October 13, 2003 12:00 PM PDT

The brewing war over broadband

A legal decision striking down a key definition of cable broadband as an information service could signal tougher regulation for the high-speed Internet access industry.

Last week's decision by the 9th U.S. Circuit Court of Appeals in San Francisco takes direct aim at the Federal Communications Commission, which has long shielded the cable industry from government regulation.

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What's new:
If not overturned, a ruling by the 9th U.S. Circuit Court of Appeals would subject cable broadband to more regulation.

Bottom line:
The Federal Communications Commission plans to appeal the ruling, in an effort to retain its policy of giving the cable industry a long leash to develop broadband services.

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The FCC's pending challenge to the ruling will postpone any immediate policy changes. However, if the appeals court's decision takes effect, analysts say the agency will find it more difficult to maintain policies pursued under Chairman Michael Powell, who has generally sought to give the private sector a long leash.

"What the FCC wants to see eventually is the continued investment in the build-out of these (cable) networks," said Mike Paxton, an analyst at market research firm In-Stat/MDR. "What they're trying to avoid is overregulating or placing onerous regulations on service providers or services to consumers. That's (Powell's) guiding principle."

A three-judge panel from the 9th Circuit on Oct. 6 issued a ruling rejecting the FCC's opinion that cable broadband should be considered solely an "information service." That's important because the government can regulate networks that are deemed "telecommunications services," but it cannot regulate information services.

If the ruling stands, the government could force cable providers to lease their broadband lines to outside companies. A similar rule applies to the Baby Bells--Verizon Communications, SBC Communications, Qwest Communications International and BellSouth--which have long been required by law to lease their digital subscriber lines (DSLs) to third parties.

However, the FCC's policies on information services are not slanted in favor of cable. In its Triennial Review process earlier this year, the FCC decided to lift requirements for the Bells to share their lines when venturing into new "advanced broadband services," such as fiber-optic lines to homes. The Bells have said they would invest billions of dollars into these fiber-to-the-home systems, which can support enough bandwidth to challenge cable's products.

The Oct. 6 ruling sparked a rallying cry of approval among smaller Internet service providers (ISPs), consumer-advocacy groups and some legal experts. "The court ruling will open up cable systems so that consumers can choose their ISP when using a cable-modem connection," David Baker, vice president of law and policy at EarthLink, said in an interview on the day of the ruling. "The FCC is trying to create a world where consumers get choice at best between a DSL provider and cable provider."

But the cable industry sees it differently. Cable companies view their networks as the result of private development and investment that should not be required by law to lease lines when third parties knock on their doors. Already, some cable companies such as Time Warner and Comcast have contractual agreements with third parties, most notably including EarthLink, to provide cable-modem service.

Cable companies also point out that their businesses differ from the phone companies, which are guaranteed a rate of return based on their local franchises. That's something cable cannot tap.

"There isn't a state cable commission that says you'll get a percentage back on every invested dollar," said Dan Brenner, senor vice president of law regulatory policy at the National Cable & Telecommunications Association (NCTA), an industry lobbying group. "Our point is this is a private investment and the 1996 (Telecommunications) Act defines telecom services as those that provide transport to public for a fee. We've never offered that service."

Policies for growth
The FCC's hands-off policies since the mid-1990s have helped the cable industry maintain a healthy lead over its Baby Bell rivals. By the end of 2003, cable is expected to have 13.3 million broadband subscribers, compared with 7.5 million for DSL, according to estimates by market researcher In-Stat/MDR.

Cable was early to sell broadband; the Bells were less-enthusiastic about investing heavily in DSL because they'd have to share their products with competitors.

Much of today's debate began with the Telecommunications Act of 1996, which required the Bells to lease their phone lines to outside companies in hopes of sparking competition for local phone service. DSL, which at the time was in its market infancy, was considered a telecommunications service and subject to these rules.

Cable, on the other hand, was not required to lease its lines and deemed separate from the Bells. This distinction allowed the cable companies to invest heavily to upgrade their networks without regulations impeding their way.

Between 1996 and 2001, cable companies spent an estimated $75 billion to convert analog networks to digital, largely in response to competition from satellite TV. The investment opened up enough bandwidth to allow cable companies to introduce new features to their subscribers, such as hundreds of channels of TV programming, video-on-demand, high-definition television, voice calling and faster, high-speed Internet.

"Either you build it out or you will be part of economic history," said Matthew Spitzer Dean of the University of Southern California's Gould School of Law. "That's what spurred cable companies to build out the digital transmission part."

Now with most of their networks supercharged for digital, cable companies want a return on their investment, and the FCC has appeared willing to defend their interests.

The FCC's next move
Shortly after the 9th Circuit released its Oct. 6 ruling, the FCC's Powell threw down the gauntlet, criticizing the decision as a "monkey wrench into the FCC's efforts to develop a vitally important national broadband policy." In his statement, Powell added, "I will direct the FCC's General Counsel to appeal."

Powell could take one of two routes. He can appeal to the circuit court and ask for an en banc hearing, where the court selects 11 judges to hold a hearing on the issue and throw out last Monday's ruling if it so decides.

"If (the ruling) were appealed to an en banc panel of the 9th Circuit, it would be a different case because an en banc panel is not bound by holdings of a three-judge panel," USC's Spitzer said. "They would look at the question fresh."

Powell also has the option of going straight to the U.S. Supreme Court with or without another hearing by the appeals court.

The process and all the filings in preparation for these hearings could take months. Meanwhile, the cable industry remains steadfast that there will not be any near-term implications to its business.

"We don't think we have had our time in court yet," said the NCTA's Brenner.

 

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