Law and Economics of Net Neutrality

      [Music]

 

Emily Manning:  Hello, everyone, and welcome to this Federalist Society virtual event. My name is Emily Manning, and I'm an Associate Director of Practice Groups with The Federalist Society. Today, we're excited to host a discussion on the "Law and Economics of Net Neutrality."

 

Our moderator today is Lawrence J. Spiwak, President of the Phoenix Center for Advanced Legal and Economic Public Policy Studies, and we're also joined by Dr. George S. Ford, Chief Economist at the Phoenix Center for Advanced Legal and Economic Public Policy Studies. If you'd like to learn more about today's speakers, their full bios can be viewed on our website, fedsoc.org.

 

After our speakers give their opening remarks, we will turn to you, the audience, for questions. If you have a question, please enter into the Q&A function at the bottom of your Zoom window, and we will do our best to answer as many as we can.

 

Finally, I'll note that, as always, all expressions of opinion today are those of our guest speakers, not The Federalist Society. With that, thank you for joining us today, and Larry, the floor is yours.

 

Lawrence Spiwak:  Thank you so much, Emily. Good morning, good afternoon, everybody. My name is Larry Spiwak. As Emily said, I'm the President of the Phoenix Center. I also serve on the FedSoc's Communications Executive Committee, and I also serve on the Anti-Trust Committee, so I'm very active at the FedSoc.

 

And with me is the Phoenix Center's Chief Economist, Dr. George Ford. As you can imagine, as I'm the lawyer and I don't do math, I'll be handling the law, and George will be handling the economics. We're very lucky to have George talk about this issue. George was actually the central citation in the FCC's Restoring Internet Freedom order.

 

And so what we are doing today -- Just for those of you who are unfamiliar with net neutrality, net neutrality has been going on in one form or another for about 20 years. We actually looked on our webpage, and we discovered that the first net neutrality paper we did was around 2003. So net neutrality has managed to pay for our kids' college and probably will go right through our retirement, and in the next generation, will come up underneath us.

 

So recently, the reason why we're now talking about it again -- Well, at the beginning of the Biden administration, it was very clear that the Biden administration—they said this in their executive order on competition—wanted to reinstate Title II common carrier regulation for the internet. It got delayed quite a bit because they could not get a third FCC commissioner in place, but they recently did a few months ago, Commissioner Anna Gomez.

 

And now the FCC is rushing to accomplish the entire regulatory agenda pretty much as fast as they can to beat the Congressional Review Act deadline, which will probably come sometime in the spring. So to this end—and this was again, no surprise—about a month or two ago, the FCC released, again, a Notice of Proposed Rulemaking to reinstate common carrier regulation on the internet.

 

So what we're going to do -- And the purpose of this is twofold. I'm going to start by going through the sordid history of net neutrality and how the law has evolved over the last 20 years or so, and I think that's very important as people start to think about this. After that, what hasn't changed is the economics of this business. And then George will talk about the economics of the problem and how the FCC is thinking about it, correctly or incorrectly, and I'll leave that up to Geoge.

 

So before I begin, I will say this: For those of you all who want to follow along at home, George and I have probably written more on this than most. And I guess about a month ago, I wrote a piece for The Federalist Society blog called "The FCC Returns to the Law and Economics-Free Zone," where I put hyperlinks to a lot of our research in there. So a lot of what we're talking about today is discussed in that blog, but there are links if you want that.

 

And then George is also going to be talking about a new paper which we released this morning, which updates a lot of the investment effects, which is called "Investment in the Virtuous Circle: Theory and Empirics." That is available on our webpage, www.phoenix-center.org. And if you also go on our webpage and look at the net neutrality section of that, you'll find all these papers and law reviews, etc., etc.

 

So let's talk about the law first. Now, full disclosure: Net neutrality, given sort of an idea -- But when you put that into practice, it's a very complicated issue and raises just a myriad of issues that come up: ratemaking, forbearance, preemption, whole attachments, privacy, just a whole host of stuff. As we don't have time during this teleforum to dive into every single issue, I'm going to try to keep it at the academic level and highlight what I think are the primary issues that folks should be thinking about as this iteration of the fight goes on.

 

So let's start with the Communications Act itself. For better or for worse, when it comes to deregulation, the Communications Act is what I would describe as binary. For all intents and purposes, there's Title II, which deals with common carrier telecommunication services. Now, there is forbearance under Title II, but that comes under Section 10 of the Communications Act, and that is a very detailed statutory criteria that you have to satisfy. And, of course, what one commissioner can forbear from, the next can un-forbear from.

