How Title II Harms Consumers and Innovators

By Roslyn Layton & Bronwyn Howell of AEI. 

"Key Points

• The Federal Communications Commission’s (FCC) 2015 Open Internet Order follows years of advocacy to implement net neutrality rules, which appears to contravene Congress’ intention that the internet be free of regulation and the people’s will for a free market for broadband.
• The application of the Title II regulatory framework to the internet has harmed consumers and innovators.
• While proponents claim they want competition in the broadband market, the objective of Title II is to create a system of government-owned broadband networks under FCC control and to significantly reduce, if not eliminate, private-sector provision.

A long-running tech policy debate is whether the internet should be shaped by the preferences of regulators and special interests or allowed to evolve through free-market forces driven by consumers and innovators. A seemingly innocuous concept, net neutrality is not officially defined or codified in the US, but its supporters claim that the Federal Communications Commission (FCC) needs to adopt internet regulation to support it. For example, proponents declare, “Net neutrality is the basic principle that protects our free speech on the Internet. ‘Title II’ of the Communications Act is what provides the legal foundation for net neutrality.”¹ In fact, it is the First Amendment of the US Constitution that protects free speech, and the terms “net neutrality,” “blocking,” “throttling,” and “prioritization” are nowhere to be found in the aforementioned Title II.

In 2015 the FCC adopted the Open Internet Order, prohibiting specific internet traffic management techniques, including blocking, throttling, and paid prioritization, and mandating a general “internet conduct” standard.² To promulgate the ruling, the FCC invoked Title II of the Communications Act of 1934 (subsequently updated by the 1996 Telecommunications Act),³ which requires telecommunications providers to be treated as common carriers. To justify such regulatory expansion, the FCC pronounced that the internet is nothing more than an extension of the circuit-switched telephone network.⁴

The 2015 order marked a stunning reversal of long-standing bipartisan policy in a divisive 3–2 vote. Almost immediately, the order was challenged by nine lawsuits from small and large cable, wireless, and telecom providers, as well as from Daniel Berninger, the coinventor of Voice over Internet Protocol (VoIP), as the order effectively banned his online application of high-definition voice behind a platform.⁵ The DC Circuit upheld the order in court, but petitioners continue to appeal.⁶ In April 2017, the new FCC Chairman Ajit Pai launched a Notice of Proposed Rulemaking to reverse the order.⁷

Such back-and-forth on classification is counterproductive and suggests that the language from the 1996 Telecommunications Act is not clear for some and that Congress should clarify whether the FCC has the authority to regulate the internet. Section 230 of the Telecommunications Act notes that it is the policy of the United States “to preserve the vibrant and competitive free market that presently exists for the Internet and other interactive computer services, unfettered by Federal or State regulation.”⁸ Incidentally, the vast majority of countries with net neutrality rules have promulgated them through legislation because existing communications laws did not stipulate the appropriate authority within the telecom regulator, and litigation would otherwise ensue.⁹

The 2015 Open Internet rules and the imposition of Title II are problematic for several reasons,¹⁰ but put plainly, common carrier obligations are meant for natural monopolies—markets in which only one firm provides a good or service. That is not the case for broadband in the US. It would be customary for an economic regulator such as the FCC to assess first whether there was an abuse of market power and to report on it accordingly before applying regulation symmetrically across the nation’s 4,459 broadband providers,¹¹ but the FCC did not do this.

Even though wireless and wireline technologies have historically been regulated with different statutes, they received the same force of the FCC’s regulation. This might suggest that the technologies are substitutable, but the FCC dismissed that as well.¹² Moreover, the FCC did not investigate whether there was systematic abuse or consumer harm but merely suggested four potential issues: one that it resolved without rules, another that was resolved mutually by the parties’ engineers, and two that did not amount to violations.¹³ Indeed the FCC notes only one formal complaint made since 2010. (The second time the FCC tried to institute regulations on net neutrality, rules were codified but later struck down.)¹⁴ Nor did the commission perform a regulatory impact assessment or cost-benefit analysis, which is de rigueur for major shifts in regulation.

Advocates assert that Title II is necessary because the broadband market is not competitive,¹⁵ but as this paper demonstrates, Title II’s objective is not to create a competitive market—that is, a market in which multiple firms compete with different broadband technologies. The objective of Title II advocates is to create a government monopoly of broadband provision with a single technology, specifically municipally owned networks offering the uniform technology of fiber to the premises (FTTX). Title II is essential because it authorizes the FCC to regulate the day-to-day activities of broadband networks similar to Ma Bell, thereby empowering regulators to realize advocates’ utopian constructs of a “neutral network,” “open network,” or “free culture commons,”¹⁶ as if there is no bias to government-provisioned broadband.

When deconstructed, the Open Internet Order and Title II reveal the means and methods to reduce the profitability of privately owned network assets. They do this through controls on prices and data traffic and the intention to levy taxes and fees on top of existing broadband subscriptions to create funding for government-owned networks, ideally using universal service provisions. The Open Internet rules against blocking and throttling, although seemingly consumer-centric, are powerful price controls and legal tools to compel broadband providers to deliver traffic regardless of the marginal cost to networks and frequently at zero price.¹⁷ Moreover, the catchall internet conduct standard can be used to limit any attempt by a broadband provider to offer a new product or service that does not pass muster by advocates’ “open” standards, however they define them—for example, the undue scrutiny of free or zero-rated offers.¹⁸

Such regulation dampens broadband providers’ ability to compete, innovate, and deploy new infrastructure¹⁹ and endeavors to create a “dumb pipe” commoditization of broadband—that is, networks that provide pure transmission without intelligence. This is helped by Title II advocates’ proposition that financial institutions be created, which would change the incentive structure for municipal broadband investment such that private provision becomes less attractive.

This paper shows that a free market, or the free exchange between broadband providers and their customers, as well as third-party content and service providers, has been systematically disintermediated by the FCC through Open Internet regulation. Title II hurts consumers by denying them freedom of choice and forcing them to pay for content, data, and features they do not necessarily recognize or value. This paper describes how the market is shaped by regulators’ preference to focus on speed, rather than to allow consumers to select and contract for their preferred features such as flexible pricing, quality, service, safety, and durability.

This paper further describes from a historical context how innovators have been harmed by the FCC banning technologies and regulating startups. The FCC thus emerges as a textbook example of the abuse of the administrative state,²⁰ in which regulators push and exceed the bounds of their delegated authority to realize “social” and “progressive” outcomes that may be inapposite to the will of the people."