issue: Telecom

PPI Statement on President Obama’s Endorsement of Title II Regulation

Posted on by The Progressive Policy Institute

PPI President Will Marshall released the following statement today after President Obama’s announcement urging the Federal Communication Commission (FCC) to regulate broadband Internet as a public utility under its Title II authority:

“’I hear you,’ President Obama assured voters in his post-midterm press conference last week. But his endorsement today of subjecting the Internet to heavy-handed regulation suggests otherwise.

“In fact, the president’s statement is exactly the wrong reaction to the election. It endorses a backward-looking policy that would apply the brakes to the most dynamic sector of America’s economy.

“The shellacking the president and his party suffered last week was largely about the economy. In exit polls, 70 percent of voters said they were mostly concerned about the economy, and an overwhelming majority of them described economic conditions as ‘not so good’ or poor.

“If the election yields any lesson, it is that Democrats need to offer the public a more convincing plan for accelerating economic growth and restoring shared prosperity. Such a plan should begin by building on America’s comparative advantages in digital innovation and entrepreneurship.

“Imposing public utility-style regulation on the Internet points in the opposite direction. It would very likely reduce private investment in broadband, which as PPI has documented in a series of policy reports, is a prime catalyst for job and business creation in the United States.

“It is also inconsistent with the Democratic Party’s legacy. After all, the Internet took off in the 1990s, thanks in significant degree to the ‘light touch’ approach to regulation adopted by the Clinton-Gore Administration.

“We hope President Obama will reflect on that legacy of pro-growth progressivism and reconsider his endorsement of Title II regulation of the Internet.”

The FCC Chairman Steps Into The Abyss

Posted on by The Progressive Policy Institute

Last Friday, Gautham Nagesh reported that the FCC  was inching closer to adopting a proposal put forward by Mozilla as its solution to the net neutrality problem. Under this “hybrid” approach, the FCC would reclassify the portion of a broadband provider’s network that interfaces with edge providers as a Title II service, while regulating the remaining portion that interfaces with end users as an information service.

The key line from Mr. Nagesh’s article reads as follows: “While the FCC still believes there should be room for such [priority] deals, its latest plan would shift the burden to the broadband providers to prove that the arrangements would be beneficial to consumers and equally available to any company that would like to participate.”

This leak portends good and bad news. First the good news: The FCC is coming to recognize that some paid priority deals could be beneficial for all parties, including end users. This recognition puts the lie to the “zero-sum hypothesis” peddled by net neutrality proponents—namely, that any priority arrangement must come at the expense of non-prioritized traffic. Hooey, say the network engineers; paid priority has existed in other portions of the network, and can be readily engineered to keep others whole.

And now the bad news: In a bow to political pressure, the FCC seems intent on establishing a presumption that any priority deal violates its rules unless the broadband provider can prove otherwise. Mr. Nagesh’s phrase “shift the burden” was a misnomer, as the FCC’s 2010 Open Internet order established the same presumption by declaring that any paid priority deals “would raise significant cause for concern” and were “unlikely [to] satisfy the no-reasonable-discrimination standard.”

Moreover, the D.C. Circuit ruled that such a presumption effectively barred such deals and was tantamount to common carriage: “If the Commission will likely bar broadband providers from charging edge providers for using their service, thus forcing them to sell this service to all who ask at a price of $0, we see no room at all for ‘individualized bargaining.’” We’ve tried this presumption before and it failed.

Critically, the D.C. Circuit laid out a legal path for the FCC to regulate pay-for-priority deals without resort to common carriage. So long as broadband providers were free to bargain individually with edge providers, the court explained, these arrangements could be regulated under the FCC’s 706 authority.

And how to establish such freedom? By flipping the presumption around, so that priority deals are reasonable until a complaining edge provider can prove otherwise. One can envision two types of complaints arising under this case-by-case framework: (1) an edge provider was denied a priority offering that was extended to its rival, or (2) an edge provider who declined priority from a broadband provider suffered a degradation in its quality of service. After demonstrating discrimination or degraded service, the burden should shift back to the broadband provider, thereby sparing the edge provider of significant legal expense.

