How Mega-Mergers Give the FCC Stealth Power for Net Neutrality

The agency can leverage approval of the massive marriages to achieve a range of policy goals.

National Journal
Brendan Sasso
May 29, 2014, 6:32 a.m.

En­act­ing new fed­er­al reg­u­la­tions can be hard work.

First, the agency has to make a form­al pro­pos­al. Then, after months of sift­ing through com­ments, the agency has to act again to im­pose the fi­nal rules. And it’s al­most a guar­an­tee that some­body will sue, res­ult­ing in more months of lit­ig­a­tion and the pos­sib­il­ity that the courts will force the agency back to square one.

But the Fed­er­al Com­mu­nic­a­tions Com­mis­sion now has a golden op­por­tun­ity to achieve some key policy goals without all the messi­ness of form­al reg­u­lat­ing — in­clud­ing on the con­tro­ver­sial is­sue of net neut­ral­ity.

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The agency is set to re­view two ma­jor mer­gers, with a pos­sible third around the corner. The FCC can give the com­pan­ies the go-ahead or block the deals. But the com­mis­sion also has a third op­tion: It can ap­prove the mer­gers provided that the com­pan­ies com­ply with cer­tain con­di­tions — and therein lies the agency’s stealth power.

Be­cause these mer­gers are so massive, any con­di­tions the FCC im­poses could re­shape the in­dus­tries it reg­u­lates. And com­pan­ies aren’t likely to fight or sue over ob­lig­a­tions they have to ac­cept to get a mult­i­bil­lion-dol­lar deal ap­proved.

The first mer­ger be­fore the FCC is Com­cast’s $45 bil­lion bid to takeover Time Warner Cable. The com­bined con­glom­er­ate would con­trol just un­der 30 per­cent of the pay-TV mar­ket and a sim­il­ar share of the na­tion’s broad­band In­ter­net sub­scribers.

AT&T is seek­ing ap­prov­al to buy Dir­ecTV for $48.5 bil­lion, and Sprint has made no secret of the fact that it would like to ac­quire T-Mo­bile.

Those mer­gers give the FCC a new tool to ad­dress the con­ten­tious is­sue of net neut­ral­ity.

The FCC en­acted net-neut­ral­ity rules in 2010, but a fed­er­al Ap­peals Court struck down those rules earli­er this year. FCC Chair­man Tom Wheel­er is now try­ing to re­write the reg­u­la­tions in a way that can sur­vive fu­ture court chal­lenges.

But many lib­er­al law­makers, tech com­pan­ies, and act­iv­ists are out­raged that Wheel­er’s pro­pos­al could al­low In­ter­net ser­vice pro­viders to charge web­sites for faster ser­vice in some cases. They warn that “fast lanes” would tilt the In­ter­net in fa­vor of the richest cor­por­a­tions, leav­ing every­one else lag­ging be­hind. They ar­gue that In­ter­net pro­viders should be re­quired to treat all traffic equally.

Act­iv­ists camped out­side the FCC over the is­sue, and guards had to drag out sev­er­al pro­test­ers who stood up and began shout­ing at the com­mis­sion­ers at the FCC’s most re­cent pub­lic meet­ing.

The FCC can use mer­ger con­di­tions to soften some of that blow­back. Even though a court said the FCC lacked the leg­al au­thor­ity for the stronger net-neut­ral­ity rules, the agency could still force mer­ging com­pan­ies to abide by the now-de­funct reg­u­la­tions.

Com­cast is already bound by the old rules un­til 2018 as a con­di­tion of its 2011 pur­chase of NBC-Uni­ver­sal. The cable gi­ant has prom­ised to ex­tend that pro­tec­tion to Time Warner Cable cus­tom­ers if the mer­ger is ap­proved. AT&T has also offered to abide by the old reg­u­la­tions for three years if reg­u­lat­ors let it buy Dir­ecTV.

Those of­fers are really just open­ing bids in ne­go­ti­ations with reg­u­lat­ors, and the FCC could likely force the com­pan­ies to ac­cept even longer net-neut­ral­ity com­mit­ments.

Wal­ter Piecyk, an in­dustry ana­lyst with the firm BTIG, said the flurry of trans­ac­tions gives the FCC a “unique” op­por­tun­ity to ad­dress the pub­lic pres­sure over net neut­ral­ity.

