The Future of U.S. Internet Regulation

This is a test. This is a test. This is a test. This is a test. So good morning everyone. I'm Doug Kramer. I'm the company's general counsel. I think we're set for another really great conversation. This one with Julius Genachowski for reasons you will find out over the next 30 minutes or so who is still mixed up with any number of things that are in the news this week and every week it seems. To give you a little bit of background, Julius had a lot of time in the private sector working with Barry Diller at IAC on a number of Internet and media properties for a number of years and then in 2009 was snatched by President Obama to be chairman of the Federal Communications Commission a post he held for about four years. And during that time really revolutionized a lot of what the FCC had done and laid the groundwork for things they're still doing today to the point where Wired Magazine at one point named them one of the top seven innovations going which to do that with a government organization is not the easiest thing. They did things like, well the one that I love because it's relevant again this week they set up this thing called working with FEMA to set up a mobile emergency alert system. I wonder if anything's ever going to come of that. It seemed like a great idea at the time. Obviously adopted the US's first net neutrality rules. We'll talk about that briefly here in a bit. Set up incentive auctions to deal with broadcast and wireless spectrums and all sorts of different things. Since he left the FCC he now works with the Carlyle Group as a principal and managing director on a number of different technology and media investments they're involved with and serves on various boards of companies like Sonos and Mastercard and things like that. So, Julius, thanks for being here. Great to be here. So we are going to tackle no smaller of a topic than what the US is going to do about technology regulation. And so I have good news and bad news on that front. The good news is we have found the one area where both parties in Washington, D.C. can agree which otherwise seems impossible in this day and age. The bad news is that one area is that they both think that there should be some significant regulation of the Internet and have all sorts of ideas of how that's going to happen. So my first question and first thing I want to talk to you about, Julius, is what is your sense, being in D .C., having had the experience you've had, of what you think that US regulators, Congress, the agencies, all of that, what do you think they're setting out to do when it comes to the Internet out of all of this activity? That's a good question. First of all, it's great to be here. I've watched Cloudflare for a number of years, got to know Matthew and Michelle just about at the beginning. And if I had been able to come to the first of the Internet summits, my answer to this question would have been very different. Matthew kept on scheduling these on Jewish holidays, and so I had to keep on. So finally, Matthew, thank you. But in this area, the shift in Washington has been really clear and really stark. When Obama was running and I was working on that campaign, when I was at the FCC as recently as the first Cloudflare Internet summit, there was a bipartisan consensus in Washington on this stuff, and it was very pro-Silicon Valley, pro-tech. And people who disagreed with each other on some issues would try to annoy the other side by trying to paint them as anti-Silicon Valley and anti-tech. And the world has shifted. And you see leaders in both parties talking about the need to regulate tech in a whole series of ways. So what's happened? You know, nothing secret, really. The manipulation of the election has been a factor. All the cyber and privacy breaches have been a factor. I think at some level, even parents worried about their kids being addicted to their mobile devices has been a factor. And then the growing size of the most successful Internet companies has been a factor. And this thing, you know, you can tell a lot by how people use language. And for a long time, people referred to Facebook and Amazon and Google and Netflix, you know, as fang or fanga, right? Now people refer to them as the digital giants. And, you know, if you're in a regulatory environment and you're referred to as a giant, there's probably another side to that coin when it comes to how Washington thinks about you. Well, let's go down that first. When you think about, you know, competition policy or the way that when you make that switch to being a giant or something that raises those concerns, in this industry, when you have on the one hand, you know, content or transmission or telecoms, and then on the other hand, you know, Internet companies and tech companies, where we're starting to see combinations that blur some of those lines, how would you all think about those combinations and what was problematic for you all? And to what extent do you think that Washington may be on that same path or maybe deviating from that path a bit? You know, I'm a little bit of a student of history. Not as much a student of history as Richard Tedlow, who I think is here. But if you go back decades and think about communications businesses and regulatory policy, there's been a recurring cycle that happens again and again. And the cycle is a new entrant comes along, tries to intrude on the turf of some established player. The