[Senate Hearing 113-845]
[From the U.S. Government Publishing Office]
S. Hrg. 113-845
WHY NET NEUTRALITY MATTERS:
PROTECTING CONSUMERS
AND COMPETITION THROUGH
MEANINGFUL OPEN INTERNET RULES
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
__________
SEPTEMBER 17, 2014
__________
Serial No. J-113-73
__________
Printed for the use of the Committee on the Judiciary
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
U.S. GOVERNMENT PUBLISHING OFFICE
21-221 PDF WASHINGTON : 2017
___________________________________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government Publishing Office,
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center,
U.S. Government Publishing Office. Phone 202-512-1800, or 866-512-1800 (toll-free).
E-mail, [email protected].
COMMITTEE ON THE JUDICIARY
PATRICK J. LEAHY, Vermont, Chairman
DIANNE FEINSTEIN, California CHUCK GRASSLEY, Iowa, Ranking
CHUCK SCHUMER, New York Member
DICK DURBIN, Illinois ORRIN G. HATCH, Utah
SHELDON WHITEHOUSE, Rhode Island JEFF SESSIONS, Alabama
AMY KLOBUCHAR, Minnesota LINDSEY GRAHAM, South Carolina
AL FRANKEN, Minnesota JOHN CORNYN, Texas
CHRISTOPHER A. COONS, Delaware MICHAEL S. LEE, Utah
RICHARD BLUMENTHAL, Connecticut TED CRUZ, Texas
MAZIE HIRONO, Hawaii JEFF FLAKE, Arizona
Kristine Lucius, Chief Counsel and Staff Director
Kolan Davis, Republican Chief Counsel and Staff Director
C O N T E N T S
----------
SEPTEMBER 17, 2014, 10:34 A.M.
STATEMENTS OF COMMITTEE MEMBERS
Page
Grassley, Hon. Chuck, a U.S. Senator from the State of Iowa...... 2
prepared statement........................................... 215
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont. 1
prepared statement........................................... 213
WITNESSES
Witness List..................................................... 37
Burnham, Bradford, Managing Partner, Union Square Ventures, LLC,
New York, New York............................................. 4
prepared statement........................................... 38
Eisenach, Jeffrey A., Ph.D., Visiting Scholar, American
Enterprise Institute Center for Internet, Communications and
Technology Policy, Washington, DC.............................. 11
prepared statement........................................... 69
attachment I to prepared statement........................... 76
attachment II to prepared statement.......................... 108
attachment III to prepared statement......................... 159
attachment IV to prepared statement.......................... 181
Livier, Ruth, Writer, Independent Producer, and Actress, Pacific
Palisades, California.......................................... 7
prepared statement........................................... 42
McDowell, Hon. Robert M., Former Commissioner, Federal
Communications Commission, and Partner, Wiley Rein LLP,
Washington, DC................................................. 9
prepared statement........................................... 49
O'Connor, Nuala, President and Chief Executive Officer, Center
for Democracy and Technology, Washington, DC................... 13
prepared statement........................................... 201
QUESTIONS
Questions submitted to Bradford Burnham by Senator Leahy......... 218
Questions submitted to Jeffrey A. Eisenach, Ph.D., by:
Senator Grassley............................................. 225
Senator Leahy................................................ 221
Senator Lee.................................................. 228
Questions submitted to Ruth Livier by Senator Leahy.............. 219
Questions submitted to Hon. Robert M. McDowell by:
Senator Grassley............................................. 223
Senator Leahy................................................ 220
Senator Lee.................................................. 227
Questions submitted to Nuala O'Connor by:
Senator Leahy................................................ 222
Senator Lee.................................................. 229
ANSWERS
Responses of Bradford Burnham to questions submitted by Senator
Leahy.......................................................... 230
Responses of Jeffrey A. Eisenach, Ph.D., to questions submitted
by Senators Grassley, Leahy, and Lee........................... 243
Responses of Ruth Livier to questions submitted by Senator Leahy. 231
Responses of Hon. Robert M. McDowell to questions submitted by
Senators Grassley, Leahy, and Lee.............................. 232
Responses of Nuala O'Connor to questions submitted by Senators
Leahy and Lee.................................................. 250
MISCELLANEOUS SUBMISSIONS FOR THE RECORD
ACS Solutions et al., letter to Hon. Penny Pritzker, Secretary,
U.S. Department of Commerce, September 9, 2014................. 287
ADTRAN et al., letter to Federal Communications Commission (FCC),
May 13, 2014................................................... 290
Aeronet Wireless Broadband Corp. et al., letter to Hon. Penny
Pritzker, Secretary, U.S. Department of Commerce, July 30, 2014 283
Computer and Communications Industry Association (CCIA),
statement...................................................... 273
Electronic Frontier Foundation, Corynne McSherry, Intellectual
Property Director, statement................................... 255
Future of Music Coalition (FMC), Casey Rae, Vice President,
Policy and Education, statement................................ 265
Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah, and
Hon. Jim DeMint, a U.S. Senator from the State of South
Carolina, Wall Street Journal, October 29, 2009, op-ed article. 300
McConnell, Hon. Mitch, a U.S. Senator from the State of Kentucky,
et al., letter to Hon. Thomas Wheeler, Chairman, Federal
Communications Commission, May 13, 2014........................ 294
National Association of Realtors (NAR), Steve Brown, 2014
President, September 16, 2014, letter.......................... 253
National Cable and Telecommunications Association (NCTA), Rick
Chessen, Senior Vice President, Law and Regulatory Policy, May
14, 2014, letter............................................... 278
Szoka, Berin, President, TechFreedom, et al., letter to Hon.
Thomas Wheeler, Chairman, Federal Communications Commission,
September 15, 2014............................................. 296
ADDITIONAL SUBMISSIONS FOR THE RECORD
Submissions for the record not printed due to voluminous nature,
previously printed by an agency of the Federal Government, or
other criteria
determined by the Committee, list.............................. 302
American Enterprise Institute, Jeffrey A. Eisenach, Ph.D.,
economic study:
http://www.aei.org/files/2012/10/17/-broadband-competition-
in-the-
internet-ecosystem_164734199280.pdf........................ 302
Eisenach, Jeffrey A., and Ilene Knable Gotts, ``In Search of a
Competition Doctrine for Information Technology Markets: Recent
Antitrust Developments in the Online Sector,'' paper:
http://www.techpolicydaily.com/wp-content/uploads/2014/06/In-
Search-of-a-Competition-Doctrine-for-Information-
Technology-Markets-
Eisenach-Gotts.pdf......................................... 302
Federal Communications Commission (FCC), Electronic Comment
Filing System, September 4, 2014, online posting:
http://apps.fcc.gov/ecfs/comment/view?id=6018327622.......... 302
Federal Communications Law Journal, Jeffrey A. Eisenach and Hal
J. Singer, June 2013, article:
http://www.fclj.org/wp-content/uploads/2013/09/65-3-
Singer.pdf................................................. 302
Journal of Law and Economics, The, R.H. Coase, October 1959,
article:
http://www.jstor.org/stable/724927........................... 302
Social Science Research Network (SSRN), Jerry Brito et al., April
12, 2010, article:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=
1587058&download=yes....................................... 302
WHY NET NEUTRALITY MATTERS:
PROTECTING CONSUMERS
AND COMPETITION THROUGH
MEANINGFUL OPEN INTERNET RULES
----------
WEDNESDAY, SEPTEMBER 17, 2014,
United States Senate,
Committee on the Judiciary,
Washington, DC.
The Committee met, pursuant to notice, at 10:34 a.m., in
Room SH-216, Hart Senate Office Building, Hon. Patrick J.
Leahy, presiding.
Present: Senators Whitehouse, Klobuchar, Franken,
Blumenthal, Hirono, Grassley, Hatch, Lee, Cruz, and Flake.
OPENING STATEMENT OF HON. PATRICK J. LEAHY,
A U.S. SENATOR FROM THE STATE OF VERMONT
Chairman Leahy. Senator Grassley is on his way, we will
begin with my opening statement and I will yield to him when he
gets here. Senator Lee is here, Senator Whitehouse, Senator
Klobuchar, Senator Franken, and Senator Hirono.
I appreciate the number of people who are here. I also
appreciate the almost overwhelming number of people who have
emailed me or contacted me about this hearing.
On Monday, the Federal Communications Commission closed the
public comment period on its proposed rules to protect an open
Internet. I was not surprised by the number of emails and calls
I got in my office because the FCC got 3.7 million--Americans
made their voices heard. The issue is critical to consumers and
businesses. An overwhelming number of the comments called on
the FCC to enact meaningful rules that will protect consumers
and preserve competition online. I should note I agree, and I
believe the FCC should heed their call.
This is the second hearing the Judiciary Committee has
convened on this issue. The first hearing, which I chaired in
Vermont this summer, was an important opportunity to hear
voices outside of the Beltway. Vermont-based small businesses
now have a reach they only dreamed of thanks to the
transforming power of the Internet. For the Vermont Country
Store--it has long operated two retail outlets and a mail order
business, the Internet now accounts for a remarkable 40 percent
of its business, one third of its employees and they hire
several hundred people. Logic Supply is based entirely online
and sells industrial computers to consumers around the world.
They both were very honest and said they have reached a
point and size that they could pay extra to jump over other
people, but they do not want it to be that way. They said they
never would have been able to start in the first place had they
had to face that kind of obstacle. Their testimony was simple,
keep the Internet an open playing field for small businesses so
that they can launch and thrive. Cabot Orton from the Vermont
Country Store said, ``All the small business community asks is
simply to preserve and protect Internet commerce as it exists
today, which has served all businesses remarkably well.'' He
could not be more right.
Martha Reid, the Vermont State Librarian, testified about
the important role that libraries play in communities
throughout the country, particularly those in underserved
areas. She said, ``All Americans, including the most
disenfranchised citizens who would have no way to access the
Internet without the library, need to be able to use Internet
resources equally.''
So this testimony and the testimony we will hear today will
underscore the importance of why net neutrality matters. It
matters for our economic growth and competitiveness. I believe
the Internet is an equalizer. It can help break a lot of cycles
of unemployment and poverty. It matters because the online
world is the ultimate tool for free expression and democracy--a
tool so powerful that it has helped topple totalitarian
governments. Think about that. I mean this is something even a
few years ago, none of us could even imagine. If you have the
Internet become a two-tiered system of ``haves'' and ``have-
nots,'' controlled by a small number of corporate gatekeepers,
it destroys everything that has made it one of the greatest
innovations, certainly in history. The FCC must act in a
meaningful way to protect its openness.
Meaningful rules would stop so-called ``paid
prioritization'' deals that would allow large corporations to
drown out smaller competitors. I introduced legislation with
Congresswoman Doris Matsui of California that would require the
FCC to develop rules to stop these deals. Regardless of whether
our bill passes or not, the FCC should act to block this kind
of behavior. You have to have rules that go beyond the
antitrust laws, which play an important role as a backstop but
alone are not enough to promote and preserve free speech and
innovation online.
The FCC's action will determine whether the Internet as we
know it stays open, vibrant, and competitive, or whether it is
going to become a place where only the most powerful have a
say. I know the outcome the people in Vermont want.
I thank the witnesses for coming today on Constitution Day.
We have extra copies if anybody wants it.
Before I start, one of my friends of decades in the U.S.
Senate, Senator Grassley of Iowa--today is his birthday. So let
us all wish him a happy birthday.
Senator Grassley. Thank you.
Chairman Leahy. That faked you out; did it not?
OPENING STATEMENT OF HON. CHUCK GRASSLEY,
A U.S. SENATOR FROM THE STATE OF IOWA
Senator Grassley. Yes. Thank you all. Thanks to everybody
in the audience who is here. Most importantly, the witnesses
who have prepared for this and our experts in this area. It is
very important that you have a hearing like this, I think a
complex topic, and I am glad the committee can hear from all
sides of the debate.
