On July 28, 2015, the FCC granted permission for AT&T to acquire DIRECTV and merge the two companies into one combined entity (see FCC Memorandum Opinion and Order in Docket 14-90, released July 28, 2015). We will leave it to others to discuss the merits of the deal. However, there are certain aspects that could have significant implications for broadband Internet service providers specifically and Internet regulation in general. That is the issue of whether the Commission, now that it has seized Title II authority over the Internet, will begin to control the pricing of Internet services and, in fact, all Internet behavior?

In its Open Internet Order that became effective on June 12, 2015, the Commission asserted that it would forebear from using its Title II pricing authority and would not mandate specific Internet prices. Critics of the Order did not buy this and argued that it was just a matter of time before the Commission would use its section 201 and 202 regulatory authority (which it refused to forebear from) to prescribe “just and reasonable” prices as a backdoor way to control Internet prices.

Unfortunately for those who were hoping that the Commission would stay out of Internet pricing, the AT&T-DIRECTV merger includes a requirement that will be in effect for four years that is a clear instance of the FCC prescribing ISP pricing. Here is the relevant condition imposed by the FCC:

Discounted Broadband Services for Low-Income Subscribers - While finding that the availability of better and lower priced bundles of video and broadband service is a potential benefit of the merger, the Commission also concludes that the public interest requires us to ensure that a bundle of video and broadband services is not the only competitive choice for low-income subscribers who may not be able to afford bundled services. The Commission accordingly requires as a condition of the merger that AT&T-DIRECTV make available an affordable, low-price standalone broadband service to low-income consumers in its broadband service area. 

Specifically, AT&T is required to offer 10 Mbps Internet speeds for $10 per month to low-income customers.

FCC Commissioner Ajit Pai, a fierce critic of the Open Internet Order, believes that this requirement is actually a clear instance of the Commission mandating a service at specific price. In his partial dissent from the AT&T-DIRECTV Merger Order, Pai stated:

When the Commission instructs a regulated entity that it must offer a particular service for no more than a particular price, there is a name for that. It is called rate regulation. So notwithstanding the repeated claims by some over the past few months that the FCC has no interest in regulating retail broadband rates, the reality is far different. When given the opportunity, the Commission did not hesitate to impose rate regulation upon a broadband provider. This is merely a preview of coming attractions (Pai statement at p. 2).

Two additional conditions the Commission imposed on the merger also worry broadband Internet service providers. First is the requirement that AT&T must submit all its interconnection agreements with edge (content) providers to the Commission for review. Specifically, the Commission states:

Internet Interconnection Disclosure Requirements - Recognizing the importance of interconnection to the operation of online video services, the Commission also requires as a condition of this merger that AT&T-DIRECTV submit its Internet interconnection agreements so that the Commission may monitor the terms of such agreements to determine whether AT&T-DIRECTV is denying or impeding access to its networks in anticompetitive ways through the terms of these agreements.

Also concerning for broadband providers is the condition that AT&T must employ an internal compliance monitor to ensure that it is living up to the conditions of the deal:

Compliance Program and Reporting - Given the important role that these conditions serve in securing the public interest benefits of the merger, the Commission requires that AT&T-DIRECTV retain both an internal company compliance officer and an independent, external compliance officer that will report and monitor, respectively, the combined entity’s compliance with all conditions of the merger.  

Commissioner Pai noted in his partial dissent, that this would be unprecedented increase in the FCC’s control:

This Independent Compliance Officer will have wide-ranging powers. Among other things, he or she will have the authority to interview any company personnel, to inspect and copy any document, email, or contract, and to require the company to provide any data or submit any reports for any purpose that he or she believes to be reasonably related to his or her duties. And he or she may hire a staff to help do all of these things. There is no justification for the Commission to adopt this extraordinary condition. The Commission does not point to any credible evidence that the company has failed to comply with the conditions imposed upon it by the FCC in prior transactions. And there is no reason to presume that AT&T will fail to abide by the conditions contained here. This also establishes a dangerous precedent. I have little doubt that when we consider future transactions, there will be calls for future applicants to accept Independent Compliance Officers as a condition of approval. Virtually any transaction involving companies we regulate could result in the injection of a Commission - selected solon with vast powers. Government - approved monitors placed throughout the communications industry would represent a pernicious intrusion into the affairs of private businesses and a dramatic expansion of the Commission’s authority (id., pp-3-4).

Supporters of Title II reclassification will correctly point out that the AT&T-DIRECTV merger is a unique occurrence and is not necessarily indicative of how the Commission will regulate the Internet on a day-to-day basis. However, with the Commission directly involving itself in reviewing AT&T’s Interconnection agreements, it not much of stretch to believe, in the near future, all interconnection agreements will face a similar Commission review. 

In addition, since the Commission now has the option to review all future Internet behavior using its “Future Conduct” rule, all ISPs may soon face an internal compliance officer ensuring compliance with the Open Internet Order. 

Finally, now that AT&T is required to provide a specific service to certain customers at a specific price, other ISPs should expect that they too will soon face the same requirement. 

That is the problem with Title II regulation. Because the Commission now has the authority to mandate “just and reasonable” rates, it becomes more and more tempting to exercise this authority.  Thus, ironically, ISPs who are meeting all the original requirements to keep the Internet “open,” including no blocking, throttling or prioritizing of traffic, may soon find themselves facing increased regulation anyway.

By Andy Regitsky, CCMI