FCC Understating Systemic Risks of “Third Way” — Why It’s a Disaster Waiting to Happen

May 7, 2010

The FCC is vastly understating the systemic risk involved in the FCC’s radical “third way” regulatory surgery to the Internet, the communications sector and the economy.

  • The FCC’s proposed “third way” is an elaborate public relations facade that disguises huge problems and fatal conceptual/practical flaws that will become painfully obvious over time.
  • The FCC’s proposal is long on politics and soothing rhetoric, but short on real world practicality or legitimacy; it predictably will ultimately collapse under its own weight, complexity and hubris — unfortunately leaving exceptional carnage in its wake.
  • Simply, this proposal is too inherently contradictory and mind-numbingly complex, and too big not to fail.
  • This analysis will explain why it is a disaster waiting to happen; it’s not a matter of if, but when the “third way” will collapse on itself.

I. Why this “third way” is a disaster waiting to happen:

The best way to understand what is going on here is to think of the Internet as a brain and the FCC’s “third way” proposal as brain surgery to fundamentally rewire how the Internet brain operates at its most basic level.

  • The Internet operationally is actually very much like a brain, in that it is comprised of thousands of networks (nerves) that have billions of edge connections (ganglia) that fire quadrillions of transmissions (synapses) made of of quintillions of bits (molecules).
  • While we know how a brain works on a basic level, we have no idea what all the individual connections and messages are and do, nor do we understand very well how all the parts connect and work together well enough to rewire or replicate brain functions — it’s simply too complex.
  • The FCC may know how the Internet brain works on a basic academic level, but the “third way” suggests that the FCC fancies itself as a near perfect brain surgeon that is more than smart enough to collectively handle the complexity of whatever the ‘third way” Internet brain surgery will entail.
  • To get a handle of how excruciatingly complex the FCC’s Internet brain surgery task is, think about what the third way proposes: “The provisions of Title II would apply to the transmission component of broadband access service...” “Transmission” is “telecommunications,” which in the broadband context means internet traffic. Internet traffic has always been defined as an unregulated data service, enhanced service, or information service, not regulated telecommunications.
    • Thus using the brain metaphor, the FCC proposes to regulate/rewire (control) only the molecules, synapses, ganglia, and nerves (Internet transmission bits, transmissions, connections and networks), from only American broadband companies, even though Internet transmissions/bits have no identifiers denoting who is transmitting them, and then only applying certain new limits on only certain of the quintillions of Internet bits and quadrillions of transmissions.
    • Taking the brain metaphor further, the FCC is proposing to apply only parts of an integrated and interdependent Title II without understanding all of the legal and practical inter-relationships and interdependencies of the various building block sections in Title II that the FCC is selectively choosing to employ. (For an example of the most glaring unintended consequence of the “third way” see my previous post on why the FCC legally cannot forbear from reciprocal compensation mandates in the law.)
      • (Simply, the FCC does not know what it does not know here.)
    • Taking the brain metaphor even further, the FCC’s “third way” Internet brain surgery is all about rewiring the Internet brain’s networks and connections, that have always operated and been designed for sending messages/bits asymmetrically (i.e. one to many, many to many, or many to one), with rules that completely assume that “transmissions” are symmetric in nature (i.e. one to one or origination and termination.)
      • Simply, the FCC brain surgery will attempt to force unregulated asymmetric Internet traffic to abide by new regulated symmetric telecommunications traffic rules.
      • Thus, the FCC will be applying outdated rules designed entirely around one technology, to a completely different technology, the classic dilemma of trying to force a square peg into a round hole. The FCC’s “third way” by design can’t work; it predictably will fail.
    • Taking this Internet brain surgery metaphor yet further, the FCC will be attempting this radical, experimental, never-been-done-before, open-skull surgery in public, over a period of months/years while everyone in and outside the operating room is shouting “don’t cut that!” “we’re suing for malpractice!”… all while the Internet is trying to function and needs to function at optimal efficiency, in order to cope with the relentlessly increasing load on the Internet brain by the Internet’s body, the Internet economy.
    • Furthermore the brash act of the FCC deciding to crack open the Internet skull to begin surgery quickly inevitably will incite foreign regulators to fancy themselves as cutting-edge brain surgeons too, and start regulating/rewiring how their part of the Internet brain will be allowed to function, using their own “innovative” surgical Internet incisions and techniques.
    • Meanwhile, many will sue that the surgery is unnecessary, unwarranted, unjustified and unauthorized, and the courts at any time are likely to order the FCC to stop its brain surgery and undo the surgical changes they have already put in motion.
    • The prospects that the FCC has the competence and perfect knowledge to succeed in this mind-numbingly complex, risky and unnecessary Internet brain surgery, without irreparable damage/impairment, mistakes, or unintended consequences, is practically nil.
    • What the FCC is attempting here is so complex, inherently inconsistent, so risky, so predictably unworkable, it is an obvious disaster waiting to happen.