I believe that many, if not all of us, share similar goals
with respect to the Internet. We all want the Internet to grow.
We want it to prosper. We all want faster and cheaper Internet
access. We all want more deployment of broadband technologies,
particularly the areas that remain without access. We all want
more innovations and new avenues by which we can access that
information. We all want consumers to have more choice and
options.
The FCC is in the process of considering whether to adopt
rules that would regulate the Internet. Chairman Wheeler claims
that there is not enough competition in the highspeed broadband
marketplace. There are some that dispute that. Rather, these
people say that we have competitive dynamic Internet right now
and the push for new regulations is a solution in search of a
problem.
Is the Internet really broken? Broadband and Internet
technologies are advancing every day. New products are
constantly entering the market. Overall, broadband deployment
and speeds, both wired and wireless, are estimated to reach 98
percent of the American households with broadband speeds of 10
megabytes or faster. 82 percent of those households have access
to broadband speeds of 50 megabytes or faster.
The overall broadband industry--cable, telco, satellite and
wireless--has invested over $1.2 trillion in infrastructure,
$60 billion a year recently. Further, it is estimated that
broadband speeds double every 2 to 3 years.
So many contend that the FCC and others are just
speculating about future harms and there is no need to deviate
from the current policies that have generated Internet
phenomenal growth. Morever, many--including this Senator--are
highly skeptical about the prospects of expansive FCC
regulation over every aspect of the Internet. The Internet has
been successful precisely because of a hands-off approach.
I note that this policy was first implemented under
President Clinton. The lack of government intervention has
allowed competition to flourish beyond wildest imaginations.
We all want more deployment of technology and
infrastructure. In fact, I would like to see more broadband
growth and options take place in rural America where I live and
where the Chairman proudly says that he resides. However, it is
more likely that we will see improvements in this area as a
result of innovation and investment and not more regulation.
Because of the fast changing Internet market, rules and
regulations could just end up impeding the development and
adoption of new technologies and services. In fact, they could
threaten investment in network upgrades, generate legal and
marketplace uncertainty, and ultimately cost jobs, harming the
economy.
It is doubtful that creating an expansive regulatory regime
will increase broadband deployments, spur innovation and ensure
better quality services and consumer satisfaction.
Supporters of net neutrality do contend that new rules will
restore Internet protections and ensure the vitality of the
Internet. If anything, I am concerned that the imposition of
such regulations and in particular, expansion of 80 year-old
rules designed to regulate old telephone monopolies under Title
II might have the exact opposite effect.
There are legitimate concerns about making sure Internet
competition and consumers are protected from bad actors. I know
about them and hear about them quite often.
No I do not support monopolistic, anti-competitive or
predatory practices in the Internet marketplace or anywhere for
that matter, but rather than allow the FCC to impose
regulations on an industry that has been so successful under a
hands-off regime, antitrust and consumer protection laws may
provide a better option to ensure consumers and businesses are
not harmed by anti-competitive conduct in the modern Internet
ecosphere. I have been a strong supporter of vigorous
enforcement of antitrust laws by the Justice Department and the
Federal Trade Commission to ensure a fair playing field in many
sectors of our economy--just recently got somewhat of a
modification in the meat-packing industry of such a merger to
make sure that that would take place. So you know that I am
active in the enforcement of the antitrust laws. I hope that
these people, the Federal Trade Commission and the Justice
Department, will be paying close attention to this market as
well.
So in conclusion, because the Internet is so important to
consumers and to our economy, we should proceed with caution.
No one wants to undermine the Internet. It is a complex policy
debate and I look forward to today's testimony. And who knows?
You could change my mind.
Chairman Leahy. It has been known to happen.
Senator Grassley. Not often enough.
Chairman Leahy. Not often enough.
[Laughter.]
Chairman Leahy. I was showing some of you the picture in
rural Vermont where I live and the Senator from Iowa has a
similar picture of his home in rural Iowa where he lives. An
open Internet in a rural area is critical. It is similar to
what my grandparents would tell me about when--in Vermont--they
got rural electricity, rural telephone, the difference it made.
It is something we all take for granted today.
Our first witness is Brad Burnham. He is a cofounder and
managing partner of Union Square Ventures, a New York based
venture capital firm. He has invested in companies like
Twitter, Etsy and Kickstarter. Obviously, you know where to
invest.
He previously worked at AT&T in a variety of sales,
marketing and business development roles. He also worked at
AT&T Ventures, the venture capital group.
Mr. Burnham, please go ahead.
STATEMENT OF BRADFORD BURNHAM, MANAGING PARTNER, UNION SQUARE
VENTURES, LLC, NEW YORK, NEW YORK
Mr. Burnham. Thank you, Senator Leahy for the opportunity.
As you said, my perspective has been shaped by a career
spent on both sides of the issue, first as a telecommunications
executive at AT&T and a partner at AT&T Ventures and then later
as a founding partner of Union Square Ventures.
I believe we are at a crossroads. The rules the FCC is now
considering will shape the Internet ecosystem for many years to
come and could have a profound effect on our economy, our place
in the world and ultimately on the nature of our society.
Almost everyone has benefited from the phenomenal innovation
enabled by the Internet, but few of us have stopped to think
about how all of this happened.
The Internet we know is the direct result of two key
characteristics. First, the Internet separates applications
from infrastructure, making it possible to create a networked
application without knowing anything about the underlying
network. Second, every applications is immediately available to
every consumer. These two characteristics radically lowered the
cost of building and distributing Internet applications,
opening the market to a much larger and more diverse pool of
creators.
For the first time, people without money, connections, or
corporate backing could create an application and reach a
global audience. Facebook was created in a dorm room.
Foursquare spent $25,000 to reach their first 100,000 users.
These companies and thousands more started from scratch and
grew to reach global audiences. They have since gone on to
empower hundreds of millions of others--independent
craftspeople setting up shop on Etsy, filmmakers raising
millions of dollars on Kickstarter, and journalists reaching a
global audience on Twitter.
This incredible explosion of innovation happened because it
became so cheap to create and distribute an application on the
Internet that innovators no longer required permission from a
boss, a network operator, or an investor to launch a business.
If you could imagine an application like Instagram, you could
build it yourself and get it into the hands of thousands or
millions of consumers almost overnight. Later, once you had a
large audience, you could approach investors from a position of
strength to raise money to grow your business. This is the
model of innovation that powered the growth of the Internet,
and all of this is about to change.
Until recently, Internet access providers could not tell if
you were watching Netflix, playing Angry Birds, or posting on
Facebook. By default, access to the Internet was open. They
have now deployed technology that allows them to see what
services you are using. This will make it possible for the
cable and telephone companies we use to get to the Internet to
charge application developers for faster delivery of packets,
slow traffic they decide is less important and even block
traffic altogether.
Even as Internet access providers increase their ability to
treat applications differently, the Internet has remained a
relatively level playing field because of a combination of FCC
enforcement actions and Comcast's acceptance of net neutrality
principles as a condition of their merger with NBC. Today,
those agreements are nearing expiration, and the FCC's ability
to enforce open Internet principles has been sharply curtailed
by the DC Circuit Court's decision in the Verizon case.
Unfortunately, the FCC, in search of a compromise, is not
proposing to reclassify Internet access. Instead, they are
proposing rules that would explicitly allow cable and telephone
companies to treat Internet applications differently for a
variety of business and network management reasons. The
combination of access provider's new technical abilities and
the FCC's proposed rules will dramatically increase the cost of
creating and distributing Internet applications. Applications
developers will have to consider the network management
strategies and even the business interests of cable and
telephone companies when they design their applications. They
will also have to change the way they approach investors.
Every web application developer knows speed is a feature.
They all work to shave milliseconds off the time it takes to
load a page. Start-ups will need to raise money up front to buy
access to the fast lane to succeed, making it impossible to
launch first as Tumbler and Foursquare did and then raise money
later. No new application will be created in a dorm room. The
applications like video and voice that compete with cable and
telephone companies will find it especially hard to raise
money.
It may seem like I am overstating my case, but ask yourself
how comfortable would you be investing in a company creating a
new air conditioner if the company that delivered power to that
device could single it out and throttle its power during busy
periods while delivering full power to their own air
conditioners. What if the power company zero-rated their air
conditioners, powering them for free?
It seems obvious that allowing electric utilities to
discriminate between different applications--technically or
financially--would distort the market for applications. The
companies that provide access to the Internet are asking to be
able to do just these things. Lobbyists for cable and telephone
companies like to jump on this analogy to suggest that
advocates for the open Internet are fuzzy headed liberals who
want the Internet regulated as a public utility. This is a
cynical, but effective misdirection. I am a capitalist. I
believe in markets. If anything, like many investors, I lean
libertarian. I am not suggesting the Internet should be
regulated. I am suggesting the telecommunications networks we
use to get to the Internet not be allowed to exploit that
bottleneck position to distort the market for Internet
applications.
This is not some dangerous new government intervention into
a free market. We have always recognized that
telecommunications services were essential services because
they are the connective tissue of our entire economy. In fact,
until 2004, there was no question that Internet access was a
telecommunications service. It was only then that cable
companies convinced the FCC to treat Internet access as an
information service. That was a fiction then, and it is still a
fiction.
How many of us use our cable or telephone company for
anything other than access to the Internet? The vast majority
of applications we use come from independent developers. Many
were created on a shoestring budget in the last couple of
years. I understand why cable and telephone companies would
like to change that. I understand why it is in their business
interests to leverage their ability to control access to
consumers to advantage their own applications or to get paid to
advantage other providers' applications. I do not understand
why anyone other than the access providers or the shareholders
of the access providers would think this a good idea.
There is a way to preserve the key characteristics that
enabled the emergence of the applications on the Internet. It
is possible to keep the cost of developing and distributing
Internet application within the reach of anyone with a computer
and a little programming knowledge. All we have to do is admit
what we all know, that access to the Internet is an essential
services. Classify that service as a telecommunication service
and then immediately forbear most of the regulatory overhead of
the current telecommunications regulation. This would give the
FCC sound legal authority to adopt the rules we need to protect
innovation and investment on the Internet--rules against
blocking? rules against prohibiting application-specific
discrimination and rules banning access fees. This simple,
clear, solution is the lightest weight approach possible. Not
only is it not overbearing government regulation, it is the
only way to prevent the distortion of the market for Internet
applications which would ultimately require much more heavy-
handed intervention.
Chairman Leahy. Thank you very much, Mr. Burnham.
Incidently, everybody's statement will be placed in the record
in full. We are going to have to try to keep closer to our
time, only because I know we are going to have votes on the
floor and we will be losing Members when that happens.
[The prepared statement of Bradford Burnham appears as a
submission for the record.]
Chairman Leahy. Ruth Livier is writer, independent producer
and actress. She created the award-winning bilingual web
series, Ylse, and she is the first member of the Writers Guild
of America West to join that union solely for work in new
media.
Please go ahead.
STATEMENT OF RUTH LIVIER, WRITER, INDEPENDENT PRODUCER, AND
ACTRESS, PACIFIC PALISADES, CALIFORNIA
Ms. Livier. Thank you, Chairman Leahy.
I am here as a Union actress and as the first person to
join the Writers Guild of America West via my work in digital
Media to share about how net neutrality changed my life.
Minority communities have historically lacked equitable and
balanced representation in traditional media. UCLA's Dr.
Darnell Hunt, a media diversity expert, testified that business
as usual in the industry is wholly inadequate for addressing
the stagnation in Hollywood diversity. A new paradigm is Needed
that goes beyond symbolic pronouncements and token gestures.
