Among the suggested changes is FCC Chairman Genachowski’s proposal, dubbed the “Third Way,” a method that would classify only the transmission component of broadband access service as a telecommunications service.  Doing so would render the transmission component subject to Section 202(a) of the Communications Act, which forbids any common carrier to “make any unjust or unreasonable discrimination in charges, practices, classifications, regulations, facilities, or services with like communication service.”  In effect, the “Third Way” would enable the FCC to implement net neutrality regulations on the transmission component of an ISP service without otherwise extending the full brunt of Title II telecommunications service regulations to the information service components of an ISP.

Since the proposal was initially released, advocates on both sides of the net-neutrality debate have voiced concerns that this reclassification may be beyond the Commission’s authority.  Just weeks ago, 171 Republican and 73 Democratic Congressmen urged the Commission not to take unilateral action in creating a new regulatory scheme by reclassifying broadband as a modified Title II telecommunications service.  Instead, they are insisting that any such classification change be implemented through legislative channels.  The FCC’s recent action appears to be a polite “No thanks” to those Members of Congress.

The FCC has explained that there is a legal basis for reclassifying broadband without legislative action.  A statement by the Commission’s General Counsel pointed out that in his dissent in National Cable and Telecommunications Association v. Brand X Internet Services, Inc., Justice Scalia said that the “computing functionality” and “broadband transmission component” of an ISP must be acknowledged as “two separate things,” the former an unregulated service under Title II and the latter a telecommunications service which could, in Scalia’s view, be a regulated Title II service.  In the FCC’s view, Scalia’s dissent is “consistent with, although not compelled by, the majority opinion in Brand X.”  The FCC is therefore confident that the Third Way approach will pass judicial scrutiny.

The reclassification of the transmission component under Title II would not place immediate restraints on ISPs, but some ISPs and analysts are concerned that this would lead to further price regulations that could potentially thwart investment opportunities in the broadband space.  AT&T explained that the Notice of Inquiry issuance is disconcerting as “it will create investment uncertainty at a time when certainty is most needed.  It will no doubt damage jobs in a period of far-too-high unemployment.”  Joining the opposition, Verizon suggested that these measures will have “negative consequences for online users and the Internet ecosystem would be severe and have ramifications for decades.”  While it is difficult to predict the precise impact additional regulations might have, the reclassification would undoubtedly extend regulatory authority to the Commission and leave ISPs susceptible to greater oversight.

In an effort to combat increased agency regulation, ISPs have suggested alternatives that allow for more flexible standards and less regulatory control of network management.  Comcast, in its reply comments, insisted that the FCC “should not adopt an absolute ban on discrimination” as this would “prohibit ‘socially beneficial discrimination’ and stifle innovation and investment.” Instead, Comcast explains that the rules should allow the Commission the power to supervise ISPs’ practices and address practices that are questionable while still giving ISPs “the flexibility to innovate and experiment with technologies and business models.”  Comcast further suggests that the regulations created by the FCC should operate in conjunction with independent third-party expert groups to “understand, refine, and address the various technical issues underlying key policy determinations.”   This would create industry-wide cooperation by integrating practical standards with current FCC policies.

Last week, in an effort to reclaim control of the network management debate, notable industry executives formed the Broadband Internet Technical Advisory Group (BITAG).  The purpose of the group is to “develop consensus on broadband network management practices or other related technical issues that can affect users’ Internet experience.”  The group is poised to inform and advise governmental agencies on technical and operational issues facing internet service and content providers that will help establish network management policies.

Regardless of the outcome of the regulatory debate, ISPs must continue managing bandwidth congestion within FCC policies and constraints.  Depending on the breadth of expansion of the regulatory controls, ISPs may seek alternative pricing structures as a way of managing network traffic without employing intense discriminatory network-management practices and running afoul of net neutrality principles or regulations.  Indeed, AT&T’s recent decision to eliminate “all you can eat” mobile data plans in favor of metered billing was intended, in part, to rein in the small number of users that consume a disproportionate amount of data.  AT&T hopes the new scheme will alleviate stress on the networks and help manage congestion.  This move may change the entire economic model for the wireless industry as other wireless providers follow suit.

