Beyond Netflix’s Hypocrisy: The Real ‘Throttling’ Debate

Kerfuffle Illustrates Incoherence of FCC’s Net Neutrality Rules

Today, TechFreedom awarded its first Tech Hypo(crite) award to Netflix for secretly throttling its video streams to wireless subscribers on AT&T’s and Verizon’s networks, despite having been a vocal proponent of the FCC’s rules against throttling and discrimination during its Open Internet rulemaking.

We were careful to emphasize that Netflix’s “throttling” was, in and of itself, neither bad for consumers nor illegal. Netflix says it’s trying to “protect our members from overage charges.” And, of course, Netflix is not covered by the Open Internet rules.

Questions have since poured in. I attempt to respond to them all here.

Why Didn’t Netflix Throttle T-Mobile & Sprint?

Until yesterday, Netflix had never publicly disclosed its throttling on AT&T and Verizon’s networks:

in an effort to protect our members from overage charges when they exceed mobile data caps, our default bitrate for viewing over mobile networks has been capped globally at 600 kilobits per second.

The WSJ elaborates on what this means:

Netflix said it doesn’t limit its video quality at two carriers: T-Mobile and Sprint Corp., because “historically those two companies have had more consumer-friendly policies.” When customers exceed their data plans on Sprint or T-Mobile, the carriers usually slow their network connections, rather than charge overage fees.

In other words, Netflix needs to throttle on AT&T and Verizon because those companies don’t throttle — they let you exceed your data cap (but, of course, notify you before you do). But Netflix doesn’t need to throttle on T-Mobile and Sprint because those companies do the throttling for Netflix.

P.S. Throttling is evil.

A classic facepalm

Why, you might wonder, can’t AT&T and Verizon just throttle users as they near their data caps — but T-Mobile and Sprint can? The short answer is: they can, in principle. The Open Internet Order specifically blesses the throttling of all data for this reason. But the details get messy — and the application of the law under gets arbitrary.

This FCC — which is driven far more by political concerns than legal nuance — has gone after both companies for how they handle this very situation. AT&T and Verizon have chosen to continue to offer users full-speed data and simply charge them for extra data, while T-Mobile and Sprint have chosen to slow user’s streaming.

It’s hard to say which is the right approach, but the important detail is that AT&T and Verizon have erred on the side of caution, because the FCC clearly has a double-standard, doing everything it can to help the two smaller companies against the two market leaders

Did Netflix Really Deceive Its Users?

Yes. Here’s what Netflix’s Terms of Service say. First, noting that testing may occur without notice:

we continually test various aspects of our service, including our website, user interfaces, service levels, plans, promotional features, availability of movies and TV shows, delivery and pricing. We reserve the right to, and by using our service you agree that we may, include you in or exclude you from these tests without notice. We reserve the right in our sole and absolute discretion to make changes from time to time and without notice in how we offer and operate our service.

Obviously, that doesn’t apply here — to making throttling a standard practice. Next:

The quality of the display of the streaming movies & TV shows may vary from computer to computer, and device to device, and may be affected by a variety of factors, such as your location, the bandwidth available through and/or speed of your Internet connection. HD and Ultra HD availability is subject to your Internet service and device capabilities. Not all content is available in HD or Ultra HD and not all plans allow you to receive HD or Ultra HD content. A download speed of at least 5.0 Mbps per stream is recommended to receive HD content, which is defined as 720p or better. A download speed of at least 25.0 Mbps per stream is recommended to receive Ultra HD content, which is defined as resolution greater than 1080p. You are responsible for all Internet access charges. Please check with your Internet provider for information on possible Internet data usage charges. Netflix makes no representations or warranties about the quality of your watching experience on your display. The time it takes to begin watching a movie or TV show will vary based on a number of factors, including your location, available bandwidth at the time, the movie or TV show you have selected and the configuration of your Netflix ready device.

In other words, plenty of caveats that “Your mileage may vary” but not even a vague mention that Netflix itself may change the speed you get depending on which carrier you use.

