The wheel that is U.S. policy on “net neutrality” has taken another turn. On November 22, 2017, the FCC released a draft of the Internet Freedom Order,1 which, when effective, will reverse the Commission’s 2015 Open Internet Order (now referred to as the “Title II Order”).
As recounted in previous DWT Alerts,2 the Title II Order’s finding that broadband Internet access service (BIAS) is a “telecommunications service” and, therefore, subject to “common carrier” regulation under Title II of the Communications Act, reversed almost 15 years of FCC precedent which held exactly the opposite – i.e., that BIAS is an “information service” and specifically exempt from Title II regulation. Included with the Title II Order’s reclassification of BIAS were a number of regulatory obligations, including prohibitions on blocking, throttling, and paid prioritization, as well as affirmative disclosure requirements (known as the “Transparency Rule”) and a multi-factor “Conduct Standard” which the FCC planned to apply prospectively on a case-by-case basis.
With the Internet Freedom Order, the FCC has returned to its pre-2015 conclusions. It is reinstating the information service classification and, with it, jettisoning many of the regulatory obligations established by the Title II Order, including the explicit bans on blocking, throttling, and paid prioritization and the general conduct standard. What will remain is a modified “transparency rule” that will require that any blocking, throttling, and paid prioritization be clearly explained in a publicly available “terms of service” document that will be subject to enforcement by the FTC.
This advisory summarizes the analysis in the Internet Freedom Order (which consists in large part of a repudiation of the Title II Order) and discusses some of the implications of the reclassification. It is organized as follows:
Part I addresses the legal basis for the reclassification, some of the policy considerations cited by the FCC in support of the reclassification, and the extension of the reclassification to mobile broadband.
Part II addresses the new “light touch” enforcement framework and the FCC’s rationale for eliminating the previous requirements.
Part III addresses the policy impact of the order on the following issues:
a. Wireline and wireless infrastructure;
b. Internet subscriber privacy and data security;
c. Preemption of state and local authority;
d. disability access; and
e. Internet traffic exchange arrangements.
The specific legal question decided in the Internet Freedom Order is whether broadband internet access service (BIAS) is an “information service” or a “telecommunications service” under the Communications Act.3 In plain English, “telecommunications” is the transmission of data without change in form or content (i.e., without computer processing). A “telecommunications service” is the offering of “telecommunications” for a fee. By definition, telecommunications services are “common carrier” services subject to “public utility” regulation under Title II of the Act. An “information service,” by contrast, is, generally speaking, a computer processing service accessed via telecommunications and is only subject to regulation by the FCC – to the extent they are regulated at all – under the general powers conferred on the FCC by Title I of the Act. The FCC has determined that “information services” and “telecommunications services” are “mutually exclusive” designations. Information services are specifically exempt from Title II common carrier regulation.
Although these definitions were codified by the Telecommunications Act of 1996, their history dates to the late 1970s, when remotely accessed data processing services first began to emerge on the scene. Telephone companies – then there was basically only one, AT&T – wanted to enter the business. Regulators were concerned, however, that the phone companies would use their market power over transmission (thought to be a “natural monopoly”) to disadvantage and stifle the burgeoning data processing firms, who needed transmission services to offer their own services and against whom the phone companies planned to compete.
To address this concern, the FCC, in a series of decisions known as the Computer Inquiries, permitted the phone companies to enter the market for data processing services, but conditioned that entry on the requirement that phone companies offer transmission pursuant to tariffed rates, terms and conditions that were subject to oversight by the FCC. Thus was born the distinction between “basic services” (i.e., transmission), which phone companies had to offer to firms providing “enhanced services” (i.e., data processing), which Congress renamed “telecommunications services” and “information services,” respectively.4
B. The First Classification Orders
The FCC first classified broadband Internet access as an information service in the 2002 Cable Modem Order. In a series of orders that followed, the FCC extended the information service classification to BIAS services offered by telephone companies (i.e., DSL and other wireline services), wireless, satellite, and “broadband over powerline.” (Together, we call these the “Classification Orders."5)
The FCC determined that Internet access is not a telecommunications service, first, because it involves “generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information ...”. One example of the data processing performed by broadband ISPs is the use of the Domain Name System (DNS) to route traffic on the Internet. DNS translates human language (e.g., the name of a website or an email address) into the numerical data (an IP address) that computers can process in order to route Internet traffic to and from websites and other end-points selected by the user. Thus, the information retrieval function and capabilities of ISP-provided DNS is a core feature of Internet usage. The FCC also looked at various consumer-facing services that BIAS providers offer, such as email (which is clearly an information service) as supporting the information service designation for BIAS services.
