By Jonathan S. Marashlian and Arman Krpoyan

Net Neutrality Update Part Two

In the first part of this series, attorneys at Brownstein, Hyatt, Farber, Schreck, LLP laid out the difference between “Broadband Internet Access Service” (“BIAS”) and business data service (“BDS”) for the purposes of net neutrality rules, reminding readers that only BIAS would be subject to net neutrality rules.  Also discussed was the seemingly generation long debate as to whether BIAS is an unregulated Title I “information service” or a Title II “telecommunications service” under the Federal Telecommunications Act (Communications Act of 1934, as amended by the 1996 Telecommunications Act).  And finally, the article explained what net neutrality rules are, their current status, and potential future.

In the second part of this series, attorneys from Marashlian & Donahue, PLLC, The CommLaw Group, pivot and focus on the potential outcomes of the most recent appeal of the Federal Communications Commission’s (“FCC”) 2018 Restoring Internet Freedom Order, currently before the U.S. Court of Appeals for the D.C. Circuit, and the practical implications of the eventual ruling on Cloud Communications Alliance (“CCA”) service provider members.

The first potential outcome of the pending appeal would be an affirmation of the FCC’s position that BIAS is properly classified as an unregulated, Title I information service.  Confirmation of the FCC’s current Title I classification could eventually lead Internet Service Providers (“ISPs”) to implement paid prioritization, blocking, throttling, or other business policies and practices that could harm CCA service providers that rely upon third party ISPs to deliver their “Over the Top” (“OTT”) Voice over Internet Protocol (“VoIP”) services to their customers.

The second outcome would be if BIAS were categorized as Title II telecommunications services; this could steer the FCC back to the net neutrality rules that were in place from 2015-2018.  And, as discussed below, a “re-reclassification” under Title II could trigger a lesser known and under-appreciated benefit to CCA service providers – the potential halving of the federal Universal Service Fund (“USF”) contribution amount from 20% to below 10%!

Outcome 1: BIAS is categorized as an Unregulated, Title I “Information Service”

The first potential outcome of the pending appeal is that the D.C. Circuit Court will allow the 2018 Restoring Internet Freedom Order to remain unchanged, thus affirming the FCC’s determination that BIAS is a Title I information service.  With this outcome in hand, ISPs would be unrestricted by the government in future efforts to implement business policies and practices such as paid prioritization, or, alternatively, the blocking or throttling of traffic riding over their networks, including the voice and data traffic of CCA service providers.  Because Title I does not contain the common carrier nondiscrimination rules found in Title II, ISPs would be legally free to create so-called “fast lanes” of traffic that will inevitably advantage some providers and disadvantage others.  The essence of paid prioritization is that:

ISPs could lawfully charge some providers for preferential treatment and put them in the fast lane, leaving CCA members who don’t pay the tolls plodding along in the “slow lane,” subjected to poor Quality of Service that diminishes the user experience (think, dropped packets, jitter, latency and the like).  ISPs could also deliver superior service, both in quality and speed, to their own over the top communications and software based services, giving them a competitive advantage over CCA members.

It is worth nothing, however, that just because the ISPs can legally do something doesn’t mean they will; indeed, the FCC argued that competitive pressures, antitrust laws, and consumer protection regulations will provide a backstop that prevents ISPs from engaging in “bad behavior.”  The four major ISPs (AT&T, Charter, Comcast and Verizon) have all issued statements supporting the “open internet,” and none have publicized any plans to implement paid prioritization at this point in time.  But there is a legitimate basis for OTT VoIP providers to be concerned about what the future might have in store for them should ISPs remain free of Title II regulation.

The last time the net neutrality issue erupted in the context of VoIP providers was in April of 2009, when Skype was added to the iPhone’s operating system, and AT&T, who held the exclusive contract for the iPhone at the time, blocked Skype from accessing its 3G networks. AT&T proceeded to block all Internet Phone Providers due to “congestion concerns” on their networks.  Several months later, AT&T reversed course in the face of consumer backlash and opened its platform to Skype and others, presumably on a non-discriminatory basis given the absence of reports to the contrary.

In sum, if BIAS is definitively categorized as a Title I information service, it would give ISPs the legal ability to discriminate against CCA members in their provision of services, but competitive pressures and customer demands have, thus far, constrained any efforts by the major ISPs from broadly implementing any of these competition-harming policies or practices under the Title I framework. There has been plenty of speculation surrounding the repeal of net neutrality and its potential impacts, but for now, the real-world adverse impacts remain to be seen.  Currently, it seems that market-driven competitive forces are preventing any of the major ISPs from becoming first adopters of paid prioritization or blocking/throttling policies.  Our conclusion, therefore, is that – at least for now – there would be no discernable impact of classifying BIAS as a Title I information service on CCA service provider members, at least from the standpoint of equal access, pricing (i.e., “toll lanes”), or other potentially damaging ISP policies or practices.