If pressed, Netflix might argue that the phrase “subject to your Internet service” implies “”depending on which carrier you use,” but the natural reading of that term is that the ISP’s network and network management practices might cause quality to vary — e.g., obviously, network congestion. It would be quite a stretch for Netflix to claim that this put customers on notice that Netflix itself would degrade service selectively, based on the carrier.

And finally:

Netflix streaming software is developed by, or for, Netflix and is designed to enable streaming of content from Netflix through Netflix ready devices. This software may vary by device and medium, and functionalities may also differ between devices.

Note what’s missing? If Netflix had just added the words “by carrier” here, they could at least claim they had vaguely alluded to the possibility that they would throttle selectively — by carrier.

Did Netflix Violate the FCC’s Net Neutrality Rules?

No, probably not. The 2010 and 2015 rules apply only to broadband providers, not to edge companies like Netflix. So even though Netflix’s failure to disclose its practices would clearly violate the FCC’s transparency rule, and its selective adjustment of speed levels would probably violate the FCC’s rigid no-throttling rule, Netflix is in the clear at the FCC.

Even though Netflix’s failure to disclose its practices would clearly violate the FCC’s transparency rule, and its selective adjustment of speed levels would probably violate the FCC’s rigid no-throttling rule, Netflix is in the clear at the FCC.

Except for two things… This would be an open-and-shut case — the FCC’s rules only apply to “Broadband Internet Access Service” — except that the FCC’s definition of that term gives it broad discretion to expand it, if it wants to:

This term also encompasses any service that the Commission finds to be providing a functional equivalent of the service described in the previous sentence, or that is used to evade the protections set forth in this Part.

Extending the rules to cover edge providers like Netflix would, of course, be crazy (and a terrible idea). But that doesn’t mean the FCC wouldn’t ever do it.

And it’s important to note that the FCC’s asserted statutory basis for the rules is broader than just having reclassified broadband providers as Title II common carriers. It claims the rules also rest on Section 706. Until 2010, the FCC understood this obscure provision of the 1996 Telecom Act as a general commandment to promote broadband deployment. But in the 2010 Open Internet Order, desperate to find some basis for “net neutrality” rules, the agency reinterpreted this provision as an independent grant of authority to do, basically, whatever it wants to promote broadband deployment — provided it doesn’t violate specific prohibitions in the Communications Act.

And here’s the key detail: the FCC’s batshit crazy reading of Section 706 applies to all forms of communications, not just broadband. So, yes, the FCC could easily extend its new net neutrality rules to cover Netflix’s own practices. But no, it hasn’t yet done so — and, politically, this FCC simply won’t.

Did Netflix Break Some Other Law?

Yes, very likely. Netflix’s failure to disclose its selective throttling of speeds is probably both a breach of contract (i.e., the terms of service) and an deceptive trade practice actionable by the Federal Trade Commission.

These are both pretty simple cases — and so is the remedy. Legally, probably all Netflix needed to do was, again, note that speeds might vary by carrier. If it had disclosed the practice specifically, it would have totally been in the clear.

Netflix may also have committed fraud — which, under common law, would carry penalties beyond mere breach of contract. And it’s possible they’ve violated their private contracts with AT&T and Verizon.

So Why Wasn’t Netflix Upfront about This?

If Netflix’s throttling wasn’t bad for consumers, and probably wouldn’t be illegal except for failing to disclose the practice, why didn’t Netflix just explain what it was doing? It would have been easy to include a few more words in its Terms of Service. And it could have simply put out a press statement or blog post to explain the practice.

Indeed, Netflix already allowed its users to reduce their bitrate — see this handy FAQ. It’s not yet clear whether a user could have used this standard feature to opt-out of Netflix’s throttling of its bitrate on AT&T and Verizon’s networks.

But even if users, in principle, remained in control, Netflix certainly didn’t tell them it was reducing the speed of their streaming even though their carrier’s network was not actually congested. But why not?

Again, the answer’s pretty simple. First, Netflix created a monster that has a far more expansive definition of “net neutrality” than its own:

1. All Internet traffic must be treated exactly the same with few, if any, exceptions.
2. Finer points of who’s doing what to whom don’t matter. “Throttling” is evil.

