FCC to ISPs: Drop Dead
Fred Goldstein, August 2005
... The big ILECs got into the DSL Internet game only after the market's potential was so obvious that it wasn't risky for them to enter ...
... Some ISPs will probably move their customers onto CLEC services, but it's hard for CLECs to match ILEC mass-market prices ...
... "beads on a string", wherein the entire stack apparently belongs to the network's owner. This type of thinking went out of fashion in the 1970s. ...
... it seems ripe for antitrust action, even after Trinko ...
... The Majority opinion in Brand X was quite explicit in not ruling that telephone companies should be exempted from common carriage. It held that cable modems could be treated differently, not that the treatment of cable was appropriate for ILECs. ...
... if three justices think that the FCC went that far in what seemed to me to be a fairly easy interpretation, then the FCC's Chevron latitude isn't necessarily huge ...
... the Supreme Court recognizes the special role played by common carriers on behalf of ISPs -- exactly the role that the FCC has just abolished...
... the Court knows that the FCC wants to deregulate incumbent telephone companies, and it has invited them to *not* do so...
... In the meantime, the ILECs will continue their drive to replace the public Internet with Fat Wasteband, and ISPs will struggle to survive. ...
The impact of this is likely to be felt severely by the ISP sector, as well as by DSL customers of non-Bell ISPs. Many ISPs today depend on ILEC DSL services to reach their customers. While ADSL, the most common variety, began in the early 1990s as a failed experiment in video carriage, it was independent ISPs who first recycled it, using dry copper facilities such as alarm loops, for high-speed Internet access. Once the Telecom Act of 1996 made unbundled loops available to CLECs, many CLECs were created to feed ISP demand.
The big ILECs got into the DSL Internet game only after the market's potential was so obvious that it wasn't risky for them to enter. And even then the Bells tended to chase after cable modem deployments, rather than lead the way into new areas. Now they have a preponderance of the mass market for DSL. Cable stil has a higher penetration, but DSL does well where it's available: Due to loop qualification issues, a fair number of homes cannot even get DSL. Cable modems, of course, don't face that problem. It's not as if "asymmetric regulation" has really harmed the Bell-subsidiary ISPs; even under the old rules, the Bells got to name their own prices, set their own speeds, and use their telephone bill inserts to advertise competitive services.
Not all ILECs are likely to cut off all ISPs. Rural carriers will retain the tariffs, in order to maintain their Universal Service Fund subsidies (which ISPs can't receive). Qwest did not ask for permission to discontinue its raw DSL service, and it seems comfortable with a wholesale business alongside retail. BellSouth suggested that they intend to offer some kind of unregulated DSL to ISPs, at least for a while. Verizon and SBC, though, seem more interested in hogging the entire business to themselves, or at best allowing only a few large ISPs to purchase access.
ISPs who lose access to Bell DSL services as a result of these new rules may look for alternatives, such as CLECs. Various changes in unbundling rules since 2001 have made the DSL-CLEC's job harder, but many still struggle to provide good service. Some ISPs will probably move their customers onto CLEC services, but it's hard for CLECs to match ILEC mass-market prices with today's rules. It was hard enough to compete with ILEC-affiliate DSL-ISP retail services whose retail price was lower than the wholesale rate that ISPs paid for the raw DSL alone.
Beads on a string?
The FCC's decision was not only wrong on policy grounds, but it shows a glaring ignorance or disregard for the technical nature of the Internet. The underlying concept behind modern networking, including the TCP/IP protocol stack, is layering. Each layer is supposed to transparently encapsulate the layers above it. IP is called the Internetwork protocol because it runs transparently across the payload of multiple lower layer networks. These lower layers can be Ethernet, modems, serial wire, leased lines, radio, cable, DSL, or in theory even smoke signals, if somebody figures out how to modulate them. A lower layer does not become its upper-layer payload just because it carries it.But in the topsy-turvy world of Kevin Martin's FCC, the lower-layer DSL service becomes the higher layer "information" service simply because its owner uses it for that purpose. Thus the various "networks" underneath the Internet aren't being viewed as lower layer facilities. They're "beads on a string", wherein the entire stack apparently belongs to the network's owner. This type of thinking went out of fashion in the 1970s. Come to think of it, I've heard that in some countries, the postal service works that way too, so you shoudln't mail anything of value there....
