RESEARCH ALERT

1530RA
FEBRUARY 19, 2015
R. EXLER

Title: Net Neutrality Enjoy the Media Circus, Hurry Up and Wait for Real Change
What is Happening?
Earlier this month in a Wired article, the chairman of the Federal Communications Commission
(FCC) proposed stronger government regulation of the Internet. Chairman Tom Wheeler
suggested that Internet service providers (ISPs) should not give preferential treatment to some
users by blocking content or creating fast lanes. Wheeler suggested regulating the ISPs by
changing their status to be under Title II of the Telecommunications Act. Title II status means
the government would regulate the Internet as a public utility.
President Obama had already chimed in, asserting that its essential to the economy to keep
the Internet free and open by protecting net neutrality for everyone. He says there should be
no gatekeepers of content and that we need to make net neutrality a legal obligation for
ISPs. He goes on to ask the FCC to reclassify the Internet as Title II. The Internet, he says, is
an essential part of everyday communication and everyday life. Consumers, not the ISPs,
should decide what Web sites they want to access. Obamas statement lists four main
categories of rules:
1. No blocking,
2. No throttling,
3. Increased transparency, and,
4. No paid prioritization.
The five-person FCC panel will vote on the 332-page proposal for the order on Thursday,
February 26. The FCC will not release the plan to public before the vote. According to those
who have seen it, eight of the pages are regulations, 79 pages are details of the provisions, and
the rest are references and comments. The expectation is for the FCC to adopt the proposal.
FCC commissioner Ajit Pai, made a statement on Feb. 10 saying that, the American people are
being misled. In a counter to President Obamas and Chairman Wheelers assertions, Pai sees
adverse consequences to the entire Internet economy should the rules become law. He says
these are vast, yet vague regulations with exogenous political influences. Pai emphasizes
that the plan:

Regulates rates,
Claims no competition exists for the majority of Americans,
Scrutinizes all options but unlimited,
Tolerates the FCC micromanaging the Internet,
Allows class action lawsuits against providers,
Regulates ISPs utility-style, and,
Opens door to billions in new taxes on Internet.
Why is it Happening?
Net neutrality is a concept to allow consumers and businesses to have full access to the
Internet. People fear they will not have free and open access because a few large ISPs control
the network. A record four million comments came to the FCC about its proposed rule changes.
Yet, the potential implementation of net neutrality is both controversial and confusing. Consumer

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 SAUGATUCK RESEARCH ALERT

groups exerted a massive response last year to the expectation that the FCC would side with
industry. Now, they are celebrating the agencys changed direction.

With President Obamas statement, the media is hyping net neutrality as a partisan issue. Also,
the Wall Street Journal reported that White House blindsided the FCC and then prodded
Wheeler to take a stronger stance on regulation. The WSJ further reported that the White House
was running a parallel version of the FCC and exerting influence on the proposed rule
contents.
A year ago, Wheeler was the target of protests from people who thought he favored weak
regulation of the Internet. Yet he changed his mind:
Originally, I believed that the FCC could assure Internet openness through a determination
of commercial reasonableness under Section 706 of the Telecommunications Act of 1996.
While a recent court decision seemed to draw a roadmap for using this approach, I became
concerned that this relatively new concept might, down the road, be interpreted to mean
what is reasonable for commercial interests, not consumers.
Market Impact
The consequences of the FCC reclassify broadband under Title II as Wheeler suggests, are
unclear. The agency would need to use forbearance and waive certain processes that dont
apply for the Internet. Opponents of this approach suggest that it would slow innovation on the
Internet by creating a regulated innovation by permission situation distinct from the current
open innovation environment. They assert that Title II carries a lot of baggage as a regulatory
option, with a risk of forcing other forms of transmission to also fall under its classification. In
essence, opponents say, if its not broken, dont fix it.
If the FCC implements Title II for the Internet, ISPs and their representatives say it will change
the way they run their business. Networks are rebuilt every 18-24 months, so innovative
engineering is ongoing. Resulting ISP changes might be slow, but a depressing effect on
business is likely. The proposed rules are unnecessary, say the opponents.
Michael Powell, the former FCC chair, is now head of the National Cable and
Telecommunications Association. In a C-SPAN interview, Powell discussed the fear of over-
regulation. He said that no ISPs are behaving in ways the proposed rules are designed to
prevent, and it would be a radical business shift for them to do so.
Litigation threats will slow any real change in the Internet rules. An AT&T executive recently told
CNBC to expect litigation if the FCC passes the new rules next week. Reports state that the
National Cable and Telecommunications Association is highly likely to litigate to protect the
investments of its members. The American Cable Association represents small cable
companies. Its president and chief executive said in recent interviews that his group is
considering litigation to stop the FCC rule change.
Powell says that the rules contain a massively complex set of legal terms. He says this is the
first untested global forbearance exercise ever at the FCC. Since there are many serious
arguments against the proposals, there will be a litigation circus for many years says Powell.
Content and network elements of the Internet are symbiotic. Yet the net neutrality discussion
has driven a wedge between the companies involved. The content providers dont want to pay
more should they succeed. Yet the government will regulate the content side next, says Powell.

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Despite the new revelations, as indicated above, Saugatuck expects little real change in the
regulation of the Internet in the next 12-24 months. There will be more discussion and litigation.
Lawsuits challenging the new rules will quickly follow the FCC vote. The effect on the growth of
Cloud and related next-gen computing architectures should be negligible during this period.
Other significant factors will determine the direction including cost, convenience, and
consistency. (1370STR, Will Proposed FCC Net Neutrality Rules Mean Evaporation of Cloud
Services?, 23May2014).
The other important player in this saga, and one that could change the game is the U.S.
Congress. Congressional authority given to the FCC is unclear; Congress has not said the FCC
is the regulatory body of the Internet. Only Congress can fix that uncertainty. There is a
legislative solution to the dilemma; some think it is the best way forward.
The House Oversight and Government Reform Committee and the Senate Homeland Security
and Government Affairs Committee just launched investigations into whether the Obama
Administration exercised any influence over FCC rulemaking. However, we expect that
Congressional involvement would not speed up any action that would affect the outcome.

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WESTPORT, CT February 19, 2015
1.203.454.3900 COPYRIGHT 2015