April 24, 2014

Until January 2014 the Federal Communications Commission (the F.C.C.) had applied a regulatory regime that treated the Internet in much the same way as it treated the telephony network: as a sort of utility governed by a spirit of equal and undifferentiated access. Put another way, the F.C.C. had tried to prevent the large network operators (such as AT&T, Verizon and Comcast) from using their ownership of the broadband pipes connecting millions of U.S. homes to the Internet as a means of negotiating – or extracting – privileged access fees from large content providers (be it a Walt Disney or a Netflix). “No high speed toll lanes” could have been the motto.

In January a the U.S. Court of Appeals (District of Columbia Circuit) ruled in favour of Verizon  in a course that pitted the telco against the regulator. To quote the decision “… we are confronted with [an F.C.C.] effort to compel broadband providers to treat all Internet traffic the same regardless of source – or to require, as it is popularly known ‘net neutrality’ … Proponents of net neutrality… worry about the relationship between broadband providers and [content] providers. They fear that broadband providers might prevent their end-user subscribers from accessing certain [content] providers altogether, or might degrade the quality… either as a means of favoring their own competing content or services or to enable them to collect fees from certain [content] providers.”

Verizon and other telcos and cable companies argued that the regulatory framework was patently unfair. They had, they argued, spent billions of dollars constructing a broadband access infrastructure and that they had the right to manage this infrastructure in order to meet the requirements of both profit and an open internet. The Court accepted this line of reasoning.

Three months later the F.C.C., which had considered appealing the ruling, has now abandoned the principle that all content flowing across the Internet must be treated equally. It has proposed new rules (to be released for comment in mid-May and voted on later in the year) that will allow content providers and broadband access providers to negotiate what amount to speedier toll lanes, with content pricing likely having to adjust to reflect these higher costs. The F.C.C. will impose obligations of disclosure and commercial reasonableness on the telcos and cablecos.

Comcast, for example, will be required to disclose whether it provides superior access for NBCUniversal, which it owns. Transplanted to a Canadian context, Rogers and BCE would, as significant owners of content, see both opportunities for new revenue as well as enhanced obligations of disclosure.

An interesting question is whether or not this will stifle innovation, given that new mechanisms for delivering content will no longer be able to benefit from one -size-fits-all treatment of Internet traffic. Netflix, for example, could well have been throttled in infancy had telcos and cablecos been able to charge extra for the surging traffic this service was generating. From a strategic perspective this may benefit content providers with scale, as they will potentially have both the resources and negotiating heft the new rules will require.