Misreading the Supreme Court's Brand X ruling
Democratic Commissioner Michael J. Copps went along with Chairman Kevin Martin, saying that he felt that the Supreme Court's recent Brand X ruling weakened the ISPs' case. He said he personally agreed with Scalia's dissent in Brand X, but saw his position weakened by the majority's view. As such he felt happy to get some trade-offs of his own into the Decision. The details are not out, but Copps, a noted conservative on many social issues, seemed happy that CALEA requirements will now be applied to broadband ISPs. The Commission also adopted a position statement, but not a rule, about what they expected Internet content to be. Therefore ISPs may be content-regulated in the future under Title 1 of the Telecom Act, something heretofore considered unthinkable.ISPs may still have legal recourse
ISPs are now in a very difficult situation that presumably calls for extreme legal action. I can see two different lines of attack that they could take, if they can muster the money to hire the lawyers. I am not a lawyer so this is legally speculative, so take it for what it's worth.One attack is antitrust. The Trinko case held that ILECs cannot be sued for antitrust violations if they legally gained a monopoly. It held that the Telecom Act is the controlling law for removing that monopoly, even though the Telecom Act has a clause leaving antitrust in place. Some people have read this as giving the ILECs a "get out of jail free" card for all antitrust actions, but that doesn't seem accurate.
In this case, the ILECs began with roughly a 0% share of the broadband ISP market, and not much more of the dialup ISP business, at the time the Telecom Act was enacted. ISPs took advantage of the Computer Inquiries rules (which the FCC abolished in the August 5 ruling) to purchase Telecommunications from LECs. When the ILECs captive ISPs (Verizon Online, etc.) offered services over DSL, they had to purchase the same underlying tariffed services from their regulated affiliates. Now, under the new ruling, the ILECs, who have a very large share (>80%) of the ISP-over-DSL market and a large share of the retail broadband ISP market in general (cable's being somewhat larger), stand to use their new power to take over the remaining share of the DSL ISP business. Since this is not a pre-Telecom Act monopoly, and since it is based on using their extreme market power in the wire business to monopolize an industry that they were once not even a player in, it seems ripe for antitrust action, even after Trinko.
However, antitrust action probably cannot commence until the Bells give their termination notices to the ISPs. So it may well be the ISPs' bankruptcy estates who will fight that battle.
Another approach is to go straight to Federal Court and argue that the FCC drastically exceeded its Brand X authority in this decision. Here, Copps got it 100% wrong. The Majority opinion in Brand X was quite explicit in not ruling that telephone companies should be exempted from common carriage. It held that cable modems could be treated differently, not that the treatment of cable was appropriate for ILECs.
What did the Brand X ruling really say?
Here's my analysis of Brand X, and why Martin's reading was so wrong. This is why I think a Court could overturn the FCC on this one, if the case is presented correctly.As some readers may know, I never supported the Brand X respondents -- I work with cable guys too, and I'm sensitive to their position. The ILECs are abusing cable's position as an excuse to evade their own responsibilities. I've long argued that cable companies should voluntarily open up to all ISPs, for their own sake. But it doesn't make them common carriers, any more than a Wireless ISP with its own Part 15 (unlicensed) antennas has to open its radios to other ISPs. The letter of the law, even if it could perhaps be called a gift to the cable industry from Congress, is with the cable guys.
The Supreme Court upheld that view, overturning the Ninth Circuit, on what look like basically ordinary points of law. They affirmed that the Chevron standard applied, and it trumped stare decisis (the principle of not overturning an earlier decision unless there's a very good reason) from the Portland case (which had held that cable modems had to provide access to all ISPs) which went against the FCC. To me, this was a no-brainer, because Portland was an outlier, already overturned by the FCC. Chevron gives the FCC a lot of latitude. Under Chevron, the FCC need merely have a plausible interpretation of an ambiguous law, and courts don't have the right to step in with a better interpretation, even if there obviously is one. The Telecom Act was intentionally ambiguous, and its authors lacked a consistent theory, so the FCC has plenty of room. But not infinite room.
