National Networks Need National Policies

November 9, 2017

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Reports indicate we are nearing the end of the “Restoring Internet Freedom” rulemaking—many expect to see a draft of the FCC’s order that will return the legal classification of broadband access service from the pseudo-public utility regulation of Title II back to the more lightly regulated information service that prevailed for virtually all of the broadband era. But in the home stretch of the FCC’s third attempt at a net neutrality regime, federal preemption of state-level net neutrality laws has emerged as a key issue.

Some more empirical-minded economists could potentially be cheered by state-by-state level experimentation with net neutrality rules, as it could conceivably provide a natural experiment to see where the Internet ecosystem best thrives. But pragmatists would be rightly troubled by such a balkanized governance system, because it would be antithetical of the cross-border nature of the Internet.

If the Republican-controlled FCC creates a less restrictive net neutrality regime (which ITIF supports), or potentially kicks the entire issue to the Federal Trade Commission and antitrust courts (which ITIF does not support), then some states may well see a political opportunity to step in and will no doubt be encouraged by the usual net neutrality activists.

Others are more skeptical.

Former FCC Commissioner Rob Mcdowell, for example, called for the FCC to preempt states and localities in his testimony last week, pointing to “a disturbing trend [that] has developed where states and localities have tried to regulate many aspects of the broadband market potentially creating a confusing and innovation-killing patchwork of local laws governing … the Internet.”

There are two situations where federal preemption of Internet and telecom laws and rules—asserting a uniform national framework—makes the most sense. The first is where multiple conflicting or diverse state laws add complexity and cost to firms’ compliance. For example, we should certainly avoid having 50 different data-breach laws, or to use a more recent example, multiple different standards for a broadband privacy. A single, common framework with clear obligations can reduce burdens on existing companies, lower entry costs for new firms, and bring greater transparency to crucial, contested policy questions.

A second situation where preemption makes sense is where there is a clear divergence between subnational government interests and overall national interests. A prime example is Internet taxes. Any individual state may benefit from a reliable source of revenue from taxing Internet access, but the costs from increasing the price of Internet access on their citizens is borne not just by their citizens and businesses but by citizens and business in all states in the form of reduced network effects. There is clear evidence that increasing the cost of broadband access limits adoption and that lower levels of adoption hurt overall U.S. economic growth. Here it makes sense for the federal government to step in and preempt harmful state taxes on Internet access.

Net neutrality regulation fits the mold in both respects. National and regional networks should be subject to uniform rules to keep compliance costs low and reduce complexity. To the extent the coming changes to net neutrality regulation see any changes in business practices, which would be more minor than many expect, a uniform policy that allows for broad scale would be an important benefit. When it comes to prioritization, the real value would be to latency-sensitive applications, so the greatest benefit to relaxing rigid net neutrality rules would be in interstate services, where distance adds unavoidable latency. To restrict these potentially valuable services simply because a customer happens to reside in a particular state makes no sense.

What is more, technology is reducing the importance of the location where a service is offered. With the shift to packet-routed networks, the cost of transit is largely distance-insensitive, meaning there is no technological reason communications over state boundaries must cost more or be treated differently than communications that remain within one state’s borders. Networks and services are now modular, with applications largely separated from the underlying network. Furthermore, many of the network functionalities, which were traditionally in carriers’ central offices, are being virtualized or shifted the edge of the network entirely, further reducing the importance of location-specific regulation. Network applications now depend on economies of scale independent of the individual state in which they are consumed. Technological advances are simply erasing the importance of state and local boundaries. It is in the national interest to give these technologies room to grow unimpeded by artificial borders.

As such, beyond simply declaring broadband an information service, the FCC should make clear that broadband policy is made at the national, not state, level. Former Chairman Kennard put it well in a 1999 speech titled “The Unregulation of the Internet: Laying a Competitive Course for the Future.” There he laid out why it was in “the national interest that we have a national broadband policy … a de-regulatory approach, an approach that will let this nascent industry flourish.”

He explicitly discussed the importance of having a unified national policy on broadband, rather than allowing individual state utility regulators to create disparate regulations. The importance of such an approach remains today. If the FCC removes itself entirely from overseeing broadband service, it risks a thicket of state-led efforts to regulate net neutrality. Regardless of the specific substantive rules, this commission should make clear broadband is a fundamentally interstate service and its policy is made at the federal level. It would be ironic if at a time that Europe is seeking to achieve a digital single market, and is looking to the United States for guidance, we go in the direction of old Europe, creating 50 different digital, broadband markets.

To ensure we don’t go there, the FCC should not just apply some fig-leaf of regulation, grasping for the bare minimum to legally claim jurisdiction to preempt states. Instead, the FCC should be looking to an actual compromise, and utilize section 706 to implement workable oversight of innovative new broadband services. This would admittedly be an imperfect solution (and it’s not clear Chairman Pai would even have the votes to use 706 if he wanted to). But some standards that allow the FCC to step in if states try to become mini EU nations would be a far better temporary solution until Congress hopefully takes the issue up for permanent resolution.

Similarly, it is important the United States show leadership on open Internet policy to influence the direction of foreign regulators. Title II sets a poor precedent, giving foreign countries an excuse for more extensive regulation, including on price, in the Internet space. Indeed, the tariffing present in telecommunications regimes around the world historically did not have a zero price for the sending party. Although Title II in the United States is now seen as a tool to ensure a “fair” and open Internet, other countries, especially ones not so amenable to our most successful edge providers, could use the same legacy telecommunications regulatory regimes to protect their own operators, contrary to the interests of both the United States and the open and interconnected global Internet.

By putting forth a clear, light-touch, predictable, case-by-case framework under the legal authority already recognized by the courts, the FCC would set a good example for others to follow, and forestall a thicket of state-level rules.