A Fair, Balanced and Nuanced Assessment of Network Neutrality A presentation at the 12th Caribbean Internet Governance Forum Belize City, BELIZE August 10, 2016 Rob Frieden, Pioneers Chair and Professor of Telecommunications and Law Penn State University rmf5@psu.edu Web site : http://www.personal.psu.edu/faculty/r/m/rmf5/ Blog site: http://telefrieden.blogspot.com/

How Did We Get Here? The First 4 Phases in Internet Development 1) Incubation--governments as anchor tenants and underwriters, with an emphasis on proof of concept, incubation and promotion. Metering and cost attribution unnecessary(1980s-1995);   2) Privatization--governments eliminate financial subsidies obligating contractors to operate commercially; cost causation really matters (1995-1998); 3) Commercialization—private networks proliferate as do ventures creating software applications and content that traverse the Internet. The “dotcom boom” triggers excessive investment and overcapacity (1998-2001); and 4) Diversification—after the dotcom bust and market re-entrenchment, Internet survivors and market entrants expand the array of available services and ISPs offer diversified terms, conditions and rates, including price and quality of service discrimination needed by “mission critical” traffic having high bandwidth requirements, e.g., full motion video content. ISPs and even content providers can use deep packet inspection to identify traffic for “better than best efforts” routing and other forms of prioritization at one extreme and blockage/throttling at the other.

A Developing 5th Phase Widespread diffusion of broadband infrastructure and increasing consumer demand for anytime, anywhere access to IPTV content. Market entry by Content Distribution Networks whose business plan contemplates far more downstream data delivery requirements not offset by upstream carriage. Widespread migration from reliance on only 2 interconnection and compensation models: 1) peering; 2) transit. Increasing disputes over interconnection and compensation terms; claims that last km. ISPs can exploit market power.

What is the Best Regulatory Model for the Internet? Laizze-faire/Cyberliberlarianism—Governments should not regulate the Internet, because marketplace forces and the “court of public opinion will remedy any and all disputes. Print/First Amendment/O’brien model—Strict scrutiny of any law or regulation that directly impacts speech/expression; intermediate scrutiny for content neutral laws/regulations. Broadcast model—Significant regulation based on market failure and the need to protect consumers and the public interest. Cable model—Permissible regulation only to achieve specific goals such as promoting localism, diversity, competition. Common Carrier model—Regulate to ensure nondiscrimination, widespread and affordable access without affecting content and business incentives. Other models? Hybrid or combination of existing models?

The Internet Ecosystem Consider the Internet as the product of seamless interconnection between servers, routers and broadband subscribers using the telecommunications transmission networks of many, often-unaffiliated operators. We should concentrate on the interconnection and compensation negotiated between various operators that go by several different names: Internet Service Provider (Tier-1, Tier-2, retail) Content Distribution Network, Peer, Paid Peer, Transit Customer, Lessee, etc. Source: George Ou, http://www.digitalsociety.org/2009/11/fcc-nprm-ban-on-paid-peering-harms-new-innovators/

Growing Dominance of Internet Platform Intermediaries ISPs operate as intermediaries in a double-sided market with retail, broadband subscribers downstream and other ISPs, content distributors and content creators upstream. The Internet ecosystem supports powerful platform operators who can capture large market share by exploiting scale economies, network externalities and high switching costs/barriers to market entry. Source: George Ou, Digital Society: http://www.digitalsociety.org/2010/12/division-of-labor-between-broadband-and-cdn/

The Many Different Ways to Frame Network Neutrality Broadly speaking network neutrality addresses whether and how governments should preempt marketplace resource allocation to remedy concerns about access, affordability, fair competition, consumer protection, social justice, equity, international human rights, national security and sovereignty. Different stakeholders offer conflicting frames: A maturing, commercialized Internet ecosystem with double-sided markets necessitates unregulated flexibility to create new options for end-to-end connectivity vs. Last mile ISPs operate as terminating monopolies with the incentive and ability to engage in anticompetitive practices that threaten innovation and require muscular, ex ante government regulation.

Ex Ante vs. Ex Post Remedies Ex ante safeguards aiming to prevent undetected, but actual harms to consumers and competition with ex post remedies that apply only after proof of harm. Ex ante regulation risks imposing unneeded remedies for false positives. Ex post remedies may arrive too late, or never resulting in false negatives. Ex ante regulation typically includes service definitions and fixed rules, both of which present problems in light of marketplace and technological convergence and the pace of change. Ex post remedies appear streamlined and lower cost, but they often rely on generalists possibly ill-equipped to ascend steep learning curves.

