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Policy

After 'Brand X,' New Challenges

7/28/2005 8:00 PM Eastern

Washington — The cable industry has won a massive victory in the U.S. Supreme Court, crushing a seven-year legal crusade advanced by the acolytes of Internet open access.

In the Brand X case, the high court affirmed, 6-3, the Federal Communications Commission's decision to quarantine cable from intrusive access regulations developed decades ago by the agency in an effort to restrain monopoly phone companies.

But the post-Brand X cable industry can't be compared to, say, the post-Cold War Pentagon, where budgets can be slashed and troops called home. History teaches that because someone is always keen on regulating cable, a bread line of laid-off cable lawyers isn't going to queue up anytime soon.

WHAT COMES NEXT

And here's why: Despite winning the Brand X case, cable operators and their legal teams are bracing for a whole new set of challenges from some of the same groups that pushed for open access.

Having lost the multiple-ISP fight, these groups have a new cause — it's called nondiscrimination, a rather open-ended concept generally meaning that network owners have to behave like common carriers even if not recognized as such by law.

“Nondiscrimination is a term of art from common carriage and what it has historically entailed is questions about what exactly is 'equal treatment,' which invariably takes you almost immediately into setting rates and doing other sorts of intrusive regulation that telephone companies have long been familiar with,” said Kyle Dixon, a policy analyst at the Progress & Freedom Foundation, a right-of-center think tank here.

What is nondiscrimination? It could mean a lot of things. Cable critics warned that MSOs might deny access to unaffiliated merchants or mess with voice and video bits of third-party providers with relationships with cable-modem customers.

“A cable company that has complete control over its customers' access to the Internet could censor their ability to speak, block their access to disfavored information services, monitor their online activity, and subtly manipulate the information sources they rely on,” said Jeff Chester, executive director of the Center for Digital Democracy, a group on the losing side in Brand X.

But Dixon indicated that it would take the courts years to distinguish between fair competition and discrimination. “If there's anything to interpret, the lawyers will make hay out of it,” he said.

Until further notice, cable-modem provision is an unregulated information service. Had Brand X gone the other way, cable's high-speed data product would have been a telecommunications service, a classification that would have caused EarthLink Inc. and other ISPs to demand wholesale access at regulated rates.

In addition to not needing to carry competing ISPs, cable is not required to pay franchise fees on cable-modem revenue, a savings of about $500 million annually (that would have been passed along to consumers).

NEUTRALIY THESIS

Non-discrimination also goes by the name network neutrality, or net neutrality. Its supporters assert a simple premise: Because cable operators possess broadband access market power, regulation is justified until that power dissipates to a point where the costs of discrimination (subscriber loss) outweigh the benefits (profit maximization).

Their thinking is that if market forces unleashed by multiple ISPs can't protect consumers and Web merchants, then government ought to — by barring the few companies that do provide network access from harming rivals in the marketplace.

“I don't think this [nondiscrimination] principle needs to be a heavy duty regulatory scheme. I think it can be just giving the FCC the ability to enforce nondiscrimination principles,” Gigi Sohn, president and co-founder of Public Knowledge, whose board includes the intellectual godfather of the net neutrality movement, Stanford Law School professor Lawrence Lessig.

National Cable & Telecommunications Association senior vice president of law and regulatory policy Dan Brenner helped chart cable's regulatory and judicial strategy from the 1998 outbreak of the open-access fight until its June 24 conclusion with the release of the Brand X opinion, written by Justice Clarence Thomas.

To Brenner, the idea that Congress or the FCC needs to impose Net neutrality rules on cable in the absence of demonstrable harm is a cure in search of disease.

“There is no problem here. It seems unfair to throw the regulatory book at an industry that isn't causing problems,” Brenner said. “If we started mass discrimination, we would lose customers or worse.”

Net neutrality proponents argue that although there might not be a problem today, it is not unrealistic for policy-makers to look at the structure of the market and make a few predictive judgments.

“I would say that for at least the next five to 10 years, we are looking at a duopoly in broadband provision at best,” Sohn said. “So the question is, how do you ensure that applications and content that go over those pipes are not discriminated against?”

Cable and phone companies serve 95% of U.S. broadband subscribers. Cable leads with 21.1 million subscribers. The Baby Bells, offering digital subscriber line (DSL) service, trail with 14.7 million, according to Leichtman Research Group figures for the first quarter of this year. SBC Communications Inc., however, is trying to close the gap by offering a $14.95 monthly teaser rate.

Sohn said the cable-telco duopoly is expected to endure until wireless companies are allowed to exploit valuable spectrum rights held by analog-TV stations. While cable and phone companies dominate the access market, she said, they have an incentive to frustrate the ability of Web-based voice and video providers to steal customers, she said.