This is where net neutrality, or the open Internet comes in.
As an American Latina, I got tired of seeing the
disproportionate amount of negative stereotypes about my
community in traditional media. So, in 2000, I wrote Ylse as a
TV pilot. It is a bicultural dramedy about a modern Latina.
At a conference designed to nurture Latino talent, I
approached an executive for advice who said, ``Who are you for
anyone to produce your show?'' Others asked, ``Who's going to
watch this?'' Their comments were not based on my writing. They
had not read a single word. Their immediate objections were
based entirely on the concept of a Latina-driven show written
by someone with no track record.
Who was I to think that anyone would take me seriously? And
how was I supposed to prove there was a market for my content?
There was no way in so, I filed the script away.
Then, years later, everything changed. Technology advanced.
Camera equipment was no longer cost prohibitive. The Internet
suddenly put worldwide distribution at our fingertips. It all
seemed too good to be true, but, it was. And it changed
everything.
We independent artists suddenly had unprecedented access to
create, produce and distribute our content. In this exciting
new frontier, anyone, regardless of ethnicity or socio-economic
standing, could finally tell their stories from our points of
view without getting discouraged, derailed or having our
visions diluted by corporate gatekeepers.
So in 2008, I took that old script and reconceived it into
the award-winning web series, Ylse.net. Our global audience was
even broader than expected. Our indie series provided jobs for
a diverse work force in front of and behind cameras. Our
minority directors earned points toward becoming members of the
Directors Guild of America and I earned points toward becoming
a Writers Guild of America member via digital Media. This meant
that the open Internet was a viable alternative way to build a
career and diversify the talent pool of professional writers.
It also meant that programming on the web was not up to the
same few gatekeepers who controlled traditional media where, by
all accounts, by every study, minorities are still under-
represented in the writers' rooms, Executive positions, and in
front of cameras. And Latinos are the most under-represented
relative to our share of the US population.
But, with an open Internet, low-budgets and no connections
does not mean there was no way in. Never again could we be
disregarded by anyone who essentially asks, ``Who are you to
have your story be told?'' We all deserve to have our stories
told. We all deserve to be heard, to be acknowledged, and to
not have to sit in the shadows until someone else decides that
our lives are worthy of being reflected in the media and to
have to wait for someone else to get it done. We could now take
the reigns in our hands and take responsibility for our own
destinies.
The open Internet has given the rest of us an opportunity
to improve our crafts, provide jobs and a creative outlet for a
more diverse work force, define ourselves by creating more
varied, complex, positive and balanced portrayals of our demos.
It has given us instant access to information and reputable
data to prove our markets and connect with our global
audiences. It has empowered and motivated historically
marginalized communities to take the reigns in our own hands
and create content, knowing there is a distribution outlet for
it.
This communication platform must not go the way of
traditional media, since through it diverse voices can finally
partake in the national conversation at all levels. But the
same companies that distribute traditional media control
Internet service and they are advancing an agenda of
unenforceable rules that would allow them to be the gatekeepers
and decide what content is available online and on what terms.
We cannot allow this to happen. That is why the FCC must
institute strong rules that ban unjust and unreasonable
discrimination by Internet service providers.
I join with the millions who have commented on the FCC's
proposed rules to call on the Commission to reclassify Internet
service as a telecommunications service, that it may, once and
for all, permanently protect Internet openness. Make no
mistake, this is a civil rights issue and it is my hope that
for future generations of minority and low-income youth having
a platform where they can express themselves on an equal-
playing field will be nothing out of the ordinary because for
us it has been nothing short of revolutionary. Thank you.
Chairman Leahy. Thank you very much. I do appreciate that.
[The prepared statement of Ruth Livier appears as a
submission for the record.]
Chairman Leahy. Our next witness is Robert McDowell who
served as a member of the Federal Communications Commission
from 2006 to 2013. Last week he joined the law firm Wiley Rein
as a partner. Prior to serving at the FCC, Mr. McDowell worked
for 10 years at Comptel. It is an association of competitive
communication service providers.
Please go ahead.
STATEMENT OF HON. ROBERT M. MCDOWELL, FORMER
COMMISSIONER, FEDERAL COMMUNICATIONS COMMISSION, AND PARTNER,
WILEY REIN LLP, WASHINGTON, DC
Mr. McDowell. Thank you, Mr. Chairman, Ranking Member
Grassley and all Members of the Committee. It is an honor to be
here before you today and thank you for pointing out the
resume. I will cut that out of my testimony right now.
I did start at Wiley Rein just last week. Nonetheless, the
opinions I will give today are strictly my own and not those of
any clients of Wiley Rein. I have to say that to make sure I
have a job when I get back to the office later this afternoon.
As was the case during my 7 years on the FCC, my hope is
that the Internet remains open and freedom-enhancing as it has
been since its inception, since it was privatized in the mid-
1990s.
As the Net migrated further away from government control,
it grew beautifully, growing from just under 90 thousand users
in the late 1980s to approximately 3 billion globally today.
Its success as the fastest growing disruptive technology in
human history was the direct result of the Clinton
Administration's bipartisan policy to keep the government's
hands, largely, off of the Internet sector. The Clinton
Administration was expressly vigilant about resisting attempts
to regulate the Net like an old phone monopoly, as some net
neutrality proponents desire today. In short, the Internet is
the greatest deregulatory success story of all time.
While serving on the FCC, I saw many, many different
iterations of the net neutrality debate. Without a doubt, the
definition of the term ``net neutrality'' keeps morphing by the
day. Years ago, new rules were offered up, ostensively, to
prevent Internet service providers from blocking or degrading
the content and applications consumers seek to use.
Since then, the term has become a sort of Rorschach inkblot
to mean anything anyone can envision regarding the Internet to
benefit their agenda and their interests. For instance, net
neutrality has evolved from being about the last mile ISPs to
the middle mile. And for the first time this year, it has grown
to include ideas for regulation of the Internet backbone. The
FCC's record even contains comments calling for the Commission
to have general regulatory over the Internet, including not
only networks like those built by cable and phone companies,
but content and application providers at the so-called ``edge''
as well. At the end of the day, some are attempting to use
public policy to essentially regulate their business rivals.
I have opposed new rules for many reasons, including, but
not limited to, these five: (1) nothing is broken in the
Internet access market that needs fixing; (2) no government
agency has conducted a bona fide, peer-reviewed market study
that has diagnosed any alleged systemic illness; (3) if
systemic market failure were to come to light, ample laws
already exist to remedy the problem, while current laws provide
a deterrent against anti-competitive behavior; (4) retrofitting
Title II of an 80-year old statute designed for the now-extent
dinosaur phone monopolies of the early 20th century would be
devastating to the entire Internet ecosphere and should not be
held out as America's cutting edge 21st century tech policy for
the world to emulate; and (5) expansion of the government's
reach into the operations of the Net is providing cover and
encouragement to regimes such as those in China, Iran, and
Russia to push for multi-lateral, intergovernmental, or as
Vladimir Putin said 3 years ago, ``international control of the
Internet.''
At this critical crossroads, two disturbing trends are
emerging at the FCC. The first is to subject the Internet to
antiquated phone monopoly regulations known as Title II. The
second is to suffocate the competitive, dynamic, vibrant and
world-leading wireless industry with new and unnecessary rules.
Some technology companies that are pushing for classification
of Internet access as a telecommunication service under Title
II should be careful what they wish for.
This section of the Communications Act is not only
antiquated, but it is particularly powerful, prescriptive, far-
reaching and it has over 1000 requirements. As market forces
cause the technical architecture of tech and telecom--as we
used to call them--companies to converge, companies that today
are calling for the regulation of their rivals and think they
will not get swept up in Title II regulation themselves could
wake up 1 day having to live under its mandates.
As a technical matter and business matter, transmission
services and information services are quickly becoming
indistinguishable. It would be impossible to parse the
difference between broadband service providers and other tech
companies that combine transmission with information processing
or storage such as content delivery networks or E-reader
services.
Accordingly, across the globe, content and application
companies are falling under the purview of more and more
regulations and court orders. The FCC has the potential to
stoke a contagion of international Internet regulation.
This scenario becomes even more nettlesome and discouraging
when it comes to wireless broadband. Since its inception,
American wireless companies have spent nearly $400 billion on
infrastructure. Investment grew more than 40 percent between
2009 and 2013, and may add up to $1.2 trillion in new economic
activity by 2017.
Over 90 percent of Americans have a choice of four mobile
broadband providers. Furthermore, America leads the world in 4G
build-out and adoption. The wireless market is clearly working
and consumers are benefiting from it like no other time in
human history.
Most importantly, though, wireless is different. As a
matter of physics, wireless networks operate far differently
from fiber or coaxial cable and require unique management.
Subjecting wireless to new, unnecessary and one-size-fits-all
rules will inject uncertainty into a thriving marketplace. Such
government action could undermine American global
competitiveness as the mobile Internet of everything comes over
the horizon to change our world. Brace yourselves, it is
coming.
In conclusion, whether creating new rules or foisting
antiquated and obsolete laws on new technologies, the end
result would be unnecessary and counterproductive while
creating uncertainty and unintended consequences. A better path
if we all share the same goal of freedom and choice and
openness on the Internet, would be to rely on time-tested anti-
trust and consumer protection laws that have helped make the
American economy the strongest and most innovative in the
world.
Thank you for the opportunity to testify today and I look
forward to your questions.
Chairman Leahy. Thank you very much.
[The prepared statement of Hon. Robert M. McDowell appears
as a submission for the record.]
Chairman Leahy. Dr. Jeffrey Eisenach is a visiting scholar
at the American Enterprise Institute. He directs the Center for
Internet, Communications and Technology Policy. He serves as
executive editor of Tech Policy Daily.com. He writes on a wide
range of issues, including industrial organization,
communications policy, the Internet, government regulations,
labor economics, and public finance. In his spare time, he
comes and testifies here before the Congress.
Go ahead, Doctor.
STATEMENT OF JEFFREY A. EISENACH, PH.D., VISITING SCHOLAR,
AMERICAN ENTERPRISE INSTITUTE CENTER FOR INTERNET,
COMMUNICATIONS AND TECHNOLOGY POLICY, WASHINGTON, DC
Mr. Eisenach. Jack of all trades, master of none, perhaps.
Thank you for your introduction.
Chairman Leahy, Ranking Member Grassley, and Members of the
Committee, thank you for the opportunity to appear before you
to present my views on net neutrality regulation. I do want to
say that while I am here in my capacity as a visiting scholar
at the American Enterprise Institute, the views I express are
my own and should not be contributed to any of the
organizations with which I am affiliated.
My testimony today advances three main points. First, net
neutrality would not improve consumer welfare or protect the
public interest. Rather, it is best understood as an effort by
one set of private interests to enrich itself by using the
power of the state to obtain free services from another, a
classic example of what economists term ``rent-seeking.''
Second, the potential costs of net neutrality regulation are
both sweeping and severe, and extend far beyond a simple
transfer of wealth from one group to another. Third, legitimate
policy concerns can be addressed through existing antitrust and
consumer protection laws.
To begin, let us be clear what we mean by net neutrality
regulation. The rules favored by net neutrality advocates would
ban or restrict payments from one type of business, edge
providers, to another type of business, broadband ISPS. Now it
is easy to see why edge providers would lobby for such rules,
but difficult to understand how they would benefit consumers or
the economy generally.
Net neutrality advocates offer a variety of justifications
starting with the idea that broadband ISPs have monopoly power.
But the monopoly argument has several fatal flaws. First, as
the FCC has repeatedly noted, broadband ISPs are investing
billions of dollars to upgrade their networks, prices are
falling at a rapid pace and broadband speeds are increasing--
Senator Leahy, as I think you mentioned--at 30 percent or more
every year. That sort of performance is not consistent with the
``cozy duopoly'' theory advanced by net neutrality advocates.
