The TV Industry Isn't "Starting to Collapse." Here's Why.

Disruption does not occur in a vacuum. Recently Henry Blodget and Dan Frommer considered whether technological disruption may lead to the "collapse" of the television industry given the recent track record of the newspaper industry. The debate centers on TV viewers’ changing habits, and the Internet, new video providers (e.g., Hulu, Netflix and iTunes) and non-TV displays (e.g., smartphones and tablets) factor heavily into this debate. Technology has enhanced time-shifting, and viewers watch much less programming live (or nearly live) or via a traditional TV.  Some viewers replace linear program streams with on-demand viewing. Reasonable minds can differ on the ramifications of these changes. What this debate lacks, however, is a thorough assessment of the role that the legal systems play in this heavily regulated space – systems that, for better and for worse, can limit and delay industry-wide disruptions. 

Video programming markets exist within an expansive, multilayered regulatory structure that shapes the options available to viewers. The structure affects access to programming, access to distribution facilities, the terms and conditions of programming rights and other aspects of production and distribution. While Blodget sees vulnerability in the network model amid alternative means for production, acquisition and distribution, Frommer argues that changes in the TV industry will “happen a lot slower than you think” due to factors such as network bundling contracts and carryovers of cable bundling to the Internet. Program suppliers (whether network or syndicated), broadcasters, cable operators, Internet-based video service providers and others compete in this marketplace, but Federal policy also plays a significant role.

Blodget and Frommer focus on the rise and viability of new à la carte competitors to traditional broadcast, cable and satellite providers. These outlets provide a variety of programming, but such providers have differing levels of bargaining power and must compete to negotiate for programming rights. These providers lack certain regulatory benefits available to cable and satellite companies. Federal law assigns certain rights (and certain burdens) to "multichannel video programming distributors," or MVPDs. To date, the Federal Communications Commission has declined to extend this definition to a category of providers that it calls “Online Video Distributors” (OVDs) which include providers such as Netflix, Hulu and others. In a pending proceeding, the FCC has sought public comment on the definition of “MVPD” due to the wide-ranging policy implications.

An MVPD classification gives a provider certain regulatory benefits with respect to access to programming. For example: 

  • Under federal program access rules, among other things, cable-affiliated programmers must make their programming available to MVPDs on nondiscriminatory rates, terms and conditions. Classification issues, however, will impact the universe of parties in the marketplace. An “over-the-top” video provider, Sky Angel, filed a program access complaint against Discovery Communications and Animal Planet in a dispute over a terminated affiliation agreement. Although the complaint remains pending, in its initial ruling, the FCC's Media Bureau found that Sky Angel was not an MVPD because it did not provide subscribers with a transmission path. Extension of MVPD status to such providers would represent a dramatic change in the regulatory regime.
  • Federal law provides, with limited exceptions, that no MVPD may retransmit the signal of a broadcast station without the station’s express authority.  Every three years, commercial broadcasters must contact their local MVPDs and must elect whether to have their broadcast signals carried by those operators in accordance with a retransmission consent agreement or to invoke statutory rights of mandatory carriage. In addition, FCC rules require MVPDs to honor broadcasters’ exclusivity rights with respect to certain network, syndicated and/or sports programming. At present, only MVPDs are eligible to seek relief from the FCC to resolve disputes with broadcasters over these rights. Again, definitions matter.

Even non-MVPDs have benefitted from FCC actions to stimulate access to programming by OVDs.  The FCC's approval of Comcast/NBCU joint venture involved several conditions designed to facilitate access by OVDs to programming owned by the joint venture. While the FCC may lack explicit statutory authority to mandate such access, if FCC approval is required for a specific transaction, the agency sometimes requires the transacting parties to adhere to behavioral, structural or other conditions to get such approval. The Commission’s actions in the context of Comcast/NBCU and the Sky Angel case are introductory steps, potentially toward addressing more significant changes down the road.

Of course, access to programming also requires consideration of the benefits and burdens of copyright laws. The Copyright Act grants copyright holders limited bundles of rights to their works, such as rights to perform their copyrighted works in public (which includes broadcast programming and retransmission of such programming on MVPD networks), rights to preclude others from making public performances of these works and rights to reproduction of those works. Qualifying MVPDs can obtain compulsory or statutory licenses to retransmit certain video programming without having to negotiate with many individual copyright holders whose programs are included in the video stream. Copyright law issues are front and center in a legal challenge brought by broadcasters against the launch of Aereo’s subscription-only Internet service. Aereo plans to offer subscribers specific bundles of broadcast network programming for a fee. The networks assert that Aereo’s service constitutes copyright infringement and argue that while other providers pay fees to license the content, Aereo does not. Once again, legal definitions and regulatory uncertainty over emerging technologies affect access to programming.

