Foreign Ownership Rules Loosened For Common Carrier and Aeronautical Licensees

FCC relaxes alien ownership restrictions for some, but NOT all, services.

While Congress continues to debate fundamental issues of immigration policy, the FCC has taken steps to make it considerably easier for aliens to own controlling and non-controlling interests in common carrier and aeronautical stations. The odd result is that aliens can now own such licenses but may find it difficult to immigrate here to operate them.

As we reported when the FCC initially proposed changing its alien ownership rules, the impetus for the FCC’s Second Report and Order (Second R&O) was two-fold. First, the Commission recognized that its cumbersome alien-ownership approval process was impeding foreign investment in the United States at a time when capital investment is being strongly encouraged. Second, the process of trying to identify exactly who a company’s foreign owners are and where they are from can be difficult, if not impossible. The Commission and its regulatees found that they were spending inordinate amounts of time and money trying to ascertain where alien owners were from for purposes of the rules without any concomitant public benefit for the effort involved.  

While the new rules retain the basic structure of requiring prior FCC approval for aliens either to: (a) indirectly control a US common carrier licensee, or (b) own more than 20% of a licensee company, they greatly simplify the procedures and detailed ownership accounting that created so much wasted effort. We hasten to emphasize that the rules continue their very strong prohibition on alien ownership or control of broadcast licensees above the benchmark levels, even though those licenses are statutorily eligible for the same treatment as common carrier and aeronautical licenses. This disparate treatment is coming under increasing attack, most directly by Commissioner Pai. For the time being the disparity remains firmly in place, although the Commission has invited comment on a request for “clarification” of limitations on alien ownership of broadcast licensees.

Here are some of the highlights of the new rules:

  • The FCC is eliminating the distinction between aliens from World Trade Organization (WTO) countries and those who are not. It seems to have consumed considerable resources of the FCC and parties involved to try to determine which aliens in a company’s structure were from WTO countries and which were not. The FCC has dropped that distinction but has retained its requirement that all foreign investment be subject to an “open entry standard.” The Commission did not really discuss what this meant, but in the past the FCC has used this to refer whether the alien’s home country provided open entry to U.S. investment – absent such reciprocal investment opportunities, the U.S. would look unfavorably on the alien being allowed to invest here. The WTO membership standard was a shorthand means of reaching that conclusion because all WTO members were presumed to allow such reciprocal opportunities.   It is unclear how dropping the WTO criterion but retaining the underlying “open entry” requirement simplifies things, since the Commission would still need to determine whether, in the cases of non-WTO member aliens, their countries allow open entry.
  • The procedures now permit named alien entities to be approved for increasing ownership levels in the future without the need for new approval.
  • The requirement that ownership interests below 5% be identified and tracked has been eliminated. This feature alone eliminates a lot of paperwork for what were truly de minimis interests.
  • The rules permit other subsidiaries and affiliates of the approved alien-owned company to benefit by an approval of their parent or affiliate.

The FCC estimates that these reforms will reduce the number of required alien ownership filings by a whopping 40% to 70% and will simplify those filings that do need to be made. The Commission emphasizes, though, that government agencies charged with investigating foreign ownership will continue to have the opportunity to perform that function in the context of either application approvals or requests for declaratory rulings.

Significantly, the Commission reiterated its position that companies must obtain permission either via the forbearance approach for ownership by aliens of significant non-controlling interests or by other FCC approval for alien control of these entities, before the alien ownership reaches the pertinent 20% or 25% threshold.  It also stressed that different approvals are required under the forbearance approach (applicable to non-controlling interests) and the standard approach (for controlling interests). This leaves in question the peculiar situation of Verizon Wireless, which did not obtain the requisite approvals before Vodafone acquired a greater-than-20% non-controlling interest in it.

The new rules adopted in the Second R&O are currently set to take effect on August 9.

Update: Comments Sought on Alien Ownership Proposal

Last September we reported on a request advanced by the Coalition for Broadcast Investment seeking "clarification" of the FCC's broadcast ownership limitations on alien ownership. You can find a copy of the Coalition’s letter request here. As summarized by the Commission, the proposal asks the Commission to “clarify that it will conduct a substantive, facts and circumstances evaluation of proposals for foreign investment in excess of 25 percent in the parent company of a broadcast licensee, consistent with and in furtherance of its authority under 47 U.S.C. § 310(b)(4)

The Commission has now solicited comments on the proposal. If you have any thoughts about the Coalition’s suggestion that you’d care to share with the Commission, you’ve got until April 15, 2013 to submit them; reply comments may be filed by April 30. You can file on paper, or electronically through ECFS (referencing MB Docket No. 13-50).

War of the Words: Coalition Urges Greater Alien Welcome

Broadcasters launch effort to promote greater alien ownership in broadcasting (while H.G. Wells rolls over in his grave).