U.S. Approach On 3 occasions, the FCC has opted for ex ante regulatory oversight based on the view that Internet Service Providers (“ISPs”) have the incentive and ability to engage in practices that harm consumers and competitors. The FCC’s most recent initiative reclassifies broadband Internet access as common carriage thereby securing jurisdiction to apply muscular, ex ante measures. This approach risks conferring an overbroad regulatory wingspan, but the FCC has declared its intent to forebear from applying most public utility safeguards including price regulation. The FCC prohibits ISPs from blocking, throttling and prioritizing traffic for additional compensation. The Commission asserts jurisdiction over ISP interconnection downstream to consumers, but also upstream to others ISPs and content/edge distributors and creators.

IPTV and OTT Applications Trigger Compensation Disputes and Scope of Network Neutrality Protection Internet Protocol Television and Over the Top media are the current “killer applications.” The FCC has cited a Sandvine, Inc. estimate that Netflix generates about 35% of all Internet, prime time traffic. Akamai and Cisco also report massive increase in downstream video. Last mile ISPs have invested billions in infrastructure upgrades and seek recoupment downstream from broadband subscribers as well as from upstream ISPs, CDNs and content sources. ISPs closely gauge cost causation. They meter traffic and replace zero charge, barter (peering) with payment demands (transiting, paid peering, surcharges). Asymmetrical traffic flows have triggered new interconnection and compensation arrangements as well as very visible disputes, e.g., Comcast-Netflix. Broadband consumers have suffered service degradation without knowing the cause. “Binge watching,” or artificial congestion by last mile ISPs to extort higher payments? The FCC has responded by banning last mile, paid prioritization, subject to a rigorous waiver standard, but common carrier, telecommunications service provides can engage in “reasonable” discrimination.

Cooperation for a Price In the current Internet generation, commercial exigencies (like the need to invest in more bandwidth) and the elimination of gov’t subsidies create incentives for profit maximization and identifying who has triggered higher service costs (cost causation). ISPs serving the last km. will seek to erect a double-sided platform with payment expectations from upstream ISPs and content providers in addition to downstream broadband subscribers. Retail ISPs may try to ration capacity, maximize revenues from both sides and offer “better than best efforts” traffic prioritization/specialized networks. With 2 sources of revenues available, Retail ISPs can offer end users new subsidized (free-rider) access such as “zero rating” and “sponsored data” much like credit card companies offer no annual fee options and even “cash back.” Commercially-driven interconnection and compensation negotiations can benefit consumers without harming competition. However, the potential exists for Retails ISPs to exploit their double-sided market platform in the absence of sufficient competition; consumers suffer when content carriage disputes lead to congestion, dropped packets and reduced QOS.

Zero Rating Zero rating/sponsored data arrangements pay for content switching, routing and transmission from ISPs, content providers, or content distributors located upstream from the ISP providing the “last mile” delivery of traffic. This payment scheme would legitimize the creation of a two-sided market with last mile ISPs able to create a second revenue streams in addition to monthly retail, broadband service subscriptions. Like credit card companies, last mile ISPs can shift charges between the 2 payment sources. Zero rating offsets payment from retail subscribers by stopping the meter that otherwise would debit a monthly data downloading/uploading allowance; exceeding a cap triggers service throttling, or a surcharge for more throughput, e.g., $10 more for an additional 1 Gigabyte of content (throughput). Wireless data plans typically provide 1-5 Gigabytes of content that subscribers can exhaust with the streaming of a few full length movies. Recently the NRAs of India and the Netherlands prohibited zero rating, but the pricing strategies exists in many developed and developing nations. Zero rating constitutes a form of price discrimination, but is it “unreasonable”?

Economics of Zero Rating Exploding demand for downloading/streaming video and other “over the top” applications strengthen last mile ISP negotiation leverage, because of terminating monopoly power and near immediate consumer anger at any QOS degradation. Last mile ISPs have pricing power, particularly in nations lacking robust broadband competition (which includes the U.S. and most LDCs). Zero rating enables last mile ISPs to shift some of the total content delivery cost away from consumers. At the very least, this creates “free rider” opportunities; it also may generate positive networking externalities by increasing the overall number of network users which in turn enhances the value of the network used. On the other hand, it can distort the “marketplace of ideas” by creating discounts for accessing specific “curated” content in a “walled garden.” Network neutrality advocates fear the next killer application won’t get a fair marketplace trial if ventures lack funds to pay surcharges.

