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Broadband scuffle reaches Supreme Court

The Supreme Court is scheduled to hear arguments to determine if cable broadband remains forbidden territory for regulators.

Tech Industry
Two competing visions of the future of high-speed Internet services will face off before the U.S. Supreme Court on Tuesday, in a closely watched case that could set the rules of the road for broadband competition in America for years to come.

At stake is whether cable broadband providers must share their lines with rivals--as happens in the phone industry--or whether they should be exempt from such rules. Though seemingly arcane, the issue could influence how quickly high-speed Internet services come online across the country, what features they will have and how much they will cost--particularly in those regions where cable is the only broadband choice for consumers.

The case pits the Federal Communications Commission against Brand X, a Santa Monica, Calif., Internet service provider.

Brand X is hoping for a ruling that will force cable companies to lease their lines at a discounted rate, so the ISP can sell broadband service to its customers. If cable companies are not required to share in this way, Brand X argues, consumers will pay higher prices and have fewer choices. The FCC, on the other hand, will try to make the case that rules hammered out in the phone industry have led to higher prices and slower broadband growth. Keeping cable companies exempt from line-sharing rules will spur investment, and benefit consumers more in the long run.

News.context

What's new:
A California ISP's challenge against the FCC's broadband rules heads to the Supreme Court next week.

Bottom line:
The case could force cable companies to open their broadband lines to other ISPs, or it could hand cable and the Baby Bells more control of their networks. This could affect how quickly--and how cheaply--broadband service rolls out.

More stories on cable broadband

"I don't think the FCC feels that high regulation in these industries is beneficial to broadband progress overall," said Patrick Mahoney, an analyst at market researcher The Yankee Group.

Though the nation's highest court will not make a formal decision until early summer, the impact could go well beyond Internet services. Cable and phone providers plan to use broadband for more than just letting people surf Web sites faster. It'll be used to feed high-definition television stations, nationwide voice calling and future digital services into peoples' homes. All these services could be affected by the court's ruling.

Tuesday's arguments are expected to highlight wildly divergent views about the impact of forcing cable operators to lease their lines to smaller ISPs such as Brand X.

Critics of open-access rules point to the lesson of the Baby Bells, who were forced to lease their DSL, or digital subscriber line, lines to competitive ISPs as part of the 1996 Telecommunications Act. While the cable industry began pouring money into network upgrades, the Bells pulled back on their improvements, arguing that any investments would be cannibalized by rivals who could lease the lines at rates set by the government.

Advocates of open access argue that the Bells were simply stalling. Once they realized the cable industry had taken a dangerous lead, the phone companies brushed past regulatory concerns and quickly began closing the gap.

For more than two years, the Bells have aggressively marketed their DSL services by dropping subscriptions to as low as $26 a month in some areas. DSL subscriptions have surged, and most major cities can now get service.

The result is a fiercely competitive market that pits cable giants against phone companies, with little room for small fry such as Brand X.

In response to DSL's gains, cable companies have hiked download speeds to as high as 5mbps for standard service, although the higher monthly subscriptions average about $45.

In 2004, broadband subscriptions grew by 8.6 million to a national total of 33.2 million, according to Leichtman Research Group. Cable remains the leader, with about 60 percent of the market, and DSL with most of the rest.

In effect, Brand X will have to argue that competition would have been even fiercer with tough cable regulations in place.

A case of definitions
Legal experts said the case will come down to an interpretation of two words: "telecommunications" and "information."

Phone companies are deemed telecommunications services, making them subject to regulations that require them to share their broadband DSL lines with competitors. Cable companies are defined as information services, which means their broadband networks are not normally subject to line sharing or local regulations. One exception is Time Warner Cable, forced to lease its lines to rivals as a condition of the 2000 merger between parent Time Warner and America Online.

The distinction has had wide-ranging effects on the Baby Bell phone companies--Verizon Communications, SBC Communications, BellSouth and Qwest Communications International--which have argued for many years that the rules are unfair to their DSL businesses. Because the Bells are considered telecommunications services, they must lease their DSL broadband lines to third-party ISPs, such as Brand X Internet Services or EarthLink.

Not surprisingly, cable companies have lobbied tirelessly to maintain their information-services label. After spending an estimated $80 billion to upgrade their networks to handle broadband and digital video, cable companies argue they should have complete control of their networks.

Despite being fierce competitors, both sides are in lockstep with the idea of keeping government out of their Internet networks. Since both industries are staking their futures on selling high-definition video programming, phone calling and data through the Internet, the Brand X case has created an odd marriage of enemies.

"Rather than argue that our competitors should be (regulated) the same way we are, the better argument is they should be free of regulation, and so should we," said Jim Olson, vice president of law and general counsel for the United States Telecom Association, the lobbying arm of the phone industry.

Not surprisingly, the cable industry hopes the Supreme Court agrees with its claim that deregulation will mean greater investment to bring broadband to more Americans. Further, keeping the status quo will allow emerging Internet technologies such as voice calling over the Internet, commonly called "VoIP," to flourish.

"Forcing legacy telephone regulation on cable modem service would in fact deter new investment, delay universal broadband deployment and impose unnecessary costs on broadband services," said Brian Dietz, a spokesman for the National Cable & Telecommunications Association.

FCC and the courts
The debate over cable's broadband definition reveals the often contentious clashes between the courts and federal regulators. Under former FCC chairman Michael Powell, the commission has beat the deregulation drum. Powell said the policy would give private providers more incentive to invest heavily into expanding their broadband lines throughout the country.

The FCC has taken many steps toward giving the Bells their share. Powell threw the Bells a bone when the FCC relaxed regulations for companies that build out speedy fiber-optic lines into homes. The Bells credit that decision with increasing their appetite for investing in their networks. Verizon is now spending billions of dollars upgrading from copper lines to optical fiber, a move that will eventually let it add premium television to its menu of services.

The FCC hopes to prevail in the Brand X case, proving its deregulatory policies will spark more competition and better services. The U.S. Court of Appeals for the 9th Circuit, however, could slow that down.

In 2000, the 9th Circuit ruled that cable networks contain elements of information services and telecommunications services, opening the door for possible local regulations.

This ruling emerged from a case between AT&T and the city of Portland, Ore., over the long-distance company's planned acquisition of cable giant Tele-Communications Inc. Portland tried to force AT&T to open its cable broadband lines to other ISPs as a condition of merger approval, but its request was denied by the 9th Circuit. But in the argument, the court noted that cable networks have elements of both telecommunications and information services.

The FCC, however, did not agree with the 9th Circuit's decision and in 2002 ruled that cable was strictly an information service. That meant companies providing cable broadband were not required to pay local taxes and were not subject to local phone rules.

Brand X and a number of other small ISPs appealed the ruling to the 9th Circuit in a last-ditch effort. It paid off. A year and a half after the FCC decision, the 9th Circuit shot back, claiming only the Supreme Court and Congress--not the FCC--could reverse its Portland ruling.

The FCC fought hard to overturn the 9th Circuit's decision. It tried to throw the case back to the court for a re-hearing, but the request was denied. It then petitioned the Supreme Court to hear the case and, with help from the U.S. Justice Department, was granted its wish.

The decision could also determine how much power the FCC holds to make rules for the telecommunications industry.

The Supreme Court "will define more clearly the boundaries in which the FCC can act," said Cheryl Leanza, legislative counsel for the National League of Cities, which is siding with the 9th Circuit's ruling.

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