 

The other is this notion of an information service under Title I of the Communications Act. So let's go back in time to -- And they are essentially unregulated. An information service, if I date myself, was originally things like what do you do about voicemail? Is that a telecommunication service? Of course not.

But again, let me step back. So let's go back in time, the early 2000s, where this fight and this discussion of Title I versus Title II came about. In the early 2000s, the 1996 acts unbundling regime was still raging hot and heavy, but it was coming to an end, and you had things like the introduction of Voice over Internet Protocol coming in. Now, if you're an information service, you didn't have to pay access charges under Title II, and I think then-Chairman Michael Powell deserves a lot of credit for that.

 

The FCC had always had a tradition of -- In order to spur new entry and to encourage new technologies, they had a paradigm of, they would keep regulation of incumbents in place, but then they would reduce as much entry barriers as they could for new entrants, and that would then spur entry. And that was the motivation behind the FCC's competitive carrier paradigm, which got long-distance service going.

 

And they tried to do that with the then-burgeoning broadband service as well as for Voice over Internet Protocol. So the decision was made back in the early 2000s. They said, "We don't want to do the Title II route" because it was perceived that the danger -- that they could flip flop, and they wanted to make a very clear statement that information services were never going to be touched by the legacy common carrier regulations of Title II.

 

So the FCC started—and this is what Michael Powell started with—with the cable modem work, which eventually went to the Supreme Court in a case called Brand X. And the decision was, "Well, does the FCC have the authority to reclassify service which was telecommunications and information service?"

 

And there was a lot of bickering back and forth about whether actually the statutory definition met or was failed, but the long story short of this decision, which is the big takeaway from this, is that the Supreme Court said, "Look, the Communications Act is ambiguous. The FCC has the authority to interpret it statute under Chevron. Therefore, we will uphold the Commission's decision to reclassify then-cable modem service from a Title II service to a Title I service."

 

And that decision in Brand X haunts us to this day—and I'll get to this a little bit—because we know the act is ambiguous. And so, under Supreme Court precedent, you can change your mind so long as you articulate a legitimate policy reason for doing so, and that's probably why, among other reasons, we've had this flip flop.

 

But nonetheless, the policy decision was made. They decided that cable modem was an information service. Shortly thereafter, the FCC then proceeded to issue independent orders reclassifying broadband provided by wireline providers, they issued an order saying that broadband provided by wireless providers was also an information service, and then finally, they actually even issued an order saying that internet provided by broadband powerline providers is also an information service. That one didn't really take off, but there is an order for that.

 

So we now have this unregulated environment where we're starting to get the investment in. You know, they used to describe it -- If I remember, the phrase was new wires, new rules, as opposed to legacy stuff. So we're starting to have -- And, again, you're getting the beginning of VoIP coming in, the beginning of the internet. I'm sure many of you remember getting internet service, for those of us who date ourselves, first 256 kilobits, then maybe you got 756 kilobits. Oh, my goodness. It was wonderful compared to what we have now, but understand the environment in which this came.

 

But nonetheless, as the desire to regulate is often very powerful to overcome, you started to hear these anecdotes about, "Oh, my goodness, the Bell operating companies—"and again, I date myself with a very old term—"or BOCs, were engaging in these horrible conduct and we need rules to protect blocking."

 

Well, what were these so-called incidences? One of them was a concert that was broadcast by, I think it was AT&T. And Eddie Vedder, the rock star, said, "F George Bush," and somebody pushed a button and censored it. Now, I remember George and I at the time thinking probably, at that time, during the middle of the Gulf War, many people on the internet were screaming nasty things about President Bush, but because one guy in a truck pushed a button, somehow that was indication that we need to have massive government regulation.

 

The other, more prominent incident was the barbershop quartet BitTorrent incident. In the old days, BitTorrent was a program that essentially -- It was a network. Everybody on the computer network who had the program, you shared among -- But there was no traffic management involved.

 

And a guy who liked to collect barbershop quartet songs said, "Gee, I'm being slowed down." And this was the big thing that motivated, "Uh-oh. Comcast had slowed it down." And this was evidence that we needed rules. What is interesting, as a quick footnote to this—and this actually was at a symposium that George and I held many years ago—it turns out that the reason why the blocking occurred was that because Comcast paying customers -- I don't know if anybody remembers AT&T CallVantage. It was interfering with that because the systems—and I would commend everybody reading the Supreme Court's decision in Grokster; there's a great footnote in there—talked about these open-access torrent sites that were very popular at the time. They had no idea.

