Verizon, ESPN, And The Future Of Broadband

On May 20, the Supreme Court ruled for the Federal Communications Commission and against the City of Arlington, Texas, in a wireless cell tower siting case. The Commission, the Court said, is due “ Chevron deference” to interpret statutes where Congress may have left open questions. Three days later, the FCC  argued this win strengthened its case in an unrelated matter -- Verizon’s challenge to its “net neutrality” rules. (Net neutrality, you'll remember, is the 2010 regulatory order that bans certain network traffic management practices and business models on the Web.)

Not so fast, Verizon replied. Chevron, Verizon argued in a brief, may give an agency leeway when there is real and narrow ambiguity. But an agency cannot create vast responsibilities and powers out of thin air -- and then presume to interpret those new powers without oversight. That is not interpreting an ambiguity. That is an agency assuming the power of the entire government -- to make, enforce, and interpret law.

The question in Arlington was over the narrow issue of permitting times for cell towers -- say, 90 or 150 days. Verizon’s challenge of the FCC’s net neutrality order, on the other hand, could hardly be broader. It concerns the presumption by an agency to regulate the entire Internet nearly any way it wishes. Congress, however, never gave it such power and in fact told the FCC the Internet should remain “unfettered by . . . regulation.”

The benefits of a mostly unfettered Internet are manifest -- search, maps, apps, mobile, message boards, video calls, games, anytime movies, and productivity enhancements across the industrial spectrum. A mostly unfettered Net has given us history’s fastest growing technological platform, one that encourages entrepreneurship and spins off innovations every day. Despite the demonstrable success of, and Congressional insistence on, an unfettered Net, the regulators persist.

Two weeks ago, for example, we got word ESPN had been talking with one or more mobile service providers about a new arrangement in which the sports giant might agree to pay the mobile providers so that its content doesn’t count against a subscriber’s data cap. People like watching sports on their mobile devices, but web video consumes lots of data and is especially tough on bandwidth-constrained mobile networks. The mobile providers and ESPN have noticed usage slowing as consumers approach their data subscription ceilings, after which they are commonly charged overage fees. ESPN doesn’t like this. It wants people to watch as much as possible. This is how it sells advertising. ESPN wants to help people watch more by, in effect, boosting the amount of data a user may consume — at no cost to the user.

Sounds like a reasonable deal all around. But not to everyone. “This is what a net neutrality violation looks like,” wrote Public Knowledge, a key backer of Internet regulation.

The idea that ESPN would pay to exempt its bits from data caps offends net neutrality’s abstract notion that all bits must be treated equal. But why is this bad in concrete terms? No one is talking about blocking content. In fact, by paying for a portion of consumers’ data consumption, such an arrangement can boost consumption and consumer choice. Far from blocking content, consumers will enjoy more content. Now I can consume my 2 gigabytes of data -- plus all the ESPN streaming I want. That’s additive. And if I don’t watch ESPN, then I’m no worse off. But if the mobile company were banned from such an arrangement, it may be forced to raise prices for everyone. Now, because ESPN content is popular and bandwidth-hungry, I, especially if a non-watcher of ESPN, am worse off.

The critics' real worry, then, is that ESPN, by virtue of its size, could gain an advantage on some other sports content provider who chose not to offer a similar uncapped service. But is this government's role -- the micromanagement of prices, products, the structure of markets, and relationships among competitive and cooperative firms? This was our warning. This is what we said net neutrality was really all about -- protecting some firms and punishing others. Where is the consumer in this equation?

Joshua Wright can tell you where. Wright, an economist, is a new member of the Federal Trade Commission, and he thinks the FCC’s net neutrality order ignores this key test of consumer welfare. “[T]he Net Neutrality Order,” Wright summarized in a speech to George Mason University’s Information Economy Project,

is a strikingly poor policy when analyzed from a consumer welfare perspective, not least of all because it is premised upon the not so subtle irony that the best way to preserve the Internet as an open and competitive platform is by imposing a set of far-reaching regulations never before imposed on it.

Wright thinks the FCC is dogmatic in its broad prohibitions:

the Net Neutrality Order deploys a set of relatively blunt and rigid rules to deal with complex legal and technological problems in a manner that ultimately may prevent precisely the type of investment and innovation that has fueled the Internet’s growth to date and improved user experience.

And the FCC forgot to look at the real world:

The fundamental failing of the Net Neutrality Order is that it creates a categorical prohibition against vertical contracts without acknowledging the vast economic literature and empirical evidence that support the view that such vertical arrangements are usually procompetitive.

In the name of abstract openness, the FCC assumed for itself powers Congress did not give it, ignored the key policy test -- consumer welfare -- and now threatens to block real value-enhancing technologies, business models, and experimentation. Such a regulator is due very little deference.