Hot on the heels of the FCC’s recent liberalization of the restrictions on alien ownership of common carrier licensees, a group dubbed the Coalition for Broadcast Investment (the Coalition) has filed a petition seeking similar leeway for broadcast licensees.  The Coalition is an ad hoc group comprised of minority-oriented station owners as well as some of the largest multi-station group owners in the country.   The Coalition’s petition is styled as a “Request for Clarification” of the Commission’s policy with respect to alien ownership of broadcast stations, but it’s effectively a petition for a declaratory ruling on the issue presented.

Our regular readers will remember that in August the FCC released an order designed to clarify the power of the Commission to authorize significant indirect, non-controlling foreign interests in common carrier licensees. The August order addressed the fact that, as interpreted by the FCC, Section 310(b)(3) of the Communications Act bars aliens from indirectly owning 20% to 50% of a radio licensee but Section (b)(4) permits indirect alien ownership – with prior FCC approval – of controlling interests in radio licensees.   The FCC dealt with this odd anomaly by “forbearing” from enforcing the Section 310(b)(3) restriction on non-controlling alien interests. 

There were two catches to this solution.

First, the FCC’s authority (found in Section 10 of the Communications Act) to forbear applies only to common carrier licensees – not broadcasters. So even if it had wanted to, the FCC could not have ceased enforcement of the non-controlling interest prohibition as it applies to broadcasters. But there’s the rub: as far as we can tell, the FCC didn’t want to allow greater alien involvement in broadcast licensees. It has traditionally refused to countenance even non-controlling alien ownership interests of greater than 20% in broadcast licensees. This despite the fact that Section 310(b)(4) of the Act expressly grants the Commission the discretion to make a determination as to whether control of broadcast licensees by aliens is in the public interest or not. This broadcast-specific xenophobia seems to have been rooted in the classic sci-fi conceit that aliens, through their insidious control of broadcast stations, could take over American brains and, thereby, American society – with generally unpleasant consequences for all of us.

But now the Coalition, representing a broad sample of American broadcast entities, has decided that the time has come to revisit this policy.

The Coalition’s petition requests that the Commission declare that, rather than simply closing its ears to any petitions for alien control of broadcast licensees, it should now conduct a case by case review of whether such ownership is in the public interest – as the statute has always contemplated and allowed. In support of this change in policy, the Coalition points to a number of persuasive factors: the diversified and fragmented media market that now diminishes the potential dominance of broadcast stations; the significant benefits to the industry which would accrue from foreign investment in broadcast stations; and the current U.S. policy which in all other spheres of the economy encourages offshore investment in US assets.

Of course, even if the FCC were to agree with the Coalition here, aliens would still be left without the right or opportunity under any circumstances to own greater than 20% non-controlling interests in broadcast licensees, since, as noted above, the forbearance action taken by the Commission for such interests does not cover broadcast licensees. Still, the relief sought by the Coalition would be a solid step in the direction of rationalizing and regularizing the treatment of aliens under our communications laws.  

The Coalition petition was filed on August 31. As of September 5, the Commission had not yet requested public comment on it. Check back here for updates.

FCC Complicates, Simplifies Foreign Ownership Rules

The Communications Act imposes complex limits on alien ownership. The FCC’s historical interpretation of those limits has made them even more complex. The Commission has now revisited that interpretation – with mixed results.

We reported last year that the FCC initiated a rulemaking proceeding to consider how it might facilitate foreign ownership of licensed common carriers.   And we reported last spring that, in the initial rounds of that proceeding, the FCC received some industry feedback that its foreign ownership rules were limiting or hindering foreign investment unduly. As FCC veterans know, the Communications Act imposes certain restrictions on the ownership of broadcast and common carrier licenses by aliens. Specifically, Section 310(b)(3) of the Act forbids aliens from directly owning more than 20% in such licenses. Section 310(b)(4) precludes aliens from controlling a company that directly or indirectly owns more than 25% of such a license unless the FCC approves the ownership. 

Three score and 18 years after the Act came into being, the FCC has now taken a fresh look at those provisions.   It had previously decided that Section (b)(3) actually applies to indirect ownership interests even though, unlike Section (b)(4), Section (b)(3) doesn’t say that. The FCC has interpreted Section (b)(3) to apply when the alien entity does not control the licensee, while (b)(4) applies only when the alien does control. Non-controlling alien ownership interests between 20% and 50% were out of luck since an alien with an indirect 30% ownership interest would exceed the permissible level for non-controlling entities banned by (b)(3) but would not have the control necessary to permit the ownership to be approved. 

This interpretation presented a strange anomaly: an alien could indirectly own a controlling interest in a company so long as the FCC approved it, but an alien couldn’t own a non-controlling interest between 20 and 50% under any circumstances.  And indirect non-controlling  interests between 20% and 25% fell even deeper into the Twilight Zone – they seem to be fully permissible under (b)(4) without any FCC approval at all, but completely and irremediably banned under (b)(3). Commissioner Pai recognized this problem in his statement accompanying the Order – the Commission’s interpretation of the statute leads to “absurd” results.

