Category Archives: Digital Life

Concensus: The Net Neutrality Fight is Just Getting Started

I published an article for CNET late last night on a spirited debate at CES yesterday over the FCC’s recently-enacted “open Internet” rules, aka net neutrality.  Panelists from the FCC, Congress, AT&T, Verizon, Google and the Center for Democracy and Technology actually agreed on one point, which is that the neutrality saga has only completed its first chapter.

(The session was the most popular of the day.  Several people were turned away from the packed room, and former Congressman Rick Boucher and FCC Commissioner Mignon Clyburn almost didn’t get in!)

While some panelists believe the next step is more regulation, others promised Congressional and perhaps court challenges aimed at undoing the Commission’s “Christmas Surprise.”  As I note in the piece, the new Congress, with its Republican majority in the House, has already taken up reversing the rulemaking as a priority.  Rep. Marsha Blackburn has introduced legislation, signed by 60 other members including at least one Democrat, that would make clear the FCC’s lack of authority over broadband access.

And Neil Fried, senior counsel to the House Energy and Commerce Committee, promised the overfull audience that the Committee would take up the FCC’s “overreaching” as its first tech agenda item.

At the Tech Policy Summit at last year’s CES, the neutrality panel featured current and former White House staffers Susan Crawford and Andrew McLaughlin, as well as more outspoken neutrality advocates from public interest groups.

Yesterday’s panel, by contrast, had industry representatives from Verizon, AT&T and Google, along with David Sohn of CDT, whose rhetoric was far less fiery than that of his counterparts last year.

So it seems the net neutrality fight is still on, and drawing even bigger audiences.  But at least at CES the White House and the most vocal public interest groups have both gone quiet, at least for now.

Today’s sessions include an interview with Chairman Julius Genachowski and a panel featuring the other FCC Commissioners.  Stay tuned for more news.

“Fake Neutrality” or Government Takeover?: Reading the FCC’s Net Neutrality Report (Part III)

In Part I of this analysis of the FCC’s Report and Order on “Preserving the Open Internet,” I reviewed the Commission’s justification for regulating broadband providers.   In Part II, I looked at the likely costs of the order, in particular the hidden costs of enforcement.  In this part, I compare the text of the final rules with earlier versions.  Next, I’ll look at some of the exceptions and caveats to the rules—and what they say about the true purpose of the regulations.

In the end, the FCC voted to approve three new rules that apply to broadband Internet providers.  One (§8.3) requires broadband access providers to disclose their network management practices to consumers.  The second One (§8.4) prohibits blocking of content, applications, services, and non-harmful devices.  The third One (§8.5) forbids fixed broadband providers (cable and telephone, e.g.) from “unreasonable” discrimination in transmitting lawful network traffic to a consumer.

There has of course been a great deal of commentary and criticism of the final rules, much of it reaching fevered pitch before the text was even made public.  At one extreme, advocates for stronger rules have rejected the new rules as meaningless, as “fake net neutrality,” “non neutrality,” or the latest evidence that the FCC has been captured by the industries it regulates.  On the other end, critics decry the new rules as a government takeover of the Internet, censorship, and a dangerous and unnecessary interference with a healthy digital economy.  (I agree with that last one.)

One thing that has not been seriously discussed, however, is just how little the final text differs from the rules originally proposed by the FCC in October, 2009.  Indeed, many of those critical of the weakness of the final rules seem to forget their enthusiasm for the initial draft, which in key respects has not changed at all in the intervening year of comments, conferences, hearings, and litigation.

The differences—significant and trivial—that have been made can largely be traced to comments the FCC received on the original draft, as well as interim proposals made by industry and Congress, particularly the framework offered by Verizon and Google in August and a bill circulated by Rep. Henry Waxman just before the mid-term elections.

1.      Transparency

Compare, for example, the final text of the transparency rule with the version first proposed by the FCC.

Subject to reasonable network management, a provider of broadband Internet access service must disclose such information as is reasonably required for users and content, application and service providers to enjoy the protections specified in this part. (Proposed)

A person engaged in the provision of broadband Internet access service shall publicly disclose accurate information regarding the network management practices, performance and commercial terms of its broadband Internet access service sufficient for consumers to make informed choices regarding use of such services and for content, application, service and device providers to develop, market and maintain Internet offerings. (Final)

The final rule is much stronger, and makes clearer what it is that must be disclosed.  It is also not subject to the limits of reasonable network management,  Rather than the vague requirement of the draft for disclosures sufficient to “enjoy the protections” of the open Internet rules, the final rule requires disclosures sufficient for consumers to make “informed choices” about the services they pay for, a standard more easily enforced.

By comparison, the final rule comes close to the version that appeared in draft legislation circulated but never introduced by Rep. Henry Waxman in October of 2010. It likewise reflects the key concepts in the Verizon-Google Legislative Framework Proposal from earlier in the year.

As the Report makes clear (¶¶ 53-61), the transparency rule has teeth.  Though the agency declines for now from making specific decisions about the contents of the disclosure and how is must be posted, the Report lays out a non-exhaustive list of nine major categories of disclosure, including network practices, performance characteristics, and commercial terms, that must be included.  It’s hard to imagine a complying disclosure that will not run to several pages of very small text.

That generosity, of course, may be the rule’s undoing.  As anyone who has ever thrown away a required disclosure from a service provider (mortgage, bank, drug, electronic device, financial statement, privacy, etc.) knows full well, information “sufficient” to make an informed choice is far more information than any non-expert consumer could possibly absorb and evaluate, even if they wanted to.   The more information consumers are given, the less likely they’ll pay attention to any of it, including what may be important.

The FCC recognizes that risk, however, but believes it has an answer.  “A key purpose of the transparency rule,” the Commission notes (¶ 60), “is to enable third-party experts such as independent engineers and consumer watchdogs to monitor and evaluate network management practices, in order to surface concerns regarding potential open Internet violations.”

