1 Picker, Internet Giants: The Law and Economics of Media Platforms12/7/2017 UChicago Law: New Frontiers in Law & Economics Randal C. Picker Summer 2017 Nondiscrimination and Neutrality

2 Picker, Internet Giants: The Law and Economics of Media Platforms12/7/2017 A National Communications System

3 Picker, Internet Giants: The Law and Economics of Media Platforms12/7/2017 The Post Office: A National Communications System

4 U.S. Constitution Art. I, Sec 812/7/2017 U.S. Constitution Art. I, Sec 8 The Congress shall have Power … To establish Post Offices and post Roads

5 “That there shall be appointed a Postmaster General … subject to the direction of the President of the United States in performing the duties of his office, and in forming contracts for the transportation of the mail.” Post Office Act of 1789 (1 Stat 70)

6 Role of Mail System “At this time, the necessity of adopting measures to preserve our national mail system is forcibly presented to our deliberations. Through no other agency can the stated means of transmitting intelligence be maintained co-extensively with the population and settlement of the country.” House Report, May 15, 1844

7 National Obligation “That is should be so maintained, we hold to be a matter of obligation upon the Government, and due to the citizen, wherever situated in our territory.” House Report, May 15, 1844

8 Picker, Internet Giants: The Law and Economics of Media Platforms12/7/2017 National Compact “The obligation was assumed in our national compact; and its faithful performance is demanded by every consideration of national regard for the social and political interests of the whole people, and by the policy most favorable to free institutions and the growth and development of the country.” House Report, May 15, 1844

9 Picker, Internet Giants: The Law and Economics of Media Platforms12/7/2017 The Post Office: Cross-Subsidization and Cream Skimming

10 Route Cross-Subsidization“Where the mail system embraces unproductive as well as productive routes, and is wholly sustained out of the postage fund, it follows, that, in the densely-peopled parts of the country, and on routes of short distances between the large towns, the postage charge (if a uniform one for a given distance) must exceed the cost of transportation; as, upon, the long routes, and in the sparse settlements, it must fall short of it.” House Report, May 15, 1844

11 Picker, Internet Giants: The Law and Economics of Media Platforms12/7/2017 Private Mail? “Individuals will carry the mails wherever it can profitably be done; but they will not take them to the sparse settlements and remote points, but at a cost too burdensome to be borne.” House Report, May 15, 1844

12 Picker, Internet Giants: The Law and Economics of Media Platforms12/7/2017 Post Office Financial Losses “Events are in progress of fatal tendency to the Post Office and its decay has commenced. Unless arrested by vigorous legislation, it must soon cease to exist as a self-sustaining institution … .” House Report, May 15, 1844

13 Picker, Internet Giants: The Law and Economics of Media Platforms12/7/2017 Caused by Private Competition “Why this loss of revenue, when the general business and prosperity of the country is reviving, and its correspondence is on the increase?” House Report, May 15, 1844

14 Picker, Internet Giants: The Law and Economics of Media Platforms12/7/2017 Caused by Private Competition “Because the correspondence, to a great and increasing extent, is conveyed by individuals and companies, who have embarked in this species of business in competition with the Government, and the present provisions of law are not fully sufficient to prevent the abuse.” House Report, May 15, 1844

15 Picker, Internet Giants: The Law and Economics of Media Platforms12/7/2017 Government Monopoly Required “The business of conveying letters being made a governmental function, it must, in the nature of things, be exclusive. … Individual enterprise, if left unchecked, will engross the productive routes, and the Government must be left to convey the unproductive mails only.” House Report, May 15, 1844

16 Picker, Internet Giants: The Law and Economics of Media Platforms12/7/2017 Government Monopoly Required “Penalties are provided in the bill we submit, both against the person who sends, and the person who conveys, a letter out of the mail … .” House Report, May 15, 1844

17 Picker, Internet Giants: The Law and Economics of Media Platforms12/7/2017 A Simple Delivery System

18 Chicago New York Slow Medium Fast C1 $0 $10 $15 C2 $9 $11 Slow MediumA Simple Delivery Service Chicago New York Two Possible Services: Medium or Slow/Fast Slow Medium Fast C1 $0 $10 $15 C2 $9 $11 Fixed Costs = $8 Slow Medium Fast Marg Cost $2 $4 $6

19 SWF under Medium SystemAssessing Viability of Business Would consumers value it for more than it costs to create it? Outcome Total costs of delivering both packages = = 16

20 SWF under Medium SystemConsumer Values Each consumer values package at $10 so total value is $20 against costs of $16 Potential Boost to SWF = $4. Business creates value Are there prices that implement that?

