The FCC Can’t Exempt Netflix from Paying for Interconnection

Posted by | June 25, 2014 | Broadband Internet | 2 Comments

When the Federal Communications Commission (FCC) announced it would investigate the fees Netflix pays Internet services providers, it was careful to avoid any implication that it intended to impose new regulation. At the time, I considered it likely that Netflix’s factual admission against its own interest — that the fees it pays Comcast and Verizon are “too small” to harm consumers — was the primary reason for the FCC disclaimer.

A subsequent review of relevant precedent revealed another powerful reason for the FCC to reject the interconnection rights sought by Netflix: Even if the FCC were to reclassify broadband Internet access as a Title II service while leaving Netflix unregulated, the FCC would lack legal authority to require Internet service providers to interconnect with Netflix at no charge.

Before explaining why, I want to clarify that this blog doesn’t address FCC authority related to ‘net neutrality’ issues. Though Netflix describes its interconnection proposal as a ‘strong’ form of net neutrality, interconnection is not a net neutrality issue.

Unlike net neutrality, interconnection has been expressly addressed by the Communications Act since its inception in 1934, and in the past 80 years, the FCC and the courts have developed an enormous body of precedent governing interconnection. That precedent indicates that Netflix would not be entitled to the type of interconnection it seeks even if ISPs were subject to regulation under Title II.

First, the statutory scheme imposes interconnection duties and provides interconnection rights only to common carriers. Section 201(a) authorizes the FCC to require common carriers “to establish physical connections with other carriers” if the FCC finds that such interconnection is in the public interest. Section 251(a)(1), which was added to the statutory scheme by the Telecommunications Act of 1996, imposes a duty on each “telecommunications carrier” to interconnect “with the facilities and equipment of other telecommunications carriers.” These provisions indicate that Netflix is not entitled to statutory interconnection rights unless Netflix itself is a common carrier — a status that Netflix has disclaimed. (Though the FCC has previously concluded that it has authority to provide interconnection rights to non-common carriers, see Expanded Interconnection Remand Order, FCC 94-190 at ¶ 19 (1994), that decision was superseded by the 1996 Act and has not been tested in court. See Pacific Bell v. FCC, 81 F.3d 1147 (DC Cir. 1996).)

Second, Netflix is seeking a particular type of interconnection — “physical collocation” or “expanded interconnection” — that would provide it with a government-granted right to place its own communications facilities on properties owned by ISPs. Even if Netflix were considered a common carrier, the FCC would have no authority to provide Netflix with physical collocation rights. In Bell Atlantic v. FCC, 24 F.3d 1441 (DC Cir. 1994), the court struck down the FCC’s “expanded interconnection” rule that authorized competitive access providers to interconnect with incumbent local exchange carriers through physical collocation because it was not expressly authorized by the Communications Act and directly implicated the just compensation clause of the Fifth Amendment.

Congress subsequently authorized physical collocation in the 1996 Act expressly, but the relevant provision wouldn’t apply to the type of interconnection Netflix seeks even if the FCC reclassified broadband Internet access as a “telecommunications service.” Section 251(c)(6) imposes a duty on “incumbent local exchange carriers” (ILECs) to provide for physical collation of equipment at the premises of the local exchange carrier (LEC) only when it is “necessary” for “interconnection” or “access to unbundled network elements”.

  • Section 251(c)(6) is applicable only to incumbent LECs, and the entities with whom Netflix seeks to interconnect are not local exchange carriers (LECs). The term “local exchange carrier” refers only to the provision of “telephone exchange service” or “exchange access,” and is thus narrower in scope than “telecommunications service.” Even if ISPs were reclassified as providers of telecommunications services, ISPs would still not be providing “local exchange” services.
  • Even if Section 251(c)(6) were applicable to ISPs who are also providing local exchange services, it wouldn’t affect Netflix’s negotiations with Comcast, because cable companies (and mobile wireless carriers) are not “incumbent” LECs (which could explain why Comcast welcomed the FCC investigation.)
  • Under Section 251(c)(6), Netflix would also have to show that physical collocation of its equipment is “necessary” for it to interconnect — a standard Netflix cannot meet if it remains an unregulated information services provider. The FCC has rejected requests to authorize physical collocation rights for equipment used to provide enhanced or information services because such equipment is not “necessary” for the “transmission and routing of telephone exchange service and exchange access” — as required by the interconnection duty in Section 251(c)(2) — or “the provision of telecommunications services” as required in Section 251(c)(3). (See Local Competition Order, FCC 96-325 at ¶ 581 (1996).)
  • Even if Netflix could meet the “necessary” standard, physical collocation is not required if a state regulator determines that it is impractical, which could result in Netflix litigating the issue separately in every state.
  • Finally, like all interconnection, the Act’s plain language also limits physical collocation rights to other common carriers. The fundamental conceit of net neutrality is that so-called edge providers are ‘end users’. Allowing end users of the Internet to interconnect through physical collocation on ISP premises in the Internet’s core would turn the ‘end-to-end’ concept underlying net neutrality on its head.

Third, to the extent the FCC otherwise has authority to require interconnection through “virtual collocation,” it would not extend to Netflix equipment used to provide information services. For the reasons noted above, equipment used to provide information services is not necessary for interconnection with telecommunications services.

Finally, even if the FCC has authority to regulate interconnection between Netflix and ISPs, it cannot grant Netflix a blanket exemption from paying for interconnection. The FCC has maintained that Title II interconnection is not a 5th Amendment taking precisely because telephone companies are permitted to recover just and reasonable rates for it. (See Expanded Interconnection Remand Order, FCC 94-190 at ¶ 24 (1994).) “Free” is not a reasonable rate for the right to collocate equipment physically or virtually on someone else’s property.

Netflix’s cynical decision to leverage the net neutrality debate in its interconnection negotiations might be considered shrewd in the court of public opinion, but it won’t avail Netflix in a court of law. No matter how many times Netflix incants “net neutrality”, the communications laws won’t allow Netflix to turn net neutrality into free interconnection rights any more than the laws of nature allow an alchemist to turn lead into gold.