Almost everyone read the Verizon v FCC net neutrality verdict WRONG

The end of the internet, my foot

Comment Doomsday arrived this week – or is about to. That's if you've been reading the tech blogosphere.

"We are the Folk Song Army.
Everyone of us cares.
We all hate poverty, war, and injustice,
Unlike the rest of you squares."
- Tom Lehrer

A US appeals court ruled on Tuesday that America's communications watchdog the FCC didn't have the authority to preemptively tell ISPs how they should operate.

Cue an avalanche of dystopian articles. Abandon all hope, all ye who enter! A new dark age would soon be upon us because telcos are going to charge online publishers and video websites for their visitor traffic, kill startups, block services, raise the cost of watching our beloved cat videos, and generally be beastly.

These are very live issues here at The Register. We aren't owned by a giant media complex, which could go mano a mano in negotiations with a giant telecom company. We aren't a loss leader for a conference-organizing business. We don't have a trust fund nor a billionaire venture-capitalist owner. Here at El Reg, our bits must get through – so, say, BT Wholesale blocking us affects the bottom line, and staff and families, in a way it doesn't affect pundits or campaigners.

However the dystopian reaction to the appeals court ruling is not remotely supported by the evidence. Some of the FCC's powers have in fact been affirmed and strengthened by the appeals court ruling, which confirmed the watchdog had the "general authority to regulate” broadband. The ruling supported the right of the FCC since 2005 to seek and destroy what are regarded as "net neutrality" violations. Which it's shown it can do so effectively, striking down a telco that blocked voice-over-internet services in 2005.

Not only that, but the court accepts net neutrality campaigners' view that American consumers are helpless pawns, unable to vote with their feet and cancel their contract with the ISP – there aren't an awful lot of providers to choose from in many areas of the States.

So how did the web's "experts" reach their potty conclusions that the end is nigh? How did they call this one so badly? To answer that we need a bit of background into the peculiar regulatory environment in the United States.

Ring Ma Bell

In 1934 the Federal Communications Commission (FCC) was created to regulate the airwaves and communications over wires – meaning it had to scrutinize the gigantic Bell telephone monopoly. Most telephone companies around the world at that time were state-owned monopolies, but Bell was a private giant, offering Americans the worst of all worlds: touchy-feely USSR-style customer service, and Robber Baron-era monopoly profits.

Today – decades after the Bell System was broken up in the early 1980s – the regulations needed to tackle that monopoly live on, embodying more than 1,000 rules.

By 1970, it was clear that the phone system would be used for more than just telephone calls. The FCC drew a distinction between traditional voice services and computer data services, and decided to leave the latter alone. The telephony system (with all its obligations, subsidies and price-fixing) were one thing, data services were another, and Congress agreed to treat them differently: it legislated to erect a wall between the two types, and affirmed they had very different regulatory principles underpinning them.

The 1996 Telecoms Act enshrined the distinction between "basic" and "enhanced" services. Today the law defines the latter to include “computer processing applications ... used to act on the content, code, protocol, and other aspects of the subscriber’s information.”

Congress reasoned that if there were business abuses in this sector, then the monopoly watchdogs at the Department of Justice and Federal Trade Commission (FTC) could step in. But if the FCC wanted to regulate computers services using the same rules as it had regulated Bell, then Congress would need to legislate to allow it do so. It didn't say you can use a backdoor.

On this point, the court hearing the Verizon v FCC complaint didn't really have a choice, something the FCC brushed aside when it passed the "net neutrality" orders by a 3:2 vote in 2011. Back then, the five FCC commissioners had split down the middle, with the majority of three arguing it must do something, and the two dissenters arguing that be that as it may, it couldn't legally do so.

The ruling this week

A fundamental part of the neutrality supporter's worldview is that consumers are hapless victims of wicked giant corporations. Because consumers have inadequate information or market power, bad things will happen to them. And when bad things happen to them, for example if they discover that Netflix has been blocked, they are helpless – and unable to switch. Remarkably, the court supports this point of view.

Here's what was at issue.

After an earlier legal challenge to its broadband regulation powers in 2009, the FCC created and imposed a new set of rules it called "Open Internet Order". Verizon asked the court to decide whether the FCC had the authority to issue these “prophylactic rules” that demand ISPs "treat all Internet traffic the same regardless of source." The key words here are "authority", and "prophylactic", the latter referring to preemptive blanket orders.

