block competitors. From the advocates’ perspective, the Powell Commission's regulatory gymnastics served the interests of the enormous incumbent network providers by shielding them from traditional common-carrier obligations that would have allowed upstart businesses to thrive.
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To mollify its critics, during the summer of 2005 the FCC issued an Internet Policy Statement that outlined “four freedoms” for Internet users: access to content, access to applications, choice of devices, and competition among service providers.
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But two of the commissioners deemed this statement unenforceable, and the policy statement itself was subject to “reasonable network management” and the “needs of law enforcement”—unclear concepts at best.
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Given these caveats and the lack of clarity surrounding the policy's legal status, it is not surprising that people who were already worried about the future of the open Internet were not satisfied.
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The “net neutrality” fights that followed Powell's deregulation of high-speed Internet access were fierce and included several prolonged and painful attempts to pass and defeat legislation. But the most important thing that happened next was a discovery by an Associated Press reporter and the Electronic Frontier Foundation (EFF).

During the fall of 2007, many Comcast users began to notice that their ability to share digital files over BitTorrent, an Internet protocol that allows people to share digital files without hosting or streaming the entire file, had been compromised. Most blamed their own computers, or the weather, or a number of other elements. Few guessed that their network access provider was blocking their ability to share video files; even if such a thing were possible, it would not have seemed right. But Robb Topolski, a barbershop-quartet enthusiast (and Intel engineer), and researchers at EFF decided to check out the disruptions more systematically.

BitTorrent works by cutting large files into pieces and allowing other users (peers) to make those pieces available across transport networks, enabling even users of devices with limited bandwidth (such as early
mobile phones) to share large data files, like video. The process results in servers being contacted hundreds of times a second, a detail that Topolski and the EFF thought might provide an opportunity for someone to interfere. Independently setting up controlled experiments and trying to download a copy of the King James Bible and other non-copyrighted works, Topolski and the EFF discovered that Comcast was effectively telling both sides of a BitTorrent communication, “Sorry, I have to hang up now,” and forcing the communication to terminate. Comcast was “hanging up” on attempts to use the BitTorrent protocol.
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When Topolski's story was published in the Associated Press, it had a sensational impact.
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Net neutrality supporters had long suspected such corporate interference, and here was their smoking gun—and, in fact, the gun was still being fired every day. Comcast was throttling BitTorrent video traffic that conspiracy-minded technologists thought might be competing with Comcast's own video plans.

Kevin Martin, then the chairman of the FCC, was known for his relentless pressure on the cable industry. He went after Comcast during two public hearings that further added to the uproar.
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(Martin has become known in telecom circles more for his Machiavellian political hijinks than for his policies. This reputation doesn't do him justice; he clearly took action vis-à-vis the cable industry.) At the end of the summer of 2008, Martin announced that Comcast's practices amounted to unreasonable network management under the FCC's 2005 Internet Policy Statement. The Commission imposed no injunction or fine but insisted that Comcast promise to adopt a protocol-agnostic method of network management by the end of 2008.
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Comcast could have let matters stand; the Commission would have continued muddling along under its assumption that it could regulate high-speed Internet access providers (to some extent, at least) under the non-common-carriage Title I of the Telecommunications Act and its dubious Internet Policy Statement. But Comcast was bothered by having to account to the Commission for its network-management practices—to Comcast, the FCC's action appeared to be ad hoc, unprincipled, and based on little more authority than its assertion that the Commission was in charge. Comcast sued, and in April 2010 it won.
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The D.C. Circuit Court of Appeals found that there was nothing in the 1996 act to which the FCC's Comcast adjudication was “reasonably ancillary.” Congress simply had not delegated power to the FCC to regulate network-access providers that the Commission had already labeled as deregulated. That label, it turned out, made a major difference. Powell's desire to “regulate up” (starting from scratch) rather than “regulate down” (by classifying these services as Title II and then restraining the Commission from applying rate regulation and other old-fashioned rules) had proven to be unenforceable; the D.C. Circuit Court ruled that the Commission had no delegated power over Comcast's behavior after it had expressly declined to regulate in this area. The FCC suddenly found itself to be a regulator with no clear regulatory authority over the central communications medium of the age: Internet access.

In short, the Commission had taken the basic idea in the Telecommunications Act—that general-purpose two-way networks should be labeled common carriers, obliged to treat everyone equally—and, with no direction from Congress, had relabeled high-speed Internet access as … something else.

The months following the decision were a frenzy of attacks and counterattacks. A difficult question confronted the FCC: could it continue to label high-speed Internet access a “deregulated” service and still accomplish its regulatory goals of achieving ubiquity, neutrality (an Obama campaign promise), and other policy ends? Or would it have to reclassify high-speed Internet access service as a “regulated” service (a Title II service) in order to tell providers what to do?

The new FCC chairman under President Obama, Julius Genachowski, was in an uncomfortable position. Since the deregulatory decisions in the mid-2000s by Michael Powell's FCC, cable companies had invested billions of dollars installing high-speed Internet access infrastructure and related facilities. Pointing out that 93 percent of the country was now reached by cable infrastructure,
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the cable trade association argued that changing the rules governing how network access was regulated would stifle the companies’ ability to attract investment that could be used to serve difficult-to-reach areas.
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Genachowski is not a bomb thrower. He has an eager way of speaking and a lawyerly, precise mind. He had served on the
Harvard Law Review
with
President Obama and wanted to avoid embarrassing the president; he also wanted to be seen as a business-friendly, investment-conscious centrist. Genachowski had been sworn in at the end of June 2009, and the first several months of his tenure had been occupied with creating the National Broadband Plan called for by the stimulus bill enacted at the beginning of the Obama administration. He had assembled a huge team to research and draft the plan, which was delivered in March 2010. The plan did not propose deep changes in America's broadband structure or make any substantive effort to deal with concentration in the market for Internet access. It did note that there would be a strong cable monopoly for video-speed broadband by 2015—a reasonable point, given that only cable would be sufficiently upgraded to allow for speeds beyond 50 Mbps, that the phone companies were reluctant to make the necessary investments to lay fiber, and that there would be no competition among cable providers—and it suggested that municipalities should be able to bring high-speed Internet infrastructure to their citizens. The report also suggested a lengthy transition in which the government would switch to subsidizing high-speed Internet access rather than telephone service (so-called “universal service”).
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At the same time, the Commission had run a separate rulemaking process aimed at the president's apparent campaign commitment to address net neutrality. Hoping to keep the National Broadband Plan uncontroversial, the Commission carefully kept net neutrality out of it.

But after the D.C. Circuit Court opinion in the BitTorrent case in April 2010, that separation became untenable. The court had ruled that the FCC did not have the power to make Comcast ensure that its “network management” was reasonable—and the arguments the Commission had used to support its exercise of authority over Comcast in the BitTorrent case were the same ones supporting its net neutrality arguments. Using the same legal tactics to support net neutrality would, it seemed, run up against problems with the D.C. Circuit Court. Similarly, the FCC's “universal service” policies in the National Broadband Plan were threatened—only a Title II common-carriage service could be subsidized and high-speed Internet access now fell under Title I. The same labeling that had released high-speed Internet access from regulatory obligations meant that federal subsidies could not be provided to allow Internet access for everyone.