National Regulation

Cable Seeks Deregulation for Modems

4/03/2005 8:00 PM Eastern

Washington— Over the last decade, the cable industry has gone before the Supreme Court several times, on topics including TV-station carriage, editorial control of public and leased-access channels, the blocking of porn channels and the fees paid to fasten cable lines to telephone poles.

All interesting questions — but nothing like the cutting-edge technology issues on display in cable’s latest visit to the high court last Tuesday, in a case about whether the Federal Communications Commission properly decided to shield cable’s broadband access service from any regulatory mandates favorable to competitors.

$10B BUSINESS

The cable industry serves about 20 million high-speed Internet subscribers, producing about $10 billion in annual revenue that represents the industry’s reward for pouring $95 billion into network upgrades in an effort to beat the phone companies in the race for dominance of the high-speed access market.

During an hour of oral argument, the cable industry urged the high court to uphold FCC rules designed to keep cable-modem service free from old-style telephone company access mandates. Both the industry and FCC fear that the application of legacy regulation will stifle investment and consumer adoption.

The court also heard from the other side — Internet-service providers, led by Brand X Internet Services, a tiny Santa Monica, Calif., firm that successfully challenged the FCC’s cable-modem policies in the 9th U.S. Circuit Court of Appeals.

UNFETTERED ACCESS

Brand X seeks mandated access to cable’s high-speed platform, allegedly to ensure that network owners can’t rob the Internet of innovation and competition by excluding rivals.

Some of the nine justices voiced concern about the policy goals articulated by both sides, with Justice Antonin Scalia voicing doubt the FCC had followed the law and Justice Stephen Breyer noting that the quicksilver dynamics of the Internet suggest that the FCC ought to have the latitude to shape policy with judicial deference.

Paul T. Cappuccio, executive vice president and general counsel of Time Warner Inc., owner of the second-largest cable company, told the court that the FCC properly determined that when cable lines are used to transmit high-speed data, cable companies are offering an unregulated information service.

“I would say that’s entitled to utmost deference,” Cappuccio said.

Thomas Goldstein, the attorney for Brand X, claimed that federal law classified cable-modem service as a telecommunications service subject to open-access rules. The FCC’s 2002 ruling that determined otherwise was a “legal error” which the high court should not endorse, Goldstein said.

So it’s up to the Supreme Court to decide whether cable modem service is a telecommunications service, in whole or part, or purely an unregulated information service as the FCC concluded.

The FCC and cable assert that when cable fuses transmission and content to form a bundled service, the combined service is an information service and is not a pure telecommunications service that consumers can use to connect to any ISP.

SCALIA PROBES

Scalia asked a number of probing questions about whether it was plausible for the FCC to conclude that just because cable offers transmission and content in a combined offering, cable is still not offering a telecommunications service.

“Have I stopped offering the broadband?” Scalia asked.

Cappuccio insisted that the regulatory classification of cable-modem service hinged on the manner in which it is offered to consumers, not on the manner in which others would like to see it offered.

“It’s still doesn’t explain to my satisfaction why it’s a different product,” said Scalia, for whom Cappuccio once worked as a clerk.

Justice Department attorney Thomas Hungar said the FCC’s ruling was a reasonable interpretation of the law and that the agency deserved judicial deference on that basis.

Goldstein — seldom interrupted by the justices in his 30-minute time allotment — outlined his understanding of the statutory scheme laid down by Congress. The law, he said, clearly required cable modem service to be classified as a telecommunications service as an initial matter but that Congress also authorized the FCC to strip away access rules if certain market conditions prevailed.

The flaw in the FCC’s reasoning, Goldstein added, was that a telecommunications service provider could add an information feature, however marginal to the main product, solely for the purpose of escaping regulation.

In that sense, he said the law did not authorize the FCC to allow telecommunications service providers to opt out of the law, or “self-deregulate.”

Breyer indicated that so much was happening over the Internet that an expert agency like the FCC was best equipped to shape policy.

Chief Justice William Rehnquist indicated that the thrust of the Telecommunications Act of 1996 was for the FCC to loosen regulation, something a telecommunications service classification on cable modem service would tend to frustrate.

Justice Sandra Day O’Connor wondered whether the FCC’s deregulatory treatment of cable-modem service squared with its treatment of digital subscriber line service provided by major phone companies. Those DSL services are telecommunications services.

A few years ago, the FCC proposed calling DSL an information service, but defeat in the Brand X litigation paralyzed the FCC’s effort.

VIEW: IT’S FCC’S CALL

Daniel Brenner, the National Cable & Telecommunications Association senior vice president of law and regulatory policy, came away from the hearing confident that cable got its points across.

“I think the court, in a number of instances, saw that this was a question for the commission’s discretion. The commission decided it and the Congress meant for the commission to make these kinds of judgments,” Brenner said.

Tom Koutsky, a former FCC attorney now in private practice, said it was impossible for either side to declare victory based on the exchanges during oral argument, even though some of the justices seemed doubtful about the FCC’s legal stance.

“I was really surprised that the government got some pretty serious push back,” Koutsky said. “A couple of the justices made it clear that the government’s interpretation of the definitions didn’t make common sense to them.”

The court is expected to issue a ruling by late June or early July.

Brand X’s understanding of the law — that cable modem and DSL are telecommunications services, with the FCC permitted to remove access mandates — is likely going to be tested weeks before the court is expected to rule.

SBC Communications Inc. has a forbearance petition pending at the FCC that asks the agency eliminate common-carrier regulation of its Internet-protocol platform and services, meaning that SBC wants ISPs to negotiate access. The FCC has to rule before May 5, or SBC’s petition is automatically granted.

If the FCC grants SBC’s petition and similar ones filed by BellSouth Corp. and Verizon Communications Inc., the NCTA has asked the FCC to provide cable with the same deregulatory coverage.

The FCC’s reliance on its forbearance authority to keep broadband providers deregulated as if they were information service providers would likely minimize the significance of a Supreme Court holding in Brand X that cable modem service in a telecommunications service. However, an FCC decision to forbear may be appealed in federal court.

APPEALABLE FORBEARANCE?

A few issues highlighted going into the Brand X case were not raised at oral argument. The 9th Circuit struck down the FCC’s cable ruling without giving the agency’s reasoning substantive review. Some observers thought the high court might remand the case to the 9th Circuit with instructions to conduct such a review. None of the justices raised the remand issue.

“The justices appeared willing to grapple with the substantive issues themselves rather than sending the case back to the lower court,” said Legg Mason Wood Walker Inc. analyst Blair Levin.

Levin said he believed that based on the oral argument, the high court would side with the FCC and cable, though Brand X and other ISPs had “a fighting chance” to prevail.

Andrew Schwartzman, an attorney representing the Center for Digital Democracy, a public-interest group fighting on the same side with Brand X, said the court “didn’t seem the least bit interested” in returning the case to the 9th Circuit.

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