“It is the single worst telecom bill that I have ever seen.”

— Reed Hundt, Jan. 31, 2012

Isn’t this rich?

One of the most zealous regulators America has known says Congress is overstepping its bounds because it wants to unleash lots of new wireless spectrum but also wants to erect a few guardrails so that FCC regulators don’t run roughshod over the booming mobile broadband market.

At a New America Foundation event yesterday, former FCC chairman Reed Hundt said Congress shouldn’t micromanage the FCC’s ability to micromanage the wireless industry. Mr. Congressman, you don’t know anything about how the FCC should regulate the Internet. But the FCC does know how to build networks, run mobile Internet businesses, and perfectly structure a wildly tumultuous economic sector. It’s just the latest remarkable example of the growing hubris of the regulatory state.

In his book, You Say You Want a Revolution, Hundt famously recounted his staff’s interpretation and implementation of the 1996 Telecom Act.

The passage of the new law placed me on a far more public stage. But I felt Congress — in the constitutional sense — had asked me to exercise the full power of all ideas I could summon. And I believed that I and my team had learned, through many failures, how to succeed. Later, I realized that we knew almost nothing of the complexity and importance of the tasks in front of the FCC.

…

Meeting in several overlapping groups of about a dozen people each . . . we dedicated almost three weeks to studying the possible readings of each word in the 150-page statute. The conference committee compromises had produced a mountain of ambiguity that was generally tilted toward the local phone companies’ advantage. But under the principles of statutory interpretation, we had broad authority to exercise our discretion in writing the implementing regulations. Indeed, like the modern engineers trying to straighten the Leaning Tower of Pisa, we could aspire to provide the new entrants to the local telephone markets a fairer chance to compete than they might find in any explicit provision of the law. In addition, the law gave almost no guidance about how to treat the Internet, data networks, . . . and many other critical issues. (Three years later, Justice Antonin Scalia agreed, on behalf of the Supreme Court, that the law was profoundly ambiguous.)

…

The more my team studied the law, the more we realized our decisions could determine the winners and losers of the new economy. We did not want to confer advantage on particular companies; that seemed inequitable. But inevitably

wink, wink,

a decision that promoted entry into the local market would benefit a company that followed such a strategy.

There are so many angles here.

(1) Hundt says he and his team basically stretched the statute to mean whatever they wanted. The law may have been ambiguous — and it was, I’m not going to defend the ‘96 Act — yet the Supreme Court still found in a series of early-2000s cases that Hundt’s FCC had wildly overstepped even these flimsy bounds. That’s how aggressive and unconstrained Hundt was.

(2) Hundt’s rules helped crash the tech and telecom sectors in 2000-2002. His rules were so complex and intrusive that, whatever your views about the CLEC wars, the PCS C block spectrum debacle, and other battles, it’s hard to deny that the paralysis caused by the rules hurt broadband and the nascent Net.

(3) Is it surprising that, given the FCC’s poor record of reaching way past its granted powers, some in Congress want to circumscribe FCC regulators by giving them less-than-omnipotent authority? Is the new view of elite regulators that Congress should pass laws, the full text of which might read: “§1. Congress grants to the Internet Agency the authority to regulate the Internet. Go forth and regulate.”

(4) On the other hand, it’s not clear why Hundt would care particularly what Congress says in any new spectrum statute. He didn’t care much for the words or intent of the ‘96 Act, and he thinks regulators should “aspire” to grand self-appointed projects. Who knows, maybe all those Supreme Court smack downs in the early 2000s made an impression.

(5) Hundt says he and his team later realized, in effect, how naive they were about “the complexity and importance of the tasks in front of the FCC.” So he’s acknowledging after things didn’t go so well that his FCC underestimated the complexity and thus overestimated their own expertise . . . yet he says today’s FCC deserves comprehensive power to structure the mobile Internet as it sees fit?

(6) Hundt admitted his FCC relished its capacity to pick winners and losers. Not particular companies, mind you — that would be improper — merely the types of companies who win and lose. A distinction without very much of a difference.

(7) We don’t argue that Congress, instead of the FCC, should impose intrusive regulation through statute. We don’t advocate long and complex laws. That’s not the point. Laws should be clear and simple, but stating the boundaries of a regulator’s authority is not a controversial act. No one should be imposing intrusive regulation or overdetermining the structure of an industry. And that’s what Congress — perhaps in a rare case! — is protecting against here.

