public choice economics

The FCC’s New “Just and Reasonable” Standard Could Be Anything But

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2000px-FCC_New_Logo.svgOn March 12 the FCC issued its 400 page ruling on net neutrality. Vox’s Timothy Lee has an excellent overview of the ruling that I’d recommend reading before you continue with my post.

I have already expressed my concerns about the relationship between net neutrality and rent seeking behavior, so I won’t rehash them now. What alarms me about the new rules is a step the FCC took that went beyond net neutrality proper. The Commission annexed for itself the general power to determine whether broadband providers’ conduct is “just and reasonable.” Even companies complying with net neutrality rules could still be investigated for violating this new standard. It works via a system of public complaints. If you (or, more likely, a major internet content provider) believe your broadband provider is being unjust or unreasonable, you can complain to the FCC. It will then consider violations of the “just and reasonable” standard on a case-by-case basis. In fact, the FCC has given no actual definition of what constitutes “just and reasonable” conduct. The Commission will make it up as it goes.

This piques my interest because I’ve spent the past few years studying the damage wrought by an equally vague FCC rule regarding radio broadcasting. In the Radio Act of 1927, which established the Federal Radio Commission, the agency was charged with assigning and renewing radio station licenses so long as they used their licenses to serve the “public interest, convenience, or necessity.” This brief, vague line opened the door to years of lawsuits and some incredible abuses of government power for partisan political purpose.

Part of the problem with the standard was that it did not define the public interest, convenience, or necessity. In the 1940s, progressives argued that commercials were not in the public interest and the FCC moved to limit the amount of airtime that stations could devote to selling King Biscuit Flour and other sponsored products. The industry rallied in opposition to the proposed rules which were promptly dropped by the FCC. In the 1950s some on the commission worried that there were too many violent Westerns being broadcast–think about the children!–and they wanted stations to air more public service time covering the news and editorializing on “controversial issues of public importance.” In 1959 these principles were codified by the FCC as the Fairness Doctrine.

The FCC had set itself up as the arbiter of the “public interest.” Opponents of the proposal argued that people could just vote with their dial in a democracy of the airwaves, but the advocates believed that the public had a bad habit of voting for things (Westerns, boo!) that were not actually in their own interest. Instead, a non-elected board of lawyers, few with communications experience, would decide what the public truly needed. I don’t have time to go into the particulars of the Fairness Doctrine here–that’s what my dissertation is for–but it did not take long for the new rules to be abused for partisan purpose.

With the advent of mass television the networks had left the expansion of radio in the hands of financially-struggling, independent stations.They were willing to take programming from whoever could pay and conservative broadcasters like Carl McIntire, Billy James Hargis, and Clarence Manion could pay in cash. By the early 1960s about a dozen conservative broadcasters aired on a hundred stations or more nation-wide. But unlike the networks, which could hire lawyers and former FCC commissioners by the bushel, these small stations were vulnerable. When the FCC wanted to make an example out of a station, better to go with a rinky-dink operation. Henry Geller, a former FCC counsel, once described the FCC’s informal “three outhouse” rule of thumb. If a station had more than three outhouses, it was approaching a size that made it dangerous for the FCC to mess with.

Right-wing broadcasting graduated from minor irritant to major political nuisance by the early 1960s. In particular, conservative opposition to the Nuclear Test Ban Treaty undermined the Kennedy Administration’s policy program and hurt the President’s reelection prospects for 1964. So in the fall of 1963 the Administration pushed the Internal Revenue Service to audit all the major conservative programs in hopes of scaring off their donors. Furthermore, President Kennedy encouraged the newly appointed Chairman of the FCC to keep the airwaves “fair” by more tightly enforcing the Fairness Doctrine. Fairness, like beauty, is in the eye of the beholder, which in this instance was the Kennedy Administration, the Democratic National Committee, the United Auto Workers, and the National Council of Churches. (Again, more details in the dissertation.)

Here’s where the vagueness of the Fairness Doctrine rules came into play. Stations were told to editorialize on current events, like the Nuclear Test Ban Treaty, but also to give both sides a fair hearing. If they aired an attack on the Test Ban Treaty, they were obligated to air a response from supporters of the Treaty. Ostensibly the rule applied to all sides and would ensure that both liberals and conservatives got to moot their opinions. The intended goal was a government-guaranteed marketplace of ideas on the airwaves.

Yet in practice the Fairness Doctrine was exclusively targeted at conservative broadcasters. Liberal interest groups–abetted by the DNC and the Administration–would lodge a complaint with the FCC whenever a station aired a conservative program attacking a liberal group or policy. The FCC would notify these stations of the complaints and mention that they would be taken into account at the station’s next license renewal hearing. Alternatively, the stations could agree to air response programs from these liberal interest groups. But here’s the kicker…they had to do so without charging for airtime. For example, when conservative program Life Line (funded by a Texas oil millionaire) paid radio stations to air an episode criticizing the Nuclear Test Ban Treaty, the pro-treaty Citizens Committee for a Nuclear Test Ban wrote to the station demanding free response time. The FCC backed the request–resulting in the “Cullman Doctrine”–and many stations complied. This made airing conservative programs a financial liability and all but the most ideologically-motivated station owners began dropping Right-wing programming in droves. By 1968 most conservative programs aired on a quarter or a third of the total number of stations as they had in 1963.

We know about this partisan use of the FCC in the mid-1960s because a number of the major players began to regret their actions post-Watergate. They had used the FCC to bully stations into airing less anti-Administration programming, but it didn’t take more than a few years of Nixon to realize how stifling that could be once the shoe was on the other foot. They leaked information and documents to a former CBS news executive named Fred Friendly who wrote a book on the topic. One chapter of my dissertation expands on Friendly’s story using documents from labor archives, the DNC, and the JFK Presidential Library.

