Tom Wheeler tries to rewrite Internet history

June 9, 2015

Bret Swanson

American Enterprise Institute

In an effort to justify its aggressive new regulation of the Internet, the Federal Communications Commission is rewriting history. Intrusive oversight of the digital economy is actually good for investment and innovation, says FCC Chairman Tom Wheeler. “Wireline DSL was regulated as a common-carrier service from the late-1990s until 2005,” Wheeler argued at a recent Broadband Communities Summit in Austin, Texas. “Interestingly in this period, under the old heavy-touch approach to Title II, our nation saw the highest levels of broadband infrastructure investment ever.”

Mr. Wheeler’s analysis, however, is like arguing that housing policy and monetary policy between 2002 and 2007 were superb because we built so many new homes. His analysis would fail to mention the housing crash, the financial panic, and the Great Recession, which arrived just months later and whose catastrophic effects lasted several years.

In fact, the FCC’s brief experiment applying Title II regulation to emerging broadband services contributed to the spectacular crash of the tech and telecom sectors in 2000-01. Only when Title II was shelved did the broadband and Web industries rationalize and begin their now-uninterrupted ascent.

In the mid-90s, the Internet idea sparked the world’s imagination. Netscape invented the Web browser, people were dialing into AOL, email was spreading like wild, and the Clinton Administration, to its credit, privatized NSFnet, a major component of the Internet. In 1996, hoping to free the nation’s communications networks from the old telephone rules, Congress passed the Telecom Act. Yahoo!, Amazon, and a thousand other dot-coms launched businesses to exploit the promise of big bandwidth from emerging broadband networks.

Amid the excitement, however, the FCC was already undermining the revolution. Although Congress hoped to promote competition chiefly through deregulation, FCC Chairman Reed Hundt set up an elaborate scheme of mandated sharing and price controls on telecom networks. He encouraged Wall Street and Silicon Valley to fund hundreds of competitive local exchange carriers (CLECs), who would lease and resell the networks of incumbents.

The scheme didn’t work. It was a boon to telecom lawyers but discouraged investment in the telecom version of broadband, called digital subscriber line (DSL). Most of the actual investment flowed to unregulated portions of the network – long-haul Internet links, ISPs, and cable broadband.

In 1999 and 2000 alone, network firms worldwide laid 150 million kilometers of optical fiber, enough to stretch to the Sun. In the U.S., between 1999 and 2001, firms like Level 3, Williams, Global Crossing, 360Networks, Sprint, AT&T, and others spent an astounding $125 billion on the long-haul fiber networks that are still today the foundation of the Internet. It was a one-time big dig, when firms dug trenches along railroad lines, built new conduits, and laid cables, each containing dozens of strands of optical fiber. In those three years, these mostly unregulated long-haul routes and metropolitan rings accounted for 43% of “broadband investment.”

The mismatch between over-investment in unregulated long-haul routes and underinvestment in hyper-regulated last-mile DSL resulted, temporarily, in a “fiber glut.”

After these multiple nationwide networks were built, however, long-haul investment came back to earth. According to Will Rinehart of the American Action Forum, by 2005 long-haul investment was 27% lower than it had been in 1996. Investment by the telecom firms was 9% lower than in 1996, and yet annual investment in unregulated cable broadband was 82% higher than in 1996. Hal Singer of the Progressive Policy Institute found, conservatively, that during the period in question Title II depressed telecom investment compared to cable investment.

A rough estimate is that just 20% of the investment during the first Internet boom was subject to Title II – a far cry from the story Mr. Wheeler has been telling. And even that 20% was under protest: lawsuits were flying left and right.

Many in Washington wanted to apply the same Title II rules to cable broadband. But Mr. Hundt’s successor at the FCC, William Kennard, resisted the temptation. “I don’t want to dump the whole morass of Title II regulation on the cable pipe,” Kennard insisted at the time. “In a market developing at these speeds, the FCC must follow a piece of advice as old as Western Civilization itself: first, do no harm. Call it a high-tech Hippocratic Oath.”

In 1998, the Clinton FCC’s own “Stevens Report” reiterated the importance of segregating modern information services, like Internet access, from older and “mutually exclusive” telephone services. In the years ahead, the differential regulatory treatment resulted in a significant gap, as cable broadband leaped ahead of telecom DSL in coverage, subscriptions, and speeds.

Today’s most passionate advocates of Title II contradict themselves. They claim cable has been so successful that it has a monopoly on fast broadband connectivity. Monopoly is far too strong a word – most Americans have three or more options – but it’s true that cable broadband’s uninterrupted standing as an unregulated information service encouraged the investment that now delivers fast Internet to 90 percent of the nation.

The headline presumption that the ’96 Act would deregulate the whole communications sector helped fuel both real investment and the millennial mania in technology stocks. When the FCC’s bureaucratic implementation proved heavy-handed, however, the market imploded. Several hundred telecom carriers and equipment firms went bankrupt, and many others were snapped up for pennies on the dollar. By 2002, according to one study, “investors were placing a value of $4 billion on assets booked by CLEC managers in the previous five years at a value of $65 billion.”

(This is no mere after-the-fact analysis. Many of us criticized the FCC’s zealous regulation at the time [one][two][three]. In one of many contemporaneous eulogies for the industry, Peter Huber in 2003 documented the policy errors that led to the crash.)

As the sector was melting down, however, the courts were finding many of the Title II sharing requirements and price controls unlawful, and the FCC came to realize its mistakes. Between 2002 and 2005 the FCC freed DSL and fiber-to-the-home, thus harmonizing telecom broadband with cable broadband, wireless broadband, and the rest of the Internet. Soon, Verizon began deploying its FiOS fiber optic network, AT&T built U-verse, cable upgraded to Docsis 3.0, and 3G and then 4G wireless data took off, delivering today’s bounty of Web video, social networks, cloud computing, and apps.

Each moment in history is unique. No analysis is dispositive. Yet Mr. Wheeler cannot argue that Title II was a success in the brief time it applied to one sliver of the nascent broadband world. Where it did apply, it depressed (or misdirected) investment and precipitated a crash. When it was banished, the U.S. information economy enjoyed unprecedented growth and innovation.

The FCC claims that its new rules are a restrained version of Title II. But in many ways, they are more expansive. The agency has arbitrarily declared all IP addresses to be part of the heavily regulated public switched telephone network (PSTN). And under the broad, new “Internet conduct standard,” the FCC reserves the right to bar any behavior it doesn’t like. Already, sponsored data plans from Facebook, Pandora, and Spotify, which resemble the previous era’s toll-free 800 phone calls, are under regulatory suspicion. In this way, the FCC is reaching well beyond the disastrous Title II of the 1990s, which only applied to telecom firms. The new Title II targets Silicon Valley and, via the purposely vague conduct standard and the redefinition of IP addresses, anyone who touches the Internet.

As Bob Metcalfe, the inventor of Ethernet reminds us, under Title II, the telephone of 1984 looked very similar to one from 1934. Information services, on the other hand – broadband, the Internet, iPhones – have enjoyed more rapid innovation than perhaps any technology in history. That’s the lesson Mr. Wheeler should be promoting.

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