Perhaps the agency has in mind here organizations like BITAG, which has been established by a wide coalition of participants in the Internet ecosystem to develop “consensus on broadband network management practices or other related technical issues.”  Or by consumer watchdogs, perhaps the agency imagines that some of the public interest groups who have most strenuously rallied for the rules will become responsible stewards of their implementation, trading the acid pens of political rhetoric for responsible analysis and advocacy to their members and other consumers.

We’ll see.  I wish I shared the Commissions confidence that, “for a number of reasons” (none cited), “the costs of the disclosure rule we adopt today are outweighed by the benefits of empowering end users and edge providers to make informed choices….”  (¶ 59).  But I don’t. Onward.

2.       Blocking

The final version of the blocking rule (§8.5) consolidated the Content, Applications and Services and Devices rule of the original draft.  The final rule states:

A person engaged in the provision of fixed broadband Internet access services, insofar as such person is so engaged, shall not block lawful content, applications, services or non-harmful devices, subject to reasonable network management.

A more limited rule applies to mobile broadband providers, who

[S]hall not block consumers from accessing lawful websites, subject to reasonable network management, nor shall such person block applications that compete with the providers’ voice or video telephony services, subject to reasonable network management

Much of the anguish over the final rules that has been published so far relates to a few of the limitations built into the blocking rule.  First, copyright-reform activists object to the word “lawful” appearing in the rule.  “Lawful” content, applications, and services do not include activities that constitute copyright and trademark infringement.  Therefore, the rule allows broadband providers to use whatever mechanisms they want (or may be required to) to reduce or eliminate traffic that involves illegal fire-sharing, spam, viruses and other malware, and the like.

A provider who blocks access to a site selling unlicensed products, in other words, is not violating the rules.  And as the agency finds it is “generally preferable to neither require not encourage broadband providers to examine Internet traffic in order to discern which traffic is subject to the rules” (¶ 48), there will be considerable margin of error given to providers who block sites, services, or applications which may include some legal components.

On this view, though the FCC otherwise contradicts it—see footnote 245 and elsewhere—a complete ban on the BitTorrent protocol, for better or worse, might not be a violation of the blocking rule.  Academic studies have shown that over 99% of BitTorrent traffic constitutes unlicensed file sharing of protected content.  Other than inspecting individual torrents, which the agency disfavors, how else can an access provider determine what tiny minority of BitTorrent traffic is in fact lawful?

A second concern is the repeated caveat for “reasonable network management,” which gives access providers leeway to balance traffic during peak times, limit users whose activity may be harming other users, and other “legitimate network management” purposes.

Finally, disappointed advocates object to the special treatment for mobile broadband, which may, for example, block applications, services or devices without violating the rule.  There is an exception to the exception for applications, such as VoIP and web video, that compete with the provider’s own offerings, but that special treatment doesn’t keep mobile providers from using “app stores” to exclude services they don’t approve.  (See ¶ 102)

Of course even the original draft of the rules included the limitation for “reasonable network management,” and refused to apply any of the rules to unlawful activities.  The definition of “reasonable network management” in the original draft is different, but functionally equivalent, to the final version.

The carve-out for mobile broadband, however, is indeed a departure from the original rules.  Though the Oct. 2009 Notice of Proposed Rulemaking expressed concern about applying the same rule to fixed and mobile broadband (see  13, 154-174), the draft blocking rule did not distinguish between fixed and mobile Internet access.  The FCC did note, however, that different technologies “may require differences in how, to what extent, and when the principles apply.”  The agency sought comment on these differences (and asked for further comment in a later Notice of Inquiry).  Needless to say, they heard plenty.

Wireless broadband is, of course, a newer technology, and one still very much in development.  Spectrum is limited, and capacity cannot easily be added.  Those are not so much market failures as they are regulatory failures.  The FCC is itself responsible for managing the limited radio spectrum, and has struggled by its own admission to allocate spectrum for its most efficient and productive uses—indeed, even to develop a complete inventory of who has which frequencies of licensed spectrum today.

Adding additional capacity is another regulatory obstacle.  Though mobile users rail against their providers for inadequate or unreliable coverage, no one, it seems, wants to have cellular towers and other equipment near where they live.  Local regulators, who must approve new infrastructure investments, take such concerns very much to heart.  (There is also rampant corruption and waste in the application, franchising, and oversight processes at the state and local levels, a not-very-secret secret.)

The FCC, it seems, has taken these concerns into account in the final rule.  Its original open Internet policy statements—from which the rules derive—applied only to fixed broadband access, and the October, 2009 draft’s inclusion of mobile broadband came as a surprise to many.

The first indication that the agency was considering a return to the original open Internet policy came with the Verizon-Google proposal, where the former net neutrality adversaries jointly released a legislative framework (that is, something they hoped Congress, not the FCC, would take seriously) that gave different treatment to mobile.  As the V-G proposal noted, “Because of the unique technical and operational characteristics of wireless networks, and the competitive and still-developing nature of wireless broadband services, only the transparency principle would apply to wireless at this time.”

The Waxman proposal didn’t go as far as V-G, however, adding a provision that closely tracks with the final rule.  Under the Waxman bill, mobile providers would have been prohibited from blocking “lawful Internet websites”, and applications “that compete with the providers’ voice or video communications services.”

So the trajectory of the specialized treatment for mobile broadband is at least clear and, for those following the drama, entirely predictable.  Yet the strongest objections to the final rule and the loudest cries of betrayal from neutrality advocates came from the decision to burden mobile providers less than their fixed counterparts.  (Many providers offer both, of course, so will be subject to different rules for different parts of their service.)