Quarantined from political forces, smart lawyers at the FCC set about drafting rules that would thread this needle—again, without resort to Title II reclassification. The agency released a Notice of Proposed Rulemaking (“NPRM”) a few months after the D.C. Circuit’s ruling, which explained that pay-for-priority deals would be subjected to a “commercial reasonable” standard, and “prohibited under that rule if they harm Internet openness.” In other words, such deals were presumed to be commercially reasonable unless an edge provider could prove otherwise. The NPRM also proposed to adopt a rebuttable presumption that a broadband provider’s exclusive pay-for-priority deal would be commercially unreasonable. From an economic perspective, those two strokes were utterly brilliant, as they efficiently placed the burden on the appropriate party.

Not so, said John Oliver and 3.7 million angry letters ostensibly submitted to the FCC. (Given the esoteric language of those letters, which invoked Title II authority, I suspect that a great many were form letters generated by public-interest groups clamoring for Title II-based solutions.) Ever since that political groundswell, the Chairman has backpedaled from the elegant, light-touch solution of the NPRM.

Indeed, key players at the FCC are trying their best to create the impression that every path to the finish line must be routed through Title II. Consider this October 27 FCC blog posting by three high-ranking FCC officials, explaining the remaining policy options on the table:

Panelists at the opening roundtable, which focused on tailoring policy to harms, debated paid prioritization—a topic central to many comments in our record.  Some parties have urged a flat ban on these practices. Others believe a presumption that paid prioritization violates the law would protect Internet openness. This is a central issue: how best can the Commission prevent harm to the virtuous circle of innovation, consumer demand, and broadband deployment, which unites the interests of consumers, edge providers, and other stakeholders?

Say what? How about that option that the FCC outlined in the NPRM, urged on by the D.C. Circuit, in which pay-for-priority deals were presumptively reasonable unless a complainant could prove that they “harm Internet openness.” By removing that critical option from the conversation, Title II seems all but inevitable.

Notwithstanding this sleight of hand, the Chairman still has two solutions on the table: A political-free solution embodied in the NPRM that draws from the FCC’s 706 authority and hugs closely to the D.C. Circuit’s decision, and a highly politicized solution drafted by a conflicted party—seeking to coordinate a price-fixing conspiracy for an input (priority) via regulation—that would reclassify a portion of a broadband providers’ network as a Title II service.

If the Chairman can’t figure out which solution is better for the dual task of protecting consumers and promoting broadband investment, then perhaps the two Republican commissioners should toss him a line by touting the virtues of the forgotten NPRM. Without it, he will fall deep into the abyss.

This piece is cross-posted from Forbes.

Press Release: PPI Releases Policy Memo Revealing FDA Regulations Struggling to Keep Up With the Digital Age

Posted on by The Progressive Policy Institute

WASHINGTON—The amount of regulation on the pharmaceutical industry has increased 40 percent since 2000, according to a policy memo released today by the Progressive Policy Institute (PPI). Moreover, some new draft regulations proposed by the Food and Drug Administration (FDA) this year fail to embrace data-driven innovation.

In FDA Regulation in the Data-Driven Economy, PPI Economist Diana Carew details new regulations proposed by the FDA designed for a slower, information-poor age. The memo concludes with policy recommendations for how the FDA can improve outcomes while still protecting consumers in a data-driven economy.

“In a data-driven economy, regulators should encourage greater information sharing, instead of pre-emptively regulating information in a way that controls and ultimately restricts it,” Carew writes. “Regulators should take the role of watchful guardians over data and information flows, taking action when there is evidence of harm or injury.”

“We hope that regulators within the FDA and across other regulatory agencies will be able to use this example as a guide for approaching future regulatory questions surrounding data. Embracing the data-driven economy is the best way to promote future prosperity and well-being for all Americans.”