established player pushes back, tries to use the levers of government to help restrain innovation and competition. And then it's usually a little bit sloppy. But overall, the government's done a pretty good job of actually landing on the side of new entrants and innovators. And so a couple of examples are interesting. One, think about telephone service. Obviously, we started with a monopoly. We broke that up into regional monopolies. And then along came some innovators who said, you know what, we can deliver telephone service wirelessly and mobily. And wouldn't that be a good idea? Well, not surprisingly, the incumbent telcos said, hmm, maybe, but I guess you should give us a couple of licenses and markets and let us do it. And, in fact, the first thing the FCC did was just that. They let the incumbents do that and didn't lead to really rapid innovation in mobile. But eventually the FCC got smart and said, you know what, we're going to issue some more licenses to get mobile service out there. And we're not going to let the incumbents get those licenses. Very important development. Similarly in that area, some innovators developed unlicensed, the ability to use Spectrum in an unlicensed manner, right, without getting too technical. There are two basic models. Most of you know this for how Spectrum is put on the market. License for exclusive use. This is how AT&T, Sprint, Verizon get their licenses. They typically pay for them at auction. And unlicensed, completely different model. No one has exclusivity. Anyone, you know, innovators can do what they want. And this has given us Bluetooth and Wi-Fi and a whole series of other innovations. Well, just on the story, when that technology came along, you know, if you had predicted that the establishment telcos would resist the FCC from authorizing unlicensed use, you would have been right. The good news is over time the FCC did authorize a very significant amount of unlicensed use. I'll do a couple more things on this because it is interesting. Broadcast TV. So on the media side, many of us grew up with just having broadcast TV. And then the pioneers of the cable industry came along and said, hey, we have a crazy idea. We're going to string coax cable everywhere in the country and give you a lot more choices for your television. Massive capital investment. A lot of risk. Interesting technology. And they actually went ahead and started trying to do that. And consistent with this theme, the incumbent broadcast industry in various ways tried to slow them down. Slow them down at the FCC. Slow them down in Congress. Slow them down with local franchise authorities. Eventually, the FCC landed on the side of the cable new entrance and said, you know what, this is good for innovation, good for competition. It's interesting now because that cable infrastructure, which the FCC helped promote to get out there, was originally designed for TV, but eventually became our core infrastructure for Internet. And so a nice unanticipated consequence. But consistent with this cycle that I've described, as the cable industry has gotten larger, and, you know, the next generation of innovators and new competitors came along and said, oh, we can use this Internet to compete with the traditional TV industry and to do other things. Well, you know, you wouldn't be shocked if you knew this history to discover that the cable companies and broadband providers tried to push back. This is what the net neutrality debate is about. You know, neutrality is simply consistent with these other examples that I mentioned of the government saying, hmm, there are artificial blocks or potential blocks to a new entrant, a new innovator, a new competitor succeeding, and we should make sure that they have a fair chance to compete in the marketplace. So if you've got, you know, sort of those ISP providers, you know, on the one hand, who are maybe at odds with sort of the tech innovative, you know, even the tech giants that have come up and innovated behind them, where do you see the next wave of innovation? Is there still enough oxygen? Is there still enough space? Or as the tech giants sort of, I don't know, calcify or do whatever they might do as they get big, do you still think that there is enough room and opportunity and fuel for new disruptive innovations behind all of that? And if so, where do you think that comes from? Yeah, I mean, I'm an optimist. I used to be more of an optimist, and now I'm watching what's going on in Washington, so I'm having to reconsider that a little bit. But I think there are a couple of interesting things going on. One is, like, the first point one has to make in this is that if you go back 30 years and looked at the people who answered these questions, you know, usually the next great innovation was something that was completely unanticipated. And so if you're a government regulator doing government policy, you want to think about things like, do we have the right infrastructure where innovators can potentially develop things? So, you know, it gets you to wanting to have universal high-speed broadband wired and wireless, things like that. I think we're in a really interesting time in history because of the emergence of more than just one or two large, well-capitalized, innovative technology companies that are each doing something where they have a competitive advantage, but also each more and more competing with the others, right? And so you have Google and you have