Congress will obviously continue to debate the implications and necessities of having an unelected agency construct overarching broadband regulations.  However, it is clear that amending the Communications Act will take time and be especially difficult during an election year.

The FCC is accepting comments on the proposed reclassification methods through July 15th.  We’re not sure whether the coming weeks and months will provide much clarity, but we anticipate that there will be opportunities amidst the uncertainty.

**Julie Hanus, a summer associate with the Firm, assisted in the preparation of this post.

We had previously written about the original sanction order, in which the FCC found that Comcast had violated the non-binding net neutrality principles by examining users’ connections and routing them (in actuality, slowing them down) based on whether the connection was being used for P2P uploads.  In effect, Comcast was managing traffic connections not based on destination but on application.  Comcast appealed the ruling, asserting that the FCC did not have the appropriate authority to issue the sanction.

The Circuit Court’s decision rested, in large part, on where the regulations governing ISPs fall within the provisions of the Communications Act.  In 2002, the FCC defined ISP services as “information” carriers, subject to Title I of the Communications Act, rather than as “telecommunications” services governed by Title II.  That distinction proved fatal to its attempt to sanction Comcast. 

FCC itself conceded that it did not have the express authority under Title I to regulate an ISP’s network management practices.  The FCC was therefore compelled to rely on the broad provisions of Section 4(i) of the Act, which authorizes the Commission to “perform any and all acts, make such rules and regulations, and issue such orders, not inconsistent with this chapter, as may be necessary in the execution of its functions.”  Under prior DC Circuit precedent, this “ancillary” authority may only be used if the FCC can demonstrate that its action, is “reasonably ancillary to the effective performance of its statutorily mandated responsibilities.”  The FCC relied on several Congressional statements of policy to show that regulating Comcast and other ISPs was within its “statutorily mandated responsibilities.”  But as the appeals court decision pointed out, Supreme Court and DC Circuit case law has held on numerous occasions that such statements of policy cannot create “statutorily mandated responsibilities.”  The Court went on to reject the FCC’s claim of “ancillary authority” and vacated the sanction order against Comcast.

So where does this leave the FCC’s net neutrality initiatives?  Several proponents of expanded FCC authority have suggested that the FCC reclassify ISPs as “telecommunications” services under Title II of the Communications Act.  Title II expressly makes it unlawful for common carriers “to make any unjust or unreasonable discrimination in charges, practices, classifications, regulations, facilities, or services for or in connection with like communication service”.  Such language would appear to provide solid footing for implementing and enforcing the net neutrality principles.

Indeed, immediately after the DC Circuit’s decision was handed down, FCC Commissioner Michael Copps released a statementurging the FCC to reverse its earlier 2002 determination and treat ISPs as telecommunications services saying “It is time that we stop doing the ‘ancillary authority’ dance and instead rely on the statute Congress gave us to stand on solid legal ground in safeguarding the benefits of the Internet for American consumers.” 

Congress may yet get into the action as well.  Last August, the Internet Freedom and Preservation Act of 2009 was introduced.  The Act expressly makes it unlawful to block, interfere with, discriminate against, impair, or degrade” access to any lawful content from any lawful application or device.”  However, no action has been taken on the bill since its introduction.

Stay tuned.

The FCC’s inquiry involves Google’s call-blocking policy.  In June, Google began noticing extremely high-cost calls to a concentrated number of rural destinations which generated vastly disproportionate costs.  Its internal investigations, using data filters to sort out call patterns, revealed that the top 10 telephone prefixes (the area code plus the first three digits of a seven digit number) to US destinations generated more than 160 times the expected amount and accounted for 26.2 percent of its monthly U.S. costs.  By August, Google began restricting calls to certain high-cost destinations.  Google’s response letter to the FCC describes the Google Voice service and explains Google’s investigation into and rationale behind its call blocking policy.  It claims that its engineers developed a “tailored solution” so that Google Voice currently restricts calls to fewer than 100 specific phone numbers, a practice which Google’s counsel believes is necessary to “prevent these schemes from exploiting the free nature of Google Voice.” 

