ATC: Cleaning Up After the Ninth Circuit in an Attempt to Save the Internet
by J. William Gurley
In 1998, President Clinton noted "Information technology now accounts for
over a third of our economic growth, and government should follow one
guiding principle: First, do no harm." This phrase, which translates from
the Latin phrase, primum non nocere, is a signal to pay just as much
attention to the "means" as the "ends." Often in complex political
systems, the objective of an action can be honorable, yet the impact of
said action can be completely at odds with the objective. This is largely
because the tools we use to encourage behavior in such systems are often
crude and imprecise.
On October 6, 2003, the Ninth Circuit Court of Appeals issued an opinion
in the case of Brand X Internet vs. FCC that has the potential to delay
the progress of the Internet in the United States by certainly years and
potentially decades. Through its actions, the Ninth Court has "invited"
the fifty independent and natural bureaucratic state-based public utility
commissions directly into the fold of the Internet.
How the Ninth Circuit accomplished this feat is both curious and
confusing. The case in question deals with whether or not cable lines
that deliver Internet service can be considered a "telecommunications
service." This wording is critical because Congress and the FCC have made
it clear that states can regulate "telecommunications services" but must
keep their hands off "information services." In 1998, the same year
Clinton made his declaration, the city of Portland mandated that AT&T
Cable, as a requirement for approval of its acquisition of TCI, open up
its broadband lines to competitive carriers. Ruling on this in 2000, the
Ninth Circuit stated that the city of Portland could not mandate this
behavior as its jurisdiction was over cable franchises, and these
broadband connections did not technically represent a cable
franchise. But the Ninth Circuit did not stop there; it made one more
historical, but seemingly unnecessary step. It declared cable modem
service a "telecommunications service."
The FCC was compelled to react to the Ninth Circuit Court's assertion, as
it flew in the face of the FCC position on this matter, as well as the
clear intent of Congress and the Executive Branch (both of whom had echoed
their desire to keep the Internet unregulated). Therefore in 2002, in an
effort to clarify and correct the decision in Portland, the FCC ruled that
cable modem services are "interstate information services" and not
"telecommunication services." Seven different petitions for review of the
FCC's "information services" ruling were filed in the Third, Ninth and
D.C. Circuits. Under the multi-circuit rules a judicial lottery was held,
and the Ninth Circuit was ironically elected to rule on the FCC's ruling.
In its decision of October 6th, the Ninth Circuit noted that the Supreme
Court had ruled in Chevron that agencies should be given the benefit of
the doubt in interpreting the subtleties of their own provisions,
particularly when consistent with the clear intent of Congress. Despite
this, and without ever questioning the intent of Congress, the Ninth
Circuit relied on two key precedents to escape this Supreme Court decision
and rule against the FCC. Surprisingly (or perhaps not), these two key
precedents were both previous actions by the Ninth Circuit ñ one being the
Portland case. The argument, quite simply, is that the FCC had no
business ruling on something that a prominent authority, none other than
the Ninth Circuit itself, had already decided. Meanwhile, in a similar
case across the country on October 16, a U.S. District Court in Minnesota
unequivocally noted that "State regulation would effectively decimate
Congress's mandate that the Internet remain unfettered by regulation."
Not lacking in hubris, Ninth Circuit Judge O'Scannlain in concurring
noted, "our adherence to stare decisis (the legal doctrine that courts are
restricted by precedent), even in the face of subsequent agency
interpretation contrary to our Portland decision, produces a result
ëstrikingly inconsistent with Chevron's underlying principles.'" He went
on to note "adherence to stare decisis in the present caseÖappears to
aggrandize, rather than limit our power over an admittedly complicated and
highly technical area of telecommunications law." Judge O'Scannlain is
right in that this certainly "appears" to be a jousting match of epic
proportion between the Ninth Circuit and the FCC. The unsuspecting and
unfortunate casualty in all of this is the Internet and everything it
means to American society.
Who would benefit from increased regulation of cable modem services? The
only clear answer is the fifty state public utility commissions. Perhaps
fearing irrelevance as a result of the rise of the Internet, these
agencies have quickly sided with the Ninth Circuit. It is not at all
clear that the Internet "needs" regulation -- in fact, quite the
opposite. Therefore, in a day and age where everyone is fearful of rising
deficits, our government should revel in the opportunity to downsize
rather than increase outdated government programs.
Who would be harmed by increased regulation of the Internet? There are
four constituents that are negatively impacted as a result of such action:
1) Consumers will be faced with higher prices for Internet
services. Highly regulated industries typically have complex tax
structures and consistently increasing prices. Competitive technology
industries typically have low or no tax structures, and constantly falling
prices. Apply regulation to the world of the Internet, and you lay the
foundation for things such as email taxation, instant messenger taxation,
VOIP taxation, per minute fees, bandwidth monitoring, and controlled
pricing (once again, read "increased" pricing at something like 5% per
year). Requiring Internet service companies to interact with fifty
different state agencies every time they "tie their shoe" will undoubtedly
add costs and complexities to their lives, which will in turn result in
higher costs and slower innovation/deployment. California consumers,
already accustomed to paying the highest gas prices in the country, will
quickly enjoy the highest Internet fees as well.