21 SWF under Medium SystemKey Assumptions Again competition pushes prices to just cover costs Prices? Set delivery price = 8

22 SWF under Medium SystemOutcome Both buy, so revenues are $16 against costs of $16 Each receives consumer surplus of 2, so SWF boosted by $4. Successfully implement desired outcome via prices

23 SWF under Slow/Fast SystemConsider Three Possible Outcomes 1. Both use slow 2. Both use fast 3. C1 uses fast, C2 uses slow Fixed Costs = $8 Slow Medium Fast C1 $0 $10 $15 C2 $9 $11 Slow Medium Fast Marg Cost $2 $4 $6

24 SWF under Slow/Fast SystemCase 1. Both Use Slow Total costs = = 12 C1 values at $0, C2 at $9, so max revenues are $9 against costs of $12 Failure!

25 SWF under Slow/Fast SystemCase 2. Both Use Fast Total costs = = 20 C1 values at $15, C2 at $11, so max revenues are $26 against costs of $20 Might be able to sustain this business SWF increase would be plus 6 ( )

26 SWF under Slow/Fast SystemCase 3. C1 Uses Fast, C2 Uses Slow Total costs = = 16 C1 values at $15, C2 at $9, so max revenues are $24 against costs of $16 Might be able to sustain this business SWF increase would be plus 8 ( )

27 SWF under Slow/Fast SystemCan we implement this through prices? Key Assumptions Again competition pushes prices to just cover costs

28 SWF under Slow/Fast SystemCase 2: Both Use Fast Total costs = = 20 Set PFast = 10, PSlow > 8 (?) Both C1 and C2 buy fast, costs are covered, so business is sustainable and net boost to SWF = 6 But … Slow Medium Fast C1 $0 $10 $15 C2 $9 $11

29 SWF under Slow/Fast SystemCase 2: No Internalization of Marginal Costs by C2 C2 only values fast at $2 more than slow, but it costs $4 more to produce fast service than slow service That means we don’t want C2 buying fast service and we need a pricing mechanism that does that

30 SWF under Slow/Fast SystemCase 3: C1 Uses Fast, C2 Uses Slow Total costs = = 16 Set PFast = 10, PSlow = 6 C1 buys fast and C2 buys slow; costs are covered, so business is sustainable and net boost to SWF = 8 Best outcome achieved! Slow Medium Fast C1 $0 $10 $15 C2 $9 $11

31 Takeaways on A Simple Delivery SystemSWF Improved with Different Tiers of Service In medium-only example, overall SWF increase is $4 and that is $2 for each of C1 and C2 In slow/fast example, overall SWF increase is $8: C1 gets $5 and C2 get $3 The two tier system improves overall SWF and gives each consumer more surplus

32 Picker, Internet Giants: The Law and Economics of Media Platforms12/7/2017 Discrimination in Network Industries: History

33 Picker, Internet Giants: The Law and Economics of Media Platforms12/7/2017 The Postal Act of 1845

34 Sec. 9: Gov’t Monopoly “That it shall not be lawful for any person or persons to establish any private express or expresses for the conveyance … between and from and to which cities, towns, or other places the United States mail is regularly transported, under the authority of the Post Office” The Postal Act of 1845

35 Sec. 9: Gov’t Monopoly “Department, of any letters, packets, or packages of letters, or other matter properly transmittable in the United States mail, except newspapers, pamphlets, magazines and periodicals; … .” The Postal Act of 1845

36 Sec. 1: Pricing By Distance“For every single letter, in manuscript, or paper of any kind by or upon which information shall be asked for or communicated in writing, or by marks and signs, conveyed in the mail, for any distance under 300 miles, five cents; and for any distance over 300 miles, ten cents.” The Postal Act of 1845

37 Sec. 1: Pricing “and for a double letter there shall be charged double these rates; and for a treble letter, treble these rates; and for a quadruple letter, quadruple these rates.” The Postal Act of 1845

38 Sec. 1: Pricing “and every letter or parcel not exceeding half an ounce in weight shall be deemed a single letter, and every additional weight of half an ounce, or additional weight of less than half an ounce, shall be charged with an additional single postage.” The Postal Act of 1845

39 Historian, U.S. Postal Service Aug 200812/7/2017 Source: Historian, U.S. Postal Service Aug 2008

40 Historian, U.S. Postal Service Aug 200812/7/2017 Source: Historian, U.S. Postal Service Aug 2008

41 Sec. 2: Newspapers “That all newspapers of no greater size or superficies than nineteen hundred square inches may be transmitted through the mail by the editors or publishers thereof, to all subscribers or other persons within thirty miles of the city, town, or other place in which the paper is or may be printed, free of any charge for postage whatever.” The Postal Act of 1845

42 Sec. 3: Magazines “That all printed or lithographed circulars and handbills or advertisements, printed or lithographed on quarto post or single cap paper, or paper not larger than single cap, folded, directed, and unsealed, shall be charged with postage at the rate of two cents for each sheet, and no more, whatever be the distance the same may be sent;” The Postal Act of 1845

43 Sec. 3: Magazines “and all pamphlets, magazines, periodicals, … shall be charged with postage at the rate of two and a half cents for each copy sent, of no greater weight than one ounce, and one cent additional shall be charged for each additional ounce of the weight of every such pamphlet, magazine, matter, or thing, which may be transmitted through the mail, whatever be the distance, the same may be transported.” The Postal Act of 1845

