Genachowski Hits The Legal Reset Button — “Title II Lite”

Genachowski has announced his proposed response to the Comcast case. This is precisely the result Comcast and the other carriers feared since the DC Circuit panel signaled at oral argument they would slam the FCC.  In my latest “5 Minutes With Harold Feld,” I give a short (at least, as short as I can) explanation of what this “Third Way” (also referred to as “Title II Lite”) means and what happens next from a process perspective. Some additional analysis, laughing at Wall St. analysts, and reference to a Dilbert from 1992 below . . .

What Genachowski Is Proposing

FCC General Counsel Austin Schlick gave the general legal theory. As it in many ways resembles the legal theory I and the rest of the gang proposed to the FCC in January (with a few additional tweaks and flourishes — and expressly disavowing some of the more aggressive pro-competition policies we urged elsewhere in the National Broadband Plan), I’m fairly pleased and supportive. (In fact, Austin’s reference to possible problems with state preemption at the end of his statement echo my own analysis in this recent post.)

True, we will need to fight to get the rules we want. Sections 201 and 202, the ones that require “just and reasonable” rates and practices and prohibit “unreasonable” discrimination in provision of services are fairly flexible sections. As my boss Gigi Sohn explained at an FCC hearing in April, Sections 201 and 202 can provide the same or better protection as the “no discrimination and reasonable network management” framework proposed in the pending FCC “open internet” proceeding. Carterfone, the 40 year old FCC case that established the “you can attach any device that won’t harm the network to the network” rule that made things like dial-up modems possible and embodies the same non-discrimination principles, was decided as an application of Sections 201 and 202.  OTOH, as Hank Hulquist pointed out at our panel at New America Foundation, the old DSL tariffs of which I am so fond all had quality of service (QoS) tariffs, so there is precedent for the kind of “fast lane” prioritization the carriers want.

“Legal Reset”

In other words, as Genachowski and Schlick both emphasized in their statements, the proposed “Title II Lite” does not mean any shift in FCC policy. If you thought the FCC wussed out by not adopting line sharing or other more aggressive pro-competition regulation — this won’t improve things. In fact, as Austin Schlick explains, the proposed broad forbearance of all but the six key provisions (201, 201, 208 (how to file a complaint under 201 and 202), 222 (consumer privacy), 254 (Universal Service Fund), and 255 (access by persons with disabilities)) will arguably make it harder for the FCC to impose such rules going forward (a price I’m willing to pay to get everything else on solid footing, even if I am not happy about it).  Furthermore, the FCC already has pending proceedings (or proposed to in the National Broadband Plan) to do USF reform, protect consumer privacy, and promote access to broadband by people with disabilities in line with Sections 222, 254, and 255.

Which is why I call this a “legal reset.” Basically, Genachowski is saying “Back in 2002, when we moved cable modem service (and later other forms of broadband access) into the Title I/information services/ancillary authority box, we thought we would still have authority to protect consumers and do other necessary policy things. The Comcast court told us we were wrong. So no we’re going to move broadband access service into the Title II/telecom service box. But nothing substantive/policy changes. We’re just doing what the DC Circuit told us to do by articulating a different theory of authority.”

While I hate to argue the ancient history again, I will say this essentially goes back to the Commission’s pre-2005 framework for DSL and dial up of separating out the information processing/enhanced service/information service part from the basic service/telecom service, but with this key difference. In the pre-2005 framework, the telcos could only offer the “information service” portion through a separate affiliate, and had to make the “basic service” (the transport/telecom part) available to rivals on a wholesale basis on the same terms it gave itself. (We call this “line sharing.”) Under the new framework, they would be able to offer broadband access directly without going through a separate affiliate. Depending on where you sit, this is either a huge concession to the cable and telco providers that destroys the hope of real competition or a fantastic and unprecedented regulatory over reach because it is the first time the FCC will directly regulate the entity offering residential service under Title II. (Guess where I sit! Guess where the cable and telcos sit! You are sooooo smart. Now, extra credit, who thinks opponents will ignore this paragraph when they want to tell me that the FCC never regulated retail dial-up or broadband access? Anyone? Bueller? )

Predictable Reactions, With Some Remarkable Foolishness From Some Wall St. Analysts

Reaction broke down predictably along party lines. Copps would have preferred a quick declaratory ruling right away. I confess to sympathy with this view, as the cablecos, telcos and their supporters will bring fantastic pressure to bear to try to derail the process. As Genachowski received a green light from the Chairs of the relevant Senate and House Committees the day before announcing his Title II Lite plan, opponents will try to delay things until the election in the hopes of an R take over. Clyburn supported Genachowski’s approach as necessary to accomplish the policies of the National Broadband Plan and protect consumers, so Genachowski would appear to have three votes unless something in the proceeding really changes things. The Republican commissioners hate it for the usual reasons: there is no market failure to justify a change in approach. (For all practical purposes, the “market failure” argument as applied by Republicans these days  is essentially a tautology. Market failure means the market fails to produce what people want. Since markets serve people, we determine what the people want by seeing what they buy in the market. Since people are buying what the market produces, what the market produces is what the people want. Therefore the market is producing what people want. Therefore there is no market failure. QED.)