Indeed, the broadband market is less concentrated than other
Internet markets like search engines, social networks, and
personal computer operating systems.
Another variant of the market power argument suggests that
while big, established edge providers might be able to fend for
themselves against the ISPs, we need to look out for the little
guys, the new entrants who may be strangled in the crib as a
result of discriminatory access fees. But what no one can
explain, however, is why ISPs would want to discriminate
against start-up edge providers which pose no competitive
threat and which create the applications and content that draw
consumers to subscribe to the broadband in the first place.
Indeed, historically, they have not done so.
The FCC's case for net neutrality regulation is mostly not
based on concerns about monopoly power. Instead, its main
theory is that in the two-sided market in which broadband ISPs
operate--with edge providers on one side and consumers on the
other--edge providers generate so much innovation that they
deserve to be subsidized by consumers through a rule that
forces consumers to pay 100 percent of the cost of the network
while edge providers pay zero. Now, this is a fine theory, but
there is not a scintilla of empirical evidence to support it.
Finally, some argue net neutrality regulations are needed
to protect freedom of speech. There are numerous problems with
this argument as well, not the least of which is that giving
Netflix the right to distribute ``Orange Is the New Black''
over Comcast broadband network for free, has nothing to do with
protecting political speech or dissenting views.
When these erroneous arguments are stripped away, what is
left is the obvious--edge providers big and small and those who
fund them and profit from their success have a powerful
economic interest in getting the government to guarantee them
free access to the ISP's networks. Occam's razor applies, the
simplest explanation tends to be the correct one and net
neutrality is no exception.
Now if all that were at issue here were a transfer of
wealth from consumers and ISPs to edge providers and venture
capitalists, that would be bad enough. But much more is at
risk. The regulations being considered by the FCC, especially
Title II, would replace the current dynamic pragmatic business
and engineering approach to operating the Internet with a
static, bureaucratic, politicized regulatory regime.
Ironically, common carrier regulation would not prevent
price discrimination, but instead can actually require that
rates vary across different types of services and customers
just as postal rates do today. Under a Title II regime, the FCC
could easily find itself overseeing rate proceedings that look
a lot like the perennial scrum between first, second and third
class mailers over who will pay how much for junk mail,
magazines, and so forth. That is not the future of the Internet
any of us want to see.
Finally, adoption of net neutrality regulation would harm
the cause of Internet freedom worldwide. By embracing the idea
of state-control of the Internet, the adoption of net
neutrality rules in the U.S. would legitimize the efforts of
tyrants everywhere to impose far-more repressive forms of
statist intervention.
To conclude, it is true that the economic characteristics
of high-tech markets throughout the Internet ecosystem result
in many firms having a form of market power and that such
market power creates the potential for anti-competitive acts.
But these characteristics are not unique to broadband markets
or broadband ISPs and they cannot justify discriminatory
regulation. The appropriate remedy is vigilant,
nondiscriminatory enforcement of the anti-trust laws.
Mr. Chairman and Members of the Committee, this completes
my testimony and I look forward to answering any questions.
Chairman Leahy. Thank you very much.
[The prepared statement of Jeffrey A. Eisenach, Ph.D.,
appears as a submission for the record.]
Chairman Leahy. Our next witness, the last one, Ms. Nuala
O'Connor. She is the president and CEO for the Center for
Democracy and Technology, and an internationally recognized
expert in Internet and technology policy.
Prior to joining CDT, she held a number of positions in the
public and private sector, including as the first Chief Privacy
Officer at the Department of Homeland Security, senior
positions at General Electric and Amazon.com. She was born in
Belfast, Northern Ireland. And I--with a certain amount of
pride--mention she is a graduate of Georgetown University Law
Center many, many, many years after I graduated from there.
Please go ahead.
STATEMENT OF NUALA O'CONNOR, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, CENTER FOR DEMOCRACY AND TECHNOLOGY, WASHINGTON, DC
Ms. O'Connor. Thank you, Chairman Leahy, Senator Grassley,
distinguished Members of the Committee, my esteemed colleagues
on the panel--I thank you.
I am honored to be here today to represent the Center for
Democracy and Technology. For over 20 years, CDT has worked to
promote and sustain public policy that protect a free and open
Internet. Above all, we are dedicated to advancing the
individual's interest in a digital world that supports free
expression, freedom of association, personal privacy, and
innovation.
Both the technology and the policy architectures of the
Internet must support these individual rights and freedoms
while also fostering innovation and the free flow of
information--not only within the United States, but around the
world. The Internet, at just over two decades old, is still in
its infancy. Sound technical and policy choices have brought
about an Internet that has supported robust expression,
creativity and innovation.
While it is an appropriate time to strengthen the rules
governing our rights in the digital world, we must be
thoughtful about the consequences. We must seek to protect an
individual's profound need to fully engage in the digital world
as speakers, as creators, as recipients of rich and diverse
ideas at reasonable costs and effective speeds. We must remain
dedicated to growth and innovation that supports these goals in
both public and private policies.
The Center for Democracy and Technology strongly supports
the concept of net neutrality. We believe that the Internet is
an enabler of knowledge, of community, and of Democracy around
the world. We encourage the FCC to take decisive action to
establish clear and strong rules that will create a level
playing field for consumers.
We seek new rules that are undergirded by principles of
fairness and Internet openness and we believe that all options
should be on the table for the FCC to consider. When the FCC's
open Internet rules were adopted in 2010, there was, in fact,
even far less agreement on net neutrality than there is today.
Most now agree that we need strong, open Internet rules that
provide clarity for consumers and for businesses alike.
Ultimately, strong rules should make it clear that the open and
free nature of the Internet cannot and would not be changed.
We advocate for a principled and a pragmatic approach to
the new rules with the following principles guiding any
decision: (1) there must be no blocking, no censorship allowed;
(2) we must have transparency about the services and the
practices offered; (3) there should be low barriers to entry to
the market on the Internet not only for individuals, but for
start-up companies as well, which means we must have baseline
nondiscriminatory rules; (4) we must encourage open technical
standards while still allowing for reasonable network
management.
It is through the lens of these principles that we should
consider all of the options on the table and be open to new
ones that we have not even considered yet.
In our comments to the FCC and our written testimony for
today's hearing record, CDT has provided a detailed examination
of the pros and cons of a number of the authorities on which
the FCC could base its oversight, including both Title II and
Section 706. We also explored a number of hybrid proposals that
had been suggested.
While all of these are real options, we remain concerned
about the limitations inherent in the structure and enforcement
of any of these solutions and the challenges to speedy and
effective implementation.
Over 3 million comments have been submitted to the FCC in
the course of this rulemaking process. The vast majority of
which call for strong rules that protect and preserve an open
Internet. While the details of these comments vary, citizens
have weighed in on this issue as never before, largely through
online filings and emails showing the very nature of the
Internet as a vehicle for political speech and openness. Many
of these comments call for Title II reclassification and all
agree that the Internet is a valuable resource and a platform
and essential to our daily lives.
While there are some procedural concerns and hurdles that
Title II must overcome, it nevertheless remains a very
significant option for the FCC to consider. Other options are
also possible.
A number of companies have called for hybrid proposals
involving Title II applied to edge providers and Section 706 to
end users. Others have suggested that prioritization might be
acceptable if it is a choice made by the individual end user
herself.
All of these proposals reflect thought and effort and
creativity and deserve the time and attention of the FCC in
crafting a new and innovative policy framework, one that
matches the speed and the innovation and the impact of the
Internet on our economy, our institutions, and our private
lives.
The Center for Technology and Democracy believes that any
regulatory framework adopted by the Federal Communications
Commission must promote access, free expression, and the civil
rights that will enable the greatest number of individuals to
fully engage in the digital world. Whatever path the FCC
chooses to take, it must act swiftly to create policy certainty
that protects the individual and promotes the future growth and
innovation.
Thank you.
Chairman Leahy. Thank you very much.
[The prepared statement of Nuala O'Connor appears as a
submission for the record.]
Chairman Leahy. Let me ask a few questions here and then
yield to Senator Grassley. I have to go back to the floor. I am
going to ask Senator Hirono to take the gavel after that.
Mr. Burnham, when you talked about why a free and open
Internet is crucial for the businesses that are flourishing
online--others have raised concerns that if you have strong net
neutrality protection, it is going to come at the cost of
investment in broadband networks. You worked at a large
telecommunications provider. You have seen what happens.
How do you respond to the concerns that net neutrality will
come at the cost of investment in broadband networks?
Mr. Burnham. First of all, I think that all of us would
like to see more investment, particularly anyone who lives in
any sort of rural community would like to see a lot more
investment in broadband capacity. I think that the important
thing to remember is that nobody I know in the community that
advocates strong network neutrality rules would object to any
provider of access to the Internet charging whatever they felt
they needed to charge in order to be able to build out the
network. I think consumers would make that trade. They would
pay more for more speed.
The problem with allowing access providers to sort of
vertically integrate up into the applications layer and extract
new profits from the applications layer in order to fund a
build-out is that it actually perverts the incentives. If they
are going to create fast lanes, the incentive is to actually
have the rest of the Internet be fairly slow to create a market
for their fast lanes.
So I think that in order to see investment, we need to
separate the infrastructure of the Internet, the actual wires,
from the applications layer and we need to manage them
separately and regulate them separately. So I do think that it
is absolutely possible to see investment in the network and
investment on the network without having this vertical
integration.
Chairman Leahy. Thank you.
Ms. Livier, we have had a lot of hearings on this. I was
struck by the fact that you are the first one who has spoken of
it as a civil rights issue. I am going to ask you the same
question I asked a number of businesses and others in Vermont
when I had my hearing. Could you have launched your own series
if the Internet had been operating under fast lanes and slow
lanes?
Ms. Livier. No, sir. I could have not. I do not have deep
pockets. I would not be able to pay for a fast lane, so there
is no way that I would be able to distribute my show. There is
no way that I would have been able to find an audience or prove
my market if that existed.
Chairman Leahy. Well, now of course, you can have others
come in and compete against you. Do you want them to have the
same opportunity you have?
Ms. Livier. Everyone should have the same opportunity.
Everyone everywhere should have the same opportunity to do it.
Chairman Leahy. You know it is interesting because I asked
that question at our hearing up in Vermont. We had a couple of
companies there doing extremely well now. They started off as
start-ups and were happy they did not have to pay for a fast
lane.
They all said they could easily pay for a fast lane today
because they have grown so large, but they do not want it.
Ms. Livier. No. It is not fair.
Chairman Leahy. Okay. Well, thank you.
Ms. Livier. Thank you.
Chairman Leahy. Obviously, you preach to the converted.
[Laughter.]
Ms. Livier. Thank you.
Chairman Leahy. Ms. O'Connor, more than 3.5 million
Americans filed comments with the FCC. I think that sets a
record. I know the comments I have received have just been
enormous.
So I share your belief that the FCC has to adopt strong and
clear rules to protect the open Internet. What is the best
approach to do that?
Ms. O'Connor. We are open to not only the Title II
approach, but the hybrid approaches that have been proposed in
a number of the filings as well as what is called a Section 706
heavy approach. We do think Title II is one of the clearest and
most direct paths to deal with the issues raised in the
overturning of the prior rules, but there are a number of
policy innovations on the table. We think the FCC should
consider all of them fully before making a decision.
I am sensitive to--having worked in the Internet industry
for many years--concern about heavy-handed regulation, but the
time is now for the FCC to take action and to settle the
playing field. I think Mr. Burnham's comments are quite right
when he says market certainty will actually help in many ways
here.