The Commission could have easily dealt with this situation by simply declaring that (i) Section (b)(3) is limited to direct ownership interests, as it appears to be by its terms, and (ii) Section (b)(4) applies only when the indirect alien ownership is a controlling one, again, as the actual language of the statute indicates. This would have: (a) left (b)(3) to bar direct alien ownership interests above 20% entirely, as Congress seems to have intended; (b) permitted indirect but non-controlling alien interests of any level without the need for FCC approval at all; and (c) would have allowed the FCC to approve indirect controlling alien ownership interests where more than 25% of the stock is owned by aliens upon a proper showing. That would have been a simple and straightforward construction of the statute, reducing the need for FCC alien ownership rulings – and alien angst – significantly; it would also have applied both to broadcast and common carrier licensees.  

The Commission did not, however, take that approach.

Instead, apparently unwilling to abandon its historical interpretation, the FCC had to devise a complicated fix. Its solution was to “forbear” from enforcement of the statute as it had interpreted it. The Act permits the FCC to forbear upon certain findings from enforcing statutory mandates with respect to common carriers but not with respect to broadcasters.

The FCC made the necessary findings and concluded that it would forbear from enforcing the ban on indirect non-controlling alien ownership between 20% and 50% upon a showing by the alien similar to the public interest showing required under current procedures when an alien seeks approval under Section (b)(4).   This approach does have the salutary effect of treating all indirect non-controlling ownership interests above 20% in a consistent way. It also eliminates the confusing doughnut hole between 20% and 25% that had existed before. The only problem is that aliens now have to seek prior FCC approval before acquiring non-controlling indirect interests that the Act on its face seemed not to care about at all.

Wasting no time, the Commission published its report and order in the Federal Register less than a week after that report and order was adopted – meaning that the new approach became effective as of August 22, 2012.

The FCC declared that its newly-adopted approach “will clarify and simplify Commission regulation of foreign ownership of common carrier licensees, thereby facilitating investment from new sources of equity financing and enhancing opportunities for technological innovation, economic growth, and job creation.”   What do you think?

Qwest Quest for Forbearance Quashed

Tenth Circuit lets FCC “move the goalpost” in on-going development of forbearance policy.

Despite its obvious concern about the fact that the FCC had “moved the goalposts” with little notice, the U.S. Court of Appeals for the Tenth Circuit has cut the Commission some slack. The court has upheld the FCC’s denial of a request by Qwest Corporation for forbearance from the application of certain dominant common carrier obligations for its local exchange operations in the Phoenix market. Qwest is the former U.S. West Bell Operating Company, later acquired by and now doing business as CenturyLink. Its request, which it framed to fit within analytical requirements the FCC had previously used, fell short when the FCC shifted the regulatory goalposts for such matters.

Two general principles are at work here. First, thanks to the 1996 Telecom Act, incumbent local exchange telephone carriers (ILECs) that are considered “dominant” in their market must, in effect, “share” their networks with competitors by providing those competitors with access to their networks, and on top of that providing access existing network elements on an unbundled basis (i.e., you don’t have to buy packages that include services or facilities you don’t want) at “just” and “reasonable” rates. For ILECs, that’s the bad news.

The good news is that the Act also requires the FCC to forbear from imposing those obligations on any particular ILEC if those obligations are: (a) not necessary to ensure just, reasonable and nondiscriminatory practices; (b) not necessary for the protection of consumers; and (c) consistent with the public interest. If an ILEC wants forbearance, it files a petition asking for it; that petition is “deemed granted” unless the FCC denies it within a year.

The FCC’s approach to analyzing the three statutory factors has shifted repeatedly since the Commission’s earliest efforts to give effect to the 1996 Act. In its forbearance petition for the Phoenix market, Qwest tried twice to keep up with the FCC’s shifting standards, to no avail – the Commission shifted yet again, leaving Qwest with the short end of the stick. Frustrated, Qwest complained to the Tenth Circuit that the Commission was acting arbitrarily. The court acknowledged that the FCC’s analysis had zigged and zagged and that Qwest had been given only limited notice of what might be expected of it. Despite that, the court concluded that the FCC’s approach was not fatally flawed.

The zig-zagging most relevant here started in 2004, when the FCC tackled a Qwest forbearance petition in Omaha. In that instance the Commission agreed that forbearance was justified, using an analysis based on market share, because Cox Cable provided sufficient facilities-based competition in the market, and wireless cellphone services also constrained the ILEC’s behavior.

On the heels of that decision other ILECs sought similar treatment. In one case, Verizon asked for forbearance in a half dozen markets. The Commission denied Verizon’s request, using a different approach to forbearance analysis. Verizon took that decision to the U.S. Court of Appeals for the D.C. Circuit. 

