The net neutrality opinion: The net impact is not neutral

Transcription

1 June 20, things The 3 things you need to know about... Communications Sector The net neutrality opinion: The net impact is not neutral Summary #1 - On June 14, 2016 the U.S. Court of Appeals for the District of Columbia Circuit (DCCoA) upheld the FCC s 2015 Open Internet Order and the FCC s approach to implementing Net Neutrality rules. #2 - The Court s decision to uphold the FCC s approach in implementing the Open Internet Order will allow Chairman Wheeler to continue to execute his recent regulatory agenda, which may have a profound and lasting impact on the Communications industry. #3 - An appeal is anticipated, but it is far from clear whether the Supreme Court will even hear the appeal. The current political environment also makes any legislative fix a longshot. If the status quo remains (see our prediction below), it may usher in a new era of FCC regulation. The 3 Things #1 - On June 14, 2016 the U.S. Court of Appeals for the District of Columbia Circuit (DCCoA) upheld the FCC s 2015 Open Internet Order and the FCC s approach to implementing Net Neutrality rules. The long-awaited DCCoA opinion addressing the FCC s 2015 Open Internet Order, and more broadly the concept of Net Neutrality, has finally arrived. While oral arguments for the case were made last December, the legal wrangling over the implementation of the FCC s Net Neutrality policy has been going on since The wait has been worth it for the FCC. In a 2-1 decision, the DCCoA s opinion provided the FCC with a significant win by clearly upholding its authority to reclassify fixed and mobile broadband as a telecommunications service under Title II of the Telecommunications Act of 1996 ( Communications Act ) as well as its approach of forbearing the application of certain Title II requirements. While the opinion validates the FCC s Open Internet rules, its real impact may come from its acceptance of the legal framework that will allow the FCC to continue to pursue aspects of Chairman Wheeler s recent aggressive and potentially industry-transforming regulatory agenda. A publication of PwC s Risk and Regulatory practice

2 Ever since President Obama made Net Neutrality a key fixture of his 2008 campaign, the FCC has been attempting to apply the concept to fixed and mobile broadband carriers. In basic terms, the concept of Net Neutrality is intended to ensure that the owners of the pipes of the internet do not discriminate against any edge providers 1 or end users. The FCC initially defined broadband services as an information service and attempted to apply Net Neutrality concepts under Section 706 of the Communications Act. In a 2014 opinion, the DCCoA rejected this approach, indicating that the proposed rule s requirements related to blocking and anti-discrimination could not be applied to information services which are not subject to Title II. Enter the 2015 Open Internet Order. In an about-face on its previous position, the FCC determined that fixed and wireless broadband were telecommunications services subject to Title II. Telecommunications services under Title II are given common carrier treatment and are: (1) required to furnish communication service upon reasonable request; (2) forbidden from unjustly or unreasonably discriminating charges, practices, classifications, regulations, facilities, or services; and (3) must charge just and reasonable rates. Under its newfound Title II authority, the FCC applied five Net Neutrality inspired rules on fixed and wireless broadband providers. The first three bright-line rules banned blocking, throttling and paid prioritization. 2 The fourth rule, known as the General Conduct Rule, forbids unreasonably interfering with both the end user s experience in accessing the internet, and the content provider s services and applications created for the users. The fifth rule imposed enhanced transparency requirements, building upon the transparency requirements promulgated in the original Open Internet Order in The FCC also applied its prerogative to not apply certain aspects of Title II to fixed and mobile broadband carriers that it did not believe aligned with the public interest and did not believe were necessary to ensure just and reasonable service or protect consumers. The FCC adopted the Open Internet Order in February 26, 2015, with a 3-2 Commission vote, and the Order went into effect on June 12, Since the Order went into effect we have seen the introduction of zero-rating services, such as T-Mobile s Binge On and Verizon s Go-90, which have raised questions in the press about Net Neutrality but no clear determination as to their permissibility under the FCC s Order. While the impact may not be immediate, the FCC intentionally reserved their right to examine both zerorating and data cap programs on a case-by-case basis in the Open Internet Order. The FCC has also received more than 20,000 Net Neutrality complaints but has yet to bring any significant actions. So, while the DCCoA Opinion upholds the Open Internet Order, we may not see an immediate surge in enforcement action. However, the affirmation certainly provides the FCC with more options and significantly more teeth to its enforcement capability. 1 Edge providers, like Netflix, Google, and Amazon, provide content, services, and applications over the internet. 2 The rule prohibits broadband providers from 'blocking' lawful content, applications, services, or non-harmful devices; 'throttling' which degrades or impairs access. The 'anti-paid prioritization' bars broadband providers from favoring some traffic over other traffic, either (a) in exchange for consideration (monetary or otherwise) from a third party, or (b) to benefit an affiliated entity.