Notice that I’ve focused only on certain regulations involving access to programming. A much longer blog post would deal with other important regulatory structures: for example, media ownership, access to network facilities, local video franchising, equipment regulation and the regulator’s role in dispute resolution.  More regulation translates into regulatory uncertainty (for example, over definitional issues), higher transaction costs, more litigation and more intensive lobbying. The lesson here is that the government regulates the video programming industry much more heavily than the newspaper industry, so it’s difficult to translate the problems facing the latter into predictions about the viability of the former.

So between Henry Blodget and Dan Frommer, who’s right about whether the TV business is “starting to collapse”? I see that as a false choice given the unpredictability of this rapidly changing marketplace. The pace of change on the Internet can be dramatic, but where regulation and litigation are involved, the pace can turn glacial. Thanks in part to the legal system, I don’t expect the “TV business” to “collapse” but rather to continue to evolve incrementally, with competition, new and disruptive technologies and government action serving as major drivers.

FCC Provides Guidance on Net Neutrality Compliance Ahead of Federal Register Publication

Late last week, the Federal Communications Commission’s Enforcement Bureau and General Counsel’s office jointly released a Public Notice offering “initial guidance” on how Internet Service Providers can comply with the transparency and disclosure rules that the FCC adopted in its Open Internet Order last December.  These are among the same “net neutrality” rules that Verizon and MetroPCS filed lawsuits to stop last December – lawsuits that U.S. Court of Appeals for the D.C. Circuit dismissed as “premature” because the rules had not been published in the Federal Register. We expect that the clarifications and explanations in the new “initial guidance” will be contained in the Federal Register publication of the Open Internet Order, which will trigger a new round of judicial review.  In this sense, the timing of the guidance can be viewed as a pre-emptive effort to possibly eliminate or narrow the lawsuits that will eventually be filed following Federal Register publication.

In another sense, the Public Notice actually provides some clarity to ISPs on how to comply with the disclosure rules.  The FCC once again stated that the guidance is illustrative and that broadband providers can implement other approaches that will comply.  Here are the five areas where the FCC provided clarification: 

  • Point-of-Sale Disclosures – The Open Internet Order requires ISPs to disclose network management practices, performance characteristics and commercial terms “at the point of sale.”  The Order further stated that, to meet this requirement, a provider must prominently display links to disclosures on a public website.  The FCC clarified that providers do not need to create or distribute hard copies of disclosure materials or to train sales employees to make such disclosures. Providers instead may direct prospective customers to the web page (not just the ISP’s home page) orally and/or prominently in writing.  In retail offices, broadband providers should have available devices that consumers can use to access the disclosures.
  • Service Description – The Open Internet Order requires broadband providers to disclose accurate network performance information.  For fixed broadband, the 13 large ISPs that are participating in the FCC’s SamKnows speed test can use the results as a sufficient representation of what their customers can expect.  Those ISPs that are not participating in the project can use the methodology to measure actual performance.  The FCC plans to release the methodology and the results before the rules become effective.  Alternatively, ISPs may disclose actual performance based on internal testing, consumer speed tests or other reliable third-party sources.  For mobile broadband, the FCC is collecting data on broadband performance and, when that information has been analyzed, the FCC plans to provide further guidance.  Until that time, mobile broadband providers may disclose the results of their own or third-party testing.  For all broadband providers, the Public Notice encourages disclosure of the source and methodology used to evaluate performance, and expects disclosure to be modified if actual performance materially differs from the disclosure. Expect the standards of disclosure to evolve based on comments filed in the FCC's separate "Need for Speed" proceeding, where the FCC has sought comment on the types of broadband speed and performance information that would be of most use to consumers.
  • Extent of Required Disclosures – The Commission stated in the Open Internet Order that its list of potential disclosure topics “is not necessarily exhaustive.”  Obviously, this statement aroused anxiety in ISPs who were concerned that potential findings of non-compliance for disclosures the FCC didn’t even mention.  Given this vagueness – and the potential legal pitfalls that could ensue – the Public Notice “clarified” that certain information contained in the Order will suffice for compliance “at this time,” though the FCC can determine in the future that that different disclosures are appropriate “at that time.”  The compliance disclosure topics are in paragraphs 56 (for all broadband providers) and 98 (for mobile broadband providers) of the Order and are summarized in this presentation.
  • Content, Applications, Service and Device Providers – The Open Internet Order requires disclosure to content, application, service and device providers.  Given the uncertainty over what broadband providers must disclose to these edge providers, the Public Notice clarified that the disclosures sufficient to enable consumers to make informed choices will generally satisfy the disclosure obligations to edge providers.  Thus, the FCC anticipates that broadband providers should only need to have one set of disclosures, and “technologically sophisticated” edge providers should be able to rely on a disclosure statement that the broadband ISP provides to consumers.
  • Security Measures – In response to claims that disclosure of numerous and constantly evolving security techniques would be unduly burdensome on broadband providers, the Public Notice reiterated the “touchstone” of its transparency rules – disclosure of information sufficient for consumers to make informed choices.  As examples, the FCC expects broadband providers to disclose if security measures intended to spread of viruses, malware, spam and other threats also prevent end users from running mail or web servers.  The FCC does not expect ISPs to disclose internal security measures that do not affect consumer choice, such as routing security practices.

