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United States turns the internet into a regulated public utility

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Published on: May 05, 2015

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The United States is about to experience protracted legal wrangling over a contentious move from the regulatory body to regulate internet service providers – in the name of protecting net neutrality. In contrast, net neutrality has not been the subject of much debate in New Zealand so far. In this Regulatory Update we explain why the issue is the subject of such heated debate in the United States (and to a lesser extent in the European Union), and contrast that to the New Zealand position.  

Developments in the United States

The Federal Competition Commission (FCC) recently reclassified (by a 3 to 2 majority) internet service providers (ISPs) as “common carriers”,1making them a regulated public utility like phone line providers. The “Open Internet” rules were adopted by the FCC on 26 February 2015 to “protect free expression and innovation on the internet and promote investment in the nation's broadband networks.”2 The regulatory framework applies to both fixed and mobile broadband internet access services. Key rules include:

  1. no blocking: ISPs cannot block access to legal content, applications, services, or non-harmful devices;
  2. no throttling: ISPs may not impair or degrade lawful internet traffic on the basis of content, applications, services, or non-harmful devices; and
  3. no paid prioritization: ISPs cannot favour some internet traffic over other traffic in exchange for consideration of any kind.3

The extent of contention surrounding this issue is evidenced by the fact that in 2014 the FCC received 3.7 million responses on a white paper on the proposal, making it the most commented on issue in FCC history.4

The Open Internet rules take effect on 12 June 2015. Since publication, seven lawsuits have been filed against the FCC seeking to prevent them entering into force.5 A key theme in the argument against the rules is that history has shown that common carrier regulation slows innovation, chills investment, and increases costs for consumers. Some parties express support for the principles of net neutrality, but argue the FCC has exceeded its authority in reclassifying internet services. The competitive market and consumer choice, rather than heavy handed regulation, should determine the future of internet services. One party describes the legal foundation as “arbitrary” and “capricious”6, despite the FCC claim that the rules are “grounded in the strongest possible legal foundation”.7

European Union position

The European Union is also looking into the issue, although due to the complexities of the European Parliament, Council and Commission structure, the future of net neutrality is currently murky as no clear rules are in place.

In April 2014 the European Parliament voted for net neutrality rules to be drafted, which would ban ISPs from blocking or slowing internet services provided by competitors. Since then, the European Council has voted in favour of changing the rules set out in that initial legislation. The current presidency of the Council, Latvia, indicated it supports a “principle-based” approach.8 The details of that approach are scarce but appear to be lending weight to a “two-tier” system that would allow the prioritisation of “specialised” services that require high quality internet access.

The rules are now being re-negotiated with a view to forming a common position amongst the European Parliament, the Council of the European Union and the European Commission. All three bodies have pledged a commitment to “safeguard open internet access”.9

Why regulate for net neutrality?

Net neutrality is the principle that, broadly speaking, all data on the internet should be treated equally. That is, ISPs should treat all online traffic running through their systems on a non-discriminatory basis. Proponents of net neutrality argue that access to the internet and its content should not be blocked, slowed down or sped up depending on where that access is sourced or who owns the points of access. This means, for example, companies should not be able to pay ISPs extra in return for premium treatment of their content.  

In contrast the “pay to play” approach permits ISPs to charge extra for a “fast lane” that avoids other internet traffic. This may also allow ISPs to better manage the flow through their systems to ensure all customers have quality broadband access. Opponents of pure net neutrality argue that traffic management is necessary for future innovation. There would be no incentive, for example, to invest in advanced networks if ISPs cannot charge a higher access fee to companies that value expanded capabilities.  

In this context, the types of behaviour employed by ISPs in the United States and Europe that has encouraged regulation include:

  1. Discrimination by protocol: Comcast, the largest cable TV operator and second largest internet provider in the United States, prevented internet service users from using file-sharing software BitTorrent for distributing large video and music files.10 Comcast argued that it was reasonable to charge for or restrict the usage of content providers because bandwith-heavy streaming services like BitTorrent put heavy strain on its network.11
  2. Discrimination by IP address: France’s telecommunications company Orange complained that traffic from Google and Facebook accounted for 50% of total traffic on its network. As a result, Orange chose to charge Google for the traffic incurred by the search engine.12
  3. Peering discrimination: Comcast agreed with Netflix to improve the quality of service to Netflix clients. In 2013, speeds for Netflix dropped by 25%; after the deal was struck in 2014, Netflix speeds recorded a 65% increase.13
  4. Favouring private networks: Comcast struck a deal with Microsoft in 2012 to provide a separate, additional bandwith flow for videos watched over Microsoft’s network.14 

New Zealand position

New Zealand’s consideration of net neutrality presents a stark contrast to the United States (and to a lesser extent the European Union), but there is good reason for this. In short, there is no problem here.