 

So you had this real traffic management problem that nobody could control. And so, back then, "Well, build your way out of congestion" was a popular argument back in the mid-2000s, but these anecdotes became very powerful when the political pressure started to build.

 

The FCC's response was to come up with a set of internet principles at the time, but they were just principles. But the pressure was mounting. The pressure was mounting. And so now we're about 2007, the waning days of the George Bush presidency, and the Democrats had seized control. And there was a big fear at the time that, much like the Cable Act of 1992, the Democrats were going to override a veto.

 

So the Commission decided it needed to do something to fit the politics, and so they brought a case against Comcast. They said, "Well, you violated the principles." And that was the FCC's, I think, attempt to put a Band-Aid on, "See, the process works. We don't need legislation." Comcast then decided that it was going to challenge the FCC's order that they ruled against them.

 

And the D.C. Circuit agreed. Again, oversimplifying, what the D.C. Circuit basically found was, is that the Commission had failed to make an adequate case of ancillary jurisdiction that ties you back to a specific authority in the Communications Act. They didn't say that the FCC lacks ancillary authority; they just said that the FCC did a very bad authority, and there were also notice issues because how could you be guilty of something if there were no formal rules?

 

So that was the Comcast case. Nonetheless, there was a change in political administration, and now we're into the first term of the Obama administration. And the FCC's response was the 2010 open internet rules. Now, what is interesting about the 2010 open internet rules is that the FCC made a very deliberate decision not to go the Title II route.

 

What they did was Section 706, which is essentially a reporting statute and a statement of policy that every American should have access to advanced broadband. They decided that they would turn that into -- They would transfer that statute from being hortatory—in other words, just statement of policy—to actually an affirmative grant of authority.

 

And what they did was they triggered that by doing -- In their broadband report, they said, "Well, broadband is not being deployed 'on a reasonable and timely basis.'" And we'll get to this a little bit, define reasonable and define timely, but that was the trigger that they use. But still, nonetheless, they did not go the Title II route.

 

What is interesting about that particular case is that the entire industry, with the exception of one company, Verizon, had signed off on that deal. I think everybody could live with it. They supported it. They filed briefs in the D.C. Circuit, but what happened was the D.C. Circuit overturned those rules.

 

Why did the D.C. Circuit overturn those rules? Very simply, it looked at the no blocking rule and said, "You know what? This is essentially common carrier regulation. This rule is you're requiring broadband service providers to provide traffic at a regulated price of zero." And what that means is that net neutrality is, at bottom, nothing else more than rate regulation, and the Communications Act clearly said that you cannot treat an information service like a common carrier service. The Court remanded.

 

So now we're back in a state of limbo, and then now we're getting into the second term of the Obama administration where Tom Wheeler is the chairman. So what happens now? There was a big fight over, could you do net neutrality rules without pulling the Title II trigger? And I think I've got a link to the law review in the blog that Emily's got, but if you look at Comcast, if you looked at Verizon, and if you looked -- There was another D.C. Circuit case called Celico which dealt with data roaming. The FCC probably could have fixed the 2010 rules, used a standard, something like commercially reasonable, and we probably would have never had to go down the Title II route.

 

However, the Obama administration wanted to go down the Title II route. There was a very famous blog or YouTube video—I can't remember—at the time, and that was basically the green light from the White House and say, "Pull the Title II trigger." And so they decided they were going to reclassify it after 15 years of deregulation and put legacy common carrier regulation back on the internet, but this is where things start to get interesting.

 

The problem that the FCC had, if you look at the law at the time, particularly if we're talking about the statute, Communications Act, plain language, and the 80 years of case law, implementing Section 201, which deals with ratemaking, and Section 202, which deals with undue discrimination, the FCC couldn't do what it wanted to do, given the parameters of the law. They just couldn't do it.

 

What they decided to do, as a result, is just engage in a huge amount of analytical gymnastics to get the order done. It really was rather remarkable. So what's interesting about that is that the FCC's own chief economist very famously said at the time, "The 2015 rules are an economics-free zone." That's not a very ringing endorsement of what you're trying to do.

 

Now, I would submit—and I wrote a very large law review with George about this—is that the order was actually also a legal-free zone. What do I mean by that? We wrote a paper called "Tariffing Internet Termination." The link is in the blog that Emily has. It's also on our webpage. It was published in the Federal Communications Law Journal.

 

And that is, if you were to take the FCC's own assumption -- Because what did the Court in Verizon say? Net neutrality is explicitly rate regulation. And when you're talking about rate regulation, the Fifth Amendment in the Constitution comes into play, right? Because you can have what's called a confiscatory rate. That's a takings.

