| Law & Industry Daily
Published on: Wednesday, January 22, 2014

FCC Net Neutrality Rules: Comatose, Zombie-Like, But Not Dead

Verizon and other ISPs have been careful not to dance on the grave of net neutrality in the wake of a court ruling that gutted much of the Federal Communications Commission’s power to require equal treatment of Internet traffic.

One reason ISPs, Internet service providers, are cautious: There’s still life left in the FCC’s broadband authority. And there are other things for ISPs to mull.

While the door might be open for ISPs to seek fees from bandwidth-gobbling websites, over-reaching could make it more likely that Congress will step in.

Moreover, Internet companies that use much bandwidth, led by Google(GOOG), Facebook (FB) and Netflix (NFLX), have gained some leverage over ISPs by ramping up investments in their own Web infrastructure.

Section 706 Might Be Key

The U.S. Court of Appeals’ Jan. 14 ruling tossed out net neutrality, also called “open Internet” rules. But the three-judge panel — in a surprise — upheld the FCC’s argument that Section 706 of the Telecommunications Act gives it broadband authority.

That latter decision gives FCC Chairman Tom Wheeler, an Obama appointee, ammo to fight the net neutrality ruling.

“The court has invited the commission to act, and I intend to accept the invitation,” Wheeler said at a conference held last week by the Minority Media and Telecom Council.

Andy Lipman, a partner at Washington, D.C., law firm Bingham, McCutchen, says Section 706 gives the FCC options.

“The FCC will investigate to what extent it can rewrite its net neutrality rules under Section 706,” Lipman told IBD via email. He says the FCC might appeal to the full U.S. Court of Appeals for the D.C. Circuit or to the U.S. Supreme Court. There’s risk, though.

He says the full court of appeals or Supreme Court might find, “on reconsideration,” that the FCC does not have broadband authority under Section 706.

George Reed-Dellinger, an analyst at Washington Analysis, says more court battles loom.

“A majority of the three-judge panel believes Section 706 of the Communications Act provides the FCC (power) to promulgate rules governing broadband providers’ treatment of Internet traffic (but not anti-discrimination), opening a path for future FCC regulations of ISPs,” Reed-Dellinger said in a research report. “This sets the stage for further net neutrality appeals and disputes.”

Verizon Communications (VZ) led the challenge to the FCC’s net neutrality rules. Those rules barred ISPs from blocking Internet content or slowing down access to websites in a discriminatory manner.

The ruling marks a win for broadband network operators, giving them more leeway to experiment with new business models, analysts say. They could, in theory, charge Internet companies more to provide faster Internet service. Yet, the situation remains uncertain, and the court ruling has yet to take a big bite out of Internet stocks, while gains by cable TV and telecom ISPs have been modest.

It remains to be seen how much near-term revenue ISPs can reap from negotiating deals for faster speed, prioritized traffic and sponsored data plans, where companies subsidize subscriber data usage. AT&T (T)in January announced a plan to let companies with wireless apps pay for the data charges users of those apps ring up.

Web Firms Bulk Up

The court ruling, though, isn’t likely to cause Internet companies to panic, some analysts say.

Netflix accounts for roughly one-third of Internet traffic and Google’s YouTube about a fifth. Netflix, whose stock has weakened on worries over subscriber growth, has deployed its own global content delivery network called Open Connect to speed up its online video delivery.

Google owns private fiber-optic network assets larger than many landline phone companies. Google could take its fledgling broadband and TV service to more cities — it’s now in Kansas City, Mo., and Kansas City, Kan.; Austin, Texas; and Provo, Utah — raising the stakes.

Facebook, Apple (AAPL) and other Internet firms have built out huge data centers in order to quickly service their customers, but those facilities require connections to high-speed broadband networks.

As more data traffic moves to wireless networks, Internet companies such as Amazon.com (AMZN) have eyed opportunities to invest in mobile broadband networks. Attorney Lipman says it’s possible Internet companies could benefit from the next round of wireless consolidation, depending on what network-access conditions regulators set on any deals.

In landline services, big ISP Comcast (CMCSA) is still bound by conditions the FCC set on its acquisition of media giant NBCUniversal until early 2018.

Analysts say it would be unwise for ISPs to take initiatives that set off a consumer backlash or public relations battle, giving Democratic lawmakers an opening to propose new broadband legislation.

Craig Moffett, analyst at MoffettNathanson, says that while the FCC searches for a way to overcome its setback, the Federal Trade Commission could step in and take a larger Internet role.

Moffett speculates there’ll be a “regulatory regime of wait-and-see, with either the FCC or FTC taking action if controversy arises.

“While Chairman Wheeler has unambiguously expressed his support for the concept of net neutrality, he has also signaled a willingness to allow carriers to experiment, at least within reason, and to establish precedent on a case-by-case basis,” Moffett said in a blog.

Joseph Mastrogiovanni, an analyst at Credit Suisse, is in the same camp.

“There is a good chance the FCC could do nothing and watch how the industry behaves,” he said.

© Copyright 2014 Investor’s Business Daily, Inc

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