As of Friday, June 12, the Internet is legally an open, unbiased network in the United States. Well, to be fair, it has been pretty open and unbiased, but now the net neutrality ruling is coming into effect.
Net neutrality rules were published by the Federal Communications Commission April 13, and the two-month waiting period for them to become effective ends today. The ruling is being appealed by Internet Service Providers (ISPs) like AT&T T +0.06% and Verizon, which will likely take months if not years if it has to go to the Supreme Court. In the meantime, ISPs asked the courts to halt parts of the ruling until there is a verdict on the appeal (in legal terms, this halt request is called a stay request), but that request was denied today. So net neutrality now becomes enforceable by the FCC. Will consumers benefit?
I have read the 400-page document of the ruling and talked to expert lawyers, industry executives and academics, trying to piece the puzzle together to answer this question. So this is the first of several articles on this topic. I wish the answer was straightforward, but as in most major rulings, the answer is mixed. Consumers will benefit in some ways, but they will lose in other ways. Here’s how.
The ruling provides rules of engagement for ISPs (defined in the ruling as Broadband Internet Access Services or BIAS) who deliver Internet content via a mobile, satellite, or fixed cable connection. One of the main issues at hand is that many of these providers have a monopoly of the last mile of cable to your home. The spirit of the ruling is to make sure that these providers give fair access and delivery of Internet content, so that the Internet remains an open access network.
The ruling has two core components. The first major ruling is that ISPs now fall under the category of telecommunications services (as opposed to information services), so they are bound by the regulations of Title II of the Telecommunications Act of 1934, which provides the FCC the authority to regulate them as a public utility. This is a major development with substantial implications on the future of the industry. It is at the core of the appeal by the ISPs, so let’s leave it for a future post and focus on what is not being disputed by the ISPs.
The second major part of the ruling is the development of so-called bright-line rules, which directly affect a consumer’s ability to access content over the Internet. Although they now go into effect and the denial of the stay request today increases the chance of these rules ultimately passing, it is awkward that they could still get lost in the appeals process. According to J.G. Harrington, attorney at Cooley LLP, “it is uncertain whether the rules that were not in the stay request will eventually survive all the legal challenges. But the fact that the stay request was denied increases the odds that these bright-line rules will survive the appeal process.”
The bright-line rules basically compel ISPs to provide non-discriminatory access of legal Internet content to consumers and also give content providers (known as edge providers in the ruling; e.g., Netflix NFLX -0.41%, Facebook) equitable access to the ISP broadband network in order to deliver the content. These bright-line rules are:
– No Blocking: ISPs cannot block access to legal content
– No Throttling: ISPs cannot throttle (slow down) delivery of legal content.
– No Paid Prioritization: ISPs cannot charge content providers for priority service to deliver content to consumers.
Benefits to Consumers
The FCC believes these three bright-line rules will protect the virtuous cycle of industry investment and innovation in Internet content and hardware infrastructure and ensure there is fair access to consumers for what they pay for: Access to all locations of the Internet where there is legal content they want access to; and for content providers, fair access to the ISP’s network so that the content can be delivered to the consumer. To enforce these rules, the ISPs are ordered to provide transparency to consumers and content providers about the services received and the network management practices.
Notice the non-discriminatory rules apply only to legal content, which leaves the door open for ISPs to block or throttle illegal content, providing a new avenue to combat piracy and cybercrime. Prior to this, regulators disapproved throttling of any content, including illegal content that violates copyright.
Adverse Effect on Consumers
The main controversy regarding these bright-line rules is that the paid prioritization ruling will thwart innovation and infrastructure investment by ISPs. The argument is that, by not allowing ISPs to charge extra fees to heavy users of the network like Netflix, they will have less incentive to invest in infrastructure because it is harder to monetize, and consumers will instead foot the bill. So consumers: get ready to pay more for Internet access, and expect lower download speeds due to congested networks.
