The Digital Age Communications Act's Regulatory Framework …

            The Digital Age Communications Act's Regulatory Framework
                               and Network Neutrality
                                        ----
          A Statement of the DACA Regulatory Framework Working Group

                                           Randolph J. May
                                            James B. Speta
                                              Co-Chairs

                                           Kyle B. Dixon
                                          James L. Gattuso
                                         Raymond L. Gifford
                                         Howard A Shelanski
                                          Douglas C. Sicker
                                          Dennis Weisman
                                             Members


         One of the hottest issues in the current telecommunications reform debate is the

discussion of "Network Neutrality," which generally refers to a nondiscrimination

mandate for all broadband Internet networks similar to the common-carrier rule that

applied to traditional telecommunications services in a monopolistic era. Most of the

legislative proposals for telecom reform include a Network Neutrality rule, 1 and the FCC

in 2005 issued a policy statement in which it backed a version of Net Neutrality

principles. 2 The exception to this trend is Senator Jim DeMint's "Digital Age

Communications Act."3


 The views expressed here are the views of the DACA Regulatory Framework Working Group and may
not necessarily reflect those of The Progress and Freedom Foundation, its Board, or its staff. This statement
is adapted from remarks delivered by James B. Speta at the March 9, 2006 Digital Age Communications
Act Conference in Washington, DC.
1
  The most recent bill to be introduced is S. 2360, Senator Ron Wyden's "Internet Non-Discrimination Act
of 2006." This bill provides that a network operator shall not "interfere with, block, degrade, alter, modify,
impair, or change any bits, content, application or service transmitted over the network of such operator."
And it also provides that "a network operator shall...offer just, reasonable, and non-discriminatory rates,
terms, and conditions" for all its broadband services.
2
  Appropriate Framework for Broadband Access to the Internet over Wireline Facilities, FCC 05-151, CC
Docket No. 02-33, September 23, 2005.
3
  S. 2113, Digital Age Communications Act, December 15, 2005. S. 2113 embodies the proposals released
by The Progress and Freedom Foundation's Digital Age Communications Act ("DACA") Regulatory
Framework, Federal-State Relations, and Universal Service Working Groups.


                                                                                                            1
        Senator DeMint's bill echoes much of the position taken by the DACA

Regulatory Framework Working Group. 4 This release explains the general structure of

the DACA proposal, and explains why it provides a better framework for dealing with

Network Neutrality issues. In brief, DACA adopts an "unfair competition" standard

which is based on competition law and economics and which is robust enough to deal

with truly anticompetitive instances of exclusion on the Internet, but without prejudging

business practices that may spur investment and deployment of new facilities and

services. DACA's case-by-case approach to Network Neutrality is superior, because it

avoids thickets of ex ante rules while maintaining the availability of ex post relief.

        The DACA Regulatory Framework In General

        The DACA framework is designed to respond to two well-known and, in our

view, largely incontestable developments. First, communications markets are

increasingly competitive. Although that competition is not perfect and does not mirror

the stylized markets of microeconomics textbooks with very large number of competitors,

technological developments have increased ­ and are likely to continue to increase ­

competition in communications. Second, those same technological developments mean

that service-based regulatory categories ­ one kind of regulation for telecommunications

carriers, another for information services, and another for cable services ­ are no longer

sustainable. 5

        The DACA is a technologically neutral regulatory paradigm, in that the Federal

Communications Commission is given the same regulatory authority over all electronic


4
  See Proposal of the Regulatory Framework Working Group, Digital Age Communications Act (Rel. 1.0,
June 2005) (available at http://www.pff.org/daca).
5
  See, e.g., Randolph J. May, Why Stovepipe Regulation No Longer Works: An Essay on the Need for a
New Market-Oriented Communications Poilicy, 58 FED. Com. L. J. 103 (2006).


                                                                                                      2
communications networks. That regulatory authority is two- fold. The agency's principal

authority is to punish and prevent "unfair methods of competition," which is a phrase

intentionally borrowed from the Federal Trade Commission Act. The core idea is to

punish and prevent practices that violate competition law principles (or that potentially

would do so). Thus, DACA charges the agency to condemn "practices that present a

threat of abuse of significant and non-transitory market power" consistent with market-

oriented competition principles. 6

        Beyond the general incorporation of competition law principles, DACA also

states that it is an unfair method of competition to substantially impede the

interconnection of public communications facilities and services in circumstances in

which the denial of interconnection causes substantial harm to consumer welfare. This

"interconnection authority" is not necessarily dependent on traditional antitrust doctrine.

