Infectious Greed and Common Carriers: Pitched Battle for the Health of the Body Politic

May 30, 2014

The internet is more complex than we like to think. Information and data can be created, and then accessed, by anyone. It seems as if it is almost a peer-to-peer service, where content creators and consumers can communicate and share things virtually unhindered. For example, Netflix can provide videos to its customers, no questions asked. But this idealistic view forgets about everything in between; the web servers, the domain name servers, the routers, the modems. “Backbone providers” create data routes which get information to the metaphorical “last mile”. Internet service providers (ISPs) make up this last mile, and are paid to deliver the content it receives from the backbone to consumers.

A new Federal Communications Commission (FCC) plan, introduced on May 15 and available for public comment until July 15, would allow ISPs to pick and choose what content it wants to deliver on this last mile. For example, Comcast could prevent Netflix from being accessed unless they paid an extra fee. Which, oh wait, is something they already did. And, luckily for Netflix users, the popular video streaming service did pay up. But this proposal, and deals like the one between Comcast and Netflix, raise serious questions for consumers.

This proposal requires ISPs to offer at least some service to all legal websites, but allows for “fast lanes”. Now this might sound like they would provide even better service than currently offered, but the opposite is the case. ISPs would act as guards in front of a virtual gate to your house. Netflix would be allowed through right away since they paid off the gatekeepers, but other services, like smaller video streaming sites that couldn’t afford the bribe, would have to wait outside for a while before being let in. You could also imagine the internet as a huge reservoir of water, and the ISP is the hose by which you access this water. They could set you up with a fire hose to let as much in as possible; instead, they hook up a cheap garden hose that limits the flow.

A large public effort, backed by Netflix and other net giants like Google, Facebook, and Amazon, opposed this proposal, claiming it directly contradicted the basic principle of net neutrality. Net neutrality means that every piece of information of the internet is treated equally, regardless of who created it. This is what allows startups to overthrow established tech giants, like how Facebook supplanted MySpace.

This idea first entered the legislative sphere in 2004 when FCC Chairman Michael Powell introduced the four internet freedoms, which essentially codified the idea of net neutrality, and in 2005, when the FCC adopted this as their official policy. Comcast disobeyed these rules by throttling (the very legal) BitTorrent and other peer-to-peer file sharing services in late 2007 and early 2008. The FCC and Comcast ended up going to court, and in 2010, the U.S. Court of Appeals for the District of Columbia Circuit ruled against the FCC, saying their policy statement lacked the official power to regulate.

Later that year, the FCC issued the Open Internet Order of 2010, which, according to their official website, “established high-level rules requiring transparency and prohibiting blocking and unreasonable discrimination to protect Internet openness”. Verizon challenged this order, claiming that the anti-blocking and anti-discrimination statutes did not apply to them. In January of this year, the same appeals court from the Comcast Corp. v. FCC ruling affirmed the FCC’s ability to require transparency, but it also struck down the blocking and discrimination rules since ISPs are not classified as common carriers.

A common carrier can’t discriminate among things that it carries. Airlines and telephone companies, for example, are both considered common carriers, which means they can’t treat some of their payload differently than others; ISPs are not common carriers. If you’re an employee of Microsoft, Apple can’t pay off Southwest to stop you from boarding the plane. If you’re ordering a pizza, Sprint can’t intentionally drop your call if Little Caesar’s refuses to pay them a cut of the order. However, if you’re streaming videos online, Comcast CAN purposefully slow down your internet speed if Netflix opts out of paying a fee.

ISPs are not considered telecommunications services, a classification that would subject them to similar rules as common carriers; instead, they are information services. Under the Telecommunications Act of 1996, ISPs benefited from deregulation, resulting in the aggregation of ISPs into monopolies. The act also classified ISPs as telecommunications services rather than information services. The ISPs didn’t like that, so they took it to court. In 2005, the Supreme Court ruled with a 6-3 majority that even though the internet is a telecommunications service, ISPs offered a wider range of services, and the act does not clearly state that a service has to be classified as a telecommunications service if they offer other things.

Now, information services are subject to much less regulation under the law, but also receive much fewer protections. However, the lack of protections no longer mattered since the Digital Millenium Copyright Act (DMCA) of 1998 offered ISPs a “safe harbor” only previously offered to common carriers: ISPs were no longer liable for the content they transported.

In light of this historical context, it now makes sense to ask why Netflix specifically was targeted. Well first, video data costs much more to provide than images or text due to the exponentially larger size. When streaming video, customers get the most “bang” (data) for their buck, while ISPs get the least. Instead of passing the costs onto consumers, Comcast took a more surreptitious approach: they slowed down Netflix until it was virtually unusable. They attributed these crawling speeds to “traffic imbalances” and “problems during peak hours”, essentially pulling the technological equivalent of “Hey, this is a really nice restaurant. It would be a shame if you didn’t buy our insurance and then something happened to it, wouldn’t it?” Sure enough, after Netflix agreed to pay a fee in February, its speed on Comcast jumped nearly 40%.