2) The growth in information technology businesses will slow
dramatically. The Ninth Circuit decision, if it stands, will have
horrible consequences for Silicon Valley. The growth of the Internet and
the numerous resulting businesses and services are the unquestioned
drivers of our current economy. Slow the penetration of broadband through
the imposition of increased regulation and all of high tech will
suffer. The Ninth Circuit decision pours concrete on the number one
facilitator of technological growth in the U.S.
3) American competitiveness will suffer. Household broadband penetration
in the U.S. is quickly falling behind innovative countries like Korea and
Japan. While we are struggling to move beyond 20% broadband penetration,
Korea is soaring past 60% on its way to 70%. Moreover, the connections in
Korea are built around fiber optics and are resultantly many times faster
than traditional U.S. broadband. These increases in Internet performance
have resulted in increased usage of the Internet for such things as
telecommuting and online education. As the U.S. faces the real loss of
white-collar jobs to the hard working, but lower wage connected workers of
Asia, one cannot help but wonder what political leader would aim to
intentionally slow the roll-out of the Internet inside the
U.S. Additionally, the key driver of the U.S. economy over the past
twelve months has been productivity based. Why mess with the underlying
network that is essential to this important metric?
4) Competitive RBOCs object as well. While one might assume that all of
the entrenched Bell monopolies would be in favor of regulation for cable
modem services, this would be an erroneous perspective. Verizon, one of
the most competitive of all RBOCs, was quick to point out that it believes
that cable modem services should be exempt from regulation. Make no
mistake, it wants regulatory parity, but it wants it through decreased
regulation on DSL not increased regulation on cable services. Likewise, a
spokesman for BellSouth recently noted, "The Internet, and for that matter
cellular service, has thrived because of limited regulation. Economic
regulation is crippling this industry (telecommunication services)."
Some will argue, as does Judge Sidney Thomas of the Ninth Circuit, that
opening the cable networks to competitive carriers will directly benefit
consumers. The enormous problem with this argument is the prima facie
evidence suggesting the opposite. Clearly stated in the Ninth Circuit
opinion, 70% of all broadband users use cable modem services as compared
with 30% for DSL. Cable companies, free to compete without the shackles
of regulation, represent over two-thirds of all broadband users in the
U.S. DSL, supposedly advantaged by its open connectivity and therefore
supposed increased competitiveness, represents less than one-third. If
regulated open-access is such a great thing, why are cable modems such a
compelling value proposition for consumers? And why were the RBOCs slow
to roll out DSL?
The bottom line is that we tried an experiment in DSL and it
failed. Attempting to increase competition by mandating that a company
invest in infrastructure and then share that infrastructure with
competitors is simply not a market-based solution. Companies, naturally
motivated to take market share, not give it away, are simply not effective
at appropriately enabling competition. If you want to increase
competition, add holistic competitors, not partial ones. This type of
solution had a huge positive impact when PCS licenses created a third
cellular alternative in most U.S. cities. Solutions such as cable
overbuilding can accomplish this as well. Notably, a WISP in Cerritos,
California recently announced an eight square mile 802.11 coverage zone
based on Cellular-WiFi equipment from Tropos Networks*. This solution
will offer ubiquitous broadband of greater than 1MB throughout the entire
city. These solutions are the ones that will successfully advantage the
customer while avoiding the overt dangers of increased regulation.
We should all know by now that rather than increasing competition,
regulation typically reinforces monopolies and oligopolies. Startups will
not and cannot prevail in heavily regulated industries. They lack the
required resources and capital to manage fifty different utility
commissions on a hundred different regulatory issues. For this same
reason, you will never see a startup deliver an automobile in the U.S. as
the regulatory red tape swamps all efforts. Increased regulation will do
nothing more than ensure that new competitors and innovative solutions are
permanently locked out of the market.
There are three ways to put an end to this potentially catastrophic
problem. The first is for the Ninth Circuit to clean up its own mess in
an upcoming large panel review known as an en banc review. The likelihood
of success here is slim. The Ninth Circuit is well known for its
reputation as the most over-turned appeals court in the nation, and it is
doubtful it would pick now to jeopardize its record. Luckily, there are
two more solutions that exist beyond the Ninth Circuit. For starters, the
Supreme Court could once again correct the Ninth Circuit. But perhaps
more appropriately, Congress should step in and legislate to ensure that
this type of misunderstanding never happens again. As Clinton and many
others have noted, the future of the Internet is simply too essential to
our national interests to suffocate it with unnecessary regulation.
Judge O'Scannlain made a peculiarly ironic but accurate warning in the
Ninth Circuit opinion. "Regardless of one's view of the wisdom of the
FCC's declaratory ruling, it cannot be denied that our holding today
effectively stops a vitally important policy debate in its tracks, at
least until the Supreme Court reverses us or Congress decides to
act." For those in Washington that do NOT want to (1) increase the
likelihood of higher Internet access rates and increased costs for
incremental services, (2) dampen the growth of Internet services and all
the companies that benefit from that revolution, and (3) negatively impact
American competitiveness, we hope you heed his urgent call.
*Benchmark Capital has an investment in Tropos Networks.
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focuses on the evolution and economics of high-technology business and
strategy. The information contained herein has been obtained from sources
believed to be reliable but not necessarily complete, and its accuracy
cannot be guaranteed. Any opinions expressed herein are subject to change
without notice. The author is a General Partner of Benchmark Capital and
its affiliated companies and/or individuals may have economic interests in
the companies discussed herein. J. William Gurley 2003. All rights reserved.
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