Bloomberg News

Calling Internet a Modern-Day Ma Bell Among Options for FCC

January 17, 2014

As it fights to reclaim the power to require equal treatment of Internet traffic, the U.S. Federal Communications Commission has two paths in a regulatory battle pitting phone carriers against Web companies.

The agency, responding to a federal court ruling, can seek new rules under a law authorizing it to promote high-speed connections. FCC Chairman Tom Wheeler also could pull Internet service providers into rules written decades ago for monopoly telephone service -- a course rejected by his predecessor and opposed by companies including Verizon Communications Inc. (VZ:US)

Those steps would be separate from appealing a Jan. 14 decision by the U.S. Court of Appeals in Washington to throw out the agency’s equal-access rules. The ruling gave Internet service providers like Verizon the freedom to charge companies such as Netflix Inc. (NFLX:US) and Amazon.com Inc. (AMZN:US) for fast connections.

The FCC has “a substantial amount of running room” to write rules to get around the decision, Kevin Werbach, associate professor at the University of Pennsylvania’s Wharton School in Philadelphia, said in an interview.

The court, while striking down the open-Internet rules, said the FCC has the authority to expand the use of high-speed connections. The case was brought by Verizon.

“The fact that the court has validated their authority for the first time is something that shouldn’t be minimized,” said Werbach, a former counsel for new technology at the FCC.

Wheeler, a Democrat in office since November following a career as a cable and telephone lobbyist and telecommunications investor, hasn’t said what path the agency will follow now.

Fight Planned

“I intend to fight,” Wheeler said in a speech yesterday in Washington.

“Using our authority we will re-address the concepts in the open Internet order, as the court invited, to encourage growth and innovation and enforce against abuse,” he said.

Asked for details, Wheeler said, twice, “I’m going to accept the invitation. Watch.”

The FCC has said that without rules to ensure equal access to the Internet, service providers could favor wealthier, established players over startups, squelching innovation.

Verizon, based in New York, told the appeals court Sept. 9 that the FCC’s rules governing what’s known as net neutrality may make it more difficult to manage network traffic and discourage investment in Internet capacity.

Some public-policy groups and a trade association for content providers are urging Wheeler to declare Internet service akin to telephone service, reversing a decision made under a Republican predecessor a decade ago.

‘Dial Tone’

“Reclassify,” Cathy Sloan, vice president of government relations for the Computer & Communications Industry Association, said in an interview. The Washington-based group lists members including Google Inc. (GOOG:US), Microsoft Corp., Yahoo! Inc. and Facebook Inc. (FB:US)

“It was a mistake to classify Internet access as an unregulated information service,” Sloan said. “It’s the dial tone of the 21st century.”

Treating Internet service providers like the old Bell telephone system would probably spark a renewed fight with Verizon and AT&T Inc., Craig Moffett, senior analyst at New York-based MoffettNathanson LLC, said in an interview.

“The companies hate it,” because being treated like telephone providers opens the door for other rules including price regulation, Moffett said in an interview.

Wheeler probably will raise the possibility of using that approach as a threat to prompt negotiations, he said. His predecessor, Julius Genachowski, decided not to reclassify Internet service providers after months of debate in 2010.

Risky Appeal

Gene Kimmelman, a former Justice Department antitrust official who’s the incoming president of Public Knowledge, a Washington-based policy group, said the powers identified by the court fall short of what’s needed.

“It certainly is unclear how you can prevent unfair discrimination against new innovators -- the edge providers on the network,” Kimmelman said in an interview.

Because the court said the FCC can’t make rules to prevent unequal treatment of Internet content, the agency would have to set weaker guidelines and then adjudicate complaints, Matt Wood, policy director for the advocacy group Free Press, said in an interview.

“That’s just too thin a reed,” he said.

The FCC would take on less political risk by using the powers allowed by the court, Jeff Silva, a Washington-based analyst with Medley Global Advisors, said in an interview.

An appeal to the Supreme Court would carry the risk the justices would agree with a dissenting appeals judge who said the decision left the FCC with too much power, Silva said.

“All we’ve done is opened Pandora’s box,” Moffett, the analyst, said. “The question is, what’s going to come out?”

To contact the reporter on this story: Todd Shields in Washington at tshields3@bloomberg.net

To contact the editor responsible for this story: Bernard Kohn at bkohn2@bloomberg.net


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