The memo focuses on one draft FDA guidance in particular, issued in February 2014, entitled “Guidance 
for Industry: Distributing Scientific and
 Medical Publications on Unapproved New Uses— Recommended Practices,” which lays out a lengthy list of rules and restrictions for how drug and medical device manufacturers are allowed to communicate with healthcare professionals and “healthcare entities,” such as hospitals, on unapproved new uses. It discusses the draft guidance and explains why it is not adequate for the digital age. Finally, recommendations for the draft guidance are provided, and the memo concludes with an expansion of the discussion to how this case study can serve as an example for regulators struggling with rulemaking in this time of unprecedented economic transformation.

PPI has undertaken extensive research on regulation in the 21st century, aimed at guiding regulators and policymakers through this transition. Our work strives to strike the right balance between protecting consumers and encouraging innovation in an interconnected world.

Download FDA Regulation in the Data-Driven Economy

FDA Regulation in the Data-Driven Economy

Posted on by The Progressive Policy Institute

The shift to data-driven growth is one of the most important forces behind the strong performance of the U.S. economy in recent years. Online sales are up by 16% over the past year, and Americans are getting more and more of their information online. Indeed, data-related products and services account for roughly 30% of real personal consumption growth since 2007, second only to the 40% coming from the growth of healthcare-related goods and services.

Yet regulators are struggling to keep up with the digital age. The accumulation of regulations designed for a slower, information-poor age fail to take advantage of new opportunities to improve outcomes while still protecting consumers. The issue of how to regulate in the data-driven economy has been widely discussed, including in several policy papers by the Progressive Policy Institute. For example, our proposal for a Regulatory Improvement Commission, designed to relieve the build-up of outdated and duplicative regulations over time, has been written into legislation and introduced in both the House and Senate.

The Food and Drug Administration (FDA), in particular, is facing a variety of regulatory issues which involve the intersection between the data-driven economy and the more traditional world of health-related regulations. For example, the FDA took a carefully balanced approach in its rule making on mobile medical applications, choosing to exercise enforcement discretion, instead of regulating apps that do not track medical information, such as counting calories.

Download “2014.10-Carew_FDA-Regulation-in-the-Data-Driven-Economy“

Economist: Silver Lining ‘How the digital revolution can help some of the workers it displaces’

Posted on by The Progressive Policy Institute

The PPI was cited by The Economist in a special report discussing the digital revolution and the potential job opportunities it provides to the very artisans it originally displaced:

“The ‘app economy’ has since grown by leaps and bounds. According to an estimate by the Progressive Policy Institute, a think-tank, in 2013 it provided work for more than 750,000 people in America alone. Many more take part in it from elsewhere in the world, including employees at Rovio, the Finnish firm behind the wildly popular “Angry Birds” line of mobile games, and people like Dong Nguyen, a young programmer in Vietnam who scored an unlikely app hit with “Flappy Bird”, a simple but addictive game that was at one point earning him $50,000 a day.”

Dr. Michael Mandel, Chief Economic Strategist at PPI, was also quoted:

Michael Mandel, a technology expert at the Progressive Policy Institute, reckons that innovation is generally followed by growth in employment. That is most obviously true in ICT, but also in sectors like energy, where fracking technology has generated an oil boom and a jobs bonanza in states such as North Dakota and Texas. Mr Mandel invites sceptics to imagine a future in which doctors can 3D-print livers (and other organs) on demand—a technology that looks increasingly realistic. 

Read the whole story at The Economist.

PPI’s Hal Singer Joins FCC Open Internet Roundtable; Argues For Case-by-Case Adjudication

Posted on by The Progressive Policy Institute

WASHINGTON—Progressive Policy Institute Senior Fellow and Economist Hal Singer today served as a panelist for an Open Internet roundtable discussion hosted by the Federal Communications Commission (FCC). The roundtable, titled “Economics of Broadband: Market Successes and Market Failures,” first considered incentives to provide high quality open Internet access service and the relevance of market power. It then turned to policies to address market power, consumer protection, and shared benefits of the Internet.

