For those of us who have argued that the free market should determine Internet winners and losers instead of the FCC’s burdensome Open Internet Order, this has been an interesting week.  As it turns out, Netflix, one of the chief advocates of Title II regulation for Internet service providers (ISPs), has itself been violating one of the FCC’s bright line net neutrality rules for five years. According to Netflix, it has been throttling its video steam on mobile networks to ensure that its customers are not overcharged for violating their data caps and do not have an incentive to drop its video service.

Let’s be clear, despite its apparent hypocrisy, Netflix has not violated the net neutrality rules. That is because as an edge provider it is not covered by those rules as are telecommunications providers and ISPs. Instead, since Netflix, Google and similar edge providers are not common carriers they continue to be regulated under the much-less intrusive rules of the Federal Trade Commission (FTC). Thus, it is highly unlikely that the FTC would open an investigation into this Netflix practice.

While the FCC cannot investigate Netflix for a net neutrality violation, it can still investigate the company for false statements made during the open Internet proceeding. That possibility was addressed by Commission Michael O’Rielly this week in a March 29 speech at the American Action Forum. O’Rielly stated:

Netflix has attempted to paint a picture of altruism whereby it virtuously sought to save these consumers from bumping up against or exceeding their data caps. There is no way to sugarcoat it: the news is deeply disturbing and justly generates calls for government – and maybe even Congressional – investigation…While we must absolutely resist any effort to subject Netflix and other edge providers to net neutrality rules, its admission and activities raise at least two critical areas that demand Commission attention. First, a company cannot knowingly make misrepresentations and inaccurate statements before the Commission. In fact, doing so violates Commission rules intended to protect the integrity of the Commission and our decisions. We need to closely examine filings that were made for potential violations in light of this new information. It appears that Netflix made accusations of wrongdoing by ISPs, all the while knowing that its own practices were one of the causes of consumer video downgrading. Second, we must all acknowledge that Netflix was not some passive participant when it came to the formation if the Commission’s Title II mandates for net neutrality. It was a key representative of the supposed marketplace the rules were designed to protect: the over-the-top video distribution business.  Many rules were based on the representations made by Netflix and other similarly situated entities, including Google.  Certainly, the entire interconnection regime was predicated on the fears of anti-competitive peering and gatekeeper status concocted by Netflix. And yet, at the same time it was making these claims, Netflix, itself, was engaged in highly suspect behavior. These revelations call into question the entire foundation and rationale of the net neutrality decision.

At the same time Netflix was admitting to throttling data, more than 50 consumer advocate groups sent a letter to the FCC on March 28 demanding an investigation into the “zero-data” plans of T-Mobile and other ISPs. According to these groups:    

As we pass the first anniversary of the FCC’s landmark net neutrality rules, Internet service providers (ISPs) like Comcast, AT&T, Verizon, and T-Mobile are using new “zero-rating” plans to undermine the spirit and the text of the rules. Zero-rating allows ISPs to exempt certain content from customers’ data caps. As currently offered, these plans enable ISPs to pick winners and losers online or create new tolls for websites and applications. As a result, they present a serious threat to the Open Internet: they distort competition, thwart innovation, threaten free speech, and restrict consumer choice—all harms the rules were meant to prevent.

There is one common factor between Netflix throttling its own customers and the zero-data plans offered by ISPs. There have been no complaints by actual customers! In fact the proliferation of these plans and the ascendance of Netflix show just the opposite. Customers appreciate these plans because it allows them to sample more content without paying extreme data overcharges. It also demonstrates that the FCC’s net neutrality rules, while making it more costly for companies to operate, will not stop consumers from having the final say in what will be successful in the market.

Some consumer advocate groups want to further impose net neutrality rules on edge providers to ensure that there can be no exceptions to Internet traffic equality. However, we believe the solution is not to expand net neutrality or penalize ISPs that offer zero-data plans or other innovative programs.  Instead, as Commissioner O’Rielly noted in his speech, the intrusive regulation that causes carriers to spend more and use centrifuge to serve customers should be eliminated:

Moreover, I would strongly oppose any efforts to capture edge providers in the Commission’s net neutrality rules or a similar regime. It is not surprising to hear calls for the equal application of these rules to all Internet companies. In fact, I predicted this would occur sooner or later. It is only human nature for some ISPs to want the burdens imposed on them to apply to all Internet companies. But that would be a colossal mistake. The solution to unnecessary regulatory burdens and overreach is not to subject everyone to them, but to reduce them for all. In other words, use the parity argument to help companies and consumers alike, rather than dragging everyone into the abyss.

Of course, the best hope for eliminating the net neutrality rules lies with the DC Circuit Court of Appeals, which is currently reviewing challenges to the FCC’s Open Internet Order. The Court’s decision is expected any day now. If the Court rejects the FCC’s Order, it will be a win for consumers, ISPs and edge providers. If the Commission wins, expect every zero-data service and future innovative services to face an FCC investigation. It would be a win for lawyers only.

By Andy Regitsky, CCMI