Market Insight

President Obama pours oil into already heated U.S. net neutrality debate

November 26, 2014  | Subscribers Only

Alzbeta Fellenbaum Alzbeta Fellenbaum Manager – Research and Analysis, Service Providers & Platforms
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Earlier this month, U.S. President Barack Obama, a long-time proponent of net neutrality, called on the Federal Communications Committee (FCC) to regulate the internet under “Title II of the Communications Act of 1934”, classifying it as a telecommunications service and applying the same restrictions placed on ‘common carrier’ telecoms services, which are considered to be public utility under the Act. Under the current status quo, broadband internet services are categorised as ‘information services’ meaning that internet service providers (ISPs) are not obliged to offer the same service for everyone, unlike in the case of telephone services or electricity.

In his statement, President Obama outlined that in order to protect net neutrality, ISPs need to be bound by rules enshrining no blocking, no throttling and no paid prioritization while being required to increase transparency of the whole network, applying net neutrality rules to points of interconnection between the ISPs and the rest of the internet and not just to the last mile portion of their network.

Our analysis

The FCC’s previous attempts to apply strict network neutrality rules were struck down by the U.S. Court of Appeals for the District of Colombia in January 2014. In a case brought by Verizon, the court ruled that the FCC could not enforce rules such as prohibition of blocking legal web services or slowing down certain content or services unless they pay a fee, without first declaring ISPs to be common carriers.

Since then the FCC has been looking into a number of options how to best set forth new open internet provisions. Up until President Obama’s public appeal, the FCC’s preference was thought to be a more modest approach based on no blocking rule but allowing for some level of paid prioritization. As an independent agency the FCC is not bound to endorse the President’s proposal, yet the FCC appears to be taking the Title II reclassification option into a serious consideration and has postponed its final decision on net neutrality, originally scheduled for its December meeting, until later in 2015.

As the issue of net neutrality turns into a hot political topic with many Republicans opposing any kind of internet regulation, FCC chairman Tom Wheeler made it clear that the FCC’s decision will be carefully evaluated from a legal point of view in order to ensure that the changes withstand an anticipated legal backlash.

Meanwhile, the leading ISPs have continued to voice their discontent with the government net neutrality proposals. AT&T, which has previously slammed common carrier provisions as unproductive and harmful to the whole internet ecosystem and having enormous impact on peering and interconnection agreements while applying additional requirements on ISPs that do not directly impact consumers, has decided, following the President’s plea, to halt any new high-speed fibre broadband networks deployments until the FCC clearly defines net neutrality rules. AT&T argues that it cannot go forward with the planned investment in fibre deployments in one hundred cities across the U.S. if the rules governing the investments are unclear.

Comcast has been less vocal against net neutrality, partly due to the fact that it is already bound by strict Open Internet rules that it agreed to as part of its acquisition of NBCUniversal in 2011 and has to abide by the principles of transparency, no blocking, and no unreasonable discrimination until 2018. However, Comcast representatives made it clear the company is strongly against the Title II reclassification as it would in their view slow down internet expansion and innovation. While the company publicly supports the provisions of open internet, it has sparked debates this February when it announced an ‘interconnection’ deal with Netflix. Even though both companies declined any preferential treatment and IHS believes the deal is not a carriage deal but a transit deal, in which Netflix pays for interconnection and which helps Comcast manage demand on its network, it raises questions whether such deal would be acceptable under the President’s definition of net neutrality.

The issue of peering and power to negotiate favourable transit deals have not been addressed by the FCC. Yet, it is these deals that provide a wiggle room for ISPs and allow for more aggressive negotiations with third parties (either CDNs or other transit providers) who can be left unable to peer with an ISP’s network without paying sufficient amount.  So far the FCC has not mentioned any intentions of regulating this aspect of broadband market and it seems likely that despite the President’s appeal, FCC’s final ruling on net neutrality will allow for some level of paid access, probably in the form of the above mentioned peering agreements already in place.

However, the scrutiny of ISPs heightened quite significantly over the past year and it can be expected that the new FCC rules will be tougher than the original Open Internet guidelines put in place in 2010. This is also a reason why Verizon now promises that it will not sue the FCC again if the new net neutrality rules are similar to the 2010 rules, suggesting that Verizon might be regretting its decision of challenging the original FCC rules in the first place.

On the other hand reclassification of internet services under Title II might be too radical a decision to be pulled off by the FCC alone and Congressional approval will likely be necessary. With the Republican majority in both House of Representatives and the Senate it will be a no easy or quick feat to achieve.  

AT&T Comcast FCC Verizon
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