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Shelanski Interview

Information Services, Common Carriage and Regulation: Beyond Brand X

BCLBE's Howard Shelanski, Boalt Hall professor of law and former chief economist at the Federal Communications Commission, says that despite concerns over the long-term impact on consumers, the Supreme Court's June decision in National Cable and Telecommunications Assn. v. Brand X "came out in the right place" in affirming the FCC's discretion to classify broadband technology as an information service. We recently spoke with Shelanski to have him walk us through Brand X and its implications.

Q: Can you tell us about the background of this case?

Shelanski: A few years ago, AT&T purchased TCI, a big cable system with a pre-existing contract with Excite at Home to be its exclusive Internet service provider (ISP). Other big ISPs, notably AOL, saw the potential of Internet cable service. So they started to demand the right to “open access” on cable networks. The FCC declined to order open access but did pressure cable systems, in some cases, to open up their systems a little bit. So when AOL and Time Warner merged, the FCC said AOL could not be the only ISP for the merged company’s broadband Internet customers. Other ISPs continued to try for access to cable systems by going to local authorities. The question arose of whether local authorities even had the right to order open access and all kinds of fractured opinions resulted with different legal approaches – first amendment, preemption, no preemption. Eventually someone got smart and filed a suit targeted directly at cable companies through Title II of the Telecommunications Act. The argument went like this: unlike the cable video service, cable modem service is a telecommunications service because the companies are providing mere transport for data. If they’re providing telecommunications, they’re subject to the common carrier rules of the Telecommunications Act. If they’re subject to the common carrier rules, they must carry competing ISPs.

The ISPs sued in a couple of different states, and in the Ninth Circuit, they got a ruling, Brand X, which, relying on an earlier decision, City of Portland, held that cable modem service is a telecommunications service and therefore subject to the common carrier rules. Some other circuits came out a little differently. The Supreme Court took certiorari to resolve this question.

The FCC for a while had dodged the issue of whether or not cable was a telecommunications service. After City of Portland, but before Brand X reached the Ninth Circuit, the FCC ruled that cable modem service was an information service, not a telecommunications service. In Brand X, the Ninth Circuit said that they owed the FCC no deference because they were governed by their own prior ruling that cable was a telecommunications service.

In Brand X, the Supreme Court ruled that the Ninth Circuit should have deferred to the FCC’s interpretation of the Telecommunications Act because it was a reasonable interpretation.

Q: It seems that Brand X is principally an administrative law decision.

Shelanski: True. It’s a hairsplitting exercise to determine whether something is primarily a telecommunications or an information service. In this day and age, data and information, not basic voice, are really what’s transmitted. Almost every communication service performs some transport and some data manipulation. So what is the predominant nature of the service — transport? Or, is transport merely a necessary adjunct to some other thing that is really the predominant service?

You see how hairsplitting this can become when you look at the interplay between the majority and the dissent. The majority says that Internet access is what this is about. The Internet is the dog and the transport is just the tail, so the FCC was perfectly justified in saying cable modem service is primarily about information, not telecommunications. In dissent, Scalia says, what are you talking about? Your cable system doesn’t provide the Internet. The service you’re buying is high speed transport. High speed transport is the dog. The information part is the tail. Once you get into a “what’s the dog and what’s the tail” debate, it helps the case that this issue should be subject to administrative deference. The expert agency looked at all the facts and then made the determination. They took an ambiguous service and made an interpretation about which box they thought it better fit in. It was not a clearly wrong or arbitrary finding.

Now, this might not be the best interpretation. It’s possible that Scalia is right. But that’s the whole point of the deference. You don’t have to have best interpretation, you have to have a reasonable and plausible interpretation. And so the reason that this is an administrative law decision more than anything else is that it’s not a decision that depends on the FCC’s ruling having been the best possible categorization of this service— it is merely a reasonable and plausible one given the ambiguity. In the end, if the majority is right, that’s why they’re right. The case is about deference to the agency’s decision, not some hard and fast rule about when, as a matter of law, something is a telecommunications as opposed to an information service.

Q:Will there be an impact on DSL providers, the phone companies?