The principal innovation of the Classification Orders was the FCC’s determination that BIAS “is a single, integrated service that ... does not include a [separate] offering of telecommunications service to subscribers.”6 In other words, while the Computer Inquiry orders assumed – and largely required – that phone companies offer transport services separately to their data processing competitors (“unbundled” transport), the Classification Orders imposed no such requirement. These determinations were affirmed by the Supreme Court in the Brand X decision.
The difficulty that the information service designation posed for the FCC, however, was that it made enforcing certain expectations that the agency had of BIAS providers – no blocking, no throttling, etc. – legally difficult. The courts invalidated several FCC enforcement efforts, each time sending the matter back to the FCC for further development.
C. The Statutory Analysis of the Internet Freedom Order and its Rejection of the Title II Order
And that is where the “net neutrality” debate stood in 2015, when the FCC, then led by Chairman Wheeler, ruled, in response to the (then) most recent D.C. Circuit remand, that BIAS is a telecommunications service and, therefore, subject to various common carrier obligations under Title II (most of which the FCC simultaneously announced that it would forbear from enforcing).
The FCC’s reasoning in the Title II Order, which rejects the analysis in the Classification Orders, is a large part of the Internet Freedom Order. For example, the Title II Order took issue with the Classification Orders’ determination that DNS is one of the characteristics that makes BIAS an information service. Instead, the Title II Order ruled that DNS is a tool that BIAS providers use to manage their networks, and therefore falls within the “management exception” to the information service classification.7 The Internet Freedom Order rejects this analysis, ruling that, “the Title II Order erred in finding that Domain Name System (DNS) functionalities fell within the telecommunications systems management exception to the definition of ‘information service.’” To the contrary, the Internet Freedom Order finds that “the record reflects that little or nothing in the DNS look-up process is designed to help an ISP “manage” its network; instead, DNS functionalities ‘provide stored information to end users to help them navigate the Internet.’”
The dialog between the Title II Order and the Internet Freedom Order on the significance of customer-facing services like email is also instructive. The Title II Order ruled that BIAS providers’ email offerings could not justify an information service classification (contrary to the Classification Orders’ determination) because end-user customers do not always use their ISP’s email services; indeed, most do not, opting instead for the email services of edge providers like Google and Microsoft. The Internet Freedom Order, however, rejects this analysis as contrary to the statute, which specifically defines an information service as “the offering of a capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information via telecommunications.”8 The fact that not all customers avail themselves of all the “capabilities ... offer[ed]” by BIAS providers is irrelevant under the statute. It is the “offering of a capability” that matters.
This same statutory analysis underlies the Internet Freedom Order’s rejection of the Title II Order’s finding that customers view BIAS as a separate offering of telecommunications because consumers largely use BIAS to access content from third parties unaffiliated with the ISP. The Internet Freedom Order rejects this analysis as incomplete, finding that the defining characteristic of BIAS is the “capability” it offers “to interact with information online,” which, in combination with other information processing capabilities (e.g., DNS, e-mail) makes it an information service.
D. Policy Considerations of the Internet Freedom Order
Finally, the Internet Freedom Order cites a number of policy considerations in support of the information service classification.
Title II Imposes Substantial Costs. The Internet Freedom Order concludes that the telecommunications classification reduced ISP investment in the network and hampered innovation due to regulatory uncertainty, citing ISP capital investment increasing each year from 2009 to 2014 but declining in 2015 and 2016 as ISPs delayed or shelved new projects and business models.
The order also asserts that the increased compliance costs and regulatory burdens associated with common carrier / Title II regulation forced smaller ISPs, which often serve rural and/or lower income users, to divert capital and attention away from expansions and upgrades and increased their cost of capital. The order predicts reclassification will help these providers expand into unserved areas. Finally, the order finds no evidence that Title II regulation has spurred edge provider investment.
