Policy

Title II Rules Leave Wall Street Unfazed

Bullish Investors Convinced Rate Threats Won’t Hurt 2/09/2015 8:00 AM Eastern

Federal Communications Commission chairman Tom Wheeler, a fan of history, last week fired the shot heard ’round the communications world, proposing to regulate the Internet like a utility — he disputes the characterization — and drawing howls of protest from providers and high praise from public-interest groups.

 

The chairman, urged to act by President Obama, last Thursday (Feb. 5) circulated a draft order of tough new network-neutrality rules based on reclassifying Internet- service providers under regulations known in local parlance as Title II, as in the common-carrier rules detailed in Title II of the Communications Act of 1934. Both Wheeler and Obama have said they want to codify rules that would block ISPs’ ability and incentive to throttle Internet traffic or otherwise threaten access to the broadband networks owned and operated by cable operators and others.

 

Never mind that formal complaints about discrimination and blocking have been notable for their absence. Internet-service providers have said they aren’t blocking or throttling traffic, and have even agreed to rules based on Section 706 of the Telecommunications Act of 1996 to prevent such actions. Section 706 gives the FCC broad authority to “promote competition in the local telecommunications market” and “remove barriers to infrastructure investment.”

 

Cable-sector investors, who have the most to lose from the decision, were decidedly unfazed, and seemed to take a cue from Alfred E. Neuman of Mad magazine: “What, me worry?”

 

Cable stocks, which were down about 10% in the month of January as the Title II threat gained steam, actually rose after Wheeler announced his regulatory intentions in a blog posted last Wednesday (Feb. 4) on the website of Wired, widely read among the Silicon Valley community. As a whole, the sector was up about 3%, with Charter Communications gaining 2.6%, Comcast 2.7% and Time Warner Cable about 2% each. Cablevision Systems was up 1.3%.

 

Wall Street’s reaction, however muted, was expected, mainly because Wheeler has telegraphed his Title II intentions for weeks — and because his announcement brings some certainty.

 

“The question was how assertive/clear the forbearance against rate regulation and fees was going to be,” Telsey Advisory Group media analyst Tom Eagan said, adding that in Wheeler’s Wired op-ed piece, the chairman was specific about excluding wireline telephony-style rate regulation, unbundling and universal-service fee requirements from the new regime.

 

“Those exclusions are an incremental positive,” Eagan added.

 

Pivotal Research Group principal and senior media & communications analyst Jeff Wlodarczak added that the gains could be the result of other investors who’d been waiting on the sidelines, deciding to jump in after Title II became more certain.

 

“There was a lot of capital sitting on the sidelines that wanted to be invested in cable given there was significant worry that the head of the FCC would pull a negative surprise out of his hat around price regulation or forcing open plant,” Wlodarczak said. “[Wheeler] came out pretty forcefully against that. In the end there was an expectation that it could be a lot worse than it actually was, so people piled in.”

 

Moreover, many believe that a true reckoning over price regulation may never come; Wlodarczak and others expect a flood of litigation from opponents to Title II once the regulations kick in, with telcos Verizon Communications and AT&T first in line, based on their stated intentions.

 

Still, some believe cable operators and investors may be whistling past the graveyard. Wheeler has told the communications world he wants, in effect, a written guarantee that there will never be competitive discrimination, by passing the toughest such rules the FCC — or even the president — has ever proposed.

 

MoffettNathanson principal and senior analyst Craig Moffett emphasized last week that Title II is by its nature a regulatory pricing regime.

 

In an interview, Moffett said the stocks’ reaction after Wheeler dropped the Title II bombshell “makes no sense. Short of simply arguing that the certainty of bad news is better than uncertainty, there is no plausible reason for why the stocks should be up.”

 

Although Wheeler has said he will not pull the price regulation trigger while he is in control, Title II could be a ticking time bomb just waiting to explode.