“There’s a solu­tion sit­ting right in front of it,” he said.

The agency could even im­pose reg­u­la­tions that go well bey­ond its 2010 net-neut­ral­ity or­der. The old rules ap­plied min­im­al re­quire­ments for In­ter­net ser­vice on mo­bile devices. The FCC could force AT&T to ac­cept new net-neut­ral­ity re­quire­ments for cell-phone ser­vice as a con­di­tion of its Dir­ecTV deal, and Sprint would likely ac­cept tough­er rules if it were al­lowed to buy T-Mo­bile.

The mer­gers also give the FCC a chance to ex­per­i­ment with new reg­u­la­tions of net­work con­nec­tion deals — a sep­ar­ate but re­lated top­ic to net neut­ral­ity. The is­sue has promp­ted grow­ing con­cern in re­cent months after Net­flix had to pay Com­cast and Ve­r­i­zon to con­nect dir­ectly to their net­works.

The net-neut­ral­ity reg­u­la­tions gov­ern only how In­ter­net pro­viders handle traffic flow­ing over the last mile of cable in­to con­sumers’ homes — not how net­works con­nect to each oth­er. But by re­fus­ing to al­low Net­flix to con­nect dir­ectly to their net­works, the broad­band com­pan­ies can ef­fect­ively throttle Net­flix’s ser­vice, res­ult­ing in more buf­fer­ing and lower-qual­ity videos.

Wheel­er has said he wants to look in­to the is­sue, but he hasn’t spe­cified wheth­er he will push new reg­u­la­tions.

An­oth­er top pri­or­ity of the Obama ad­min­is­tra­tion is uni­ver­sal In­ter­net ac­cess. Of­fi­cials ar­gue that a high-speed In­ter­net con­nec­tion is an es­sen­tial part of par­ti­cip­at­ing in the mod­ern eco­nomy. The FCC could ad­vance that goal by re­quir­ing com­pan­ies to build out to more rur­al areas and of­fer cheap plans to low-in­come con­sumers.

As part of the NBC deal, Com­cast agreed to of­fer an “In­ter­net Es­sen­tials” plan to low-in­come fam­il­ies, but con­sumer groups have ques­tioned the ef­fect­ive­ness of the pro­gram.

Wheel­er is clearly open to us­ing mer­ger con­di­tions as a policy tool. In a per­son­al blog post be­fore he was nom­in­ated to lead the agency, Wheel­er wrote that the FCC should use AT&T’s bid to buy T-Mo­bile as a “back­door to im­pos­ing a new reg­u­lat­ory re­gime” that “could ul­ti­mately spread to all wire­less car­ri­ers.” The FCC and the Justice De­part­ment blocked that deal out­right in 2011.

But Re­pub­lic­ans have cri­ti­cized the FCC in re­cent years for reg­u­lat­ing through mer­gers. They ar­gue that con­di­tions on deals should be nar­rowly tailored to ad­dress the pos­sible harms of the deal rather than pur­su­ing broad policy goals.

“Con­gress nev­er in­ten­ded for the FCC’s trans­ac­tion re­view au­thor­ity to be used as a ‘back­door’ poli­cy­mak­ing tool that lacks both trans­par­ency and ju­di­cial re­view,” Sen. John Thune, the top Re­pub­lic­an on the Sen­ate Com­merce Com­mit­tee, said last year dur­ing Wheel­er’s con­firm­a­tion hear­ing. “We already have too many fed­er­al agen­cies car­ry­ing out their own agen­das and over­step­ping their con­gres­sion­al man­dates — we don’t need the FCC to be an­oth­er one.”

John Bergmay­er, a seni­or staff at­tor­ney for the con­sumer ad­vocacy group Pub­lic Know­ledge, said mer­ger con­di­tions can be “tempt­ing” but that they’re “not really the best way to set policy.”

He ar­gued that net-neut­ral­ity rules should ap­ply in­dustry-wide and not ex­pire in a few years. He also ar­gued that no amount of con­di­tions would make the Com­cast pur­chase of Time Warner Cable good for con­sumers.

“The best way to pre­vent the mer­ger-spe­cif­ic harms is to just pre­vent the mer­ger,” he said.

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