More apt enforcement mechanisms. The Internet Freedom Order also concludes that Title II enforcement mechanisms are not the best tools for safeguarding the interests of internet “open-ness.” As described more fully below, the order scraps the ex ante prohibitions on blocking, throttling, and paid prioritization – and the Commission’s ability to enforce those prohibitions – and returns jurisdiction to the Federal Trade Commission (FTC) and other consumer protection mechanisms to enforce the transparency requirements,” which remain largely in place. The order predicts that the FTC’s authority to prohibit unfair and deceptive practices will address potential harms to consumers and will better serve the dynamic Internet ecosystem than utility-style regulation for the following reasons:
- Antitrust’s case-by-case, content-specific, ex post analysis will allow innovative new business arrangements to emerge, which will be evaluated based on real-world effects rather than a regulator’s ex ante predictions;
- The “rule of reason” will strike a better balance in protecting an open Internet while allowing “permissionless innovation;”
- A focus on protecting competition and consumers means that the law will not condemn practices that benefit consumers; and
- The same laws will apply to all sectors of the economy, including all Internet actors, which avoids the regulatory distortions of Title II.
Finally, the Internet Freedom Order concludes that common carrier regulation of BIAS is, to quote the order, “a solution in search of a problem.” The order finds that Title II imposes significant costs on ISPs based on only sparse evidence of harms. In the two decades as an information service under Title I, the Internet flourished and problematic conduct was rare. The order underscores that while the Title II Order was premised on the concern that ISPs would exercise their market power to distort economic efficiency and harm users, data indicates these providers face pressures through direct and inter-modal competition. At lower speeds, competition is widespread for wireline ISPs; therefore, the primary market failure rationale for Title II is absent. Furthermore, mobile wireless ISPs face even greater competition than wireline ISPs. Finally, the order points out that edge providers are not dependent on gaining access to any single ISP, noting, for example, that Comcast, the largest ISP, serves only 25 percent of all wireline broadband connections. Larger edge providers have a ubiquitous national presence and countervailing market power that the FCC predicts will reduce the likelihood of inefficient outcomes due to ISP market power.
E. Information Service Classification Extended to Mobile Broadband
Prior to Title II Order, the Commission classified mobile BIAS as a private mobile service which, as a consequence, was not subject to common carrier regulation. Based on some fancy statutory footwork, the Title II Order ruled otherwise, holding that mobile BIAS is a commercial mobile service, thus subjecting mobile BIAS to regulation as a common carrier service. The Internet Freedom Order returns mobile BIAS to classification as a private mobile service and thus removes mobile BIAS from common carrier style regulation.
II. New Enforcement Mechanisms
A raison d’etre for the Title II Order’s reclassification of BIAS as a telecommunications service was the D.C. Circuit’s ruling that the FCC’s previous restrictions on blocking, throttling and paid prioritization effectively constituted common carrier regulation that could only be enforced pursuant to Title II.9 With the reclassification back to information services, those prohibitions are once again effectively unenforceable and have been scrapped by the Internet Freedom Order. The order also eliminates the general Internet conduct standard.
In addition to the legal imperative described in the previous paragraph, the order provides three overarching reasons for the FCC’s action: first, the FCC reasons that the transparency rule, when coupled with the state of BIAS competition, and antitrust and consumer protection laws, obviates the need for conduct rules by achieving comparable benefits without the associated costs; second, the order generally finds that the costs of each rule outweigh any potential benefits; and third, the Commission finds that the record does not identify any legal authority to adopt the conduct rules for all ISPs.
The order relies significantly on the fact that its newly-adopted transparency rule will achieve greater benefits than the conduct rules without the associated costs. The order states that “public attention, not heavy-handed Commission regulation, has been most effective in deterring ISP threats to openness.” Further, the order predicts that the transparency rule amplifies the power of antitrust law and the FTC to deter and remedy behavior that harms consumers. “Transparency  leads to openness and achieves comparable benefits to conduct rules.” Finally, the elimination of the conduct rules will substantially reduce the compliance burdens imposed on ISPs, and will consequently result in a substantial reduction in costs associated with the rules.