 

Randolph May, president of Rockville, Md.-based think tank the Free State Foundation, said he thinks the Title II order will eventually be all about the money. “I predict that either immediately, or in the not-too-distant future, the agency will regulate broadband usage tiers, ban or require modifications to so-called zero-rating plans, and control prices for interconnecting Internet facilities,” May said.

 

Compounding the uncertainty is that most people misunderstand what Title II really means, according to Moffett.

 

“There is no ambiguity about what Title II really is — Title II is about pricing regulation, full-stop,” Moffett said. “You can forbear the subsections about price regulation, but when you import an act that is fundamentally about price regulation, it would be naïve to think that price regulation isn’t going to seep in around the edges.”

 

FUTURE CONSIDERATIONS

 

That is especially true as political administrations and affiliations change. Having such a powerful tool at the ready could be extremely handy if the FCC decides to “unforbear” from unbundling or price regulations.

 

Understandably, cable operators are against the proposal and have begun circling the wagons to determine just how they will address the new regulatory regime. Charter Communications CEO Tom Rutledge, a veteran of past industry regulatory battles, recently said that Title II could be business as usual, basically enforcing what cable operators are already doing. But he, too, said he fears what the future could hold under what he called an “excessive approach.”

 

“While it doesn’t change the status quo in any way, somebody has a bazooka aimed at you, and that’s an uncomfortable situation,” Rutledge said.

 

One official called it a double-barreled source of authority that employs every tool in the toolbox, or more apropos, every gun in the arsenal. Title II also turned out to be personal for Wheeler.

 

This Time, It’s Personal

 

“I personally learned the importance of open networks the hard way,” he wrote in Wired. “In the mid-1980s I was president of a startup, NABU: The Home Computer Network. My company was using new technology to deliver high-speed data to home computers over cable television lines. Across town, Steve Case was starting what became AOL.

 

“NABU was delivering service at the then-blazing speed of 1.5 megabits per second — hundreds of times faster than Case’s company. ‘We used to worry about you a lot,’ Case told me years later.

 

“But NABU went broke while AOL became very successful,” Wheeler continued. “Why that is highlights the fundamental problem with allowing networks to act as gatekeepers.

 

“While delivering better service, NABU had to depend on cable-television operators granting access to their systems. Steve Case was not only a brilliant entrepreneur, but he also had access to an unlimited number of customers nationwide who only had to attach a modem to their phone line to receive his service. The phone network was open whereas the cable networks were closed. End of story.”

 

The chairman is proposing to reclassify Internet access as a Title II service to buttress three bright-line, enforceable rules against blocking, throttling (degrading) of content and a ban on paid prioritization, the so-called Internet fast lanes that had net-neutrality opponents staging protests at Wheeler’s home and staging mock fights between people in cat, and “fat cat,” suits outside FCC headquarters.

 

The rules will, for the first time, be applied to mobile Internet service, as well as fixed broadband.

 

And in a nod to the ongoing complaints of Netflix about peering, the FCC for the first time will provide for a complaint process for consumers and businesses that believe interconnection practices, including pricing, harm competition, and give the Enforcement Bureau the power to investigate and take action.

 

That is a way to address the issue without turning it nuclear. Although ISPs could not file complaints against edge providers, who are not covered under the new rules, if a company such as Netflix complained, a Comcast or Time Warner Cable could offer up evidence for arguments that Netflix engineered congestion to further its political objectives.

 

The draft includes a catch-all general conduct rule that allows the FCC to “stop new and novel threats to the Internet.” Wheeler did not elaborate, but a senior FCC official suggested that would be a way to get at specialized services — which are still allowed — if they are functional equivalents of Internet access or attempts to evade the rules.

 

That will also be a way to prevent “anticompetitive” discrimination but allow it for things like prioritizing remote health monitoring over video game playing. That could also include preventing ISPs from exempting their own content from data caps, one official said.

 

The draft also “enhances” the FCC’s network management transparency requirement, in ways that include more specifics on how to measure quality of service and making clear that reasonable network management applies to technical, not business, needs.