44 Sec. 4: Fast lanes? “That the Postmaster General be and he is hereby, authorized, upon all mail routes over or upon which the amount of matter usually transported, or which may be offered or deposited in the post office or post offices for transportation, is or may become so great as to threaten materially to retard the progress or endanger the security of the letter mail,” The Postal Act of 1845

45 Sec. 4: Fast lanes? “or to cause any considerable augmentation of the cost of transporting the whole mail at the present rate of speed, to provide for the separate and more secure conveyance of the letter mail, at a speed at least equal to that at which the mail is now transported over such route, taking care to allow in no case of any greater delay, in the transportation of the other matters and things to be transported in the mail” The Postal Act of 1845

46 Picker, Internet Giants: The Law and Economics of Media Platforms12/7/2017 Sec. 4: Fast lanes? “on any such route, than may appear to be absolutely necessary, regard being had to the cost of expediting its transportation, and the means at his disposal or under his control for effecting the same.” The Postal Act of 1845

47 Picker, Internet Giants: The Law and Economics of Media Platforms12/7/2017 The Commerce Act of 1887

48 Railroads as Common CarriersSection 1: “That the provisions of this act shall apply to any common carrier or carriers engaged in the transportation of passengers or property wholly by railroad.” Commerce Act, Feb 4, 1887

49 Just and Reasonable ChargesSection 1: “All charges made for any service rendered or to be rendered in the transportation of passengers or property as aforesaid, or in connection therewith, or for the receiving, delivering, storage, or handling of such property, shall be reasonable and just; and every unjust and unreasonable charge for such service is prohibited and declared to be unlawful.” Commerce Act, Feb 4, 1887

50 Unjust DiscriminationSection 2: “That if any common carrier subject to the provisions of this act shall, directly or indirectly, by any special rate, rebate, drawback, or other device, charge, demand, collect, or receive from any person or persons a greater or less compensation for any service rendered, or to be rendered, in the transportation of passengers or property, subject to the provisions of this act,” Commerce Act, Feb 4, 1887

51 Unjust DiscriminationSection 2: “than it charges, demands, collects, or receives from any other person or persons for doing for him or them a like and contemporaneous service in the transportation of a like kind of traffic under substantially similar circumstances and conditions, such common carrier shall be deemed guilty of unjust discrimination, which is hereby prohibited and declared to be unlawful.” Commerce Act, Feb 4, 1887

52 Picker, Internet Giants: The Law and Economics of Media Platforms12/7/2017 Bars Long-Haul/Short Haul Discrimination Section 4: “That it shall be unlawful for any common carrier subject to the provisions of this act to charge or receive any greater compensation in the aggregate for the transportation of passengers or of like kind of property, under substantially similar circumstances and conditions, for a shorter than for a longer distance over the same line, in the same direction, the shorter being included within the longer distance; …” OUTRO: Next segment: jump 100 years to the early days of cable ISPs TAGLINE: I’m Randy Picker at the University of Chicago. This is Internet Giants: The Law and Economics of Media Platforms. Commerce Act, Feb 4, 1887

53 Picker, Internet Giants: The Law and Economics of Media Platforms12/7/2017 Constructing Net Neutrality

54 Picker, Internet Giants: The Law and Economics of Media Platforms12/7/2017 Classifying Cable ISPs

55 FCC, Mar 15, 2002

56 State of U.S. Internet Access“As of September 2001, 50.5% of U.S. households had Internet connections. The vast majority of them subscribe to “narrowband” service provided over local telephone facilities. … We use the term ‘narrowband’ here to refer to Internet access service that is designed to operate at speeds of less than 200 kilobits-per-second (‘Kbps’) in both directions.” FCC, Mar 15, 2002

57 State of U.S. Internet Access“Industry analysts estimate that high-speed Internet access service is now available to approximately 75-80% of all the homes in the United States via DSL or cable modem service, and approximately 11% of all households subscribe to these services today.” FCC, Mar 15, 2002

58 Not Telcom Service “The FCC determined that cable modem service is not a ‘cable service’ as defined by the Communications Act. The FCC also said that cable modem service does not contain a separate ‘telecommunications service’ offering and therefore is not subject to common carrier regulation.” FCC, Mar 14, 2002

59 Brand X, 545 U.S. 967 (2005)

60 Title II of the 1934 Act “Title II of the Communications Act of 1934, 48 Stat. 1064, as amended, 47 U.S.C. § 151 et seq., subjects all providers of ‘telecommunications servic[e]’ to mandatory common-carrier regulation, § 153(44).” Brand X, 545 U.S. 967 (2005)

61 FCC Concluded Exempt from Title II“In the order under review, the Federal Communications Commission concluded that cable companies that sell broadband Internet service do not provide “telecommunications servic[e]” as the Communications Act defines that term, and hence are exempt from mandatory common-carrier regulation under Title II.” Brand X, 545 U.S. 967 (2005)