3 #2 - The Court s decision to uphold the FCC s approach in implementing the Open Internet Order will allow Chairman Wheeler to continue to execute his recent regulatory agenda, which may have a profound and lasting impact on the Communications industry. The most important impact of the DCCoA opinion may well be that it empowers the FCC to continue its recent spate of industry-altering rulemaking. Chairman Wheeler and the FCC began their regulatory push in March 2016, when they issued their proposal to unlock the set-top box, with the stated objective of ushering in a more competitive environment around customer access to linear and video content (See PwC s 3things, Unlocking the Set-Top Box, March 9, 2016). The FCC followed-up in April 2016 with a proposal to impose privacy requirements on Internet Service Providers ( ISPs ) (See PwC 3things, A New Privacy Sheriff in Town? The FCC s Proposed Broadband Privacy Rule, April 5, 2016). The FCC derived its authority to propose its privacy rule on ISPs based on the Title II authority it established in the Open Internet Order upheld by the June 14 DCCoA opinion. ISPs have traditionally been subject to the privacy regime of the Federal Trade Commission (FTC). The reclassification of fixed and wireless broadband under Title II elevated the FCC into the primary regulator role on privacy issues and provided the regulatory basis for their privacy proposal. The privacy proposal has generated significant controversy and debate as the approach the FCC has taken is more restrictive than the FTC and could have a direct impact on the ability of ISPs to monetize valuable customer data. The FCC proposal departs from the FTC s traditional opt-out model and requires ISPs to acquire affirmative optin consent to use customer data for any purpose outside of communications-related marketing. This includes all targeted advertising and sharing with third parties, putting many data monetization models at risk. The ISPs believe that the privacy proposal establishes an uneven competitive playing field as edge providers are still subject only to the FTC s opt-out rule. With the privacy proposal following closely on the heels of the Set-Top Box proposal, it's not surprising that the industry is concerned about what may be next in Chairman Wheeler s Competition, Competition, Competition campaign. In fully upholding the FCC s reclassification of fixed and mobile broadband under Title II, as well as the FCC s approach to applying that authority, the DCCoA has essentially sanctioned the statutory framework for the FCC to continue its recent regulatory approach. It seems clear that Chairman Wheeler wants to leave a lasting legacy at the FCC after his tenure ends (likely sometime in the next year, as he makes way for a new Chairman appointed by the new President). As we have noted in our previous 3things pieces on Set- Top Box and Privacy, we see no further barriers to those two rules passing in some form, as long as there remains a 3-2 Commission balance in favor of the Democrats. With his latest victory, we would not be surprised to see an aggressive FCC continuing its rulemaking momentum through the end of the year. #3 - An appeal is anticipated, but it is far from clear whether the Supreme Court will even hear the appeal. The current political environment also makes any legislative fix a longshot. If the status quo remains - and we believe it will - it may usher in a new era of FCC regulation. As soon as the DCCoA Opinion was handed down, the discussion of a potential appeal or legislative remedy began. While the prospect for either is far from certain, it is important to understand the options and why