Netflix was likely, and understandably, terrified of how the mob would react to Netflix delivering its video at different speeds depending on what wireless carrier its customers use. And it would certainly look hypocritical for Netflix to admit throttling its traffic while lobbying the FCC to ban the practice for broadband providers.

Pretty simple.

Did Netflix Skew Competition?

TechCrunch, no fan of either AT&T or Verizon, says “Netflix is making videos look like garbage on AT&T and Verizon”:

[Netflix’s selective throttling] also makes AT&T and Verizon look bad. Many users must be thinking that these two networks are too slow and can’t handle streaming these videos in a decent quality. It’s also worth noting that Netflix caps videos on many other networks around the world, especially those with expensive overage fees.

Meanwhile, John Legere has been telling Americans to use T-Mobile because it offered better Netflix streaming quality. This turned out to be true — because T-Mobile’s partner, Netflix, was secretly sending an inferior quality version of its product to AT&T and Verizon and a superior version to T-Mobile.

This is precisely the kind of thing that would fail an FCC-based “harms to competition” test — at last absent some countervailing benefit for consumers. It may also be illegal under the antitrust laws or the FTC’s somewhat broader Unfair Methods of Competition authority.

If the FTC weren’t starting to approach the FCC in politicization, you might expect to see the FTC investigate Netflix’s conduct — or that the DOJ would (since the two agencies share antitrust jurisdiction). If an investigation found evidence that Netflix had secretly conspired with T-Mobile (and/or Sprint) to harm its rivals, this could well constitute an antitrust or UMC violation. AT&T and Verizon might also be able to bring a lawsuit against Netflix for tortious interference of its business relationships with its customers.

“But… Netflix has competition and ISPs don’t!”, right? Well… competition’s never perfect, but Netflix clearly has less competition than mobile carriers do. Netflix has exclusive online distribution rights to much of the key content consumers really want. While one mobile carrier’s product differs from another only on the margins, offering a slightly different bucket of price, network quality and a few other distinguishing features like customer services. So it’s not hard to see a court saying that, if there was market power here, it belongs to Netflix, and Netflix was trying to leverage that to favor its affiliates in a related market — a fairly typical antitrust fact pattern.

Netflix clearly has less competition than mobile carriers do. If there was market power here, it belongs to Netflix.

Did Netflix Violate the Spirit of Its “Strong Net Neutrality?”

While Netflix may not have violated the FCC’s net neutrality rules, or the original understanding of net neutrality that drove the FCC, it certainly violated the expansive version of net neutrality that the company has been screaming about at the top of its lungs for over two years.

Under Netflix’s “strong net neutrality” — a term the company introduced in March 2014 — net neutrality was no longer limited to how broadband providers managed their networks. What mattered was how things seemed from the “consumer’s perspective.”

Specifically, as I explained in my initial post, Netflix was trying to get the FCC to cover interconnection — so that Netflix could force broadband providers to build the infrastructure needed to accept traffic from Netflix’s network for free.

Tom Wheeler initially tried to keep that issue distinct, saying that “That is a different matter that is better addressed separately” in his statement on the rules proposed by the FCC in May.

But Netflix succeeded in stoking a political firestorm. On June 1, HBO Comedian John Oliver took Netflix’s framing and made it funny — really, really funny. He compared trusting Wheeler, who worked for the cable industry in the early 80s, to hiring a dingo as a babysitter. The angry comments from Oliver’s viewers (whom he called his “monsters”) began to pour into the FCC. And Wheeler simply crumpled.

Twelve days later, he announced the FCC was looking into Netflix’s claims that it was being shaken down — claims that independent experts had debunked, saying Comcast was actually saving Netflix money. In this LA Times piece, Wheeler appeared to concede Netflix’s reframing of the issue:

“Consumers pay their ISP and they pay content providers like Hulu, Netflix or Amazon,” Wheeler said after reading one of the 19,000 emails he has received on the topic.

“Then when they don’t get good service they wonder what is going on,” he said. “Consumers must get what they pay for.”