So we are really asking for the FCC to take decisive action
based on the principles of openness and focus on that as their
goal.
Chairman Leahy. Dr. Eisenach, I know in your testimony you
said that in a paid prioritization world, the ISPs have an
incentive to give start-ups a lowest cost access, but what if
those start-ups are competing with products or services that
are being provided by those who are paying the higher price?
Are they going to have a conflict there?
Mr. Eisenach. Well, certainly, I am glad you asked. I think
this is precisely where the antitrust laws come into play. A
case that we are all familiar with and remember--Senator Hatch
and I talked about this at the time--was a Microsoft case.
In that circumstance, you had a monopolist which exercised
its market power to disadvantage a new entrant, Netscape, also
JAVA at the time, and the antitrust laws were brought to bear
successfully. So I think it was always hard to figure out what
to do with Microsoft when you caught them, but we did finally
catch them and deterred that behavior and we have not seen it
since.
So that is an example of how the antitrust laws can come to
bear in precisely the circumstance you are talking about. That
is a legitimate concern.
Chairman Leahy. Mr. Burnham, how do you feel about that?
Mr. Burnham. That is a very difficult way to solve the
problem for a start-up. The start-ups in the Internet world
come and go in a matter of years for sure, but perhaps months.
So by the time an antitrust procedure works its way through the
courts or even an FCC 706 procedure, I think that it would be
irrelevant for most start-ups.
I think you need clear bright-line rules that start-ups can
rely on so that they can build their business without having to
hire a lawyer and represent themselves either in front of the
Department of Justice or the FCC.
Chairman Leahy. Thank you very much.
Senator Grassley.
Senator Grassley. Thank you very much.
Chairman Leahy. I would note for everybody, I kept within
my 5 minutes.
Senator Grassley. All right. I am going to ask Mr. McDowell
to comment on something that was in Mr. Burnham's testimony
about Title II reclassification and the fact that--not
concerned about the impact on investment in the Internet
marketplace. Do you agree with that position? Is there any
problem in that area?
Mr. McDowell. No. I do not agree with that position and
actually, other analysts do not as well. For instance just this
Monday, Robert Kaminski from Capital Alpha Partners--investment
analysts called Title II classification the nuclear option.
Back in 2010, when the FCC examined this issue last, Credit
Suisse's Jonathan Chaplin said, ``But while it is business as
usual now, capital investment will come down if Title II
becomes a reality.''
So the investment community has a variety of concerns and
like a lot of things, where you stand is a matter of where you
sit, perhaps.
Senator Grassley. To you, Dr. Eisenach and Commissioner
McDowell--both of you do not have to answer this, but if you
want to--I want an answer on the claim that rural communities
will be hit especially hard if there is no new net neutrality
rules. Do you agree and should I--coming from a rural state--
have any concern?
Mr. Eisenach. You absolutely should have concern that net
neutrality regulation would deter investment in rural broadband
networks. That is precisely what would happen and that is
something that even the advocates of net neutrality
acknowledge. I am quoting Tim Wu when I say that, ``The impact
of net neutrality regulations, an open question whether in
subsidizing one side of the market content the welfare gains
would be as great as consumers would enjoy or the benefit of
expanding broadband service to new consumers.'' So in
subsidizing edge providers, we are explicitly taxing consumers
and the ISPs who we want to be building out rural broadband
service.
Senator Grassley. Yes. Do you have anything to add? If you
do not want to, I will go on.
Mr. McDowell. I would like to go back, actually to
something Mr. Burnham said earlier, a common misconception that
somehow before 2004, broadband access was classified as common
carriage. That is simply not the case. If you look in the
attachment to my voluminous testimony, there is a May 2010
letter to Congressman Waxman which outlines this.
But you can go back to the 1996 act and also the 1998--what
was called the Stevens' Report, named for Senator Stevens--to
Congress from the FCC where the Clinton era FCC Chairman
Kennard issued a report to Congress saying, ``Internet access
services are appropriately classified as information rather
than telecommunication services. The provision of Internet
access services offers end-users information service
capabilities inextricably intertwined with data transport. As
such, we conclude that it is appropriately classified as
information service.''
They have never, ever been classified under Title II, those
services.
Senator Grassley. All right. Mr. McDowell and Mr. Eisenach,
it has been argued that antitrust analysis is purely a numbers
game that does not take into account important non-economic
values. Do you agree, but more importantly, does an antitrust
analysis only consider financial and economic values, or can
it, in fact, constitute a broader consumer welfare-based
analysis that looks at other consumer values?
Mr. McDowell. There is antitrust. There is also consumer
protection laws, in general, as well as breach of contract and
the Trial Lawyers Bar, others who would have a field day if
Internet service providers, indeed, were to act in anti-
competitive way that harms consumers.
But when you have robustly competitive markets that
actually makes a rising tide that floats all boats, not just
economically, but socially as well--so let us just take a look
back at what has made the Internet so fantastically successful.
It has been this incredible area of freedom that has benefited
society in more ways than we ever could have imagined 15 years
ago.
Mr. Eisenach. I would just add that we are all very strong
supporters of the social benefits that have been created by the
Internet both here and abroad and those benefits have been
created under an unregulated regime. The concerns that--those
of us who have concerns about net neutrality is that bringing
regulation into the mix will harm rather than benefit those
benefits in the future.
Senator Grassley. Then for the two of you again--and this
will be my last question--in your opinion, has there been any
widespread anti-competitive behavior within the Internet
ecosystem that would warrant a prescriptive regulator solution
imposed by the FCC?
Mr. McDowell. The answer is no. I have long advocated for
years that the Government do a peer-reviewed market study that
would be put out for public comment. The last time the
Government looked at this was in 2007, the Federal Trade
Commission. It was not a peer-reviewed market study, but they
unanimously on a bipartisan basis found there was no market
failure and they warned against the unintended consequences of
new rules.
Mr. Eisenach. Yes. I think what we have seen is some
occasional accusations, but the accusations have not been borne
out. Most recently, Netflix--I think--has been making wild
accusations with respect to Comcast and other ISPs. In a
current filing at the Federal Communications Commission in the
past few days, it has acknowledged that it was the one that was
throttling traffic and then turned around and used the slow
delivery of some of its traffic to some of its customers as an
excuse to try to seek regulation of the ISPs.
So I think there is the potential for lots of back and
forth. That is what we are worried about. But there have not
been any bonafide antitrust problems that we know of.
Senator Grassley. Thank you. Those are all my questions,
but I have some materials I would like to enter into the
record.
Senator Hirono. Certainly, without objection.
[The information referred to appears as submissions for the
record.]
Senator Hirono. Senator Klobuchar.
Senator Klobuchar. Thank you very much, Madam Chair. Thank
you for holding this important hearing to Senator Leahy,
Senator Grassley.
The open and equal nature of the Internet has been
incredibly important for economic development in the U.S. and I
do not think people always think of it that way, but it has
been.
In our state of Minnesota where Senator Franken and I
serve, online sales represented more than 36 billion in revenue
for local businesses just last year. And in the wake of recent
court decisions, it has become clear that the FCC needs to
pursue new rules.
The record three million comments received by the FCC--I
believe the website went down a number of times--are proof that
Americans recognize the impact of these decisions and the
importance of our careful deliberation.
Legitimate concerns have been raised about the FCC's May
2014 rulemaking proposal regarding what authority the agency is
seeking to use and what regulations may include or what types
of business arrangements would be allowed.
As Chairman of the Senate Judiciary Antitrust Competition
Policy and Consumer Rights Subcommittee, I have a strong
interest in ensuring robust competition for all users of the
Internet. And as I wrote the FCC earlier this summer, antitrust
law alone is not sufficient to regulate the Internet. We need a
clear set of rules for a fair playing field.
Mr. Burnham, one of the most central elements of the
Internet is its ability to foster new and creative developments
like Yahoo and Google, Facebook, they have all resulted from
literally students using the open and free Internet to create
billion dollar companies. As a venture capitalist in this
field, what is the most important idea for encouraging this
type of innovation, how will investment in tech and Internet
companies change if FCC rules do not sufficiently protect and
promote the open Internet and competition?
Mr. Burnham. It will change. And so we are really debating
here investment in the Internet or in the infrastructure that
delivers the Internet and investment on the Internet.
The problem with investing on the Internet, you know, the
opportunity that we have had is to invest in any idea that
could reach any consumer in a completely free and open way with
no discrimination. The minute you begin to allow the
infrastructure, the wires that deliver that service to
consumers to reach up into that layer and either manage it for
network management purposes or extract some kind of rents from
that layer, it distorts that market. And so we as investors
would have to then consider what kind of relationship they had
with a provider.
If you want to get a hint of what this looks like, think
back to all of the applications that were created and
distributed by cell phone operators on their cell phone before
the iPhone. How many of those actually became businesses? How
many of those did you actually use?
Those services were controlled by the carriers and
distributed by the carriers. And you had to get permission of
the carrier to launch that service. Once we opened that up, the
world changed.
Senator Klobuchar. Right. Exactly. Mr. Eisenach, do you not
you think this paid prioritization could affect this investment
that I was just discussing with Mr. Burnham?
Mr. Eisenach. Well, two points. The first point is that he
is right. This is a question over who will pay for the network.
And the proposal, as Mr. Burnham said very clearly is that
consumers pay 100 percent of the cost of the network and rich
venture capital firms like Mr. Burnham's and their companies
that they invest in pay zero.
Now, there is no shortage of investment going into Internet
start-up companies. Mr. Burnham's company has invested hundreds
of millions of dollars and returned billions of dollars on
those investments, and that is in the absence of net neutrality
regulation. There is simply no basis for thinking net
neutrality regulation is needed.
This is my second point, the phenomenon Mr. Burnham just
described which is the death of vertically integrated cell
phone applications and the rise of this very vibrant mobile
applications economy happened in the absence of any kind of net
neutrality regulation. It happened through the free market.
Senator Klobuchar. Can I go to Ms. O'Connor because you
have heard Ms. McDowell and Dr. Eisenach talking about how
antitrust laws could be used effectively and I want to know
what you think. Do you believe that antitrust law is sufficient
to address potential Internet distribution issues, the things
that would harm competition and consumers and what do you think
needs to be done?
Ms. O'Connor. Well, the short answer to that question is
no. After almost 20 years of practicing law, I have seen few
areas of the bar short of their ability to solve the problem
than the antitrust bar, maybe second only to the telecom bar.
But I do not think it works in this context.
First of all the analysis is largely economic and
commercial, but it is also ex post. So it would not solve for
the issue Mr. Burnham has raised, and that is a very real one,
the ability of a small independent start-up or an individual
user to get online absent interference. To ask those
individuals to apply for antitrust relief after the fact would
basically prevent individual freedom and opportunity in getting
into the Internet economy, into the Internet space, into the
digital world. So it is not an effective and it is not a
complete solution to the problem we are facing of a truly open
and vibrant digital life.
Senator Klobuchar. Thank you.
Senator Hirono. Senator Lee.
Senator Lee. Thank you, Madam Chair, and thanks to each of
you for being here today and for your thoughtful testimony. The
issue of an open Internet has attracted a lot of attention from
a lot of Americans. A considerable amount of public attention.
Now, regardless of where any American stands on this issue,
whether someone views herself as in support of or against what
is commonly known as net neutrality, Americans are sending a
consistent message which is, do not break the Internet. Do not
mess with it. Do not mess with the most vibrant, expansive,
even explosive area of our economy because it has worked and it
has worked well, and it has brought enormous benefits in terms
of economic growth to our great country and it has played an
important role in bringing more information, more education,
more entertainment, more opportunities generally to people not
only throughout our great country, but throughout the world.