 

And if you have a no blocking rule that says you must take traffic at zero, and you know that the traffic imposes costs on your network, that is, by definition, a takings. So if you were to look at the way the FCC had teed up their argument, the correct and proper application of Title II would have mandated carriers having to file tariffs could not have done it with forbearance at a positive price. That's how it'll work.

 

I mean, what's fascinating to me about -- You know, they set a price of zero. Well, how'd you get a price of zero? Did you do a cost study? No. Did you set a ratemaking methodology? Telerik? No, they just picked a price of zero. And that's a very important point about the ratemaking thing, and they didn't do that.

 

So the order comes out, and then it gets appealed in USTelecom. Here's the problem, what happened in USTelecom. And again, I would come on commend everybody to read my law review, which is also referenced in the thing. It was also published in the Federal Communications law journal called "USTelecom and its Aftermath."

 

Because the primary argument against the 2015 rules -- For whatever reason, people decided not to challenge the rules on basic ratemaking and Fifth Amendment. People stuck to their guns and made the argument going, "Oh, no, we're back to the statutory definition." The Court just shrugged that off, given where it was in Brand X.

 

And I would submit, in a case of extraordinary judicial deference, the D.C. Circuit upheld all of the FCC's gymnastics, all of them, creating -- As I say, Title II has absolutely no meaning right now. It ignored the ratemaking issues. It ignored the forbearance issues. It elevated Section 706 above Section 202. It is just replete with intellectual errors.

 

And the net result of that case -- And I think this is a very important point to remember. The net result of that case is that that case stands for the proposition that the U.S. government can regulate the rates, terms, and conditions of private firms without having to do the due process protections that a tariff would allow. How'd you get the rate? Did you do a cost study? It's just, I will pick a price and you will do it.

 

And you've seen now the precedent that that has caused and the mischief that has caused. I will give you two examples. After that case came out, Tom Wheeler tried to do a thing with special access. He just picked a price and said, "You will do this again." Again, how do you get to that price? I don't know, but they did it.

 

NCIA currently, to get BEAD funding as a middle-income plan that's mandatory, well, how did you get -- Are we doing any ratemaking? No. This has been a major destruction of legal norms that I think a lot of people are overlooking, and the law now is -- It just means what literally the old joke at the FCC is: What does it take to win? Three votes. And it is, in my view, a huge abuse of administrative power, but the law is the law.

 

And the FCC certainly is very proud that the 2015 order -- The current FCC is very proud that the 2015 order was upheld. And I could go on, but again, it's a very long law review, and you can delve into the details if you're that interested. So we had that. One other thing also, just in the 2015 order, at the time, some people had made an investment argument.

 

They said, "Oh, this is going to reduce investment. You can't do this." What the D.C. Circuit said in U.S. Telecom, "Look, we're kind of new. It's been a couple of months since the order, whatever it was. The FCC has made predictive judgments. We're a court of law. We don't like looking at economics. It's math. We're lawyers. We will just defer to the FCC's predictive judgments."

 

Okay. Predictive judgments. Now let's flash forward to the next presidential administration. Trump administration, where the Commission, under Chairman Ajit Pai said, "Wait a minute. We got to go back and reverse all this." The difference, though, I would submit, between Chairman Pai and Chairman Wheeler is that Chairman Pai respected economics. And he wrote an order, and he relied in good part on George's stuff and said, "Gee, the cost of reclassification clearly outweigh the benefits of regulation."

 

And so he issued the Restoring Internet Freedom Order. That order raised a lot of issues dealing with whole attachments and federal state relations, which I won't go into, but long story short, when that went up to the D.C. Circuit, going back to the Brand X case, the D.C. Circuit upheld and said, "Well, you've articulated decent reason. Under Brand X, we have to do this."

 

Now, what I find interesting, if you read the Mozilla case, is that I think -- Particularly with the benefit of time of a couple of years now, what is interesting—and I was just rereading it the other day—yes, they upheld the Commission, but I would submit that they upheld the Commission reluctantly.

 

That decision, which was done per curiam, is just littered with little bombs and stuff. It's like, "I really don't want to do it. I really don't want to give the Commission the benefit of the doubt here, but Brand X governs." And what's interesting, if you read the Commission's new NPRM, they actually cite Mozilla as if it upheld the Commission's decision to do the 2015 rules, but that's kind of where the law is on this.

 

So the law right now, it's a mess. There's no doubt about it. I'm not sure what it means. And so, as I said a moment ago, the FCC just released its new NPRM about a month or two ago. Again, no surprise, they're going to do it, and the FCC seems to think, given that the law is a mess, that they are on firm legal grounds. And as I point out in my blog for the FedSoc, they might have a point. They really might have a point.

