Mark Del Bianco

The FCC’s net neutrality (or Open Internet) rules are largely about minimizing the ability of mobile broadband providers to engage in anticompetitive or anti-consumer behavior.  Regardless of whether those rules are upheld by the D.C. Circuit on appeal (see earlier posts), there are steps the FCC and/or the Federal Trade Commission could take to reduce the incentive of mobile broadband providers to mislead customers or engage in other anti-consumer tactics. The most important would be very simple – let customers vote with their feet or their money.  Most mobile broadband customers are locked in to 2 year contracts.  Either the FTC or the FCC could enact a rule allowing retail customers to void their long term contracts without any early termination penalty and move (with or without their mobile devices) to another carrier if their present carrier fails to disclose information required by the transparency rule or if it materially changes any of its privacy or network management policies.  This step alone would go a long way towards ensuring that mobile broadband carriers have practices that are consumer-friendly, transparent and reasonably non-discriminatory.  And after all, isn’t that what consumers want from a net neutrality rule?

This is not a novel idea.  The FCC has in the past exercised its power to invalidate commercial contracts and require a “fresh look” when market changes warranted. No doubt some will say that this idea can’t work because carriers have built a subsidy into the price of the mobile devices that they bundle with their service, and allowing customers to end their contracts early will deprive the carriers of the right to recover the subsidy.  In fact, it will give the carriers even more of an incentive to engage in transparent and pro-consumer behavior because they will have more to lose.

The importance of customer lock-in and the concept that customers should have access to everything on the Internet (whether they want it or not) are being tested today.  Since early in 2011, Metro PCS has offered a $40 per month mobile broadband plan that many have derided as “Internet lite” because it has a cap on downloads and limits the customer’s access to streaming video and a variety of applications and websites.  The service is already the subject of an informal complaint at the FCC, with public interest groups charging that it constitutes a violation of the net neutrality rules.  But maybe it should be viewed as a noble experiment instead.  The plan’s potential for competitive harm is minuscule.  Metro PCS has no market power – it’s the fifth largest U.S. wireless carrier, with less than 5% of customers.  And it doesn’t require any contract, so there’s no customer lock-in.  There may be questions about the transparency of the plan’s parameters (see the FCC complaint), but if customers don’t like the plan, they can vote with their money and move to another carrier.  If a new service such as the plan were being offered in any other industry, it wouldn’t be a cause for concern.  But it is under attack because it is viewed by many as the camel’s nose under the tent of “access by every customer to everything on the Internet.”  I don’t know what the outcome will be, but I would be interested in seeing how many customers have signed up for the service, and how the churn rate compares to other plans and other carriers.

I suggested in my last post that even if the D.C. Circuit strikes down the FCC’s mobile wireless net neutrality rules, it may not make much difference.  Putting it another way, the battle for the soul of the smartphone may already have been decided.  It will take years to know for sure.

There are at least three reasons why it will be difficult for mobile broadband carriers to seize the soul of the smartphone.  The first is the impact of a regulatory requirement that is independent of the net neutrality rules.  In the 2008 700 MHz spectrum auction, the FCC mandated that the buyer of one band of the auctioned spectrum, the C Block, operate that part of its network as a nationwide open platform for devices, content and applications, subject to “reasonable network management.” The FCC was vague on the actual requirements for openness, and on the meaning of “reasonable network management.”  But Verizon Wireless bought the spectrum and is using it for rollout of its 4G LTE network.  Right now, VZW’s LTE network is the gold standard for mobile broadband in the U.S.

Even if the FCC rules were struck down and Verizon Wireless wanted to adopt restrictive practices, it couldn’t adopt them network-wide.  At worst, it could only impose restrictive conditions on its 3G network customers.  The resulting bad publicity would be a nightmare for VZW. How could it justify treating 3G customers – who are already getting slower speeds and fewer applications – worse than its 4G customers?

The second reason is that there are two large, nationwide wholesale carriers in the process of building out networks – Clearwire and LightSquared.  Both have announced that their networks will be open, so retail service providers riding their networks can offer any sort of open or closed service.

The other large national carriers – AT&T, Sprint, and T-Mobile – have to compete with Verizon’s open access LTE network and the coming Clearwire and LightSquared networks.  They will have a strong market-based incentive to adopt or maintain open mobile wireless platforms.  If they don’t, customers are likely to perceive their networks as less friendly or desirable, and either leave or not be willing to pay as much for the service.

The C block requirements resulted from a Google initiative.  Google asked the FCC to impose  openness requirements, and in order to entice the FCC Google committed to meeting the minimum reserve of $4.5 billion for the spectrum.  To Google’s great relief, after it made that bid Verizon topped it and got the spectrum.  Google’s move was brilliant.  It spent very little to get a test bed to shed light on the costs and benefits of mobile network open internet provisions on a national scale.  Up to now, the experiment seems to be working.  I’m not aware of any complaints by device manufacturers or by application, content or service providers that Verizon is hampering or blocking their offerings on its LTE network.  And if Verizon’s LTE network is as crucial as I think it is, Google also created a Trojan horse for net neutrality across the board, on wired and wireless networks alike.

The third reason why mobile broadband providers may not have the ability to engage in conduct that would violate the net neutrality rules lies in the nature of the relationship between wireless customers and their smartphones.  It’s personal, personal in a way that the user’s relationship to his PC or her Macbook is not.  Why is this important?  Well up to now net neutrality has been debated largely among academics and policy wonks, with occasional input from technical experts such as Robb Topolski, who first figured out in 2007 that Comcast was interfering with its customers’ BitTorrent transmissions.  Imagine if tomorrow a mobile broadband provider were to block access to Citibank online accounts because it had signed a deal with Bank of America, or selectively degraded transmissions from a website such as YouTube or a streaming service such as Netflix.  The conduct would almost certainly be discovered quickly, and users would be outraged that their carrier was trying to interfere with the ways they used their smartphones.  Thousands, perhaps tens of thousands, of affected customers would use their smartphones to publicize the conduct and organize a response.  There has been a strong negative public response each time that possible net neutrality violations were publicized – think about the Comcast case, the Verizon text messaging case, or Madison River blocking VOIP service.  Given the closer relationship between users and their smartphones, there is every reason to believe that outraged users would be able to change the offending practice or, at a minimum, adversely affect the carrier’s market share (see Netflix).

The FCC’s Open Internet (i.e., net netrality) rules for broadband mobile wireline and wireless networks go into effect next week.  Numerous groups and companies filed appeals and petitions for review challenging the FCC’s action.  All the cases were consolidated and assigned by lottery to the DC Circuit.  A decision from the court is likely next summer or fall.

So what is going to happen?  Well, I think the new FCC rules for mobile wireless will survive review by the DC Circuit, even if the tougher wireline net neutrality rules don’t.  There is a stronger jurisdictional argument for wireless because Title III of the Communications Act gives the FCC broad authority to regulate all wireless services.  I also think the Court will have a Goldilocks moment and affirm the substance of the mobile wireless rules against the wireless network operators’ arguments that they go too far and the public interest groups’ claims that they don’t go far enough.

But even if the court strikes the mobile wireless rules down, it may not make much difference.  In order to engage in practices that would harm competition or consumers and increase their own revenue, mobile broadband providers need to have not only the incentive but the ability.

Incentive – I’ll grant you they have that.  Ability, that is a different question.  Nobody really knows the answer.  It is possible that mobile wireless operators may not have the ability to discriminate in ways that benefit them economically.  There are at least three reasons why this may be so.  I’ll look at them in a future post.