At the very least, the advocates should have seen it coming.  Many did.  A number of “advocacy” groups demonized Google for its cooperation with Verizon, and refused to support Waxman’s bill.  (It should also be noted that none of the groups objecting to the final rules or any interim version ever actually proposed their own version—that is, what they actually wanted as opposed to what they didn’t want.)

3.      Unreasonable discrimination

The final rule, applicable only to fixed broadband providers, demands that a provider not “unreasonably discriminate in transmitting lawful network traffic over a consumer’s broadband Internet access service.”  (§ 8.7, and see ¶¶ 68-79 of the Report).

Though subtle, the difference in language between the NPRM and the final rule are significant, as the FCC acknowledges.  The NPRM draft rule noted plainly that “a provider of broadband Internet access service must treat lawful content, applications, and services in a nondiscriminatory manner.”

The difference here is between “nondiscrimination,” which prohibits all forms of differential network treatment, and “unreasonable discrimination,” which allows discrimination so long as it is reasonable.

The migration from a strict nondiscrimination rule (subject, however, to reasonable network management) to a rule against “unreasonable” discrimination can be seen in the interim documents.  The Verizon-Google proposal, which called for a “Non-Discrimination Requirement,” nonetheless worded the requirement to ban only “undue discrimination against lawful Internet content, application, or service in a manner that causes meaningful harm to competition or to users.” (emphasis added)

Rep. Waxman’s draft bill, likewise, would have applied a somewhat different standard for wireline providers, who “shall not unjustly or unreasonably discriminate in transmitting lawful traffic over a consumer’s wireline broadband Internet access service,” also subject to reasonable network management.

Over time, the FCC recognized the error of its original draft and now agrees “with the diverse group of commenters who argue that any nondiscrimination rule should prohibit only unreasonable discrimination.” (¶ 77)

As between the suggested limiting terms “undue,” “unjust” and “unreasonable,” the FCC chose the latter for the final rule.  Though many have complained that “unreasonable” is a nebulous, subjective term, it should be noted that of the three it is the only one with understood (if not entirely clear) legal meaning, particularly in the context of the FCC’s long history of rulemaking and adjudication.

The earliest railroad regulations, for example, which also provided the beginning of the FCC’s eventual creation and authority over communications industries, required reasonable rates of carriage, and empowered the Interstate Commerce Commission to intervene and eventually set the rates itself, much as the FCC later did with telephony.

One lesson of the railroad and telephone histories, however, is the danger of turning over to regulators decisions about what behaviors are reasonable. (Briefly, regulatory capture often ends up leaving the industry unable to respond to new forms of competition from disruptive technologies, with disastrous consequences.)

The V-G proposal gets to the heart of the problem in the text I italicized.  Despite the negative connotations of the word in common use, “discrimination” isn’t inherently bad. As the Report makes clear, in managing Internet access and network traffic, there are many forms of discrimination—which means, after all, affording different treatment to different things—that are entirely beneficial to overall network behavior and to the consumer’s experience with the Internet.

The draft rule, as the FCC now admits (see ¶ 77 of the Report), was dangerously rigid.  If any behavior should be regulated, it is the kind of discrimination whose principal purpose is to harm competition or users—though that kind of behavior is already illegal under various antitrust laws.

For one thing, users may want some kinds of traffic – e.g., voice and video – to receive a higher priority over text and graphics, which do not suffer from latency problems.  Companies operating Virtual Private Networks for their employees may likewise want to limit Web access to selected sites and activities for workers while on the job.

A strict nondiscrimination rule would have also discouraged or perhaps banned tiered pricing, harming consumers who do not need the fastest speeds and the highest volume of downloads to accomplish what the want to online.  (Without tiered pricing, such consumers effectively subsidize power users who, not surprisingly, are the most vociferous objectors to tiered pricing.)

Discrimination may also be necessary to manage congestion during peak usage periods or when failing nodes put pressure on the backbone.  Discrimination against spam, viruses and other malware, much of which is not “lawful,” is also permitted and indeed encouraged.  (See ¶ 90-92.)

By comparison, the Report notes three (¶ 75) types of provider discrimination that are of particular concern.  These are:  discrimination that harms competitors (e.g., VoIP providers of over-the-top telephone service, such as Skype or Vonage, that competes with the provider’s own telephone service), “inhibiting” end users from accessing content, services, and applications of their choice (but see the no-blocking rule, above, which already covers this), and discrimination that “impairs free expression,” including slowing or blocking access to a blog whose message the broadband provider does not approve.

On that last point, however, it’s important to note that Congress has already given broadband providers (and others) broad freedom to filter and otherwise curate content they do not approve of or which they believe their customers don’t want to see.  Under Section 230 of the Communications Decency Act,

“No provider or user of an interactive computer service shall be held liable on account of . . . any action voluntarily taken in good faith to restrict access to or availability of material that the provider or user considers to be obscene, lewd, lascivious, filthy, excessively violent, harassing, or otherwise objectionable, whether or not such material is constitutionally protected.”

The goal of Section 230 was to immunize early Internet providers including CompuServe and Prodigy from efforts to exercise editorial control over message boards whose content was provided by customers themselves.  But it gives providers broad discretion in determining what kind of content it believes its customers don’t want to see.  So long as the filtering is undertaken in “good faith” (e.g., not with the intent of harming a competitor), there is no liability for the provider, who does not, for example, become a “publisher” for purposes of defamation law.

The FCC (¶ 89) acknowledges the limit that Section 230 puts on the discrimination rule.

On the harm to competitors prong, the FCC waffles (see ¶ 76) on whether “pay for priority”—the bugaboo that launched the neutrality offensive in the first place, actually constitutes a violation of the rules.  While a broadband provider’s offering to prioritize the traffic of a particular source for a premium fee “would raise significant cause for concern,” the agency acknowledges that such behavior has occurred and thrived for years in the form of third party Content Delivery Networks.  (See footnote 236)  CDNs are allowed.   (More on CDNs in the next post.)