Singer has long called for the FCC to eschew the heavy-handed approach of Title II regulation, and lean instead on its Section 706 authority to regulate potential abuses by ISPs on a case-by-case basis. Investment across both edge and content providers, he argues, will be greater compared to Title II, and the FCC can avoid any unintended consequences, such as creeping regulation, that encompasses content providers or other ISP services. Even an imperfect case-by-case approach to Internet discrimination is better and less costly than blanket prohibition, according to Singer.

“I would like to make five simple points in favor of a case-by-case approach to adjudicating discrimination complaints on the Internet,” Singer said in his remarks. “First, economists and engineers who have studied the issue of priority service unanimously believe that a market for priority could be a good thing for all parties to the transaction, including broadband customers. Second, not only do all parties to the priority transaction benefit, no third party is worse off with priority.

“Third, the leading proponent of strong net neutrality acknowledged in last week’s FCC Roundtable that priority could be a good thing so long as it is user-directed and users pick up the tab. Fourth, even if the FCC wanted to ban priority outright, there is no guarantee that Title II is up for the task. Fifth, the critiques of case-by-case should not persuade the Commission to embrace a blanket prohibition on priority.”

Download Singer’s prepared remarks.

# # #

Multichannel News: Singer Makes Case For Case-By Case Approach to Discrimination

Posted on by The Progressive Policy Institute

Multichannel News discusses PPI Senior Fellow Hal Singer’s stance on the FCC’s upcoming Network Neutrality forum:

“Singer, who points out that he has worked with independent cable nets on a number of discrimination complaints before the FCC, plans to say that economists and engineers who have looked at the issue believe paid priority could (emphasis Singer’s) be a good thing  for all concerned, including consumers. He says they could be used for “bad” as well as good, like anticompetitive favoring of an ISP’s own content. But that, for instance, the packets associated with telemedicine demand better treatment than those carrying a cat video. That is why all priority deals should not be banned.”

Read the entire story at Multichannel News.

Washington Post reports on U.S. Investment Heroes of 2014

Posted on by The Progressive Policy Institute

The Washington Post quoted PPI Chief Economic Strategist Michael Mandel in a story mentioning PPI’s newest report, U.S. Investment Heroes of 2014: Investing at Home in a Connected World:

For a more optimistic one, look inside one more report out this week, from the Progressive Policy Institute. It lists the 25 companies that invested the most in capital improvements in America last year, led by AT&T and Verizon. Most of the companies on the list come from the telecommunications sector, the energy sector or the tech sector – all areas where American minds have engineered big breakthroughs in recent years.

“The investments have followed the innovations,” one of the report authors, Michael Mandel, said in an interview. Jobs, he added, have followed the investments. So if you spur more innovation, you’ll spur more jobs.

Read more at The Washington Post.

 

WJLA Channel 7: Websites protest FCC ‘fast lanes’ with Internet Slowdown Day

Posted on by The Progressive Policy Institute

PPI Senior Fellow Hal Singer was quoted in a story by WJLA Channel 7 regarding yesterday’s Internet Slowdown Day, a protest organized by net neutrality advocates unhappy with new Open Internet rules being proposed by the Federal Communications Commission:

Hal Singer, senior fellow at the Progressive Policy Institute, supports the FCC proposal. He says, “Fast lanes is a loaded term. What I prefer to say is ‘just say no to slow lanes.’”

He continued, “It’s a political campaign. These guys on the other side are very effective at this game. They would like all of these priority delivery offerings to be available for free. Well, that’s very convenient for them. I say, on the other hand, if you don’t want the priority delivery offering, it’s a free country. You can always decline it.”

Singer says – for the average small business or Internet start-up – there’s no demand for such high-speeds. Meanwhile, major telecom firms point out video traffic consumes enormous bandwidth and costs more. And they warn that treating broadband like a utility would harm innovation.

“We’re going to freeze the current technology in place,” Singer said. “And that’s not good for anyone, particularly Internet consumers, because we’re going to keep coming up with new fancy applications that we want and who knows what kind of speeds are required to support those applications.”