62 FCC Entitled to Chevron Deference“We must decide whether that conclusion is a lawful construction of the Communications Act under Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U. S. 837 (1984), and the Administrative Procedure Act, 5 U.S.C. § 551 et seq. We hold that it is.” Brand X, 545 U.S. 967 (2005)

63 Picker, Internet Giants: The Law and Economics of Media Platforms12/7/2017 An Open Internet?

64 Bars VOIP Blocking “According to the terms of the consent decree, Madison River commits that it will refrain from blocking VOIP traffic and ensure that such blocking will not recur. The company will pay a contribution of $15,000 to the United States Treasury to settle this matter.” FCC, Mar 3, 2005

65 Four Principles “The Federal Communications Commission today adopted a policy statement that outlines four principles to encourage broadband deployment and preserve and promote the open and interconnected nature of public Internet: (1) consumers are entitled to access the lawful Internet content of their choice;” FCC, Aug 5, 2005

66 Four Principles “(2) consumers are entitled to run applications and services of their choice, subject to the needs of law enforcement; (3) consumers are entitled to connect their choice of legal devices that do not harm the network; and (4) consumers are entitled to competition among network providers, application and service providers, and content providers.” FCC, Aug 5, 2005

67 Why a Policy? “Comcast’s goal is to provide its customers with the best residential cable Internet service possible. In order to help accomplish this, Comcast has adopted this Acceptable Use Policy (the ‘Policy’).” Comcast Acceptable Use Policy

68 Policy Limits “In general, the Policy prohibits uses and activities involving the Service that are illegal, infringe the rights of others, or interfere with or diminish the use and enjoyment of the Service by others.” Comcast Acceptable Use Policy

69 No Copyright Infringement“… upload, post, publish, transmit, reproduce, create derivative works of, or distribute in any way information, software or other material obtained through the Service or otherwise that is protected by copyright or other proprietary right, without obtaining any required permission of the owner … .” Comcast Acceptable Use Policy

70 Comcast Content Blocking“Ruling on a complaint by Free Press and Public Knowledge as well as a petition for declaratory ruling, the Commission concluded that Comcast has unduly interfered with Internet users’ right to access the lawful Internet content and to use the applications of their choice.” FCC, Aug 1, 2008

71 Comcast Content Blocking“Specifically, the Commission found that Comcast had deployed equipment throughout its network to monitor the content of its customers’ Internet connections and selectively block specific types of connections known as peer-to-peer connections.” FCC, Aug 1, 2008

72 Blocking BitTorrent “The Commission’s action today is the result of an exhaustive examination of conduct that was first brought to light by Comcast subscribers who noticed that they had problems using peer-to-peer applications, such as BitTorrent, over their Comcast broadband connections.” FCC, Aug 1, 2008

73 Comcast: Not Us “When first confronted with press reports about these difficulties, Comcast disclaimed any responsibility for its customers’ problems. … Comcast changed its story and admitted that it did target its subscribers’ peer-to-peer traffic for interference.” FCC, Aug 1, 2008

74 Only at Peak Congestion“The company initially claimed that it did so only during periods of peak network congestion and of heavy network traffic.” FCC, Aug 1, 2008

75 Picker, Internet Giants: The Law and Economics of Media Platforms12/7/2017 Actually, Not … “Later, confronted with yet more evidence suggesting that interference was not limited in this manner, Comcast recast its position yet again and admitted that it interferes with peer-to-peer traffic regardless of the level of overall network congestion at the time and regardless of the time of day.” FCC, Aug 1, 2008

76 Anticompetitive Motive“Indeed, the Commission noted that Comcast has an anticompetitive motive to interfere with customers’ use of peer-to-peer applications.” FCC, Aug 1, 2008

77 Anticompetitive Motive“Such applications, including those relying on BitTorrent, provide Internet users with the opportunity to view high-quality video that they might otherwise watch (and pay for) on cable television.” FCC, Aug 1, 2008

78 Anticompetitive Motive“Such video distribution poses a potential competitive threat to Comcast’s video-on-demand (‘VOD’) service.” FCC, Aug 1, 2008

79 Deep Packet Inspection“The Commission found that Comcast monitors its customers’ connections using deep packet inspection and then determines how it will route some connections based not on their destinations but on their contents.” FCC, Aug 1, 2008

80 Deep Packet Inspection“In essence, Comcast opens its customers’ mail because it wants to deliver mail not based on the address on the envelope but on the type of letter contained therein.” FCC, Aug 1, 2008

81 Did the FCC Have the Power to Regulate Comcast?“In this case we must decide whether the Federal Communications Commission has authority to regulate an Internet service provider’s network management practices.” Comcast v FCC (CADC Apr 6, 2010)

82 Did the FCC Have the Power to Regulate Comcast? No.“The Commission also relies on various provisions of the Communications Act that do create such responsibilities, but for a variety of substantive and procedural reasons those provisions cannot support its exercise of ancillary authority over Comcast’s network management practices.” Comcast v FCC (CADC Apr 6, 2010)