So in the end the discrimination rule doesn’t appear to add much to the blocking rule or existing antitrust laws.  Discrimination against competing over-the-top providers would violate antitrust.  Blocking or slowing access to disfavored content is already subject to the blocking rule.  And interfering with “free expression” rights of users is already significantly allowed by Section 230.

What’s left?   “The rule rests on the general proposition,” the agency concludes (¶ 78), “that broadband providers should not pick winners and losers on the Internet,” even when doing so is independent of competitive interests.  What exactly this means—and how “reasonable” discrimination will be judged in the course of enforcing the rules—remains to be seen.

Next:  The exceptions and what they say about the real purpose of the rules

One Hundred Years of Coase: Reading the Open Internet Report (Part II)

In my previous post on the FCC’s Open Internet Report and Order, I looked at the weak justification given for the new rules the Commission approved on Dec. 21, 2010

In this post, an aside on the likely costs of the rules, and in particular the costs of enforcement.

Last week was the 100th birthday of Nobel prize-winning economist Ronald Coase, a remarkable man I have had the great fortune to know personally. Among his many contributions to the field, Coase has always advocated for more empirical research and other data collection to help lead the field out of its theoretical quagmire. To that end, Coase co-founded the International Society for New Institutional Economics, and served as its first President in 1996.

Unfortunately, the FCC, which owes a great debt to Coase for his early championing of auctions for radio spectrum, does not seem to have learned much else from his work. In a section optimistically captioned, “The Benefits of Protecting the Internet’s Openness Exceed the Costs” (¶¶ 38-42), the Commission makes no effort to calculate either with any hint of rigor. Wishing away serious economic analysis, the Report simply states that “By comparison to the benefits of these prophylactic measures, the costs associated with the open Internet rules adopted here are likely small.”

The sole citation for this remarkable claim is to comments filed by Free Press, one of fifty citations to Free Press in the Report. So far as I know, Free Press does not keep economists on staff, nor did they perform any economic analysis of the benefits or costs of rules that, of course, weren’t in any case finalized until months after comments were filed.

So the belief that the costs are likely small, let alone the value of the benefits not of the open Internet but of the rules adopted to salvage it, is simply that—a belief, or, more likely, a mere hope.

The Report goes on to note that openness and no-blocking are already the “norm” and the “status quo” for broadband Internet providers (so, again, why are new rules so urgently required?), and therefore the only significant compliance cost the FCC envisions is for the new transparency rule, which will require disclosure of network management practices that consumers are imagined to use in deciding which broadband provider to choose. (See ¶¶ 39, 43, and 53-61)

The transparency rule itself, § 8.3, will be discussed in a later post. But assuming that complying with this rule represents the only significant change to existing practices by broadband Internet providers required by the new rules, it probably won’t add enormous new costs. On the other hand, this is also the rule least likely to deliver much in the way of benefits. (Just take a look at the Truth in Lending Disclosure on your last mortgage refinance or read the required FDA disclosure for a recent prescription—which you surely didn’t do before deciding to complete the transaction—to get a sense of just how useful the newly-required network management disclosure will be.)

The Nature of Enforcement

But what of the costs of enforcing the rules, or defending against a claim that a broadband Internet provider has violated them?  The Report here is eerily silent.

There are three types of actions that may be taken to enforce the rules.

First, any individual or organization may file an informal complaint, without paying any fee, through the FCC website. (¶ 153.) Though such complaints will not automatically lead to agency action, “the Enforcement Bureau will examine trends or patterns in complaints to identify potential targets for investigation and enforcement action.”

Second, under ¶ 160, the agency itself may initiate actions, perhaps based on trends or patterns it notes in the informal complaints.

The third avenue for enforcement, the filing of a formal complaint, is the most worrisome. Under § 8.12 of the Order, “Any person may file a formal complaint alleging a violation of the rules….” (emphasis added) (See also ¶¶ 154-159)

In his greatest work, “The Nature of the Firm” (1937), Coase plainly and clearly laid out his belief that business organizations exist only to the extent that their internal costs are less than the costs of using the market to perform every activity associated with the production and marketing of the firm’s products and services. The market in reality is not the magic font of perfect efficiency that theoretical economists assume in their models. Each transaction between a buyer and a seller has certain inefficiencies or costs associated with it, costs Coase referred to as “transaction costs.”

I have written in all of my books about the importance of transaction costs in understanding how the Internet—which reduces transaction costs—is putting unique pressures on the structure of firms, and there’s no need to repeat that discussion here.

But of the six categories of transaction costs Coase introduced in 1937, one that seems not to have penetrated the FCC’s analysis is the one he called “enforcement costs.” In the even the terms of a transaction are not met to the satisfaction of buyer or seller or both, various mechanisms—including arbitration, negotiation, regulators and/or the courts—must be invoked to ensure the bargain made is the bargain received.

In many cases these costs can be exorbitant; indeed, far greater than the value of the underlying transaction. A rational consumer won’t sue the maker of a rubber band that breaks the first time you use it.

At least not when the consumer has to bear the costs of litigating the claim herself. The loss of value from the broken rubber band is a fraction of a penny. The cost of initiating—let along prosecuting—a lawsuit would exceed that price by several orders of magnitude. And, in most situations, the most the consumer could hope to win would be the fraction of a cent. The cost of enforcing the implied promise of a working rubber band—and the seller’s cost of defending itself—are lost.

But what if the consumer can offset nearly all of the enforcement costs on someone else—on the FCC, perhaps, or their broadband ISP provider? If “any person” who believes something is amiss could file an open Internet complaint and pay only a small filing fee to start the machinery of enforcement, why not bring a complaint for any perceived infraction, no matter how small or, indeed, illusory?