Read more on WJLA Channel 7.

Multichannel News: Comcast, TWC On List Of Top Capital Spend

Posted on by The Progressive Policy Institute

Multichannel News quoted PPI Senior Fellow Hal Singer accompanying the release of PPI’s newest report, U.S. Investment Heroes of 2014: Investing at Home in a Connected World.

“Given the importance of broadband investment to the U.S. economy, the social costs of imposing rate regulation under Title II will be even larger than the immediate harms to broadband consumers from an atrophying network; growth in U.S. productivity and job formation could be slowed,” said senior fellow Hal Singer in a statement.

Read more on Multichannel News.

“Given the importance of broadband investment to the U.S. economy, the social costs of imposing rate regulation under Title II will be even larger than the immediate harms to broadband consumers from an atrophying network; growth in U.S. productivity and job formation could be slowed,” said senior fellow Hal Singers in a statement – See more at: https://www.multichannel.com/news/policy/comcast-twc-list-top-capital-spend/383702#sthash.2C5Yd5yy.dpuf
“Given the importance of broadband investment to the U.S. economy, the social costs of imposing rate regulation under Title II will be even larger than the immediate harms to broadband consumers from an atrophying network; growth in U.S. productivity and job formation could be slowed,” said senior fellow Hal Singers in a statement – See more at: https://www.multichannel.com/news/policy/comcast-twc-list-top-capital-spend/383702#sthash.2C5Yd5yy.dpuf
“Given the importance of broadband investment to the U.S. economy, the social costs of imposing rate regulation under Title II will be even larger than the immediate harms to broadband consumers from an atrophying network; growth in U.S. productivity and job formation could be slowed,” said senior fellow Hal Singers in a statement accompanying release of the report. – See more at: https://www.multichannel.com/news/policy/comcast-twc-list-top-capital-spend/383702#sthash.2C5Yd5yy.dpuf

U.S. Investment Heroes of 2014: Investing at Home in a Connected World

Posted on by The Progressive Policy Institute

In this era of globalization, goods, services, money, people, and data all cross national borders with ease. Indeed, connectedness to the rest of the world is now essential for the data-driven economy we find ourselves in to thrive. It follows that our tax, trade, immigration, and regulatory policies must be oriented to encourage that connectedness.

But perhaps paradoxically, prospering in a connected world requires a dedication to investing at home. It is impossible to participate as a full partner in the global economy unless we are investing in digital communications networks, education, infrastructure, research, energy production, product development, content, and security domestically. Investment generates increased productivity, higher incomes, new jobs, and more opportunities for the economic mobility and growth that we all desire.

Such prosperity-enhancing investment comes in many flavors, both private and public. In this report, we focus on identifying the U.S.-based corporations with the highest levels of domestic capital expenditures, as defined by spending on plants, property, and equipment in the United States. Currently, accounting rules do not require companies to report their U.S. capital spending separately, although some do. We fill in this gap in available knowledge using a methodology outlined at the end of this paper, based on estimates derived from published data from nonfinancial Fortune 150 companies.

To understand which companies are betting on America’s future, we rank the top 25 companies by their estimated domestic investment. We believe this list can help inform good policy for encouraging continued and renewed investment domestically.

Download “2014.09 Carew_Mandel_US-Investment-Heroes-of-2014_Investing-at-Home-in-a-Connected-World“

USA Today: AT&T, Verizon, Exxon are top corporate spenders

Posted on by The Progressive Policy Institute

PPI Economist Diana Carew was quoted in a USA Today exclusive covering PPI’s newest report, U.S. Investment Heroes of 2014: Investing at Home in a Connected World. Carew co-authored the report with PPI Senior Economic Strategist Michael Mandel.

PPI economist Diana Carew says the government should promote faster capital spending growth and contributions from more industries through policies that encourage investment.

Last year, three sectors — telecommunications and cable, Internet and technology, and energy — accounted for 83% of the top 25 firms’ total investment.