Shortly after Verizon’s request was filed with the Commission, but before the Commission had acted on it, Qwest also filed for forbearance in four markets (including Phoenix). It, too, was turned down, and it, too, appealed to the D.C. Circuit. The court held Qwest’s case in abeyance while it considered Verizon’s, and ultimately remanded the Verizon case to the FCC, concluding that the FCC had not adequately explained the changed analysis underlying the denial of Verizon’s request.   Since the denial of the Qwest request was also based on that unexplained analytical change, the Qwest case, too, was sent back to the FCC at the FCC’s request.

Qwest then renewed its petition for forbearance, this time limited to Phoenix. Qwest modified its showing to include more market-specific information that the FCC had, in its first denial of Qwest’s Phoenix request, said would be necessary. Overall, Qwest argued, the competition figures relative to the Phoenix market, were essentially as good as those that had led to forbearance in Omaha – so forbearance in Phoenix should be a no-brainer.

Maybe, maybe not, replied the FCC. We have a few problems with the analysis, once again. 

For example, how to gauge the competitive effect on ILECs of wireless services. In 2004-2007, the Commission had included wireless-only customers in determining an ILEC’s market share – the theory being that customers who had “cut the cord” had done so in reaction to the ILEC’s prices. Since precise information about the prevalence of “cut-the-cord” customers in particular markets wasn’t generally available, the Commission applied a national estimate to the market in question.   But in addressing the re-filed Phoenix request, the FCC changed its mind and decided that better data were available, so it wanted market-specific data on cord-cutters.

In its post-remand Phoenix forbearance request, Qwest provided market-specific information as best it could, but the Commission had by then moved on in its thinking. Cord-cutting statistics might be relevant if the cord-cutting occurred in response to ILEC pricing, but only if the availability of wireless service would have a “material price-constraining effect” on wireline voice services. Qwest hadn’t shown that to be the case – whether or not it knew that the FCC expected it to provide that information being beside the point.

Another problem with relying on the Omaha precedent: as it turned out, the behavior that the FCC had anticipated after granting forbearance in Omaha did not come to pass. One competitor, McLeod USA, cut its operations way back, and the ILEC didn’t make any enticing offers to encourage McLeod to change its mind. Integra, another potential competitor, decided not come out and play in Omaha at all. And ILEC prices did not go down. Net result: the competitive playing field was worse following the Omaha forbearance decision. Perhaps our analysis there missed the mark, mused the FCC.

So the Commission concluded that there are apparently reasons other than price that drive customers to abandon wireline in favor of cellphones. Plus, its earlier notion that two competitors in a market might really compete price-wise had turned out to be a bit off base, possibly because in such circumstances there is considerable opportunity for tacit price coordination. 

With its confidence in its previous analytical approaches thus shattered, the Commission zigged again. It said that the real test here, based on antitrust law, should be whether competition will constrain the ILEC from imposing a “small but significant and nontransitory” price increase. Such constraint didn’t occur in Omaha, so maybe we had better look at just conventional wireline and VoIP competition, leave wireless out of it, and go from there. Under that analysis, it doesn’t look like anyone else is poised to enter the Phoenix market, and a duopoly of Qwest and Cox is not enough to justify forbearance. So Qwest’s Phoenix request was denied yet again. At that point Qwest took its case to the Tenth Circuit. (Why Qwest chose the Tenth rather than the D.C. Circuit is not clear – but, given Verizon’s earlier success in D.C. and Qwest’s lack of success in the Tenth, Qwest may now regret its decision to switch courts.)

Qwest howled about the FCC’s repeated zig-zags, and the Court said that the FCC surely did “move the goalposts.” But the FCC managed to prevail: while it may not have engaged in an “optimal mode of administrative decision-making,” the decision wasn’t illegal because it wasn’t not arbitrary and capricious.

The Courts have often bashed the FCC for changing its mind without adequate explanation. Here, however, the agency’s explanation was found to be sufficient: the FCC had applied an analytical framework in Omaha, and the results were not what the Commission had anticipated. That’s a fair enough reason for re-thinking the analytical framework, particularly since the ultimate objective – i.e., to retain regulation unless and until market power is no longer significant – remained unchanged. The Omaha approach apparently did not result in constraints on market power, so the FCC was well within its authority to try to come up with a reasonable alternative analysis. Most importantly, that effort was entitled to the deference that courts normally show to administrative agency interpretations of their own governing statute.