“I've had people in the cable industry say to me privately that we can't let our video services be cannibalized,” Sohn said, calling those comments an indication that cable intends to “put roadblocks in front of … competitors who are providing video over broadband.”

Before joining the PFF, Dixon worked for then-FCC chairman Michael Powell, helping to push through the March 2002 order that established cable-modem service as an information service. The notion that cable and phone companies have only anti-competitive incentives is shortsighted, Dixon said.

“There have been allegations that the companies will have these incentives. However, what those allegations never seem to incorporate is the counterincentives to please their own customers that the owners of networks have,” Dixon said.

Congress is working on a new telecom law designed to overhaul the Telecommunications Act of 1996. Sohn is hopeful that Net neutrality provisions will be included. Rep. Rick Boucher (D-Va.), an influential member of the Energy and Commerce Committee, has generally endorsed net neutrality.

Because it could take Congress several years to pass a new law, net neutrality proponents hope new FCC chairman Kevin Martin will embrace their cause. However, after the result in Brand X became known, Martin issued a statement signaling his desire to deregulate DSL. Phone companies today are required to provide open access to ISPs and must contribute DSL revenue to the universal-service program, which subsidizes phone service in rural America.

“It appears they are going to extend the cable-modem regime in some form to what have traditionally been common-carrier networks. The reality of that is that you've got a high probability of increased discrimination,” said Earl Comstock, president of CompTel/ALTS, a trade group that includes ISPs and facilities-based phone providers.

At a July 15 forum here, Michelle Carey, Martin's top phone-industry adviser, said to expect new DSL rules soon.

“As the chairman has said repeatedly, putting the telcos providing the DSL Internet access service on an equal footing with the cable providers is his highest priority,” she said. “He is very focused on trying to level the playing field.”

DIVIDED FCC

The FCC is politically divided, with two Republicans and two Democrats. Because Democrats Michael Copps and Jonathan Adelstein have been reluctant to remove common-carrier obligations, Martin probably can't advance his broadband agenda until a third Republican has been seated at the agency.

Some market participants are seeking protections that don't seem consistent with Martin's deregulatory mindset. Pulver.com, a voice-over-Internet protocol (VoIP) provider with no last-mile facilities, sent the FCC a letter July 5 stating that in the wake of Brand X, the FCC “must ensure that consumers can control their own Internet experience,” adding that the agency had “an immediate, compelling need” to adopt rules.

MADISON RIVER FINE

The FCC hasn't waved off allegations of broadband discrimination. Before Powell left in March, Madison River Communications LLC, a small phone company in Mebane, N.C., blocked phone calls of a VoIP provider, reportedly Vonage Holdings Corp.

After a brief investigation, the FCC fined Madison River $15,000. To some, the Madison River incident was the first wave of the tsunami, to others just an odd example totally unrepresentative of what's happening in the marketplace.

“This was an [incumbent phone company], the [FCC] acted within hours not days and it seems to me that if there was port-blocking of a nature that prevented service, that the [FCC] can and has acted with great speed to address the situation,” NCTA's Brenner said.

Vonage told some reporters that an unidentified cable company had replicated Madison River's conduct. The FCC, though, has yet to take action against a cable company found to be blocking a third-party VoIP provider.

It is unclear whether the FCC has the same power over unregulated information service providers as it does over heavily regulated telecommunications-service providers like Madison River.

Andrew Schwartzman — president of Media Access Project, a public-interest law firm that fought cable and the FCC in the Brand X litigation — claimed that Justice Thomas stated in his Brand X opinion that the agency had broad authority over information-service providers.

“Justice Thomas's opinion very clearly contemplates that the FCC does have authority to require open access and similar kinds of structure as it deems necessary in its discretion,” Schwartzman said. “I think it resolves that question.”

Comstock said the FCC “was able to take action against Madison River because they were a common carrier. The line of authority to do that [to an information service provider] is a little less clear.”

But Comstock indicated that Schwartzman might have a valid point.

“Certainly, the Supreme Court hinted at the suggestion that [the FCC] could do something. … Obviously, we need to discuss further with the [FCC] what their authority might be and what they might be willing to do,” he said.

While cable is celebrating the demise of the open-access movement, Schwartzman hasn't concluded that the Brand X defeat is the final word.

“You may see the ISP choice issue arise in the Comcast-Adelphia-Time Warner transaction,” he said, referring to the pending acquisition of Adelphia Communications Corp. by the top two U.S. MSOs, a merger that requires approval from the FCC and the Federal Trade Commission.

 

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