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TMT Perspectives Insight & Commentary on Business, Legal and Policy Developments Affecting the Telecom, Media, and Technology Sectors

The Legal Argument for Opposing Open Internet Regulations

Posted in FCC, Legal Developments, Net Neutrality

Over the past few years opposition to net neutrality has been based upon concerns that net neutrality regulations would unreasonably limit facilities-based network providers from charging their customers market-based rates for different broadband speeds or qualities of service. For example, going back to 2007, prominent economist Hal Singer wrote a well-received article arguing this point. More generally, Hal worries, in this article and various other writings, that an unintended result of almost any ex ante regulatory policy will be to stifle innovation.

(An ex ante policy is an express public policy, normally reduced to writing. Ex post policy refers to the taking of subjective enforcement action. A posted speed limit is an ex ante policy to ensure safe transportation; a ticket for “reckless” driving is ex post policy.)

Net Neutrality Proponents Fail To Provide Specificity

Net neutrality proponents have invited this concern through lack of specificity. Rather than lay out concrete policy proposals, net neutrality advocates said simply that the FCC should prohibit on-ramp providers, such as cable and telephone companies, from “discriminating.” Presumably this has meant that on-ramp providers should not block access to a particular service or website, but that has never been entirely clear. And, of course, in business one person’s discrimination is another’s innovation.

In response, the network providers were right to oppose net neutrality to the extent it means that they cannot offer different Internet speeds or qualities of service. But that always seemed like a response to a straw man. The net neutrality proponents had to mean something more important. But what?

It looks like the on-ramp providers themselves have finally answered the “but what?” question that the net neutrality proponents have avoided.

Net Neutrality Opponents Finally Clarify What Is At Stake with Open Internet Regulations

As it turns out, the economic argument for opposing open Internet regulations is fairly simple. Verizon’s reply brief (discussed in our prior post) lays it out clearly.

The brief says that when the government imposes rules saying that the Internet shall be open, this interferes with Verizon’s right to maximize profits from its on-ramp services. In other words, on-ramp providers have the legal right to not provide their customers with a fully open Internet.

How does it interfere? Verizon says that its “customers” include both monthly purchasers of Internet access services, but also every other party who has a presence on the net.

This is an interesting perspective, and one that is not well understood. If it has been articulated before this litigation, we are not aware of it. Thus, Verizon’s customers are not just those who sign up to purchase Verizon’s service. Verizon’s “customers” are also every entity with a web presence, including national retailers such as Amazon, local restaurants with websites, and charities such as Goodwill.

This point is not so much argued, as simply asserted as true. And, once asserted, it follows that on-ramp providers are being harmed when web presences (which the brief awkwardly calls “edge providers”) exist but don’t pay a toll:

But broadband providers are paid by end-users, not by the edge providers who are in effect being granted a permanent easement on private networks.

And when the local restaurant or Amazon does not pay the on-ramp providers for allowing the consumer to access their website, this is the same as penalizing the on-ramp providers:

…broadband providers are not “compensated by a ‘commercially reasonable’ payment” … for the squatting rights the [FCC’s open Internet regulations] grant[] edge providers.

In sum, the on-ramp providers are arguing in federal court that the FCC’s net neutrality rules fail because the FCC has said that Verizon cannot leverage its substantial control over Internet access to extract economic value from parties doing business on the web on terms that it deems are in its best interest.

This is one understanding of how the Internet is to work. We doubt educated consumers would favor this policy.