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President Barack Obama’s carefully crafted statement Monday calling on the Federal Communications Commission to adopt strong net neutrality rules may well represent a turning of the tide in what has been until now a confusing battle over the future of the Internet.
Obama urged the FCC to use Title II of the 1996 Telecommunications Act, which would treat the Internet as a utility, which net neutrality advocates would like to see happen. The one thing everyone can agree on is that the Internet has proven to be crucially important to American society and the global economy. How to keep it growing is the issue.
“It’s an echo of a century ago,” said Ken Doctor, analyst for Outsell Inc. “It’s a question of market domination and antitrust just as those laws went forward a century ago. But it’s more nuanced. What the president did throws down the gauntlet and says this looks different because it’s digital but it’s essentially an unregulated monopoly and by law and by common sense, it’s the FCC that should regulate it.”
For the past couple years, the FCC has tried to use section 706 of the 1996 Telecommunications Act to achieve that goal. Section 706 urges the FCC to achieve the goals of free speech, the public interest and fair business practices but doesn’t exactly give the FCC the authority to actually do anything.
Under Title II, the government has the right to declare a business a form of monopoly and regulate it in the same way American utilities have been regulated over the years.
This whole battle was ignited this past January when a federal appeals court ruled that the way the FCC used 706 was not correct; and it killed an effort by the FCC to regulate the web.
So the FCC in May said it would try again, but this time with a lot more input from all of the stakeholders. It got that and more, as more than four million people and companies submitted petitions and comments, one of the greatest outpourings from individuals and businesses in American history.
The response has been so huge that the FCC has delayed a decision until sometime in 2015 at the earliest.
The millions of comments ranged from cable and technology companies who want no regulation — because they say it would stifle innovation — to those who want heavy-handed regulation to make sure companies that sell access to the web have to act as little more than common carriers.
Obama has had his share of problems with technology, both as policy and in the real world (the Obamacare website, for example). However, he is still known for consulting with a range of people before making a decision.
In this case, many of his backers have been asking him to take this action. In recent weeks a dozen Democratic senators have called for the use of Title II, including Edward Markey of Massachusetts, Charles Schumer of New York and Ron Wyden of Oregon.
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Unlike the debate over SOPA and PIPA, the failed attempt to legislate against international piracy, this time Google, Netflix and many other companies who were opponents of that government action want the FCC to act.
Even though it is building cable systems in some cities itself, Google said in September (after a long silence on the subject), “No Internet access provider should block or degrade Internet traffic, nor should they sell ‘fast lanes’ that prioritize particular Internet services over others.”
“You have essentially a number of behemoths that have gotten big very fast,” said Doctor, “including Google, Amazon, Apple and Comcast. And they tend to mate with each other. And you have Netflix playing both ends, decrying the lack of net neutrality and then paying for it.”
Of course, there are opponents. The group TechFreedom said, “there’s no precedent for the FCC to take this action and it “would raise a host of other problems, including choking broadband competition, inviting regulation of the rest of the Internet and validating Russia and China’s push to have the International Telecommunications Union regulate the Internet as a telecom service.”
“Comcast has a good point,” said Doctor. “The nature of their business is that it does require incredible investment. It doesn’t require monopoly.”
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Comcast, the largest and most powerful cable provider, warned that the president’s proposal would be alarming to Wall Street, and he was right that cable stocks declined on the news. Comcast in a statement called the proposal “a radical reversal that would harm investment and innovation, as today’s immediate stock market reaction demonstrates.”
Time Warner Cable, which Comcast is in the process of trying to acquire, warned that the use of Title II would lead to years of litigation and “threaten the continued growth and development of the Internet.”
It could also derail the merger, according to Wall Street analyst Richard Greenfield. Asked about the president’s statement on his website, Greenfield referred back to something he wrote in July: “If Title II were to be pushed through, we believe it could lead to a termination of Comcast’s pursuit of Time Warner Cable. Why own more cable systems if the end result is even more subscribers covered by archaic, heavy-handed government regulations?”
The real question, added Doctor, is whether a cable company is a form of monopoly or duopoly like utilities that were regulated in the past. “It opens up the view of what the 21st century is about,” added Doctor. “Both law and regulation have been confused because the digital business is different in a lot of ways. In this case you have traditional pipe suppliers who are now becoming dominant in terms of cash flow and consumer presence. The battle is over whether they are going to be regulated.”
While cable may have some competitors, what the U.S. Appeals Court ruled in January was that it is a form of monopoly because consumers have limited choices and it is hard once they pick a provider to change.
If Title II is used, it won’t be a cookie-cutter version of the regulation that has kept phone service available widely and at a reasonable cost for a century.
FCC chairman Thomas Wheeler, who is known to be a close friend of the president, said in his carefully calculated response on Monday, “Recently, the Commission staff began exploring ‘hybrid’ approaches, proposed by some members of Congress and leading advocates of net neutrality, which would combine the use of both Title II and Section 706.”
What this means is that the FCC can regulate openness without imposing burdensome rate regulations. As the president put it in his statement, “the FCC should reclassify consumer broadband service under Title II of the Telecommunications Act — while at the same time forbearing from rate regulation and other provisions less relevant to broadband services.”
“One of the things Obama said was it’s not about picking winners,” said Doctor. “Smart regulation has to understand how regulating in this era is different. These are not companies in separate businesses.”
Doctor predicted that if the FCC moves ahead with Title II there will be Congressional hearings and inevitable lawsuits. He expects that it will take until 2017 or 2018 before it all plays out.
Ian Olgeirson, principal analyst for SNL Kagan, said that whether the FCC uses Title II or not, this creates “potential to put conditions or restrictions on the merger between Comcast and Time Warner Cable” and “leaves Comcast open to having to make some concessions.”
However, added Olgeirson, if the FCC does adopt Title II, there would be no need for restriction because the agency would be able to make rules they will have to follow for years to come.
“Clearly [cable companies] don’t want a heavy regulatory regime on high-speed data services,” added Olgeirson. “It’s their most defensible territory. As you look over the top services, it’s the one element where the economics aren’t eroding on them.”
What he is saying is that both in video and phone services, the cable companies are fighting just to maintain their customers and to make a profit. However, broadband has emerged as a growth area for cable companies and a major profit center.
As more over-the-top services become available beyond Netflix and Amazon — such as HBO and CBS streams — broadband becomes even more key to retaining customers who may well opt out of the full video bundle.
While Title II has the potential to slow innovation, it depends on what kind of hybrid is created. It can also be the right way for the government to spur innovation and insure every service available can get to every consumer without delay or excessive charges.
“It is always important not to jump the gun,” said Olgeirson, “and read too much into something about dire consequences when we don’t really know what the parameters are. But the devil is definitely in the details of what the regulations might look like. We aren’t sure what that is going to look like yet.”
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