While Google has only recently began blocking costly calls, the practice whereby rural telecoms charge long distance carriers exorbitant rates to connect and terminate calls from their networks is not new.  In may cases these telecoms partner and share revenue with adult chat service, conference calling centers and others to attract traffic to their networks.  AT&T, and other long-distance carriers, have long complained and sued over these so-called traffic pumping schemes.  However, as common carriers subject to FCC regulations, they were banned in 2007 from blocking calls and are required to deliver phone calls without discrimination to all numbers dialed.  AT&T’s complaint to the FCC is rooted in its contention that Google’s call blocking policy is enabling it to dance around this ban that applies to other carriers.

However, this recent skirmish over Google Voice is really part of a larger debate currently playing out in the regulatory stage over “network neutrality” rules being reexamined by the FCC and AT&T has framed Google’s actions as part of the debate. 

In its Statement on Google Voice and Net Neutrality, AT&T stated that “By openly flaunting the call blocking prohibition that applies to its competitors, Google is acting in a manner inconsistent with the spirit, if not the letter, of the FCC’s fourth principle contained in its Internet Policy Statement.“   The FCC’s fourth principle on net neutrality states that “consumers are entitled to competition among network providers, applications, and service providers, and content providers.“  

Some members of Congress are also concerned about the adverse impact on the market and support for universal service if Google is allowed to operate its telephone services outside of the rules that govern carriers.  As they stated in their letter to the FCC “[I]t is our opinion that a company should not be able to evade compliance with important principles of access and competition set forth by the FCC by simply self-declaring it is not subject to them without further investigation.”

Google responded to these charges by stating that “The FCC’s open Internet principles apply only to the behavior of broadband carriers – not the creators of Web-based software applications.” Google claims that AT&T is attempting to blur the distinction between Google Voice and traditional phone service but maintains that web applications like Google Voice and Skype shouldn’t be treated like traditional phone service.

Google distinguishes Google Voice from traditional phone carriers by explaining that unlike traditional carriers which charge users for their services, Google Voice is a free, web-based software application similar to e-mail rather than a telecom service designed to “supplement and enhance existing phone lines, not replace them” and should therefore be exempt from common carrier rules.   The service is currently available to a limited number of users on an invitation-only basis.  Users are still required to have an existing land or wireless line in order to use Google Voice and are still able to make outbound calls on any other phone device.  Therefore, because Google Voice is a software application, not a telephone company, Google believes that its service is not and should not be subject to common carrier laws or the FCC’s jurisdiction.

Distinctions aside, with nearly 1.5 million users, the increasingly popular service is viewed by some as running a rival service to traditional phone companies.  The heart of the FCC’s inquiry is whether Google Voice is a telecom service or an online software application and whether this distinction really matters.  How different is a call traveling directly over carrier lines from one that goes through software applications?  As of now, the difference appears to be the ability to block less than 100 calls, an option not available to AT&T and other carriers.

Whether the FCC agrees with Google’s characterization of its service and its interpretation of the current open Internet principles may have a dramatic impact on both the telecom and internet marketplaces.  And the FCC’s newly proposed rules on network neutrality may also play a prominent role in this debate.  We will continue to monitor the proceedings and keep you posted.

