48
4
one narrow set of relationships in that ecosystem retards innovation and limits the ability of
Americans to share in the global revolution currently taking place for mobile services.
To illustrate this observation, one need look no further than upstart wireless provider
MetroPCS. In early 2011, MetroPCS was in a bind. It was a small player in a highly competitive
market, with neither the scale nor the margins to compete effectively against industry giants such
as Verizon and AT&T. As the industry began the capital-intensive transition to 4G networks,
MetroPCS launched an innovative new pricing policy to gain share and escape its fifth-place
position. The company offered a base plan of unlimited voice, text, and web-browsing services
for only $40 each month.
1
As an added bonus, the plan also included free access to YouTube,
courtesy of an arrangement with Google whereby the search giant helped optimize YouTube
content for MetroPCS’s capacity-constrained networks.
2
For an additional $10 or $20 per month,
customers could receive additional services, including turn-by-turn navigation and data access.
3
While these plans were more restrictive than the broadband plans of the larger carriers (in the
sense that customers could not access non-YouTube streaming video and some other bandwidth-
intensive services), they were only one-third the cost.
4
Through these plans, MetroPCS sought to
bring mobile Internet use to its core market of customers unable or unwilling to pay large carrier
rates—thus fulfilling its marketing promise of providing “wireless for all.”
1
See Ryan Kim, MetroPCS LTE Plans to Charge More for VoIP & Streaming, G
IGAOM
(Jan. 4, 2011, 9:26 AM
PST), http://gigaom.com/2011/01/04/metropcs-lte-plans-charge-more-for-skype-and-streaming/.
2
Thomas W. Hazlett, FCC, Net Neutrality Rules, and Efficiency, F
INANCIAL
T
IMES
, Mar. 29, 2011, http://www.ft
.com/intl/cms/s/0/f75fd638-5990-11e0-baa8-00144feab49a.html#axzz2gFHqNfak. In a letter to the FCC, MetroPCS
explained that because of the limited broadband throughput of its 1xRTT CDMA (2G and 3G) networks that most
customers relied upon, it could offer web services such as HTML browsing, but advanced broadband services such
as multimedia did not work well. And the company’s limited spectrum posed similar challenges for the 4G LTE
network that it had recently launched. Because YouTube content was a “competitive necessity” to keep pace with
larger carriers, MetroPCS worked with Google to compress its content to consume less bandwidth when accessed
over the company’s networks. See Letter from Carl W. Northrup to Chairman Julius Genachowski (Feb. 14, 2011)
[hereinafter Northrup Letter], http://apps.fcc.gov/ecfs/document/view?id=7021029361.
3
Kim, supra note 1.
4
Hazlett, supra note 2.
43
5
But rather than cheering this creative attempt to narrow the mobile-digital divide, many
consumer groups condemned MetroPCS for violating net neutrality—despite the fact that the
Federal Communications Commission’s rules had not yet taken effect, and would not do so for
another eleven months.
5
Net neutrality proponents accused MetroPCS of “restrict[ing] consumer
choice and innovation in a developing mobile market, all for the sake of further padding its
bottom line.”
6
In a letter to then-Commission Chairman Julius Genachowski, a coalition of
groups such as the Center for Media Justice, Free Press, Media Access Project, and the New
America Foundation urged the Commission to “investigate MetroPCS’s behavior and act to
remedy its disparate treatment of mobile broadband services.”
7
Any traditional antitrust analysis would find this demand for regulatory intervention
puzzling. At the time, MetroPCS had only eight million subscribers, a customer base less than
one-tenth the size of industry leader Verizon Wireless.
8
The company had no market power and
was in no position to extract supercompetitive profits or otherwise harm consumers. As Professor
Tom Hazlett notes, its customers were mostly price-sensitive cord-cutters who had little use for
the bells and whistles of larger carrier plans, especially at higher price points.
9
MetroPCS’s plan
was poised to bring wireless data to this market segment. But instead it found itself facing the
threat of agency action because its plan did not match the Federal Communications
Commission’s preconceived notion of what the wireless broadband experience should be.
5
See Preserving the Open Internet, 76 Fed. Reg. 59192 (2010). The commission originally released the Open Internet
order in December 2010, but due in part to interagency review, the final rule did not take effect until November 2011.
Id. These rules were codified in part at FCC Preserving the Open Internet Rule, 47 C.F.R. § 8 (2011).
6
Press Release, Free Press, Free Press Urges FCC to Investigate MetroPCS 4G Service Plans (Jan. 4, 2011), http://
www.freepress.net/press-release/2011/1/4/free-press-urges-fcc-investigate-metropcs-4g-service-plans.
7
Notice of Ex Parte Presentation: GN Docket No. 09-191 (Preserving the Open Internet); WC Docket 07-52
(Broadband Industry Practices), Jan. 10, 2011, available at http://newamerica.net/publications/resources/2011/notice
_of_ex_parte_presentation_gn_docket_no_09_191_preserving_the_open_.