Left unaddressed was the uncertainty surrounding enforcement of the Open Internet rules.  As we wrote in our earlier blog post, the FCC’s failure to articulate timing of decisions on complaints and remedies for non-compliance made it difficult for broadband providers to assess the risk associated with the complaint process.  At least with the guidance offered in the Public Notice, broadband providers have a little more clarity that will, hopefully, spur disclosures that are not put to the enforcement test.

Comcast-NBCU: FCC Conditions Deal to Promote Online Video Services; Questions Remain

Perhaps video never “killed the radio star,” but what should we expect for online video now that the joint venture between Comcast Corporation and NBC Universal, Inc. (“Comcast-NBCU”) has become a reality? This new entity may be the product of two “old media” powerhouses, but new-media concerns about online video distribution represent a major theme in regulatory approvals of the Federal Communications Commission and the U.S. Department of Justice. These new regulatory ground rules will help shape the online video marketplace – a marketplace that so far is vaguely defined and in a state of transformation.

As we’ve previously described, the FCC often uses its merger-review authority to help advance objectives that may ordinarily exceed the agency’s reach. In light of the continuing legal battles over the scope of the FCC’s legal authority to regulate the Internet, it is noteworthy that Comcast and NBCU, in an effort to obtain FCC approval, agreed to some enforceable commitments and conditions to govern the new entity’s participation in the online video marketplace. While these conditions are specific to the transaction, they will affect how Comcast-NBCU will negotiate with third parties who want access to Comcast-NBCU content.

A key question: what “marketplace”? In conditioning its approval, the FCC expressed concern that Comcast-NBCU would have the “incentive and ability” to discriminate against two FCC-defined categories of online video distributors: 

  • Multichannel video programming distributors (or “MVPDs”) such as cable operators, satellite providers or other providers of such multichannel programming; and
  • Non-MVPD distributors of online video programming, such as standalone “over-the-top providers” like Hulu (in which NBCU has an ownership stake), Netflix, GoogleTV and iTunes.  

In general, these categories contrast MVPDs (as providers combinations of linear program streams such as cable or broadcast channels of programming) with more “over-the-top” video services (such as on-demand and pay-per-view services). To complicate matters further, in a footnote, the FCC left open the possibility that certain types of OVDs also could be deemed MVPDs. The FCC determined that “regardless of whether online video is a complement or substitute to MVPD service today, it is potentially a substitute product” and sought to implement conditions to address these “nascent” online video services. The FCC’s decision has consequences for online video and in other contexts. For example, just yesterday DirecTV asked the FCC to clarify which entities constitute MVPDs for purposes of regulations involving set-top boxes. 

With respect to the marketplace for online video, Cardozo Law School professor Susan Crawford's blog post on Comcast-NBCU provides an interesting analysis of the FCC’s decision to apply conditions to protect OVDs. She asserts that the FCC has “created a market” by designating OVDs as a category entitled to protection. In my view, the “OVD” designation is more like a class of service providers than a market, because the FCC declined to identify current potential substitutes for the provision of these services and implicitly raised the question of whether some OVDs compete in a separate market for the provision of multichannel programming service. For these reasons, and in light of the definitional ambiguities surrounding the “MVPD” designation, the “marketplace” for OVD services, however defined, is an evolving concept. 

Acronym soup notwithstanding, the FCC sought to address Comcast-NBCU’s purported incentives to discriminate against rival OVDs (whether MVPD or not). For example, the FCC expressed concerns that Comcast-NBCU would raises prices for rivals to access its affiliated programming or would refuse to provide this programming in a timely manner or in the same quality. The FCC found that its program-access rules – i.e., rules designed to prevent vertically integrated program suppliers from improperly favoring affiliated cable operators – would not provide sufficient protection because strategies of uniform price increases would not discriminate among service providers. Instead, the FCC required Comcast-NBCU to provide affiliated programming to rival MVPDs at fair market value and on nondiscriminatory prices, terms and conditions.   

