When is a cable company like a pizza-delivery service?

Photographer: Chip Somodevilla/Getty Images

Cable Companies, Lawsuits and Net Neutrality

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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It looks like the Federal Communications Commission is indeed going to head down the path of regulating broadband Internet service as a public utility, albeit probably not one subject to price controls and such. The news slipped out yesterday, and it's supposed to become official on Thursday. Assuming it does happen, I can tell you just what will take place after that.

There will be lots of screaming and yelling, with the cable companies in particular predicting the end of Internet civilization, after which the FCC will eventually adopt the rule. Then, one or more of the big cable or phone companies will sue, and the case will make it to federal appeals court or maybe even the Supreme Court. 

Net Neutrality

How do I know this? It’s what happens when the FCC makes a big regulatory change related to broadband. You could even say that past lawsuits by the phone and cable companies have driven the FCC to exactly the decision it seems likely to make this week, a decision that is sure to drive the phone and Internet companies crazy. Nice little irony, no?

The back story here is that in the early days of the consumer Internet, the companies that competed to provide dialup service (AOL, EarthLink, etc.) were treated by the FCC as lightly regulated “information services,” while the phone companies whose lines they were piggybacking on were “telecommunications services” subject to utility regulation.

When phone companies started offering faster DSL connections over their lines, the FCC still considered that a telecommunications service. But as the cable companies began putting in their own broadband connections, the commission thought about it, and under Chairman Michael Powell made the fateful decision in 2002 to classify cable broadband as an information service. (Yes, the same Michael Powell who is now president and chief executive of the National Cable & Telecommunications Association. Totally a coincidence, though.)

Several telephone companies and Internet service providers sued, and the case finally wended its way, under the name National Cable & Telecommunications Assn. v. Brand X Internet Services, to the Supreme Court, where a majority ruled in 2005 that the FCC had every right to make that decision. Antonin Scalia dissented, effectively arguing that of course cable broadband is a telecommunications service, you ninnies. After that the FCC went ahead and said DSL was an information service as well, which seemed only fair. (Just so you know, I have self-plagiarized some of this from an earlier piece I wrote on this topic.)

Cable broadband is generally much faster than DSL, so except in the areas where phone companies or Google have rolled out fiber-optic lines to homes, the cable companies now have something approaching a monopoly on true high-speed Internet service. On occasion they have wielded their monopoly power to restrict what people can do over their broadband connections, and the FCC has objected. The problem has been that, as long as the FCC classifies broadband as an information service, there are limits to what it can do.

When Comcast started blocking BitTorrent and other file-sharing services for using too much bandwidth, the FCC jumped in and determined in 2008 that this behavior “unduly squelches the dynamic benefits of an open and accessible Internet.” Comcast sued, and in 2010 a D.C. Circuit Court of Appeals panel ruled that the FCC had failed to offer adequate statutory justification for its actions.

That in turn led to the “open Internet” rules (known outside the FCC as “network neutrality”) approved by the commission in 2010. This time Verizon sued, arguing again that as long as broadband was an information service, there wasn’t enough justification in the law for the rules. A year ago, the D.C Circuit agreed, throwing out the open Internet rules and tossing the matter back to the FCC with some advice on how to write rules that would stand up to judicial scrutiny.

Back in May the FCC followed that advice, proposing rules that urged broadband providers to be good, but would allow them to charge Netflix and other content companies for better service. That led to the blowback from Internet companies, John Oliver and even President Barack Obama that appears to have pushed FCC Chairman Tom Wheeler (himself a former head of the National Cable & Telecommunications Association) to bite the bullet and reclassify broadband as a telecommunications service.

But it was the lawsuits by Comcast and Verizon that got us here in the first place. They made it impossible for the FCC to regulate broadband under the rules it chose in 2002, which is now forcing the agency to make use of the stronger rules at its disposal. The companies won in court, so obviously they were to some extent right to bring the suits. Now, though, they may have gotten themselves into a pickle. Predicting what judges will decide is dangerous work, but having read the earlier decisions I find it hard to see how a court could justify striking down a rule that simply states that broadband providers are telecommunications services. Because, well, they ARE telecommunications services.

In his 2005 dissent,  Scalia, criticizing the FCC’s reasoning that cable companies weren’t telecommunications services because they were providing other services besides a connection to the Internet, offered this charming if somewhat convoluted analogy: 

If, for example, I call up a pizzeria and ask whether they offer delivery, both common sense and common “usage”  would prevent them from answering: “No, we do not offer delivery—but if you order a pizza from us, we’ll bake it for you and then bring it to your house.” The logical response to this would be something on the order of, “so, you do offer delivery.” But our pizza-man may continue to deny the obvious and explain, paraphrasing the FCC and the Court: “No, even though we bring the pizza to your house, we are not actually ‘offering’ you delivery, because the delivery that we provide to our end users is ‘part and parcel’ of our pizzeria-pizza-at-home service and is ‘integral to its other capabilities.’ ” … Any reasonable customer would conclude at that point that his interlocutor was either crazy or following some too-clever-by-half legal advice.

I get the feeling the cable companies may have been following some too-clever-by-half legal advice as well.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Justin Fox at justinfox@bloomberg.net

To contact the editor on this story:
James Greiff at jgreiff@bloomberg.net