 

And the question is, if one is going to challenge those rules, what is it going to do, given the mess that the state of the law is in? I think the most obvious, from what I'm hearing from folks going around, is that most people are going to put their eggs into the major questions doctrine basket, which is a legitimate point.

 

And I think Emily is going to put up a link. We did a phenomenal teleforum with two former FCC general counsels of both parties, a former acting chair of the FCC and a former acting solicitor general, to talk about this. I would commend everybody to look at that. The major questions doctrine, after West Virginia v. EPA, is basically, if it's a question of major economic and political importance, maybe it's best for Congress to decide.

 

So the question is, is net neutrality, a reimposition, a question of major political and economic importance? I think the paper that George just did would sort of answer that question yes, but that is a whole other issue. And again, many people have written on the major questions doctrine, and the FedSoc has had many, many events on that.

 

However, one should not put all of their litigation eggs in the same basket. I do have a couple of other ideas, and I said those in my blog. You know, as you've heard from my last description of what I talked about, I still think, if people want to take it up, the idea of Title II properly applied.

 

I'm really shocked that nobody has made what, to me, is a rather obvious ratemaking argument, given what the D.C. Circuit said. You know, every time I hear the FCC saying it's not regulation, obviously, they haven't read Verizon because it said explicitly rate regulation. That is a fertile ground, and I would hope that people do that.

 

Another big issue, if you read the 2023 NPRM, is that they keep saying it's needed to do for public safety. And they always cite back to this fire department in, I think it's Santa Clara, where they had a residential plan, and they got cut off in the middle of wildfires. But you know what's available now that wasn't available in 2015? FirstNet, which is actually the U.S. government's formal, nationwide, interoperable public safety network.

 

That issue should be off the table, and the FCC doesn't even mention this in their order. There's that. And then, I think, related to the major questions doctrine, one could probably argue that the FCC's investment analysis in and of itself -- I mean, what's amazing, if you read the 2023 order—and George will get into this in a moment—notwithstanding that the Pai administration relied on peer-reviewed work, the current administration and leadership at the FCC has basically said, "I don't believe it." Well, if you're not going to believe something that went through outside reviews and there's no other studies—and George will get into this—I don't know what to tell you. I think it's cognitive dissonance at best, but that's where we're at.

 

I think the other problem with that is that Courts are slightly reluctant. We being lawyers and doing math, the D.C. Circuit has routinely said that we do not sit as a referee of an economics journal. But I do think, when you have lack of any support, that's still something to hit the Court with, but we'll leave with that.

 

So now that we're talking about investment, I will leave that now to George to really take the deep dive into all the economics the FCC has used over the years, what they've relied on and what they haven't relied on.

 

George Ford:  All right. Thanks for that review, Larry. Brings back old memories.

 

Lawrence Spiwak:  Doesn't it?

 

George Ford:  Yeah. Been there, done that. The investment question, I guess, peaked out there with the 2018 order. That was a pivot point on the major argument for reclassifying broadband as a Title I service, but that investment argument has been around for ages, since basically the very beginning of the dispute.

 

The Commission has never done anything serious about studying that question. Very few people have, really. There's some published work on it, some unpublished work on it, almost all of it showing something happened, always on the non-positive side of the equation. But instead, the Commission uses just really silly arguments about investment, demands increasing, some investments increasing, everything will be fine.

 

Those kind of arguments ignore what would have happened if you hadn't regulated what is the counterfactual investment level, which is largely absent in almost all the discussion of investment effects of net neutrality or any other regulation, really, that the FCC is engaged in. The counterfactual idea is related to what would have happened if some policy was not in place, and not just looking at what's happening to investment-relative sites last year.

 

You can use a simple example of that. If you think about lead poisoning that we saw in Michigan a few years ago, you could imagine somebody saying, "Well, we measured the height of the children in the area two years ago, and we measured them again today, and they grew by two inches on average; therefore, the lead poisoning is not a problem." Because it stunts growth.

 

Of course, everybody would laugh at that kind of argument because what you'd want to do is compare it to what the average growth is of a child at age over a two-year period, which would probably be more like six to eight inches. Okay. But most of the arguments that we see, the Commission's arguments included, and even some people who oppose net neutrality, is that they're just looking at the two-inch argument rather than the six- to eight-inch argument.