For OVDs seeking access to Comcast-NBCU programming, the FCC provides the following rights. 

  • An OVD may decide to become an MVPD and, like other MVPDs, would be entitled to access Comcast-NBCU-affiliated content for online display at fair market value and on nondiscriminatory prices, terms and conditions.  
  • An OVD may request that Comcast-NBCU offer its video programming to the OVD on the same terms and conditions that would be available to an MVPD, provided that the OVD is willing to pay the economic equivalent of the price, terms and conditions on which Comcast-NBCU provides video programming to MVPDs. If the OVD qualifies, Comcast-NBCU must provide “materially” the same programming that it offers to other “similarly situated” MVPDs; however, if the other MVPD is obligated to make the programming available through a linear stream, the OVD’s obligation must be “materially similar.” 
  • An OVD will be entitled to access to “comparable programming” available on economically equivalent prices, terms and conditions if the OVD enters into an arrangement to distribute programming from one or more of Comcast-NBCU’s non-affiliated “peers.” Who are these peers? They include certain broadcast networks, cable programmers, production studios and film studios whose names you’ve heard before (e.g., they are affiliated with Disney, Time Warner, News Corporation, Viacom, Warner Bros., 20th Century Fox or Sony Pictures) or otherwise must be one of a handful of the largest players in their industry. Unlike the second option, this programming need not be provided in linear streams.

So what’s the upshot? Comcast describes these procedures as a “focused mechanism for online video providers to obtain access to certain NBC Universal content [that is] carefully crafted to be fair to all players.” That said, these conditions clearly serve as a filtering function to help ensure that Comcast-NBCU only has to share programming with companies that demonstrate certain “bona fides.” OVDs may opt to enforce these conditions via arbitration, but the legal text is replete withdense interpretive issues. Moreover: 

  • If the OVD opts to become an MVPD, that is an expensive proposition. The OVD must consider the costs of deploying networks, negotiating carriage and programming rights, and obtaining local franchises, as well as the prospects of being deemed another cable company.
  • If the OVD decides to compete on an equal footing with an MVPD, that too is an expensive proposition. The MVPD must consider the costs of economically equivalent programming and the likely requirement that the programming would have to be provided as a linear stream offered on an “all or nothing” basis – i.e., akin to real-time distribution of a program channel as opposed to on-demand programming.
  • If the MVPD enters into an agreement with a Comcast-NBCU “peer” for comparable programming, that is – you guessed it – an expensive proposition. This trigger requires an agreement with one of the largest industry players, who no doubt would have to be presented with a compelling business case to sign an agreement with an unaffiliated distribution partner because many of these participants already have extensive distribution channels.  

In addition, Comcast provides some online programming on an “authenticated” basis to only those individuals who subscribe to Comcast MVPD service. Comcast will continue to be allowed to do so, subject to these sets of conditions. Comcast-NBCU also will not be allowed to put certain online programming behind a paywall for as long as at least one of the other major broadcast networks provides a similar service. 

The FCC has tried in other ways to implement enforceable “fair play” conditions on Comcast-NBCU. Comcast-NBCU may not enter into agreements to hamper online distribution of its or another’s video programming. Comcast-NBCU also must continue to offer standalone broadband Internet access services, at reasonable prices and of sufficient bandwidth that customers can access online video services without being required to purchase a Comcast-NBCU subscription for cable television services. The company may not disadvantage rival online video distribution services through its broadband services and/or set-top boxes. Finally, Comcast-NBCU has agreed to abide by the FCC’s “Open Internet” rules (a.k.a "Net Neutrality"), and it appears that this commitment would remain even if those rules are successfully stricken or modified by judicial appeal

As for Hulu, as a result of the FCC’s approval, neither Comcast nor NBCU will be permitted to exercise any rights to influence Hulu’s conduct or operation, but the companies may retain a purely economic interest. Recent media reports indicate that Hulu is considering an MVPD-style approach to online video distribution. Just yesterday Hulu CEO Jason Kilar posted his thoughts about the future of TV and argued that consumers, advertisers and content owners will play a more important role than distributors in the future of online video – an interesting take in light of the FCC’s actions to limit Comcast-NBCU’s oversight. 