To understand why the ruling for no paid prioritization will have this adverse outcome for consumers, let me briefly explain what ISPs could do in the absence of the ruling. Broadband networks have limited perishable capacity so congestion is bound to occur. Analogies of networks with limited perishable capacity abound, like transportation networks (e.g., airlines, trains, buses) and utilities (e.g., electricity). To solve the congestion problem, one option is to attack it on the supply-side, by providing incentives for content providers to reduce the bandwidth consumption, or to strike deals so they pay for the extra capacity needed to bear the heavy bandwidth consumption. But by outlawing paid prioritization, content providers like Netflix have less incentive to innovate in data compression and encoding technologies that will lead to less bandwidth consumption, plus they are mandated legally not to strike deals to get preferential treatment which could otherwise subsidize new congestion-reducing infrastructure.
Without this option, the alternative is to attack the problem on the demand-side. The best solution is to dynamically charge consumers a higher price during congested periods so they have an incentive to move to off-peak consumption. These dynamic pricing techniques exist in industries with perishable goods like airlines and hotels. Currently, ISPs have usage-based tiered pricing structures based on download speed (cable, telcos) or actual data consumption (wireless cell phone carriers). But usage-based pricing is not enough to solve the congestion problem.
Soumya Sen and Alok Gupta, professors at the University of Minnesota, research dynamic pricing to resolve congestion problems in telecommunications networks. Soumya states: “Usage-based pricing is unlikely to help tackle congestion from growth in demand for data. This is because the network bandwidth provisioning cost is driven by the peak demand. Even with usage-based pricing, there is no incentive for heavy users to not crowd on the network at the same time. To discourage large peak demand, prices need to have a temporal component.” So we are bound to see a move to congestion-based, dynamic pricing for consumers, and away from usage-based and unlimited data plans.
So how does this all lead to under-investment in infrastructure by ISPs? It follows from the solution to the congestion problem. Gupta adds, “If congestion-based pricing is implemented, then ISPs now have incentives to keep some congestion in the network so they can charge peak prices.” It is similar to the phenomenon at airlines and airports. With congestion-based pricing, airlines lose incentives to solve the congestion problem completely. Just recall what you have experienced on a full flight: Some pay an exorbitant fare in comparison to an off-peak fare, and the experience is… hot, smelly, and claustrophobic. The airline can make more money with a full-flight at higher prices, than with two flights at off-peak prices.
Light At The End of the Tunnel
Is there a solution whereby consumers, ISPs, and content providers can be better off? Yes. According to Sen: “Dynamic pricing on the consumer side can help ISPs manage network resources better, but it puts the entire cost on the consumers instead of the businesses. So how can the businesses chip in to subsidize consumer’s cost? For example, through sponsored data or content.” Sponsored data plans enable ISPs to exclude specific content from a consumer’s usage plan, sponsored by the respective content provider. Perhaps the easiest analogy is the use of toll-free numbers in telephone networks. Consumers benefit because they get a discount, the content provider is better off because it generates more sales, and the ISP is neutral.
The FCC in the net neutrality ruling states that it will evaluate these sponsored data arrangements on a case-by-case basis. On the positive side, at least they are not outlawed for now. On the negative side, adjudicating as cases emerge adds uncertainty to innovation in dynamic pricing and other methods to make solve the congestion problem, which in turn, may once again discourage investment and innovation.
To conclude, the “no blocking” and “no throttling” rules pave the way for an Open Internet. The “no paid prioritization” rule is a double-edged sword. It protects the Internet from bias in content access and delivery, which is good for consumers. But because of the inability of ISPs to solve the congestion problem on the supply-side, they address it on the demand-side, so consumers will end up paying the bill through congestion-based fees.
Now that no paid prioritization is in effect, the alternative is to encourage and legally allow innovative dynamic pricing and other novel business practices to manage congestion. Going forward, all stakeholders of the Internet will benefit from proactive action by the FCC that allows ISPs and content providers to develop innovative congestion management practices, to mitigate the adverse effects on consumers.
As a faculty member of the Graziadio School of Business at Pepperdine University, Nelson researches digital trends in travel, media, and entertainment. Follow him on Twitter, Tumblr, Forbes.
“So we are bound to see a move to congestion-based, dynamic pricing for consumers, and away from usage-based and unlimited data plans.”
Bingo!
They would PREFER to escape the unlimited data plans. This way, they don’t have any incentive to offer them to be able to compete for customers.