Entner: Internet's regulatory future will bring near-endless litigation

Roger Entner Recon Analytics

Roger Entner

The Federal Communications Commission voted along party lines Thursday week to apply "public utility" style regulations to the Internet. This is a dramatic turn away from the more nuanced regulatory framework the FCC had been considering before President Obama asked the agency to flex its regulatory muscles under Title II of the Communications Act.

There has to be a better way to achieve net neutrality than through Title II as life under Title II has been an extremely litigious one. Chairman Tom Wheeler has been trying to quell concerns that he's applying too much regulation. Wheeler has promised to apply a "modern version" of the old rules, only using 11 of the 38 sections of telecom regulations. That might seem downright reasonable--until you look at how much litigation those 11 sections have been responsible for in the traditional telecom world. According to an analysis by communications law firm Wiley Rein, regulations under those sections have been challenged in court over 850 times. In fact, Section 201--which deals with whether a service provider is charging "just and reasonable" rates--is responsible for 290 of those lawsuits. It's one of the most legally irksome sections there is.

While the FCC states that it intends to forebear rate regulation today, but apparently includes Section 208 in the proposed rules that were adopted by the FCC at its Feb. 26 meeting. In case you didn't know, Section 208 allows anyone--from consumers to businesses negotiating interconnection--to make a complaint about the rates charged and lets the FCC decide if those rates are "just and reasonable." So while it is true that operators don't have to ask the FCC to roll out new pricing plans, but if someone complains – and someone always complains--the FCC decides if the rates of the price plan can prevail. Walks like a duck, talks like a duck; I am sorry, but that's a duck called rate regulation. From this alone it should be obvious that the tight Title II corset will just lead to a lot more litigation (as well as internal FCC actions, which itself has seen over 25,000 Title II challenges before the courts ever got involved). One would think a rule established in 1934 would be settled after a few years. Unfortunately, the most recent appellate court decision around Title II was decided in 2012. Since under Title II everything is reviewable by a court--and literally everyone can (and will) sue--the vision of another 80 years of litigation is just mindboggling.

Even without considering any regulatory uncertainty, we know that if Title II regulations are applied to Internet services, revenues and costs will shift away from telecom providers to Internet-based businesses. As gross profits shift away from telecom companies, their ability to invest in improving networks will be impaired. One of the most distinguished economic experts, former Treasury Secretary and former Director of the National Economic Council Larry Summers, told the Wall Street Journal he's been "very concerned about overly heavy-handed approaches to net neutrality" that "could choke off substantial volumes of productive investment to the detriment of American economic growth."

Summers' concerns are well-founded. Telecom providers are the largest capital investment spenders in the United States. According to US Telecom, the entire telecom sector invests more than $70 billion per year in expanding its networks. The uneasiness is not only among economic experts and telecom executives, but also extends to Internet giants such as Google. The WSJ also reported that Google Executive Chairman Eric Schmidt spoke urged White House officials not to go through with utility-like rules.

The effect of instituting Title II on broadband network is a government intervention in an open market favoring Internet-based edge providers over telecommunications firms. Title II utility-style regulations will deny ISPs the flexibility to evolve their business models; edge providers will see no such restrictions. The repercussions have been swift: A mere day after the FCC Chairman announced that he would propose Title II, Verizon announced it would sell a roughly a quarter of its wireline and fiber network, stating that "an important consideration was the current regulatory uncertainty and the potential impacts on future investments of a reclassification of broadband under Title II." For a company that invested $23 billion dollars into its fiber network, this step is significant and dramatic.

The United States has prospered enormously from a light-touch regulatory environment, which--without good cause--is being thrown overboard in favor of a regulatory framework that essentially stopped any innovation under its purview. The administration is basically gambling that innovation in the telecom sector comes from edge providers, and that broadband provider innovation has slowed to such a degree that the corset of regulation won't choke off infrastructure-based progress. In any economy where the government picks winners and losers, especially when acting on potential scenarios rather than actual events, it creates scenarios leading inexorably to a future where innovation across the entire ecosphere goes to die.

Roger Entner is the Founder and Analyst at Recon Analytics. He received an Honorary Doctor of Science from Heriot-Watt University. Recon Analytics specializes in fact-based research and the analysis of disparate data sources to provide unprecedented insights into the world of telecommunications. Follow Roger on Twitter @rogerentner.

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