In the end, the FCC’s “transaction-specific” conditions will have major implications for the “over the top” providers who had no part in the transaction. Time will tell how the FCC’s actions, and the reactions of Comcast-NBCU and the competition, will influence the evolution of online video services. In light of this unprecedented vertical combination, all eyes will be on the industry to spot the next players in line with plans to create a similar combination of content and distribution.

FCC's New Net Neutrality Rules Face First Judicial Challenge

The wait is over, net neutrality watchers – the first legal challenge to the Federal Communications Commission’s new rules has been filed, so those who have waited with baited breath can feel free to exhale. 

Yesterday, Verizon and Verizon Wireless filed a notice of appeal with the U.S. Court of Appeals for the D.C. Circuit seeking to strike the rules adopted in the FCC’s December 23, 2010 Report and Order (the R&O).  The fact that Verizon lobbed the first volley in this near-inevitable litigation is unsurprising, and Verizon’s efforts will have a ripple effect on how and where the appeal is heard. As we've blogged about before, these rules – transparency, no blocking and no unreasonable discrimination, as set forth in 194 pages – have stirred debate in DC among service providers, lawmakers, lawyers, lobbyists, policy influencers and the just plain interested.  The rules have not even taken effect – that will happen 60 days after the date of a Federal Register notice announcing that the Office of Management and Budget has approved the information collection requirements contained in certain of the new rules.  The text of the R&O itself has not yet been published in the Federal Register – and that’s where things get interesting.

Verizon’s filings make clear that Verizon believes that the D.C. Circuit would provide a receptive audience to Verizon’s concerns – one with exclusive jurisdiction to review the matter at this stage. Here’s where the Federal Register comes into play.  There are two permissible tracks for appellate review of final FCC decisions, and Verizon is attempting to rely upon the track that requires review by the D.C. Circuit and does not require that the FCC decision be published in the Federal Register. 

  • For Track #1, the D.C. Circuit Court of Appeals has exclusive authority to review certain statutorily defined FCC decisions – generally dealing with FCC licensing matters.  Verizon claims that the R&O modifies Verizon’s licenses, thus triggering the exclusive jurisdiction of the D.C. Circuit.  Verizon’s argument relies on the FCC’s assertions in the R&O that it has authority to impose net neutrality rules because the FCC has statutory authority to change license terms and to propose new requirements on existing licenses, provided that it complies with statutory procedures.
  • Track #2 is available for review of all FCC decisions except those that are governed by Track #1.  In track #2, review of certain decisions can be obtained by any U.S. Court of Appeals in any judicial circuit once that decision is published in the Federal Register. As noted above, this triggering event has not yet happened with respect to the R&O. At least one court has found that a Track #2 appeal filed prior to Federal Register publication must be dismissed as incurably premature (the Council Tree case).  Under the Track #2 approach, if appeals are filed by multiple parties in multiple circuits, there is a process for consolidating appeals in one court.

When a single FCC document contains elements of both a rulemaking (i.e., establishing rules of general applicability) and an adjudication (i.e., resolving a specific dispute among parties before the FCC), things are more complicated.  Under FCC rules, the deadlines for the adjudicatory portions are calculated based on the release date of the FCC’s decision, while the deadlines for the rulemaking portions are calculated from the date of Federal Register publication.  Verizon has acknowledged that the R&O has elements of both a rulemaking and an adjudicatory decision and has stated an intention to file a separate appeal with the D.C. Circuit upon Federal Register publication.  Clearly, Verizon is trying to cover both bases with a “belt and suspenders” approach.

The receptive-audience hypothesis finds more support in Verizon’s unusual request to have the same three-judge panel that heard the Comcast case hear Verizon’s appeal.  In Comcast v. FCC, decided last April, the D.C. Circuit struck the FCC’s efforts to enforce certain of its net neutrality policies (prior to their codification last December) in a complaint against Comcast regarding alleged interference with peer-to-peer networking applications.  The Court found that the FCC failed to link its assertion of authority to any statutorily mandated responsibility and thus lacked authority to regulate an Internet Service Provider’s network management practices.  Verizon essentially is asking the D.C. Circuit to consider the R&O to be a response to the Comcast case and to have the same three-judge panel handle this appeal.

Will Verizon succeed in having the case heard in the D.C. Circuit?  We certainly can expect challenges to Verizon’s filings in addition to challenges to the R&O filed by other parties.  Public Knowledge quickly expressed its displeasure with Verizon’s efforts, and supporters of the FCC’s R&O undoubtedly will follow.  Expect arguments over whether the court lacks jurisdiction because it is incurably premature a la the Council Tree decision  Some may challenge whether the R&O actually amounts to a license modification because the R&O states that it does not take effect until some future date or because the R&O cites numerous statutory grounds for authority other than the bases cited by Verizon.  Expect appeals in other judicial districts, although these will have to develop some creative arguments to avoid dismissal on Council Tree grounds if Federal Register publication is not complete at the time.

