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If you happen to own a computer, television or other streaming device, you’ve probably heard that Netflix recently reached an agreement with Comcast to streamline the delivery of Netflix’s videos to Comcast customers.

You’ve probably also heard that the chairman of the Federal Communications Commission has circulated new “net neutrality” rules to govern how traffic moves across the so-called “last mile” connection between an internet service provider and your home.

What do these have to do with each other? The short answer is “nothing,” but you wouldn’t know that from listening to Netflix’s CEO.

In short, the Netflix-Comcast agreement deals with something known as interconnection – how big content providers transmit their huge files over the internet’s backbone in order to get to Comcast (and other ISP) last mile facilities in the first place.  Net neutrality deals with how traffic is handled once it arrives at the last-mile, and whether it makes sense for certain traffic to receive priority treatment once it gets there.

Let’s take the issue of interconnection first.

Big content providers have always had to pay someone to manage delivery of their shows, movies and services. Typically these companies use specialized services called “content delivery networks” (CDNs) to manage this traffic as it travels from the provider to the ISP, which then moves it over its “last miles” to individual customers and screens. CDNs often build significant infrastructure of their own to improve speeds, and content providers (including Netflix) have always paid for this.

A company like Netflix can also connect to ISPs directly to cut out the middleman. Companies like Google, Microsoft, Amazon and others do just this, paying for network “ports” that enable them to manage their own traffic and offload their massive data streams directly, instead of paying a third party to handle it.

Netflix’s much-loved videos take up as much as 30 percent of all internet bandwidth in the U.S, creating longstanding traffic management problems for the company that have been costly to address.  Netflix had used a number of CDN middlemen to deliver its traffic, but ran into problems when it overloaded one CDN, Cogent, which didn’t want to pay for the extra infrastructure needed to offload the additional content.
So Netflix chose to interconnect directly with Comcast, which had already invested heavily in the infrastructure to handle large volumes of content.  Although Netflix pays Comcast for interconnection, it has reportedly saved a ton of cash in cutting out the middleman— and increased its speeds by 65 percent.

Net neutrality, on the other hand, addresses the issue of discrimination on the last-mile networks owned by Comcast and other ISPs. In essence, it seeks to prohibit unfair treatment of unaffiliated content traveling within an ISP’s network. Under the new proposed rules, according to reports, if an ISP decides to provide premium speeds to Netflix over its last mile facility, it can’t deny that same quality of service to Netflix’s competitors.

So if the issues of interconnection and net neutrality are entirely different, why did Netflix CEO Reed Hastings take to the airwaves to complain that the interconnection deal with Comcast – one that he initiated and over which he stands to save money – amounts to an unfair “toll” on Netflix that threatens net neutrality?

Apparently, Mr. Hastings figured he could confuse longstanding, widely accepted interconnection practices with the debate over net neutrality, hoping politicians and regulators who favor net neutrality might help him get a free pass on interconnection costs.

But free to whom? Someone has to pay for the infrastructure needed to handle Netflix’s traffic. If Netflix (or Cogent) doesn’t pay, everyone using the network would have to, whether they were Netflix customers or not.

In reality, Hastings was looking for a government handout – either in the new net neutrality rules or via “conditions” attached to approval of the Comcast/Time Warner Cable deal. Given that Sen. Al Franken recently asked Netflix to help him kill the transaction using similar “gatekeeper” metaphors, Hastings’ ploy may well be effective. But that doesn’t make it logical or fair.

There is simply no justification for offering Netflix any special treatment in its interconnection arrangements. Online content providers have countless ways to connect with broadband networks. Competition has forced prices for these interconnection services down by a remarkable 99 percent in recent years. ISPs can do nothing to thwart interconnection, and, in fact, Comcast has every incentive to keep the online video spigot wide open.

There is a reason every iteration of the FCC’s net neutrality rules, including the latest, have explicitly not applied to backbone interconnection agreements: Interconnection over the backbone has always been open and competitive, and it simply doesn’t give rise to the kind of discrimination concerns net neutrality is meant to address.

That Netflix would prefer not to pay for delivery of its content isn’t surprising. But net neutrality regulations don’t — and shouldn’t — have anything to do with it.

Cross-posted from the Oregonian

I have a new article on the Comcast/Time Warner Cable merger in the latest edition of the CPI Antitrust Chronicle, which includes several other articles on the merger, as well.

In a recent essay, Allen Grunes & Maurice Stucke (who also have an essay in the CPI issue) pose a thought experiment: If Comcast can acquire TWC, what’s to stop it acquiring all cable companies? The authors’ assertion is that the arguments being put forward to support the merger contain no “limiting principle,” and that the same arguments, if accepted here, would unjustifiably permit further consolidation. But there is a limiting principle: competitive harm. Size doesn’t matter, as courts and economists have repeatedly pointed out.