This is effectively double dipping; we don’t pay ISPs to provide us with content, but rather to provide us with the content we choose. That service is already paid for, yet Comcast is going to content providers (CPs) asking for additional money in return for access. We may not like what Comcast, or our personal ISP, is doing, but it’s not like we can switch. According to a government study, 96% of Americans have access to two or fewer cable broadband providers. This is due in part to a 2005 decision by the FCC that repealed regulations requiring ISPs to share their Digital Subscriber Lines (DSLs) with competitors.

This change in policy is in stark contrast to other countries, such as Japan and South Korea, where service-based competition takes precedence over facilities-based competition. In Japan, the Ministry of Internal Affairs and Communications (MIC) forced top telecom company Nippon Telegraph and Telephone (NTT) to open up its infrastructure to new entrants. This is an example of service-based competition, as the public’s choice will be based on the quality of service. This method also provides a much larger choice for customers as new ISPs can enter the industry more easily. Compare that to the the United States, where new entrants into the market have to build their own infrastructure, as government policy and large upfront investments imply high barriers to entry.

The facilities-based competition amplifies the problem as providers intentionally stay out of each other’s way. When Comcast, the largest ISP, and Time Warner, the second largest ISP, announced a merger in February, questions were raised about the possible decline in competition. Comcast CEO Brian Roberts appeared on CNBC to reassure those who were protesting against the merger.

“Both in video and in broadband, we don’t compete with Time Warner. You have to start with that very fundamental point,” Roberts explained in an interview during CNBC’s coverage of the Code Conference. “They’re in New York, we’re in Philadelphia. They’re in LA, we’re in San Francisco. You can’t buy a Comcast in New York, you can’t buy a Time Warner in Philadelphia, so there’s no reduction in competition.”

That’s because there can’t be a reduction in competition when companies mark out their “turf” in such a way that there’s no competition. If the FCC lets the merger go through, Comcast would have nearly 30% of the cable market and 40% of the wired broadband market, reducing choices for even more consumers. The lack of competition is evident when looking at average download speeds for Americans. Despite customers paying nearly $90 a month on average, the United States was 30th out of 33 countries with an average of 45 mbps for customers using high-speed broadband.  

Google Fiber, the popular tech company’s attempt at shaking up the ISP market, has been rolled out in Kansas City, KS, Provo, UT, and Austin, TX, and is currently being expanded to Kansas City, MO. In February, Google announced another 34 cities it considered “candidates” for future expansion. What makes Google Fiber unique is that is a fiber-to-the-premises (FTTP) ISP, meaning fiber-optic cables run from the central office all the way to the premises of the customer.

This fiber-optic cable is a relatively new technology in the broadband market. The largest FTTP company, Verizon FiOS, only had 3.4 million internet subscribers as of 2009, a miniscule amount of the market share, especially compared to Comcast’s 20 million plus. A more useful comparison might be that AOL dial-up still has 3 million paying subscribers. Whichever way you frame it, FTTP has yet to successfully penetrate the market.

This failure to compete could be a result of speed. Google Fiber attempts to fix these issues, offering 5 mbps download speeds (around the same as most non-premium users in the US; the 45 mbps speed cited earlier was for high-speed broadband) for a one-time installation fee of $300 and no monthly fees after that. Additionally, for the significantly lower-than-average price of $70/month, users can receive one gigabit per second (1000 mbps) service, a speed unheard of in the United States. Compare that to the city of Chattanooga, Tennessee. For around the same price as Google Fiber, citizens can also receive 1 gbps internet service through a taxpayer-owned fiber-optic network colloquially known as “The Gig”. The interactive map below shows all 1 gpbs FTTP services in the United States. Click on markers for more information about each location.

The idea of a publicly-funded and owned broadband service is not a new one. In 2003, Bristol, VA established “Optinet“, a municipal broadband service that serves around 9500 customers. Additionally, upwards of 60 municipalities offer publicly owned wi-fi, including Denver, Houston, and Pittsburgh. North Carolina is attempting to curb this practice, as a few years ago, it passed a bill that put severe regulations on municipal broadband networks in an attempt to make competition with ISPs “more fair”.

Stanford scholar Lawrence Lessig argued against proponents of the bill, saying that the “unfairness” of municipal broadband could also apply to “companies that would like to provide private roads. Or private fire protection. Or private police protection. Or private street lights. These companies too would face real competition from communities that choose to provide these services themselves. But no one would say that we should close down public fire departments just to be ‘fair’ to potential private first-responders.” FCC Chairman Tom Wheeler backed up Lessig, saying “If the people, acting through their elected local governments, want to pursue competitive community broadband, they shouldn’t be stopped by state laws promoted by cable and telephone companies that don’t want that competition.” The comment from Wheeler is a strong statement against the industry he lobbied on behalf of before his appointment to the FCC.