Netflix spokesman Joris Evers said: “We welcome the FCC’s efforts to bring more transparency in this area. Americans deserve to get the speed and quality of Internet access they pay for.”

Netflix had to change the subject from the traditional focus of “net neutrality” — concerns over the bottleneck power of ISPs as gatekeepers — because, despite its claims to the contrary, it had multiple options for interconnecting with ISPs. Instead, Netflix’s “strong net neutrality” is about “consumers getting what they pay” for and “consumer choice” — not technical nuances.

Netflix’s “strong net neutrality” is about “consumers getting what they pay” for and “consumer choice” — not technical nuances.

So… if Netflix doesn’t give you the mobile streaming speeds you expect just because you happen to use AT&T or Verizon instead of Sprint or T-Mobile — and doesn’t tell you why you’re getting slower service — how does that not violate “strong net neutrality?”

Hmm?

What Does This Say about the FCC’s Approach to Net Neutrality?

At a minimum, this kerfuffle should illustrate that there are, in fact, occasions where throttling traffic can be beneficial to consumers. Netflix believed that Verizon and AT&T wireless customers would be better off getting a throttled video service because it would help them ration their data plans — and Netflix was right.

“But,” you might say, “surely that’s completely different from broadband providers throttling your data! Broadband providers have unique gatekeeper control! Even if you know exactly what’s happening, it’s harder to switch between broadband providers than to dump Netflix. Right?”

Well, again, no: it’s much easier to get the mobile service you want on another carrier than to get the much of the licensed content you want on another video service.

Regardless, the FCC’s absolutist, hard-line approach to net neutrality doesn’t even let Verizon or AT&T give you the option of throttling Netflix (or any other video service) so you can better manage your data plan.

Because… that would be “discrimination.” And discrimination is evil. Even when the user chooses it.

The FCC’s absolutist, hard-line approach to net neutrality doesn’t even let Verizon or AT&T give you the option of throttling Netflix.

This is so insane, it bears repeating: The FCC’s rules would completely prohibit a broadband provider from providing a tool that would do precisely the same thing Netflix did, even if they were 100% upfront about it and empowered you to turn it on and off.

The FCC’s rules would completely prohibit a broadband provider from providing a tool that would do precisely the same thing Netflix did.

The Open Internet Order (¶ 122) says user-directed prioritization lies outside the no-throttling rule’s absolute ban — but then adds a sentence that seems put that right back under the ban if the throttling is based on a specific application or class of applications:

Because our no-throttling rule addresses instances in which a broadband provider targets particular content, applications, services, or non-harmful devices, it does not address a practice of slowing down an end user’s connection to the Internet based on a choice made by the end user. For instance, a broadband provider may offer a data plan in which a subscriber receives a set amount of data at one speed tier and any remaining data at a lower tier. If the Commission were concerned about the particulars of a data plan, it could review it under the no-unreasonable interference/disadvantage standard. In contrast, if a broadband provider degraded the delivery of a particular application (e.g., a disfavored VoIP service) or class of application (e.g., all VoIP applications), it would violate the bright-line no-throttling rule. We note that user-selected data plans with reduced speeds must comply with our transparency rule, such that the limitations of the plan are clearly and accurately communicated to the subscriber.

Now, it’s possible the FCC could read this to say, “Of course that’s not what we meant. What matters is that the user is in control.” They certainly should! But, as with everything else in the Open Internet Order, they’ve written this so that they can stop carriers from letting users choose prioritization.

That’s one of the reasons why we joined the lawsuit to strike down the FCC’s Open Internet Order. All of the Silicon Valley tech entrepreneurs and innovators we represent fear, with good reason, that the FCC would block their new offerings. One in particular, as we explained when we asked the court for leave to intervene, Charles Giancarlo, a VoIP pioneer, plans a service called ItsOn. He’d offer users a completely new paradigm of mobile data service — where they pay a la carte instead of paying more for a large monthly bundle. It would be user empowerment on steroids. Yet the FCC could, and probably would, prohibit it under a strict reading of the bolded language above.