Action at the FCC also will play a role.  The FCC handles the process of submitting the R&O for Federal Register publication.  If Federal Register publication happens in the near future, expect Verizon to make additional appellate filings with D.C. Circuit on that basis as well and to ask either for consolidation of its appeals or for the court to select the appropriate docket.  In addition, some parties may exercise their rights to seek reconsideration of the R&O by the FCC and/or may seek a stay at the D.C. Circuit pending such reconsideration.

The upshot here is that the FCC’s new net neutrality rules will be shaped by the appellate process, and Verizon’s filings represent simply the first attempt to leverage appellate procedures to influence the outcome of that process.    

TV White Spaces: Finishing Touches Near as FCC Reconsiders Rules that Preclude Rural Deployment

            Finishing the TV white spaces proceeding has proved to be a bit of a challenge for the Federal Communications Commission.  After more than two years from its adoption of initial rules, the FCC released the second TV white spaces order on September 23, 2010.  The rules recently took effect on January 5, 2011, raising hope that new services would soon follow.  Unfortunately, the FCC still needs to add a few coats of paint to its white spaces rules before we see wide-scale commercial broadband deployments, although the number of action items has dwindled.

      "[T]he rules effectively preclude fixed white space operations in large portions of the country."

     At the top of the list: a few rules are subject to reconsideration.  Most prominently, a consortium of trade associations, database administrator applicants and equipment manufacturers led by the Wireless Internet Service Providers Association (“WISPA”), a Rini Coran, PC client, asked the FCC to relax its tower height and out-of-band emission rules for fixed white space devices.  In the September 2010 order, the FCC limited the maximum height of tower sites to 76 meters above average terrain (HAAT).  Together with the 30-meter tower height limit adopted in November 2008, the rules effectively preclude fixed white space operations in large portions of the country.  As shown in the maps provided by Comsearch at Appendices B and D in WISPA's FCC filing, the areas affected by the height restrictions are, not surprisingly, rural, hilly and mountainous areas of the country where white space spectrum could otherwise be used to provide much-needed broadband service – indeed, the intended targets of white space services.

            The petitioners asked the FCC to adopt a 250-meter HAAT limit while also increasing the keep-out zones for co-channel and adjacent-channel TV stations to ensure that there would be no increase in harmful interference to broadcasters.       

            The September order also tightened the spectral mask for adjacent channels, limiting the amount of usable spectrum and adding cost to equipment and deployment.  Led by Motorola, petitioners asked the FCC to relax the emission mask to reduce costs and promote spectral efficiency, while increasing the adjacent-channel keep-out zones to protect incumbent TV stations. 

             Also on the white spaces wish list: the FCC still has not released its long-awaited order designating geo-location database administrators and establishing final database governance rules.  Long anticipated since the release of the second TV white spaces order, the would-be administrators still have no marching orders.  No doubt, the FCC’s Office of Engineering and Technology has been pre-occupied with net neutrality and a spate of other important orders. The reality is that the FCC can only authorize experimental operations until the database administrators are selected and ready.  The good news is that OET is expected to issue its order any day now, so hopefully that roadblock soon will be in the rear-view mirror.

             Not far behind is the certification of TV white space equipment.  Because of the need for equipment to have geo-location capabilities that are linked to the databases, the FCC cannot certify equipment until the databases are established and certification procedures finalized.  No word on how long the certification process will take, but hopefully that can be measured in days and weeks and not months.

             Fortunately, the FCC only has a few issues to address in the reconsideration phase, so the proposed changes to the height and emission mask rules likely can be implemented soon.  Even so, once the database administration process is set and equipment is certified, white space deployments can begin right away in those parts of the country where the HAAT and mask issues are not impediments. 

Hidden in Plain View: The Threat Within the FCC's Enforcement of its Net Neutrality Rules

Now that the Sturm und Drang over the FCC’s new Net Neutrality Rules is in full throat, some lurking concerns warrant more attention – namely, concerns about the FCC’s enforcement of its new rules and the administration of its complaint process.  The FCC states that it seeks “prompt and effective” enforcement of its new rules, but eyebrows are arching regarding whether the current structure will effectively promote this goal. 

"The FCC states that it seeks 'prompt and effective' enforcement of its new rules, but eyebrows are arching regarding whether the current structure will effectively promote this goal."

