Ex Ante Versus Ex Post Approaches to Network Neutrality: A Comparative Assessment A presentation at the 2015 Annual Scientific Seminar on the Economics, Law and Policy of Communications and Media: 2015 Annual Scientific Seminar on the Economics, Law and Policy of Communications and Media: Policy Challenges in Digital Markets European University Institute, Centre for Media Pluralism and Media Freedom Florence, ITALY March 27, 2015 Rob Frieden, Pioneers Chair and Professor of Telecommunications and Law Penn State University Web site : Blog site:

2 False Positives vs. False Negatives The network neutrality debate juxtaposes ex ante safeguards aiming to prevent undetected, but actual harms to consumers and competition with ex post remedies that apply only after proof of harm. Ex ante regulation risks imposing unneeded remedies for false positives; ex post remedies may arrive too late, or never resulting in false negatives. One 3 occasions, the FCC has opted for ex ante regulatory oversight based on the view that Internet Service Providers (“ISPs”) have the incentive and ability to engage in anticompetitive practices. The FCC’s most recent initiative reclassifies broadband Internet access as common carriage thereby securing jurisdiction to apply muscular, ex ante measures. Opponents of network neutrality favor ex post remedies for proven harms typically in judicial fora.

3 European Union vs. U.S. Strategies The E.U. emphasizes competition policy safeguards that require market determinations and assessments of dominance. The U.S. emphasizes regulatory policy, subject to limited and declining antitrust review. FCC constrained by statutory definitions, e.g., mutually exclusive telecommunications and information services. The E.U. strategy risks delayed or poorly calibrated relief, particularly for digital markets that have multiple sides, participants, products and services. The U.S. strategy risks excessive vigilance that can generate regulatory uncertainty, reduce innovation and create investment disincentives. Note that one cannot consider all U.S. remedies ex ante and all E.U. remedies ex post; no absolute dichotomy as both safeguards available.

4 The Risk of Harm Without a Remedy in the U.S. Verizon Commc’ns, Inc. v. Law Office of Curtis V. Trinko, 540 U.S. 398 (2004) substantially reduces grounds for antitrust relief if no duty to deal exists and the FCC finds marketplace competition sufficiently robust to foreclose anticompetitive practices. The information service classification assumes no need to impose a compulsory duty to deal/interconnect. Pac. Bell Tel. Co. v. Linkline Commc’ns, Inc., 555 U.S. 438 (2009) ignored clear evidence of a price squeeze where an incumbent carrier offered end users lower retail rates than the wholesale rate offered competitors. The FCC resorted to common carrier regulation (and the risk of false positives) in part because the information service classification eliminated most ex ante safeguards and the Supreme Court largely rejects ex post remedies that force competitors to cooperate. The Court rejects the essential facility doctrine and non-statutory duties to deal. High confidence in a robust marketplace and its ability to limit the staying power of monopolies.

5 The Risk of Sanctioning Temporary or Nonexistent Harm in the E.U. E.U. competition policy includes an essential facility doctrine and support for pluralism coupled with less confidence in a self-healing marketplace. Potential for finding harm where none exists plus possibly unnecessary, wrong, delayed, or ineffectual remedies. An ex post safeguard may take years to occur; the remedy may apply to long past conditions; it may have limited effect on future anticompetitive conduct; and violators may consider monetary damages a relatively minor cost of doing business. For example, by the time the E.U. sanctioned Microsoft, the greatest potential for harm came from Internet platform dominance and not a dominant software operating system. Sanctioning Google for Internet search dominance has no significant impact on its growing market power in various evolving segments of Internet advertising.

Growing Dominance of Internet Platform Intermediaries Internet Service Providers (“ISPs”) operate as intermediaries in a double-sided market with retail, broadband subscribers downstream and other ISPs, content distributors and content creators upstream. The Internet ecosystem supports powerful platform operators who can capture large market share by exploiting scale economies, network externalities and high switching costs/barriers to market entry. 6

Proliferation of Interconnection Models ISPs consider price and QOS discrimination essential for generating new profit centers; “better than best efforts” offered in lieu of a single “best efforts” model. New alternatives to the peering/transiting dichotomy: use of Internet Exchange Points; paid peering (Comcast-Netflix); CDN surcharges (Level 3-Comcast), equipment co-location, e.g., Netflix Open Connect Network; “specialized networks” and Intranets; Multiprotocol Label Switching and non-carriers like Google securing Autonomous System identifiers. Retail ISPs providing last kilometer service test pricing limits by tiering and raising end user monthly subscriptions at the same time as they impose surcharges on upstream ISPs, and offer paid peering options to highest volume content providers, e.g., Netflix. Retail subscribers quickly become agitated when QOS suffers and have no patience with ISP compensation disputes, much like cable television subscribers denied access to particular networks during a retransmission dispute. 7