Consider Sprint’s apparent decision to use “roaming” in Oklahoma and Kansas instead of building its own network. Now, roaming is a standard feature of mobile networks worldwide. Company A might not have as much capacity as it would like in some geography, so it pays company B, who does have capacity there, for access. Company A’s customers therefore get wider coverage, and Company B is paid for use of its network.

The problem comes with the FCC’s 2011 “digital roaming” order. Last spring three FCC commissioners decided that private mobile services — which the Communications Act says “shall not . . . be treated as a common carrier” — are a common carrier. Only D.C. lawyers smarter than you and me can figure out how to transfigure “shall not” into “may.” Anyway, the possible effect is to subject mobile data — one of the fastest growing sectors anywhere on earth — to all sorts of forced access mandates and price controls.

We warned here and here that turning competitive broadband infrastructure into a “common carrier” could discourage all players in the market from building more capacity and covering wider geographies. If company A can piggyback on company B’s network at below market rates, why would it build its own expensive network? And if company B’s network capacity is going to company A’s customers, instead of its own customers, do we think company B is likely to build yet more cell sites and purchase more spectrum?

With 37 million iPhones and 15million iPads sold last quarter, we need more spectrum, more cell towers, more capacity. This isn’t the way to get it. And what we are seeing with Sprint’s decision to roam instead of build in Oklahoma and Kansas may be the tip of this anti-investment iceberg.

Last spring when the data roaming order came down we began wondering about a possible “slow walk to a reregulated communications market.” Among other items, we cited net neutrality, possible new price controls for Special Access links to cell sites, and a host of proposed regulations affecting things like behavioral advertising and intellectual property (see, PIPA/SOPA). Since then we’ve seen the government block the AT&T-T-Mobile merger. And the FCC is now holding up its own important push for more wireless spectrum because it wants the right to micromanage who gets what spectrum and how mobile carriers can use it.

Many of these items can be thoughtfully debated. But the number of new encroachments onto the communications sector threatens to slow its growth. Many of these encroachments, moreover, are taking place outside any basic legislative authority. In the digital roaming and net neutrality cases, for example, the FCC appeared clearly to grant itself extra- if not il-legal authority. These new regulations are now being challenged in court.

We need some restraint across the board on these matters. The Internet is too important. We can’t allow a quiet, gradual reregulation of the sector to slow down our chief engine of economic growth.

— Bret Swanson

So of course the Federal Communications Commission on Thursday declared mobile data roaming (which is a private mobile service) a common carrier. Got it? The law says “shall not.” Three FCC commissioners say, We know better.

This up-is-down determination could allow the FCC to impose price controls on the dynamic broadband mobile Internet industry. Up-is-down legal determinations for the FCC are nothing new. After a decade trying, I’ve still not been able to penetrate the legal realm where “shall not” means “may.” Clearly the FCC operates in some alternate jurisprudential universe.

I do know the decision’s practical effect could be to slow mobile investment and innovation. It takes lots of money and know-how to build the Internet and beam real-time videos from anywhere in the world to an iPad as you sit on your comfy couch or a speeding train. Last year the U.S. invested $489 billion in info-tech, which made up 47% of all non-structure capital expenditures. Two decades ago, info-tech comprised just 33% of U.S. non-structure capital investment. This is a healthy, growing sector.

As I noted a couple weeks ago,

You remember that “roaming” is when service provider A pays provider B for access to B’s network so that A’s customers can get service when they are outside A’s service area, or where it has capacity constraints, or for redundancy. These roaming agreements are numerous and have always been privately negotiated. The system works fine.

But now a group of provider A’s, who may not want to build large amounts of new network capacity to meet rising demand for mobile data, like video, Facebook, Twitter, and app downloads, etc., want the FCC to mandate access to B’s networks at regulated prices. And in this case, the B’s have spent many tens of billions of dollars in spectrum and network equipment to provide fast data services, though even these investments can barely keep up with blazing demand. . . .

