FCC's in quite the privacy predicament
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As I wrote in this space last year, the common currency in the internet age for both "edge" providers such as Google and the operators of "core" broadband networks such as AT&T and Comcast is information to provide consumers with enhanced online experiences. Given Americans' voracious use of the internet, and what our browsing and buying habits say about us, common sense would dictate that the U.S. government should develop a cohesive policy framework to guard against violations of consumers' online privacy.

Through a series of unfortunate events, I regret to say that we are farther away from good privacy policy than ever.

Our story begins with the Federal Communications Commission's (FCC) controversial decision to reclassify broadband Internet access as a Title II common carrier telecommunications service in its 2015 Open Internet Order

With reclassification, two related legal effects were triggered.

First, reclassification stripped the Federal Trade Commission (FTC) — the agency that traditionally has jurisdiction over digital privacy concerns for the entire internet ecosystem — from bringing a privacy enforcement action against broadband service providers because the FTC has no jurisdiction over common carriers.

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Second, with reclassification, all broadband service providers — whether wireline, cable or wireless — became subject to the Customer Proprietary Network Information (CPNI) statutory framework contained in Section 222 of the Communications Act.

 

The problem is that Section 222, designed for a pre-internet telephone world, applies only to a specific type of information collected in the provision of basic voice telephone service. As a result (and as the FCC conceded), the CPNI rules on the commission's books suddenly became hopelessly outdated.

Reclassification, it would seem, put the FCC into a bit of a pickle with regards to digital privacy.

On the one hand, with the FTC now ostensibly out of the enforcement picture, the FCC convinced itself that it must develop a special regulatory regime just for broadband service providers to prevent the inevitable privacy apocalypse.

On the other hand, the agency recognized that because Section 222 has clear limitations, it would have to engage in significant legal gymnastics and stretch the definition of CPNI past any reasonable statutory interpretation if it wanted to use Section 222 as a jurisdictional hook.

As the FCC soon found out, solving this predicament was harder than it seemed. However, after two years of machinations and the development of a significant public record urging caution, the FCC nonetheless opted to plow ahead with formal rules.

Neither the process nor the outcome were pretty.

To minimize disruption, the FCC could have harmonized its approach with that of the FTC, creating a consistent set of protections that did not favor one set of competitors over another. Unfortunately, that approach did not serve then-Chairman Tom Wheeler's political agenda.

Instead, in yet another example of regulatory hubris, the FCC chose to blaze its own path by issuing draconian rules that only addressed actions by broadband service providers, despite overwhelming evidence in the record that such a regime would disserve consumers and curtail emerging competition to Google and others in the digital advertising market.

Thus, rather than create a harmonized industry-wide regulatory approach to digital privacy with the FTC, the FCC created two discrete asymmetrical regulatory regimes: a restrictive ex ante regime specifically for broadband service providers with rules enforced at the FCC, and an ex post case-by-case regime enforced by the FTC for everybody else.

This is just bad policy, plain and simple.

As FTC Commissioner (and now Acting Chair) Maureen Ohlhausen warned, we should be focused a policy of maximum flexibility toward digital privacy, but the FCC's rules are hardly that. Instead, the agency's new privacy rules — just like the FCC's overall net neutrality regime where edge providers do not have to pay broadband service providers for terminating access despite imposing costs on their networks — represents another prime example of the Obama administration's naked bias of enacting policies designed to transfer economic profits from the internet's core to its edge.

You don't need to have a Ph.D. in economics to understand that when profits decline, investment suffers. To quote the FCC's own National Broadband Plan:"Private capital will only be available to fund investments in broadband networks where it is possible to earn returns in excess of the cost of capital. In short, only profitable networks will attract the investment required."

Like it or not, as we at the Phoenix Center have repeatedly pointed out, broadband is increasingly becoming "commoditized," driven in part by government interventions like net neutrality. What is crucial to understand is that as commoditization of broadband becomes more prevalent, the incentive to invest in network infrastructure goes down.

Thus, if network investment is to continue (as mandated by Section 706 of the Telecommunications Act and as called for by new FCC Chair Ajit Pai), then broadband service providers must look to alternative sources of investment-driving income, including the ability to monetize data appropriately that enables them to better serve their customers.

What is particularly annoying is that this economic reality was well-known to the Wheeler-led FCC, but — like most economic evidence during the Obama administration — the agency deliberately chose to ignore it.

Take, for example, the testimony of the FCC's lead witness at the agency's April 2015 Privacy Workshop, University of Pennsylvania Professor Matt Blaze. As Blaze testified, to stem the tide of decreasing profits resulting from the commoditization of the internet, broadband service proviers will be increasingly forced to "look for ways to monetize [consumer] data" to support the needed network investments. Monetizing data injects income into the ecosystem's core, thereby providing a sound financial environment for the internet to evolve and flourish.

But this puts the broadband service providers in competition with edge providers, so the Obama administration followed its standard game plan: side with Google. Asymmetrical regulatory intervention on one (albeit extremely crucial) segment of the internet ecosystem directs this evolution on a less healthy and innovative path by effectively transferring profits from the core to the edge.

What a disaster.

Given the huge costs that would be imposed by the FCC's new privacy rules (compliance costs, lost investment incentives, etc.), and the minimal (if any) benefit these rules would confer on consumers, common sense dictates that Pai should have the agency immediately stay the privacy rules until it figures this mess out.

Again, a stay should not invoke panic: This country went for two years between the time of the Open Internet Rules and the FCC's privacy rules without incident.

We can certainly wait a bit longer to make sure we get the policy right.

Lawrence J. Spiwak is the president of the Phoenix Center for Advanced Legal and Economic Public Policy Studies, a nonprofit organization that studies broad public-policy issues related to governance, social and economic conditions, with a particular emphasis on the law and economics of the digital age.


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