II. Identifying the predictable disastrous consequences of the FCC’s “third way:”

First, the FCC’s “third way” very likely will be over turned in court.

There is no “Title I 1/2” in the law and there is no way to create it out of thin air. The FCC is not the Federal Communications Congress; under the Constitution, only Congress can make new law. This “third way” is way beyond the unbounded regulatory overreach the court struck down in the Comcast decision; the FCC is making up legal authority that simply does not exist.

  • The FCC’s “third way” is predictably a “lose-lose gamble” by the FCC because the FCC very likely will lose in court while accomplishing nothing, but further damaging the FCC’s reputation, influence and agenda.

Second, the FCC majority is on path to most severely polarize and politicize the Internet for the first time, which will have lasting destructive and unintended consequences.

  • To date, FCC, communications, and Internet policy has been exceptionally bipartisan, collaborative and cooperative for the last twenty years.
  • The essence of the Internet is that it is voluntary, there is no one or no entity in coercive control of the Internet.
  • By replacing the consistent historical collaborative, cooperative, competitive way the U.S. Internet has operated to date, with conflict, coercion and control, the FCC majority is putting the Internet at serious risk of balkanization domestically and internationally.
  • There is nothing “neutral” about the FCC clearly picking winners and losers. There is nothing “open” about a “mother-may-I, centralized, common carrier FCC regulatory approach. There is nothing “common sense” about abandoning what has worked for an untested risky experiment that is not necessary, warranted, justified, or authorized.
  • This will be the first core FCC ruling on general Internet policy that will not be bipartisan and unanimous.
    • That is a huge historical inflection point for the FCC.
    • It heralds a very different FCC going forward.

Third, the FCC is creating investment uncertainty on steroids.

The “third way” is likely to become a metaphor for three FCC votes.

  • The message the FCC is sending unequivocably to the investment community is that the law, the Constitution, and legal precedent don’t matter, only three votes at the FCC.
  • What that means for investors is that the FCC’s decisions will shift from the more predictable trajectory of building on or subtracting from known legal precedent, to a lottery-wheel dynamic where the trajectory will be where ever three votes arbitrarily happen to want to take the FCC at any particular time.

Fourth, the FCC has become an arbitrageur’s/speculator’s dream and an investors nightmare.

  • By disregarding the rule of law, politicizing Internet policy outcomes, and picking winners (Google, Amazon, eBay, IAC) and losers (all broadband companies and equipment suppliers) the FCC is disadvantaging long term investors and pension funds that need dividend-paying securities, and advantaging day-traders, speculators and arbitrageurs that bet on headline events and the government proactively stepping on the scales for the benefit of one set of companies over another.  
In sum, the FCC’s now-expected “third way” decision to regulate the Internet for the first time with heavy common carrier regulation, may be the single most out-of-bounds and destructive FCC decisions I have witnessed in my twenty years of following the FCC closely.

  • The FCC’s clever, pitch-perfect public relations effort to mask the real and very different intent and impact of this radical reversal of longstanding, highly-successful non-regulation of the Internet, won’t wear well with time.
  • The lesson here is don’t listen to what the FCC says, watch what they do. They are not the same.

Lastly, what the FCC is proposing is predictably destructive and unworkable.

  • The “third way” has obvious systemic risks and flaws.
  • Having been successful in the FCC prediction business for two decades, this is not a hard call — this will end very badly; it is a predictable disaster waiting to happen.

 

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