Vague Net Neutrality Rule Impedes Innovation

April 22, 2015

The Federal Communication Commission's (FCC's) recent order imposing common carrier and net neutrality obligations on broadband Internet access providers creates a complex new regulatory structure.  Despite a 400-page order, the obligations created by the new rules are not entirely clear and are unlikely to be known for several years after the results of litigation and future FCC interpretations are known. The uncertainty regarding regulatory requirements will reduce the incentive to implement innovations that might (or might not) be found improper after future regulatory proceedings.

A portion of the new section 8.11 illustrates the challenges ahead for Internet innovators: "Any person engaged in the provision of broadband Internet access service… shall not unreasonably interfere with or unreasonably disadvantage… edge providers' ability to make lawful content, applications, services, or devices available to end users." "Edge providers" are defined very broadly to include "any individual or entity that provides any content, application, or service over the Internet." Almost any significant change in pricing structure or other practices will disadvantage some edge provider and thus the key determinant of the lawfulness of changing existing practices is the qualifier "unreasonably."  That word is subject to wide and varying interpretations depending on the policies in place at any particular time and the personnel making the decision regarding reasonableness in a specific case.

Consider, for example, an Internet Service Provider contemplating a change from a flat-rate pricing structure to a usage-based pricing structure. In the unregulated Internet of the past, that decision is determined by ordinary market considerations without regulatory constraints. Providers have generally chosen flat rate pricing for wired access and usage-based pricing for wireless access but they have been free to change their pricing structure at any time, subject to the risk of losing dissatisfied customers. Under the new rules, a change from flat-rate to usage-based pricing would “disadvantage” video providers whose customers have high usage rates and would likely generate an FCC complaint and proceedings to determine if the change "unreasonably" disadvantaged the provider.

The rule creates a vague property right in the existing arrangements and creates an incentive to continue with the existing arrangements rather than to experiment with new ideas. Trying something new creates regulatory risk in addition to the normal market risk associated with innovation. The FCC recognizes that the new rule is vague and offers companies an opportunity to submit their proposals to the FCC Enforcement Division for advance review, but provides no promise of an expeditious review or definitive answer to the questions raised. The vague rules, subject to regulatory delay and litigation, reduce the incentive to innovate in favor of continuing approved practices from the past.