On February 26, 2015 the FCC voted to approve the Report and Order on Remand, Declaratory Ruling, and Order (FCC 15-24), also known as the “Open Internet Order.” The Order reclassifies the “internet” as a “telecommunications service and allows the FCC to impose strict regulations on Internet Service Providers (ISPs). What is interesting is that there are no rules that have been made public. The rules will follow later. The internet is rife with summaries of what the Order will accomplish, so I won’t use this post to go into those details. What I will do is to explain why I believe that this Order tolls the death knell for the internet as we know it.
When I first started practicing law three decades ago, I handled the disposition of assets for two bankrupt railroads, the Rock Island and the Chicago Milwaukee and Pacific. I also handled regulatory work for a third railroad that managed to avoid bankruptcy, the Chicago and Northwestern (later swallowed up by the Union Pacific). I learned a lot about railroads and I learned a lot about federal regulations. Here is some of what I learned. The railroads had a good thing going in the 1800s and early 1900s but destroyed it through monopolistic practices, suppression of innovation, terrible customer relations, price gouging and lowered levels of service. As a result of the public outcry about the railroads, the Interstate Commerce Commission and every state adopted draconian regulations to protect the public and shippers, to keep prices low, and to increase competition. The result was exactly opposite of what was intended.
Because railroads were now fully regulated, they could not do anything unless they plodded through years and sometimes decades of litigation. Investment dried up, tracks began to fall apart, and railroads found themselves totally unable to compete with the new trucking industry. The trucking industry had the competitive advantage of not having to pay for the billions of dollars that the US Government spent on the brand new interstate highway system outside of a modest fuel tax.
Between the death grip of burdensome regulation and heavily subsidized trucking, the railroads had no chance. One after another huge operations went into bankruptcy. As a result, Congress was forced to pass the Railroad Revitalization and Regulatory Reform Act of 1976. However, it was too little too late. The Staggers Rail Act of 1980 was another effort to save the dying industry but by then most of the major railroads were bankrupt. Finally, in 1995 Congress abolished the ICC altogether. Out of those ashes rose a revitalized railroad mostly free of government regulation.
So why do I talk about railroads when talking about the internet? Let me swap out the railroad terms for the situation that we find ourselves in now.
The major ISPs (telecom and cable companies) had a good thing going in the 1990s and early 2000s but destroyed it through monopolistic practices, suppression of innovation, terrible customer relations, price gouging and lowered levels of service. As a result of the unprecedented public outcry, primarily about mindbogglingly hateful anti-customer behavior, the Federal Communication Commission adopted draconian regulations to protect the public, to keep prices low, and to increase competition. The result was exactly opposite of what was intended.
Because the ISPs were now fully regulated, they could not do anything unless they plodded through years and sometimes decades of litigation. Investment dried up, switching facilities and fiber optic lines began to fall apart, and the IPSs found themselves totally unable to respond to new forms of communication. One by one they filed for bankruptcy, leaving consumers with no choice, high prices, and slow connections.
Do I blame the FCC for taking the action it did? Not really. I blame the ISPs for treating their customers so poorly that the American public demanded action. However, increased regulation is rarely a recipe for innovation or economic progress. One exception is breaking up natural monopolies that only work to stifle progress and competition. The one partial success story I can think of was the breakup of Bell Telephone in 1982. Had that hide-bound monopoly not been broken up we would still be using rotary phones to communicate. This is why I believe that parts of the FCC’s Order are misplaced. While it is good to prevent government from protecting monopolies and to encourage competition, it is usually the death of innovation to regulate prices and services. As they say, be careful what you ask for as we may actually get exactly what are demanding — the internet of 2008 — frozen in place for the next twenty years.