“Policies need to make investment an explicit focus,” Carew says.

Continue reading on USA Today.

The Data-Driven Economy and the FDA

Posted on by The Progressive Policy Institute

The shift to data-driven growth is the single most important reason why the U.S. economy is far outperforming the European economy these days. Online sales are up by 16 percent over the past year, and Americans are getting more and more of their information online, spending an average of 40 minutes per day on Facebook alone.

Yet regulators are struggling to keep up with the data-driven economy.  Regulatory assumptions designed for a slower, information-poor age are ill-suited for today’s information-rich environment, both failing to take advantage of new opportunities and failing to protect consumers against new threats.

Nowhere is this regulatory struggle clearer than the attitude of the Food and Drug Administration (FDA) towards social media. Rather than embracing the astonishing power of social media to inform the public, the FDA is proposing to protect consumers by greatly hobbling the ability of pharmaceutical companies to communicate directly with them. The FDA implicitly assumes that communications from pharma companies regarding prescription drugs and medical devices are likely to be promotional or marketing in nature.

Certainly the FDA is justified in its mission to protect consumers against false or misleading information. There are serious risks associated with prescription drugs and medical devices, some of which could be fatal.

But in its approach to protecting consumers, the FDA is ignoring the trade-off between consumer protection and promoting cost-saving healthcare innovation in an economy dependent on constant communication.

The FDA’s outmoded thinking threatens to hold back cost-saving innovation in healthcare design and delivery. Pharmaceutical companies don’t just produce drugs, they produce information that is useful to consumers, and not intended for promotional or marketing purposes. By restricting the transmission of information, the FDA is increasing costs and reducing productivity.  Consumers could greatly benefit from increased access to truthful and non-misleading healthcare information, but pharmaceutical companies need flexibility in how they can communicate.

For example, proposed January guidance would dictate that every interactive “promotional” communication – including items on blog sites, Facebook, and Twitter – must be submitted to the FDA. This would apply to any interactive communication that is owned, controlled, created, influenced, or operated by the company, regardless of the intended audience. Further, every month pharmaceutical companies would have to submit reports on interactive or real-time communications for any site in which they are actively engaged.

In June, subsequent draft guidance from the FDA would further restrict how drug companies can communicate online.The “Internet/Social Media Platforms with Character Space Limitations-Presenting Risk and Benefit Information for Prescription Drugs and Medical Devices” draft guidance requires that each communication must include detail about risk, established name, and dosage information, in addition to a clearly marked link to a more complete risk discussion. (A corresponding draft guidance would provide a narrow exception to the rules when correcting explicit cases of misinformation.) So comprehensive are the requirements, communicating information about prescription drugs and medical devices on sites like Twitter and Facebook would be very onerous.

The FDA should rethink its approach to communications regulation to embrace the data-driven economy. Pharmaceutical companies need more flexibility in their communications, not less. A greater ability to share information will enable these companies to reduce healthcare costs, through innovation in healthcare design and delivery. Moreover, it will promote gains in consumer welfare, as people are able to get better quality healthcare information faster online. Finally, such regulatory reform will actually better protect consumers against risk, because it will enable rules to remain effective in a constantly changing communications landscape.

Forbes: Want To Keep Telecom Investment Going Strong? Avoid Rate Regulation Under Title II

Posted on by The Progressive Policy Institute

Quants have been studying the million-plus comments submitted to the FCC during the Open Internet proceeding, and unsurprisingly, the vast majority favor net neutrality. But what does that mean?

Those pressing for heavy-handed regulations would like it to mean “support for Title II,” but the myriad comments that mentioned Title II were most likely form letters generated by advocacy groups: It is doubtful that ordinary citizens understand the legal nuances that distinguish the FCC’s authority to regulate Internet service providers (ISPs) under section 706 and Title II.

To understand which regulatory path to take, we need to clearly define what sort of conduct cannot be tolerated on the Internet. Consider the following offer (“Offer A”) by an ISP to a content provider: “If you don’t take my priority-delivery offering, I will degrade your connection speeds on my network.” Such repugnant conduct would diminish the absolute performance of any content provider who declined the offer.

