The State of California Goes Head to Head with The US Department of Justice on Net Neutrality

The Golden State is renowned for doing things differently from the rest of the US and, yesterday, its liberal credentials were reiterated by California Governor Jerry Brown signing net neutrality legislation into state law. This new legislation will prohibit internet service providers (ISPs) from blocking or impeding lawful traffic and demanding fees from sites and online- service providers for the delivery or prioritisation of their traffic to consumers. By taking this decision, Californian state legislators directly confronting the Federal Communication Commission (FCC), which in December 2017 decided to rescind the regulatory restrictions previously placed upon ISPs. As a result, the Department of Justice has issued a lawsuit arguing that California’s Net Neutrality Law is in violation of the Federal prerogative around inter-state commerce.

Why the stakes are so high for both consumers and telcos

The December 14th 2017 decision by FCC chairman Ajit Pai to rescind the "common carrier" regulations, which restricted the ability of the ISPs to selectively choose how they engage with direct-to-consumer businesses using their infrastructure, suddenly elevated telcos from the dreaded “dumb pipes” status to which they had previously been consigned. Telcos in their role as ISPs, are now empowered to determine the performance of specific consumer services being delivered through their infrastructure. In the last decade, the growth of digital engagement with media has financially benefitted both media content intellectual property (IP) owners and digital distribution services such as Netflix, Spotify and Facebook. The net neutrality restrictions placed on the telcos prevented their being able to strike favourable service relationships with the digital distributors, which would have allowed them to effectively monetise their  position as digital toll-road operators. The FCC ruling changed all this, despite vociferous lobbying from both digital distributors and consumer rights groups concerned about the precedent that could set for selective access to content based upon ability to pay.

California Attorney Xavier Becerra was quoted as saying that California, which is “home to countless start-ups, tech giants and nearly 40 million consumers, will not allow a handful of power brokers to dictate sources for information or the speed at which websites load.”

Net neutrality is driving consolidation across media and telco

The irony of the DOJ decision to sue the State of California over its defence of net neutrality came after a protected legal dispute which it recently lost with AT&T to prevent the telco acquiring Time Warner – home to media power houses Turner Networks, HBO, and Warner Bros. The DOJ argued that the unification of the largest domestic telco with the largest domestic media provider would create an overly powerful commercial entity, which would be able to price gouge the consumer through its control of both the pipes and the content.

The killing ground for companies in media is lack of ownership of infrastructure or billing rights. Indeed, efforts to avoid this ground has led to great mergers shaking up the media landscape over the previous two years. This year alone, the AT&T/Time Warner acquisition was followed by 21st Century Fox (21CF) putting its non-news and sports assets up for sale – with Disney desperately outbidding Comcast for those rights, and then Comcast retaliating by outbidding 21CF for the 60% of Sky that Disney did not acquire. Both 21CF and Disney know that either infrastructure or a direct-to-consumer proposition is essential to avoid ending up in the digital media killing ground of the offering mainstream content in the digital landscape.

California’s contrarian stance maybe in the interests of its citizens but it is surely fighting against the inexorable momentum unleashed by the telcos scenting opportunity to level the playing field with the tech majors that have positioned themselves as the media successor purveyors.