Shelanski: Brand X will give the DSL providers some ammunition for their pending proceeding at the FCC where they will say, hey look, if cable is an information service, then we’re an information service. There is no difference.

Q: But isn’t that true?

Shelanski: It is true. Comcast’s got a set of pipes. SBC has a set of pipes. So for high speed Internet access, SBC will argue it’s not a common carrier -- while telephone service may be a “telecommunications service,” Internet access is not. The FCC has been reasonably consistent. And they have been gradually paring the obligations under the Telecommunications Act for anything related to broadband Internet. In the interim there are some asymmetric regulations. For now, unlike cable, incumbent phone companies providing DSL do have to let any ISP serve their customers. But it’s going to be awfully hard for the FCC to justify continuing with a different categorization for DSL service than for cable modem service. So I think this case helps DSL providers in their quest to be deregulated.

Q: So what happens to the small ISP?

Shelanski: The small ISP has a number of options. First of all, there’s nothing stopping the consumer from getting to any ISP through the web. Admittedly, this is not great. You’re already paying for an ISP as part of your package. Are you really going to pay for another? So it may hurt them. Now, if the ISP has some local cachet, it may be able to negotiate with the local cable or DSL provider and say look, you want us. We’re very popular. You should really let us be one of the options when people buy your service. And, it’s not in the economic interest of cable or DSL providers to exclude all competing ISPs. Consumers want choice. I’m SBC. I’m trying to get people to buy DSL. Their other choice is Comcast. I may want to say, “Don’t go to them, I’ll give you the choice of more ISPs.” So market forces may lead to some choice of ISPs.

Other ISPs may go out of business. But you know what? One needs to ask how big a problem that really is. In the late nineties there were thousands of ISPs. There are many fewer of them now. We didn’t need all those little ISPs. They didn’t add anything. It’s possible that some of these small ISPs may go out of business or may sell out to the big guys, but it’s probably not a grave consumer harm. You do want to keep a good number of ISPs competing in the market. My guess is that market forces, over time, will keep some number of ISPs available.

Q: What’s the impact on the consumer?

Shelanski: The price of broadband consists of two things: the price of Internet access and the price of ISP service. You buy your package and get access but you also get your ISP. The real price driver here is the access, the physical pipe, and nothing in this ruling affects the number of choices for physical access pipes. Open access doesn’t mean additional physical networks. It means access to the existing networks for ISPs. The bottom line is that the impact on consumers may be much more modest than is often argued. It was a big tagline: harmful for consumers, less competition in ISP service. But it’s not ISP service that’s fundamentally determining the price of your broadband access. It’s the fact that there are only two pipes right now.

Now, there are other concerns that relate to how this ruling could affect the Internet more broadly. Some commentators argue that the large DSL and cable modem providers will use their market power to dictate the content and services accessible over the Internet—that they will favor some providers over others and limit the ability of small content and service providers to flourish. I agree that we have to be vigilant about the vertical practices of cable and DSL providers, but it is unclear to me that this ruling will have a big impact. Broadband providers do not want to kill the golden goose and make the Internet less attractive to customers. And if one provider does head in that direction, the other will use the opportunity to gain market share by providing more choice. As wireless Internet options become more viable in the United States, the pressure against such compromising of the Internet will only strengthen. Cable and DSL providers are investing a lot in broadband and are trying to expand their market. I do not wish to make light of the potential competitive dangers of a two or three-player market, but I would not casually assume that it is in the interests of any of these firms, individually or collectively, to reduce choice of content or services for Internet access customers. Should such conduct occur, there are antitrust and regulatory responses available.

Q: It sounds to me that you think that the Court basically came out in the right place.

Shelanski: Yes. I do think this was a close case. In my own view, the reason they came out in the right place is what the alternative would mean from a regulatory or administrative standpoint. If you did open up cable modem services as common carriage, you’d have to figure out at what price, what the terms of the deal might be, and then you have a regulated pricing system for access to these networks and that’s a very complicated issue. And so my feeling is, for the moment, not just as a matter of administrative law, but probably substantively, the Court came out in the right place.