And that, unfortunately, is exactly the kind of incentive system created by the Order.

The existence of the new open Internet rules, of course, may operate as a deterrent against the behaviors they prohibit. But it is also likely that the agency will be called upon to enforce the rules against broadband access providers who are accused of violating them. The enforcement costs can be significant—including the costs to the agency itself (that is, to the taxpayers), as well as to the companies accused, rightly or wrongly, of violations.

Bizarrely, the Report makes no mention of the costs of enforcement or their potential impact on the cost-benefit analysis that is dispensed with so quickly. Yet the rules as written are likely to introduce substantial enforcement costs, as evident by looking at the mechanisms for making and resolving complaints. (¶¶ 151-160).

The Danger of a Private Right of Action

In legal terms, the ability of any individual to initiate an enforcement action is known as a private right of action. Federal law grants very few such broadly-written rights. There are, of course, hundreds of millions of American consumers, and giving all of them the right to initiate a formal proceeding that the FCC and the complained-of party must address can generate enormous costs.

But that is precisely what the new rules have done. Regardless of the merits or specifics of a complaint, “the defendant must submit an answer.” In cases where the “facts” are disputed, “a thorough analysis of the challenged conduct might require further factual development and briefing.” (¶ 156) Moreover, “the broadband provider must answer each claim with particularity and furnish facts, supported by documentation or affidavit, demonstrating reasonableness of the challenged practice.” (¶ 157)

In resolving formal complaints, “the Commission will draw on resources from across the agency—including engineering, economic, and legal experts—to resolve open Internet complaints in a timely manner.” (¶ 159)

These are the general comments in the Report. Specific “pleading requirements” laid out in the Order provide the procedures for filing complaints, answers and replies, conducting discovery, developing and supporting legal arguments, verifying facts and documents submitted, and the like. (§§ 8.13-8.17) These sections are in fact far longer and more detailed than the rules themselves, and in essence create a system of adjudication that is similar to the most complex cases brought in federal court.

For example, any broadband provider served with a complaint must respond within 20 days, and must respond to each and every fact referenced in the complaint, supported with documentation including affidavits, legal authority, and other evidence. The Commission “may specify other procedures,” including hearings and oral arguments, and “may require the parties to submit any additional information it deems appropriate for a full, fair, and expeditious resolution of the proceedings, including copies of all contracts and documents reflecting arrangements and understandings alleged to violate” the rules.

Again, a party filing a formal complaint can be any person or organization so long as they have a good faith belief that the broadband provider has violated the rules. (They need not themselves be a customer of the broadband provider.)

Since the kind of blocking and traffic discrimination the rules prohibit can only be distinguished from “reasonable network management” practices (or indeed, behavior that may appear to involve ISP activity but which may simply be a function of overall network conditions at any given time) by reference to detailed discovery, we can expect a lot of complaints to be filed that will turn out not to reveal violations of the rules.

Since consumers aren’t likely to know with any certainty that the behaviors they observe are in fact violations of the rules without extensive and technically complicated discovery, in other words, any slow-down, hiccup, temporary outage or other network artifact that appears to suggest interference will constitute a good faith belief that a violation has occurred, and therefore put the broadband provider (and the FCC) to the cost of demonstrating otherwise.

Is your Internet connection acting up today? Did it take a long time to watch the latest YouTube video? Did you have trouble finding the website you were looking for? Could be that your ISP is blocking or otherwise discriminating against particular content, so perhaps you should submit a formal complaint to the FCC just in case.

All the costs will be borne by others—the provider on the one hand and the FCC on the other.

It’s not Just Money that’s Being Wasted

Such an open-ended grant of standing to “any person,” whether for good or for evil, cannot be squared with the belief that “the costs associated with the open Internet rules adopted here are likely small.” Even if no violation of the rules is ever found—even if no broadband provider ever interferes illegally with the open Internet in the future—providers and the agency will find themselves buried under mountains of complaints, all of which must be investigated and responded to…within 20 days of the filing, no less.

It isn’t just money that will be wasted. The process of enforcement could undermine basic Constitutional protections as well. If a complaint alleges that a broadband provider is interfering with traffic—perhaps on an on-going basis—in ways that violate the rules, the FCC will of necessity analyze large volumes of traffic to determine if a service is being blocked or unreasonably discriminated against. And that means not just looking at traffic patterns but, of course, at the contents of the packets themselves.

The FCC, in other words, in the name of enforcement, will be looking at the Internet behavior not only of the person making the complaint but perhaps of many other customers of the same provider or other providers for comparison.

Economists were clearly absent from discussions about the cost of the rules. But one would have thought at least that civil libertarians would pause at new rules that, in the name of an open and transparent Internet, give the FCC the ability to observe traffic—to perform deep packet inspection—that in any other context would require federal officers to obtain a search warrant based on probable cause of a crime.

But no.  So far, not a peep.

Next: the final rules and what they “preserve.”

Chairman Genachowski and His Howling Commissioners: Reading the Open Internet Report (Part I)

At the last possible moment before the Christmas holiday, the FCC published its Report and Order on “Preserving the Open Internet,” capping off years of largely content-free “debate” on the subject of whether or not the agency needed to step in to save the Internet.

In the end, only FCC Chairman Julius Genachowski fully supported the final solution.  His two Democratic colleagues concurred in the vote (one approved in part and concurred in part), and issued separate opinions indicating their belief that stronger measures and a sounder legal foundation were required to withstand likely court challenges.  The two Republican Commissioners vigorously dissented, which is not the norm in this kind of regulatory action.  Independent regulatory agencies, like the U.S. Courts of Appeal, strive for and generally achieve consensus in their decisions.