4 both remedies may be longshots. There are two possibilities for appeal: (1) an appeal to the same court, the DCCoA, en banc, or (2) an appeal to the United States Supreme Court (SCOTUS). If the appeal remains with the DCCoA, the case will be presented to all the judges in the Circuit instead of the 3-judge panel. An en banc hearing or rehearing is not common and ordinarily will not be granted unless it is needed to secure or maintain uniformity of the DCCoA s decisions, or if the proceeding involves a question of exceptional importance - neither of which clearly applies in this case. If the case is appealed to SCOTUS, it is not a foregone conclusion that they will even accept the case. SCOTUS has judicial discretion whether to hear the case and will only do so for compelling reasons, such as conflicting opinions between two or more Federal Circuit Courts of Appeal, a Court of Appeals decision on an important question of federal law that requires a decision by SCOTUS, or a decision on an important federal question in a way that conflicts with relevant decisions of SCOTUS. None of these situations seem to apply to the current case, and while the future of Net Neutrality and the FCC s regulatory approach is of significant importance to those industries impacted, it is not the type of case SCOTUS would typically make a push to take on. There has also been some rumbling on the Hill about a legislative fix. This is also highly unlikely in the short term, as President Obama has been clear that he would veto any bill that threatens the recent FCC pro-competition rulemaking efforts. The one political wildcard is the outcome of the Presidential election. If we have a Clinton administration, we can expect a continuation of the Obama/Wheeler FCC policy agenda. If we have a Trump administration, we frankly have no idea how he will address Net Neutrality or the FCC agenda. The recently released Republican platform is against Net Neutrality and other recent FCC regulatory policies, but the Trump campaign has been silent on these issues. One would think we would have a movement away from the current FCC regulatory approach with a Republican administration and Congress. So, what are our predictions? Barring a change to a Republican administration, our view is that we are entering a new era of FCC regulatory oversight that will accelerate the changes already gripping the industry. We see little likelihood of a successful appeal to either the DCCoA en banc or SCOTUS. With an emboldened FCC, the Set-Top Box and Privacy rules will both be passed in some form this year and the FCC will more clearly establish its position regarding the application of the Open Internet Order and Net Neutrality. We also believe that Chairman Wheeler will continue to execute on his regulatory agenda with additional rulemaking on issues such as Unlicensed Spectrum, Universal Service and/or Spectrum Frontiers. Did the DCCoA opinion bring an immediate change to how the FCC will execute its enforcement of Net Neutrality and the Open Internet Order? Probably not. What it did do, however, is likely signal the start of a new FCC regulatory era and carriers will need to anticipate these future regulatory changes as they make multi-billion dollar capital investment decisions around their networks and products.

5 Additional information For additional information about this topic and how PwC can help, please contact: Joe Atkinson David Sapin Advisory, TICE Leader TICE Risk & Regulatory Leader (267) (202) Rob Mesirow Jason Wagner TICE Risk & Regulatory Advisory, Comms Sector Leader (202) (917) Contributing authors: Marc Mazzie, Shanna Holako 3things is a publication of PwC s TICE Advisory Risk and Regulatory practice and is intended to highlight 3 key takeaways from evolving risk and regulatory issues impacting the Technology, Communications, Entertainment & Media and Hospitality, Gaming & Leisure sectors. Companies in these rapidly evolving industries face increasing market and competitive risks, as well as other internal and financial risks from the challenges of managing their complex - and often global - businesses. They are also facing an uncertain regulatory environment, as regulators across the globe grapple with how to effectively implement their policy objectives in an era of unprecedented technological change. The TICE Risk and Regulatory team brings a combination of deep industry expertise and an understanding of the evolving regulatory environment to help our clients in these sectors navigate the risk and regulatory complexities of running their business and executing on their strategies. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. At PwC US, our purpose is to build trust in society and solve important problems. We re a network of firms in 157 countries with more than 208,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see for further details.