Transcript Regulation vs. Market-based Mechanisms for the Internet’s Future A Presentation at 6th Annual University of Nebraska College of Law Washington, D.C. Space & Cyber.

Regulation vs. Market-based
Mechanisms for the Internet’s Future
A Presentation at
6th Annual University of Nebraska College of Law Washington, D.C.
Space & Cyber Law Conference
Washington, D.C. Nov. 5, 2013
Rob Frieden, Pioneers Chair and Professor of Telecommunications and Law
Penn State University
[email protected]
Web site : http://www.personal.psu.edu/faculty/r/m/rmf5/
Blog site: http://telefrieden.blogspot.com/
Options: Marketplace Self-Regulation
The preferable option in the absence of market failure and public policy
reasons to circumvent, or regulate market forces.
The need for scale economies favors market consolidation and a few,
large operators. Bigness and a high HHI number not an automatic
regulatory trigger.
But Congress historically has enacted market countervailing regulatory
goals, e.g., probably unsustainable competition in some sectors,
diversity, localism, consumer protection, compulsory cross-subsidies,
cost averaging, etc.
In an Internet-centric “next generation network” will sustainable
competition (inter-modal and intra-modal) exist?
Will competitors refrain from colluding explicitly, or implicitly?
Will the marketplace foreclose other types of unfair trade practices while
serving public interest objectives?
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Risk of Self Serving, Self-Regulation?
In many instances telecommunications stakeholders falsely framed selfregulatory initiatives as “win-win.”
For example, when Kingsbury committed AT&T to stop acquiring rural
carriers, he replaced growing market share with a “too good to refuse”
deal for incumbent rural carriers: offering above market “separations and
settlements” in effect co-opting them with easy money.
Kingsbury achieved a lucrative and stable environment managed by a
“benign monopolist.”
Self-regulation in some instances can impose harmful limitations on
consumers with an even greater adverse impact than government edicts.
A government referee may be needed to prevent collusion, consciously
parallel conduct and anticompetitive practices, etc.
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Options: Ex Ante Regulation
Ex ante regulation typically applies oversight by an expert, independent
regulatory agency authorized to anticipate and prevent problems.
Using an existing agency, the FCC, risks applying skills, assumptions
and oversight tactics fine-tuned for previous technologies and
marketplace circumstances, i.e., “fighting the last war.”
The Internet currently and prospectively has areas of robust competition,
but for first and last mile access, consumers typically select only one ISP.
The FCC needs to remain vigilant to ensure that end users can easily shift
carriers quickly and cost-effectively.
Medium-specific regulatory models are becoming unsustainable,
especially when market entrants can exploit (arbitrage) lesser regulatory
burdens than incumbents.
The FCC should enforce rules to provide consumer safeguards, but the
nature of oversight should migrate toward dispute resolution and
responding to complaints; light-handed (referee-type) vs. heavy-handed
regulation.
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Options: Ex Post Regulation
Ex post regulation typically applies oversight by a generalist
regulatory agency after an allegedly anticompetitive practice
has occurred.
Note that this option does not exist in the U.S. and would
require substantial legislation the prospect of which would
trigger a turf war.
In the U.S. ex post review occurs by reviewing courts.
Could a generalist agency have sufficient expertise to resolve
disputes and complaints?
Are after the harm remedies too late for market entrants?
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Options: Ex Post Litigation
Ex post litigation typically examines whether the FCC engaged in rational
decision making supported by the evidence.
Reviewing courts often defer to agency expertise.
The Chevron Doctrine supports reasonable interpretations of ambiguous laws by
expert agencies.
The Supreme Court has substantially limited appellate antitrust review.
Verizon v. Trinko (a unanimous 2003 Supreme Ct . decision) defers to statutory
safeguards and preempts appellate courts from creating remedies the FCC did not
consider necessary.
Pacific Bell Telephone Co. v. Linkline Communications, Inc. (2009) eliminates
appellate antitrust review and additional safeguards or remedies even when the
incumbent offered retail subscribers rates below the wholesale rate.
A majority of the Court rejects “essential facilities” rationale and class actions
even when a plausible cause of action covers all plaintiffs, e.g., similar Comcast
rates across several adjacent franchise areas.
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The Likelihood of Future Conflicts Between Carriers
In the absence of a compulsory duty to deal (interconnect) as common
carriers, commercially driven incentives should ensure connectivity and
full cloud access.
However, one can expect conflicts regarding interconnection and
compensation terms and conditions, particularly when ventures migrate
from telecom pricing models, such as tariffs, metering and settlements, to
Internet pricing models, such as peering and transit.
New models for distributing content have arisen to handle the massive
volume generated by ventures such as Netflix and YouTube. For
example, Content Distribution Networks emphasize downstream delivery
and may not have the capacity to accept equivalent upstream traffic. Last
mile ISPs have imposed surcharges and eliminated zero cost peering as a
result of traffic imbalances.
NGN disputes will occur in the same vein as broadcaster-cable
television operator “retransmission consent” battles and retail ISP
surcharge demands of CDNs, e.g., Comcast-Level3
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The Likelihood of Future Conflicts Between Carriers
(cont.)
Some last mile ISPs now claims that they deserve compensation from far
upstream content sources, e.g., Google. This expectation deviates from
the status quo that provides compensation only from directly
interconnecting parties: downstream retail subscribers and upstream
ISPs.
The migration to NGNs also triggers larger questions about the
appropriate scope of government intervention to ensure fairness,
openness and fair dealing between ventures that typically qualify for less
or no regulation. ISPs generally do not operate as telecommunications
service providers and common carriers. Disputes will arise as to what--if
any--regulatory burdens they should bear.
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Quasi-Common Carriage on the Ascent?
Carriers subject to quasi-common carriage can assert that this possibility
generates regulatory uncertainty and a disincentive to invest in next
generation network plant.
Verizon has invoked a First Amendment right for its content packaging and
distribution function as an ISP. As with must carry, data roaming would
trigger intermediate scrutiny and would constitute a minor burden, based on
an insignificantly greater spectrum and carriage duty to handle data
roaming.
The data roaming decision probably does not identify a road map for the
FCC to impose network neutrality/open Internet access, quasi-common
carriage, because these requirements look too much like actual common
carrier duties.
However as incumbent carriers have begun the process of trying to convince
the FCC to allow them to end basic telephone service and replace it with
unregulated Internet-based services, the FCC may have a new precedent for
maintaining still necessary duties to deal/interconnect.
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