The Internet Freedom Order’s Critique of the Title II Order’s Enforcement Rules
a) The Internet Conduct Standard
The order criticizes the now-eliminated Internet conduct standard as vague and little more than a rule that “simply warns carriers to behave in accordance with what the Commission might require, without articulating an actual standard.” Consequently, the order posits that the Internet conduct standard created uncertainty, which has contributed to the recent reduction in network investment and service-related innovation described above. To illustrate, the order cites the uncertainty created by the Wireless Bureau’s 13-month investigation into zero-rating practices, during which few, if any, new such programs were rolled out, as illustrative of the chill on innovation created by uncertainty surrounding the standard.
b) Paid Prioritization
The Internet Freedom Order declines to adopt a ban on paid prioritization. The order states that the transparency rule, along with the enforcement of the antitrust and consumer protection laws, addresses the concerns regarding paid prioritization raised in the record and that antitrust law “would only allow [ ] ISPs to engage in pro-competitive paid prioritization practices.” Further, the order predicts that elimination of the rule will spur innovation and experimentation, and result in better allocation of network costs. In particular, the order predicts that elimination of the paid prioritization rule will result in the development of innovative Quality of Service arrangements that are necessary for telemedicine and connected vehicle technologies. Furthermore, the order reasons that elimination of the rule will result in economic efficiencies that benefit consumers, such as differential usage-based pricing models (for consumers that use bandwidth intensive applications like Netflix) or that shift costs to the edge providers themselves.
c) Blocking and Throttling
The order also eliminates the blocking and throttling rules based on the view that the transparency requirement will prevent the potential harms that could be caused by blocking or throttling. For example, any attempt by an ISP to block or throttle content would likely be met with a fierce consumer backlash. Furthermore, the order notes that numerous ISPs have publicly pledged not to block or throttle content that consumers choose, which are reflected in the providers’ transparency disclosures, and that that violations of those disclosures will give rise to enforcement by the FTC and the consumer protection laws. The “transparency requirements, rather than conduct rules, are the most effective means of preserving Internet openness.”
d) The Transparency Requirements
The Internet Freedom Order reaffirms the Commission’s 2010 commitment to baseline transparency requirements applicable to both wireline and mobile ISPs but scales back the enhancements added in 2015.10 All ISPs will continue to be required to publicly disclose information regarding their network management practices, network performance characteristics and commercial terms of the broadband internet access services they offer “sufficient for consumers to make informed choices.”
Importantly, the Commission has determined that these latest transparency requirements work hand-in-hand with restoring the FTC’s jurisdiction over BIAS providers as a result of reclassification. FTC oversight and the disclosure rules obviate the need for the conduct rules (discussed above) that are being eliminated in the order.“ We find that the conduct rules are unnecessary because the transparency requirement we adopt, together with antitrust and consumer protection laws, ensures that consumers have means to take remedial action if an ISP engages in behavior inconsistent with an open Internet.”
Notably, the order does not exempt small providers from any transparency disclosure requirements, in part because they were already subject to the 2010 standards. Thus, if adopted, all wireline and mobile ISPs will be subject to these rules and will be required to disclose on their website, or directly to the Commission, information in the following three categories:
Category 1: Network Management Practices
- Blocking. Any practice (other than “reasonable network management”)11 that blocks or otherwise prevents end user access to lawful content, applications, service, or non-harmful devices, including a description of what is blocked.
- Throttling. Any practice (other than reasonable network management) that degrades or impairs access to lawful Internet traffic on the basis of content, application, service, user, or use of a non-harmful device, including a description of what is throttled.
- Prioritization of Traffic. Any practice that directly or indirectly favors some traffic over other traffic, including through use of techniques such as traffic shaping, prioritization, or resource reservation “in exchange for consideration, monetary or otherwise.”
- Prioritization of Affiliate’s Traffic. Notably, the order requires ISPs to disclose and distinguish prioritization techniques applied to all traffic, from those applied to any prioritization that benefits an affiliate. ISPs must also identify the affiliate benefiting from such prioritization.
- Congestion Management. Descriptions of congestion management practices, if any. These descriptions should include the types of traffic subject to the practices; the purposes served by the practices; the practices’ effects on end users’ experience; criteria used in practices, such as indicators of congestion that trigger a practice, including any usage limits triggering the practice, and the typical frequency of congestion; usage limits and the consequences of exceeding them; and references to engineering standards, where appropriate.
- Application-Specific Behavior. Whether and why the ISP blocks or rate-controls specific protocols or protocol ports, modifies protocol fields in ways not prescribed by the protocol standard, or otherwise inhibits or favors certain applications or classes of applications.
- Device Attachment Rules. Any restrictions on the types of devices and any approval procedures for devices to connect to the network.
