The Consequences of the Portland Case for the FCC and the Internet

(September 3, 1999) In the cable access case, AT&T v. Portland, now pending in the Ninth Circuit Court of Appeals, the only participant to suggest that the Cable Act of 1984 may not apply to the broadband Internet service at issue is the FCC.

On the surface this may appear to be selfless exercise in regulatory restraint. However, a finding that the broadband cable service in this case is not a cable service under the Cable Act could actually facilitate a much larger expansion of FCC regulation of Internet services.

Broadband Internet access provided over cable facilities has one thing in common with cable services. Both use coaxial cable. And classifying broadband Internet access via cable as a cable service would give the FCC some new powers.

But the FCC has relatively limited authority currently over cable services. It has far more powers over telecommunications services, and even broadcasters.

As for classifying broadband Internet access as broadcast, it is perhaps significant to note that the FCC labels as "broadcasts" its own web site's serving of streaming audio of its opening meetings.

Also, FCC Chairman William Kennard gave a speech to National Association of Broadcasters on September 2, 1999, in which he said that Internet audio is "broadcast".

Broadband Internet access also has something in common with telecommunications. As Internet telephony develops, more and more people will be engaging in voice communications via packet switched Internet Protocol. IP telephony services are similar to old fashioned public switched network telecommunications to the extent that both involve people talking to each other. Moreover, AT&T is buying up cable companies not just to provide cable TV and broadband Internet services. It also plans to upgrade cable facilities to extend its phone network into homes to compete with the incumbent local exchange carriers.

While one can advance arguments as to why this service looks like cable service, telecommunications, or broadcast, one key consequence of picking one over the others is that the FCC would emerge with more regulatory authority if AT&T's cable service in Portland were classified as a telecommunications service than if it were classified as a cable service or broadcast.

Something else to consider is that for many years the FCC and many members of Congress have sought the holy grail of decreased phone bills via local competition. Section 271 has not worked as they had once hoped. AT&T's cable gambit is seen by the FCC as a possible solution.

From the FCC's perspective, preventing local authorities from mandating open access is not just good Internet policy, it facilitates local voice competition. After the open access movement has lost, AT&T has built up its cable network and provides local competition, then the FCC may want to regulate broadband cable access as, or similar to, telecommunications. An appeals court decision (and perhaps ultimately a Supreme Court decision) that AT&T broadband Internet services are a cable service could stand in the way of this.

Yet another consideration is the affect that this case could have on the FCC's universal service programs. Currently, the FCC and its subsidiary corporations run a vast collection of cross subsidization programs to make telecommunications services more available in high cost and low income areas, and to provide telecommunications services, computer networking, and Internet service in schools and libraries. That is, business customers subsidize residential customers. Urban customers subsidize rural customers. All phone customers subsidize schools.

Administering a universal service system is complex even if there is one giant monopoly. It is a Herculean task with a small number of regulated companies. It is utterly impossible in a mega-player open competitive environment. Yet, if the FCC's handling of the "e-rate" and Section 254h1b is any indication, the FCC is not conceding the end of universal service. Rather, it is expanding it. And certainly, the FCC is not operating in a vacuum. It is under pressure from various groups and  Members of Congress to continue and adapt universal service to a competitive environment.

And if competition does not kill universal service, convergence could. The public switched telephone network is becoming less important as users switch to other types of services.

To make universal service programs work, the FCC needs a huge pool revenue to tap. If the FCC is to be able to fund the sort of universal service programs that the FCC, Congress and President may impose in the future, it would need to be able to tap IP telephony, and other Internet services. But, to be able to do this, it would be better for the FCC if broadband cable Internet access were classified or treated as a telecommunications service, rather than a cable service.

And conversely, for a company like AT&T, which does not like to bill its "telecommunications" customers for universal service programs, it would be better if its broadband Internet access services were classified as cable, rather than telecommunications.

So, the FCC has reasons opposing the "cable services" classification in the Portland case. It could hamper the FCC from imposing an even greater level of regulation on this Internet service.

Until recently, most types of businesses and services regulated by the FCC fit into easily definable and distinguishable categories. And it was easy to distinguish between unregulated information services and regulated services. Recently, the advancement and convergence of technologies has made it harder to apply old categories.

The telephone, the television, and the computer were once easily discernable. Now, one can make a phone call with a computer, and surf the Internet on a television. The boundaries between regulatory categories, and between regulated and unregulated services, is breaking down.

For the parties in the case, the assumption is that converged technologies will be regulated. The only questions are by whom, and under what regulatory categories.

Everyone is arguing here that services that are a product of convergence of previously regulated and previously unregulated services should be regulated, even in the absence of any statutory authority for doing so.

The critical fact about the Portland case is that no one in this case is advancing the legal argument that there is no statutory authority for any government to regulate this converged service. And no one is arguing as a policy consideration that converged services should not be regulated, or that the FCC does not have a mandate to set national Internet policy.

AT&T may be pursuing the lesser of two regulatory evils. That is, it is pursuing the least burdensome level of regulation that it expects that it could attain, while at the same time defeating the open access movement.

If the Ninth Circuit accepts the arguments of AT&T, then AT&T will defeat the open access movement. But also, AT&T may deliver much to the FCC. It will give the FCC a huge legal precedent for the proposition that the Cable Act covers broadband Internet access. It will defeat the local threat to FCC's authority in this area. It will provide a tacit ratification of the FCC's antitrust merger review authority. And finally, it will build the FCC's mandate to set national Internet policy.

AT&T seeks to recreate itself from an old fashioned public switched long distance voice network into a broadband IP diversified services company. Its make or break strategy is based on acquiring a coaxial cable network. But AT&T needs more than just the physical facilities.

It desperately needs the beneficence of the FCC. And so far, it has received it. The FCC approved the AT&T TCI merger (and far more quickly than, say, the SBC Ameritech merger). The FCC refused to impose open access conditions. FCC Chairman Kennard has spoken  frequently in public against the open access movement. And, now the FCC has come to AT&T's aid with an amicus brief.

But if AT&T is pursuing a Faustian appeal strategy, it may also lead the Internet through the portals of government regulation.

The issue goes further than who wins and who loses the open access argument. There is a wide range of regulatory burdens which the FCC imposes on various of industries under its authority, but not on information services. These include universal service subsidies, fees, licensing, spectrum allocations, technical standards, racial hiring quotas, minority ownership rules, local content, censorship, and others.

And now, there is a new 800 pound regulatory gorilla to deal with: CALEA. While the language of the statute expressly covers only "telecommunications", and expressly exempts "information" services, the FBI has been taking the position that it covers whatever the FBI wants it to cover. FCC rules announced last week, and released on Monday, extend it to certain packet mode services.