Tariffing Internet termination: pricing implications of classifying broadband as a Title II telecommunications service.

• Author: Ford, George S.

TABLE OF CONTENTS I. INTRODUCTION II. RECLASSIFICATION AND THE CREATION OF A TERMINATION MARKET III. A NEW TERMINATION MARKET IV. FORBEARANCE AND THE TERMINATING MONOPOLY PROBLEM V. CONCLUSION I. INTRODUCTION

Since the early days of the Internet, the Federal Communications Commission (the "FCC") has taken a largely "hands off' regulatory approach to broadband Internet services--a light touch widely-held to be a key contributor to the rapid innovation, diffusion and adoption of Internet services in the United States. (1) Facilitating this deregulatory approach was the agency's classification of broadband Internet access as an "information service" under Title I of the Communications Act. (2) Despite the success of this approach, and in response to the agency's struggles to construct legally sustainable "Open Internet" rules, (3) the FCC is coming under intense political pressure to reverse course and classify broadband Internet connectivity as a common carrier telecommunications service under Title II. (4) Doing so, it is argued, is the only way to provide the agency with sufficient legal authority to prevent Broadband Service Providers ("BSPs") from engaging in anticompetitive conduct. (5)

This reclassification debate begs the question: How does classifying broadband as a common carrier telecommunications service help protect the "Open Internet"? According to proponents of reclassification, the answer lies in the direct application of Sections 201 and 202 of the Communications Act. (6) As stated by the advocacy group Public Knowledge, "Sections 201 and 202 provide strong statutory grounding for creating strong rules to protect an open internet." (7) Section 201 requires rates to be "just and reasonable" (8) while Section 202 prohibits "unreasonable discrimination." (9) These two sections, it is argued, can be used to prevent Broadband Service Providers from establishing slow and fast lanes for the delivery of edge-provider traffic to consumers, since such differential treatment of edge providers could be labeled by the FCC as "unreasonable discrimination." (10) Network Neutrality advocate and law professor Marvin Ammori, pointing to Section 201 and 202, claims "under Title II, the FCC can eliminate certain classes of fees and discrimination, including banning paid prioritization (a.k.a. fast lanes) on the Internet altogether." (11)

Thus far, the advocates for reclassification have put forth mostly superficial arguments, suited more for political markets than for policymakers (and consumers) trying to grasp the full implications of such a significant regulatory change. (12) Almost no attention has been directed at the fine details of how reclassification would be implemented. To wit, what service is to be reclassified and regulated? Who are the buyers and sellers impacted by reclassification? What enforcement mechanisms are available? In this ARTICLE, we address these specific issues. Our legal and economic review forces us to conclude that reclassification is likely to cause a radical change in the economic fabric of the Internet ecosystem.

Relying on the plain terms of the FCC's governing statute, current case law, and the FCC's own precedent, we show that reclassification turns edge providers into "customers" of Broadband Service Providers. This new "carrier-to-customer" relationship (as opposed to a "carrier-to-carrier" relationship) would then require all BSPs (i.e., telephone, cable, and wireless broadband providers) to create, and then tariff, a termination service for Internet content under Section 203 of the Communications Act. Critically, this termination service would be separate and apart from any carrier-to-carrier agreements to deliver traffic. (13) Because a tariffed rate cannot be set arbitrarily, and since a service cannot be generally tariffed at a price of zero, reclassification would require all edge providers (not their carriers)--as customers of the BSP--to make direct payments to the BSPs for termination services. That is, all content providers, whether Netflix or a church website (or its host company), would be on the hook to pay every broadband service provider a positive termination fee. (14) Most importantly, the agency would likely be prohibited from using its authority under Section 10 of the Communications Act to forbear from such tariffing requirements because the FCC has labeled all BSPs as "terminating monopolists." In the presence of a terminating monopoly in the relevant market (i.e., each BSP is "dominant" for terminating access to their customers), competition--a key prerequisite for invoking section 10--cannot be used as a basis for forbearance for "terminating services." Accordingly, the agency has boxed itself in for mandatory tariffing under Title II. In light of the above, we can find no clear, legally supported path to a "Title II Lite" that avoids a tariffed termination service. (15)

To explore this complex issue in detail, this ARTICLE is organized as follows: In Section II we delineate the relevant market and show how reclassification turns edge providers into customers of BSPs, thereby creating a formal, regulated termination market. In Section III, we demonstrate that BSPs must set tariffs for this termination service, and the established rates would most likely have a positive price. In Section IV, we show that the FCC's own precedent likely prohibits forbearance of the tariffing requirements of Section 203 of the Communications Act. Conclusions and policy recommendations are provided in the final section.