- Security. Any practices used to ensure end-user security or security of the network, including types of triggering conditions that cause a mechanism to be invoked (but excluding information that could reasonably be used to circumvent network security).
Category 2: Network Performance Characteristics
- Service Description. A general description of the service, including the service technology, expected and actual access speed and latency, and the suitability of the service for real-time applications.
- Impact of Non-Broadband Internet Access Service Data Services. If applicable, what non-broadband Internet access service data services, if any, are offered to end users, and whether and how any non-broadband Internet access service data services may affect the last-mile capacity available for, and the performance of, broadband Internet access service.
Category 3: Commercial Terms
- Price. Monthly prices, usage-based fees, and fees for early termination or additional network services.
- Privacy Policies. A complete and accurate disclosure of the ISP’s privacy practices. For example, whether any network management practices entail inspection of network traffic, and whether traffic is stored, provided to third parties, or used by the ISP for non-network management purposes.
- Redress Options. Practices for resolving complaints and questions from consumers, entrepreneurs, and other small businesses.
Format and Means of Disclosure
The order provides two options for disclosure: either on a publicly available, easily accessible website (in a manner accessible by people with disabilities), or by direct transmission to the Commission, who will make such disclosures available on its own website. The order eliminates the consumer broadband label safe harbor that was promoted under the Title II Order.
Wireless and Wireline Infrastructure
The reclassification presents issues for infrastructure deployment, which the Commission states in the Internet Freedom Order it intends to address in subsequent proceedings. For example, the Order defers consideration of the impact of the reclassification on wireline and wireless pole attachment rights granted by Section 224 (which applies to telecommunications carriers not providers of information services), stating that to the extent such issues arise, it will consider them in proceedings governing wireline and wireless broadband deployment and access to multiple tenant environments.
The order states that “we are resolute that today’s decision not be misinterpreted or used as an excuse to create barriers to infrastructure investment and broadband deployment.” The Order recognizes, however, that pole owners and municipalities have aggressively sought to take advantage of broadband deployment by imposing additional charges on what they claim are “unregulated services” – i.e., services not meeting the definition of cable television or telecommunications. The FCC hastened to make clear its position that federal protections still apply to BIAS providers as long as they offer other qualifying services on a commingled basis. For example, it expressly reminds pole owners of their continuing obligation to offer “rates, terms, and conditions [that] are just and reasonable.” And, it reiterates that Section 224 protections apply to any infrastructure that provides “both telecommunications and wireless broadband Internet access service.” Notably the Commission cautions pole owners that they should not use the reclassification “as a pretext” to increase pole attachment rates or “an excuse to create barriers to infrastructure investment and broadband deployment.”
The order also addresses the deployment of wireless infrastructure. It reaffirms the Commission’s decision in its 2007 Wireless Classification Order, in which the FCC first classified wireless broadband Internet access service as an information service, and established that the limitations on local government authority contained in Section 332(c)(7)(B),continues to apply where the wireless infrastructure provides both telecommunications and wireless broadband Internet access service. The order states that this “clarification will alleviate concerns that wireless broadband Internet access providers not face increased barriers to infrastructure deployment as a result” of the reclassification. The Internet Freedom Order also explains that the Section 332(c)(7) protections apply to facilities, including DAS or small cells, that are deployed for the provision of personal wireless services, even where such facilities also may be used for broadband Internet access services.
Addressing both wireline and wireless deployment, the order states that the FCC “will closely monitor developments on broadband infrastructure deployment and move quickly to address barriers in a future proceeding if necessary.”
Privacy and Data Security
When BIAS was reclassified as a Title II telecommunications service in 2015, the FTC Act’s common carrier exemption shifted consumer privacy protection from the FTC to the FCC. As a result, in 2016 the Commission, relying on its authority under the Customer Proprietary Network Information (“CPNI”) provisions in 47 U.S.C. § 222, adopted detailed privacy rules governing the provision of BIAS. Shortly after the change in administration this year, the Commission stayed those CPNI rules, which were ultimately repealed under the Congressional Review Act, thus prohibiting the FCC from implementing “substantially similar” rules in the future.