First, some context.  Assume for the moment that you provide fixed or mobile broadband service and that the new rules survive unscathed after the administrative, judicial and legislative battles that are almost certainly on the way.  Someone believes that you have violated these rules – for example, your subscriber believes that you have failed to adequately disclose your network management practices, or an edge provider believes that you have blocked its lawful content (if you are a fixed provider) or an end user complains that you have unreasonably discriminated in transmitting their lawful network traffic over your network.  How can this aggrieved party seek legal relief, and what relief is available? 

The FCC has retained independent enforcement authority for the net neutrality rules, but as noted in Matthew Lasar’s overview at Ars Technica, the FCC's enforcement process is overwhelmingly complaint-driven.  The new rules give the aggrieved party two “backstop mechanisms” at the FCC in the event that the interested parties cannot resolve their dispute privately: a formal complaint process and an informal complaint process. 

  • The formal complaint process imposes procedural obligations on the complainant and launches an adjudicatory proceeding.  Formal complaints will be addressed through “accelerated docket” procedures.  Before filing a formal complaint, the complainant must notify the respondent in writing that the complainant intends to file the complaint.  The complaint must comply with FCC processes, and the complainant must pay a filing fee (which may be the FCC Enforcement Bureau’s version of “paid prioritization”).  The complainant must “plead fully and with specificity the basis of its claims and to provide facts, supported when possible by documentation or affidavit, sufficient to establish a prima facie case of an open Internet violation.”  The rules set forth a timetable for answers and replies, and the FCC will issue an order “determining the lawfulness of the challenged practice.” 
  • The informal complaint process, by contrast, is more akin to tossing “paper grenades.”  Anyone with a computer may submit informal complaints (for example, via the FCC’s website or to the agency’s Consumer and Government Affairs division) in an effort to draw the FCC’s attention to challenged practices and perhaps spark an investigation.  There are no “accelerated docket” procedures.  The FCC has stated that individual informal complaints will not typically result in written Commission orders, and the potential remedies and sanctions are unclear.

As Larry Downes describes in his essay regarding the costs of enforcement of net neutrality rules, allowing “any person” to launch net neutrality complaints triggers inefficiencies and transaction costs because the filer can shift enforcement costs to the FCC or to ISPs.  Its not hard to imagine a disgruntled group campaigning and recruiting others to file loosely worded complaints that tie up the resources of broadband providers as they respond to paper grenades launched via the FCC’s electronic transom.  What is hard is running a small business or getting financing while buried in paper when an FCC decision on a complaint – even in a frivolous case – may be months away. 

"Given the FCC's lack of resources (and authority?) to police the entire Internet and its long-standing enforcement track record, we should expect the process to remain complaint-driven..."

Given the FCC’s lack of resources (and authority?) to police the entire Internet and its long-standing enforcement track record, we should expect the process to remain complaint-driven; however, reliance on a formal complaint process alone would reduce the incentive for “any person” to file complaints in bad faith.  The FCC’s decision to make available the “informal” process in addition to the “formal” process may turn out to be costly for broadband providers.  Here’s why:  

  • While the FCC has stated that “any person” may file a complaint, the formal complaint process has more mechanisms in place to deter the filing of non bona fide complaints – for example, there’s a $200 filing fee, procedural requirements and an “abuse of process” sanction against parties who file “unlawful” frivolous pleadings.  These mechanisms should make it much harder for competitors, disgruntled employees or others who suffer no actual harm to game the process. 
  • The availability of informal processes may encourage the filing of “cookie cutter” complaints, where persons or groups may seek to launch a barrage of nearly identical complaints in an effort to get the FCC staff’s attention for political purposes. 
  • The FCC does not set forth any particular remedy for an informal complaint other than saying that the FCC would “take appropriate enforcement action, including the issuance of forfeitures” for any net neutrality violation. 
  • The FCC did not adopt any specific forfeiture amounts for violations, so the penalty would likely be set on a case-by-case basis. 

Also, if what is past is prologue, broadband providers should have concerns that the mere filing of an informal complaint, even a frivolous one, would have other consequences.  Consider the case of those broadcasters who have found that meritless indecency complaints have hindered their ability to conduct legitimate business.  The reason is the “enforcement hold” that the Enforcement Bureau imposes against broadcasters’ FCC applications (e.g., license renewals, approvals for transactions) when one or more complaints are filed against their broadcast station(s).  Under FCC policy, the presence of this “red flag” can force the broadcaster to become involved in potentially protracted negotiations to get FCC clearance for their proposed transaction or license renewal.  This pressure has resulted in some broadcasters giving up legal rights by entering into consent decrees (whereby the station pays a penalty to resolve the complaint but does not admit liability for the conduct) or tolling agreements (where the broadcaster agrees to forego its rights to challenge an FCC action that takes place outside of the statute of limitations; i.e., their “shot clock” for reaching a decision) with the FCC.  Essentially, licensees often face intense pressure to agree to “voluntary” concessions and to raise the white flag in an effort to get the FCC to drop their red one.

