b r o a d b a n d connect v ty compet t on pol cy ftc staff report June 2007 Federal Trade Commission DEBORAH PLATT MAJORAS Chairman PAMELA JONES HARBOUR Commissioner JON LEIBOWITZ Commissioner WILLIAM E. KOVACIC Commissioner J. THOMAS ROSCH Commissioner Brian Huseman Chief of Staff Charles H. Schneider Executive Director Jeffrey Schmidt Director, Bureau of Competition Lydia B. Parnes Director, Bureau of Consumer Protection Michael A. Salinger Director, Bureau of Economics Maureen K. Ohlhausen Director, Office of Policy Planning Jeanne Bumpus Director, Office of Congressional Relations Randolph W. Tritell Director, Office of International Affairs Nancy Ness Judy Director, Office of Public Affairs William Blumenthal General Counsel Donald S. Clark Secretary of the Commission Report Drafters and Contributors: Gregory P. Luib, Assistant Director, Office of Policy Planning Daniel J. Gilman, Attorney Advisor, Office of Policy Planning Christopher M. Grengs, Attorney Advisor, Office of Policy Planning James F. Mongoven, Deputy Assistant Director, Bureau of Competition Armando Irizarry, Bureau of Competition Mary Beth Richards, Deputy Director, Bureau of Consumer Protection Elizabeth A. Hone, Assistant Director, Bureau of Consumer Protection Robert Schoshinski, Bureau of Consumer Protection Denis A. Breen, Assistant Director, Bureau of Economics Patrick J. DeGraba, Bureau of Economics Rachel Miller Dawson, Assistant General Counsel for Legal Counsel, Office of General Counsel Lisa M. Harrison, Office of General Counsel Robert B. Mahini, Office of General Counsel Kim Vandecar, Congressional Specialist, Office of Congressional Relations Katherine Rosenberg, Office of Congressional Relations Yael Weinman, Office of International Affairs Inquiries concerning this Report should be directed to: Maureen K. Ohlhausen, Director, Office of Policy Planning (202) 326-2632 or [email protected] This Report represents the views of the FTC staff and does not necessarily represent the views of the Commission or any individual Commissioner. The Commission, however, has voted to authorize the staff to issue this Report. i TABLE OF CONTENTS INTRODUCTION AND EXECUTIVE SUMMARY.................................................................................... 1 I: THE INTERNET: HISTORICAL AND TECHNICAL BACKGROUND............................................. 13 A. HISTORICAL DEVELOPMENT.......................................................................................................... 13 B. MAJOR INTERNET COMPONENTS................................................................................................... 23 C. NETWORK MANAGEMENT, DATA PRIORITIZATION, AND OTHER FORMS OF DATA DISCRIMINATION 28 II: LEGAL AND REGULATORY BACKGROUND AND DEVELOPMENTS....................................... 37 A. FTC JURISDICTION UNDER THE FTC ACT..................................................................................... 38 B. FCC JURISDICTION UNDER THE COMMUNICATIONS ACT.............................................................. 42 C. REGULATORY AND JUDICIAL CLARIFICATION............................................................................... 43 III: ARGUMENTS IN FAVOR OF AND AGAINST NETWORK NEUTRALITY REGULATION..... 51 A. ARGUMENTS IN FAVOR OF NETWORK NEUTRALITY REGULATION................................................ 52 B. ARGUMENTS AGAINST NETWORK NEUTRALITY REGULATION...................................................... 60 IV: DISCRIMINATION, BLOCKAGE, AND VERTICAL INTEGRATION.......................................... 70 A. LAST-MILE ACCESS CONCERNS CONTINGENT ON MARKET POWER.............................................. 72 B. POTENTIAL PROBLEMS INDEPENDENT OF LAST-MILE MARKET POWER........................................ 76 C. POTENTIAL BENEFITS OF VERTICAL INTEGRATION....................................................................... 80 D. BRIEF SUMMARY AND REMAINING QUESTIONS............................................................................. 82 V: DATA PRIORITIZATION........................................................................................................................ 83 A. WHY PRIORITIZE DATA?................................................................................................................ 84 B. PRIORITIZATION VERSUS CAPACITY EXPANSION........................................................................... 86 C. TYPES AND USES OF DATA PRIORITIZATION.................................................................................. 88 D. CONCLUSION.................................................................................................................................. 96 VI: THE CURRENT AND FUTURE STATE OF BROADBAND COMPETITION............................... 