It is perhaps not surprising that a small number of service providers who don’t invest as much in high-capacity networks might wish to gain artificially cheap access to the networks of the companies who invest tens of billions of dollars per year in their mobile networks alone. Who doesn’t like lower input prices? Who doesn’t like his competitors to do the heavy lifting and surf in his wake? But the also not surprising result of such a policy could be to reduce the amount that everyone invests in new networks. And this is simply an outcome the technology industry, and the entire country, cannot afford. The FCC itself has said that “broadband is the great infrastructure challenge of the early 21st century.”

But if Washington actually wants more infrastructure investment, it has a funny way of showing it. On Sunday at a Boston conference organized by Free Press, former Obama White House technology advisor Susan Crawford talked about America’s major communications companies.  ”[R]egulating these guys into to an inch of their life is exactly what needs to happen,” she said. You’d think the topic was tobacco or human trafficking rather than the companies that have pretty successfully brought us the wonders of the Internet.

It’s the view of an academic lawyer who has never visited that exotic place called the real world. Does she think that the management, boards, and investors of these companies will continue to fund massive  infrastructure projects in the tens of billions of dollars if Washington dangles them within “an inch of their life”? Investment would dry up long before we ever saw the precipice. This is exactly what’s happened economy-wide over the last few years as every company, every investor, in every industry worried about Washington marching them off the cost cliff. The White House supposedly has a newfound appreciation for the harms of over-regulation and has vowed to rein in the regulators. But in case after case, it continues to toss more regulatory pebbles into the economic river.

Perhaps Nick Schulz of the American Enterprise Institute has it right. Take a look. He calls it the Tommy Boy theory of regulation, and just maybe it explains Washington’s obsession — yes, obsession; when you watch the video, you will note that is the correct word — with managing every nook and cranny of the economy.

From the beginning — that is, since the advent of the net neutrality concept early last decade — I argued that a strict neutrality regime would have outlawed, among other important technologies, CDNs, which prioritized traffic and made (make!) the Web video revolution possible.

So I took particular notice of this new interview (sub. required) with Akamai CEO Paul Sagan in the February 2011 issue of MIT’s Technology Review:

TR: You’re making copies of videos and other Web content and distributing them from strategic points, on the fly.

Paul Sagan: Or routes that are picked on the fly, to route around problematic conditions in real time. You could use Boston [as an analogy]. How do you want to cross the Charles to, say, go to Fenway from Cambridge? There are a lot of bridges you can take. The Internet protocol, though, would probably always tell you to take the Mass. Ave. bridge, or the BU Bridge, which is under construction right now and is the wrong answer. But it would just keep trying. The Internet can’t ever figure that out — it doesn’t. And we do.

There it is. Akamai and other content delivery networks (CDNs), including Google, which has built its own CDN-like network, “route around” “the Internet,” which “can’t ever figure . . . out” the fastest path needed for robust packet delivery. And they do so for a price. In other words: paid priority. Content companies, edge innovators, basement bloggers, and poor non-profits who don’t pay don’t get the advantages of CDN fast lanes.

So important are CDNs in today’s Internet architecture that the FCC felt the need to explicitly exempt them. So much for a “neutral” policy.

In footnote 235 and elsewhere, the FCC seems to think CDNs are all about geographic advantages (to overcome speed-of-light delay) and server-consolidation (yielding infrastructure efficiencies to content and app providers). True enough, but the FCC ignores what Sagan believes is his key service — real-time prioritization.

The net neutrality Order allows CDN prioritization but says paid priority by broadband service providers on the customer link “would raise significant cause for concern,” and “as a general matter, it is unlikely that pay for priority would satisfy the ‘no unreasonable discrimination’ standard.”

Numerous legal infirmities are likely to kill the entire Order when reviewed by the courts. But the substantive technological problems and inconsistencies embodied in the paid priority section need to be examined. Parsing these items should help us all understand how this very complex thing we call the Internet works . . . perhaps chasten the FCC when it attempts to enforce its new rule . . . and hopefully inform a better policy should this Order be vacated.

The FCC fails to explain persuasively why CDN prioritization is much different from last-mile broadband prioritization. Even if a meaningful distinction were demonstrated, we’d still be left with a probable ban on last-mile prioritization, which is a problem because last-mile prioritization will likely prove essential for a variety of real-time communication services.