Proliferation of Interconnection Models ISPs consider price and QOS discrimination essential for generating new profit centers; “better than best efforts” offered in lieu of a single “best efforts” model. New alternatives to the peering/transiting dichotomy: use of Internet Exchange Points; paid peering (Comcast-Netflix); CDN surcharges (Level 3-Comcast), equipment co-location, e.g., Netflix Open Connect Network; “specialized networks” and Intranets; Multiprotocol Label Switching and non-carriers like Google securing Autonomous System identifiers. Retail ISPs providing last km service test pricing limits by tiering and raising end user monthly subscriptions at the same time as they impose surcharges on upstream ISPs, and offer paid peering options to highest volume content providers, e.g., Netflix. This has resulted in several high visibility conflicts. Retail subscribers quickly become agitated when QOS suffers and have no patience with ISP compensation disputes, much like cable television subscribers denied access to particular networks during a retransmission dispute.

Legacy and New Interconnection Models Peering/Barter—zero cost interconnection based on near parity in traffic volume, or reliance on external subsidy Paid Peering—traffic volumes not in parity, e.g., CDNs; content source secures higher QOS with closer and earlier interconnection Transit—volume-based interconnection for pay Unchanged, but smaller ISPs agree to peer, or meet at Internet Exchange Points Unwelcomed Hot Potato Routing—“premature” traffic hand-offs; considered abuse of privilege Welcomed Hot Potato Routing—offered for additional compensation Primary Reliance on Receiver Pays—end user broadband subscriptions cover cost of service Receiver + Sender Pays--Last km. ISP seeks to operate in a 2x-sided market combining sender and receiver payments; strategic balancing of financial burdens, including “sponsored data/zero rating”

Consumers Want Conduit Neutrality Except When They Don’t Most consumers favor ISP neutrality and the application of “best efforts” routing protocols. In the absence of congestion, the status quo provides a level competitive playing field between content providers and distributors in terms of “access to eyeballs.” New bandwidth intensive applications, such as IPTV and OTT, increase the probability of congestion and degradation of service quality, even in the absence of deliberate efforts by an ISP to “throttle” bandwidth hogging subscribers, or to disadvantage competitors. IPTV consumers have a quick pain threshold for QOS degradation; full motion video cannot become a slide show, or lose packets. IPTV consumers welcome QOS enhancements, including ones that offer “better than best efforts” prioritization of “mission critical” bitstreams, e.g., live, “must see” TV programming such as sporting events and award telecasts.

Conclusions As broadband markets mature, carrier profit maximize their service tiering and diversification, even as many consumers expect low cost, “open” and universally available access. NRAs will continue to struggle to find a lawful way to impose open Internet rules calibrated to sanction only harmful QOS and price discrimination without creating investment disincentives. FCC and others have opted for muscular intervention. NRAs should emphasize commercial peering/interconnection negotiations, including specialized arrangements. In most countries, ISPs do not have to treated as public utilities for the NRA to impose good faith, transparency, truth in billing, reporting requirements and binding conflict resolution. Common carrier regulation has a long and tortuous history of protracted disputes over what constitutes “reasonable” discrimination and “similarly situated” parties. ISPs appear to have solidified their control over the Internet ecosystem, despite the conventional wisdom that “content rules.” Last km ISPs can demand compensation from both downstream broadband subscribers and upstream carriers and content providers. ISPs will frame paid prioritization as a necessary to manage a scarce resource, while opponents will accuse ISPs of creating scarcity and rationing a resource that previously managed to deliver content without surcharge or congestion.

Conclusions (cont.) ISPs will frame paid prioritization as a necessary to manage a scarce resource, while opponents will accuse ISPs of creating scarcity and rationing a resource that previously managed to deliver content without surcharge or congestion. Zero rating combines prioritization of traffic and content types with subsidies to deserving constituencies. Universal service subsidies increasingly cover both voice telephony and data services. Zero rating fits within a universal access mission, provided NRAs establish rules on who qualifies, how long the promotion runs and what subsidizers can do with consumer data they generate. On balance the benefits of zero rating exceed the safeguards generated by an absolute prohibition. Conditional zero rating can generate more benefits than harm and comply with nondiscrimination laws and regulations.