Subjecting the Internet to heavy-handed regulations, the
type of regulations that were designed to regulate the railroad
industry in the 19th century and designed to regulate Ma Bell
in the 20th century could threaten to do precisely that.
Unwise regulation in this area would do nothing, I fear,
but stifle much-needed innovation in Internet service and
would, in the process, make it harder in the long run for
consumers to be able to secure better service and ultimately
have a real choice, more choices than they currently have about
who delivers their Internet service.
Anyone who has ever had an hour-long frustrating phone call
with their cable company's customer service representative
knows that consumers certainly could use more choices rather
than fewer choices, particularly in this area. The proposed
regulations of the sort that we are talking about today, would,
I fear, do nothing to make the underlying problem better, but
instead, I fear, would make it much, much worse.
So I have a few questions. I would like to talk to you
first, Dr. Eisenach. Rent-seeking is often defined as a process
in which someone devotes money and other resources to lobbying
government so that they can take in a greater share of wealth
that is already been produced without actually generating
wealth on their own. Would you agree basically with that
definition?
Mr. Eisenach. I think that is correct.
Senator Lee. Do you think we should be concerned about the
possibility that the sort of FCC regulation that we are talking
about today will lead to more rent-seeking behavior than it
would solve the problems for which it was purportedly designed
to solve?
Mr. Eisenach. Absolutely. The FCC has a long history and an
unfortunate history in the rent-seeking department. Ronald
Coase who won a Nobel Prize for helping to develop the theory
of rent-seeking won it in part for an article titled ``The
Federal Communications Commission'' which was about the
lobbying and political influence that went into the allocation
of broadcast licenses back during the 1950s and 1960s. That
same kind of activity, and I spent an unfortunate amount of my
time in and around the Federal Communications Commission and a
tremendous amount of activity, as Rob knows better than anyone,
goes into precisely that sort of lobbying and everyone who is
paying a lobbyist to be there on all sides of the argument is
there defending the interests--their economic interests--in
these arguments. Senator Lee. So when government gets involved
in picking winners and losers in the marketplace, the winners
end up being not necessarily those who provide the best service
at the best price to consumers, but rather those with the most
effective context perhaps with the best relationships to
government decisionmakers. I would like to ask you briefly
about a point that was made earlier, I believe, by Mr. Burnham.
An analogy was made to an air conditioner. Let us take that
analogy a step further, let us explore it a little bit more.
Let us suppose that someone installed a particular type of air
conditioner that consumed an extraordinary amount of electric
power, so much power that it made it very difficult for the
electric utility in question to supply adequate electricity to
other customers in the area. Would there be anything
extraordinary about the electric power company perhaps charging
a higher rate for that consumer who chose to use that
particular air conditioning system?
Mr. Eisenach. No, nor would there be anything wrong with
the electric company turning around and saying to manufacturers
of air conditioners, you know, our network, our ability to
serve our customers efficiently depends on your making more
efficient air conditioners. We would like to give incentives
for you to use less energy in the air conditioners that you
manufacture. Both of those would be good things and would
result in more efficient markets.
Senator Lee. And one follow-up to that. If the electric
utility company in question decided to get into the business of
providing its own air conditioning equipment to its rate
payers, if it did that and then engaged in practices that
favored its own system as compared to others, would not
antitrust laws be equipped to handle that? And so too here, to
the extent that we have Internet service providers that start
to compete with content providers, if they use their position
in the marketplace in an anti-competitive manner, are our
antitrust laws not there for that very reason?
Mr. Eisenach. Absolutely. That story is called Microsoft
and Netscape. And one can easily imagine that story replaying
itself in this environment. And one can easily imagine the
antitrust laws being responsive to that.
One point very quickly on the speed with which regulation
versus antitrust can be brought to bear. We are a decade into
the net neutrality saga. We do not have enforceable rules.
Whatever the FCC does, we will not have enforceable rules for
three to 5 years while this round of regulatory gamesmanship
plays itself out in the courts. In the meantime we could have
had five rounds of antitrust cases.
So the notion that regulation is a faster way of getting to
the right end I think is upside down.
Senator Lee. Okay. Thank you, sir.
I see my time is expired, Madam Chair, thank you.
Senator Hirono. Thank you. Senator Franken.
Senator Franken. Thank you, Madam Chair.
I think there is a fundamental misunderstanding here. Net
neutrality is not about regulating the Internet. Net neutrality
is about preserving the Internet as it is. Net neutrality has
been the architecture of the Internet from the very beginning.
Innovation has not just happened while net neutrality has
been in place. It has happened because net neutrality is in
place. Let me just talk about one example so everybody who is
listening and watching can hear.
Before YouTube there was a thing called Google Video. It
was not very good. The guys who started YouTube did it over a
pizza place in San Mateo, California. It was superior to Google
Video. And because it was allowed to travel at the same speed,
people preferred it and it replaced Google Video as the medium
that people watched videos on. And Google ended up buying it
for $1.6 billion. This is about innovation that has taken place
because of net neutrality. What the FCC has proposed, paid
prioritization--that represents a change. That is why 3.5
million people have commented--because they understand this.
This is not about new regulation; this is about preserving the
structure that we have had. The Occam's razor here is do not
change what we have.
Ms. O'Connor, can you speak to that?
Ms. O'Connor. Thank you so much, Senator Franken and thank
you so much for your leadership on this issue. That is exactly
right, there has always not only been rules and regulation, but
there has been the specter of enforcement by the FCC and the
FTC for the entire lifetime of the Internet.
We are looking at it not only obviously as an economic
empowerment issue and as an opportunity for growth and
innovation, and small business empowerment, we are looking at
it as a need of the individual to engage in digital life in
every aspect of their world: in their communications with their
spouses, with their employers, with their schools, with each
other.
The example that Jeff gave about antitrust law versus net
neutrality regulation I think actually proves the point. In the
case he cited, Microsoft v. Netscape, millions of dollars of
legal fees were spent on both sides. No small business is going
to have the resources to engage in that kind of fight. But 3.5
million individual citizens of this country were able to
comment on this proceeding at the FCC. That proves the point
that regulation is a more democratic opportunity here, and this
is the path we need the FCC to take.
Senator Franken. And it is just preserving the way it has
been the whole time. So all this innovation you have cited, all
this investment you have cited has happened while there has
been net neutrality.
Mr. Burnham, I have met with some small businesses in
Minnesota and start-ups who tell me that net neutrality is just
crucial for them. They are making applications to do all kinds
of things ranging from a company called ``thisCLICKS,'' which
helps companies manage their employees' time sheets. That is in
St. Paul. A Minnesota company called ``Sport Ngin,'' which is
now employing about 300 people, has tripled their number of
people in the last year, connecting people who want to join
recreational sports leagues.
Now these companies are growing and they are innovating and
there are thousands and thousands of companies like them. Now,
if under pay prioritization they were made to compete with
bigger, deep-pocketed entities, they could not do that, but let
us say they did. Let us say they got on, they paid for pay
prioritization. What they told me is that the apps that they
use--the software that they use to run their app--unless those
subcontractors pay for pay prioritization, their thing would
not work. Is this not all about these pay prioritizations? Is
this not about squelching the kind of innovation that we have
all been celebrating, all five witnesses? Is that not the way
it has been and aren't these pay prioritization lanes going to
squelch that? Is that not a huge change?
Mr. Burnham. It is a huge change. And as I pointed out in
my testimony, it is only in the last few years that the
Internet access providers have even had the technology to
figure out what you are doing online and therefore to be able
to discriminate between that. So not only do we have the threat
of FCC enforcement, but we also had the lack of technology in
place. That is what has changed. The technology is in place and
the FCC has proposed a new set of rules.
You bring up a very interesting point which is, it is not
just the application that you see that matters, it is all the
applications that they use. So, for instance Tumblr runs their
application in their own data center, but they store all of
their images at Amazon. And so in order to load a Tumblr page,
you go to the Tumblr data center, but you also send a call out
to the Amazon data center. If Amazon is not paying for paid
prioritization, that page will not load. So there is a whole
ecosystem of services that are built on top--or rather
underneath--the services that you see that would also be
affected.
Senator Franken. Well, speaking of Amazon, all the
companies that are like Amazon: DropBox, eBay, Facebook,
Google, Microsoft, Netflix, Reddit, Tumblr, Twitter--they are
all saying we need this. These are the innovators. And I just
want everybody to understand that this is about preserving the
Internet the way it is. That is what net neutrality is about.
Thank you, Madam Chair.
Senator Hirono. Senator Hatch.
Senator Hatch. Well, thank you, Madam Chairperson. Net
neutrality is not a new issue. Congress has been debating this
issue for year. As Chairman of the Senate Republican High Tech
Task Force I co-authored a Wall Street Journal op-ed in the
fall of 2009 when then FCC Chairman Julius Genachowski and his
Democratic colleagues first proposed their net neutrality
rules. My op-ed entitled ``Who is Going to Build the
Information Superhighway'' is just as applicable today as it
was then.
Here is what I wrote in 2009. ``If there is any sector of
our economy where competition is so fierce, and where the pace
of innovation is so rapid that government interference would
only get in the way, it is the Internet and telecommunications
market. The Internet has grown because of the virtuous and
mutually beneficial circle.
``Network operator provide ever-increasing speed and
bandwidth. Content providers one-up each other with game
changing innovations and consumers adapt and adopt at lightning
speed. Yet despite an overwhelming record of innovation and
customer satisfaction Washington wants to replace the judgment
of consumers with that of politicians and bureaucrats. Net
neutrality may sound like fairness, but it is actually the
opposite. Bandwidth is finite like the finite number of lanes
on a highway network providers must innovate in order to
accommodate the burgeoning traffic. As they invest billions of
private dollars in new and improved networks they should right
expect to set prices and manage those networks as they see fit.
``If the FCC takes control of the Internet, we will have
the inevitable result of all poorly designed regulations,
business decisions prejudiced by politicians and political
decisions prejudiced by corporations. Keep in mind we are
talking about the most competitive, efficient, and consumer-
driven industry in the global economy.''
Now, I did not write those words 5 days ago, but 5 years
ago. I ask unanimous consent to enter the entire Wall Street
Journal op-ed into the record at this point?
Senator Hirono. Without objection.
[The op-ed referred to appears as a submission for the
record.]
Senator Hatch. Although 5 years have past, those statements
are just as true today. We have been the recipients of an
explosion of apps, products, and services that directly result
from broadband and Internet growth.
Without government regulation the Internet is growing. So
what is the problem? What is broken? What is it that needs to
be fixed?
An unregulated Internet has spurred innovation and economic
growth all around the world. Yet despite all these successes,
some argue we need to regulate the Internet. I cannot disagree
more.
Let me just ask Mr. McDowell and Mr. Eisenach to answer a
simple question. If so, what is it that needs to be fixed here?
If you could answer that question.
Mr. McDowell. Senator, you raise an excellent point which
is nothing is broken that needs fixing. And we have the open
and freedom enhancing explosive and amazingly bountiful
Internet today precisely because of market forces and the laws
that already existed before there were any formal net
neutrality rules which really did not even start happening
until 2008. We had Facebook, eBay, all those great companies
had already blossomed into giants.
Senator Hatch. They did not do that because of net
neutrality rules.
Mr. McDowell. It was long before then.
Senator Hatch. Right. Mr. Eisenach.
Mr. Eisenach. Well, Senator, absolutely. So what you have
in the Internet echo system is you have lots of firms who are
creating value and they share in the creation of that value. So
edge providers and networks and applications providers all have
to get together. They get together on the screen of your iPhone
to produce something of tremendous value and they fight about
how they are going to share that value creation. All right.
Every day on the Internet is a battle over who is going to----
Senator Hatch. I want to keep that fight going.