The FCC’s case really rests on Section II.B, which is all about the supposed motives of broadband service providers. Apparently, the FCC thinks CDNs should be exempt because they have no malign intent whereas broadband service providers are awash in “incentives to limit Internet openness.”

The FCC says broadband providers may have incentives to

(1) disadvantage some edge providers by blocking or controlling the transmission to end-users;

(2) charge edge providers for access or priority to end-users; and

(3) “degrade or decline to increase the quality of the service they provide to non-prioritized traffic.”

The “no blocking” principle that all parties agreed to way back in 2005 would seem to take care of ominous incentive (1). And a much simpler reliance on existing consumer and/or antitrust law could easily defang ominous incentives (2) and (3).

But these specifics fail to address the larger point: Is it even true that most incentives steer broadband service providers toward a less open Internet? Did the FCC even consider incentives that point in the opposite direction — toward a more open Internet? I can’t find any evidence they did.

The FCC apparently cannot see that the vast bounty of content and apps on the Web created an entirely new market for telcos and cablecos. Namely, broadband Internet access. (Of course, in the typical two-sided coin of positive-sum innovation, it was broadband that created a new market for content and apps.)

As I wrote in The Wall Street Journal way back in 2006:

Blocking and degrading Internet access would quite simply be business suicide for incumbent service providers. Compared to cable’s other content operations like basic and premium TV channels, its broadband cable modem services are more than 50 times as profitable per unit of bandwidth consumed. This means that with just a tiny sliver of the usable bandwidth in its pipes, cable’s Internet services supply about 20% of the revenue and the majority of their net income. Does anyone really think the bandwidth providers are going to kill their golden goose?

Yes, it’s true that popular broadband Internet services also cannibalize some existing products. Long distance voice went away, and Web video is now beginning to compete with cable TV. But the telcos and cablecos know they will never be the key creators of content and apps — not compared to the rest of the world. They get the wonderful Web for free. Compared to hefty sums they must pay for TV content (e.g., ESPN) or movies, broadband access is a simple business. Why decimate the value of one of their three basic products (the others being TV and mobile) by closing off big chunks of the Web to their customers? It would be dumb. It won’t happen. It hasn’t happened.

So the FCC twists itself in pretzels trying to use a high-minded “net neutrality” or “open Internet” policy to do what it really wants — the much more vulgar task of regulating the telcos and cablecos — while exempting (for now) technologies and services that it knows are absolutely essential to a well-functioning Internet but are not at all “neutral” or “open” according to the FCC’s own criteria.

I’m glad CDNs are not covered by the rules, but in its feeble attempt to explain the broadband-CDN distinction, the FCC overlooked the fact that the no-priority rules could limit or block innovation in key real-time communications services.

CDNs are good for speeding static content and even putting some broadcast content (like live sports events) onto fast-lanes to consumers. (Akamai’s record traffic day to that point was its Web broadcast of the Masters golf tournament last spring.) But when it comes to decentralized, real-time, interactive, unpredictable, transactional content — like high-resolution video conferencing or online gaming — CDNs won’t do. We will need some form of in-stream prioritization.

But this is a matter of engineering and economics. There are several ways to achieve quality-of-experience for multimedia applications. We can create virtual (logical) channels using packet priority technologies. We can dedicate frequency (analog) channels using cable-TV like banding or, in the optical realm, wavelength division multiplexing (WDM) within a wire. Or we can deploy more wires (or wireless spectrum). There are technical and financial tradeoffs between using computer power (switching) and communications power (bandwidth) to achieve these ends. They depend on the state of the existing infrastructure, the cost-performance ratios of the technologies and resources (which change over time), and the strategic architecture and business model of the network. In the end we will either prioritize digitally on the last-mile link or prioritize incoming/outgoing traffic onto/from a frequency channel just outside the FCC “no priority” zone. But that will then raise the question of whether providing such channels is itself paid priority. Do we begin to see why these are not questions that can be answered by crude politics?

By exempting CDNs, the FCC acknowledges their herculean task in delivering multimedia to the masses. Akamai cogently described the state of play when unveiling its new HD video service:

Why is it so difficult to deliver an optimal end-user experience? Simply put, it’s challenging to reliably deliver high-throughput data streams across the Web – especially to large audiences.