But regardless of whether governments can provide internet, should they? In economics, public goods are goods that ought to be provided by the government instead of private industry. They are traditionally non-excludable (meaning it is impossible to prevent free-riders from accessing the good) and non-rivalrous (meaning one person using it does not prevent another from using it). Internet service is clearly not non-excludable since each user can be differentiated. It is, however, non-rivalrous, but only to a certain degree. Multiple people can use the same wires, but as more users access the network, speeds for all slow down. This is comparable to roads.

Even if a service is rivalrous and excludable, it can be considered a public good if it has positive externalities (or spillover benefits) that benefit society as a whole. A good example is education, which is neither non-excludable nor non-rivalrous; however, our society has determined that the benefits to society of education warrant public access. Broadband service draws an obvious comparison to water, electricity, gas, and telephone services. In most places in the US, water is offered publicly, while electricity, gas, and telephone services are private. Contrast that with France, where water supply is almost entirely private. In some places, municipal electric systems are standard, such as the one set up by the Tennessee Valley Authority during the Great Depression. Elsewhere, cable and telephone services are offered by the government; even outside the United States, European governments owned these two commodities for decades.

There is no consensus on whether broadband service is a public good. The issue gets more complicated when one considers the potential natural monopoly of the industry; government takeover would be an option if it were one, but the inefficiencies of the monopoly would have to be weighed against the bureaucracy and red tape of government interference.

In a majority of places within the United States, internet service is not considered a public good, which means the problems of the industry are still at play. Adding to the potential capacity for abuse, Comcast, in addition to its internet service, offers cable services. Netflix, on the other hand, has been instrumental in causing people to “cut” or “shave the cord” on their cable; a small number of customers actually cancel their television service, but at an ever increasing rate, they have been cancelling premium channels and DVR services in favor of services such as Netflix and Hulu Plus. On top of that, Comcast acquired a majority stake in NBC Universal in 2009, and now owns 100% of it. Comcast is a content creator, content provider, and ISP all in one. Slowing down the service of its competitors, even though they’re competing in different arenas, could help ensure that it maintains an advantage.

This isn’t the first time in American history that a company has owned the means of production, the product, and the method of transportation. Possibly the most famous example is the Bell System, commonly known as Mother (Ma) Bell, that held a monopoly in the telephone service industry. The FCC set up Bell as a regulated monopoly under the Communications Act of 1934. By 1940, Ma Bell owned nearly all telephone service in the United States, from local to long-distance service, and everything in between, and even the actual telephone handsets. This domination of the market allowed Bell to force its customers to use Bell phones, or else pay a “rewiring charge” and a subsequent monthly fee.

The Department of Justice filed an antitrust lawsuit against AT&T, the owner of the Bell Operating Companies, in 1974, at a time when AT&T controlled all telephone service in the United States, and its subsidiary Western Electric produced the vast majority of telephonic goods, such as the handsets. This vertical integration, worthy of Andrew Carnegie, is what led to the eventual antitrust case United States v. AT&T. This case ended in a settlement in 1982 which broke the largest corporation in American history into seven “Regional Bell Operating Companies”, or “Baby Bells”. Four of the Baby Bells re-aggregated into AT&T Inc., while two others formed Verizon Communications. The seventh was bought by CenturyLink.

The railroad industry of the late-1800s and early-1900s is also called to mind.  In the early 20th century, Teddy Roosevelt and Congress regulated the railroad industry with such bills as the Elkins Act and the Hepburn Act. These forbid favorable treatment for some shippers over others, effectively enforcing the idea that these railways were common carriers. Previously, the Interstate Commerce Act of 1887 instituted non-discriminatory regulations on railroads.

This power to regulate came from Article I, Section 8 of the Constitution, which laid out the powers of Congress. Clause 3 states, “[The Congress shall have Power] To regulate Commerce with foreign Nations, and among the several states, and with the Indian tribes”. The very nature of the modern internet causes it to involve “interstate commerce”. Amazon is the 13th most frequented website in the world, and eBay is 26th. Consumerism has been irrevocably tied into the web, especially when compared to the net of two decades ago, the environment in which the Telecommunications Act and the DMCA were passed. A loose definition of the commerce clause isn’t even necessary to include ISPs under the government’s umbrella of regulation.

As the Supreme Court hears the case of Aereo, a startup that intercepts frequencies satellite television companies use and then saves them into a users cloud-based “locker”, the very nature of the internet is being thrust into the spotlight. Even if the Court rules in favor of the controversial startup, the FCC’s new guidelines would leave it dead in the water as ISPs who also have a stake in the cable industry would flex their muscle. This all comes together to call into question not only what is being transmitted over the internet, but howwhy, and from whom.

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