The Broadband Credibility Gap
47 Pages Posted: 19 Jun 2010
Date Written: June 2010
With the D.C. Circuit’s recent ruling in Comcast v. FCC, the court has thrown the Federal Communications Commission’s efforts to promote an “Open Internet” into legal limbo. In response, FCC Chairman Julius Genachowski has announced that he intends to seek to impose a “Third Way”, whereby the Commission would reclassify broadband transport as a “telecommunications service” under Title II of the Communications Act, coupled however with aggressive use of the FCC’s forbearance authority under Section 10 of the Communications Act to eliminate many of the more burdensome requirements of Title II regulation. In so doing, the Commission would ostensibly create some sort of “Title II Lite” regulation for broadband Internet services. To explore this important topic, we first provide a simple game theoretic analysis that exposes the underlying issue surrounding regulatory classification. We demonstrate that a “light touch” toward regulating broadband in not a credible commitment. Moreover, we use the current Commission’s own actions to demonstrate it lacks the necessary self-discipline or mindset for “light touch” regulation. Next, we consider the investment effects of reclassification using a theoretical model of investment. In this model, a model firm faces either “weak” or “strong” regulation. This model shows that an increase in the ex ante probability of “strong” regulation -- that is, reclassification -- weakens investment incentives. Third, we provide evidence from the financial markets supporting the negative investment effects implied by the theory. This same evidence also reveals that investors have no confidence that the Commission possesses the self-discipline required to successfully implement “light touch” regulation. Finally, we show that the Comcast decision is not a threat to ancillary authority for broadband; the Commission merely has to make better arguments to tie the proposed regulation to the Commission’s express statutory objectives under Title II, III, or VI of the Act. Although the Chairman’s “Third Way” may provide the Commission with a perceived blanket of legal comfort, that legal certainty comes at the expense of financial uncertainty. The Comcast court makes clear that Title I continues to provide sound legal footing to protect consumers from harm -- at least until Congress decides to update and amend existing Communications law with a cleaner framework.
Keywords: network neutrality, Third Way, Title I, Title II, Communications Act, Comcast v. FCC, Broadband Credibility Gap, Investment, broadband
JEL Classification: K20, K23, K40, L50, L51, L96, L98, O38
Suggested Citation: Suggested Citation