The Commerce Commission (Commission) was unconcerned about net neutrality when it conducted its demand side study in 2012.15 The Commission’s view reflected the general position of stakeholders that network neutrality was not an issue when ISPs, who operate in a competitive market, are transparent about the limitations or restrictions placed on their broadband services.

In July 2014 at the InternetNZ annual Nethui, the Minister of Communications and Information Technology acknowledged United States and European Union developments, but suggested that the net neutrality debate is unlikely to become a significant problem in New Zealand.16 Hon Amy Adams reasoned that the local regulatory scheme encourages competition and ensures consumers have choice between ISPs.17

Nonetheless, the Minister acknowledged that New Zealand is experiencing significant increases in data consumption and greater pressure on networks. Further, we are evolving from a position of less integration between broadband and content services compared to overseas markets. Given that net neutrality is an issue that needs to be considered under the broader regulatory debate, the Minister suggested a proactive approach.  InternetNZ has subsequently produced a pre-public discussion document on the matter.18 The document aims to establish a definition of network neutrality and whether there is any cause for concern about network neutrality in the New Zealand market. InternetNZ emphasises the preliminary nature of the discussion by stating it is the “start of an open and collaborative process to develop an understanding of network neutrality grounded in the realities of the New Zealand market” and its aim is to propose solutions that are uniquely appropriate to the challenges and opportunities in New Zealand.19

As InternetNZ implies, New Zealand does not necessarily have to follow the approach in United States or European Union. However, given the rapid progress of content services provided over the internet, the Minister’s speech and MBIE’s 2013 Discussion Document20, it looks likely that net neutrality will be included in the mandatory review of the policy framework for regulation of telecommunications services, due to be carried out by 30 September 2016.21 Even so, it appears that there is plenty of scope for New Zealand to maintain a light-handed approach materially different to that adopted in the United States.

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FOOTNOTES
  1. Title II of the Communications Act 1934.
  2. Federal Communications Commission, Open Internet, available here.
  3. Full copy of the Protecting and Promoting the Open Internet Rule available here.
  4. The Verge, FCC Received a Total of 3.7 Million Comments on Net Neutrality, September 2014 available here.
  5. As at 28 April 5015. CNS News, Seven Lawsuits Now Pending Against FCC Over ‘Net Neutrality’ Rule, April 2015, available here.
  6. Techcrunch, Lawsuit Calls FCC’s Net Neutrality Rules “Arbitrary” And “Capricious”, April 2015 available here.
  7. Federal Communications Commission, Open Internet, available here.
  8. Business Insider Australia, A Lot of Powerful Lobbyists are Trying to Get Rid of Net Neutrality in Europe, March 2015, available here.
  9. Business Insider Australia, A Lot of Powerful Lobbyists are Trying to Get Rid of Net Neutrality in Europe, March 2015, available here.
  10. Wired, Comcast No Longer Choking Filer Sharers’ Connections, Study Says, October 2011, available here.
  11. File-sharing applications account for between 50 percent and 90 percent of overall internet traffic.
  12. The Verge, French ISP Orange Says It’s Making Google Pay to Send Traffic over Its Network, January 2013, available here.
  13. Digital Trends, Comcast Jumps Up in Netflix Speed Rankings after Payola-Style Agreement, April 2014 available here.
  14. Bloomberg, Comcast ‘Invents’ Its Own Private Internet, June 2012, available here.
  15. Commerce Commission, High Speed Broadband Services Demand Side Study, June 2012, at page 18-19, available here.
  16. Hon Amy Adams, 10 July 2014, text of speech available here.
  17. Particularly the new Broadband Product Disclosure Code that require ISPS to state the circumstances in which traffic management may apply and the effect this may have on customers, and the obligations on ISPs under the Fair Trading Act 1986.
  18. Submissions closed on 5 February 2015. InternetNZ, Network Neutrality in New Zealand Pre-public Discussion Document, December 2014, available here.
  19. InternetNZ, Network Neutrality in New Zealand Pre-public Discussion Document, December 2014, page 2 available here.
  20. MBIE, Review of the Telecommunications Act 2001, August 2013, at pages 19 and 68, available here. Net neutrality was listed as a topic the Government considered could be included in the review.
  21. Telecommunications Act 2001, s157AA.

This publication is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice.

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