 

So the trick with investment analysis is trying to figure out what would have happened absent the rules -- or absent the risk of the rules is really what I study, and I don't do that -- I didn't come up with that idea on my own, really. It was an investment advisor who spoke at one of our conferences who said that, once Julius Genachowski had dropped the Title II word on the scene, the industry had begun to incorporate that prospect into its investment decisions.

 

And you did see the stock market react very negatively to the proposal in 2010. So what I've always studied there is the 2010 treatment day. And I think, from that point on, really, the industry knew that this was going to be a regulated service until something serious happened that would make it not regulated under Title II of the Communications Act.

 

So that's the treatment date, and actually, even proponents of net neutrality and critics of my work have used that treatment date, so I think it's fairly reasonable one. I've done a lot of work on investment over the years using different data series, and it's always found to be negative. I've published some work in that area, a couple of papers in that area of study.

 

Other work that's been done in that area, most of it pretty horrendous, but the work that was eventually published was what the FCC relied on, the 2018 order. Another piece of work that was used at the time, and actually mentioned in the Court's decision on the 2018 order, was the work by the Internet Association, I think, by Chris Hooton.

That work was shockingly bad. The data was corrupted. Much of the data was made up, literally, not figuratively. It was literally made up. And even after that was exposed, the advocates for net neutrality continued to push that. That, to me, is shocking. To take a study of made-up data and corrupted data to the Court is just shocking, really, very disappointing.

 

But anyway, the question has arisen again, and we've had this flip-flopping back and forth between Title I, Title II. To me, as an economist, I don't think the flip-flopping is very important after the first event, really. The industry knows that Title II is a hotly contested election away every four years. It is a perfect determinant of whether you'd be Title I or Title II.

 

So you don't respond to the 2018 order, really, because you know that, come November of 2020, the whole thing could be turned upside down and you'd be right back where you were, and that's exactly what we've seen. Once the Democratic majority was secured at the Commission, the NPRM came out. Obviously, they'd been writing it for months, and it was 43 days, I think, after Anna Gomez was confirmed that the NPR came out.

 

All three Democrats have said before a drop of the evidence was given to the record that they would vote for Title Two regulation. So there's no appearance of impartiality here. There's no question about where this is going. It's going to happen, and it's going to happen sooner rather than later because there's some deadlines that the Commission has to satisfy.

 

What I've recently done, paper released today, was to look at the USTelecom data and see what it says about the investment effects of Title II, combine that with some government data on investment in other industries, conduct a fairly standard statistical analysis, econometric analysis of the data, and like before, I find sizeable effects, about 10 percent loss of investment relative to the counterfactual.

 

If you look at investment, in telecom, it's fairly stable over much of the period from 2000, which is the period I looked at, but we were coming out of recession about 2009. And investment in nearly every other industry, I think more than 80 percent of industries, had strongly positive investment trends as we came out of a recession.

 

And so the counterfactual investment is positive after that time, and telecom investment is stable and growing. So you get this spread between what it would be, had it followed the pattern of investment that it followed prior to 2011, basically. So you find a set of industries that have the same pattern and investment over time as the telecom industry, and then you see how that tracks out.

 

Past the 2010 date, on average, it's going up significantly, and the telecom industry is flat. So the results show about a 10 percent decline in investment, and this is investment in broadband networks. Some of the earlier work included investment from broadcasting and things because you couldn't separate the telecom from the broadcasting and probably other groups that are included in there, even though almost all the investment comes from telecommunications firms, who invest more than any other industry in the nation.

 

So you see, a 10 percent decline in investment, and that has a significant effect. That's about $8 billion a year in lost investment, which is significant, 8.1 billion, 8.2 billion over 10 years, which is about twice the amount of money allocated by the IIJA for broadband subsidy. So it's a big number, but a 10 percent reduction is not crazy.

 

Nobody's arguing that investment is going to fall by 50 percent. You know, it's just going to fall by some as you look at the margins of your business, at the lower return operations, and say, "Well, it doesn't make sense to do that anymore." And you might stop investing in certain kinds of intellectual property or certain types of network and redirect that to other kinds of investments. Take your investment outside of the U.S., which happened a lot during the abundant years.

 

So that's the story. If you take estimates of job losses, think ahead, about 80,000 jobs lost in the information sector and a couple hundred thousand jobs lost in the economy broadly. Based on some other empirical evidence, I also found the same thing in earlier work on what happened to telecommunications employment and after the 2010 Title II announcement. And you can also track this through to -- And that loss of jobs is nearly $20 billion of labor income, so it's pretty significant.