83 Picker, Internet Giants: The Law and Economics of Media Platforms12/7/2017 2015 FCC Open Internet Order

84 400 Page Download FCC Open Internet Order, Mar 12, 2015

85 Picker, Internet Giants: The Law and Economics of Media Platforms12/7/2017 The Virtuous Innovation Cycle “Four years ago, the Commission adopted open Internet rules to protect and promote the ‘virtuous cycle’ that drives innovation and investment on the Internet—both at the ‘edges’ of the network, as well as in the network itself.” FCC Open Internet Order, Mar 12, 2015

86 Picker, Internet Giants: The Law and Economics of Media Platforms12/7/2017 The Virtuous Innovation Cycle “In the years that those rules were in place, significant investment and groundbreaking innovation continued to define the broadband marketplace. For example, according to US Telecom, broadband providers invested $212 billion in the three years following adoption of the rules—from 2011 to 2013—more than in any three year period since 2002.” FCC Open Internet Order, Mar 12, 2015

87 Picker, Internet Giants: The Law and Economics of Media Platforms12/7/2017 The Virtuous Innovation Cycle “The lesson of this period, and the overwhelming consensus on the record, is that carefully-tailored rules to protect Internet openness will allow investment and innovation to continue to flourish.” FCC Open Internet Order, Mar 12, 2015

88 Does Market Power Matter?“Consistent with the Verizon courts analysis, this Order need not conclude that any specific market power exists in the hands of one or more broadband providers in order to create and enforce these rules. Thus, these rules do not address, and are not designed to deal with, the acquisition or maintenance of market power or its abuse, real or potential.” FCC Open Internet Order, Mar 12, 2015

89 Three Problems (and Same Rules for Fixed and Mobile)“Because the record overwhelmingly supports adopting rules and demonstrates that three specific practices invariably harm the open Internet—Blocking, Throttling, and Paid Prioritization—this Order bans each of them, applying the same rules to both fixed and mobile broadband Internet access service.” FCC Open Internet Order, Mar 12, 2015

90 No Throttling “A person engaged in the provision of broadband Internet access service, insofar as such person is so engaged, shall not impair or degrade lawful Internet traffic on the basis of Internet content, application, or service, or use of a non-harmful device, subject to reasonable network management.” FCC Open Internet Order, Mar 12, 2015

91 No Blocking “A person engaged in the provision of broadband Internet access service, insofar as such person is so engaged, shall not block lawful content, applications, services, or nonharmful devices, subject to reasonable network management.” FCC Open Internet Order, Mar 12, 2015

92 No Paid Prioritization“A person engaged in the provision of broadband Internet access service, insofar as such person is so engaged, shall not engage in paid prioritization.” FCC Open Internet Order, Mar 12, 2015

93 Defining Paid Prioritization“‘Paid prioritization’ refers to the management of a broadband provider’s network to directly or indirectly favor some traffic over other traffic, including through use of techniques such as traffic shaping, prioritization, resource reservation, or other forms of preferential traffic management, either (a) in exchange for consideration (monetary or otherwise) from a third party, or (b) to benefit an affiliated entity.” FCC Open Internet Order, Mar 12, 2015

94 Gatekeeper Power “The key insight of the virtuous cycle is that broadband providers have both the incentive and the ability to act as gatekeepers standing between edge providers and consumers.” FCC Open Internet Order, Mar 12, 2015

95 Gatekeeper Power “As gatekeepers, they can block access altogether; they can target competitors, including competitors to their own video services; and they can extract unfair tolls. Such conduct would, as the Commission concluded in 2010, ‘reduce the rate of innovation at the edge and, in turn, the likely rate of improvements to network infrastructure’.” FCC Open Internet Order, Mar 12, 2015

96 Gatekeeper Power “In other words, when a broadband provider acts as a gatekeeper, it actually chokes consumer demand for the very broadband product it can supply.” FCC Open Internet Order, Mar 12, 2015

97 Internet Conduct Standard: Limiting Gatekeeper Authority over Edges“Any person engaged in the provision of broadband Internet access service, insofar as such person is so engaged, shall not unreasonably interfere with or unreasonably disadvantage (i) end users’ ability to select, access, and use broadband Internet access service or the lawful Internet content, applications, services, or devices of their choice,” FCC Open Internet Order, Mar 12, 2015

98 Internet Conduct Standard: Limiting Gatekeeper Authority over Edges“or (ii) edge providers’ ability to make lawful content, applications, services, or devices available to end users. Reasonable network management shall not be considered a violation of this rule.” FCC Open Internet Order, Mar 12, 2015

99 Picker, Internet Giants: The Law and Economics of Media Platforms12/7/2017 Transparency Rule Continues “A person engaged in the provision of broadband Internet access service shall publicly disclose accurate information regarding the network management practices, performance, and commercial terms of its broadband Internet access services sufficient for consumers to make informed choices regarding use of such services and for content, application, service, and device providers to develop, market, and maintain Internet offerings.” FCC Open Internet Order, Mar 12, 2015