The FCC squeaked by here – it’s not often that a court approves agency action after chiding the agency for “moving the goalposts” and engaging in something other than an “optimal mode” of decision-making. The Commission succeeded in convincing the court that the FCC is not just flailing around blindly, but rather is struggling, rationally and deliberately, to get a handle on an enormously complicated problem. In particular, the court confirmed that the FCC can change its regulatory course as long as it gives the public adequate notice and opportunity on anticipated changes (which it did here, although just barely?). It’s not carte blanche to do anything to anyone any time, but this is one more court decision that will help the FCC craft future actions to meet changing circumstances in the rapidly evolving communications environment.

In the wake of the Tenth Circuit decision, Chairman Genachowski wasted no time issuing a press release celebrating the fact that the FCC “is now winning court cases more than 90 percent of the time.” Such claims tend to raise eyebrows. To be sure, the FCC’s track record in the appellate arena seems to have improved in recent years, but a lot of appeals from FCC decisions are of limited merit and, thus, relatively easy wins for the agency. If the Chairman is using all FCC appellate wins to get to his 90% figure, that’s a little like calculating an MLB team’s overall record based not only on regular season play, but also on pre-season scrimmages with various farm teams.

What the win percentage may be in cases of major importance has not been advertised. The FCC has indeed had some significant victories in the past few years, but it has also suffered its share of setbacks. Perhaps more importantly, it’s currently facing a number of major court challenges involving high-stakes issues, with aggressive, well-heeled appellants on the other side. Check back here for updates (but not necessarily statistics – we’ll leave those to the Chairman for now.)

Update: Comment Deadlines Set in Alien Ownership Inquiry

A week or two ago we reported on a request for further comments in the alien ownership proceeding. The FCC’s notice asking for more comments has now made it into the Federal Register, which establishes the deadlines for anyone interested in chipping in his/her two cents’ worth. Comments in response to the notice are due by May 15, 2012; reply comments are due by May 25.

FCC Seeks Further Input on Foreign Ownership Rules

Commission contemplates forbearance approach to direct alien ownership limits.

Last fall we reported on an FCC Notice of Proposed Rulemaking in which the FCC is considering how to simplify the application of the foreign ownership restrictions that appear in the Communications Act.   After digesting the comments submitted in that proceeding, the FCC has asked for more input. It seems that a number of commenters were concerned about the interplay of Section 310(b)(3) of the Act with Section 310(b)(4).

Section 310(b)(3) strictly forbids ownership of a broadcast or common carrier licensee by a corporation which is more than 20% owned by aliens or their representatives or by foreign governments or foreign corporations.   In other words, no more 20% of the licensee entity itself may be owned by aliens or their representatives. Section 310(b)(4), however, permits licensee entities to be owned by companies that are themselves owned by aliens or their representatives, so long as the FCC OKs the ownership. In other words, indirect ownership of licensee entities by any quantum of aliens is permissible as long as the FCC approves it.   These provisions have long been thought to define two separate classes of ownership, direct and indirect, with distinct restrictions applicable to each.

Apparently Verizon – a company whose Cellco Partnership subsidiary has significant foreign ownership – pointed out that the FCC’s 2004 effort to provide guidance on these matters actually confused things. Those 2004 guidelines seemed to treat indirect interests in licensees as being subject to the strict 20% prohibition of 310(b)(3) rather than the more liberal 25% provision applicable to indirect interests under Section 310(b)(4). Verizon correctly noted that this makes no sense, and the FCC seems to have heard Verizon’s plea.

The FCC seeks comment on this specific issue. It also proposes a possible solution. Under the Communications Act, the FCC is allowed to forbear from applying any provision of the Act to a telecom carrier if the Commission finds such forbearance to be in the public interest, unnecessary to protect consumers, and unnecessary to ensure just, reasonable and non-discriminatory rates.   Accordingly, the FCC asks whether it should use that tool to get around the strict prohibition of Section 310(b)(3) if it applies to indirect interests. A company would simply have to make a showing similar to the one now needed to obtain Section 301(b)(4) approval and the Commission would then routinely forbear from applying the prohibition.

This seems to us to be a cumbersome and unnecessary procedure that could be handled much more directly. If the FCC simply interpreted 310(b)(3) straightforwardly to apply only to direct ownership interests in licensee – as Congress seems to have intended – the Commission would limit the application of that section to a very limited number of situations while handling the indirect ownership scenario through the now tried and tested Section 310(b)(4) approval process.

The forbearance process floated by the FCC in its recent notice can apply only to telecom licensees because the forbearance process is limited to that class of regulated entities. By contrast, the course we are suggesting would have the added benefit of applying to broadcast licensees since it would apply across the board to all licensees.  However, since to date the FCC has virtually never approved indirect foreign ownership of more than 25% of a broadcast entity, broadcasters under our approach would get only the marginal relief of being able to have up to 25% foreign ownership without running afoul of the statute.

There’s a short window to comment on this one – 21 days from publication in the Federal Register, plus ten more days for replies. We’ll let you know when that happens.