Now consider a slightly different offer by an ISP (“Offer B”): “If you don’t take my priority-delivery offering, you will continue to receive the same connection speeds that you previously enjoyed. If you take it, however, your connection will be even faster.” In contrast to Offer A, this offer would not threaten the absolute performance of the content provider; the only impact for those who decline it would be a diminution in their performance relative to those who elected priority delivery.

A broad consensus has formed around the need for regulation to prevent the type of conduct associated with Offer A. There is also wide acceptance of rules that would bar ISPs from favoring affiliated websites over independents by, for example, slowing or blocking access to the competing content. Importantly, none of these regulations would require the FCC to engage in rate regulation. All would be achievable under the “light-touch” approach of section 706.

What section 706 cannot prevent, however, is the type of conduct associated with Offer B. The D.C. Circuit has said as much, ruling that any attempt to prevent ISPs and content providers from negotiating for priority delivery smacks of common-carriage regulation. In other words, if rates for priority delivery were set by regulatory fiat, then there would be no need for ISPs and content providers to negotiate over the rate.

Will FCC Chairman Tom Wheeler give a "thumbs up" to Title II?

Title II would not bar priority-delivery offerings out of the gate: Even under Title II, ISPs would be free to offer such services, so long as they did so in a non-discriminatory way—that is, each package would have to be available to all similarly situated websites. But Title II could empower the FCC to begin a rate proceeding for priority delivery, at which point interested parties could petition the agency for zero rates, which would effectively eliminate priority delivery from the marketplace.

Would it be a good thing to unleash rate regulation on ISPs to prevent the formation of priority delivery? Not if investment is the metric. In a new study released by the Progressive Policy Institute (PPI), Bob Litan and I analyzed the impact of rate regulation pursuant to Title II on the investment of incumbent telcos, entrants, and cable providers in the 1990s and early 2000s. The results should give regulators pause before dabbling in rate regulation again.

Telco entrants: The 1996 Telecom Act required the incumbent Regional Bell Operating Companies—the localized telephone monopolies that were part of the integrated AT&T before it was broken up by court order in 1984—to share or “unbundle” the pieces of their local exchange networks to telco entrants at regulated rates to allow the latter to begin breaking down the local monopolies. With two co-authors (including your fearless blogger), Bob Crandall of Brookings used cross-state variation in the price of constructing local phone lines relative to leasing unbundled loops at regulated rates to identify the sensitivity of the entrants’ investment in local lines to these regulated rates. The researchers found that facilities investment by telco entrants was actually greater in states with higher unbundling rates; in other words, the more generous the subsidy, the less facilities-based investment occurred by telco entrants.

Cable companies: Cable television providers were best positioned to challenge the telcos’ hegemony in voice and Internet services in the mid-1990s. But to enter, cable operators first had to upgrade their networks to support IP-based transmissions. Yet cable companies were reluctant to make such investments so long as regulators were providing a less expensive entry path to their competitors (the telco entrants). High margins in local telephony and Internet access were the signal for cable entry, but the FCC’s unbundling experiment was injecting unnecessary noise. It took a series of court orders that unwound the unbundling regime by 1999 for the cable operators to see the market signal through the noise. Using data from NCTA, we found that the average annual capital expenditure for cable operators during the three years following the 1996 Act was $6 billion. In comparison, the cable industry’s average annual capital expenditure during the three-year period after the unbundling rules were unwound was $15.1 billion.

Incumbent telcos: Perhaps the most pivotal regulatory decision concerning the fate of broadband occurred in 2003. In its Triennial Review Order, which became effective in October 2003, the FCC determined that there would be no unbundling requirement for fiber-to-the-home loops. Once the telcos understood that they were free of the obligation to lease their fiber-based networks to competitors at regulated rates, they entered into a race with their cable counterparts to begin building the broadband networks that are now transforming the telecom landscape. In the span of just five years, from the FCC’s adoption of a policy of regulatory forbearance for fiber and IP networks in 2003, the miles of optical fiber doubled from five to ten million. Annual wireline broadband investment by the telcos jumped to $15.5 billion by 2008.

