The Investment Effects of the FCC’s New Asymmetrical Privacy Regime…

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Last September, I participated in a conference sponsored by the U.S. Chamber of Commerce Foundation entitled “The Internet of Everything: Data, Networks and Opportunities.”  As part of my presentation, I discussed an essay I co-authored with Phoenix Center Chief Economist Dr. George Ford entitled Information, Investment and the Internet of EverythingIn this essay, George and I pointed out that as a consequence of the Federal Communications Commission’s (“FCC”) decision in March 2015 to reclassify broadband Internet access as a Title II common carrier “telecommunications” service in its controversial Open Internet Order, all Broadband Service Providers (“BSPs”)—whether wireline, cable or wireless—are now subject to the Customer Proprietary Network Information (CPNI) statutory framework contained in Section 222 of the Communications Act—rules that were designed for pre-Internet services offered by the handful of telephone companies in existence at the time.  In so doing, the FCC has created an asymmetrical regulatory approach to digital privacy: an ex ante regime specifically for BSPs with rules enforced at the FCC, and an ex post case-by-case regime enforced by the Federal Trade Commission (“FTC”) for everybody else. Our essay cautioned that the FCC’s new asymmetrical privacy regime could create disincentives for investment in broadband infrastructure, depending of course on the particular way the CPNI rules are implemented by the Agency.

Increased investment in broadband infrastructure is viewed as essential for the future economic and social vitality of the United States.   That infrastructure investment is made by BSPs now subject to a different privacy regime than other Internet companies that do not invest in the network infrastructure that brings high-speed broadband services to your home, business or mobile device.  Each year, BSPs invest billions of dollars into their networks, with nearly $0.20 of every dollar of revenue going to network investment.  To support that investment, BSPs must find ways to recover their costs, which is difficult in a world where many people believe the Internet, and everything on it, should be free.  As we at the Phoenix Center have repeatedly pointed out (see, e.g., here and here), and was even specifically recognized by the FCC’s chosen keynote speaker—University of Pennsylvania Professor Matt Blaze—at the Commission’s April 2015 Privacy Workshop, broadband is increasingly becoming “commoditized,” a feature of the service that makes it difficult to financially support the billions in investment necessary to keep broadband service deployed, maintained, and upgraded.  This commoditization results, in part, from economic forces, but it is also driven by numerous government interventions, like net neutrality and handset unlocking.

Along the same lines, asymmetrical privacy regimes pose great risks.  As we explained in our essay:

For both the edge and the core, however, the common currency of the [Internet of Everything] is information—that is, the ability to collect, track and ultimately monetize a plethora of information to provide enhanced online experiences for consumers.  Moreover, it is the ability to monetize information successfully that will encourage, at least in part, the investments by both the edge and core to support the [Internet of Everything].

If information is the currency of the information age, then closing off BSPs from monetizing information shrinks their potential market, which, in turn, discourages investment and reduces competition.  As we explained in our essay,

What is crucial to understand is that as commoditization of broadband becomes more prevalent, the incentive to invest in network infrastructure goes down.  [See, e.g., here and here.]  To stem this tide, Professor Blaze testified that BSPs are going to “look for ways to monetize [consumer] data” to support the needed network investments.  Monetizing data injects income into the ecosystem’s core, providing a sound financial environment for the [Internet of Everything] to evolve and flourish.  Asymmetrical regulatory intervention on one (albeit extremely crucial) segment of the [Internet of Everything] ecosystem, which is mostly politically motivated and whimsical at this point, directs this evolution on a less healthy and innovative path by effectively transferring profits from the core to the edge.

The dangers are apparent, but it appears that FCC Chairman Tom Wheeler is prepared to severely constrain the ability of BSPs to use the information they gather to increase the value of their networks.  Edge providers, sitting outside of the FCC’s authority, may continue to monetize information in darn near any way they see fit.  Chairman Wheeler’s favoritism for the edge—a bias he admits reflects his own business failures—remains fully intact.

Our predication about the impact of differential treatment is already manifesting.  It was just reported on Tuesday of this week that ratings agency Moody’s Investors Services stated that the FCC’s forthcoming attempt to impose privacy restrictions on BSPs was “credit-negative.”  According to Moody’s, Internet providers could be “severely handicapped” in their ability to compete with digital advertisers such as Facebook Inc and Google.  Indeed, Moody’s said that the FCC’s forthcoming rules were a “a long-term risk to the current TV advertising business model, as well as all broadband providers whom also have ad sales exposure” because edge providers such as Google will have “a distinct competitive advantage” as more advertising dollars will continue to flow to them.

Building and operating broadband networks is a hard business—few have the guts for it.  If more and better networks is the goal, then Internet policy must be developed with a sound understanding of the economics of the Internet business.  While there’s a role for policy in Internet markets, we must not lose sight of the fact that investment requires a return, and the seemingly incessant efforts by the FCC to hem in—if not outright sabotage—the business case for private investment in broadband networks is not helpful.