Even given that, the dissent was interesting. Scalia's view, joined by Souter and Ginsburg, was that the FCC's reading of the law was beyond reasonable: "After all is said and done, after all the regulatory cant has been translated, and the smoke of agency expertise blown away, it remains perfectly clear that someone who sells cable-modem service is 'offering' telecommunications." So even if they agreed on the Chevron rule's trumping stare decisis, they didn't think Chevron applied here. To me that's a warning; if three justices think that the FCC went that far in what seemed to me to be a fairly easy interpretation, then the FCC's Chevron latitude isn't necessarily huge. That's good news for ISPs and other competitive providers now in the FCC's crosshairs.
The Supreme Court's majority ruling said, "As we understand the Declaratory Ruling, the Commission did not say that any telecommunications service that is priced or bundled with an information service is automatically unregulated under Title II. The Commission said that a telecommunications input used to provide an information service that is not "separable from the data-processing capabilities of the service" and is instead "part and parcel of [the information service] and is integral to [the information service's] other capabilities" is not a telecommunications offering. Declaratory Ruling 4823, ¶39; see supra, at 1617."
That's the heart of the argument, from the cable point of view. But from a DSL point of view, where the services are obviously "separable", it doesn't seem to apply. MCI did not seem to help the ISP's cause with their arguments, which the Majority said would have led to Title II common carrier regulation of all ISPs, even those who lease facilities. I sense some bad lawyering there, but then I didn't actually hear their arguments. The Court may have just mis-taken them. But in its action, the Commission actually does start talking about regulating ISPs, albeit under Title I, both for content, and (presumably to get rural-advocate Adelstein's concurrence) price. While there is no price regulation per se, broadband ISPs will apparently now be subject to rate-averaging rules, like long distance companies, so rural subscribers cannot be charged more than urban ones. (This is certainly not a hallmark of a fully competitive marketplace.)
The issue at hand is forbearance and the removal of both Title II Common Carriage and the Computer Inquiries from ILEC DSL services. Martin's recent talk of equalizing treatment on a deregulated basis does not comport, as I read it, with these parts of the Supreme Court's Brand X ruling:
[still at 26] "This construction does not leave all information service offerings exempt from mandatory Title II regulation. "It is plain," for example, that a local telephone company "cannot escape Title II regulation of its residential local exchange service simply by packaging that service with voice mail." Universal Service Report 11530, ¶60. That is because a telephone company that packages voice mail with telephone service offers a transparent transmission path— telephone service—that transmits information independent of the information-storage capabilities provided by voice mail.... By contrast, the high-speed transmission used to provide cable modem service is a functionally integrated component of that service because it transmits data only in connection with the further processing of information and is necessary to provide Internet service. The Commission's construction therefore was more limited than respondents assume."
Now, the "Commission's construction" has been changed to mean almost the opposite of what it was when the Supreme Court ruled. DSL is not a "functionally integrated component" in the same sense.
The underlying DSL service used by ISPs is "transparent" and "transmits information independent of the information-storage capabilities" or its equivalent. DSL is simply a physical medium upon which ATM (or occasionally Frame Relay) is layered. Those are transparent bearer services, long tariffed. And the history of independent ISPs using it is proof. No such history existed for cable modems. I've heard anecdotally that some of the design input into the DOCSIS spec was intended to make sharing of the plant by ISPs difficult. (Cable ISP @Home was in business at the time, and they may have had a finger in the pie, even if indirectly through their owners.) So the two worlds are Different, with a capital D:
[at 29] "...MCI claims that the Commission's decision not to regulate cable companies similarly under Title II is inconsistent with its DSL policy.
"We conclude, however, that the Commission provided a reasoned explanation for treating cable modem service differently from DSL service. As we have already noted, see supra, at 910, the Commission is free within the limits of reasoned interpretation to change course if it adequately justifies the change.4 It has done so here. The traditional reason for its Computer II common-carrier treatment of facilities-based carriers (including DSL carriers), as the Commission explained, was "that the telephone network [was] the primary, if not exclusive, means through which information service providers can gain access to their customers." Declaratory Ruling 4825, ¶44 (emphasis in original; internal quotation marks omitted). The Commission applied the same treatment to DSL service based on that history, rather than on an analysis of contemporaneous market conditions. See Wireline Order 24031, ¶37 (noting DSL carriers' "continuing obligation" to offer their transmission facilities to competing ISPs on nondiscriminatory terms)."