Deadlines Set In Further Net Neutrality Inquiry

Less than a week ago we reported on the FCC’s inquiry into two “under-developed issues” relative to the Network Neutrality debate. (The issues on the table include how the Commission’s Open Internet approach should address: (1) certain “specialized” services –  referred to in the NPRM as “managed or specialized services”; and (2) mobile wireless platforms.) The Commission’s notice has now been published in the Federal Register, thus establishing the deadlines for comments and reply comments. If you’re planning on filing comments, you have until October 12, 2010; reply commenters will have until November 4, 2010.

FCC Narrows Focus In Network Neutrality Dispute

Public notice seeks further comments on specialized and wireless services

 As all Network Neutrality aficionados know, last October the Commission took a huge step toward adopting Net Neutrality rules by issuing a Notice of Proposed Rulemaking (NPRM) in which it laid out six principles that would be codified in the FCC’s rules. (Check out our post about the NPRM here.) The proposal was, and remains, ambitious – and subject to considerable debate. That debate is complicated by the fact that Internet-related technological and commercial developments and innovations continue despite, or possibly because of, the pendency of the NPRM.

Apparently responding to some of those developments and innovations, the Commission has now issued an inquiry into two “under-developed issues” in its on-going “Open Internet” deliberations. In particular, the FCC is focusing on how its Open Internet approach should address: (1) certain “specialized” services (referred to in the NPRM as “managed or specialized services”); and (2) mobile wireless platforms.

Much has happened in the 10 months since the NPRM was released. Over and above the tens of thousands of comments which have been submitted in response to the NPRM, the Open Internet approach has been addressed, often contentiously, in Congress, at the FCC, and in countless other public venues. The discussion has been dramatically affected by the D.C. Circuit’s Comcast decision, which undercut the jurisdictional basis for the proposed Open Internet rules.  Chairman Genachowski has announced a novel “Third Way” proposal – not formally adopted by the Commission, but nevertheless supported by two other Commissioners and the FCC’s General Counsel – which might allow the Commission to achieve its Open Internet goals despite the limitations imposed by the Comcast decision. Negotiations have been held among the major players under the auspices of the FCC and Congress. And Verizon and Google have reached agreement on a “Legislative Framework Proposal” (Verizon-Google Proposal) intended, in their words, to “preserve the open Internet”.

With so many moving parts, it's little wonder that the FCC needs more information.

The Commission’s latest inquiry seems to respond in large measure to two aspects of the Verizon-Google Proposal. According to Verizon and Google: (1) as long as they comply with four general Open Internet principles (relating to consumer protection, transparency, non-discrimination, network management), Internet service providers should be allowed to provide other broadband services that would not be subject to the Open Internet rules; and (2) wireless Internet access service providers should be subject only to the transparency principle at this time. 

Well, isn’t that special?

With respect to the question of “specialized” services, the Commission is concerned that carving out exceptions for such services could undermine the ultimate effectiveness of the Open Internet principles. “Specialized” services include things like subscription video, telemedicine, or business services to enterprise customers. They’re services that are provided over the same last-mile facilities as “broadband Internet access service” (BIAS). They can in many instances look just like the kind of services normally available to the public through standing Internet access. But they are available only to those who sign up, and they typically incur costs beyond ordinary Internet access.

And that’s the problem.

Such “specialized” services can attract important private investment and can provide those willing to pay with new and valued services. There is therefore good reason to foster them by, for example, exempting them from Open Internet principles. In the NPRM the Commission appeared to recognize this and, accordingly, sought comment on how to define such services.

But the Commission is now focusing more on the possible risk that, if providers avail themselves of such an exemption, the whole point of those principles might be defeated. Providers might use the exemption to avoid Open Internet principles with respect to delivery of services that are substantially similar to standard broadband service. Or providers might devote so much of their capacity to such “specialized” services that the incentive and resources to expand standard broadband service would “wither”. The potential for anti-competitive conduct exists as well. And the risk of any of these undesirable consequences would be exacerbated if the public’s choices of Internet broadband service providers are unduly limited.

With these concerns in mind, the Commission suggests six possible approaches:

Definitional Clarity” – This would involve defining BIAS “clearly and perhaps broadly”, with the Open Internet principles applicable to such service. “Specialized” services not subject to the Open Internet principles would be those services with a “different scope or purpose than broadband Internet access service (i.e., which do not meet the definition of broadband Internet access service)”,. This is somewhat similar to the approach suggested in the Verizon-Google Proposal, which characterized the exempt services as “additional or differentiated services . . . distinguishable in scope and purpose from broadband Internet access service”. The main difference, it would appear, is that the FCC is contemplating a more inclusive definition of BIAS that would, presumably, narrow the range of services entitled to the exemption.

Truth in Advertising” – This heading – quoted directly from the FCC’s inquiry – is curious. The Commission’s brief summary under this heading refers to prohibiting providers from marketing “specialized services” as a substitute for BIAS. The Commission also suggests requiring providers to offer BIAS as stand-alone service. It is not clear that either of those suggestions necessarily involves “truth in advertising”.