100 Broad Classification Authority Under Brand X“Exercising our delegated authority to interpret ambiguous terms in the Communications Act, as confirmed by the Supreme Court in Brand X, today’s Order concludes that the facts in the market today are very different from the facts that supported the Commission’s 2002 decision to treat cable broadband as an information service and its subsequent application to fixed and mobile broadband services.” FCC Open Internet Order, Mar 12, 2015

101 Solves Problem of Verizon Decision“By classifying broadband Internet access service under Title II of the Act, in our view the Commission addresses any limitations that past classification decisions placed on the ability to adopt strong open Internet rules, as interpreted by the D.C. Circuit in the Verizon case.” FCC Open Internet Order, Mar 12, 2015

102 Appeal of 2015 FCC Open Internet OrderUSTA v. FCC, 825 F.3d 674 (CADC 2016)

103 Appeal of 2015 FCC Open Internet Order“For the third time in seven years, we confront an effort by the Federal Communications Commission to compel internet openness—commonly known as net neutrality—the principle that broadband providers must treat all internet traffic the same regardless of source.” USTA v. FCC, CADC, 14 June 2016

104 Appeal of 2015 FCC Open Internet Order“The Commission then promulgated the order at issue in this case — the 2015 Open Internet Order — in which it reclassified broadband service as a telecommunications service, subject to common carrier regulation under Title II of the Communications Act.” USTA v. FCC, CADC, 14 June 2016

105 Appeal of 2015 FCC Open Internet Order“The Commission also exercised its statutory authority to forbear from applying many of Title II’s provisions to broadband service and promulgated five rules to promote internet openness.” USTA v. FCC, CADC, 14 June 2016

106 Appeal of 2015 FCC Open Internet Order“Three separate groups of petitioners … challenge the Order, arguing that the Commission lacks statutory authority to reclassify broadband as a telecommunications service … . For the reasons set forth in this opinion, we deny the petitions for review.” USTA v. FCC, CADC, 14 June 2016

107 FCC NOPR FCC, 23 May 2017

108 FCC NOPR FCC, 23 May 2017

109 FCC NOPR FCC, 23 May 2017

110 FCC NOPR FCC, 23 May 2017

111 Ex Ante v. Ex Post “To determine how to best honor our commitment to restoring the free and open Internet, we propose reevaluating the Commission’s existing rules and enforcement regime to analyze whether ex ante regulatory intervention in the market is necessary.” FCC, 23 May 2017

112 Ex Ante v. Ex Post “To the extent we decide to retain any of the Commission’s ex ante regulations, we seek comment on whether, and how, we should modify them, specifically considering different approaches such as self-governance or ex post enforcement that may effectuate our goals better than across-the-board rules.” FCC, 23 May 2017

113 Eliminate Conduct Standard to Promote Investment“We propose eliminating this Internet conduct standard and the non-exhaustive list of factors intended to guide application of the rule, and we seek comment on this proposal. … .” FCC, 23 May 2017

114 Eliminate Conduct Standard to Promote Investment“We believe that eliminating the Internet conduct standard will promote network investment and service-related innovation by eliminating the uncertainty caused by vague and undefined regulation.” FCC, 23 May 2017

115 Zero Rating Programs “The now-retracted so-called Zero Rating Report issued by the Wireless Telecommunications Bureau illustrates the dilemma providers experience under a Title II regulatory regime.” FCC, 23 May 2017

116 Zero Rating Programs “After a thirteen-month investigation, the Report did not specifically call for an end to any provider’s practices or identify any particular harm from offering consumers free data.” FCC, 23 May 2017

117 Zero Rating Programs “Instead, it stated that the free-data plans ‘may raise’ economic and public policy issues that ‘may harm consumers and competition.’ It then reiterated that any determination about the harm from free data offerings would be made by the Commission on a ‘case-by-case’ basis, using a ‘non-exhaustive list of factors.’” FCC, 23 May 2017

118 Role of Market Power “Must we find that market power exists to retain rules in this space, and if so must the rules only apply to providers that have market power?” FCC, 23 May 2017

119 Role of Market Power “Further, should any approach we adopt —whether ex ante rules, expectations regarding industry self-governance, or ex post enforcement practices—vary based on the size, financial resources, customer base of the broadband Internet access service provider, and/or other factors?” FCC, 23 May 2017

120 Treatment of Affiliated Content“The Commission partially justified the 2015 rules on the theory that the rules would prevent anti-competitive behavior by ISPs seeking to advantage affiliated content.” FCC, 23 May 2017

121 Treatment of Affiliated Content“With the existence of antitrust regulations aimed at curbing various forms of anticompetitive conduct, such as collusion and vertical restraints under certain circumstances, we seek comment on whether these rules are necessary in light of these other regulatory regimes.” FCC, 23 May 2017