Read the full piece here.

Excerpt

No mattter what you think of network neutrality — for it, against it, it’s complicated, who cares — the fact that a federal court just struck down most of the FCC’s net neutrality rules is clearly cause for concern.

But not for the reasons you think. Others are saying that the FCC just lost the battle but “can finally win the war” — if the agency formally “reclassifies” broadband as a heavily regulated “common carrier” (like traditional telephone services). Actually, the FCC lost the battle, but it just won the war over regulating the internet. It no longer needs to bother with reclassification, a process so difficult and drawn-out it was always a political fantasy anyway.

The FCC’s broad new powers should worry everyone, whatever they think of net neutrality. Because beneath the clever rallying cries of “net neutrality!” lurks a wide range of potential issues. Most concerns are imaginary or simply misplaced. The real concerns would be better addressed through other approaches — like focusing on abuses of market power that harm competition.

But first, we need to look at the ruling in a more nuanced way.

Continue reading on Wired.com

Today the D.C. Circuit struck down most of the FCC’s 2010 Open Internet Order, rejecting rules that required broadband providers to carry all traffic for edge providers (“anti-blocking”) and prevented providers from negotiating deals for prioritized carriage. However, the appeals court did conclude that the FCC has statutory authority to issue “Net Neutrality” rules under Section 706(a) and let stand the FCC’s requirement that broadband providers clearly disclose their network management practices.

The following statement may be attributed to Geoffrey Manne and Berin Szoka:

The FCC may have lost today’s battle, but it just won the war over regulating the Internet. By recognizing Section 706 as an independent grant of statutory authority, the court has given the FCC near limitless power to regulate not just broadband, but the Internet itself, as Judge Silberman recognized in his dissent.

The court left the door open for the FCC to write new Net Neutrality rules, provided the Commission doesn’t treat broadband providers as common carriers. This means that, even without reclassifying broadband as a Title II service, the FCC could require that any deals between broadband and content providers be reasonable and non-discriminatory, just as it has required wireless carriers to provide data roaming services to their competitors’ customers on that basis. In principle, this might be a sound approach, if the rule resembles antitrust standards. But even that limitation could easily be evaded if the FCC regulates through case-by-case enforcement actions, as it tried to do before issuing the Open Internet Order. Either way, the FCC need only make a colorable argument under Section 706 that its actions are designed to “encourage the deployment… of advanced telecommunications services.” If the FCC’s tenuous “triple cushion shot” argument could satisfy that test, there is little limit to the deference the FCC will receive.

But that’s just for Net Neutrality. Section 706 covers “advanced telecommunications,” which seems to include any information service, from broadband to the interconnectivity of smart appliances like washing machines and home thermostats. If the court’s ruling on Section 706 is really as broad as it sounds, and as the dissent fears, the FCC just acquired wide authority over these, as well — in short, the entire Internet, including the “Internet of Things.” While the court’s “no common carrier rules” limitation is a real one, the FCC clearly just gained enormous power that it didn’t have before today’s ruling.

Today’s decision essentially rewrites the Communications Act in a way that will, ironically, do the opposite of what the FCC claims: hurt, not help, deployment of new Internet services. Whatever the FCC’s role ought to be, such decisions should be up to our elected representatives, not three unelected FCC Commissioners. So if there’s a silver lining in any of this, it may be that the true implications of today’s decision are so radical that Congress finally writes a new Communications Act — a long-overdue process Congressmen Fred Upton and Greg Walden have recently begun.

Szoka and Manne are available for comment at [email protected]. Find/share this release on Facebook or Twitter.

Filed under: federal communications commission, international center for law & economics, net neutrality, regulation, technology, telecommunications, wireless Tagged: Broadband, FCC, Federal Communications Commission, Internet of Things, net neutrality, Open Internet Order, Verizon v. FCC

Today the D.C. Circuit struck down most of the FCC’s 2010 Open Internet Order, rejecting rules that required broadband providers to carry all traffic for edge providers (“anti-blocking”) and prevented providers from negotiating deals for prioritized carriage. However, the appeals court did conclude that the FCC has statutory authority to issue “Net Neutrality” rules under Section 706(a) and let stand the FCC’s requirement that broadband providers clearly disclose their network management practices.

Read the full piece here.

Summary

“Twenty years ago, Democrats and Republicans agreed on the need to refocus communications competition policy on promoting competition in an era of convergence, focusing on effects rather than formalism. Unfortunately, that focus was lost in the sausage-making process of legislation – and the FCC has been increasingly adrift ever since. The FCC has not waited for Congress to act, and has instead found creative ways to sidestep the formalist structure of the Act. It is high time for Congress to reassert its authority and to craft a new act focused on the effects of competition as a durable basis for regulation.

