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Fuzzy Picture, Clear Signal

WASHINGTON — When Tom Wheeler was tapped to run the Federal Communications Commission, opponents in Silicon Valley and elsewhere practically brought pitchforks and torches to the agency, demanding to know how a former cable and telco lobbyist could protect the sanctity of the Internet.

Not to worry. The tech-centric chairman and history buff — keen to the cries of the Internet’s potential ruin — was guided by a central principle, a path he signaled clearly: Broadband is a transformative technology, perhaps the most transformative in history, and the FCC must protect it.

That meant when it came to new network-neutrality rules, and with a nudge from President Obama, Wheeler set about drafting an expansive regulatory framework that sent cable operators rushing to court like bulls stampeding Pamplona.

While the FCC majority views the new rules as appropriately flexible, cable operators and other ISPs face what they call an increasingly vague broadband regulatory regime in which the FCC’s Enforcement Bureau will play a key role, and in which regulatory certainty about usage-based pricing and interconnection and a host of other issues could be hard to come by, and even harder to plan for from a business standpoint.

Cable operators carp that they’ve spent almost a quarter of a trillion dollars ($230 billion) in infrastructure investment in the past two decades to build out the nation’s broadband network, and they cringe at the authority the FCC has taken over their business.

SPOOKED BY UNCERTAINTY

The FCC’s new network-neutrality rules may or may not survive; a federal court will have to determine that. But the regulations’ allowance for FCC interpretation of conduct unbecoming to an open Internet has clearly struck a raw nerve with ISPs trying to figure out how not to run afoul of the rules, and that uncertainty — perceived or actual — extends beyond Title II.

It’s a genie that’s unlikely to be put back in the bottle: Not on Wheeler’s watch, nor under that of a Democratic successor, should Hillary Clinton win the White House.

Clinton, the front-runner for the Democratic presidential nomination, has declared Internet openness no less than a “Fifth Freedom,” along the lines of the “Four Freedoms” declared by President Franklin D. Roosevelt in his 1941 State of the Union speech, delivered just before the United States entered World War II.

Wheeler clearly sees the bounty in the boundless Internet, and has the FCC watching over the Web protectively for fear of the ISP wolf at the door, hungry to discriminate against competitors. But what ISPs see as investment-chilling uncertainty, the reigning FCC philosophy defines as relying on a necessarily flexible approach in a space that is constantly innovating and changing.

Neither Wheeler nor FCC general counsel Jonathan Sallet, who has staked out the legal authority for the chairman’s broadband regulatory moves, would comment for this article. But in a speech, Sallet argued that “in a fast-moving world of technological and economic change, a critical requirement of government is that it is constantly learning and monitoring its prior actions against new market, technological, and social evidence.”

Any way you dissect it, the FCC is in the broadband-regulation business to stay.

Wheeler has made it clear that he thinks bright-line rules against specific practices are not enough to protect broadband from potential anticompetitive conduct not yet seen or known.

Witness the inclusion, for the first time, of interconnection agreements — for exchange of traffic among the parts of the virtuous network circle between the content and the consumer — under the FCC’s net-neutrality regime, and the general Internet conduct standard that could include everything from pricing to speech.

Without specific guidance, that conduct standard “might be interpreted to require, for instance, a detailed showing of how exactly a specific practice affects application innovation, competition, or free speech,” wrote Barbara van Schewick, director of Stanford Law School’s Center of Internet and Society. “[A] vague, multi-factor standard gives the FCC ample discretion to decide specific cases and so interfere with competitive markets for websites and services, providing opportunities for FCC overreach.”

Critics view the FCC’s recent actions as driven by the view that broadband is so powerful and ubiquitous that the government has a responsibility to anticipate and head off any potential choke points through increased regulation.

It helps the FCC’s case that few could dispute broadband’s power and ubiquity, which are self-evident; it’s a point Wheeler makes to buttress his broadband-centricity.

WEB POWER VS. FCC POWER

“The largest taxi company in the country doesn’t own any vehicles; the largest overnight lodging company doesn’t own any hotels; and the fastest-growing of the top- 10 retailers has no showrooms,” Wheeler said in a speech to the Brookings Institution. “What they do have is easy access to a broadband network.”

But what troubles regulated entitites is the FCC’s conflating broadband’s dominance with a need for the agency to assert its dominion over the Internet space.

Wheeler made clear his views on just how important broadband is at a House Communications Subcommittee oversight hearing two months ago. “Broadband is the information pathway of the 21st century, and to deny access to that is to deny access to the 21st century. We need to have policies that make sure that everyone has access to that essential pathway.”