Many consumer advocates have argued that the repeal of the FCC’s privacy rules created a regulatory “gap” in online consumer privacy. However, in the absence of specific rules, broadband privacy has remained subject to the general protections in Section 222, which the FCC committed to enforce so long as BIAS remained classified as a Title II telecommunications service. By now moving BIAS back to a Title I information service, the Commission has stated its intent to “return jurisdiction” to the FTC “to apply its extensive privacy and data security expertise to provide the uniform online privacy protections that consumers expect and deserve.” However, the privacy protections of Section 222 and the formerly reinstated CPNI rules will continue to govern traditional Title II voice services, as well as interconnected VoIP service.
In restoring the FTC’s jurisdiction, the order also rejects arguments that a recent Ninth Circuit decision “precludes FTC oversight of non-common carriage activities of common carriers” which would prevent the FTC from overseeing activities of ILECs and other entities that provide common carrier services in addition to BIAS. That panel decision has been vacated and is awaiting a decision of the full court following argument on rehearing en banc last September. In the event the full court reverses the panel decision, Ninth Circuit law will be consistent with precedent from the Second and Fourth Circuits that precludes FTC jurisdiction over common carriers only with respect to the actual provision of common carrier services. If not reversed, the Circuit split would make the case ripe for Supreme Court review.
Another wrinkle that will need to be ironed out in coming months is the effect of the Order’s preemption of any and all “state and local laws that interfere with the federal deregulatory policy restored in this order.” In reaction to Congress’ repeal of the FCC’s rules, many state and local governments attempted to impose similar privacy rules in their respective jurisdictions. Most of the bills introduced in 2017 were brought as emergency measures or were introduced late in the state legislative sessions, and failed as a result of their rushed nature. It is widely expected that the 2018 legislative season will see renewed state efforts, which will have to be reconciled with the FCC’s preemption language, the grant of rights to state and local authorities in other statutes (including within other sections of the Communications Act), and will likely trigger litigation.
Preemption of State and Local Regulations
In an effort to preclude state or local governments from seeking to reimpose provisions of the Title II Order, the Commission “preempt any state or local measures that would effectively impose rules or requirements that we have repealed or decided to refrain from imposing in this order or that would impose more stringent requirements for any aspect of broadband service that we address in this order,” including “common-carriage requirements akin to those found in Title II of the Act and its implementing rules .…” Under established caselaw, the commission’s policy of non-regulation is entitled to as much preemptive effect as its regulations are. “Nothing in the Act suggests that Congress intended for state or local governments to be able to countermand a federal policy of nonregulation or to possess any greater authority over broadband Internet access service than that exercised by the federal government.”
The Commission has long preempted state regulation of information services. The Commission based its preemption authority on prior findings in the Title II Order that BIAS is jurisdictionally interstate; that it would be “impossible or impracticable for ISPs to distinguish between intrastate and interstate communications” and because state or local regulation would “interfere” with the new order’s purposes, preemption is authorized.
Unstated – but apparent – issues concern the extent of state and local government’s authority over broadband infrastructure and privacy. The Commission made clear its intent to preempt any effort to impose rules that have been repealed, but also recognized that state law on “fraud, taxation and general commercial dealings” would still apply if they do not interfere with the Commission’s deregulatory objectives. Similarly states that have certified to regulate pole attachments under 47 U.S.C. § 224 would continue to do so, as well as designate eligible telecommunications carriers and adopt universal service policies. Other proceedings governing wireline and wireless deployment may be where the Commission would take further action.
The order downplays the impact of its reclassification on disability access, emphasizing that the Twenty-First Century Communications Video Accessibility Act of 2010 (“CVAA”) and implementing regulations independently applied certain accessibility obligations to broadband Internet access services regardless of whether BIAS is classified as a telecommunications or information service. The order reiterates the FCC’s prior conclusion that ACS equipment and services already must ensure that any incorporated browsers are accessible to persons with disabilities. Likewise, it reminds that Section 718 expressly mandates accessibility for mobile browsers. The order goes on to state that Section 710 of the Act addressing hearing aid compatibility applies regardless of any action taken in the Internet Freedom Order. Consistent with its approach to pole attachment regulation, the order provides that to the extent that any other Internet-related accessibility issues arise, it will address them in separate proceedings pursuant to its specific authority to regulate disability access.