CONCLUSION:  When it comes to the aforementioned issues (over which much ink has been spilled as the FCC swung from Title I deregulation to Title II and back to Title I), we would call the eventual outcome of the pending 2018 Restoring Internet Freedom Order appeal a “draw.” 

But CCA service provider members may have another, lesser known reason to be supportive of limited Title II regulation of BIAS.  One potential – and we postulate, “likely” –  effect of shifting BIAS from Title I to Title II are the significant implications on the USF contribution base.  While BIAS services were excluded from USF contributions under Title II, the trend seemed to be heading towards adding broadband revenue into the USF contribution base.  Should BIAS remain under Title I, broadband revenue would be clearly excluded from the contribution base.  Accordingly, it would be helpful to discuss the next potential outcome: What if BIAS is considered to be a Title II telecommunications service?  Would that be such a bad thing for cloud communications providers?

Outcome 2: BIAS Categorized as Title II Telecommunications Service and Added to USF Contribution Base

The second outcome we’d like to discuss is if BIAS is re-categorized as a Title II telecommunications service, and if broadband revenues are added to the USF contribution base. Should this be the case, there would potentially be three different points of impact for CCA members.

First, CCA members would re-gain the net neutrality protections that were in place from 2015 up until the 2018 Restoring Internet Freedom Order; BIAS providers, therefore, could not implement paid prioritization, nor could they discriminately block or throttle CCA members’ services.  BIAS providers would be expressly prohibited from these actions that hurt competitors, like AT&T tried to do with Skype almost ten years ago.

Second, should BIAS providers be subject to certain Title II regulations, broadband revenue could more easily be added to the USF contribution base.  In 2015, when BIAS was categorized as a Title II telecommunications service under the Obama Administration, then FCC Chairman Tom Wheeler explicitly exempted BIAS providers from many Title II requirements, including the requirement to contribute to the USF.  Thus, even though BIAS providers were receiving USF funding to support deployment they were not required to pay into and support the USF with contributions.  At a time when BIAS was still subject to Title II regulation, the FCC asked AT&T to provide data that would show the impact of adding broadband services revenue, along with other services revenue, to the USF contribution base.  The mere fact that the FCC solicited this data from AT&T was an undeniable manifestation of the direction the Commission intended to take – which was to add broadband services to the USF contribution base; something that likely would have happened had the 2016 election turned out as prognosticators anticipated.

The data provided to the FCC by AT&T showed that the potential impact of adding broadband revenue to the USF contribution base would have been staggering.  The USF contribution factor in the first quarter of 2015, when AT&T provided its data, was 16.78%, based on a contribution base of approximately $52 billion dollars and a program cost of approximately $8.7 billion dollars.  AT&T’s data showed that if broadband services revenue were added to the contribution base, the contribution factor would be cut by more than half, to 8.35%, as broadband services revenue alone would pour an additional $52.4 billion of USF-assessable revenue into the contribution base.  CCA service provider members, in other words, would potentially benefit if BIAS is considered a Title II telecommunications service and added to the USF contribution base because it will add billions of dollars in revenue to the USF contribution base, which then lowers CCA members’ USF contribution factors precipitously and, accordingly, the total cost of their services as perceived by end users.  Concurrently, doing so would shift USF pass-through costs to the invoices of the customer’s ISP.  Customers still end up contributing the same amount into the USF, but the shift of 100% of the surcharge burden off of VOIP providers to a 50/50 shared burden with the ISP could make over the top VOIP services more attractive and marketable.

On the other hand, it has been argued ad nauseum (mostly by the large ISPs) that adding BIAS to the contribution base, and making broadband more expensive to the end user, could slow the deployment of low-cost broadband to certain audiences and target markets.  However, the “mass market” customers potentiality impacted by the big ISP sound bite attack on Title II regulation should not be a major concern for CCA members, since most member companies are not targeting the consumer market.  CCA members predominantly focus on small & medium businesses (“SMBs”) and enterprise customers; these business consumers are unlikely to give up their broadband connections or settle for less capacity than what’s required to meet their communications needs simply because an 8% USF surcharge is added to their invoices; furthermore, ample broadband opportunities already exist for most these business enterprises.  And most importantly, as clarified in Part 1 of this series, Title II regulation was never extended to “business grade” broadband, only “mass market” BIAS services.

CONCLUSION:  When it comes to substantially lowering the Universal Service Fund contribution burdens on cloud communications providers without materially inhibiting the deployment of broadband services, the U.S. Court of Appeals rejection of the 2018 Restoring Internet Freedom Order and restoration of limited Title II regulation could be a long-term “win” for providers of OTT voice and data services.

This wraps up the CCA’s two part series on the current net neutrality landscape. We will be sure to provide any other updates as the D.C. Circuit weighs arguments on whether to overturn the FCC’s 2018 Restoring Internet Freedom Order.

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