 

And then you can track it to GDP, which is tricky, but I use the standard production model that's been used frequently to analyze the effects of telecom investment on GDP and find the effects to be sizable, about 145 billion in GDP as the telecom sector spreads into other sectors as a general purpose technology.

 

So the effects are large; not too large, but large, and I think the results are plausible. I looked at it in a few ways statistically, and I think it's pretty strong. Something happened around 2010 in the telecom sector that didn't happen elsewhere, and there's one pretty clear thing you can point to, that and the companies themselves had said that these kinds of regulations would interfere with their investment choices.

 

The other thing that we did in the paper was look at the virtuous circle argument—virtuous circle, virtuous cycle; the Commission uses both—which is the -- I don't want to call it theoretical, but it's the framework in which the Commission contemplates this, and it's basically an argument that the edge of the network and the core of the network are strong complements.

 

And this creates a virtuous circle where good things happen to the edge, and then good things happen to the core, and round and round and round we go. What the Commission has failed to do ever is to explain why, within this virtuous circle, that regulation is required, and what part of virtue requires regulation.

 

And so we looked at it, taking the Commission at its word, and we don't find any reason for the broadband providers to provide some sort of non-neutral treatment of traffic. If the two are strong complements, then the health of the edge is important to the profits of the core. So that argument, virtuous circle argument, doesn't support the intervention, but it does point to a potential problem with net neutrality.

 

And I think it's fairly obvious: The investment effects got to be non-positive, and most likely negative, if not decidedly negative. There's nothing about what the Commission is doing under Title II that makes being a broadband provider better. They certainly oppose it, and there's no reason why this would increase their profits, and certainly reasons why it would decrease their profits or just increase the risk of being in the business, the prospect of reduced profits, when you hand that kind of power to parties and regulators who don't appear to have any bounds on what they're willing to do to cede some political objective.

 

So that's really where this comes from, I think, is the great risk that the regulation proposes, more so than necessarily exactly what it stops because there's nothing for it to stop at the moment. And I think every commissioner has acknowledged that there is no justification for this based on behavior, and they use the term guardrail, which is basically to say, "Nobody's doing anything, but we're afraid they might, even though they never have."

 

Even in the few cases where they have—Madison River and the peer-to-peer situation—those are very unique circumstances that people are not really paying attention to the underlying incentives. The Madison River case was a rebellion against the Commission's proposal to arbitrage access charges. It's plain and simple. It's the same reason that phone companies sabotaged phones being connected to its network. You only get that kind of behavior when there's regulation.

 

The FCC has, on the one hand, a plan that says really high access charges are going to subsidize rural networks, and then on the other hand, says, "Oh, by the way, if you run it through this machine, you don't have to pay any access charges." Well, that's a response to poorly designed regulation or a regulatory arbitrage situation implemented by the regulator.

 

And as Larry mentioned, the peer-to-peer case was, the technology had overwritten the safety protocols, the congestion protocols on the internet, and were congesting circuits. And Comcast wasn't doing it to protect themselves. This is what their engineers said at one of our conferences. They did it because it was interfering with other people's services, services that competed with their services, the VoIP service provided by AT&T.

 

So those two cases are not evidence of companies' behavior or decision to engage in some kind of anti-competitive behavior, and there's been nothing since. I was reading a document about public knowledge the other day about what's happened, and it's just almost laughable what they can come up with.

 

So I don't see really any reason to reimpose this kind of regulation, but I do see that it will be implemented. I don't know. I think the consequences of the new one will be worse than in the past. It's including more sections of Title II, 214 in particular, which is the "Mother, may I invest" portion of the statute. I can't imagine how that's going to happen. I've done some of those back in the day, and that's a mess.

 

And it also has disproportionate effects on smaller providers, so I think that's bad. And then you mix it in with the general regulatory climate, which is pretty bad right now, and you got this unnecessarily aggressive and adversarial digital discrimination rules that are going to solve a problem which doesn't exist. And I'm sure there'll be many other aggressive regulatory things.

 

When you put all those together, that just makes it really unpleasant to invest capital in this industry. And it could drive up the cost of capital, and the investors are not going to pour money into an industry that's being treated the way the current FCC is treating them. It's not just a broadband provider saying, "Oh, I'm not going to invest" or, "If I am going to invest." They have to go get the money from somebody, and those people may look at the industry as being too risky.

 

So that's the story. We would expect a negative effect. We find it. You know, I expect somebody will say it's not there, but it just completely ignores the evidence. They never provide any counter evidence to suggest that it's not negative, and even if they did, it'd be better if it wasn't done with made-up and corrupted data.