Disclosure” – This approach would entail the required disclosure, by providers, of information about specialized services, including their effect on capacity and the BIAS market.

Non-exclusivity in Specialized Services” – Commercial arrangements for the offering of specialized services would have to be offered to all qualified parties on the same terms.

Limit Specialized Service Offerings” – Broadband providers would be allowed to offer “only a limited set of new specialized services, with functionality that cannot be provided via broadband Internet access service”. The Commission offers telemedicine as a possible example.

Guaranteed Capacity” for BIAS – Broadband providers would have to keep “providing or expanding” capacity allocated for BIAS regardless of any specialized services offered. Moreover, the provision of specialized services would be prohibited from “inhibiting the performance of broadband Internet access services at any given time, including during periods of peak usage”. Some of these suggestions are strong medicine, although for now, merely a starting point for discussion.

Going mobile

With respect to mobile wireless platforms, the FCC has asked in the NPRM how, to what extent, and when openness principles should be applied. Again, the Commission is concerned about furthering innovation, private investment and competition in the industry. In the most recent inquiry, the Commission seeks to update the record on these questions in light of intervening developments.

The two intervening developments that appear most significant to the Commission are: (1) the Verizon-Google Proposal suggestion that wireless broadband be exempt from all Open Internet principles other than transparency; and (2) the recent rise of wireless pricing plans based on the amount of data the customer uses. The latter, in particular, raises a serious question.

In essence the issue boils down to this. The need for “network management” – i.e,, blocking or slowing traffic – generally increases to the degree that network traffic approaches or exceeds network capacity. If usage-based pricing reduces congestion on wireless networks, will wireless operators have less need to use traffic management techniques that trigger open Internet issues?  

The latest inquiry raises far-reaching questions, and poses potential solutions, that are likely to generate considerable debate. Look for a further influx of commentary, for and against, as the deadline for comments approaches. (As of this writing the deadlines for comments and replies have not been established. Check back to for updates.)

There is two additional intriguing aspects of the latest inquiry (and Chairman Genachowski’s separate statement in support of it). First, according to the notice, the “discussion” triggered by the Open Internet proceeding “appears to have narrowed disagreement on many of the key elements of the framework proposed in the NPRM”. Genachowski’s statement strikes a similar note. It is, of course, impossible to say for sure whether that gloss on the on-going deliberations is accurate. Certainly the Chairman would prefer it to be so. The response to the most recent may or may not tell a different story. 

Second, whenever the comment and reply deadlines happen to be set, the window for replies will not close before November 2. . . which happens to be Election Day. That means that the conclusion of the Open Internet proceeding, once expected by some to be set for September, will not happen before the upcoming election. In view of the high profile the issue of Network Neutrality has had on Capitol Hill – it’s probably no accident that Verizon and Google titled their magnum opus a “Legislative” proposal – an intervening election could have a significant impact on the fate of the Open Internet proceeding.   We shall see.

The Third Way: What's It All Mean?

Notice of Inquiry seeks definitions to help shape Third Way. We hope the FCC steps carefully in looking for answers.

When an appeals court here in D.C. overturned the FCC’s attempt to enforce “Net Neutrality” in April (reported here and here), the FCC had to come up with a new jurisdictional basis for its Internet policies. It needed a way to support not only the net neutrality rules it proposed in 2009, but also key elements of its proposed National Broadband PlanAs noted by my colleague Mitchell Lazarus, the FCC’s recently released Notice of Inquiry (NOI) attempts to craft a “just right” jurisdictional answer. The proposed “Third Way” is offered as a compromise between an overly burdensome, telephone-type Title II approach, and the Title I approach rejected by the Comcast court. In the process, the NOI raises – both intentionally and otherwise – revealing and challenging questions.

Trouble from the Start

Even a careful reading of the NOI leaves largely unanswered a basic question: What service is the FCC trying to regulate? The stated goal in the NOI is to define a pure Internet connectivity service which the FCC would regulate a “telecommunications service”. (The remainder of Internet access would be left under the current classification of “information service”.) But defining that narrow connectivity service will not be easy, and may not even be possible.

The problems begin in the first footnote of the NOI, where the FCC unhelpfully introduces new terminology, or (more accurately) uses a variation of an established term to mean something possibly different. Where the Commission had previously used the term “broadband Internet access service” for a bundle of services that allow end users to connect to the Internet, it now drops the term “access” and calls the bundle “broadband Internet service”. This seems backwards. According to Commissioner Copps, at least, the Commission is seeking only to regulate how people “get to the Internet”, not the Internet itself. Deletion of “access” certainly suggests that that the target of FCC regulation is getting broader, not narrower.

