Privacy, profits and broadband investment

In the internet age, the common currency for both “edge” providers such as Google and the operators of “core” broadband networks such as AT&T and Comcast is information — that is, the ability to collect, track and ultimately monetize a plethora of information in order to provide consumers with enhanced online experiences. Indeed, it is the ability to monetize information successfully that will encourage, at least in part, the investments by both the edge and core to support the bourgeoning “Internet of Things.” Given Americans’ voracious use of the internet, therefore, common sense would dictate that the U.S. government develop a cohesive policy framework to deal with consumer privacy concerns. Unfortunately, common sense is in short supply in Washington, particularly at the Federal Communications Commission (FCC) under the leadership of Chairman Tom Wheeler.

{mosads}With the FCC’s controversial decision to reclassify broadband internet access as a Title II common carrier “telecommunications” service in its 2015 Open Internet order (currently on appeal, with a decision expected any moment), all broadband service providers (BSPs) — whether wireline, cable or wireless — are now subject to the Customer Proprietary Network Information (CPNI) statutory framework contained in Section 222 of the Communications Act — rules which were designed for pre-internet services offered by the handful of telephone companies in existence at the time. Because this statute was never intended to apply to the internet, Wheeler has launched a notice of proposed rule-making (NPRM) to find a way to put a round peg into a square hole.

Adding to the legal morass, Wheeler’s decision on reclassification has essentially stripped the Federal Trade Commission (FTC) — the agency that traditionally has jurisdiction over digital privacy concerns for the entire internet ecosystem — from bringing a privacy enforcement action against BSPs because the FTC has no jurisdiction over firms which provide a “common carrier” service. While Wheeler could have at least attempted to incorporate some lessons from the FTC’s extensive experience in dealing with the complexities of online privacy in his proposed approach, he arrogantly refused, choosing instead to reinvent the wheel. In fact, as noted by comments from both the FTC’s staff and FTC Commissioner Maureen Ohlhausen, Wheeler ran as far as he could from the FTC in his NPRM. Accordingly, rather than create a harmonized industry-wide regulatory approach to digital privacy, Wheeler intends to create two discrete asymmetrical regulatory regimes: a restrictive ex ante regime specifically for BSPs with rules enforced at the FCC, and an ex post case-by-case regime enforced by the FTC for everybody else.

But as bad as this legal morass may be, the big takeaway is that Wheeler’s proposed asymmetrical privacy regime in which edge providers can collect customer data with impunity but BSPs cannot — just like the FCC’s overall net neutrality regime where edge providers do not have to pay BSPs for terminating access despite imposing costs on their networks — represents another prime example of the Obama administration’s naked attempt to transfer economic profits from the core to the edge. You don’t need to have a Ph.D. in economics to understand that when profits decline, investment suffers. To quote the FCC’s own National Broadband Plan team: “Private capital will only be available to fund investments in broadband networks where it is possible to earn returns in excess of the cost of capital. In short, only profitable networks will attract the investment required.”

Like it or not, as we at the Phoenix Center have repeatedly pointed out, broadband is increasingly becoming “commoditized.” This commoditization results, in part, from economic forces, but it is also driven by government interventions like net neutrality. What is crucial to understand is that as commoditization of broadband becomes more prevalent, the incentive to invest in network infrastructure goes down. Thus, if network investment is to continue, then BSPs must look to alternative sources of profits, including the ability to appropriately monetize data that enable them to better serve their customers.

While Wheeler is probably reluctant to take our word for it, perhaps the chairman should recall the testimony of the FCC’s lead witness at the agency’s April 2015 privacy workshop, University of Pennsylvania Professor Matt Blaze. As Blaze testified before the FCC, to stem the tide of decreasing profits resulting from the commoditization of the internet, BSPs will be increasingly forced to “look for ways to monetize [consumer] data” to support the needed network investments. Monetizing data injects income into the ecosystem’s core, thereby providing a sound financial environment for the internet to evolve and flourish. Asymmetrical regulatory intervention on one (albeit extremely crucial) segment of the internet ecosystem, which is mostly politically motivated and whimsical at this point, directs this evolution on a less healthy and innovative path by effectively transferring profits from the core to the edge.

Under Section 706 of the Telecommunications Act, the FCC has a statutory mandate to “encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans.” And despite a plethora of onerous regulations imposed by the Obama administration, American network operators do just that, investing billions of dollars into their networks each year, with nearly $0.20 of every dollar of revenue going to network investment. At some point, however, bad policies will inevitably have an effect. So while BSPs will no doubt continue to make short-term capital investments to keep their networks up and running, no one will make the necessary investment for the next “big thing” if profits are not there.

In sum, as the internet continues to evolve, there will be a lot of trial and error as both edge and core providers seek to innovate and build alternative business plans. The distribution of new value across the internet ecosystem will determine its evolutionary path, and this progress should be left, to a large extent, to efficiency rather than political dictates. That said, an eye must be kept on privacy concerns, but the best way to manage privacy is also yet to be determined: Who is best to manage access to data? Who will shield customers from prying eyes? Whom do customers ultimately want to deal with for protection? For these important reasons, as FTC Commissioner Maureen Ohlhausen warned, we should be focused a policy of maximum flexibility toward digital privacy. Unfortunately, as a senior industry executive poignantly observed, because “the FCC appears to have already made up its mind” about creating a restrictive, asymmetrical privacy regime, “these concerns will probably fall upon deaf ears.”

Spiwak is the president of the Phoenix Center for Advanced Legal & Economic Public Policy Studies, a nonprofit 501(c)(3) research organization that studies broad public-policy issues related to governance, social and economic conditions, with a particular emphasis on the law and economics of the digital age.