The FCC argued that it had affirmative authority to intervene in the broadband market since it had Congress' blessing "to encourage broadband deployment." The court agreed, saying the FCC had reasonably interpreted the rules giving it power "to promulgate rules governing broadband providers' treatment of Internet traffic." So the court has further strengthened the FCC's position in web traffic matters that neutrality supporters want policed.

One by one, the court rejected Verizon's many objections, even turning its own language against it, noting that the telco is "executing a triple-cushion shot of its own," at one point [ruling PDF]. The court fully accepted the pro-neutrality view of the potential problem:

Broadband providers represent a threat to Internet openness and could act in ways that would ultimately inhibit the speed and extent of future broadband deployment. First, nothing in the record gives us any reason to doubt the Commission’s determination that broadband providers may be motivated to discriminate against and among edge providers.

So-called over-the-top websites like Hulu and Netflix, which piggyback on ISPs' networks, do compete directly with the telcos' vertically integrated video services. In a competitive market – where that exists in a meaningful way in the US – it's hard to imagine how an ISP that blocked Netflix or Google would have any customers. They either wouldn't sign up – or if Netflix was blocked, they'd switch to a competitor.

But the court doesn't it see it that way: "We see no basis for questioning the Commission’s conclusion that end users are unlikely to react in this fashion."

Why? Well, the court, rather insultingly, asserts that Americans are too stupid to realize what was happening. The court said that if a service was being degraded or blocked, in the court's words, the punter would "[not be] fully responsive to the imposition of such restrictions."

It also rejects Verizon's case that investment in internet infrastructure would decline if investors couldn't make money from it. So overall, this is a very, very FCC-friendly, pro-neutrality ruling - although not one without wit:

Quote from the judge: When an edge provider such as YouTube transmits some sort of content—say, a video of a cat—to an end user, that content is broken down into packets of information, which are carried by the edge provider’s local access provider to the backbone network, which transmits these packets to the end user’s local access provider, which, in turn, transmits the information to the end user, who then views and hopefully enjoys the cat.

Net neutrality campaigners want broadband regulated like the Bell phone system was regulated - making ISPs common carriers. This is where the court stepped in, pointing out that the FCC can't treat net service providers like telephone companies because Congress required it to keep the two types separate:

Given that the Commission has chosen to classify broadband providers in a manner that exempts them from treatment as common carriers, the Communications Act expressly prohibits the Commission from nonetheless regulating them as such ... Because the Commission has failed to establish that the anti-discrimination and anti-blocking rules do not impose per se common carrier obligations, we vacate those portions of the Open Internet Order.

By legal necessity, the FCC had to argue that its rules were not "creating common carriage" out of ISPs. The court replied, rather sharply, that the FCC,

appears to misunderstand the nature of the inquiry in which we must engage. The question is not whether, absent the Open Internet Order, broadband providers would or did act as common carriers with respect to edge providers; rather, the question is whether, given the rules imposed by the Open Internet Order, broadband providers are now [court's emphasis] obligated to act as common carriers.

In short, the FCC was seeking to "impose requirements that contravene express statutory mandates." The court also sensibly drew a distinction between “unjust or unreasonable discrimination,” and "all discrimination."

In other words, the court's Circuit Judge Tatel told the FCC: yes, you can intervene in net neutrality but you can't do it through the backdoor. It isn't fair to an ISP to do so using a mechanism from which you've already exempted it. If the FCC doesn't like that, Congress will have to change the law.

A dissenting opinion from Senior Circuit Judge Silberman expressed some disquiet at the implications of the ruling. He pointed out that the FCC's remit to "promote broadband", which is used to justify its Open Internet Order, is so broad, it can be used to justify almost anything at all:

The Commission frankly admits its purpose is much wider than the statutory objectives. It claims it must regulate broadly, so as to 'protect consumer choice, free expression, end-user control, and the ability to innovate without permission'… which certainly indicates a Commission objective that exceeds the statutory authority granted.

Presto, we have a new statute granting the FCC virtually unlimited power to regulate the Internet.

Judge Silberman also points out that even the FCC doesn't quite agree that the consumer is a helpless sap – it just wants you to think so. Where the FCC could have specified a history of violations, it hedged the case with "may have," "might use," "may act," "may have incentives," and "might withhold or decline." That's not good enough, he thinks:

Deference must be based on some logic and evidence, not sheer speculation.

So the FCC's method was thrown out, but some of its ropiest arguments were upheld. And the general principle of regulatory activism was strongly supported. Why, you might wonder, was the reaction so hysterical?

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