8
Hazlett, supra note 2.
9
Id.
44
6
So MetroPCS’s pricing experiment ended, not with a bang, but with a whimper. The
company formally disputed the notion that its plans violated the pending net neutrality rule.
10
But, perhaps uninterested in being the test case for the Commission’s newly minted rules, the
company ultimately shifted to a higher-priced data plan that did not treat streaming video and
other data-intensive applications differently.
11
In the meantime, MetroPCS joined Verizon’s
lawsuit challenging the Commission’s net neutrality rules in court.
12
MetroPCS found it
increasingly difficult to survive against its better-capitalized and better-entrenched rivals, and by
the end of 2012 had agreed to merge with fellow upstart T-Mobile, thus reducing the number of
national facilities-based wireless providers from five to four.
13
The MetroPCS saga illustrates the chilling effect that even the Commission’s “light
touch” wireless broadband net neutrality rules have on broadband innovation. The rules for
residential fixed Internet providers are even more stringent, imposing significant restrictions on
the types of services those providers can offer. Meanwhile, outside the United States, broadband
companies are increasingly innovating with regard to the bundles they provide to consumers,
especially in the wireless sector. This paper seeks to shine a spotlight on the way that net
neutrality limits broadband innovation, by describing some of the diverse business models being
offered internationally.
10
See Northrup Letter, supra note 2.
11
See Adi Robertson, MetroPCS Adds $70 a Month Pricing Tier for Unlimited LTE Data, Caps $60 Plan at
5GB, T
HE
V
ERGE
, Apr. 3, 2012, http://www.theverge.com/2012/4/3/2922425/metropcs-4g-lte-unlimited-data
-pricing-change.
12
See Stacey Higginbotham, MetroPCS Joins Verizon in Suing FCC over Net Neutrality, G
IGAOM
(Jan. 25, 2011,
12:14 PM PST), http://gigaom.com/2011/01/25/metropcs-joins-verizon-in-suing-fcc-over-net-neutrality/.
13
See David Goldman, T-Mobile and MetroPCS to Merge, CNNM
ONEY
, Oct. 3, 2012, http://money.cnn.com/2012
/10/03/technology/mobile/t-mobile-metropcs-merger/.
55
7
I. Net Neutrality: A Brief Overview
At the core of the net neutrality debate is the principle that Internet service providers should not
favor certain Internet content and applications over others.
14
Rather, net neutrality proponents
argue that broadband providers should grant consumers access to all services available on the
network and should route all data packets to customers in the same fashion, regardless of the
identity of the sender or the nature of the content inside. Professor Timothy Wu coined the term in
a 2003 article, in which he argued that such a rule was necessary to guard against the risk that
broadband providers could leverage their control over the Internet access market to distort
innovation in the upstream market for Internet content.
15
Since then, the concept has been the
subject of substantial debate among academics, engineers, policymakers, and industry participants.
The Federal Communications Commission adopted rules codifying net neutrality
principles in December 2010.
16
The rules provide that fixed-broadband providers (such as
Verizon and Comcast, which provide high-speed wire-based Internet access to residential and
business customers) “shall not block lawful content, applications, services, or non-harmful
devices.”
17
The Commission’s order clarified that “[t]he phrase ‘content, applications, services’
refers to all traffic transmitted to or from end users of a broadband Internet access service,
including traffic that may not fit cleanly into any of these categories.”
18
In addition, these providers “shall not unreasonably discriminate in transmitting lawful
network traffic over a consumer’s broadband Internet access service.”
19
Although the
14
See, e.g., Public Knowledge, Key Issues: Net Neutrality, http://publicknowledge.org/issues/network-neutrality
(last visited Jan. 22, 2014).
15
Tim Wu, Network Neutrality, Broadband Discrimination, 2 J.
T
ELECOMM
.
&
H
IGH
T
ECH
.
L. 141, 145 (2003).
16
See Preserving the Open Internet: Broadband Industry Practices, 25 FCC Rcd. 17905, 17906 (2010) [hereinafter
Net Neutrality Rules].
17
Id. ¶ 63; see 47 C.F.R. § 8.5(a).
18
Net Neutrality Rules ¶ 64.
19
Id. ¶ 68; see 47 C.F.R. § 8.7.
47
8
Commission did not provide a definition of “unreasonable discrimination,” it noted that such
practices would include discrimination that harms an actual or potential competitor, impairs free
expression, or “inhibit[s] end users from accessing the content, applications, services, or devices
of their choice” online.
20
The Commission explicitly cited “pay-for-priority” agreements,
whereby a provider such as Netflix would pay for preferential treatment over the network, as an
example of a practice that is likely to be considered unreasonable, because it would give the
provider a competitive advantage over its rivals when delivering its product to consumers.
21
The Commission imposed somewhat less onerous rules on wireless providers, though
even this lighter touch imposes significant controls on this segment. The Commission recognized
that mobile broadband was a less mature technology than its fixed counterpart, and that the
wireless marketplace is more competitive than fixed broadband.