Reaction on the Hill also broke down along party lines. In addition to the aforementioned go ahead from Waxman and Rockefeller, Dem leaders Nancy Pelosi and John Kerry also praised the plan as targeted and necessary. John Boehner and other high-ranking Republicans condemned the plan as job killing big government blah blah blah. (Why do we bother to even read the news?)

Also predictable was the reaction of carriers Wall St. analysts and believers in the “we must allow network providers to exact monopoly rents recoup investment so any threat of regulation is bad bad bad, kills investment, causes the stock market to crash, and will no doubt trigger a new recession.”  For example, this Wall St. J. headline Cable Providers Concerned On FCC Regulatory Move; Stcks Decline and begins: “Cable stocks dropped sharply Thursday after the U.S. government announced plans to claim new authority to regulate the Internet in an effort to enforce net neutrality rules.” Because, of course, nothing else could have impacted cable stocks yesterday. After all, it’s not like anybody else declined yesterday.

This reminds me of a very old Dilbert where Dogbert pretends to be a space alien invading the Earth. His credibility is established when the TV news announces: “the Market fell five points today. Analysts blamed interest rates and aliens.”

Still, it appears some analysts are downgrading cable stocks based on the perceived “new regulatory risk”. Lets leave aside the idiocy of developing public policy by how it influences stock prices. What boggles me is how people who supposedly follow this field think this has any impact on future earnings unless one of the following is true:

Cable did too good a selling job. Carriers and their buddies have told everyone, with absolute puppy dog sincerity, that if the Genachowski ever thinks happy thoughts about Title II their stock values will plummet like rocks. Apparently, they persuaded a bunch of analysts, which makes it a self-fulfilling prophecy. I expect the cable guys will now have to go out and take these guys aside to explain why they were just foolin’ and analysts should never take what they tell the FCC seriously, because carriers always tell the FCC (who are usually more gullible than analysts) that  if the FCC does something cable operators don’t like then stock values will plummet.

Cable has figured out how to monetize discrimination after all. One of the things the cable guys always say is that (past experience not withstanding), they would never block or degrade content. At the same time, they want the “flexibility” to develop some sort of vague “new business models” that would benefit everyone and “prioritize” content without “degrading” other content. Analysts I’ve talked to in the past, even those generally supportive of cable, have professed ignorance of what kind of business models cable has in mind. Is it possible that some bright boy somewhere has figured out how to monetize this stuff after all? Or is this just more chasing rainbows and pots of gold, the same way analysts in the 1990s insisted that big media companies needed to combine to get “synergies,” resulting in numerous corporate bankruptcies when “synergies” failed to emerge?

[I exclude from my general criticism of analysts a few folks who actually do more than just read corporate press releases and fawn on CEOs on quarterly calls.  In particular, I want to recognize Rebecca Arbogast and David Kaut at Stifel Nicolaus. While I don’t always agree with them, they actually do real research and make intelligent evaluations.]

What Next?

Genachowski will need to get two things done. First, the FCC needs to issue a “declaratory ruling” that changes the existing legal classification (Title I) to the new classification (Title II). Although the FCC could do this anytime on its own motion (for example, the FCC issued a declaratory ruling classifying wireless broadband access as Title I on its own motion in 2007), it is safer to proceed with a Notice of Inquiry. At the same time, the FCC will actually need to propose forbearance for the statutes it wants to forbear from, including an opportunity to comment on the proposed forbearance. So it will need to issue two items (possibly combined into one, as they are interdependent), which will require a vote of the full Commission. While Genachowski could try to get this on the agenda for the upcoming meeting on May 20.  That would be something of a squeeze, and the Commissioners will want time to read the item and have input, so it’s likely to be some time after that. Possibly at a special meeting called between the May and June meetings, as now that Genachowski is committed he’s going to want to move on this. (Yes, the Commission could vote “on circulation,” but the Commissioners don’t have to vote until an actual public meeting, so it is likely that Genachowski will need to put the item on the agenda for a meeting to get the Republicans to vote.)

Once the NOI and proposed forbearance are issued, there will be a public comment period. Probably short, but it will still take time. Then the FCC will need to vote again on the final order for a declaratory ruling and forbearance order. After that, we can expect to see judicial appeals. While everyone talks about the DC Circuit (and I have made my opinion of the DC Circuit abundantly clear in the past), I point out that there is no guarantee this will end up in the DC Circuit. This is not a remand of the Comcast case, but a fresh agency action that could end up elsewhere. We’ll just have to see. And, in any event, we’re probably looking at several months before we get to that point. Should be a fun summer.

Stay tuned . . . .