And standing in the way, Wheeler has suggested, are the ISP gatekeepers with the ability and incentive to harm the other parts of what he calls the Internet’s “virtuous circle.” That means getting content from the edge through the network to users without blocking, degrading or unfairly prioritizing it.

That rhetoric does not include search engines, which also have the financial incentive and technical ability to harm consumers. So why does the edge appear to get a pass, at least rhetorically?

One critic of the FCC’s broadband regulatory bent suggested portraying the ISPs in black hats and edge providers in white ones dovetails with a Democratic storyline of redistribution of wealth from the big guys to the little, a natural follow-on to the Baby Bells vs. competitive carriers plotline.

But viewing the edge as the garage innovators misses the mark when it comes to such companies as Google or Netflix.

Consumers are also capable of messing with the virtuous circle and the fundamental economics that support it. Just ask the Motion Picture Association of America, which for years has been trying to impress upon Web surfers that online content piracy is theft that threatens its own virtuous cycle of content that earns money so more content can be procured.

“An estimated 710 million pirated movies and TV shows were shared on BitTorrent in the U.S. in 2014, including 416 million movies and 294 million TV shows,” MPAA spokesman Howard Gantman said. “This estimate covers the volume of pirated content shared on BitTorrent, but not the volume shared via other types of piracy sites and apps.”

ISPs are concerned that, combined with a muscular Enforcement Bureau looking at complaints on a case-by-case basis, the FCC’s new Open Internet rules could signal a new era in broadband regulation in which ISPs may only know after the fact what interferes with that “circle,” as interpreted by either FCC staffers or a commission majority.

There is some disagreement over the extent to which Wheeler was initially willing to go the Title II route for those rules, which — combined with all those case-by-case, know-it-when-we-see-it elements — sent ISPs to court this time around.

Wheeler’s original plan did not involve Title II authority, and his pivot certainly appeared to dovetail with the Obama Administration’s strong support for using that provision of the Communications Act of 1934. But the chairman had long signaled that he would do whatever it took to protect his vision of network neutrality.

Big questions posed by that Title II regime include just how much authority the FCC will assert over interconnection agreements or usage-based pricing.

Interconnection deals are now under net-neutrality enforcement authority for the first time, and usage-based pricing is implicated by the reigning FCC theory that ISPs are potential bad actors in need of close monitoring, particularly in how they advertise those plans.

For instance, the FCC proposed fining telco AT&T some $100 million for allegedly deceiving millions of smartphone customers who were billed for unlimited data plans that were later subjected to a bandwidth cap. AT&T said that fine came for conduct the FCC had never signaled was out of bounds — until it did.

And during the approval process for AT&T’s acquisition of satellite-TV provider DirecTV, the FCC signaled that it thought carve-outs from usage limits for affiliated content were out of bounds, though merger reviews are supposed to be fact-specific and don’t necessarily indicate a general prohibition.

Another example of the FCC’s interpretative prowess is its recent designatedentity decision involving Dish Network. In the recent $45 billion auction of AWS-3 wireless spectrum, the FCC denied $3 billion in spectrum-auction bidding credits to designated entities — small, often minority or women-owned businesses, that get a boost via auction rules — associated with the satellite-TV provider.

Wheeler explained to Congress at an FCC oversight hearing that the AWS-3 auction’s outcome hinged on applying a “totality of circumstances” test to conduct that appeared to Dish to have been within the rules.

Wheeler pointed out that the FCC had, for the first time, used the “totality of circumstances” test that he emphasized had “never been applied before.” The FCC then decided to write that test into a rewrite of those designated entity rules.

“I think that we have shown that there is a total picture you have to look at, and that we have the — whatever it takes — to step up and blow the whistle,” Wheeler told Congress.

Aaron Schutt, president and CEO of Doyon, the Dish-backed joint venture that funded the designated entities, disagreed.

“This unfair decision is a reaction to political concerns, and demonstrates that the FCC believes it is authorized to intervene and reinterpret its own rules after an auction is concluded in order to pick winners and losers,” Schutt said. “From our perspective, the FCC’s decision should be of concern to every regulated entity that wants predictability, and a concern for everyone who values diversity and competition in the wireless sector.”

Adonis Hoffman, former chief of staff to FCC commissioner Mignon Clyburn, said Dish shouldn’t have been punished for playing by already-set rules.

“If Dish played by the rules at the time of auction — and was more innovative than others — it should not be penalized,” Hoffman said in an op-ed piece he wrote for the Aug. 10 issue of Multichannel News. “After the game, the FCC referee determines it did not like the outcome, or the winner, and takes away the trophy.”