 

FOREBEARING IS NOT SCARING

 

The FCC will forbear, i.e., not apply, most of the Title II regulations — officials last week called it Title II tailored for the 21st century — and Wheeler insisted last week that the rules do not impose utility-style regulation on ISPs. For example, he said, there will be no rate regulation, new tariffs or unbundling of last-mile connections — that doesn’t apply to future FCCs or their chairmen, of course.

 

Nor does it trigger an obligation to pay into the Universal Service Fund, though the FCC has a separate proceeding on whether to make ISPs pay into the fund, which could eventually result in a USF hit for cable operators.

 

The rules apply to ISPs, not to other parts of the net, notably edge providers and companies that haul bulk traffic to ISPs before the final mile to consumers. The rules, Wheeler said, don’t create “burdensome administrative filing requirements or accounting standards.”

 

Wheeler chose Wired, the Silicon Valley bible, to announce what many were expecting; “I am proposing that the FCC use its Title II authority to implement and enforce open Internet protections,” he said in an online op-ed that appeared about the same time House Communications Subcommittee chairman Greg Walden (R-Ore.) was criticizing him for a planned takeover of the Internet.

 

But legislators were doing more than taking sides on the issue, though they were doing that, too.

 

Republicans in both the House and Senate were still working on a draft bill that would block the imposition of Title II while giving the FCC express authority — in a new section of the Communications Act some have labeled Title X — to prevent blocking and degrading and paid priority, essentially everything Wheeler and the president said they wanted.

 

No Democrats have signed onto the bill, but a few last week said they were still willing to work on a bipartisan bill.

 

ISPs had already been bracing for the blow. National Cable & Telecommunciations Association president Michael Powell — who, as FCC chairman during President George W. Bush’s first term, backed defining Internet access as an information service, rather than a Title IIcovered telecom service — called the new rules a “heavy burden of Title II public-utility regulation on the Internet that goes far beyond the worthy goal of establishing important net-neutrality protections,” protections Powell said he supports. He was concerned that, despite the chairman’s protestations to the contrary, the new rules would “confer sweeping discretion to regulate rates and set the economic terms and conditions of business relationships,” and called Title II an “Internet Iron Curtain.”

 

Meredith Attwell Baker, a former FCC Republican and now president of CTIA–The Wireless Association, said the new rules threatened the future of mobile broadband. She has vowed to sue if the Title II order is approved and applied to mobile providers.

 

Title II activists were seeing it as payoff for years of work, including driving millions of comments to the FCC. “This is a banner day, as years of grassroots organizing is paying historic public interest dividends,” Michael Copps, a former FCC Democrat and onetime acting chairman, said.

 

“Chairman Wheeler’s announcement is the culmination of a decade of dedicated grassroots organizing and advocacy,” Free Press policy director Matt Wood said, echoing Copps’s sentiment.

 

Congressional Democrats who have been pushing Title II, including Sens. Al Franken (D-Minn.) and Ed Markey (D-Mass.), were also doing victory laps. “Today is an historic day — historic for consumers, innovators, entrepreneurs, for anyone who counts on the Internet to connect to the world,” Markey said last week. “These rules are a Declaration of Independence for the Internet.”

 

The End is Near

 

Wheeler has set a Feb. 26 vote on the order, which was only a draft that circulated to the other members the customary three weeks before a vote.

 

An FCC official said the commissioners’ offices all received the item at the same time. The commissioners will have a chance to suggest edits, and cable operators and ISPs will be hoping for some changes. For example, the American Cable Association, which represents smaller, independent MSOs, didn’t get the carve-out from the rules for its members that it asked for, so it will be hoping to move the needle on that issue.

 

After the Feb. 26 vote, the order must be published in the Federal Register, which will likely take at least a few weeks and possibly months. Once published, there will likely be petitions to reconsider, then lawsuits.

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