In the NOI the FCC refers to the component which it would regulate as “Internet connectivity service” or “broadband Internet connectivity service”.  This, too, gives rise to potential confusion and a need for careful definition.  

Historically, the Commission has defined the term “Internet connectivity” to include functions that “enable [broadband Internet subscribers] to transmit data communications to and from the rest of the Internet.” But this definition is probably  too broad to apply to the theoretically more narrow and discrete term “Internet connectivity service”. Apparently sensitive to this none-too-subtle nuance, the Commission solicits information on the specific functions necessary to allow end users to merely access the Internet, without more.

The Commission has previously used the term “Internet connectivity” to refer to a wide range of elements, including: the establishment of a physical connection to the Internet; interconnecting with the Internet backbone; and sometimes provision of numerous other features (think protocol conversion, Internet Protocol address assignment, domain name resolution, network security, caching, network monitoring, capacity engineering and management, fault management, and troubleshooting). Now the Commission wants to revisit “Internet connectivity.” But who is to make the call? Should ISPs be given latitude to define their own telecommunications service, should the FCC define only “bare minimum characteristics” of such service, or should the FCC step in and define “functionality, elements, or endpoints of Internet connectivity service”? Complicating the picture are important differences among the various technologies for delivering broadband Internet, and even among providers’ implementations of those technologies.

Re-engaging in this kind of functional analysis could be a dangerous task for the FCC.  After similar analyses, a pair of Commission orders in 2002 and 2005 concluded that the transmission component is so integrated with the finished Internet service as to make the two a single, integrated offering.  Is there adequate justification – based, for example, on changes in the functional components over the last decade – for adopting some alternate definition that splits the previously integrated components? In the NOI the Commission floats a few candidate explanations, none very persuasive.

Such salami-slicing can also have unintended consequences. To its credit, the FCC does ask commenters to describe the possible consequences of classifying Internet connectivity as a telecommunications service. But all of the business and technical consequences of such reclassification may be impossible to perceive at this point. And mistakes now could be hard to correct later.

Can the FCC Prevent “Un-forbearance”?

There is considerable agreement that full-blown traditional Title II regulation of Internet access would be unduly burdensome on ISPs, and ultimately harmful to the Internet. A key element of the “Third Way” solution is intended to limit some of that burden. That is, the Third Way includes a promise to forbear from applying most of the Title II statutory obligations to Internet connectivity.

A swell idea. But just how permanent could that promise be?

ISPs remain concerned that some future Commission could alter, or scrap entirely, the decision to forbear. Could the Genachowski Commission establish a policy of forbearance that would be immune from reversal at some point down the line? There is precious little precedent on these issues, although normally general administrative law contemplates flexibility to allow agencies to adjust rules and policies to deal with changed circumstances. Still, in the NOI the Commission seeks comment on possible provisions to “establish a heightened standard for justifying future unforbearance.” Crafting such provisions will take great creativity – and even if a plausible approach is identified now, it’s difficult to imagine that future Commissions, and (perhaps more importantly) future courts, will necessarily feel themselves permanently handcuffed by today’s Commission.

Make no mistake: today’s Commission is acutely aware of the problem. The NOI describes a sort of worst-case-scenario for ISPs. It runs like this. First, the FCC classifies Internet connectivity as a Title II service but forbears from applying many of the Title II obligations. Someone appeals the order, as someone usually does. The reviewing court upholds the Title II classification, BUT vacates some or all of the forbearance, thus requiring the FCC to regulate more heavily than the current FCC thinks is necessary or appropriate.  (Yes, a court could do that, if it thought the statute requires it.) The result: The Internet would be subject to precisely the full-tilt Title II burdens that the Genachowski Commission hopes to avoid through the Third Way.

In an attempt to plan ahead, the FCC asks how it might deal with that scenario. One option, of course, would be to undo the Title II classification, much as the proposed Title II regime would undo earlier orders that combined transmission and information services into a single offering under Title I. But the undoing would be neither easy nor quick, and would itself be subject to judicial review. Just the possibility of these events creates a degree of regulatory uncertainty that many people (including Commissioners McDowell and Baker) fear will limit crucial investment in the nation’s broadband network. But  the FCC’s current route to Net Neutrality runs straight through this particular minefield.

The NOI asks some hard questions. We look forward to seeing the FCC’s answers.

[Post-script: As this blog was being prepared for posting, the press reported that a number of top FCC officials have recently met with representatives of AT&T, Verizon, Google, Skype and the National Cable & Telecommunications Association – and possibly others – in what were referred to as “negotiations” looking toward a possible compromise that would enable the FCC to enforce Net Neutrality rules without having to overhaul the regulatory rationale for such rules. While not unheard of, this sort of gathering this early in a proceeding is certainly unusual.   It will be interesting to see how much of the resolution to this complex regulatory problem will be negotiated among the parties, and how much will be imposed by the Commission.]