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Cable wins Supreme Court battle

Court sides with FCC, cable companies in case that could have changed the competitive landscape in the broadband market.

update The cable industry can breathe a sigh of relief, as the U.S. Supreme Court has ruled that cable companies will not have to share their infrastructure with competing Internet service providers.

In a 6-3 decision, the court overturned a federal court decision that would have forced cable companies to open up their networks to Internet service providers such as Brand X and EarthLink. The majority opinion was written by Justice Clarence Thomas. Dissenting justices were Ruth Bader Ginsberg, Antonin Scalia and David Souter.

The decision likely will not affect consumers immediately, since cable companies have long been exempt from having to share their networks. But Brand X and its supporters believe that over the long term, the decision will hamper competition and will ultimately lead to higher broadband prices.

Timeline

Here are highlights of the court battles and regulatory rulings that began in 2000 and led to Monday's U.S. Supreme Court decision in FCC v. Brand X.

June 22, 2000: In AT&T v. City of Portland, the 9th U.S. Circuit Court of Appeals rules that cable-modem offerings are telecom services. AT&T wins case to keep rivals off network.

March 14, 2002: FCC declares cable modems to be unregulated interstate information services. High-speed ISPs to see less regulation.

Oct. 6, 2003: In FCC v. Brand X, the Ninth Circuit rules that cable modems include a telecom component. Court rejects FCC cable ruling.

Nov. 19, 2003: The 9th U.S. Circuit Court of Appeals gives the FCC until Dec. 4, 2003, to file its appeal. Court grants FCC extension on cable ruling.

Dec. 4, 2003: FCC submits appeal to the 9th Circuit. FCC seeks to overturn cable broadband ruling.

March 31, 2004: 9th Circuit denies FCC petition for rehearing the Brand X case.

Dec. 3, 2004: Supreme Court agrees to hear appeal of Brand X case. Supreme Court to hear broadband case.

March 2005: Supreme Court scheduled to hear oral arguments in Brand X case. Broadband scuffle reaches Supreme Court.

June 27, 2005: In a 6-3 decision, Supreme Court declares that cable companies will not have to share their infrastructure with competing ISPs.

"Clearly, this sends a message from the Supreme Court that we get out of the Internet business," said Jim Tickrell, president of Brand X Internet, based in Santa Monica, Calif. "The Bush administration has made it clear that they are hostile toward small, independent service providers like us. And we think that is a big disaster for consumers, and a huge win for the monopolistic phone and cable companies, which spend millions of dollars on lobbying efforts."

The case, which was closely watched as it wound its way through the federal court system, pitted Santa Monica, Calif.-based ISP Brand X against the Federal Communications Commission. The case hinged on the definition of cable service.

The FCC has defined cable broadband as an "information service"--a definition that, under agency guidelines, frees cable companies of regulations that would require operators to share their networks with competitors, including ISPs such as Brand X.

But Brand X argued that cable networks should be regulated like phone lines, which, because they handle telecommunications service, fall under a different set of rules--rules that require carriers to allow competing services to ride over their networks. In December, the Supreme Court agreed to review the case.

In the opinion, the court upheld the FCC's interpretation of cable as an information service.

"We find nothing arbitrary about the Commission's providing a fresh analysis of the problem as applied to the cable industry," the majority wrote (click for PDF).

The Court also took a strong stance in reinforcing the FCC's ability to make critical decisions when it comes to interpreting the nuances of the Telecom Act. Because the case was so technically involved, the court said it was reasonable to defer to the expertise of the FCC.

"(The) question turns not on the language of the Act, but on factual particulars of how the Internet works," reads the opinion. "This leaves federal telecommunications policy in this technical and complex area to be set by the Commission, not warring analogies."

Justice Scalia, writing for the dissent, said that the FCC achieved its decision based on an "implausible reading of the statute" that as a result "exceeded the authority given it by Congress."

"This is a wonderful illustration of how an experienced agency can (with assistance from credulous courts) turn statutory constraints into bureaucratic discretions," Scalia wrote. "After all is said and done, after all the regulatory cant has been translated, and the smoke of agency expertise blown away, it remains perfectly clear that someone who sells cable-modem service is 'offering' telecommunications."

Mixed reaction
The National Cable and Telecommunications Association, the principal trade association of the cable television industry in the United States, heralded the opinion.