Mr. Eisenach. And that fight should happen between private
companies in private bargaining as opposed to being a complaint
before the Federal Communications Commission every time two
parties disagree.
Senator Hatch. Well, let me ask you both again, do you
think that the Internet today would be characterized by the
current level of innovation if it had been subject to common
carrier regulation?
Mr. McDowell. No, sir. What folks are calling for is what
is called ex-ante regulation, before the fact, or what some
call ``Mother May I,'' which is that then starts to prompt
companies that may have thousands of miles of fiber optics and
servers and routers that offer voice, video, and data services,
those could be tech start-ups. Those are going to be tech
companies, not what we think of as cable or phone companies.
Senator Hatch. Let me ask you----
Mr. McDowell. They would have to file petitions for
declaratory ruling at the FCC for permission to innovate.
Senator Hatch. Sure. Now, what will be the global impact if
the FCC reclassifies the Internet as a utility under Title II
of the Communications Act?
Mr. Eisenach. The International Telecommunications Union
has been trying to get its hands on the Internet since the mid-
1990s when the Clinton administration said no. And that is
precisely what would happen. They would ultimately be
successful in doing what they would like to do which is
regulate the Internet as a public utility internationally.
Senator Hatch. One last question and this just needs a yes
or no from both of you. In your view would investment and
innovation increase or decrease if the FCC subjects broadband
services to common carrier regulation?
Mr. McDowell. I think the right answer is decrease, not yes
or no, but, yes, decrease.
Mr. Eisenach. Technological innovation would decrease;
lobbying innovation, however, would grow.
Senator Hatch. What are we talking about here. I mean, to
me, I cannot understand why my friends on the other side love
this type of regulation so much when I think it will wind up
really fowling up the whole Internet.
Well, thank you, Madam Chairman.
Senator Hirono. Thank you.
We have heard a lot about the antitrust laws as being
adequate to provide consumer protection in this area. I am
curious to know from either Mr. Burnham or Ms. O'Connor who I
assume you have practiced in this area, you understand
antitrust law. So, Ms. Livier has said that if we did not have
net neutrality it would be highly unlikely that you would have
been able to get your show on the Internet. So I am curious to
know what kind of--in her situation looking at that kind of
start-up, Mr. Burnham or Ms. O'Connor, what kind of antitrust
claim would lie that she could pursue? Are we talking about
price fixing? Are we talking about time? What are we talking
about? What would she be able to proceed under to go forward?
Mr. Burnham. Well, I am not a lawyer and I am not practiced
in antitrust law, so I am going to turn it over to Ms.
O'Connor.
Ms. O'Connor. Having been in the Internet law and policy
space again my entire career almost working in front of the
Federal Trade Commission and in this area, there would be
precious few remedies available under antitrust law. Your point
is incredibly well taken. The limitations for a small
individual artist or start-up company or individual end user to
avail themselves of redress under the law would be quite
limited. And the phrase that keeps coming to mind is, your
antitrust law is not good enough for my Internet. It is just
not comprehensive enough to protect the needs of the individual
end user, the rights of the citizen.
Again, it is a fallacy to say the Internet has not been
regulated. I was at a company in the late 1990s that had not
only an FTC investigation, but 21 class actions, 12 attorney
general investigations, a slew of regulatory oversight for the
idea--the scintilla of an idea about a data matching project.
It is wrong to say the Internet has not been regulated by the
FCC and the FTC for years.
To not act right now would actually be the change. Senator
Franken is right, to not act would be the absence of the
playing field that is open and accessible to the individual end
user.
Senator Hirono. Thank you. I appreciate, Mr. Burnham, your
pointing out that the technology has changed, so now our
providers can figure out what the consumers are accessing. I
think that is a very powerful piece of information for
providers. And this is why I believe that the landscape is
changing and why we are here today.
Now, Ms. O'Connor, you mentioned that--and several of you
mentioned Title II is really probably not terribly applicable
because Title II is a public utility. And we regulate public
utilities up the kazoo. So this is not necessarily where we
want to go.
You also mentioned that maybe we should look at Section
706. But that may not fit either. So my question to either Mr.
Burnham, or you, Ms. O'Connor, is should we be talking about a
new title?
Ms. O'Connor. We would welcome that kind of policy
innovation from Congress or from the Federal Communications
Commission. The Internet is a precious and valuable space for
the individual and for the end user and for small business
innovation. And I am sympathetic to those claims that these are
old titles that were based in historical parts of the economy
that are very different. And we do not want to slow down the
speed of the Internet economy and growth. But given the options
on the table, we encourage the FCC to explore all of the
options, all of the opportunities. And we have seen some very
creative hybrid approaches proposed by policy groups and by
companies, things that would combine 706 and Title II to get
the enforcement abilities of both. And we encourage the FCC to
consider those.
Senator Hirono. Well, possibly in the best of all worlds
that we would be coming up with a very clear new title, but in
the absence of that happening, which will very likely be the
case, that you are saying that the FCC--and I assume that Mr.
Burnham agrees--that they have the authority to proceed under
either Section 706 or Title II----
Ms. O'Connor. Yes.
Senator Hirono [continuing]. To protect consumers?
I mean, clearly consumers feel that net neutrality is
important because all of us have heard from hundreds, and
hundreds, and hundreds of our constituents who have said, make
sure that we are not going to create an environment where they
are going to have to pay differential rates for access to the
Internet.
So my time is fast expiring and I would like to--well,
Senator Flake.
Senator Flake. I will go quickly. I find it interesting, I
heard one of my colleagues say that the purpose of these net
neutrality rules is to maintain the Internet as it is. Imagine
if any tech company said, we are going to succeed by
maintaining our company as it is. If Apple prior to launching
iPhone 6 or the Apple watch said, we are just going to maintain
as it is. I do not think if the Internet stays as it is, that
it will be prepared for the future innovations that we are
going to need to advance.
I hear the same kind of arguments with regard to
pharmaceuticals or drug companies. I think with regulation we
can make current drugs cheaper. You can, but you do not get the
innovation you need to grow and progress and to go into other
areas. So, I am always wary when we want to maintain something
as it is especially something as dynamic as the Internet.
But just one question. I know we have votes going on. Dr.
Eisenach, you have done some work in this area, can you discuss
the University of Pennsylvania, Professor Chris Hugh's work on
Europe and investment in broadband and Internet compared where
they have regulatory regime perhaps similar to what we would be
moving to here compared to what we have here? What is the
difference between investment there and in the United States?
Mr. Eisenach. Thank you, Senator Flake. As Christopher Hugh
has written as Richard Bennett at the American Enterprise
Institute has written in a new study available from the
TechPolicyDaily.com. The Europeans have followed a much more
regulatory course than the U.S. and five or 10 years ago there
was a debate about how wise a course that was. There was a
debate about whether the U.S. was ahead or behind in broadband
infrastructure. There is no debate today. The Europeans have
recognized that the U.S. course was the wiser course. There is
almost no fiber availability, virtually no fiber availability
from telephone companies and very little from cable companies
in Europe. The Europeans are a generation behind now on
wireless broadband access, LTE only covers about a quarter of
the population of Europe versus virtually 100 percent of the
U.S.
So the regulatory course proved to be disastrous for
Europe. And I think has the potential--we talked about leaving
things the same versus changing them. The Internet has not been
regulated. Net neutrality is a proposal to regulate it, I think
it is that simple.
Senator Hirono. We need to vote now, so I would like to
call a brief recess and ask the witnesses to remain until I
return. And I am also expecting Senator Blumenthal to return so
he can pose his questions.
Recess.
[Whereupon at 12:08 p.m., the Committee recessed.]
[Whereupon at 12:15 p.m., the Committee reconvened.]
Senator Blumenthal. We are now back in session. Thank you
very much for being so patient. I was going to apologize for
voting, but we should not be apologizing for voting. We should
be applauded for moving forward. Thank you.
Let me ask, I have a few questions and then I understand
Senator Cruz is coming back. Mr. Burnham, as you know better
than anyone, the Internet's incredible economic success has
been made possible because it is an open platform where anyone
with a good idea can connect and consumers across the globe can
compete on a level playing field for their business. And it is
the relevance of an entrepreneur's product, the consumers are
not sort of their sweetheart deals with large broadband
providers that determine success. After launching their
business start-ups frequently come to you, they want to be
financed. They need capital. And they pitch their ideas to
secure additional funding that would take their ideas to the
next level.
Without net neutrality start-ups may not even be able to
launch their products without turning to you for funding first.
And it seems like to be successful in a paid priority context,
you would want to know whether they have a deal with Comcast or
AT&T. They would have to come to you with that sort of
sweetheart deal first. Can you tell me how the content of
start-up pitches would change in a world without the net
neutrality rules? How do your criteria as an investor change?
Mr. Burnham. Well, we would need to understand the
relationship between what they were doing and the interests of
the companies that they depended on for distribution. And so
that would--you know, we would stop focusing on the innovation
and start focusing on the deal that they had struck. And that
would make it very difficult.
I think, you know, contrary to what Mr. Eisenach has said
about venture capital, this actually is not so bad for venture
capital. If we end up in a paid prioritization regime because
every start-up would now have to come to us first. They would
have no negotiating leverage and we could extract a fairly big
chunk of the company in exchange for taking the risk to fund
them in this new riskier environment.
The way the world works today, start-ups launch, they get
to scale, and they have real engagement with users, real
traction, and then they farm out, you know, they basically shop
that opportunity and venture capitalist compete with each other
to do that deal because they have already proven that it works.
That is a much better situation for entrepreneurs and start-up
and any creator. It is not so great for venture capital, but we
would prefer to see the world favoring entrepreneurs.
Senator Blumenthal. So it might be better for some of the
sources of financing, but worse for the start-ups, worse for
the entrepreneurs?
Mr. Burnham. Yes.
Senator Blumenthal. Ms. O'Connor, the antitrust laws are
intended to prohibit business practices that unreasonably
deprive consumers of the benefits of competition and that
result in higher prices for goods and services. These important
laws are crucial to America's success today by prohibiting
collusion, conspiracy, monopoly power, and they evaluate
combinations and agreements to preserve competition. But really
what is at stake here is more than just questions of the
economic benefit, it has also harmed the customers and freedom
of speech. It is the speech that is made possible as a core
component of our democracy.
In a world of pay prioritization, for example, NBC's
website could tap into its affiliation with Comcast to make
sure that its news reaches Comcast subscribers faster than
Fox's website. Or we could see one Presidential candidate pay a
broadband provider so that content on his or her website loads
faster than the other candidates. Consumers and content
providers alike would be affected. And these are effects in
noneconomic ways. So my belief is that to safeguard free speech
in the 21st century and the infrastructure that prevents
interference with free speech, we ought to make sure that net
neutrality is preserved. And maybe you can tell us a little bit
more about how net neutrality affects those values of free
speech?
Ms. O'Connor. Senator Blumenthal thank you so much for
raising what we think is the fundamental question. It is
important to address the antitrust laws and the appropriate
authorities the FCC should consider. But it is the voices of
the individual citizen, the voices of the artists like Ruth.
The voices of the entrepreneur, the start-up technology who has
the tiny kernel of an idea. Those are the voices we are
concerned about, not only in the United States, but around the
world.
And the concern, first of all, internationally that by
taking some action we will be sending the wrong signal to the
rest of the world, we are concerned about that too at CDT, but
we think the signal we would be sending is that free speech is
a fundamental right. It is the most important right, and the
Internet is the greatest engine and the greatest platform that
history has known for the individual's voice to be heard.
An independent artist like Ruth can suddenly reach millions
of viewers overnight. A small company like the ones Senator
Leahy talked about can suddenly reach customers all around the
world. Without strong open Internet protections, those voices
will go to the back of the line. This is simply unacceptable
and undemocratic. It is the fundamental reason I am here today.