Why should the FCC focus on investment when promulgating new Internet regulations? First, Congress instructed the agency to do so in section 706 of the Act. Second, and perhaps even more important, investment in the communications sector continues to play a pivotal roll in driving the U.S. economy.

This week, PPI released its third annual report on “U.S. Investment Heroes,”  authored by Diana Carew and Michael Mandel, which analyzes publicly available information to rank non-financial companies by their capital spending in the United States. Once again, AT&T and Verizon ranked first and second, respectively, with $21 and $15 billion in domestic investment in 2013. Comcast, Google, and Time Warner also made PPI’s top 25 list, each investing over $3 billion. The authors credit investment in the core of the network with sparking the rise of the “data-driven economy.”

In light of the results from prior experiments in rate regulation, the FCC should eschew calls to regulate ISPs under Title II. The incremental benefits (potentially barring fast lanes) are dubious, but the incremental costs (less investment at the core of the network) would be economically significant. Given its size and contribution to the U.S. economy in terms of jobs and productivity, even a small decline in core investment in response to rate regulation would impose social costs beyond the immediate harm to broadband consumers from an atrophying network.

Let’s not repeat the mistakes of the past. If we focus on what’s important—preventing an absolute decline in the welfare of content providers and preserving incentives to invest—we can nurture our precious Internet ecosystem at both the edge and the core.

The Best Path Forward on Net Neutrality

Posted on by The Progressive Policy Institute

Net neutrality—the notion that all Internet traffic, regardless of its source or type, must be treated the same by Internet Service Providers (ISPs)—is back on the nation’s political radar. The catalyst was the D.C. Court of Appeals’ decision last January in Verizon v. FCC, which overturned the Federal Communications Commission’s (FCC) “Open Internet Order.” The essence of the Court’s ruling was that the FCC lacked legal authority to impose the specific non-discrimination requirements embodied in that order, which prohibited ISPs and content providers from negotiating rates for speedier delivery or “paid prioritization.” The Court’s rationale was that the FCC had previously declined to designate Internet access “common carriage” under Title II of the Telecommunications Act, a classification that the Court essentially suggested could have justified its order.

Importantly, the Court also articulated a less-invasive path for regulating such arrangements, in which ISPs and content providers could voluntarily negotiate the terms for priority delivery. The FCC could serve as a backstop to adjudicate disputes if negotiations broke down and discrimination was to blame. Moreover, the Court signaled that the FCC could invoke this alternative approach under its existing (Section 706) authority without reclassifying ISPs.

The Court’s decision has unleashed a vigorous debate over both paid prioritization and whether Internet access now should be subject to Title II. Broadly speaking, public interest and some consumer groups, coupled with some in the tech community (collectively, the “netizens”), want the same (zero) price for all types of online content, regardless of the volume of traffic on each site. The surest legal way to that result, many in this camp believe, is for the FCC to accept the Court’s implicit invitation to impose Title II regulation on Internet access. Understandably, the ISPs, parts of the tech community and many economists oppose that path forward. They fear that imposing public-utility style regulation on Internet access—complete with rate filings and FCC approvals, among other requirements—would dampen innovation and investment in more, faster broadband.

Unfortunately, the debate between the two sides has taken on the character of a religious dispute, with the FCC caught in the crossfire. The key to a possible resolution, however, may be the eventual realization by the Commission that Title II regulation of Internet access would (1) reduce ISP investment at the “core” of the Internet by more than what it stimulated at the “edge” by content providers, resulting in a net loss in investment, and (2) could one day boomerang on certain major tech companies or be expanded to regulate other ISP offerings. In that case, the FCC will need another way to move forward on net neutrality—and we propose one in this report.

Download “2014.09-Litan-Singer_The-Best-Path-Forward-on-Net-Neutrality“