So for now we have a set of “net neutrality” rules that a bi-partisan majority of the last Congress, along with industry groups and academics, strongly urged the agency not to adopt, and which were deemed unsatisfactory by four of the five Commissioners.  It’s hardly a moment of pride for the agency, which has been distracted by the noise around these proceedings since Genachowski was first confirmed by the Senate.  Important work freeing up radio spectrum for wireless Internet, reforming the corrupt Universal Service Fund, and promoting the moribund National Broadband Plan have all been sidelined.

How did we get here?  In October, 2009, the agency first proposed new rules, but their efforts were sidetracked by a May court decision that held the agency lacked authority to regulate broadband Internet.  After flirting with the dangerous (and likely illegal) idea of “reclassifying” broadband to bring it under the old telephone rules, sanity seemed to return.  Speaking to state regulators in mid-November, the Chairman made no mention of net neutrality or reclassification, saying instead that “At the FCC, our primary focus is simple: the economy and jobs.”

Just a few days later, at a Silicon Valley event, the Chairman seemed to reverse course, promising that net neutrality rules would be finalized.  He also complimented the “very smart lawyers” in his employ who had figured out a way to do it without the authorization of Congress, which has consistently failed to pass enabling legislation since the idea first surfaced in 2003.  (Most recently, Democratic Congressman Henry Waxman floated a targeted net neutrality bill days before the mid-term elections, but never introduced it.)

From then until the Commission’s final meeting before the new Congress comes to town in January, Commissioners and agency watchers lobbied hard and feinted outrage with the most recent version of the rules, which the agency did not make public until after the final vote was taken on Dec. 21.  In oral comments delivered at the December meeting, two commissioners complained that they hadn’t seen the version they were to vote on until midnight the night before the vote.  Journalists covering the event didn’t have the document all five Commissioners referenced repeatedly in their spoken comments, and had to wait two more days for all the separate opinions to be collated.

Why the Midnight Order?  FCC Commissioners do not serve at the whim of Congress or the President, so the mid-term election results technically had no effect on the chances of agency action.  Chairman Genachowski has had the votes to approve pretty much anything he wants to all along, and will for the remainder of his term.

Even with a Republican House, legislation to block or overturn FCC actions is unlikely.  The Republicans would have to get Democratic support in the Senate, and perhaps overcome a Presidential veto.

But Republicans could use net neutrality as a bargaining chip in future negotiations, and the House can make life difficult for the agency by holding up its budget or by increasing its oversight of the agency, forcing the Chairman to testify and respond to written requests so much as to tie the agency in knots.

So doing something as Congress was nearly adjourned and too busy to do much but bluster was perhaps the best chance the Chairman had for getting something—anything—on the Federal Register.

More likely, the agency was simply punting the problem.  Tired of the rancor and distraction of net neutrality, the new rules—incomplete, awkward, and without a solid legal foundation—move the issue from the offices of the FCC to the courts and Congress.  That will still tie up agency resources and waste even more taxpayer money, of course, but now the pressure of industry and “consumer advocate” groups will change its focus.  Perhaps this was the only chance the Chairman had of getting any real work done.

The Report and Order

Too much ink has already been spilled on both the substance and the process of this order, but there are a few tidbits from the documents that are worth calling out.  In this post, I look at the basis for issuing what the agency itself calls “prophylactic rules.”  In subsequent posts, I’ll look at the final text of the rules themselves and compare them to the initial draft, as well as to alternatives offered by Verizon and Google and Congressman Waxman.  Another post will review the legal basis on which the rules are being issued, and likely legal challenges to the agency’s authority.  I’ll also examine the FCC’s proposed approach to enforcement of the rules.

“Prophylactic” Rules

Even the FCC acknowledges that the “problem” these new rules solve doesn’t actually exist…yet.  The rules are characterized as “prophylactic” rules—a phrase that appears eleven times in the 87-page report.  The report fears that the lack of robust broadband competition in much of the U.S. (how many sets of redundant broadband infrastructure do consumer advocates want companies to build out, anyway?) could lead to ISPs using their market influence to squeeze content providers, consumers, or both.

This hasn’t happened in the ten years broadband Internet has been growing in both capability and adoption, of course, but still, there’s a chance.  As the report (¶ 21) puts it in challenged grammar, “broadband providers potentially face at least three types of incentives to reduce the current openness of the Internet.”

We’ll leave to the side for now the undiscussed potential that these new rules will themselves cause unintended negative consequences for the future development or deployment of technologies built on top of the open Internet.  Instead, let’s look at the sum total of the FCC’s evidence, collected over the course of more than a year with the help of advocates who believe the “Internet as we know it” is at death’s door, that broadband providers are lined up to destroy the technology that, ironically, is the source of their revenue.

To prove that these “potential” incentives are neither “speculative or merely theoretical,” the FCC cites precisely four examples between 2005 and 2010 where it believes broadband providers have threatened the open Internet (¶ 35).   These are:

1.      A local ISP that was “a subsidiary of a telephone company” settled claims it had interfered with Voice over Internet Telephony (VoIP) applications used by its customers.

2.      Comcast agreed to change its network management techniques when the company was caught slowing or blocking packets using the BitTorrent protocol (the subject of the 2010 court decision holding the agency lacked jurisdiction over broadband Internet).

3.      After a mobile wireless provider contracted with an online payment service, the provider “allegedly” blocked customers’ attempts to use competing services to pay for purchases made with mobile devices.

4.      AT&T initially restricted the types of applications—including VoIP and Slingbox—that customers could use on their Apple iPhone.

In the world of regulatory efficiency, this much attention being focused on just four incidents of potential or “alleged” market failures is a remarkable achievement indeed.  (Imagine if the EPA, FDA, or OSHA reacted with such energy to the same level of consumer harm.)

