Kovacs: D.C. Circuit's net neutrality ruling poses danger to edge providers

Anna Maria Kovacs


Not surprisingly, initial reactions to the opinion of the U.S. Court of Appeals for the D.C. Circuit upholding the Federal Communications Commission's (FCC) Open Internet Order have focused on its effect on fixed and mobile broadband internet access providers (ISPs). Analysts have speculated that the FCC might pursue more rate regulation, forbid usage-based pricing or zero-rating, and become more aggressive in areas such as privacy.  Most did not expect a short-term impact because, as Oppenheimer pointed out, "No carrier has had any financial gains from exploiting their positions, nor were they expected to any time soon." Barclays, however, noted that "the outcome is likely to be a longer-term negative" for broadband business models with valuations depressed if the FCC regulates broadband extensively.

Very little attention, however, has been paid to the threat this decision poses to edge providers. The logic used by the FCC and upheld by the court has opened the door to subjecting any internet platform that connects users for a fee to Title II. According to the Telecommunications Act of 1996, as the court notes, "telecommunications service" is an "offering of telecommunications for a fee directly to the public." For a start, the court supported the FCC's contention that it can decide what ISPs are offering. Even though ISPs provide telecommunications together with email, caching, domain-name (DNS) lookup and other services which are information services when not provided by ISPs, the FCC decided that in their case these services are either severable from the telecommunications or ancillary to it. 

In section IV of the opinion, in which the court upholds the FCC's decision to reclassify mobile broadband as a telecommunications service, the FCC is allowed to stretch the definition of the public switched network (PSN) to include all Internet Protocol (IP) endpoints along with conventional phone numbers. In effect, the entire internet has become the PSN and potentially subject to Title II. The FCC is also allowed to argue that mobile broadband interconnects with the entire PSN because Voice-over-IP services like FaceTime, Skype, and Google Voice and Hangout as well as email and messaging services like Gmail and WhatsApp can be integrated with mobile broadband to facilitate the transmission of mobile broadband communication.

While the court cited some arguments to indicate that facts may have changed since the Supreme Court decided that cable-modem service is not a telecommunications service, it also accepted the FCC's contention that "changed factual circumstances were not critical to its classification decision" since the FCC could "disavow our prior interpretations to the extent they held otherwise."

Thus, the court has given the FCC enormous latitude. In effect, an offering is what the FCC defines it to be, based on facts as it perceives them at a given time, with permission to change its interpretation whether or not the facts have changed. Similarly, the PSN is whatever the FCC defines it to be at a given point in time. A service is a telecommunications service because users are considered to interconnect even if it takes integrated information services to enable them to do so.

Whether the enormous latitude given by the court to the FCC will stand up on appeal remains to be seen. If it does, there will be nothing to prevent the FCC from deciding that internet platforms like FaceTime, Facebook, Vonage, Skype, YouTube, Netflix, Gmail or even Uber or Google Search are telecommunications services. After all, they have myriad users and massive revenues and can potentially be reached by any or all IP endpoints. Of course, they have aspects that look like information services, but will a search algorithm seem any less ancillary in a few years than a DNS-lookup does today?

The D.C. Circuit's affirmation of the FCC's Open Internet Order creates enormous uncertainty for companies in all parts of the internet, not just for access providers. It invites edge providers to contort their services to attempt to evade classification under Title II. Thus, it threatens innovation and investment throughout the internet ecosystem.   

©Anna-Maria Kovacs 2016.  All rights reserved.

Anna-Maria Kovacs, Ph.D., CFA, is a Visiting Senior Policy Scholar at the Georgetown Center for Business and Public Policy. She has covered the communications industry for more than three decades as a financial analyst and consultant.