So the Supreme Court is agreeing that DSL and Cable are Different, not that "broadband", whatever it is, never has a telecommunications service component. And the Supreme Court recognizes the special role played by common carriers on behalf of ISPs -- exactly the role that the FCC has just abolished.
Next, the Court gave what seems to be Martin's little opening:
"The Commission in the order under review, by contrast, concluded that changed market conditions warrant different treatment of facilities-based cable companies providing Internet access. Unlike at the time of Computer II, substitute forms of Internet transmission exist today: "[R]esidential high-speed access to the Internet is evolving over multiple electronic platforms, including wireline, cable, terrestrial wireless and satellite." Declaratory Ruling 4802, ¶6; see also U. S. Telecom Assn. v. FCC, 290 F. 3d 415, 428 (CADC 2002) (noting Commission findings of "robust competition . . . in the broadband market"). The Commission concluded that " 'broadband services should exist in a minimal regulatory environment that promotes investment and innovation in a competitive market.' " Declaratory Ruling 4802, ¶5. This, the Commission reasoned, warranted treating cable companies unlike the facilities-based enhanced-service providers of the past. Id.Id., at 4825, ¶44. We find nothing arbitrary about the Commission's providing a fresh analysis of the problem as applied to the cable industry, which it has never subjected to these rules. This is adequate rational justification for the Commission's conclusions. "
So here they're accepting the FCC's speculative assumption of intermodal competition as a plausible reason for adopting a policy. But even then, they cap it off by saying "as applied to the cable industry, which it has never subjected to these rules". Plausibility within Chevron guidelines may apply here to cable, but since there's a qualitative and quantitative difference between the long-time "carrier of last resort" (ILEC) and a new entrant (cable), it is a stretch to say that this paragraph absolutely blesses Martin's view.
This seems reinforced by a concluding paragraph:
[at 31] "Respondents argue, in effect, that the Commission's justification for exempting cable modem service providers from common-carrier regulation applies with similar force to DSL providers. We need not address that argument."
So why did Copps think they did address that argument? I doubt he actually read the whole Decision. Indeed, the "Respondent" MCI seemed to be taking acquirer Verizon's position here, not the one Brand X would like. The Court did not go there. Continuing within that same paragraph,
"The Commission's decision appears to be a first step in an effort to reshape the way the Commission regulates information-service providers; that may be why it has tentatively concluded that DSL service provided by facilities-based telephone companies should also be classified solely as an information service. See In re Appropriate Framework for Broadband Access to the Internet over Wireline Facilities, 17 FCC Rcd. 3019, 3030, ¶20 (2002). The Commission need not immediately apply the policy reasoning in the Declaratory Ruling to all types of information service providers. "
So, Copps cop-out notwithstanding, the Court knows that the FCC wants to deregulate incumbent telephone companies, and it has invited them to *not* do so:
"It apparently has decided to revisit its longstanding Computer II classification of facilities-based information-service providers incrementally. Any inconsistency between the order under review and the Commission's treatment of DSL service can be adequately addressed when the Commission fully reconsiders its treatment of DSL service and when it decides whether, pursuant to its ancillary Title I jurisdiction, to require cable companies to allow independent ISPs access to their facilities. See supra, at 7, this page. We express no view on those matters. "
Here, they're equally inviting the FCC to use Title I, as it exists, to create the open access obligation for cable that Brand X the company had called for. Such a result is thus explicitly within their Chevron latitude. It's the opposite of what they did. The FCC made "one hand like the other", but it was the wrong hand.
"In particular, we express no view on how the Commission should, or lawfully may, classify DSL service."
So Martin claimed DSL was deregulated by Brand X, and got Copps and Adelstein to believe it too, but that sentence proves otherwise. The Court did not rule either way, and seemed to invite the FCC to deliberate slowly on the whole area, not to rule rashly one way or the other.
So I see plenty of grounds to appeal the FCC's decision to the Federal judiciary, simply on grounds that they did not properly apply a fairly clear Supreme Court ruling. This rash deregulation of DSL would probably keep the three dissenters together against the FCC, and could very easily bring in others, should it get that far.
In the meantime, the ILECs will continue their drive to replace the public Internet with Fat Wasteband, and ISPs will struggle to survive.