One way for broadband providers to minimize liability is to be sure that they are complying with the FCC’s transparency requirements.  Providers that make adequate disclosure of their network management practices, performance characteristics and commercial terms of service will enjoy greater latitude in negotiating with the FCC.  And, so long as those practices are followed, a complaining party will find its burden a bit more difficult to meet. 

Nevertheless, with the broadcast indecency lesson in mind, broadband providers should be concerned.  It is reasonable to expect significant litigation over the rules, just as the FCC’s indecency policies have been heavily litigated. The FCC may hold up informal complaints for a protracted period as the legal challenges continue – recall that there is no “accelerated docket” for informal complaints and even if there was, the FCC may claim authority to waive any its internal timetables for “good cause.”  Such a litigation tangle may result in stalled FCC enforcement and delays in application processing – delays that could apply differently to different categories of service providers because some are more dependent on FCC licensing than others. 

In short, enforcing the FCC’s net neutrality rules represents a regulatory thicket for broadband providers and others – one that is worth the effort to navigate around given the uncertainty and the legal challenges to come. 

Net Neutrality: FCC Declares Open Internet

It seems fitting that the Federal Communications Commission took advantage of yesterday’s winter solstice to shine new light on its plans to regulate the “Open Internet.”  By a 3-2 vote along party lines, the FCC adopted “net neutrality” rules that will govern how fixed and mobile broadband providers do business with their subscribers and others that use the Internet.  Only Chairman Julius Genachowski seemed happy about the rules, calling them a “strong and balanced” approach to Internet governance that avoided the extremes of his colleagues.

At first blush, the rules appear to strike a balance between two extremes – intrusive government micromanagement and toothless requirements that have little practical effect. There are, however, open issues that give rise to concern.

Once it became clear that net neutrality rules would be adopted and the government would be involving itself in Internet access, some fixed wireless broadband providers (WISPs) feared that their small, capacity-constrained networks would buckle under the strain of the same rules that would apply to Comcast, Verizon and other large ISPs operating on high-capacity wired platforms.  As a general matter, broadband providers will not be permitted to block consumers’ access to lawful content, applications and devices and cannot engage in “unreasonable discrimination.”  These rules are subject to “reasonable network management,” a key phrase for any ISP and small WISPs in particular.

As with any regulation, words matter.  And in this case, how the FCC defines “reasonable network management” is especially crucial.  Providers will be given “meaningful flexibility” to manage network issues such as congestion and security.  “Reasonable” is defined generally along the lines of what is appropriate and tailored to achieving a legitimate network management purpose, taking into account such factors as network architecture and technology.  Examples of legitimate network management purposes include ensuring network security and reducing the effects of network congestion.  In this regard, the rules may be interpreted to recognize the unique challenges that WISPs face in operating small businesses in small communities with small networks.      

Not only do words matter, but how the FCC will enforce its rules and applies its definitions will be important to watch.  Given the FCC’s decision to allow consumers to file informal complaints, broadband providers hopefully will not be required to respond to ongoing, time-consuming complaints that may force ISPs to be overly cautious in the way they manage legitimate network issues.  It would not be surprising to see consumer groups spearheading enforcement efforts that create uncertainty in network management.

This is not the last we will hear of net neutrality and the Open Internet. Some have raised serious questions about the legality of the new rules and about whether the FCC has sufficient authority to adopt them.  Republican Commissioners Robert McDowell and Meredith Attwell Baker issued strenuous oppositions in line with their recent statements in the press.  Calling the FCC's failure to learn from the past as “regulatory hubris,” McDowell sharply criticized the majority's reliance on Section 706 of the Communications Act as a legal authority and essentially laid out an analytical roadmap to overturn the rules in court.  Baker also stated that unelected officials should not be making decisions with such far-reaching consequences.  Echoing concerns from House Republicans, McDowell and Baker accused the majority of acting where no competitive harm is present--a position set forth by AT&T. One Republican Senator has already introduced an amendment to an appropriations bill that would strip the FCC of funding for anything related to implementing and enforcing the net neutrality rules.

It will likely be a long time before the full impact of the FCC’s rules can be assessed.  In the meantime, Internet businesses of all kinds will need to account for the potential new costs and the regulatory burdens that may follow.