122 FCC NOPR FCC, 23 May 2017

123 FCC NOPR Comments

124 Picker, Internet Giants: The Law and Economics of Media Platforms12/7/2017 Zero Rating and Sponsored Data

125 FCC Zero Rating Report “This report presents the results of the Wireless Telecommunications Bureau (WTB or the Bureau) staff review during 2016 of sponsored data and zero-rating practices in the mobile broadband market. Based on this review of these offerings, the report puts forward a draft framework for evaluating mobile zero rated data offerings generally.” FCC, Zero Rating Report, 11 Jan 2017

126 Zero Rating Emergence “2016 was a year of significant creativity and experimentation in mobile broadband offerings by wireless carriers. Over the course of 2016, carriers introduced numerous unlimited data programs, as well as launched a variety of zero-rated services and sponsored data arrangements.” FCC, Zero Rating Report, 11 Jan 2017

127 Zero Rating Emergence “During the year, for example, T-Mobile significantly expanded the number of participating, zero-rated edge providers in Binge On, an offering introduced in November 2015 that zero-rated standard definition video.” FCC, Zero Rating Report, 11 Jan 2017

128 PickerSports ESPN DIRECTV NetflixZero Rating PickerSports 5GB ESPN 5GB DIRECTV 5GB Netflix 5GB Smartphone w/10GB per month package 1. Which programs do you watch and why? 2. Would it matter if some of them didn’t count against your data cap?

129 Zero Rating and Sponsored DataKey Ideas With zero rating, actual bandwidth used doesn’t count against cap That might be achieved by having someone pay the ISP to have their data given a zero rating E.g. ESPN might make that sort of payment

130 Zero Rating and Sponsored DataTry This: Consumer has a 10GB per month plan for a fee Provider adds zero rated content and C watches 5GB of that C is clearly better off Yes? No? Smartphone w/10GB per month package PickerSports 5GB ESPN DIRECTV Netflix

131 Zero Rating and Sponsored DataA Pre-Slides Board Example Dynamically-sized data plans and bandwidth capacity constraints with fee and zero-rated data Smartphone w/10GB per month package PickerSports 5GB ESPN DIRECTV Netflix

132 Zero Rating and Sponsored DataKey Questions 1. When, socially, do we want a positive price for the use of bandwidth? 2. A zero price? 3. A negative price? Smartphone w/10GB per month package PickerSports 5GB ESPN DIRECTV Netflix

133 Zero Rating and Sponsored DataKey Answers 1. Positive price?: When there is an actual social cost to the use of bandwidth 2. Zero price?: When bandwidth is free (no congestion) Smartphone w/10GB per month package PickerSports 5GB ESPN DIRECTV Netflix

134 Zero Rating and Sponsored DataKey Answers 3. A negative price?: When a content provider on the other side would like to pay to reach a consumer Smartphone w/10GB per month package PickerSports 5GB ESPN DIRECTV Netflix

135 PickerSports ESPN DIRECTV NetflixZero Rating: Edge Competition between Incumbents and Start Ups? PickerSports 5GB ESPN 5GB DIRECTV 5GB Netflix 5GB Smartphone w/10GB per month package If ESPN pays so that it doesn’t count against the cap and PickerSports does not, how does that shape competition between them?

136 PickerSports ESPN DIRECTV NetflixZero Rating: Affiliated Content and Competition PickerSports 5GB ESPN 5GB DIRECTV 5GB Netflix 5GB Smartphone w/10GB per month package If DIRECTV is zero rated and doesn’t have to pay (because the cell phone co is AT&T), how does that shape competition between DIRECTV and Netflix?

137 PickerSports 5GB ESPN Zero Rating: Edge Competition between Incumbents and Start Ups? “Such ‘pay for play’ arrangements favor big content providers who can afford to pay for access to users’ eyeballs, and marginalize those who can’t, such as nonprofits, startups, and fellow users.” EFF, 18 Feb 2016

138 AT&T Data Free TV “For example, AT&T Mobility offers a ‘Data Free TV’ feature on its DIRECTV app that enables its broadband consumers who also subscribe to direct broadcast satellite service from AT&T’s wholly-owned affiliate, DIRECTV, to view unlimited DIRECTV video content with no impact on the user’s mobile data monthly allotment.” 11 Jan 2017

139 FCC Concerns re AT&T Program“AT&T’s Sponsored Data program is designed to enable third party edge providers to deliver streaming edge content on a zero-rated basis to AT&T’s mobile broadband subscribers. Unlike the two sponsored data programs discussed above, we have serious concerns that AT&T Mobility’s Sponsored Data program presents competitive problems … .” 11 Jan 2017

140 Vertical Integration and Affiliate Transactions“In theory, transactions among vertically-integrated corporate affiliates, in which the upstream ‘gatekeeper’ network operator supplies inputs to its affiliated provider of downstream services, do not necessarily have anti-competitive impacts.” 11 Jan 2017

141 Safeguards in the Past “But in past cases where the Commission has found such arrangements to be ‘just and reasonable’ and ‘not unreasonably discriminatory’ under Sections 201 and 202, structural and/or conduct safeguards have been in place to ensure that the network entity supplied the inputs on reasonable terms that did not diverge significantly from the terms faced by the downstream affiliate.” 11 Jan 2017

