Feds to cable industry: Embrace broadband competition, or else

Federal Communications Commission Chairman Tom Wheeler had a strong message for the cable industry at its annual conference Wednesday: Don't interfere with broadband competition.

Speaking at INTX: The Internet and Television Expo, Wheeler said the cable industry has reached a tipping point at which its broadband subscribers outnumber its pay TV subscribers. In this new era, cable operators don't have a lot of competition for their services, especially at the higher speeds, he said. But Wheeler emphasized that competition in any marketplace is critical for putting the necessary pressure on an industry to continue to improve.

"History proves that absent competition a predominant position in the market such as yours creates economic incentives to use that market power to protect your traditional business in a way that is ultimately harmful to consumers," he said. "Your challenge will be to overcome the temptation to use your predominant position in broadband to protect your traditional cable business."

The speech comes at a tense time between the cable industry and the FCC. In the past three months, the FCC has redefined broadband as a public utility in order to support new strict Net neutrality rules. It has put the kibosh on a megamerger that would have allowed Comcast, the largest cable operator in the US, to gobble up Time Warner Cable, the second-largest cable company. It has also increased the speed it considers broadband to be, making it 25 Mbps. It has also declared that the broadband market is not competitive and has preempted laws in two states that prevent municipally owned broadband networks from expanding.

If anyone in the cable industry thought that Wheeler, a former lobbyist and head of the National Cable and Telecommunications Association, was their friend, they no longer do.

Still, Wheeler said he's not out to get the cable industry.

"The purpose of the Open Internet order is not to create an obstacle course to test the ingenuity of ISPs in how they may structure certain activities," he said. Instead, he explained, it's to ensure that everyone has access to the Internet.

Net neutrality is the idea that all traffic on the Internet is treated equally. Broadband providers shouldn't be allowed to block or slow down consumers' access to content. And they shouldn't be allowed to cut deals that let them charge companies such as Netflix extra in exchange for delivering those companies' content faster than anyone else's. On these basic principles, the cable industry says it agrees with Wheeler.

What the NCTA doesn't agree with is how the FCC justifies its authority to enact these rules. As part of the Open Internet order adopted in February, the FCC reclassified broadband as a Title II telecommunications service under the 1934 Communications Act. It's this change in definition that the broadband industry, along with the wireless industry and the two largest phone companies, AT&T and Verizon, have railed against. The NCTA, which said it appreciated the chairman coming to its conference to "highlight the importance of Net neutrality," is one of several entities that has filed lawsuits challenging the FCC's redefinition of broadband.

During his speech, Wheeler didn't spend too much time arguing the finer points of the Net neutrality order. Instead, he focused on moving forward, saying that when the new rules go into effect on June 12, "there will be in effect strong protections to shield against harm to an Open Internet." He tried to reassure the cable industry that the FCC took special care in its rules to exclude broadband from rate regulation.

"That is why the Open Internet order was constructed, so as to put broadband providers in a situation where they could profit from the value of their investments free from any limiting rate regulation," he said.

He applauded Comcast CEO Brian Roberts' leadership for recognizing that it was time for the company to drop its bid to buy Time Warner Cable when it became clear regulators wouldn't support the effort. And he agreed that it's not helpful to dwell on the specific reasons why regulators were unhappy with the deal, except to note that as the deal was being analyzed the market was quickly shifting. The cable industry is no longer about providing TV service but is instead all about broadband.

"It is important to understand that the tipping point from cable to broadband came while the transaction was under review," he said. "We recognized that the industry had changed and we saw concrete evidence of the new competition and business models made possible by high-speed Internet access."

He explained that regulators put broadband at the center of their analysis and that video has become an application that rides over this infrastructure. As a result, the FCC's job, as he sees it, is to promote competition at the broadband infrastructure level to help protect competition in video. The new FCC Net neutrality rules and the agency's rejection of the Comcast-Time Warner Cable merger were also meant to protect competition. He suggested that future FCC actions and policies will also promote broadband and video competition, and that cable operators shouldn't stand in the way of its efforts to create more competition.

"As you have changed, so have the issues, obligations and the opportunities," Wheeler said. "This is the key challenge for your industry."

Wheeler added that he supports a proposal that will allow Internet streaming-video services to be treated the same as cable TV networks, and he said he supports an FCC proposal to assess whether retransmission-consent negotiations between broadcast TV networks and cable companies are being conducted in good faith.

Reactions to Wheeler's speech were sharp. During a panel following his remarks, Michael Fries, CEO of Liberty Global, a cable company that operates in Europe, said he is "baffled by the chairman's remarks" since it was an unregulated industry that has been allowed to consolidate that has fostered the growth of the broadband industry that Wheeler applauded during his speech. Fries said it seemed as though the FCC was punishing cable companies for their success. He went on to call the agency's Net neutrality rules "terrible."

"We're happy to be abroad," Fries said.

Patrick Esser, CEO of the US cable operator Cox Communications, said he's already starting to see the damaging effects of the FCC's decision to reclassify broadband as a regulated utility service.

"Pole attachment fees are going up; legal costs are going up," Esser said. "And our customer base pays for this. It's not needed, and unnecessary."

Time Warner Cable CEO Rob Marcus said he sees broadband very differently than the FCC does.

"In my world, broadband is incredibly competitive," Marcus said.

Jim Dolan, CEO of Cablevision, agreed with Marcus that cable in his region, surrounding New York City, is very competitive. But he said he hasn't seen any effect so far from the Net neutrality rules or the reclassification of broadband.

"I don't see any of these regulations affecting us at all," Dolan said. "Competition is what regulates our market."

The one thing Dolan is worried about, though, is the FCC's support of government-subsidized competition. "That's dangerous," he said.

Still, Wheeler said his agency's policies will help the broadband market flourish for all players, including cable operators, while ensuring Americans have access to the latest and greatest technology available.

"As I have made plain at the outset," Wheeler said. "I believe the rules we have crafted provide what's needed to enable an economic return that will justify new investment and secure an Open Internet."

CNET's Joan Solsman contributed to this report.