The fundamental challenges of online video delivery lie within the Internet itself. Given that the Internet is made up of over 13,000 competing networks, it works surprisingly well. But its many bottlenecks and capacity limitations are unpredictable and difficult to manage – lying outside the control of any single entity or group. While these problems affect the delivery of all types of Internet content, they are particularly challenging for video, which requires the transfer of large data volumes at very high rates.

But if delivering static and broadcast content is a challenge, doubly so for the coming wave of real-time interactive cinema-quality video. It’s a challenge CDNs cannot conquer and will require new technologies, architectures, and business models — many of them requiring some form of broadband prioritization — to master.

It would be a shame if the FCC’s new Order interrupted this essentially technological and economic story because of a dubious analysis that narrowly focuses on the supposed political motivations of broadband service providers and completely ignores powerful incentives pushing all parties toward Internet openness.

Despite the Federal Communications Commission’s “net neutrality” announcement this week, the American Internet economy is likely to survive and thrive. That’s because the new proposal offered by FCC chairman Julius Genachowski is lacking almost all the worst ideas considered over the last few years. No one has warned more persistently than I against the dangers of over-regulating the Internet in the name of “net neutrality.”

In a better world, policy makers would heed my friend Andy Kessler’s advice to shutter the FCC. But back on earth this new compromise should, for the near-term at least, cap Washington’s mischief in the digital realm.

. . .

The Level 3-Comcast clash showed what many of us have said all along: “net neutrality” was a purposely ill-defined catch-all for any grievance in the digital realm. No more. With the FCC offering some definition, however imperfect, businesses will now mostly have to slug it out in a dynamic and tumultuous technology arena, instead of running to the press and politicians.

In a speech this morning, FCC chair Julius Genachowski outlined a proposal he hopes the other commissioners will approve at their December 21 meeting. The proposal, which comes more than a year after the FCC issued its Notice of Proposed Rule Making into “Preserving the Open Internet,” appears mostly to codify the “Four Principles” that were agreed to by all parties five years ago. Namely:

• No blocking of lawful data, websites, applications, services, or attached devices.
• Transparency. Consumers should know what the services and policies of their providers are, and what they mean.
• A prohibition of “unreasonable discrimination,” which essentially means service providers must offer their products at similar rates and terms to similarly situated customers.
• Importantly, broadband providers can manage their networks and use new technologies to provide fast, robust services. Also, there appears to be even more flexibility for wireless networks, though we don’t yet know the details.

(All the broad-brush concepts outlined today will need closer scrutiny when detailed language is unveiled, and as with every government regulation, implementation and enforcement can always yield unpredictable results. One also must worry about precedent and a new platform for future regulation. Even if today’s proposal isn’t too harmful, does the new framework open a regulatory can of worms?)

So, what appears to be off the table? Most of the worst proposals that have been flying around over the last year, like . . .

• Reclassification of broadband as an old “telecom service” under Title II of the Communications Act of 1934, which could have pierced the no-government seal on the Internet in a very damaging way, unleashing all kinds of complex and antiquated rules on the modern Net.
• Price controls.
• Rigid nondiscrimination rules that would have barred important network technologies and business models.
• Bans of quality-of-service technologies and techniques (QoS), tiered pricing, or voluntary relationships between ISPs and content/application/service (CAS) providers.
• Open access mandates, requiring networks to share their assets.

Many of us have long questioned whether formal government action in this arena is necessary. The Internet ecosystem is healthy. It’s growing and generating an almost dizzying array of new products and services on diverse networks and devices. Communications networks are more open than ever. Facebook on your BlackBerry. Netflix on your iPad. Twitter on your TV. The oft-cited world broadband comparisons, which say the U.S. ranks 15h, or even 26th, are misleading. Those reports mostly measure household size, not broadband health. Using new data from Cisco, we estimate the U.S. generates and consumes more network traffic per user and per capita than any nation but South Korea. (Canada and the U.S. are about equal.) American Internet use is twice that of many nations we are told far outpace the U.S. in broadband. Heavy-handed regulation would have severely depressed investment and innovation in a vibrant industry. All for nothing.