Given the result of the Trinko case7 and the importance of interconnection in

communications markets, the DACA provides separate authority for the FCC to order

interconnection. But this authority, under DACA, must still be linked to a theory of

consumer welfare. 8 It is important to recognize that net neutrality is linked to the welfare

of independent content and applications providers, but not to a sound theory of consumer

or aggregate welfare. Even the most nuanced versions of network neutrality limit a

network's ability to charge an application that imposes comparatively high costs on a

network accordingly, leaving the network to recover at least some of those costs through

subscription prices paid by consumers. Net neutrality thus risks being regressive:



6
  DACA § 4(a).
7
  Verizon Communs., Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398 (2004).
8
  DACA § 4(b).


                                                                                              3
relatively low use consumers within a service tier may end up subsidizing those

consumers whose use imposes relatively high costs on the network.

        A last, general point about DACA: the regulatory framework is expressly tilted

towards resolving competition problems that arise through adjudication and ex post

remedies. The agency is still given rulemaking authority, although it must meet a higher

evidentiary burden before promulgating rules. But the statute contemplates, and we

prefer, the agency to act not through the development of a thicket of rules, but through

case-by-case considerations.

        Net Neutrality Claims Under the DACA Framework

        Although there is some ­ indeed, it is fair to say, much ­ disagreement about how

a network neutrality rule would operate in practice, such a rule is essentially an attempt to

impose on the Internet the sort of nondiscrimination rule that traditional common carrier

regulation has long imposed on telephone companies. The supposed point of network

neutrality is to ensure access for applications and content providers, against the alleged

incentives that network providers might have to deny or degrade access to certain

unaffiliated content and services.

        DACA proposes to handle these issues without the necessity of a specific rule,

and without the need for a blanket rule that tries to anticipate every imaginable harm, and

which would present opportunities for regulatory litigation. Antitrust law and economics

has a well-developed body of learning about acts of vertical foreclosure ­ which is what

denials of access would be. 9 Network neutrality may be a new label, but it is just a

specific example of a more general competition issue with which there is over a century

9
 For one excellent summary of the economics as applied to Internet access, see Joseph Farrell & Philip J.
Weiser, Modularity, Vertical Integration, and Open Access Policies: Towards a Convergence of Antitrust
and Regulation in the Internet Age, 17 Harv. J.L. & Tech. 85, 117-18 (2003).


                                                                                                        4
of enforcement experience and accumulated knowledge. Antitrust analysis takes into

account the possibility of foreclosure, but also looks on a case-by-case basis for justified

or efficient business arrangements. Competitive markets often involve legitimate price

and service discrimination, and network owners often are pursuing legitimate

technological or business objective s in particular cases. The "unfair competition"

prohibition in DACA provides sufficient authority for the FCC to condemn and prevent

anticompetitive violations of network neutrality. Indeed, DACA goes beyond antitrust

law by giving the FCC authority to regulate vertical interconnection where necessary to

protect consumers. For Congress to legislate such interconnection in advance of actual

market experience to justify its necessity risks economic harm to consumers and

producers--harm that has not been adequately considered in the case for network

neutrality. An ex ante approach to actual harm, backed by the FCC's proposed authority

under DACA, provides a more targeted approach to real harms. To take only the most

famous case to date of a Network Neutrality complaint, the Madison River foreclosure of

a competing VoIP provider, 10 antitrust analysis would handle this as a classic monopoly

maintenance scenario. At the same time, DACA's case-by-case approach preserves the

space companies need to develop new network facilities and services and to enter into

new business arrangements.

           In addition, DACA's interconnection authority would also achieve a substantial

amount of the same openness that network neutrality proponents claim to be seeking. In

particular, ne t neutrality would allow applications and content providers to reach users of

all interconnected carriers, so long as they are able to reach a negotiated agreement with

some carrier. The necessity of one negotiated agreement is an important check on
10
     In the Matter of Madison River Communications, LLC, 20 F.C.C. Rcd. 4295 (2005).


                                                                                               5
regulatory opportunism, however. It channels efforts at entry into the marketplace and

away from litigation at the FCC.

        Conclusion

        Given that DACA has the analytic power and the regulatory tools necessary to

handle truly anticompetitive network neutrality issues, institutional design becomes all

important. And the institutional design of the DACA framework and the way that it

would handle net neutrality issues comes back to its fundamental premises. One of

DACA's fundamental premises is that, given developing competition, an extensive web

of ex ante rules would have unintended consequences that would harm consumers and

likely stifle markets. DACA is also premised on the view that infrastructure providers

will act, in general, to promote applications and services that consumers want.

Consumers do not purchase bandwidth for its own sake; they buy connections if those

connections provide services and applications that consumers want. 11

        And so, if the evidence supports the requisite conditions ­ that the markets will be

reasonably competitive, that the risks of truly anticompetitive actions are reasonably

small, and that antitrust-based competition analysis is powerful enough to address it when

it happens ­ then DACA is the right framework through which to address net neutrality.




11
  For this argument, see, e.g., James B. Speta, Handicapping the Race for the Last Mile?: A Critique of
Open Access Rules for Broadband Platforms, 17 Yale. J. on Reg. 39 (2000).


                                                                                                          6