2. RECLASSIFICATION AND THE CREATION OF A TERMINATION MARKET

   If the FCC is to impose regulations to protect the "Open Internet," then it is essential to define exactly what transaction will be regulated, along with identifying the buyers and sellers involved in this transaction. That is, the relevant market must be established. Using the FCC's 2010 Open Internet Order, (16) the D.C. Circuit's remand of the agency's Network Neutrality efforts in Verizon v. FCC, (17) and the agency's 2014 Open Internet NPRM, (18) it is possible to sharply delineate the relevant transaction.

   We first turn to the FCC's 2014 Open Internet NPRM for a clear depiction of the relevant market. There, the agency defines the "Open Internet" as a broadband ecosystem that "allows innovators and consumers at the edges of the network to create and determine the success or failure of content, applications, services and devices, without requiring permission from the broadband provider to reach end users." (19) In this statement, "permission" is the key word. According to both the FCC and the D.C. Circuit in Verizon, the BSP's ability to grant or deny "permission" to particular edge providers arises from the belief that BSPs are "terminating monopolies" (or "gatekeepers") and thus may exert control over the flow of Internet traffic over the last mile connection. (20) A BSP's interference with the flow of content from the edge to the customer is argued to disrupt the "virtuous circle of innovation" in the broadband ecosystem. (21)

   The 2014 Open Internet NPRM lays out three concerns arising from the "terminating monopolist's" control over traffic flow over the last mile: (a) broadband providers may have economic incentives to block or disadvantage a particular edge provider or class of edge providers', (b) broadband providers may have incentives to increase revenues by charging edge providers for access or prioritized access to broadband providers' end users; and (c) broadband providers, if charging positive prices for prioritized service, would have an incentive to degrade or decline the quality of service they provide to non-prioritized traffic. (22) The FCC and proponents of reclassification point to offerings such as Verizon's "expressed interest in pursuing commercial agreements with edge providers" and AT&T's "new sponsored data service, in which an edge provider enters an agreement with AT&T to sponsor and pay for data charges resulting from eligible uses of the sponsor's content by an AT&T mobile subscriber" as examples. (23) From these statements, it is clear that the relevant transaction which the FCC would have to regulate under Title II is the one between BSPs and edge providers, (24) As observed by the FCC, the relevant transaction for "Open Internet" regulations is the "second side of the market--between broadband providers and edge providers or other third parties." (25) The service provided in this "second side of the market" is termination, a fact made clear by the use of the term "terminating monopolies." Thus, according to the FCC's logic, to protect the "Open Internet," any rules must target the transactions between edge providers on the demand side and BSPs on the supply side of the market in which a termination service is traded.

   Historically, edge providers have not been considered "customers" of the BSPs. (26) Upon reclassification, however, edge providers would formally and legally become customers of BSPs. (27) In Verizon v. FCC, the creation of this new termination market is made plain:

   It is true, generally speaking, that the "customers" of broadband providers are end users. But that hardly means that broadband providers could not also be carriers with respect to edge providers.... [b]ecause broadband providers furnish a service to edge providers, thus undoubtedly functioning as edge providers' "carriers" ... regardless of whether edge providers are broadband providers' principal customers. This is true whatever the nature of the preexisting commercial relationship between broadband providers and edge providers .... No one disputes that a broadband provider's transmission of edge-provider traffic to its end-user subscribers represents a valuable service: an edge provider like Amazon wants and needs a broadband provider like Comcast to permit its subscribers to use Amazon.com. (28) By reclassifying broadband as a telecommunications service, this...