Internet Traffic Exchange Agreements
The Internet traffic exchange market historically functioned and developed without any significant regulatory oversight. In the Internet’s infancy, ISPs and edge providers largely paid third-party backbone service providers for transit, which connected upstream to a Tier 1 backbone service provider that enabled access to the full Internet. Recently, however, edge providers increasingly used direct connections with ISPs, rather than transit, to increase the quality of their service. In the Title II Order the Commission applied eight different sections of Title II to traffic exchange between ISPs and edge providers or their intermediaries, which created a complicated regulatory framework governing these agreements. By reclassifying BIAS as an information service, the Internet Freedom Order restores the Internet traffic exchange to the free market framework that the Internet developed within for several decades.
In the absence of rigid regulation of Internet traffic exchange arrangements, innovative and alternative exchange arrangements are likely to develop. From 2005 to 2015 the cost of Internet transit fell over 99 percent on a cost-per-megabit basis largely due to parties utilizing direct interconnection arrangements that benefited consumers by reducing congestion, increasing speeds, and housing content closer to consumers. The Commission expects the development of alternative Internet traffic exchange arrangements and concludes that removal of the Title II utility-style regulation from the Internet traffic exchange market will spur further innovation in this market.
Furthermore, the deregulation of Internet exchange traffic will also eliminate the asymmetrical regulatory treatment of parties to Internet traffic exchange arrangements. The Open Internet Order imposed a one-sided interconnection duty upon last-mile ISPs, which reduced incentives to share costs between ISPs and upstream middle-mile networks, transit networks, content providers, and edge providers. Restoration of the regulatory parity among these sophisticated commercial entities will allow the parties to more efficiently allocate costs arising from increased demands on the network.
While the Order lifts the Title II utility-style regulation from the Internet traffic exchange market, the Commission is quick to note that there are several factors in place that will constrain any anti-competitive behavior by ISPs. In particular, the Commission points to antitrust laws and consumer perception of businesses as two factors that will severely constrain ISP behavior. Regardless, the action taken by the Commission in the draft Order should lead to an innovative Internet traffic exchange market that will ultimately benefit consumers.
FOOTNOTES1 Although released as a draft, we expect that it will be adopted by the FCC with few, if any, changes. We therefore refer to the draft order as the Internet Freedom Order or “the order” with that expectation. To the extent that any changes are made to the order between now and final release, we will update this advisory accordingly.
2 DWT’s analysis of the 2015 Open Internet / Title II Order can be found here. For a comprehensive discussion of the “net neutrality” debate as it stood in 2011, see here. Many of the firm’s advisories on the issue can be found here.
3 Section 3 of the Act defines an “information service” as “the offering of a capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information via telecommunications, and includes electronic publishing, but does not include any use of any such capability for the management, control, or operation of a telecommunications system or the management of a telecommunications service.” 47 U.S.C. § 3(24). A “telecommunications service,” by contrast, is “the offering of telecommunications for a fee directly to the public, or to such classes of users as to be effectively available directly to the public, regardless of the facilities used.” Id. § 3(53). Finally, “telecommunications” – a term used in each of the prior two definitions – is “the transmission, between or among points specified by the user, of information of the user’s choosing, without change in the form or content of the information as sent and received.” Id. § 3(50).
4 The statutory phrases actually borrow from the nomenclature used by the court supervising the break-up of AT&T.
5 See this DWT advisory for analysis of the first of these orders, the 2002 Cable Modem Declaratory Ruling.
6 Cable Modem Order ¶¶ 38-39.
7 See 47 U.S.C. § 253(24) (definition of “information service,” providing that information service “does not include any use of [a telecommunications capability] ... for the management, control or operation of a telecommunications system or the management of a telecommunications service”).
8 47 U.S.C. § 153(24).
9 Although the court did suggest that the FCC might be able to achieve the same or similar results pursuant to authority under Section 706 of the Act, the Title II Order ultimately did not rely on that theory. The Internet Freedom Order goes further and finds that Section 706 is hortatory only and not an independent grant of regulatory authority.
10 The order also eliminates certain network performance disclosure requirements that were imposed by the Title II Order, including: packet loss, geographically specific terms, network performance during “peak” usage, and monthly or promotional rates for service. As described below, the order does require providers to disclose service technology, expected and actual access speed and latency, and the suitability of the service for real-time applications.
11 Reasonable network management is defined as a practice “appropriate and tailored to achieving a legitimate network management purpose, taking into account the particular network architecture and technology of the broadband Internet access service.”