Thank you.
Senator Blumenthal. Well, thank you for that strong
statement. I agree completely with you because it highlights
the non-economic benefits, but those non-economic benefits in
turn produce enormous value throughout our society. It is the
reason that entrepreneurs want to come here. And scientists
want to invent and that great writers want to be here. The
value of free speech is what distinguishes America, our
protections for free speech.
Let me ask Commissioner McDowell, you know, I know from
what I have been told that you have spoken about the efficiency
and effectiveness of the market and competition apart from the
net neutrality rules. Two weeks ago FCC Chairman Wheeler said,
and I am quoting, ``Meaningful competition for high speed,
wired broadband is lacking and Americans need more competitive
choices for faster and better Internet connections.'' He went
on to say that ``between three-quarters and 82 percent of
consumers lack choice depending on the service.''
Why do you believe that broadband is a competitive market
that will correct itself in light of what Chairman Wheeler has
said?
Mr. McDowell. Thank you, Senator, and it is a privilege to
be before you today. Excellent question. I think the Commission
is looking at the broadband market too myopically. We have
wireless broadband. We also have unlicensed wireless. Senator
Klobuchar and I have worked very closely together on the
proliferation of that.
If you look at market data, I also look at my children, my
young kids, the number one screen now is becoming the mobile
screen. And that is causing a wonderfully disruptive element to
the marketplace. So that is, I think, disrupting things in a
way we could not have imagined 10 years ago.
Back to your Comcast and NBC analogy though, there are a
number of complaints, thinking as a lawyer, that could be
brought, not just in the antitrust context that would prevent
that from happening or deter that from happening like
exclusionary conduct and raising rivals' costs, but also breach
of contract and tortious interference with contract and state
attorneys general of which you were one, would have a field day
if that type of behavior were to happen. That is also a
deterrent, I think, in the marketplace.
Senator Blumenthal. Thank you. Well, I want to thank all of
you for giving us the benefit of your wisdom and insight on
this very, very important issue. It has been very valuable
testimony. I am going to turn back to Senator Hirono if she has
additional questions. And, again, many thanks for being here.
Senator Hirono. Thank you. I understand that Senator Cruz
is on his way back. So I would like to give him the opportunity
to come back in time to ask his questions. So that being the
case I have a question for Ms. O'Connor.
Chairman Wheeler has proposed evaluating certain practices
of broadband providers under a commercially reasonable
standard. Can you explain your concerns with that standard and
why it would be a poor fit for preserving open Internet?
Ms. O'Connor. Thank you so much, Senator. The commercially
reasonable standard was only a relatively recent creation of
the Federal Communications Commission and it certainly goes to
the commercial qualities of any agreement between various
providers on the Internet. But we think it misses the mark in
an open Internet proceeding that is, we wish, to protect the
interests of the individual end user and the entrant to the
market, not the established players. We seek a standard that
looks more like something that protects the qualities of an
open Internet or does not degrade services to the individual.
So we think that not only the language, but kind of the theory
underpinning commercially reasonable, while perhaps and
completely applicable in other contexts under FCC jurisdiction
is not the right standard for a rulemaking proposal that seeks
to protect the qualities of a flat Internet structure that
allows for low barriers to entry and a free market--and a
market that is open to all.
Senator Hirono. Thank you. Mr. McDowell, you have testified
that the antitrust laws would be adequate to protect the
consumers. So there has been discussion about the antitrust
laws as basically protecting an economic argument. So if the
Internet providers now know what customers are accessing, it
would be a way for them to determine without net neutrality
rules in place that they would want to have differential
pricing based on what the consumer is accessing. So in that
kind of circumstance, do you think that the antitrust laws are
adequate to protect the consumers' right to access whatever
programming and applications the consumer wants to access?
Mr. McDowell. I do. And as I explained in greater length in
the appendices to my testimony more about that. But not just
the antitrust laws, but general consumer protection laws,
Section 5 of the Federal Trade Commission Act, for instance,
you have state laws and other Federal laws. As I was explaining
to Senator Blumenthal, breach of contract, tortious
interference with contract. You have to remember that every
major ISP has in their terms of service, their contracts
essentially, with their customers these types of protections.
If they were to breach them, the plaintiffs' bar would have a
field day. That is a huge deterrent right there. But let us
look at what has worked. What has worked in this country to
have a wonderfully, you know, blossoming Internet ecosystem are
the laws that are in place, that were in place before net
neutrality came about as a government action which was only
2008. You know, the iPhone came about in 2007. And the ap
community started to--the ap industry started to explode.
So that is what has made it wonderful is the marketplace,
market forces, and these general, flexible, more nimble rules
that are in place that, as Nuala pointed out before, in the
1990s she was at a company or knew of a company that was
investigated by the Federal Trade Commission, state attorneys
general, and all the rest. What is better than creating a new
body of law which would create uncertainty and years of
litigation, as Dr. Eisenach pointed out, would be for the
Government to sit down and sort of assemble a war council. I
called for this for years. You could have the Federal Trade
Commission, you could have the FCC, you could have the
Department of Justice, state attorneys general, consumer
groups, the plaintiffs' bar, all sit down and say, hey look,
any of you, whether you are ISPs, or you are search engine
giants, if you act in an anti-competitive way that harms
consumers, then we are going to come down on you. We are going
to launch this avalanche of rules.
But I also agree and wanted to speak to the fact that we
sorely need to rewrite the Communications Act of 1934. We need
to start over and look at all of this through the lens of
consumer protection, knock down the silos that regulate based
on your technology whether it is copper, or coaxial cable, or
fiber, or wireless. All those are regulated differently. From
the consumers' perspective, they just want their stuff when
they want it and generate it, right? So they do not really care
what the laws are behind the scenes. They are antiquated, they
need to be rewritten. I hope in the next Congress we can get
that done.
Senator Hirono. I see our witnesses nodding their heads. So
there seems to be general agreement that we probably should
amend the 1934 law so that it is up with the times. So pretty
much you agree? Well, maybe we can work on that.
I see that Senator--I am sorry, Ms. O'Connor, did you want
to say something?
Ms. O'Connor. I could not agree more that consumers want
what they want when they want it. And they do not really
differentiate how they get their Internet whether it is on
their mobile device, or on their home computer, or in the air.
And I would like us to consider banning the phrase
``Internet of things.'' This is not the Internet of things.
This is the Internet of people. So we want what we want when we
want it, but we also want a level playing field to get in the
game.
Senator Hirono. Thank you. Senator Cruz.
Senator Cruz. Thank you, Madam Chairman. And I want to
thank each of the witnesses for being here today to discuss a
critical issue that impacts the desire of all of us to keep the
Internet free and open, a marketplace of competition and an
oasis that historically has been beyond the unnecessary reach
of government regulators.
This is by no means the first time the issue of so-called
net neutrality has been raised. And every time it stirs up an
interesting debate between government regulation versus to some
the terrifying freedom of the Internet. I think the American
people do not find that freedom all that terrifying at all.
The FCC's latest adventure in net neutrality in my view
would only serve to stifle innovation, and would potentially
subject the Internet to nanny state regulation from Washington.
Internet freedom has produced robust free speech for
billions across the world. And a wide open incubator for
entrepreneurs to generate jobs and to expand opportunity.
Back in May, FCC Commissioner Ajit Pai said this is, ``not
for us five unelected individuals to decide. Instead it should
be resolved by the people's elected representatives, those who
choose the direction of the Government and those whom the
American people can hold accountable for their choice.'' I
could not agree more. Although in Washington there are a lot of
folks in Congress who are fans of pushing difficult decisions
off to unelected members of our Government to insulate
themselves from accountability at the voting booth.
And I fully agree with Commissioner Pai that a five-member
government panel should not be dictating how Internet services
will be provided to millions of Americans. More than $1.2
trillion has already been invested in broadband infrastructure
since 1996. And that has led to an explosion of new content,
applications, and Internet accessibility.
The FCC should not be endangering future investments by
needlessly stifling growth in the online sector which remains
one of the few bright spots in an economy that is otherwise
struggling.
Net neutrality is a wolf in sheep's clothing. It is a set
of government directives disguised, as they always are, as
concerns about consumers and competition. That is the
justification for nanny state regulations over and over again,
whether it is the Mayor of New York telling us that our glass
of Coke is too big, or the FCC deciding here is how the
Internet should be governed.
We must keep in mind that when government imposes new
regulations, inevitably the cost of them is easily absorbed by
the large dominant companies, by the major players, and those
who bear the brunt of it, those who are fatally strangled so
often by these regulations are the little guys or the start-ups
or the ``mom and pops.''
The Internet has grown and flourished in ways we never
could have imagined from back in the days when Al Gore invented
the Internet. And a big part of the reason has been that
Washington has left the Internet alone.
Now, that used to be a bipartisan commitment. Back in 1996,
President Clinton said, ``Governments can have a profound
effect on the growth of electronic commerce. By their actions
they can facilitate electronic trade or inhibit it.''
Government officials should respect the unique nature of
the medium and recognize that widespread competition and
increased consumer choice should be the defining features of
the new digital marketplace.
We are seeing this growth in nanny state regulation in many
contexts. One is net neutrality and the push to bring
Washington into the day-to-day, online world. Another is a bill
that Congress is considering and that I fear Congress will try
to push through in the lame duck session and that is, namely,
extending an Internet sales tax to millions of ``moms and
pops'' who are selling their goods online who are starting
small businesses and who if Congress has its way will be forced
to collect taxes for 9600 jurisdictions nationwide. The big
guys will be benefited by that. But the little guys, the young
people, the Hispanics, the African Americans, the single moms,
the people just filled with hopes and dreams wanting the
American dream will find their lives made harder if we begin
taxing the Internet, if we begin regulating the Internet.
Instead, I believe we should protect the freedom of the
Internet. And that should be something that brings us together
across partisan lines, across the country, keep the Internet
free that protects our speech. It protects our economy, and
most importantly it protects opportunity for those who are
struggling and want a better life.
Thank you, Madam Chairman.
Senator Hirono. Thank you, Senator Cruz. Thank you to our
witnesses. This hearing is adjourned and the record will stay
open for 1 week.
[Whereupon, at 12:36 p.m., the Committee was adjourned.]
[Additional material submitted for the record follows.]
A P P E N D I X
Additional Material Submitted for the Record
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Additional Submissions for the Record
A list of material and links can be found below for Submissions for the
Record not printed due to voluminous nature, previously printed by an
agency of the Federal Government, or other criteria determined by the
Committee:
Journal of Law and Economics, The, R.H. Coase, October 1959,
article:
http://www.jstor.org/stable/724927.
Federal Communications Law Journal, Jeffrey A. Eisenach and
Hal J. Singer, June 2013, article:
http://www.fclj.org/wp-content/uploads/2013/09/65-3-Singer.pdf.
Social Science Research Network (SSRN), Jerry Brito et al., April
12, 2010,
article:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=
1587058&download=yes.
American Enterprise Institute, Jeffrey A. Eisenach, Ph.D., economic
study:
http://www.aei.org/files/2012/10/17/-broadband-competition-in-
the-
internet-ecosystem_164734199280.pdf.
Eisenach, Jeffrey A., and Ilene Knable Gotts, ``In Search of a
Competition Doctrine for Information Technology Markets:
Recent Antitrust Developments in the Online Sector,'' paper:
http://www.techpolicydaily.com/wp-content/uploads/2014/06/In-
Search-
of-a-Competition-Doctrine-for-Information-Technology-Markets-
Eisenach-
Gotts.pdf.
Federal Communications Commission (FCC), Electronic Comment Filing
System, September 4, 2014, online posting:
http://apps.fcc.gov/ecfs/comment/view?id=6018327622.
[all]