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Net Fix: Title II, the two words that terrify the broadband industry

Title II, a provision in the country's 81-year-old telecommunications law, could be used to tighten regulations on the telecom and cable industries. Here's why they're not happy about it.

From left: Commissioner Mignon Clyburn, Chairman Tom Wheeler, Commissioner Jessica Rosenworcel and Commissioner Michael O'Rielly watch as protesters are removed from the dais during a hearing at the FCC in December. Brendan Smialowski/AFP/Getty Images

This story is part of a CNET special report looking at the challenges of Net neutrality, and what rules -- if any -- are needed to fuel innovation and protect US consumers.

Heavy-handed. Archaic. Disastrous.

Those are just some of the ways critics describe Title II of the Communications Act of 1934, which lets the Federal Communications Commission set rates and ensure equal access to traditional phone service.

As the FCC gets ready to propose new rules governing the Internet, the broadband industry -- the cable, wireless and telecommunications companies providing Internet service in the United States -- is using even more colorful epithets to describe Title II. That's because the FCC, led by Chairman Tom Wheeler and backed by President Barack Obama, wants the broadband industry to abide by the same rules governing old-style telephone utilities. To do that, broadband will have to be governed by Title II.

This month, the FCC will try to redefine what broadband is, how it's delivered and whether all Internet traffic gets equal treatment. That concept of equal treatment -- which means preventing broadband providers from favoring certain kinds of content -- has been dubbed Net neutrality or the open Internet.

Though it may seem like a topic only policy wonks can love, the debate over Title II has everyone from President Obama to comedian John Oliver weighing in. At stake is how the Internet will work and the kind of online access US consumers will receive in the future.

On one side stand Internet service providers and their supporters, who argue that stringent regulations on what they can and can't charge will stifle network investment and strangle innovation. Michael Powell, a former Republican chairman of the FCC who is now CEO of lobbyist trade group the National Cable and Telecommunications Association, said in 2013 that any attempt to reclassify broadband under Title II amounts to "World War III." The broadband industry players have already said they plan to legally challenge any attempts to bring Title II into the picture.

See also: Why FCC's Wheeler is defying the greatest lobbyists in the world

On the other side are Internet companies, like Netflix, and consumer advocates who believe Title II is the only way to stop telecommunications and cable providers from offering "fast lanes" to businesses that will pay a premium for higher-connection speeds to their customers. Such fast lanes, they say, would mean the death of Net neutrality because they would give an unfair advantage to deep-pocketed players.

In November, President Obama sided with consumers and cited Title II as his preferred answer to Net neutrality, arguing that Internet service providers shouldn't be allowed "to restrict the best access or to pick winners and losers in the online marketplace for services and ideas."

Wheeler has already said the president's stance will serve as the basis for the FCC's new Internet proposal, which will be presented to the public on February 5. A final vote by the agency is scheduled for February 26.

By any other name

Title II was written into the original Communications Act to protect consumers from the AT&T monopoly in 1934. It banned "unjust or unreasonable discrimination" in providing phone services. That's the same principle Net neutrality proponents want to see extended to Internet access.

So what about Title II has broadband providers freaking out?

For starters, there's Section 201, which gives the FCC the right to dictate the prices Internet service providers can charge for their services. The providers fear the FCC may set rates too low to allow them to recoup the costs associated with building out their networks. That, in turn, would deter them from making future investments, they argue.

"It's the mother lode of rate regulation authority," said Scott Cleland, president of Precursor Group, a consultancy that works with the telecom industry.

The concerns may be unfounded, though, as even President Obama has said he prefers to strip out rate regulation from any proposed rules.

But then there's the issue of "touch," as in light versus heavy-handed. Considered an "information service," the broadband industry is currently governed by a light set of regulations under a different section of the Communications Act. This lighter touch opens the door to Internet fast lanes because there's no language in the law that guarantees equal access. Internet media companies including Netflix hope to use Title II to close off the possibility of fast lanes.

Reclassifying Internet service as a utility under Title II gives the FCC a heavier hand in regulating broadband service. That makes sense to those who side with the President and believe the Internet has become a basic part of Americans' lives. "It's like connecting your electricity -- and that looks like a utility," said American University communication professor Patricia Aufderheide.

Titanic legacy

If the FCC gets its way, Internet service will fall under the same centuries-old principle that has been applied to everything from shipping lanes to roller coasters: common carriage.

A core theme of Title II is common carriage, a principle that says if a consumer wants to use a certain service or mode of transportation and is willing to pay a reasonable price for it, the service provider can't discriminate against that customer -- regardless of race, religion or gender -- and deny service.