But in legal parlance, regulating on such a microscopically thin basis goes well beyond mere “pretense”—it’s downright embarrassing the agency couldn’t come up with more to justify its actions.  Of the incidents, (1) and (2) were resolved quickly through existing agency authority, (3) was merely alleged and apparently did not even lead to a complaint filed with the FCC (the footnote here is to comments filed by the ACLU, so it’s unclear who is being referenced) and (4) was resolved—as the FCC acknowledges–when customers put pressure on Apple to allow AT&T as the sole iPhone network provider to allow the applications.

Even under the rules adopted, (2) would almost surely still be allowed.  The Comcast case involved use of the BitTorrent protocol.  Academic studies performed since 2008 (when the protocol has been expanded to more legal uses, that is), find that over 99% of BitTorrent traffic still involves unlicensed copyright infringement.  Thus the vast majority of the traffic involved is not “lawful” traffic and, therefore, is not subject to the rules.  The no blocking rule (§8.5) only prohibits blocking of “lawful content, applications, services or non-harmful devices.”  (emphasis added)

Indeed, the FCC encourages network providers to move more aggressively to block customers who use the Internet to violate intellectual property law.  In ¶ 111, the Report makes crystal clear that the new rules “do not prohibit broadband providers from making reasonable efforts to address the transfer of unlawful content or unlawful transfers of content…..open Internet rules should not be invoked to protect CR infringement….” (Perhaps the FCC, which continues to refer to BitTorrent as an “application” or believes it to be a website, simply doesn’t understand how the BitTorrent protocol actually works.)

Under the more limited wireless rules adopted, (3) and (4) would probably still be allowed as well.  We don’t know enough about (3) to really understand what is “alleged” to have happened, but the no-blocking rule (§ 8.5) says only that mobile broadband Internet providers “shall not block consumers from accessing lawful websites, subject to reasonable network management; nor shall such person block applications that compete with the provider’s voice or video telephony service, subject to reasonable network management.”

A mobile payment application wouldn’t seem to be included in that limitation, and in the case of the iPhone, it was Apple, not AT&T, that wanted to limit VoIP.

Even so, the Report makes clear that the wireless rule (¶ 102) doesn’t apply to app stores: “The prohibition on blocking applications that compete with a broadband provider’s voice or video telephony services does not apply to a broadband provider’s operation of application stores or their functional equivalent.”  So if the software involved in incidents (3) and (4) involved rejection of proposed apps for the respective mobile devices, there would still be no violation under the new rules.

And the caveat for “reasonable network management” (§8.11(d)) says only that a practice is “reasonable if it is appropriate and tailored to achieving a legitimate network purpose, taking into account the particular network architecture of the broadband Internet access service.”  Voice and video apps, depending on how they have been implemented, can put particular strain on a wireless broadband network.  Blocking particular VoIP or apps like Slingbox might be allowed, in other words.

So that’s it.  Only four or fewer actual examples of non-open behavior by ISPs in ten years.  And the rules adopted to curb such behavior would probably only apply, at best, to the single case of Madison River (1), a local telephone carrier with six hundred employees, in a case the FCC agreed to drop without a formal finding of any kind nearly six years ago.

But maybe these aren’t the real problems.  Maybe the real problem is, as many regulatory advocates argue vaguely, the lack of “competition” for broadband.  Since the first deployment of high-speed Internet, multiple technologies have been used to deliver access to consumers, including DSL (copper), coaxial cable, satellite, cellular (3G and now 4G), wireless (WiFi and WiMax), and broadband over power lines.  According to the National Broadband Plan, 4% of the U.S. population still doesn’t have access to any of these alternatives.  In many parts of the country, only two providers are available and in others, the offered speeds of alternatives vary greatly, leaving high-bandwidth users without effective alternatives.

If lack of competition is the problem, though, why not solve that problem?  Well, perhaps the FCC would rather sidestep the issue, since it has demonstrated it is the wrong agency to encourage more competition.  The FCC, for example, has supported legal claims by states that they can prohibit municipalities from offering wireless service, and has dragged its feet on approving trials for broadband over power lines—the best hope for much of the 4% who today have no broadband option, most of whom live in rural areas which already have power line infrastructure.

Indeed, if there are anti-competitive behaviors now or in the future, existing antitrust law, enforceable by either the Department of Justice or the Federal Trade Commission, provide much more powerful tools both to prosecute and remedy activities that genuinely harm consumers.

It’s hard, by comparison, to find many examples in the long history of the FCC where it has used its sometimes vast authority to solve a genuine problem.  The Carterfone decision, which Commissioner Copps cites enthusiastically in his concurrence, and (finally) the opening of long distance telephony to competition, certainly helped consumers.  But both (and other examples) could also be seen as undoing harm caused by the agency in the first place.  And both dealt with technologies and applications that were mature.  Why does anyone believe the FCC can “prophylactically” solve a problem dealing with an emerging, rapidly-evolving new technology that has thrived in the last decade in part because it was unregulated?

The new rules, which are aimed at ensuring “edge” providers do not need to get “permission to innovate” from ISPs, may have the unintended effect of requiring ISPS—and edge providers—to get “permission to innovate” from the FCC.  That hardly seems like a risk worth taking for a problem that hasn’t presented itself.

Radio commentary on rescuing the National Broadband Plan

I recorded a commentary today  for KQED–NPR in the Bay Area–on the importance of the National Broadband Plan.  In the wake of tumult over net neutrality, Title II, and other regulatory gibberish, the important goals of the NBP, published in March of 2010, have been lost.  That’s unfortunate, because the authors did a great job of setting out ambitious goals essential to maintain U.S. competitiveness.  The plan also relies for funding on private investment and incentives, giving it a realistic chance of success.

While recent polls indicate that few Americans want the government involved in encouraging adoption of broadband, I believe this is one example where intervention–if only of the cheerleading and goal-setting variety–is appropriate.  As I’ve written extensively elsewhere, the Internet’s success is a function of network effects, as succinctly described by Metcalfe’s Law.  The more people who have broadband access, the more valuable the network is for everyone.  And the better the chances for serendipitous new uses and applications to flourish.