142 FTC Staff Comments 17 July 2017

143 FTC Staff Comments: Vertical Integration“Most forms of vertical integration can generate procompetitive efficiencies, thus antitrust analysis generally regards them as harmless or even beneficial to consumer welfare. However, such integration may be anticompetitive under specific circumstances. … ” 17 July 2017

144 FTC Staff Comments: Vertical Integration“Such competitive harm might occur by either denying competitors access to essential inputs (for example, in the market for broadband Internet access) or denying access to downstream distribution outlets (for example, in the market for online content and applications).” 17 July 2017

145 FTC Staff Comments: Vertical Integration“The FTC’s investigations and enforcement actions in Internet-related markets has been consistent with its actions in other industries. Where harm to competition outweighs the potential benefits to consumers, the FTC has initiated antitrust enforcement.” 17 July 2017

146 FTC Staff Comments: Vertical Integration“The FTC’s activities in Internet-related markets demonstrate its ability to protect the competitive process, promote the innovation that such competition fosters, and preserve the resulting benefits to consumers.” 17 July 2017

147 Netflix Comments “Netflix supports strong net neutrality. Because Netflix believes the internet should be open, we do not support rolling back existing net neutrality protections as the FCC has proposed to do in the Restoring Internet Freedom Notice of Proposed Rulemaking.” 17 July 2017

148 Netflix Comments “Netflix supports enforceable rules that promote an open internet: free from blocking, throttling, and paid prioritization on the last mile and at the points at which a broadband provider’s network connects to the Internet. … .” 17 July 2017

149 Netflix Comments “But broadband internet access services providers can use (and have used) gatekeeper power to restrict consumers’ ability to access the content they choose, especially from growing and competitive firms.” 17 July 2017

150 Internet Techies

151 Internet Techies “Similar to how Comcast decided to favor its own video-on-demand services, other carriers have chosen to distort the market and give their own video services an unfair advantage as well. ….”

152 Internet Techies “ [T]he consumer harm is identical to the Comcast case—an ISP distorts the market for content by using its gatekeeping power to favor some content over others, thereby depressing investment in content by third-parties and reducing the choices available to their customers.”

153 AT&T Comments 17 July 2017

154 AT&T Comments “This regulatory history illustrates a simple point: the Title II rules that the pro-regulation advocates claim are essential to an open Internet were not even adopted until more than 16 years into the broadband era and have been in effect for only two years. …” 17 July 2017

155 AT&T Comments “During the same period of unregulation, edge providers such as Facebook, Twitter, Netflix, Skype, Etsy, and YouTube grew from start-ups into the powerhouses they are today, accelerating the virtuous circle of investment and innovation throughout the Internet ecosystem.” 17 July 2017

156 AT&T Comments “The previous Commission’s treatment of zero-rating programs—its most prominent application of section 201/202 ‘nondiscrimination’ principles against broadband ISPs—provides an instructive case study of the consumer harms inflicted by Title II reclassification.” 17 July 2017

157 AT&T Comments “From the outset, AT&T Mobility offered the same sponsored data service at the same unit cost to all unaffiliated content providers, regardless of their size or the amount of data they chose to sponsor.” 17 July 2017

158 AT&T Comments “That sponsored-data rate, moreover, was set at an extremely attractive wholesale level as low as the market-based rates AT&T Mobility offers to major wireless resellers who commit to significant purchase volumes.” 17 July 2017

159 AT&T Comments “As such, it was generally well below the effective rates that retail customers pay per unit of actual consumption, and these lower effective rates generated additional data usage. The resulting combination of increased output at lower per-unit prices is the very criterion of increased consumer welfare.” 17 July 2017

160 ESPN can continue to compete over all other dimensionsZero Rating: Edge Competition between Incumbents and Start Ups? Smartphone w/10GB per month package PickerSports 5GB ESPN DIRECTV Netflix A version of net neutrality limits the ability of ESPN to compete with PickerSports by reducing price of data to consumer ESPN can continue to compete over all other dimensions What is the reason to somehow exclude one dimension of competition? (Ans in 3 slides?)

161 Zero Rating: Affiliated Content and CompetitionSmartphone w/10GB per month package PickerSports 5GB ESPN DIRECTV Netflix This is much closer to a traditional antitrust question regarding vertical integration And very related to the issues considered in EU Google Shopping case on preferencing What are the advantages of ex ante regulation (net neutrality) over ex post regulation (antitrust)?

162 Zero Rating and Sponsored DataA Pre-Slides Board Example Dynamically-sized data plans and bandwidth capacity constraints with fee and zero-rated data Smartphone w/10GB per month package PickerSports 5GB ESPN DIRECTV Netflix

163 Zero Rating and Sponsored DataPositional Competition? If all pay to be zero rated, what have we accomplished? Is this the reason to block ESPN from buying zero rating? And how should we think about incentives to expand bandwidth/capacity?