Cable Scores On Data

3/17/2002 7:00 PM Eastern

During the Clinton years, the issue was how many rules would the communications sector have to shoulder. In the Bush era, it's how many are headed for the shredder.

That shift was on microcosmic display last week at the Federal Communications Commission, which essentially ruled that cable systems for now are off limits to unaffiliated Internet-service providers unless operators consent to such carriage.

If an anti-deregulation virus spawned by the Enron Corp. debacle is spreading in Washington, it hasn't yet infected the FCC's Republican majority, headed by chairman Michael Powell.

The FCC — in a 3-to-1 vote that once again exposed partisan friction — overturned a longstanding precedent established in the telecom sphere: Wireline network owners must share facilities with competing information-service providers.

That policy directly led to America Online Inc.'s explosive growth in the dial-up Internet-services market.

As a formal matter, the FCC issued two decisions. The first was a declaratory ruling that cable-modem service was neither a cable service nor a telecommunications service, but an interstate information service under agency jurisdiction.

Historically, the FCC has accorded information service providers almost total freedom.

The decision was hardly a shock because for months, Powell has signaled his aversion to network-sharing policies. He wants network owners to battle it out and bring content providers along on a voluntary basis to establish product differentiation.

"This decision didn't really come as surprise to any one of the MSOs in the industry," said Janco Partners Inc. cable analyst Matt Riegner. "All the decisions that have come down recently have been very kind of hands-off, from a regulatory standpoint."

The second move was the adoption of a notice of proposed rulemaking (NPRM) which asked whether market conditions make it "necessary or appropriate" for the FCC to require cable operators to carry unaffiliated ISPs, rather than making a tentative conclusion.

That left the door ajar as to whether open access remains a possibility.

FCC sources cautioned the cable industry not to get too giddy because a GOP-led agency refused to bury the forced access issue for good. Moreover, the FCC has yet to decide whether it can justify a regulatory landscape in which phone companies comply with access rules but cable operators do not, the sources said.

"If the [FCC] decides to maintain some form of access obligation (on phone companies], we would need to develop a compelling rationale if we were to refrain from imposing an analogous requirement on cable operators," Republican FCC member Kathleen Abernathy said.

FCC Cable Services Bureau chief Kenneth Ferree said he planned to wrap up the rulemaking process by year-end.

"I am not sure that this commission has given up on a pure facilities-based competition model," Ferree said. "Maybe there will be enough facilities and enough different platforms that the idea of multiple ISP access will seem rather quaint and unimportant."

National Cable & Telecommunications Association president Robert Sachs applauded. He said the FCC had crafted a national policy for cable-modem service that would promote regulatory stability and investment.

Sachs said he does not expect the NRPM to conclude with forced-access rules.

"We are confident that the further record will indicate a very competitive marketplace and does not warrant the imposition of legacy regulations on this service," Sachs said.

ISPs weren't the only losers last week. Cities suffered a setback when the FCC tentatively concluded in the notice that MSOs don't have to pay the 5 percent franchise fee on cable-modem revenue, and are not required to obtain a new franchise to offer information services.

Although cable operators may stop paying cable-modem fees today, the FCC would examine whether state law gives cities the residual authority to require data-over-cable fees or franchises, Ferree indicated.

But collecting fees on cable-modem service — which isn't classified as a cable service — could run afoul of the Tax Freedom Act, cable operators have noted.

The Yankee Group estimates that cable-modem service generated $2.7 billion in 2001 revenue. Losing 5 percent of that would cost cities $135 million.

What should cable operators do: bank the 5 percent fee, or share it with customers?

"This is the cable industry you are talking about. Do they ever give back money? My bet is that they pocket the money," said Yankee Group cable analyst Michael Goodman.

Sachs said the NCTA would not give MSOs advice on whether they should stop collecting cable-modem franchise fees.

"Each cable operator is going to have to consult their own counsel and review the FCC's decision," Sachs said.


Litigation is expected to proliferate.

Consumer groups hammered the FCC for not classifying cable-modem service as a telecommunications service, thus requiring open access to ISPs.

"We expect to sue, and I am confident others will do so as well," said Andrew Jay Schwartzman, president of the Media Access Project, a public-interest law firm.

Despite carriage deals with Time Warner Cable and AT&T Broadband, EarthLink Inc. is considering court action — again based on the FCC's rejection of the telecommunications-service classification.

Atlanta-based EarthLink is a 4.8-million-subscriber ISP with 470,000 broadband customers.

"Today's decision is bad law and bad policy," said EarthLink vice president of law and public policy David Baker. "Encouraging broadband deployment does not mean sacrificing consumer choice and unfortunately, today's FCC's decision does just that."

Although cities need time to study the FCC's ruling, they are expected to challenge the agency's decision not to classify cable-modem service as a cable service. Cities have the power to collect franchise fees on revenue derived from cable services.

"I cannot predict whether we will take that action until I see the legal document," said National Association of Telecommunications Officers and Advisers president Libby Beaty.

Now that cable-modem service is an information service, operators are probably going to stop collecting franchise fees on cable-modem revenue, she said.

"I suspect that operators will be sending letters to cities notifying them that fees will be adjusted as of today," Beaty said. "I cannot predict how cities will respond."

Court challenges have a "slim" chance of success, said The Precursor Group telecom analyst Scott Cleland.

"This is the bread-and-butter stuff that a regulatory agency was created to do," said Cleland. "Unless they have been grossly incompetent, they are not likely to get overturned. Tie goes to the FCC."


At the FCC meeting — at which tension was palpable — Powell argued the FCC's job was to define cable-modem service, and then to enforce the regulations, if any, that flow from that classification. The job was not to decide which regulations cable should live with, and then pick the classification.

"Information services, whether people wish to disregard it or not, is a definitional category in the statute. It's there and it cannot be ignored," Powell said. "I think it's fantastic to suggest that this category is not part of the congressional scheme."

Powell also took umbrage at the notion that some think his agenda is to unleash media giants at the expense of would-be competitors.

"You just must be the bad guys who just are looking for a way to make big companies get off on their obligations. I think that is preposterous," Powell said. "I think this commission is all committed to the right answer."

Michael Copps — the FCC's lone Democrat — once again issued a stinging dissent. Last month, Copps lashed out at commission proposals to deregulate the Baby Bells' data services.

"I do believe that some access requirement is necessary in order to ensure that consumers have choices of ISPs," said Copps, after arguing that the cable industry has been slow in reaching deals with competing providers.

Copps also expressed the view that "a powerful case" had been made for open access, and that Congress had no intention of shielding phone companies and cable operators from network-sharing mandates.


"I can't imagine that [Congress] envisioned that its statutory handiwork being made obsolete by a new service offering," Copps said. "Make no mistake, today's decision places these services outside any viable and predictable regulatory framework."

Support for Copps arrived quickly. Rep. Edward Markey (D-Mass.), a key architect of the Telecommunications Act of 1996, said classifying cable-modem service as an information service "defies common sense and logic."

"One wonders how that service gets transmitted from state to state" without a telecommunications service component, Markey said.

In a related move, the FCC tentatively concluded that to the extent a court held that cable-modem service is a telecommunications service, the agency would not require cable operators to comply with common-carrier regulation.

This was in response to litigation in the 9th U.S. Circuit Court of Appeals.

The FCC's rulings did not address whether Internet protocol telephony provided over cable plant is a telecommunications service, Ferree said.

Want to read more stories like this?
Get our Free Newsletter Here!