New Incentives Risk Network Balkanization and Challenges to the Goal of Ubiquitous Access Level 3-Comcast Dispute In late 2010 Comcast imposed a traffic delivery surcharge when Level 3 became a major CDN for Netflix in the U.S. Level 3 characterized the surcharge as a discriminatory toll while Comcast framed the matter as a commercial peering dispute. Comcast is correct if one narrowly focuses on downstream traffic termination. But more broadly the dispute raises questions about the scope of duties Comcast owes its broadband subscribers and whether Level 3 is entitled to a good faith effort by Comcast to abate the traffic imbalances with upstream traffic. It also raises questions about the flow of compensation due participating carriers downstream from sources with which retail ISPs do not directly interconnect. 8

Misconceptions (or Misrepresentations) in the Level 3-Comcast Dispute Retail ISPs providing the “last mile” delivery of traffic customarily do not directly receive compensation from upstream sources of content such as Google, Netflix, YouTube and Hulu. The peering process traditionally involves directly interconnecting carriers. This means (absent paid peering) Netflix has the responsibility of securing the services of a CDN, such as Level 3, but Level 3 bears the direct interconnection and compensation burden with retail ISPs such as Comcast. It is untrue to assert that hyper giant sources of traffic do not pay for delivery of their content. Note that Comcast successfully imposed a surcharge on its peering partner Level-3 when Netflix traffic upset the balance of traffic flows. 9

Netflix-Comcast Once an advocate for network neutrality, Netflix has opted for higher QOS through a paid peering arrangement with Comcast. Netflix now directly interconnects with Comcast at many locations thereby reducing latency and the number of networks and routers typically used. Virtually overnight Netflix traffic congestion problems evaporated. Paid peering, providing “Most Favored Nation” treatment of specific traffic streams, has triggered a vigorous debate over what constitutes reasonable price and QOS discrimination. Netflix’s payments to Comcast are offset in part by reduced or eliminated payments to CDNs, but the accrual of more revenues for retail ISPs raises concerns about increasing bottleneck/terminating monopoly control. Will surcharge demands and better than best efforts become the new normal even for venture with modest traffic volumes previously accommodated by the standard best efforts model? 10

Consequences of the Netflix-Comcast Deal Pressure to Upgrade—Absent network neutrality restrictions, upstream content distributors and downstream end users “upsold” on alternatives to standard, best efforts delivery. Higher Broadband Profit Margins--Broadband rate increases through tiering transmission bit rate and download allotments. Likely substantial narrowing in the gap between wireline (200 or more Gbytes) and wireless (250 Mbytes to 10 Gbytes). More Subscriber Options for Avoiding Download Debits--ISPs will “soften the blow” of stingy download caps with expanded opportunities for “sponsored data” by content and service providers who pay the retail ISP in lieu of it metering the download. ISPs Demand More Incentives to Upgrade--ISPs will leverage network upgrades in exchange for better interconnection terms with content providers, CDNs and upstream carriers. More Interconnection Compensation Disputes—Lots of finger pointing when QOS declines. Was Netflix to blame when it made the entire 2d season of House of Cards available for “binge viewing,” or was it cheapskate CDNs, or something nefarious inside the last kilometer? 11

Conclusions NRAs will continue to struggle to find a lawful way to impose open Internet rules calibrated to sanction only harmful QOS and price discrimination without creating investment disincentives. NRAs should emphasize commercial negotiations, but provide a forum for resolving complaints. In most countries ISPs do not have to treated as public utilities for the NRA to impose good faith, transparency, truth in billing and reporting requirements. Common carrier regulation has a long and tortuous history of protracted disputes over what constitutes “reasonable” discrimination and “similarly situated” parties. ISPs appear to have solidified their control over the Internet ecosystem, despite the conventional wisdom that “content rules.” When content demand triggers real or artificial congestion, the content provider and its subscribers end up paying more. ISPs will frame paid prioritization as a necessary to manage a scarce resource, while opponents will accuse ISPs of creating scarcity and rationing a resource that previously managed to deliver content without surcharge or congestion. 12