The antitrust statutes have not been fundamentally modified in over a century because Congress has not needed to do so: antitrust law has evolved on top of them through a mix of court decisions and doctrinal development articulated by the antitrust agencies. At the heart of this evolution of common law has been one guiding concern: effects on consumer welfare, seen through the lens of law and economics. The same concern and same analytical lens should guide the re-write of the Communications Act that is, by now, two decades overdue.

While refocusing competition regulation on effects, Congress should give equal focus to minimizing remaining barriers to competition. In particular, that means minimizing regulatory uncertainty (and, in particular, avoiding any return to mostly archaic Title II regulations); maximizing the amount of spectrum available; simplifying the construction and upgrading of wireless towers to maximize the capacity of wireless broadband; and promoting infrastructure policy at all levels of government that makes deployment cost-effective…”

For those in the DC area interested in telecom regulation, there is another great event opportunity coming up next week.

Join TechFreedom on Thursday, December 19, the 100th anniversary of the Kingsbury Commitment, AT&T’s negotiated settlement of antitrust charges brought by the Department of Justice that gave AT&T a legal monopoly in most of the U.S. in exchange for a commitment to provide universal service.

The Commitment is hailed by many not just as a milestone in the public interest but as the bedrock of U.S. communications policy. Others see the settlement as the cynical exploitation of lofty rhetoric to establish a tightly regulated monopoly — and the beginning of decades of cozy regulatory capture that stifled competition and strangled innovation.

So which was it? More importantly, what can we learn from the seventy year period before the 1984 break-up of AT&T, and the last three decades of efforts to unleash competition? With fewer than a third of Americans relying on traditional telephony and Internet-based competitors increasingly driving competition, what does universal service mean in the digital era? As Congress contemplates overhauling the Communications Act, how can policymakers promote universal service through competition, by promoting innovation and investment? What should a new Kingsbury Commitment look like?

Following a luncheon keynote address by FCC Commissioner Ajit Pai, a diverse panel of experts moderated by TechFreedom President Berin Szoka will explore these issues and more. The panel includes:

• Harold Feld, Public Knowledge
• Rob Atkinson, Information Technology & Innovation Foundation
• Hance Haney, Discovery Institute
• Jeff Eisenach, American Enterprise Institute
• Fred Campbell, Former FCC Commissioner

Space is limited so RSVP now if you plan to attend in person. A live stream of the event will be available on this page. You can follow the conversation on Twitter on the #Kingsbury100 hashtag.

When:
Thursday, December 19, 2013
11:30 – 12:00 Registration & lunch
12:00 – 1:45 Event & live stream

The live stream will begin on this page at noon Eastern.

Where:
The Methodist Building
100 Maryland Ave NE
Washington D.C. 20002

Questions?
Email [email protected].

Filed under: federal communications commission, net neutrality, regulation, technology, telecommunications, wireless Tagged: at&t, Berin Szoka, Commissioner Pai, Federal Communications Commission, Fred Campbell, Hance Haney, Harold Feld, Jeff Eisenach, Kingsbury Commitment, Rob Atkinson, techfreedom

I have a new post up at TechPolicyDaily.com, excerpted below, in which I discuss the growing body of (surprising uncontroversial) work showing that broadband in the US compares favorably to that in the rest of the world. My conclusion, which is frankly more cynical than I like, is that concern about the US “falling behind” is manufactured debate. It’s a compelling story that the media likes and that plays well for (some) academics.

Before the excerpt, I’d also like to quote one of today’s headlines from Slashdot:

“Google launched the citywide Wi-Fi network with much fanfare in 2006 as a way for Mountain View residents and businesses to connect to the Internet at no cost. It covers most of the Silicon Valley city and worked well until last year, as Slashdot readers may recall, when connectivity got rapidly worse. As a result, Mountain View is installing new Wi-Fi hotspots in parts of the city to supplement the poorly performing network operated by Google. Both the city and Google have blamed the problems on the design of the network. Google, which is involved in several projects to provide Internet access in various parts of the world, said in a statement that it is ‘actively in discussions with the Mountain View city staff to review several options for the future of the network.’”

The added emphasis is mine. It is added to draw attention to the simple point that designing and building networks is hard. Like, really really hard. Folks think that it’s easy, because they have small networks in their homes or offices — so surely they can scale to a nationwide network without much trouble. But all sorts of crazy stuff starts to happen when we substantially increase the scale of IP networks. This is just one of the very many things that should give us pause about calls for the buildout of a government run or sponsored Internet infrastructure.

