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FCC Chairman proposes elimination of net neutrality provisions

November 23, 2017

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After removing media cross ownership rules earlier in the week, the FCC chair Ajit Pai has released the agenda for the FCC’s next meeting on 14th December and included a proposal to “Restore Internet Freedom” that would see net neutrality regulations rolled back if it is passed by the commissioners. With Pai sitting alongside two Republican Commissioners and against two Democrat nominees, that is likely to be the outcome. Michael O Reilly and Brendan Carr (Republican) have already issued statements indicating their full support while Jessica Rosenworcel and Mignon Clyburn (Democrat) signalled their opposition. 

Our Analysis

Title II classsification

The current rules were introduced in 2015 after previous attempts at ensuring net neutrality such as the 2010 Open Internet Order were watered down through the appeal court process. The 2015 move classified internet services under the more potent Title II Common Carrier provisions which made it “unlawful for any common carrier to make any unjust or unreasonable discrimination in charges, practices, classifications, regulations, facilities, or services for or in connection with like communication service, directly or indirectly, by any means or device”.

The comprehensive Title II provisions, originally dating from 1934, were clarified for their application to internet provision with three ‘bright line rules’:

  1. No blocking of legal content, applications, services or non-harmful devices
  2. No throttling of specific traffic on the basis of content, applications, services or devices
  3. No paid prioritization: No ‘fast lanes’ favouring specific traffic or prioritizing content and services of affiliates

While this was only introduced in 2015, there has been a constant debate and regulatory flux over net neutrality since 2005 as both legislators and the FCC pushed forward a number of proposals to regulate access providers. That has itself been one factor in ensuring that egregious manipulation of how content flows through access networks, or the use of tiered pricing regimes, was limited. However, a number of mainly mobile operators have tested the bounds of the existing net neutrality provisions through 'zero rating' (exempting from counting towards data caps) specific services of their own or approved third party providers. 

An opportunity for recognition of the value of the network? 

The first question this raises is whether cable and telecoms companies will be able to increase their profits by changing the terms of their engagement with consumers, charging third party content and services providers, or manipulating their access networks to favour their own services. With Deep Packet Inspection (DPI), consumers could be charged for enabling specific services, either directly or indirectly with payments accruing to the network provider for facilitating a specific service.  Direct payments or to the access network provider could take the form or a charge such as ‘enable unlimited UHD video streaming for an extra $10 per month’ or to a greater degree given the limited bandwidth requirements: ‘enable WhatsApp voice calling’. Indirect charges to a consumer could also be levied  with service providers charged to deliver their content effectively e.g. ensuring that network speed, latency and jitter support video streaming and voice services effectively, or again, using DPI, that those services are not blocked at the network level.

While the market has moved towards offering all-in bundled services, the vision of the proponents of this move is one of enabling consumer choice where basic services can be offered at a low cost with additional services such as voice and video priced as an add on to the basic service package. They believe that this more accurately reflects the cost of providing that network as the voice and TV services that would have been delivered over legacy cable and telecom networks at an additional cost have seen that revenue increasingly cannibalised by over the top (OTT) service providers, undercutting the economics of expensive network deployment.

Competitive limitations

Competitive factors are a potential issue limiting abuse, though with consolidation of the market, the removal of broadband unbundling requirements since 2005 and a continued lack of overbuilding in many areas there are question marks over the existence of effective competition in many areas.   So the second question that this development raises is this: Will consumers accept such a change in the terms of engagement with internet services, and will they have effective competitive choice in service providers to enable them to act on such a lack of acceptance?

The FCC measures and reports broadband availability based on census blocks, of which there are some 11.2 million, though nearly five million of those have a population of zero. With some 126 million households in the United States, there are on average around 20 households per census block, leaving a small degree of over-counting in the FCC’s measures of fixed residential broadband providers by census block when compared to actual availability per household. It should also be noted that the coverage for lower speeds (>3mbps and >10 Mbps) is flattered by the availability of satellite broadband to 99.1% of census blocks. In addition to limited speeds (up to 15 Mbps in 2016 when the FCC undertook this research but now up to 25 Mbps), these connections tend to be more expensive, with limited usage caps, and suffer from significant latency, which can particularly effect Quality of Service for applications such as VoIP. 

Increasing network overbuild to create more local competition was briefly an objective of the FCC. Under conditions for passing two mergers, Charter Communications was required to overbuild its network to cover an additional one million homes that already have a broadband service provider. This was reversed by the FCC in April 2017, instead requiring that Charter build into unserved areas.

Vertical integration vs net neutrality

The proponents of ‘net neutrality’ believe that enabling access network operators to manage or manipulate their networks freely, inhibiting certain content types or sources, or requiring developers and service providers to pay for access to the end consumer will stifle the third party innovation that has driven the explosive growth of the internet services market. With consumer expectations for open access baked-in to some extent, and the internet services market having reached a level of maturity that makes a return to the walled gardens of the AOL portal model near impossible to return to, it will be difficult for network operators to fully leverage their privileged position as gatekeepers to the internet. However, the increasing vertical integration of access and content operations exemplified by the Comcast-NBC Universal acquisition demonstrate that network operators see continued opportunities in pushing along the path to a vertically integrated model that could be well served by a walled garden, or at least lightly fenced approach.

Such vertical integration is also seen in the acquisition of Time Warner by AT&T, which The Department of Justice has filed a lawsuit to block this week with the D.C. Federal Court, a rare move to prevent an attempt at vertical integration. That move by the DoJ is perceived to be based on the potential for AT&T to steer users of its extensive mobile, broadband and TV distribution networks towards its own content and away from competitors’. As the DoJ complaint states, AT&T has itself noted that “distributors that control popular programming “have the incentive and ability to use (and indeed have used whenever and wherever they can) that control as a weapon to hinder competition.” That DoJ complaint also makes direct reference to the ability of online service providers to compete effectively with traditional TV services. The removal of Title II net neutrality provisions take away some of the protections that would have limited AT&T’s options if this merger is to proceed. It also indicates that the direction of travel pursued by the DoJ in this case is potentially running against that of a de-regulatory FCC.  In addition to moving to remove net neutrality, the FCC also acted earlier this month to loosen restrictions on media cross-ownership designed to ensure access to a plurality of voices. Such changes to the regulatory landscape open up the scope of strategic options for network operators, though as the DoJ action shows, those options may face limitions from other sources. 


North America USA
Research by Market
Mobile & Telecom
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