The point is: throttling based on type of traffic, source or destination is not a “per se” bad thing. The FCC could easily have avoided this nutty result by:

• Clarifying that user-directed throttling is not covered by the strict ban on throttling — and instead subject to the FCC’s “general conduct standard.” That standard is hopelessly vague and still allows the FCC free rein to do whatever it wants, but at least it’s not an outright ban.
• Even better: focusing all its rules on a “harms consumers or competition” test. User-directed prioritization should be presumptively legal. But there are other examples of practices that could be legal, too. The “general conduct standard” should focus on consumer welfare instead of letting the FCC make arbitrary, politically driven decisions.

What Does All This Mean for Consumers?

Netflix’s announcement yesterday buried the fact that the company had been throttling video and focused on how it would be transparent going forward:

As consumers increasingly watch video over mobile networks, Netflix is constantly exploring ways to give members more control over their Netflix experience. That’s why we will soon introduce a data saver feature designed for mobile apps.

The data saver feature will provide members with more control over their data usage when streaming on mobile networks, allowing them to either stream more video under a smaller data plan, or increase their video quality if they have a higher data plan. We’re on track to make it available to members sometime in May.

One wonders why they didn’t offer that feature when they started throttling, but… great!

So is every content provider now going to start offering this kind of tool? Am I going to have to configure the bitrate settings on YouTube, Netflix, Amazon video, Apple TV, Hulu etc. one-by-one?

That seems like a pain — and a sure-fire way for less sophisticated users to wind up incurring unexpected streaming charges. Isn’t there a better option?

Yes, obviously: my mobile carrier could offer me such a tool. That’s essentially what T-Mobile did with BingeOn, which slows all streaming to conserve data — but allows the user to opt-out.

But net neutrality hardliners at EFF (who used to warn that “net neutrality” could be a Trojan Horse for broader, unchecked FCC regulation) immediately urged the FCC to investigate, pointing to the Open Internet Order paragraph I quoted above. They don’t want the carriers to do any throttling ever, even if the user’s fully in charge.

Again, it’s not clear the FCC would allow such a tool. If they don’t, are consumers stuck? Will multiple streaming bitrate controls on competing platforms become the mobile phone’s version of the old “too many remote controls” problem?

Will multiple streaming bitrate controls on competing platforms become the mobile phone’s version of the old “too many remote controls” problem?

In theory, it’s possible that Apple, Google and Microsoft could build such tools into the mobile operating system. But because they don’t actually control the traffic on the network, it would require a complicated API, so the bitrate control panel could interface with each streaming service. That might be possible, but it would probably take years to get off the ground. And it’s far from clear it would work well, or consistently across mobile operating systems. And even if it did work, it would only work for video services that participated in the process to connect controls.

And… it’s possible the FCC might say this OS-level feature was being “used to evade the protections [of the no-throttling rule]” — and thus declare it to be subject to the rule, even though an operating system isn’t otherwise considered part of “Broadband Internet Access Service.” That’s especially likely if the OS makers tried to work with the carriers to make the tools work better — such as by letting the OS-level tool control network-level throttling.

By contrast, mobile carriers could offer this kind of network-level throttling tool today, for all video streaming. It remains to be seen whether the FCC will allow T-Mobile to innovate (in the name, remember, of “permissionless innovation”) — and even less certain whether AT&T and Verizon will be allowed to follow suit.

Meanwhile, consumers will either incur charges for streaming video at bitrates higher than they really needed/wanted — or simply be deterred from streaming mobile video at all.

So… Why Did Netflix Deserve the Hypo Award?

The simplistic answer would be: Netflix used to supporte net neutrality but was violating it all along

But that’s not quite accurate. They haven’t violated the FCC’s rules, and arguably haven’t violated the original concept of “net neutrality,” either. But there’s more to it than that.

The most precise framing would be:

• Netflix played a key role in expanding the concept of net neutrality into something far broader — not just using Title II (which Netflix needed to try to get free interconnection) but changing the focus to “what consumers expect,” regardless of exactly who’s doing what.
• Netflix’s secret throttling definitely does violate the logic of the “strong net neutrality” it proposes.
• Netflix’s sensationalist, self-serving rhetoric around interconnection is now being blowing up in its face.