22
At the same time, however, it
reiterated that “[t]here is one Internet, which should remain open for consumers and innovators
alike, although it may be accessed through different technologies and services.”
23
Moreover, the
Commission’s rationales for ordering the rules “are for the most part as applicable to mobile
broadband as they are to fixed broadband.”
24
Under the rules, wireless broadband companies “shall not block consumers from
accessing lawful websites.”
25
The Commission found that wireless web browsing was
sufficiently “well-developed” to justify regulation. Consumers “expect to be able to access any
lawful website through their broadband service, whether fixed or mobile.”
26
Mobile applications
were a less mature technology, and the Commission recognized that downloading and running an
20
Net Neutrality Rules ¶ 75.
21
Id. ¶ 76.
22
Id. ¶¶ 94–95.
23
Id. ¶ 93.
24
Id.
25
Id. ¶ 99; see 47 C.F.R. § 8.5(b).
26
Net Neutrality Rules ¶ 100.
45
9
application may present network-management issues.
27
But the Commission also recognized that
mobile broadband providers had incentives to interfere with apps that competed against the
carrier’s own services. Therefore the rules also prohibited providers from “block[ing]
applications that compete with the provider’s voice or video telephony services.”
28
The
Commission explained that it intended to “proceed incrementally” with the wireless market and
would “closely monitor developments in the mobile broadband market” to determine whether
more regulations are required to admonish “any provider behavior that runs counter to general
open Internet principles.”
29
Through net neutrality, the Commission sought to safeguard against barriers to
innovation among Internet content and application providers. As the Commission explained, the
framework “aims to ensure the Internet remains an open platform . . . that enables consumer
choice, end-user control, competition through low barriers to entry, and the freedom to innovate
without permission.”
30
The rules sought to preserve an environment that “enables innovators to
create and offer new applications and services without needing approval from any controlling
entity.”
31
Without these restrictions, broadband providers’ actions might “reduce the rate of
innovation at the edge” of the network.
32
But to promote innovation on the Internet, the rules inhibited innovation by the networks
that bring the Internet to consumers. The Commission was explicit about its desire to prevent
broadband providers from changing their business models: “These rules are generally consistent
27
Both the fixed and mobile broadband rules were subject to exceptions for “reasonable network management,”
meaning a practice that is “appropriate and tailored to achieving a legitimate network management purpose, taking
into account the particular network architecture and technology of the broadband Internet access service.” Id. ¶ 10;
see 47 C.F.R. §§ 8.5, 8.7.
28
Id. ¶ 100, ; see 47 C.F.R. § 8.5(b).
29
Net Neutrality Rules ¶¶ 104–5.
30
Id. ¶ 10.
31
Id. ¶ 13.
32
Id. ¶ 14.
55
10
with, and should not require significant changes to, broadband providers’ current practices, and
are also consistent with the common understanding of broadband Internet access service as a
service that enables one to go where one wants on the Internet and communicate with anyone
else online.”
33
In fact, the Commission suggested that a company offering access to only a
portion of the Internet would be suspected of trying to evade the rules:
A key factor in determining whether a service is used to evade the scope of the rules is
whether the service is used as a substitute for broadband Internet access service. For
example, an Internet access service that provides access to a substantial subset of Internet
endpoints based on end users preference to avoid certain content, applications, or
services; Internet access services that allow some uses of the Internet (such as access to
the World Wide Web) but not others (such as e-mail); or a “Best of the Web” Internet
access service that provides access to 100 top websites could not be used to evade the
open Internet rules applicable to “broadband Internet access service.”
34
Before the rules were adopted, several critics recognized that the Commission was
biasing the market in favor of existing models and that it was myopic to sacrifice potential
advancements from network diversity. Professor Christopher Yoo had long suggested that
network differentiation, rather than network neutrality, may be the best approach to increasing
consumer welfare.
35
In comments filed in the net neutrality proceeding, Yoo noted that the
Internet is an incredibly complex phenomenon that exhibits growing heterogeneity among users,
meaning a one-size-fits-all access model is unlikely to meet customer needs.
36
As the market
becomes saturated, providers must be free to innovate to deliver increasing value to this disparate
array of consumers.
37
Yoo highlighted the wireless broadband market in particular, which faces
unique physical characteristics that may demand greater flexibility.
38
Companies often test new
33
Id. ¶ 43.
34
Id. ¶ 47.
35
Christopher S. Yoo, Beyond Network Neutrality, 19 H
ARV
.
J.L
AND
T
ECH
. 1 (2005).
36
Comments of Christopher S. Yoo, In re Preserving the Open Internet: Broadband Industry Practices, at 13.
37
Id.
38
Id. at 13–26 (noting, for example, that the physics of wave propagation, the need for congestion management, and the
heterogeneity of mobile devices suggest the need for greater flexibility when regulating the mobile access market).
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