Another of those things is whether there’s any need for that. Which brings us to my TechPolicyDaily.com post:

In the week or so since TPRC, I’ve found myself dwelling on an observation I made during the conference: how much agreement there was, especially on issues usually thought of as controversial. I want to take a few paragraphs to consider what was probably the most surprisingly non-controversial panel of the conference, the final Internet Policy panel, in which two papers – one by ITIF’s Rob Atkinson and the other by James McConnaughey from NTIA – were presented that showed that broadband Internet service in US (and Canada, though I will focus on the US) compares quite well to that offered in the rest of the world. […]

But the real question that this panel raised for me was: given how well the US actually compares to other countries, why does concern about the US falling behind dominate so much discourse in this area? When you get technical, economic, legal, and policy experts together in a room – which is what TPRC does – the near consensus seems to be that the “kids are all right”; but when you read the press, or much of the high-profile academic literature, “the sky is falling.”

The gap between these assessments could not be larger. I think that we need to think about why this is. I hate to be cynical or disparaging – especially since I know strong advocates on both sides and believe that their concerns are sincere and efforts earnest. But after this year’s conference, I’m having trouble shaking the feeling that ongoing concern about how US broadband stacks up to the rest of the world is a manufactured debate. It’s a compelling, media- and public-friendly, narrative that supports a powerful political agenda. And the clear incentives, for academics and media alike, are to find problems and raise concerns. […]

Compare this to the Chicken Little narrative. As I was writing this, I received a message from a friend asking my views on an Economist blog post that shares data from the ITU’s just-released Measuring the Information Society 2013 report. This data shows that the US has some of the highest prices for pre-paid handset-based mobile data around the world. That is, it reports the standard narrative – and it does so without looking at the report’s methodology. […]

Even more problematic than what the Economist blog reports, however, is what it doesn’t report. [The report contains data showing the US has some of the lowest cost fixed broadband and mobile broadband prices in the world. See the full post at TechPolicyDaily.com for the numbers.]

Now, there are possible methodological problems with these rankings, too. My point here isn’t to debate over the relative position of the United States. It’s to ask why the “story” about this report cherry-picks the alarming data, doesn’t consider its methodology, and ignores the data that contradicts its story.

Of course, I answered that question above: It’s a compelling, media- and public-friendly, narrative that supports a powerful political agenda. And the clear incentives, for academics and media alike, are to find problems and raise concerns. Manufacturing debate sells copy and ads, and advances careers.

Filed under: federal communications commission, net neutrality, regulation, technology, telecommunications, truth on the market, wireless Tagged: Broadband, FCC, Internet Access, Network neutrality, rankings, TPRC

Excerpt

You may not know much about the most important agency in Washington when it comes to regulating new technologies. Founded 99 years ago today, the Federal Trade Commission has become, for better or worse, the Federal Technology Commission.

The FTC oversees nearly every company in America. It polices competition by enforcing the antitrust laws. It tries to protect consumers by punishing deception and practices it deems “unfair.” It’s the general enforcer of corporate promises. It’s the de facto regulator of the media, from traditional advertising to Internet search and social networks. It handles novel problems of privacy, data security, online child protection, and patent claims, among others. Even Net neutrality may soon wind up in the FTC’s jurisdiction if the Federal Communications Commission’s rules are struck down in court.

But how should the FTC regulate technology? What’s the right mix of the certainty businesses need and the flexibility technological progress demands?

There are essentially three models: regulatory, discretionary and evolutionary.

The epitome of traditional regulatory model is the FTC’s chief rival: the FCC. The 1996 Telecom Act runs nearly 47,000 words — 65 times longer than the Sherman Act of 1890, the primary antitrust law enforced by the FTC. The FCC writes tech-specific before technology has even developed. Virginia Postrel described the mentality best in The Future and Its Enemies:

Technocrats are “for the future,” but only if someone is in charge of making it turn out according to plan. They greet every new idea with a “yes, but,” followed by legislation, regulation, and litigation…. By design, technocrats pick winners, establish standards, and impose a single set of values on the future. 

The less technocratic alternative is the evolutionary model: build flexible law that evolves alongside technology. Learn from, and adapt to, the ever-changing technological and business environments.

On antitrust, that’s essentially what the FTC (along with the Department of Justice) does today. Judicial decisions are firmly grounded in economics, and this feeds back into the agencies’ enforcement actions. Antitrust law has become nearly synonymous with antitrust economics: both courts and agencies weigh the perils of both under- and over-enforcement in the face of unavoidable uncertainty about the future.

But much of what the FTC does falls into the discretionary model, unmoored from both sound economics and judicial oversight. The discretionary and evolutionary models share a similar legal basis and so are often confused, but they’re profoundly different: The discretionary model harms technological progress and undermines the rule of law, while the evolutionary model promotes both.

Continue reading on Tech Dirt