The Federal Communications Commission has broad authority over the telephone industry, and wants to add broadband to the mix. FCC

The precursor for this idea first cropped up with ship owners, innkeepers and stable owners. In the 19th century, laws fashioned around common carriage ideas became a critical way of regulating the railroads to ensure equal access to trains by both riders and businesses. The applications have been far reaching: the California Supreme Court ruled in 2005 that Disneyland's roller coasters had to abide by the same kind of heightened safety rules as other transportation services that follow the common carrier rule. That decision was as an offshoot from a wrongful-death lawsuit filed against Walt Disney and its "Indiana Jones" ride.

"What is really at stake is a social contract that defines the relationship between the government and media institutions and the public," said Victor Pickard, a communication professor at the University of Pennsylvania. "These are inherently contentious relationships and they are constantly being fought over."

In the early 1900s, the federal government tried to create these kinds of laws for telecommunications services. The young industry was so lightly regulated at first that the sinking of the Titanic was blamed in part on haphazard use of radio frequencies, which made it difficult for the ship's distress signal to reach rescuers.

The most significant telecommunications law in the US came a few years later, with the Communications Act of 1934, which created the FCC and placed responsibility for all electronic mass communications under that one independent agency.

The law was the culmination of Congress' attempt to respond, "often belatedly and ineffectively," to the rapidly changing pace of communications technology, Indiana State University professor Robert Van Sickel wrote in the 2004 book, "Major Acts of Congress."

An antiquated rule?

After Title II was written into the Communications Act, the FCC had the authority to tell AT&T how much it could charge for its services so it could protect consumers from monopolistic pricing.

The FCC was practical in the application of its authority. The regulatory body dictated rates that let shareholders make money and it ensured there was enough profit to pour back into the phone network. "It was a guaranteed return on investment," said Jerry Power, a professor in the field of communications and technology at the University of Southern California's business school. "[The government] got rid of risk and uncertainty."

AT&T CEO Randall Stephenson at Mobile World Congress in 2013. He has said that the uncertainty has caused his company to go into "pause mode" on future projects. Stephen Shankland/CNET

But Title II was instituted to control a sprawling monopoly, not a field of Internet service providers aggressively jockeying for the attention of consumers. That distinction is critical, say a chorus of broadband executives.

"First of all, this is not an issue about Internet rules," Verizon Chief Financial Officer Fran Shammo said on an earnings conference call last month. "It's about an issue of FCC reclassifying broadband a Title II service, and this will absolutely affect us and the industry on long-term investment in our networks."

AT&T CEO Randall Stephenson warned against Title II regulation in November, when he said a reclassification would cause a for the nation's largest provider of fixed telephone service. He initially hinted that the delay would extend to its plan to expand its super-fast GigaPower Internet service, but later reaffirmed his commitment to the project. "It's prudent to pause," he said. "We want to make sure we have line of sight on this process and where these rules could land, and then re-evaluate."

Verizon, the largest wireless service provider in the US by subscribers, echoed AT&T's concerns. "Title II is an extreme and risky path that will jeopardize our investment and the development of innovation in broadband Internet and related services," Shammo said.

The comments reflect the broadband industry's core argument: Title II, and specifically rate regulation, may choke their ability to generate a return on investment. That would discourage them from taking a risk on future projects, such as network upgrades to provide higher speeds and future wireless technology.

"This is uncharted territory," telecom industry consultant Cleland said about uncertainty in the regulatory environment.

Hurry up already

Not everyone buys the industry's argument. "This notion is one of the most enduring, ridiculous, false and easy-to-prove lies they use anytime they don't want more regulations," said Derek Turner, research director of consumer advocacy group Free Press.

He's skeptical the stiffer regulations will cause wireless carriers, which could also be reclassified under Title II, to stop investing in their networks. It's a valid point given that wireless companies last week bid a record $45 billion in an FCC auction of spectrum for those looking to expand their wireless networks. Verizon and AT&T, the second-largest wireless carrier in the US, were among the bidders.

When going into negotiations with the FCC, the investment point is the strongest card the broadband providers can play, said New Street Research analyst Jonathan Chaplin. "In reality, Title II will have no impact on the carriers and cable business and no impact on their spending."

A pro-Google Fiber sign outside a Homes for Hackers house in Kansas City. Marguerite Reardon/CNET

Sprint, the nation's third-largest wireless carrier, has taken a different stance from its brethren. It backed the adoption of Title II, saying it didn't believe the new regulations would chill expansion of its wireless network.

Google is also expanding its own ultra-fast fiber-based Internet service to 18 new cities. "The dialog that the FCC is having today doesn't impede our progress on Google Fiber," said Dennis Kish, vice president of Google Fiber.

Still, uncertainty about the FCC's rules has unsettled broadband providers. "The whole market is on tenterhooks wondering what's happening," said Steven Shepard, a director of educational programs at USC's business school.

A little bit of clarity will go a long way to settling the industry's nerves, no matter the outcome. "Right now, we are just anxious to see where the FCC comes out so we can all begin to formulate our plans," Stephenson said.

He'll get his answer this week.