Those of us who already have broadband access, in other words, would benefit just as much from getting non-users online as those users themselves.

Perhaps even more.

Cloud Users and Providers Win Big Privacy Victory – U.S. v. Warshak

The Sixth Circuit ruled on Tuesday that criminal investigators must obtain a warrant to seize user data from cloud providers, voiding parts of the notorious Stored Communication Act.  The SCA allowed investigators to demand providers turn over user data under certain circumstances (e.g., data stored more than 180 days) without obtaining a warrant supported by probable cause.

I have a very long piece analyzing the decision, published on CNET this evening.  See “Search Warrants and Online Data:  Getting Real.” (I also wrote extensively about digital search and seizure in “The Laws of Disruption.”)  The opinion is from the erudite and highly-readable Judge Danny Boggs.    The case is notable if for no other reason than its detailed and lurid description of the business model for Enzyte, a supplement that promises to, well, you know what it promises to do….

The SCA’s looser rules for search and seizure created real headaches for cloud providers and weird results for criminal defendants.  Emails stored on a user’s home computer or on a service provider’s computer for less than 180 days get full Fourth Amendment protection.  But after 180 days the same emails stored remotely lose some of their privacy under some circumstances.   As the commercial Internet has evolved (the SCA was written in 1986), these provisions have become increasingly anomalous, random and worrisome, both to users and service providers.  (As well as to a wide range of public interest groups.)

Why 180 days?  I haven’t had a chance to check the legislative history, but my guess is that in 1986 data left on a service provider’s computer would have taken on the appearance of being abandoned.

Assuming the Sixth Circuit decision is upheld and embraced by other circuits, digital information will finally be covered by traditional Fourth Amendment protections regardless of age or location.  Which means that the government’s ability to seize emails (Tuesday’s case applied only to emails, but other user data would likely get the same treatment) without a warrant that is based on probable cause will turn on whether or not the defendant had a “reasonable expectation of privacy” in the data.  If the answer is yes, a warrant will be required.

(If the government seizes the data anyway, the evidence could be excluded as a penalty.  The “exclusionary rule” was not invoked in the Warshak case, however, because the government acted on a good-faith belief that the SCA was Constitutional.)

Where does the “reasonable expectation of privacy” test come from?  The Fourth Amendment protects against “unreasonable” searches and seizures, and, since the Katz decision in 1968, Fourth Amendment cases turn on an analysis of whether a criminal defendant’s  expectation of privacy in whatever evidence is obtained was reasonable.

Katz involved an electronic listening device attached to the outside of a phone booth—an early form of electronic surveillance.  Discussions about whether a phone conversation could be “searched” or “seized” got quickly metaphysical, so the U.S. Supreme Court decided that what the Fourth Amendment really protected was the privacy interest a defendant had in whatever evidence the government obtained.  “Reasonable expectation of privacy” covered all the defendant’s “effects,” whether tangible or intangible.

Which means, importantly, that not all stored data would pass the test requiring a warrant.   Only stored data that the user reasonably expects to be kept private by the service provider would require a warrant.  Information of any kind that the defendant makes no effort to keep private—e.g., talking on a  cell phone in a public place where anyone can hear—can be used as evidence without a warrant.

Here the Warshak court suggested that if the terms of service were explicit that user data would not be kept private, then users wouldn’t have a reasonable expectation of privacy that the Fourth Amendment protected.  On the other hand, terms that reserved the service provider’s own right to audit or inspect user data did not defeat a reasonable expectation of privacy, as the government has long argued.

An interesting test case, not discussed in the opinion, would be Twitter.  Could a criminal investigator demand copies of a defendant’s Tweets without a warrant, arguing that Tweets are by design public information?  On the one hand, Twitter users can exclude followers they don’t want.  But at the same time, allowed followers can retweet without the permission of the original poster.   So, is there a reasonable expectation of privacy here?

There’s no answer to this simplified  hypothetical (yet), but it is precisely the kind of analysis that courts perform when a defendant challenges the government’s acquisition of evidence without full Fourth Amendment process being followed.

To pick an instructive tangible evidence example, last month appellate Judge Richard Posner wrote a fascinating decision that shows the legal mind in its most subtle workings.  In U.S. v. Simms, the defendant challenged the inclusion of evidence that stemmed from a warranted search of his home and vehicle.  The probable cause that led to the warrant was the discovery in the defendant’s trash of marijuana cigarette butts.  The defendant argued that the search leading to the warrant was a violation of the Fourth Amendment, since the trash can was behind a high fence on his property.

Courts have held that once trash is taken to the curb, the defendant has no “reasonable” expectation of privacy and therefore is deemed to consent to a police officer’s search of that trash.  But trash cans behind a fence are generally protected by the Fourth Amendment, subject to several other exceptions.

Here Judge Posner noted that the defendant’s city had an ordinance that prohibited taking the trash to the curb during the winter, out of concern that cans would interfere with snow plowing.  Instead, the “winter rules” require that trash collectors take the cans from the resident’s property, and that the residents leave a safe and unobstructed path to wherever the cans are stored.  Since the winter rules were in effect, and the cans were left behind a fence but the gate was left open (perhaps stuck in the snow), and the police searched them on trash pickup day, the search did not violate the defendant’s reasonable expectation of privacy.

For better or worse, this is the kind of analysis judges must perform in the post-Katz era, when much of what we consider to be private is not memorialized in papers or other physical effects but which is likely to be intangible—the state of our blood chemistry, information stored in various data bases, heat given off and detectable by infrared scanners.

The good news is that the Warshak case is a big step in including digital information under that understanding of the Fourth Amendment.  Search and seizure is evolving to catch up with the reality of our digital lives.