98 A. HISTORICAL BACKGROUND: DIAL-UP SERVICE............................................................................. 98 B. VIEWS ON THE STATE OF BROADBAND COMPETITION................................................................... 99 C. MUNICIPAL PROVISION OF WIRELESS INTERNET ACCESS.............................................................. 106 D. FEDERAL SPECTRUM POLICIES...................................................................................................... 109 E. INTERNATIONAL COMPARISONS.................................................................................................... 113 VII: ANTITRUST ANALYSIS OF POTENTIAL BROADBAND PROVIDER CONDUCT.................. 120 A. GENERAL PRINCIPLES UNDERLYING THE ANTITRUST LAWS......................................................... 120 B. POTENTIAL ANTITRUST THEORIES................................................................................................. 121 ii VIII: CONSUMER PROTECTION ISSUES................................................................................................ 129 A. AN OVERVIEW OF SECTION 5 OF THE FTC ACT..................................................................................................... 129 B. APPLICABILITY OF CONSUMER PROTECTION LAWS TO BROADBAND INTERNET ACCESS SERVICES.. 130 C. ADDITIONAL MEASURES TO PROTECT CONSUMERS........................................................................................... 136 IX: PROPOSALS REGARDING BROADBAND CONNECTIVITY.........................................................138 A. EXISTING AGENCY OVERSIGHT..................................................................................................... 138 B. FCC POLICY STATEMENT AND MERGER CONDITIONS.................................................................. 141 C. LEGISLATIVE PROPOSALS.............................................................................................................. 145 D. OTHER PROPOSALS RELATING TO BROADBAND CONNECTIVITY................................................... 147 X: SUGGESTED GUIDING PRINCIPLES.................................................................................................. 155 A. COMPETITION IN BROADBAND INTERNET ACCESS SERVICES........................................................ 155 B. GROUNDS FOR PROCEEDING WITH CAUTION................................................................................. 157 C. CONTINUED AGENCY OVERSIGHT................................................................................................. 161 APPENDIX 1 – BROADBAND CONNECTIVITY COMPETITION POLICY WORKSHOP PARTICPANTS 163 APPENDIX 2 – GLOSSARY OF FREQUENTLY USED ACRONYMS................................................... 165 iii INTRODUCTION AND EXECUTIVE SUMMARY Background The Internet1 has profoundly impacted numerous aspects of daily life for many people in the United States and is increasingly vital to the American economy. In response to recent debate relating to Internet access issues, Federal Trade Commission (“FTC” or “Commission”) Chairman Deborah Platt Majoras announced the formation of the Internet Access Task Force (“Task Force”) in August 2006 and invited interested parties to meet with the Task Force to discuss issues relating to Internet access generally and net neutrality2 in particular.3 The Task Force held a two-day public workshop on broadband connectivity competition policy in February 2007 (“Workshop”) to bring together consumer advocates and experts from business, government, academia, and the technology sector to explore competition and consumer protection issues relating to broadband Internet access.4 The purpose of this Report is to summarize the Task Force’s learning on broadband Internet connectivity in general and network neutrality in particular, as developed from the Workshop, meetings between the Task Force and various interested parties, and the FTC staff’s independent research. 1 As discussed in more detail in Chapter I of this Report, the term “Internet” is commonly used to refer to the decentralized, interconnected network of computer networks that allows computers to communicate with each other. Individual networks are owned and administered by a variety of organizations, such as private companies, universities, research labs, government agencies, and municipalities. 2 The terms “net neutrality” and “network neutrality” have been used to identify various policy concerns and prescriptions raised by diverse parties to the larger social discussion of broadband Internet connectivity. Typically, such terms are identified with positions that recommend, at least, some legal or regulatory restrictions on broadband Internet access services that include non-discrimination requirements above and beyond any