Lots of smart lawyers doubt the FCC has the authority to issue even the relatively modest rules it outlined today. They’re probably right, and the question will no doubt be litigated (yet again), if Congress does not act first. But with Congress now divided politically, the case remains that Mr. Genachowski’s proposal is likely the near-term ceiling on regulation. Policy might get better than today’s proposal, but it’s not likely to get any worse. From what I see today, that’s a win for the Internet, and for the U.S. economy.

— Bret Swanson

• Does the U.S. really rank 15th — or even 26th — in the world in broadband? No.
• The U.S. generates and consumes substantially more IP traffic per Internet user and per capita than any other region of the world.
• Among individual nations, only South Korea generates significantly more IP traffic than the U.S. (Canada and the U.S. are equal.)
• U.S. wired and wireless broadband networks are among the world’s most advanced, and the U.S. Internet ecosystem is healthy and vibrant.
• Latency is increasingly important, as demonstrated by a young company called Spread Networks, which built a new optical fiber route from Chicago to New York to shave mere milliseconds off the existing fastest network offerings. This example shows the importance — and legitimacy — of “paid prioritization.”
• As we wrote: “One way to achieve better service is to deploy more capacity on certain links. But capacity is not always the problem. As Spread shows, another way to achieve better service is to build an entirely new 750-mile fiber route through mountains to minimize laser light delay. Or we might deploy a network of server caches that store non-realtime data closer to the end points of networks, as many Content Delivery Networks (CDNs) have done. But when we can’t build a new fiber route or store data — say, when we need to get real-time packets from point to pointover the existing network — yet another option might be to route packets more efficiently with sophisticated QoS technologies.”
• Exempting “wireless” from any Net Neutrality rules is necessary but not sufficient to protect robust service and innovation in the wireless arena.
• “The number of Wi-Fi and femtocell nodes will only continue to grow. It is important that they do, so that we might offload a substantial portion of traffic from our mobile cell sites and thus improve service for users in mobile environments. We will expect our wireless devices to achieve nearly the robustness and capacity of our wired devices. But for this to happen, our wireless and wired networks will often have to be integrated and optimized. Wireline backhaul — whether from the cell site or via a residential or office broadband connection — may require special prioritization to offset the inherent deficiencies of wireless. Already, wireline broadband companies are prioritizing femtocell traffic, and such practices will only grow. If such wireline prioritization is restricted, crucial new wireless connectivity and services could falter or slow.”
• The same goes for “specialized services,” which some suggest be exempted from new Net Neutrality regulations. Again, necessary but not sufficient.
• “Regulating the ‘basic’ Internet but not ’specialized’ services will surely push most of the network and application innovation and investment into the unregulated sphere. A ’specialized’ exemption, although far preferable to a Net Neutrality world without such an exemption, would tend to incentivize both CAS providers and ISPs service providers to target the ’specialized’ category and thus shrink the scope of the ‘open Internet.’ In fact, although specialized services should and will exist, they often will interact with or be based on the ‘basic’ Internet. Finding demarcation lines will be difficult if not impossible. In a world of vast overlap, convergence, integration, and modularity, attempting to decide what is and is not ‘the Internet’ is probably futile and counterproductive. The very genius of the Internet is its ability to connect to, absorb, accommodate, and spawn new networks, applications and services. In a great compliment to its virtues, the definition of the Internet is constantly changing.”

What we have here is “mission creep.” First, Net Neutrality was about an “open Internet” where no websites were blocked or degraded. But as soon as the whole industry agreed to these perfectly reasonable Open Web principles, Net Neutrality became an exercise in micromanagement of network technologies and broadband business plans. Now, Louderback wants to go even further and regulate prices. But there’s still more! He also wants to regulate the products that broadband providers can offer.

A Net Neutrality regime will not make the Internet more “open.” The Internet is already very open. More people create and access more content and applications than ever before. And with the existing Four Principles in place, the Internet will remain open. In fact, a Net Neutrality regime could close off large portions of the Internet for many consumers. By intruding in technical infrastructure decisions and discouraging investment, Net Neutrality could decrease network capacity, connectivity, and robustness; it could increase prices; it could slow the cycle of innovation; and thus shut the window to the Web on millions of consumers. Net Neutrality is not about openness. It is far more accurate to say it is about closing off experimentation, innovation, and opportunity.