Facebook and you have Apple, et cetera. If you take a step back in a broader lens, you have Alibaba, you have Tencent. I can't remember if I mentioned Amazon. But you have a number of really large companies that are largely unconstrained by their own balance sheets, that have tons of brilliant engineers who are really competing and pushing each other. I think that's interesting. And then in the traditional communications area around the world, certainly in the U.S., it's sort of an odd thing where you have cable. You know, those companies are all global. Cable companies in the U.S. are regional. Wireless companies are national. And, you know, the world is changing in a significant way. If the question is, is it getting harder for new entrepreneurs and innovators to enter and compete with all of these digital giants, yeah, I think it is. I think it is. And so availability, if you listen to Jeff Immelt, availability of funding certainly isn't the problem for these folks. But are there any particular structural obstacles that you would sort of be targeted in making sure that, you know, either get knocked down or never get stood up in the first place to those new innovators? Anything we should be looking for in that space? I think we're early in being able to answer this question, right? So this gets to the first question that you asked. If you look at each of the different large Internet tech companies, they have some very real advantages that anyone in the marketplace understands. Wow, you know, whether it's Google and Search or, you know, Amazon with AWS or other things, wow, that's a pretty significant market position they have. What do we do about it? The what do we do about it is really hard. I found one of the things that I found when I was at the FCC was that it's pretty easy to figure out what to do if you're looking at a part of the market where there are low barriers to entry and really robust competition. It's easy to figure out what to do, not much. And then there's a lot of literature on what you do as a regulator if you believe that the industry you're looking at is a monopoly. And then, you know, if you ask the question that I asked, OK, well, what if you're dealing with markets of imperfect competition where you have, you know, more than one player, so you can't say it's a monopoly, but you see real advantages. You see challenges, you know, some barriers to entry. What is a set of principles that one can bring to ensuring that new entrants have a chance to develop and go to the market with new innovations without unfairly slowing down companies, which by themselves are competing globally? So I think it's a hard set of questions. What you're seeing in Washington now is some frustration by the size and the apparent power, but not a lot of really good ideas on the competition piece of it on how to handle it. So I want to switch gears to something that I think is an incredibly significant change in this area, even when you were serving at the commission. So, you know, when you were there 2009, 2011, not only was there a bit more of a virtuous sort of approach to tech and what was going on out here, but really you had the field largely to yourself. And what the FCC might do, certainly they would have to work with the FTC and the Hill and all that, but the American position on what this market should look like, how it should be regulated, really was by and large adopted around the world. And now you've got, you know, with some exceptions, largely the tech giants are U.S.-based companies. That certainly is not the case anymore, right? In the past couple of years, we have seen predominantly in Europe, but in a number of other countries as well, a new and varied group of significant regulations that are going to hit Internet companies, and for reasons you explained before how it is a global marketplace, you know, those lines and the application of those regulations gets blurred. So what sort of, I mean, obviously this brings complications, but how do you think that that plays out? Is there some way that this gets harmonized, or does it just become a race to the bottom with all the different jurisdictions competing against each other for their own interests? What do you see happening in that space? Yeah, it's interesting, and you can throw in a third leg of the stool too, right? So you have U.S., you have Europe, and you have what's going on in China, and the fourth leg would be India. Yes. So it's a very difficult set of challenges. In a world that is impossible, you'd have one set of consistent rules that apply to everyone everywhere around the world. That's not what's going to happen. One point about Europe, just to start this, I've been watching Europe really closely on this. Part of the reason was when I took over at the FCC in 2009, the U.S. was behind Europe on mobile. So for those of you who are old enough to remember 3G, the U.S. was behind on 3G, and Europe was ahead. And so one of the big U.S. policy goals, Obama talked about this, I spent a lot of time on this, was, you know, the U.S. really should lead the world in 4G LTE. And that worked out pretty well. You see this debate happening now in 5G. And there were some regulatory decisions made in Europe, made in the U.S., that contributed to the U.S. actually being ahead in 3G. The details aren't that important. What I did notice when I was at the FCC, 2009 to 2013, as the American Internet companies started to grow significantly and started to be pushing a lot of data through a lot of pipes, there was a lot of pushback in Europe, starting with the European telcos, who were struggling at that point, blaming all their problems on the U.S.