Net neutrality rules coming

Regulations on network neutrality will likely be slowly imposed in many countries. Operators should look to prevent unworkable rules from being introduced

The core principle of net neutrality is the preservation of an open internet for content, application and service providers, with no blocking or unfair discrimination by access providers. Nevertheless, the precise definitions of net neutrality are rather vague across the world and the principles of net neutrality proposed by the regulators differ even more between countries.

We see the common aim of these principles as being the protection of customers and the promotion of fair competition between services that are provided over the network. Regulators are particularly keen to prevent broadband providers, including both telcos and cable companies, from favoring their own content and service applications over their competitors'.

Nevertheless, the regulators' different principles lead to diverse regulatory approaches in this area.

The US is leading the pack with a strong push to impose net neutrality, with the FCC's six principles proposed at the end of 2009 including non-discrimination, the need for transparency, and four open internet principles intended to ensure consumers can access the lawful internet content, applications, and services of their choice.

The last year has seen the debate on net neutrality move from the US to most developed markets, including Europe, Japan and Canada. More national regulatory authorities (NRAs) outside of the EU and North America are likely to become tied down in the debate this year.

At the heart of the argument is whether there should be a principle of non-discrimination for different forms of internet traffic being carried across networks. It mainly focuses on how data is distributed on the internet, whether using a tiered approach or treating all traffic equally. Generally speaking, there are two sets of players with competing views that strongly disagree with each other.

Focus of the debate 

Broadband providers wish to continue what they see as the unregulated nature of the internet, which is competitive and therefore subject to market forces, and essentially self-regulating. Intervention by regulators might inappropriately second-guess the market and distort normal market forces.

Internet content and service providers (ICSPs) wish to have an open internet in which all data is treated equally. Most big names on this side (such as Google, eBay, Skype, Facebook, Amazon and Sony Electronics) would like to preserve what they see as an open, non-discriminatory internet in which innovation can flourish, where broadband providers don't unreasonably discriminate against different types of traffic.

However, despite having quite clear views, both groups perceive threats to their agendas. For the broadband providers, the biggest threat is that NRAs are formally attempting to introduce regulation imposing net neutrality. For the ICSPs the threat is the perceived intentions of broadband players to introduce tiered services, as well as possibly degrading, filtering or even blocking competing content and services.

Finding new revenue sources to finance their investment and innovation is at the heart of the debate for both sets of players. New revenues in this ecosystem mostly come from content and video-streaming services rather than from traditional voice and access fees. As such, strict net neutrality regulation could have a negative impact on the ability of broadband operators to profit from their huge investment in infrastructure. Nevertheless, the introduction of tiered services, which might directly or indirectly degrade or throttle ICSPs' content and services, could hurt their revenues.

The key principle of net neutrality may appear simple, but it presents complex implications for regulators to contemplate. To regulate or not to regulate? How to handle network congestion? How to encourage investment? If only "unreasonable discrimination" is to be outlawed, how to define "reasonable" discrimination? Ultimately, regulators have to seek a balance between the competing demands of these two sides.

Perhaps the ultimate arbiter of policy in this area should be the needs of consumers, which are distinct from those of both the ICSPs and the broadband providers. Traffic management, as well as any limits imposed on it, will affect consumers most of all. Most consumer groups have taken a supportive position on net neutrality regulation on the basis of freedom of speech, and therefore tend to be keen advocates of ex-ante rules. As such, the groups claiming to represent consumers have so far overwhelmingly sided with the ICSPs.

However, regulators should bear in mind that net neutrality rules could also thwart two objectives the NRAs support: giving broadband providers ways to legitimately recover infrastructure investment costs and ensuring quality of service for consumers. In addition, the regulators need to ensure fair competition, which is one of key objectives of imposing regulation.

Therefore, regulators have to assess whether there is sufficient competition in the content and services market to prevent network operators using their market power to thwart competitors, or whether only net neutrality rules can preserve that competition. Considering all of these issues together, it appears that regulators are rightly hesitant to adopt formal measures at this time.

Inconsistent intervention

Globally, most NRAs are currently taking a wait-and-see approach. Some European regulators, including PTS in Sweden, CMT in Spain and Ofcom in the UK, have concluded that there is no need for specific ex-ante rules, believing that the current level of competition and tools available are sufficient to deal with any anti-competitive situations.

Other regulators have chosen to intervene, but the regulatory approach differs among these NRAs.

In a net neutrality report, Japanese regulator the MIC proposed the adoption of a principle whereby consumers were entitled to use IP-based networks flexibly and access the content and application layers freely. The Norwegian regulator NPT has taken a soft regulatory approach toward net neutrality, under which industry players have agreed to voluntarily endorse and comply with guidelines it published in 2009.

In contrast, the Italian government has proposed a bill under which network access must operate under neutral conditions with respect to content, services, applications and terminal equipment, with a penalty to be imposed if ISPs fail to comply.

Drawn out process

We expect this trend of diverse approaches to continue during 2010, with net neutrality hotly debated by most NRAs.

In January the FCC completed its consultation process, which attracted a flurry of comments from a range of interested parties. These comments highlight the disagreements about what the network neutrality framework should look like and show that the FCC has much to do to reconcile the different sides. Even with the FCC's strong approach, uncertainty remains for the time being.
A flexible approach and voluntary guidelines set in conjunction with the industry, as seen in Norway and Japan, might present a suitable interim strategy for most regulators considering intervention.

The wait-to-see approach is currently an appropriate choice for the majority of regulators. Firstly, there is little evidence of operators significantly breaching the rules of open internet. The existing regulations and/or self-regulation are enough to solve the problem in most cases. Secondly, if regulatory intervention is carried out too early and too strongly, this could have potential negative consequences, such as hampering investment and reducing innovation. In addition, regulatory intervention might disrupt the current market forces that are already keeping balance between the industry players.

Lastly, regulators must carefully consider the impact on all stakeholders before they adopt formal measures and reconcile their views. It will be difficult to reach a common position given the disparate views of the various sides. The US's heavy-handed approach to the introduction of net neutrality rules will provide a useful example for other NRAs considering a similar approach in the future.

In the long term, in most countries net neutrality regulation will be imposed through formal measures rather than a voluntary agreement being reached by the industry players.

The new European Body of European Regulators for Electronic Communications (BEREC) met for the first time in Brussels in January and is already heading in this direction. It has made net neutrality one of the key priorities in its 2010 work program, which should stimulate further debate around the issue. The revision to the regulatory framework will strengthen requirements for keeping the internet neutral, which will also drive the 27 EU member states toward introducing rules.

Charice Wang is a London-based analyst for Ovum

MORE ARTICLES ON BEREC, CMT, FCC, JAPAN, MIC, NET NEUTRALITY, OFCOM, REGULATION, SPAIN, UK, US

 

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