Terms like “totality of circumstances” and “unreasonable” conduct leave a lot of room for interpretation, which means a lot of room for the FCC to exercise its power. Regulated entities are not opposed to flexibility. Cable operators could benefit from the “totality of circumstances” test when applied to good-faith negotiations, for example, if it means limiting broadcaster blackouts of on-air or OTT content.

PARSING THE FUTURE

For the industry, the troublesome aspect of flexibility is trying to anticipate what that open-ended language might mean in conjunction with the Wheeler principle that broadband is so important to so many aspects of life, and so large in scope and reach, that regulating it requires aiming at targets not yet in sight.

“The FCC’s ‘modern’ approach to regulating ISPs was supposed to promote Internet innovation while encouraging investment in broadband networks,” blogged Fred Campbell, director of the Center for Boundless Innovation in Technology and former Republican chief of the FCC’s Wireless Bureau. “It has instead encouraged ISPs to adopt a ‘better safe than sorry’ approach to providing Internet services. Fear of unpredictable government sanctions and liability in court won’t motivate investors to bet billions on next-generation Internet infrastructure. It will create pervasive uncertainty that results in the same stagnation that slowed progress on the telephone network in the 20th century.”

Cable and telco ISPs faced with having to divine the will of the FCC told a federal court that was one of their big problems with the new rules.

Given that Wheeler has told Congress that even the FCC isn’t sure what could be unreasonable under its new general Internet Conduct Standard, ISPs have said such uncertainty gives them “no principle for determining” when they have passed from the “safe harbor of the permitted” to the “forbidden sea of the prohibited.”

For the chairman, the stated mantra is, “Competition, competition, competition.” For ISPs, it seems more like, “He knows it when he sees it.”

And while ISPs suggest there is no principle for figuring out just what will be off limits, Wheeler has made his overarching principle pretty clear.

And he has not made a secret of the issues that could raise red flags. Interconnection, previously not a net-neutrality issue, is now an issue in both that regime and in merger reviews, if the FCC’s just-issued conditions for AT&T-DirecTV are any indication.

The chairman is also high on speed — broadband speed, that is. So anything the FCC thinks might impede fast Internet speeds is in his crosshairs. The chairman launched an inquiry into broadband billing practices, for example, the result of which was the whopping $100 million fine proposed against AT&T.

In its response to the fine, AT&T hit on the theme of lack of notice, citing the FCC’s “failure to provide the required notice of the conduct it now seeks to sanction.”

The FCC’s flexibility to interpret net-neutrality rules — in this case, the transparency rule that survived a court remand from the 2010 rules — was viewed by AT&T as “the astoundingly broad authority [the FCC] now asserts to police any and all statements for claimed inaccuracies.”

Wheeler’s view of preserving competition clearly differs from those he regulates, and he has the experience in industry arguments he can use as ammunition against them.

As the former top lobbyist for both the NCTA and CTIA—The Wireless Association — two of the key constituencies in net neutrality and the IP transition — he can combine the “know it when we see it” approach with “been there, done that.” The chairman has pointed out on more than one occasion, in response to arguments from industry, that he has been in the same position and knows where their interests lie.

A source familiar with legal arguments holding sway at the FCC said Wheeler’s case-by-case approach reflects the most basic concept of administrative law, which is that agencies get to choose when they want to use rulemakings to set prescriptive standards and when they want to use adjudication on an individual basis.

In a speech last year, FCC general counsel Sallet framed regulatory flexibility this way: “[I]n a time of constant innovation, strict standards offer a form of certainty, but they leave little leeway for handling the exceptional or unanticipated case — and innovation is almost by definition hard to anticipate.”

Sallet argued that the FCC is providing the flexibility the chairman has said is necessary in the digital age.

That means that rather than or in addition to bright-line rules, there should be provisions for “totality of circumstances tests” or “reasonableness” tests, case-by-case adjudication or rebuttable presumptions.

Ultimately, Sallet cited clear common-law precedent for what he sees as necessary flexibility, quoting from Justice Oliver Wendell Holmes: “[T]he most difficult labor will be to understand the combination of [history and existing theories of legislation] into new products at every stage.”

However uncertain Wheeler’s path appeared at the start, he certainly isn’t looking back now: “What is clear about our network revolution is that the new information networks are the new economy … We are at a crossroads in the evolution of digital networks. The FCC must play the crucial role of facilitating more dynamic, world-leading change to ensure that the gains of the last several decades are dwarfed by the wonders of the years to come. At the same time, the commission must also safeguard and nurture and project into the future (emphasis ours) the enduring civic values that networks have historically embodied.”

The chairman is clearly committed to using the FCC’s power to to protect his “virtuous circle.”

Cable operators could be forgiven for viewing that circle as a target on their backs.