-based Internet content companies that European consumers really liked to consume. And it always struck me as a little bit odd, because rather than the European companies saying, oh, our Internet consumers here really seem to like this stuff, surely there's a business model in here somewhere. They wanted to convince the regulators to figure out how to push back on the American companies. Some of what we're seeing now has actually been talked about and debated in Europe for a long time. And as we in the U.S. had this give the Internet companies a lot of room to maneuver approach, Europe had a different approach. But to your point, they've clearly put rules in place now on privacy. GDPR is probably the leading example. And it may end up being a good thing. GDPR is imperfect. But the idea that there should be some clear rules of the road in place is not a crazy idea. I think it's also not a crazy idea to have different parts of the world, governments in different parts of the world, compete a little bit on what the best regulatory approach is. Is it this approach to privacy or is it a different approach to privacy? It's not bad to have some laboratories of experimentation. I think we're seeing some of that now. People are looking at Europe, privacy. People are looking at California. We'll see what happens in the marketplace, what consumers think, what businesses think. So I don't think we'll get to complete uniform national rules. Although so many of the businesses see the frustrations of dealing with different local rules wherever they operate that there will be people in all of the different governments saying, to the extent we can have consistency, that would be better. China might be a little bit different for its own reasons. So these are all in great deep cuts. I feel I will be in a lot of trouble out here if I don't let you play your free bird, and that is to talk to you about net neutrality. So you mentioned briefly before attitude and approach to net neutrality. Obviously, since you left and with the new administration, the commission's view on that and rules on that are changing. How do you see this, as someone who has lived this and also has a pretty good perspective, how do you see this playing out? Are we just left with this pendulum where one administration will have one set of rules and then we have to be ready on election day to switch to the other set of rules? Is there some consensus that you think could be reached here? How do people who want to make long -term investments in making this industry work well deal with that, and where does your crystal ball see that going? I think the pendulum is mostly awful because it doesn't allow companies and innovators to plan as effectively as they should, and I tried really hard to avoid that. I was committed to putting in place the country's first net neutrality rules, but I thought that how we did that was as important as the fact that we did that. There are other areas of the FCC where pro -competition rules over time, pro -innovation rules had been bipartisan rules, very healthy for all the players in the industry. And even though net neutrality in 2009 was already a highly polarized issue, you had CEOs of telcos saying these are our wires, we're going to do whatever we want with it, and you had groups on the left that had already organized. My goal was still to try to find a way for there to be a broad consensus on what the rules should be so that we could move on. And we worked really hard, and we ended up with a set of net neutrality rules, not particularly complicated, right, no blocking, no throttling, no unreasonable discrimination, where we had a really broad consensus supported by Silicon Valley, smaller companies, VCs, larger companies supported by the cable industry, AT&T, supported by everyone except for one company, Verizon, which ultimately decided to sue, and Verizon's decision to sue is what's led to the thing just not resolving itself. But I do think something good came out of that year plus of getting people from different parts of these different industries in a room together to try to work out zones of agreement. Because I think that we succeeded, I think, in shifting the debate. Because the industry, the ISPs, even Verizon that sued, ended up agreeing with the principles of net neutrality. Most of them supported actual rules, but they all agreed that, well, the ISPs shouldn't do this, this, and the other thing. And the reason I think that that's important is that when that is the social norm, number one, and then number two, you can reasonably predict that the rules in place will go back and forth depending on who's in power, you end up with a pendulum affecting the rules, but a little bit less so the actual practices in the marketplace. Because the companies understand that, in this case, the Democrats will come back to power, and they want to have a certain level of caution. They also understand that consumers are paying attention, and they don't want to have a backlash. So I think it would be better just to have some consistent resolution. I think there's some chance, maybe after the midterms, that there's legislation that's adopted, that's sensible, that's bipartisan, that works to put the issue behind