The Federal Communications Commission appears ready to use Title II of the Telecommunications Act to classify Internet Service Providers as utilities, allowing for net neutrality to be reinstated. But in a move to counter those urging the FCC to regulate interconnection agreements, Verizon (NYSE:VZ) has filed a document that may influence how the Open Internet is defined.
In a filing to the FCC, Verizon argued that the commission has no right to regulate paid interconnection deals like the ones Netflix (NASDAQ:NFLX) has reached with Verizon and other Internet providers. Making ISPs utilities using Title II should remain distinct from Internet interconnection deals, an attorney for the ISP argued in the brief.
At the moment, this argument is just being made directly to the FCC, but if the agency takes action to outlaw these deals, Verizon could head to court. And if the courts agree with Verizon, the FCC could struggle to ensure a truly open Internet and regulate paid interconnectivity deals. While this outcome would benefit ISPs, let's explore the crux of the argument and how unregulated deals impact consumers.
What Verizon is arguing
Verizon isn't saying the FCC can't use Title II to establish net neutrality; it's simply saying those rules don't apply to interconnection deals. "The interconnection of Internet networks and the exchange of Internet traffic have always been accomplished through voluntary, commercially negotiated arrangements," Verizon Vice President and Associate General Counsel William H. Johnson wrote in the brief. Johnson continues by arguing any such regulation is unlawful:
Those interconnection arrangements, moreover, have been deemed to be outside the scope of Open Internet proceedings and not suitable for similar regulation. ...The Commission cannot under any circumstances lawfully impose Title II common-carriage requirements on interconnection, as some regulatory proponents propose. Such requirements apply only to "common carriers," that is, to telecommunications service providers already "engaged as a common carrier for hire." ... But providers of CDN, transit, or other interconnection services do not offer those services on a common-carrier basis. And as the D.C. Circuit has explained, when a provider is not operating as a common carrier, the Commission cannot "relegate" that provider "to common carrier status" by imposing common-carriage regulation.
Basically, Verizon is putting the FCC on notice that it should think twice about outlawing these deals. Offering the court precedent is a not-so-subtle way to suggest what the company's course of action will be if the commission has a different opinion.
So why is this bad for consumers?
Although streaming services are striking deals with ISPs to buy faster access to consumers, that doesn't necessarily benefit everyone.
For instance, before Netflix reached its deal with Verizon, the streaming service's customers were victims of poor quality service when attempting to watch video while using the ISP. But the two struck an agreement that involved Netflix paying for its customers to receive higher-quality stream from Verizon, although the deal's exact terms have never been made public.
Netflix also struck a similar deal with Comcast (NASDAQ:CMCSA) prior to the Verizon deal. Not surprisingly, "Netflix performance on Comcast improved 65% after the companies struck their peering arrangement," according to ARS Technica.
While this may sound positive, the lesson here is that even if you're paying for both Internet access and services like Netflix, you could still experience poor quality if the streaming service does not pay your ISP for faster access to your device. And even if your streaming service does pay, that money has to come from somewhere -- either a price increase or a reduction in money spent on content. Either way, consumers have virtually no control over this process despite ultimately bearing the costs.
Meanwhile, Verizon and the other ISPs have not lowered prices despite their new revenue stream, and it's hard to imagine them doing so if this type of interconnection agreement becomes permanently legal and more common.
What will happen next?
The FCC may not require a court to make the decision. Bloomberg recently reported that Chairman Tom Wheeler was open to allowing paid interconnectivity deals, albeit with a major caveat. According to the report, Wheeler "has decided the rules, scheduled for a vote next month, will permit the agreements but include a procedure for companies to ask for agency review."
In this case, the deals would be legal, but the FCC would at least have a mechanism to regulate them and prevent price gouging or the use of pricing to freeze smaller companies out the market.
With an oversight procedure, the FCC could order an Internet service provider to stop demanding unfair fees, or to improve its connection, Harold Feld, senior vice president of the Washington-based policy group Public Knowledge told Bloomberg. Contracts would be considered against a standard of whether they are "just and reasonable," Feld said.
While this outcome would benefit ISPs -- who will retain a new source of revenue -- it's bad news for consumers, who would have benefited most from the complete elimination of these deals.
Daniel Kline owns shares of Apple. He believes he would make an excellent commissioner of the FCC. The Motley Fool recommends Apple, Netflix, and Verizon Communications. The Motley Fool owns shares of Apple and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.