"Today's Supreme Court decision is a victory for consumers and maintains the momentum to advance broadband in the U.S.," Kyle McSlarrow, NCTA president and CEO, said in a statement. "Classifying cable modem service as an interstate information service, as the FCC did, keeps this innovative service on the right deregulatory path."

Cable companies view the ruling as a victory.

"We are very pleased," Cox, the nation's third largest cable operator, said in a statement. "Competition is ample and vigorous in the broadband marketplace."

But consumer advocates say that by upholding the FCC's classification of cable Internet as an unregulated "information service," the Supreme Court has paved the way for a privatized, tightly controlled broadband market. Groups such as the Center for Digital Democracy or CDD, which was one of the petitioners in this case, say that the decision leaves the vast majority of broadband households in the United States at the mercy of just two companies--the local cable monopoly or one of four remaining "Baby Bells."

"Today, the Court struck a blow against freedom online," Jeff Chester, CDD's executive director, said in a statement. "The Internet they have bestowed promotes the interest of a few big media companies against the best interests of the public--in the U.S. and globally."

The Consumers Union, a major consumer advocacy group, said by giving cable operators "gatekeeper" status, the percentage of the U.S. population with a broadband connection will continue to lag the rest of the world.

The group noted that the United States has slipped from third in the world to 16th in recent years. And Americans pay 10 to 20 times more on a megabit basis for broadband than the Koreans or Japanese, it said.

"In its action, the agency abandoned a fundamental principle that has applied to all means of communications throughout U.S. history," a Consumers Union representative said.

"It is our view that the FCC clearly abused its discretion in ruling that cable operators should not be constrained in their treatment of independent (Internet service providers)."

Just the beginning?
While this particular court case may have come to a conclusion, experts say the battle over broadband regulation is only just beginning. The Supreme Court's decision has likely paved the way for the FCC to deregulate DSL service as well. The FCC had already opened proceedings on this question a couple of years ago. But not much has been done as the FCC awaited the Supreme Court's decision on cable's classification.

"This decision puts the phone companies in a very strong position to argue for equal treatment," said John Rigovin, former general counsel of the FCC who argued this case before the Ninth Circuit Court and now is a partner at Wilmer Cutler Pickering Hale & Dorr. "I expect they'll argue for a level playing field, which makes a lot of sense. It seems unfair that cable modem service is unregulated and DSL service is highly regulated."

The Supreme Court declined to directly address how DSL should be classified, but in the majority opinion alluded to potential changes to DSL classification.

"The Commission's decision appears to be a first step in an effort to reshape the way the Commission regulates information service providers," said the opinion. "We express no view on how the commission should, or lawfully, may classify DSL."

The phone companies wasted little time in pushing this issue forward for their own benefit.

"This decision confirms the FCC's authority to classify broadband services in a manner that reflects the highly competitive nature of those services," Tom Tauke, executive vice president of public affairs, policy and communications for Verizon said in a statement. "Now, to provide consumers the full benefits of new technology and competition, the FCC and Congress should act promptly to finish the job."

Competitive local exchange carriers, which rely on laws that require phone companies to share their networks, are already gearing up for battle.

"If the FCC tries to do the same thing for DSL, we believe it would be a mistake and something that is not allowed by the statute," said Jason Oxman, general counsel for ALTS/Comptel, an industry group that represents more than 300 competitive phone and Internet providers. "Today's decision only speaks to the cable network. Cable service has a very different regulatory history than phone service, and we hope the FCC will recognize that."

An entirely deregulated broadband market would be bad news for ISPs and other competitive providers, say experts.

"I think it's safe to say that it will continue to be harder and harder to have viable business plan if you don't own the infrastructure," Rigovin said. "The conventional wisdom is that there is already so much competition from different technologies."

Paul Gallant, an analyst with the Stanford Washington Research Group and former legal advisor to former FCC Chairman Michael Powell, said that competitive providers can still survive. He said that even if broadband was entirely deregulated, ISPs could still negotiate deals with cable providers and phone companies.

"Independent ISPs aren't out of the game yet," he said. "But they are going to have to find ways to create more value in their service. Connectivity is not enough."

Comcast, another of the nation's largest cable operators, had no immediate comment and instead deferred to the NCTA's statement on the ruling.

CNET News.com's Ben Charny and Declan McCullagh contributed to this report.