us. But that's net neutrality. Okay, so before we get to everybody's questions, I'm going to ask you one follow-up, and ask you to give me sort of the ten-word answer, or fewer, whatever. And that is, so 2020 comes around, we elect a Democratic president. They say, let's just get Julius back in here, run the whole thing back. You go into your office at the FCC. What do you do about net neutrality on day one? What's your approach at that point when you're back in power in light of everything you just said? Yeah, I think the short answer is I'd announce that we were putting rules into effect. I'd also go to the Hill to try to work out some legislation so that it wouldn't have to be done at the FCC because there are a bunch of legal problems. Not to give away my tricks, but I'd probably announce that the FCC would adopt a pretty extreme set of rules to create the conditions for some sensible legislation. Absolutely, very good. Okay, well, we've got a couple of minutes for questions, so if you have questions, raise your hand, and helpful folks with microphones will grab you. I have a question about, let's see, we have 7 billion IoT devices, or maybe 10, it's hard to predict, and none of them are regulated. There's no equipment acceptance program. They're all connected to this common resource. When will the FCC step up to the plate and think about network cleanliness and resilience, which has been its responsibility since the start of the telephone network? Yeah. What's different now? No, it's a great question. I think you're right. With one exception, those devices actually all have an FCC stamp on them. They're radios. Sorry? They're radios. Exactly. So all those devices go through the FCC. I think you're raising a really big and important issue where we have all these devices out there that don't meet any set of standards that if smart people sat around and said, all right, what are the basic standards we would want here for cyber, for resiliency, for everything else? So I think that's right. If I were at the FCC now, I would certainly press the authority that the FCC had to try to do something about that. I'm not sure if the authority is just limited to regulating RF frequencies, but there are all sorts of things you can do to bring industry together, to do some standard setting. But I'd be on that really aggressively because I think you're right, and it's just so obvious, and it's a large, important, scary area that's not getting enough attention anywhere in government right now. So in a lot of these discussions with IoT devices, it often comes up, you know, there should be a certification, a good housekeeping seal, something like that. Do you want to claim that territory for your friends at the FCC? They want to take that on? Do you think that's an option? I think it is an option. Yeah. I think it is an option. Yeah. Hi. So the United States has one of the lower speeds of broadband, and we largely have a duopoly of telcos and cable, plus now wireless, and they're basically trying to do rent-seeking, maximize the amount of money that they're receiving on their investment. At one point in time, it seemed that SELACs, competitive local exchange carriers, were the answer. How do we actually increase broadband speed and make it so that net neutrality isn't really an imperative because there's enough bandwidth out there so that doesn't matter? Yeah. It's a great question, and you're right that, you know, if you had robust competition to the home for broadband, you wouldn't necessarily need net neutrality regulations. I agree with you on that. We can debate, you know, whether the U.S. should get a yellow light or a red light on broadband speeds overall, but it should be better and stronger, and I think there's – I'm disappointed. I think a lot of people are disappointed that competition in broadband to the home didn't develop in the way that people had hoped. You know, Verizon had Fios, a great fiber network, but they pulled back in most markets from actually competing with cable. There's a company that's overbuilding cable in a number of markets, RCN combined with some other companies, and I think it's probably the case that in markets where there are at least two players competing, you get better speeds and service than where there's only one player. It is a problem. There are some people who have a great amount of hope for what the wireless companies might be able to do with high frequency, you know, the new high frequency spectrum that's being put out there. I hope that's the case. You know, I do – an interesting learning for me was that a bunch of technology truths that I was told when I was at the FCC turned out not to be right. You know, so like a lot of engineers told me that, say, satellites would never be able to have really fast, low latency Internet, and that turned out to be wrong. And at the time, people were saying, you know, these super high frequencies will never be any good for anything. That's probably wrong. Even in that world, though, it's hard to imagine that being a solution for rural areas, you know, more of a solution in dense areas. So I'll stop at this point, but it's a really important area, and we have a lot more to do. Well, very good. Well, I want us all to thank Julius not only for being here today. I want to thank him on behalf of all of us for our texts from President Trump both yesterday and going forward, and best of luck with everything you do. Thanks for being here.