SCOTUS, the FCC, and Your Broadband Connection

On March 29th, the US Supreme Court heard arguments in Brand X Internet Services vs NCTA (04-277) and FCC vs Brand X Internet Services (04-281) consolidated. The case is an appeal of the decision (pdf) of the Ninth Circuit Court of Appeals back in October 2003. As the court summarized, ‘We must decide whether our prior interpretation of the Telecommunications Act controls review of the Federal Communications Commission’s decision to classify Internet service provided by cable companies exclusively as an interstate “information service.”’

If you are unfamiliar with the issues, and don’t wish to slog through all the details, a rather brief and unbiased review of the issues can be found in this Red Herring article on the case. If you wish to go a little deeper, here are a few other related online articles:

Washington Times Editorial
Another Washington Times Editorial
A Forbes Article
Supreme Court Briefs

Who cares, you ask? Well, if you use broadband to access the Internet, or someday might, this case could impact you. It could impact the price you pay, or the selection of vendors from which you choose. It could have dramatic impacts on the future of voice communications in the form of Voice over Internet Protocol (VoIP).

The issue comes down to the level of regulation faced by your broadband service provider, as well as who gets to decide that level. The crux of the issue comes down to some basic statutory definitions of “telecommunications services” and “information services”, under the Telecom Act of 1996 (333 page pdf). The case is specifically about categorizing cable modem service.

You see, the two most prolific technologies of broadband access to the Internet are cable modem service and DSL Internet service. But the two technologies are not on equal footing in terms of regulation. Today, regulation favors cable modem service.

Background

The definition of “telecommunications services” has evolved from a broader definition of “wire communications” dating back to the Communications Act of 1934 (the act that created the FCC). In 1980, in an FCC proceeding known as Computer Inquiry II, the FCC developed a distinction between “basic service” and “enhanced service”, and those terms evolved with little change to become “telecommunications service” and “information service” in the Telecom Act of 1996. In Computer Inquiry II, “basic service” was defined as “a pure transmission capability over a communications path that is virtually transparent in terms of its interaction with customer supplied information.” “Enhanced service” was defined as “services, offered over common carrier transmission facilities used in interstate communications, which employ computer processing applications that act on the format, content, protocol or similar aspects of the subscriber’s transmitted information; provide the subscriber additional, different, or restructured information; or involve subscriber interaction with stored information.” Computer Inquiry II deemed “enhanced services” not regulated (and, therefore, outside the purview of the FCC).

The current definition of “telecommunications service” comes from the Telecom Act of 1996, which says, “The term ‘‘telecommunications service’’ means the offering of telecommunications for a fee directly to the public, or to such classes of users as to be effectively available directly to the public, regardless of the facilities used.” Further, the Act says, “The term ‘‘telecommunications’’ means the transmission, between or among points specified by the user, of information of the user’s choosing, without change in the form or content of the information as sent and received.” It also says, “The term ‘‘information service’’ means the offering of a capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information via telecommunications, and includes electronic publishing, but does not include any use of any such capability for the management, control, or operation of a telecommunications system or the management of a telecommunications service.”

(Note: Cable modem service clearly does not fall under the definition of “Cable service” in the Telecom Act, which says, “the term ‘‘cable service’’ means-- (A) the one-way transmission to subscribers of (i) video programming, or (ii) other programming service, and (B) subscriber interaction, if any, which is required for the selection or use of such video programming or other programming service.” [Emphasis added])

Now, those of us in the business use a rule of thumb for help in making the determination between these two types of services - the protocol conversion test. In this digital age, we can think of all transmissions as composed of bits - ones and zeros. If the bits that a customer puts into the network are identical to the bits that come out the other side - it is a telecommunications service. If not - if the network has acted upon the bits that came into the network, changed them somehow before sending them back out - it is an information service.

Luckily, pretty much everyone agrees that Internet services are interstate Information Services - outside the jurisdiction of the states, and excluded from regulation by the FCC (subject to change by Congress).

Now, here is where we need to interject some new terms for the purposes of our debate here. I want to draw a distinction between DSL service and DSL Internet Service. Why? Because our current regulatory policy draws just such a distinction. DSL service is the basic “telecommunications service” provided by a common carrier (telephone company). Under the Telecom Act of 1996, common carriers are required to provide open access to these facilities to their competitors at substantially reduced rates. When a telephone company wishes to offer DSL Internet Service, they have to effectively “buy” the underlying DSL service from themselves (the common carrier). In this manner, the regulators are attempting to make sure that the telephone companies are not competitively advantaged by the fact that they own the facilities used to deliver the (unregulated) Internet Service. By itself, that is all good and fine.

The problem, though, is that the telephone companies compete with the cable companies. And the cable companies are under no such obligation. That’s what this case is all about. Brand X, a California ISP, has sued in order to gain access to the cable companies cable modem service in order to provide cable modem Internet service. They argue that the cable companies are providing a telecommunications service (the communications between the cable modem itself and the equipment at the cable “head end”) which is separable from the cable modem Internet service - just like the phone companies. The cable companies are arguing that their cable modem Internet service is inseparable from any underlying telecommunications service.

The Telecom Act of 1996 didn’t address the point with clarity. A couple of court cases reached differing conclusions. On March 15, 2002, the FCC issued its position, which included the following statement, “cable modem service, as it is currently offered, is properly classified as an interstate information service, not as a cable service, and that there is no separate offering of telecommunications service.” [Declaratory Ruling, 17 F.C.C.R. at 4802]

To support this position, in a case of post hoc ergo hoc, the cable companies argue that it is inseparable since they don’t offer the telecommunications service by itself. This would make some sense if the telcos offered DSL service to their competitors by choice, but in fact, they are compelled to do so by the FCC. And that is what the petitioners are arguing - that the cable companies should be compelled as well. (Note: in the Red Herring article linked above, this issue is described as the butter in the cake)

The Debate

Two points, quite simply:

How will SCOTUS decide this case?

How should SCOTUS decide this case?

My position

In my view, the court could go one of three different directions. First, it could uphold the appeals court decision, effectively overriding the FCC’s determination, and subjecting the cable companies to the same level of regulation as faced by the telephone companies (which, in the short term at least, would obligate the cable companies to open up their cable modem service to competitors). Second, it could overturn the appeals court decision, find in favor of the FCC’s position, which would effectively equate to status quo. Or third, it could remand the issue back to the FCC with guidance that whatever the FCC finds with respect to cable modem service (telecommunications service or information service), the same criteria must apply to DSL service provided by the telephone companies.

To summarize the winners and losers in each outcome:
Case 1 - Winners: Telcos and ISPs; Losers: Cablecos
Case 2 - Winners: Cablecos; Losers: Telcos and ISPs
Case 3 - Winners: Telcos, in the respect that they would be guaranteed a level competitive playing field, but it would then be up to the FCC to determine the impacts on Cablecos and ISPs.

My answer to both debate points are the same (I’m an optimist!), and I believe they will and should go with the third option. SCOTUS shouldn’t be deciding which industries get regulated, but it should make sure that the FCC’s determinations are generally consistent with the statute and applied fairly across all industries.

Beyond that, I think if SCOTUS takes the third option, the FCC will quickly find that both the cable companies and the telecom companies are offering information services, and the telephone companies will no longer be obligated to separate DSL from Internet service, and to therefore be forced to offer DSL to their competitors.

Disclaimer: I work in the telecom business, and own stocks of multiple phone companies and one large ISP. I have no direct financial interest in any cable company. Therefore, my opinions may be biased in favor of the telcos and/or the ISPs.