Let me end by listing some of the unintended consequences of the vague “public interest, convenience, or necessity” standard of the Radio Act of 1927 and its regulatory descendant the Fairness Doctrine:

1) Major companies were generally protected from any adverse consequences because of their deep pockets.
2) The burden of compliance fell disproportionately on new, struggling independent stations.
3) The rules were hijacked to serve partisan, political ends.
4) Stations dropped voices from the political periphery.

Of course, the FCC’s “just and reasonable” standard isn’t identical to the “public interest, convenience, or necessity” standard that gave rise to the Fairness Doctrine. Still, the Commission’s poor track record in enforcing this old vague standard should give us pause about a new vague standard. If the past history of the FCC is any guide, future Commissions will interpret the “just and reasonable” standard in ways that benefit the loudest, best-connected, and most well-financed lobbying groups. Regulatory capture is the bane of administrative law and the vaguer the rules, the more opportunity there is for incumbents to shape those rules in ways that benefit established interests.

Rent Seeking and the New Net Neutrality Rules

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Net Neutrality
Yesterday the Federal Communications Commission voted to implement net neutrality rules banning internet service providers (ISPs) from privileging content from any one source over another. The worry was that ISPs would create “fast” and “slow” internet lanes based on payments from content creators. A company like Netflix might pay Comcast for priority on its broadband network, relegating competing companies to slower, stuttering service. Allowing that to happen, net neutrality advocates say, would result in a two tier access to the internet that will hurt poorer Americans, discourage internet startups, and line the pockets of already wealthy ISPs. Given how widely hated ISPs are–11 of the 15 least popular companies in America are cable or broadband providers like Comcast, Time Warner, and Charter Communications–it’s not surprising that a record 3.7 million pro-net neutrality comments were registered with the FCC in 2014.

ISPs and others opposed to net neutrality have argued that the rules will slow the expansion of faster broadband. Making broadband less profitable, the argument goes, will give companies less incentive to invest in new lines. Furthermore, opponents note that future internet innovation could very well depend on paid prioritization. For example, as telemedicine applications boom, wouldn’t you want your connection to your doctor across the country to be prioritized over someone playing Call of Duty? Lag when you’re shooting fake terrorists is less dangerous than if a doctor is controlling a distant surgical robot in a real isolated military outpost.

One of the odd aspects of the debate is how theoretical it is. The internet is one of the great technological innovation success stories of the past two decades and it became so with very little government regulation. Why, suddenly, are new rules needed now? After all, there is only a single concrete violation of net neutrality principles in recent years. In 2007 the FCC slapped Comcast’s wrist for “bandwidth throttling” when it discriminated against peer-to-peer traffic (P2P) . At the time ISPs had found that a massive proportion of bandwidth was consumed by P2P activity, between 49 and 95% depending on time of day, with most of that traffic coming from less than 1% of internet users. Heavy P2P downloaders of (mostly) illegal music, movies, porn, and games were clogging up the internet for everyone else. Comcast started throttling speed for those uber-users in order to speed up other customers who paid just as much for access. Yet net neutrality advocates worried that the action set a bad precedent. Comcast backed off under FCC pressure.

It’s a debatable issue, but what concerns me, as well as the generally pro-net neutrality Electronic Freedom Foundation, is how vague some of the new rules appear to be (the text of the new rules won’t be released for several more weeks). As the EFF put it in a letter to the FCC:

A “general conduct rule,” applied on a case-by-case basis with the only touchstone being whether a given practice “harms” consumers or edge providers, may lead to years of expensive litigation to determine the meaning of “harm” (for those who can afford to engage in it). What is worse, it could be abused by a future Commission to target legitimate practices that offer significant benefits to the public.

When the EFF refers to “those who can afford to engage in it,” its has in mind very profitable ISPs like Comcast, which had a cool $2.59 billion in income in its last reported quarter. Well-heeled companies are better able to afford to fight the rules in court as well as to cover the cost of compliance should they lose. ISPs should come through the new rules, whatever they end up being, relatively unscathed; they might not like them, but they’ll find a way to turn them to their own benefit. Regulation that preserves the status quo tends to favor incumbents and the new rules–which don’t appear to include an unbundling provision–may make it harder for new entrants to compete in the marketplace. Product differentiation, a key way for new companies to compete with incumbents, is now banned although they’ll still be able to compete on price.

Might this hurt new internet content creators as well? Imagine you’re a challenger to Netflix trying to break into the world of online video streaming. They are the 600 pound gorilla. So you make a deal with Google Fiber to allow their base level users–who pay nothing for 5 mbps download speeds–to also receive the 15 mbps speed necessary for HD streaming for no charge but only for your service. It’s a loss leader but it’s a way of trying to challenge the dominant market leader. Google wins–getting bucks from the upstart. The upstart wins–gets a shot at increasing market share. The public wins–get more free access to content. Only one person loses–Netflix.

Less you think this stranger than fiction, note that there are some past examples of cell providers trying to gain an edge over their competitors by not charging subscribers for data when they access certain websites or music services. There’s a precedent for this.

In that light, it’s no wonder that current internet companies tend to favor net neutrality. It protects them from future competitors. In other words, net neutrality isn’t just a story about little content creator Davids facing off against big ISP Goliaths. It’s also an attempt by incumbent internet content providers to protect against upstarts. Rent-seeking in all things, apparently.

Stay tuned later this week for some thoughts on how the FCC’s missteps with the Fairness Doctrine in the 1960s should give us pause over implementing net neutrality.