• The FCC announced plans to impose more than $12 million in fines on 600 telecoms that failed to file paperwork last year detailing how they are going to protect the privacy of their customers.  The FCC is seeking the fines because many of the phone companies, internet telephone service providers and calling-card companies that are supposed to make the detailed annual reports are not complying with the current rules. 
• In a week where we’ve read so much about newspapers becoming obsolete, a new survey by The Rosen Group has found that the majority of Americans still consider print to be a vital source for their news and entertainment even though a third of us consider websites to be our number one source of information. 
• According to a report by PriceWaterhouseCoopers, internet gambling, which was banned in 2006, could bring in over $52 billion in tax revenue over 10 years.  That may be one of the factors driving a decision to reintroduce legislation in Congress to overturn the ban. 
• A two-year old lawsuit filed by Eminem’s production company against Universal Music Group seeking about $1.3 million in unpaid digital music royalties finally went to court this week and its outcome could have a profound effect on the digital music business.  The issue is whether digital music downloads fall under “distribution” or “licensing” agreements — the latter giving artists a 50% take on royalties earned. 

• E-commerce sites, especially Amazon, the biggest of them all, got some bad news as the New York Supreme Court upheld the validity of a law requiring e-tailers to collect state sales tax. Amazon and Overstock.com sued based on a 1992 Supreme Court ruling that a company had to have a physical presence in the state to collect taxes.  Appeals are likely but for now, it looks likely that sales tax on e-commerce is inevitable.  More information is here.
• A task force has been formed by four Madison Avenue trade groups, with the support of the Council of Better Business Bureaus, to develop industry guidelines for new forms of online behavioral advertising and to lobby the government regulators and policymakers on the benefits to consumers.  The initiative is in response to potential government regulations that would limit new forms of online user targeting.  More details here.
• Reports out of Washington say that Julius Genachowski is being considered to take the chair of the Federal Communications Commission.  Although he was a former general counsel at the FCC and knows the agency well, he is better known as a digital media veteran, a longtime executive at InterActiveCorp and founder of a D.C.-based VC firm which has invested in numerous Web companies.  Here’s a piece from all things digital.com discussing the proposed appointment and industry reaction.
• Two consumer groups are set to appear before the FCC to seek an investigation into mobile ads.  The Center for Digital Democracy and US Public Interest Research Group claim that mobile ad firms don’t fully disclose the extent of the information they collect from consumers.  Here’s an article from the San Francisco Chronicle detailing the debate.

• One report says that ad spending on social networking sites will be lower than expected this year and will remain relatively flat in 2009.  Details from the WSJ are here. 
• The House Committee on Energy and Commerce has released a report entitled “Deception and Distrust:  The Federal Commmunications Commission under Chairman Kevin J. Martin.”  Some of the highlights of the criticism: lax oversight of telecommunciations companies and pushing for revisions to agency reports in a less-than-open fashion.  One caveat:  the report was prepared and released by the majority staff and is not necessarily a consensus view.  Here’s a link.
• Google has reached agreement to bring the magazine archive and current issues online as part of Google Book Search.  Titles involved in the project are a diverse bunch and include New York Magazine, Popular  Mechanics and Ebony.  The announcement was made via this post on Google’s official blog.
• The New York Times takes a look at licensing and other revenue opportunities that are being exploited in virtual worlds.  We’ll be looking at the legal impact that emerging technologies in the virtual space might have on licensing arrangements in the coming weeks.  Check back for the full post.

The bill was introduced as the FCC was investigating Comcast for allegedly instituting measures to slow down P2P traffic on by its users. On August 1, the FCC entered an order finding that Comcast had, in fact, violated FCC net neutrality principles by examining users’ connections and routing them (in actuality, slowing them down) based on whether the connection was being used for P2P uploads.  In effect, Comcast was managing traffic connections not based on destination but on application.  The order directed Comcast to suspend the network management practices that violated the FCC rules, with the intention of making the suspension permanent. 

As expected, on September 4, Comcast filed suit in the US Court of Appeals for the DC Circuit seeking to overturn the FCC ruling.  While Comcast has said it will comply with the directives in the order, it was appealing the order because, in the words of a Comcast spokesperson, “the Commission’s action was legally inappropriate and its findings were not justified by the record.”

Stay tuned . . .