 

But finding nothing is pretty easy. That just requires a bad econometric model. But if you look at it, I think, in a sensible way, there are other ways to do it, but if you look at it in a modern, empirical approach manner and use what data is available, there's something there. Something happened, and it's not a small effect.

 

Lawrence Spiwak:  Thanks, George. I'm so glad you brought up Madison River. I knew I'd forgotten something. Good Lord, blast from the past, that and the Pulver Order.

 

George Ford:  We're too old, Larry.

 

Lawrence Spiwak:  I'm sure everybody's going, "What are they talking about?" In the five minutes I got left, let me ask you this one thing because this hit me as I was walking the dog this morning. Again, we've done so much. It's been like 20 years. I just keep remembering stuff that I'd forgotten about.

 

This goes to something that you've done a lot of work on. So the FCC is going to bring back 706 as in affirmative source of authority. And then Gene had reclassified it as hortatory. Now they're going to bring it back as the affirmative source of authority. And again, in order to trigger Section 706, you have to show that broadband is not being deployed on a reasonable and timely basis, which gets to -- You know, the easy way of doing it is just keep jacking up the speeds, and you'll never get to that.

 

But we did a proposal like 15 years ago where we talked about define timely, and also define reasonable. And remember, you were saying something about it's $50,000 a home, and you start seeing what people are doing with the BEAD money, whereas out in Alaska, is that reasonable?

 

And I think nobody's also making that argument, which, to me, is sort of a fascinating thing. I was wondering if you had a comment about that. And then also the other thing about 706 in the remaining five moments -- This is another paper we did years ago. Turns out that 706 gives co equal jurisdiction to states and to the feds. And what would happen if, say, the state of Alabama decided to say, "I want to do a deregulatory thing?"? Nobody's ever challenged that. I think it's an interesting point.

 

But go back to the to the reasonable and timely because you've done so much work on what is enough, what is reasonable, what are broadband speeds? And if you can just give a quick comment on that. Is the FCC playing games with the triggering proceedings to invoking 706?

 

George Ford:  Well, the FCC will play games.

 

Lawrence Spiwak:  I'm shocked.

 

George Ford:  That's guaranteed. It's an interesting question and something I've been wanting to study. The reasonable and timely has two components to it, I think. One is what is reasonably and timely for private actors to do, which is not 100 percent coverage, obviously. We subsidized broadband for billions of dollars.

 

And then what is reasonably and timely from a public perspective? And the public's perspective is revealed and the amount of subsidy dollars the government is willing to allocate. It might be tricky this time around to invoke 706 when the government has said, "I'm giving you $42 billion—"really, I think it's more like $300 billion in various forms—"to guarantee everybody has access."

 

Well, now you've got the private sector who's done 92, 93 percent of it. The government is now saying, "Well, I'm going to do the rest of it." So it seems almost, by definition, that it's reasonable and timely, but that could be an interesting question how they wiggle their way out of that because what has not been done by the private sector, money has been allocated by the public sector to accomplish that.

 

So we have accomplished the goal, or at least had the funding to accomplish the goal. It will take a few years because there's a shortage of labor and sometimes equipment, but that's an interesting question. I'll have to think about how that might play out in the future, but that could be a serious problem. it's a serious problem anyway.

 

When your own data shows that well over 90 percent of people have 100 megabits of service or better, and you've got a satellite network capable of delivering pretty close to that anywhere on the planet, how do you make the argument it's not deployed, particularly under the current standard of 25.3?

 

That's probably going to change, but even at 120, almost everybody has it, except for these extremely costly rural areas and tribal areas that have their own unique disadvantages. And then buildings, multi-dwelling units that you can't get access to. In some cases, governments interfere. Local governments interfere with the upgrading service. So it's hard to argue that it's not reasonably deployed when nearly everybody has really good broadband service.

 

Lawrence Spiwak:  All right. Well, thank you very much, everybody. I've noticed we've actually made it to the hour. And thank you very much for bearing with Georgia myself. Again, all of our research is available on our webpage, www.phoneix-center.org. I'd like to thank George Ford. I'd like to thank Emily and the FedSoc for hosting us. I hope everybody had a good time. Feel free to reach out, everybody, if you have questions. And Emily, I will turn it back to you. Thank you very much, everybody. 

 

Emily Manning:  On behalf of The Federalist Society, thank you both for joining us for this great discussion today. And thank you also to our audience for joining us. We greatly appreciate your participation. Check out our website, fedsoc.org, or follow us on all major social media platforms @fedsoc to stay up to date with announcements and upcoming webinars. Thank you once more for tuning in, and we are adjourned.

 

[Music]