Ambiguity Is Clear for Net Neutrality

(Originally published here.)

Lots of people are unhappy with the Federal Communications Commission’s latest efforts to protect the so-called open Internet. The New York Times led its news story on the subject with the assertion that “the principle that all Internet content should be treated equally as it flows through cables and pipes to consumers looks all but dead.” That’s an extreme interpretation. It’s more likely that regulators are embracing constructive ambiguity to encourage behavior without radically altering the existing rules.

The FCC is in this pickle because of the way it classifies Internet providers. It could say they are “common carriers” under the Communications Act. That would give the FCC broad authority to prevent broadband companies from discriminating among their customers — rules that have long applied to landline phone service. The FCC has resisted taking this step, however, instead preferring to treat Internet providers as information services, which both transmit and process data. Maybe regulators agree with the National Cable and Telecommunications Association that “common carrier regulation discourages infrastructure investment and network enhancements.”

Whatever the logic, the FCC’s restraint means that it lacks a firm legal basis for the strict rules so-called net-neutrality advocates desire, which is why the agency’s previous regulations were struck down by a federal appeals court in January. The new rules, like the ones that were thrown out, are supposed to prevent Internet providers from imposing tolls by threatening to block sites or slow traffic. However, they would allow broadband companies to make “commercially reasonable” deals with businesses such as Netflix Inc. or Inc. that want dedicated high-speed connectivity. The FCC would have to be told about the terms of each deal and would have discretion to assess whether they were “reasonable.”

This probably won’t change much. The term “reasonable” is so vague that most businesses will probably prefer to err on the side of caution. After all, despite warnings you may read about their nefarious market power, the big Internet providers know that if they step too far out of line the FCC could always reclassify them as common carriers.

Remember when Comcast Corp. bought NBCUniversal? At the time, advocates thought it would be dangerous to have a content company vertically integrated with a cable and Internet business. Regulators agreed and forced Comcast to abide by strict rules in its treatment of NBC and the subscription video service Hulu. Those rules will still be in effect until 2018 and no one seems to have seriously argued that Comcast has violated its agreements so far. It’s possible that Comcast could choose to discriminate against online content from ESPN to promote the Comcast Sports Network once the deal expires but that doesn’t seem likely when the threat of common-carrier reclassification remains hanging over executives’ heads.

Besides, Internet providers and content companies already make bilateral deals to improve speed and reliability. Most of those deals wouldn’t be affected by stricter regulation of the ways broadband companies distribute content along the so-called last mile to residential customers, which is the issue at hand. Regulators didn’t bat an eye when Netflix paid Comcast to connect directly to its backbone network, or when it was rumored that Apple Inc. would pay Comcast to get its content treated as a “managed service,” which Microsoft Corp. already does for Xbox Live. The newly permissive rules don’t affect any of this.

Even more important is that the mobile Internet, which now accounts for more than half of total U.S. Internet usage, has never been protected from discriminatory treatment by wireless carriers. AT&T Inc. recently patented technology that would let it track how you use the Internet and alter your data plan according to whether it approves or disapproves of your behavior. Imagine the outrage if a cable company said it would raise or lower your bill depending on which channels you watched! AT&T also sells sponsored data to content companies that want to let consumers exceed their monthly caps. Despite these potential dangers to the open Internet, the market for new (and unprofitable) apps is quite robust and content companies haven’t been complaining that they are being mistreated. The wireless carriers haven’t, as of yet, abused their position because they too could always be reclassified as common carriers.

Maybe it would be better for regulators to avoid the ambiguity and treat the Internet the way they treat landline phones. But the existing approach of keeping companies in check with ambiguous threats seems to be working pretty well.

To contact the writer of this article: Matthew C. Klein at

To contact the editor responsible for this article: James Greiff at


About Matthew C. Klein

I write about the economy and financial markets for Bloomberg View. Before that I wrote for The Economist on a fellowship provided by the Marjorie Deane Financial Journalism Foundation. I have worked at the world's largest hedge fund and read every FOMC transcript since May, 1987.
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