Net Fight Shifts to Neutral

Dems mull laws that could hurt telecoms looking to expand.
Author:
Publish date:

With Corporate America struggling to tame the cyberfrontier and use it as an engine for profit growth, the Democratic Party's surge in Wednesday's midterm elections has big implications for legislation that could dictate the future of business on the Internet.

Phone companies, cable mavens, media giants, Web innovators and many others have been watching the progress of a piece of telecom-reform legislation that was moving through Congress before it fell prey to an increasingly rancorous debate over regulation known as net neutrality.

This week's power shift from Republicans to Democrats should spell doom for the telecom bill in the upcoming lame-duck session, but it could also revive the calls for net neutrality regulation.

That's bad news for major phone companies like

Verizon

(VZ) - Get Report

and

AT&T

(T) - Get Report

as they rush to catch up with cable operators like

Time Warner

(TWX)

and

Comcast

(CMCSA) - Get Report

to offer pay-television service.

It's great news, however, for Internet companies like

Google

(GOOG) - Get Report

,

Yahoo!

(YHOO)

,

eBay

(EBAY) - Get Report

and

Amazon

(AMZN) - Get Report

.

"Net neutrality is good for every Internet company," says Trip Chowdhry, analyst with Global Equities Research. "When Democrats increase their power in the Congress, that will be good for net neutrality."

Net neutrality regulation would prohibit cable and phone companies from charging content providers for the use of their networks, which deliver high-speed Internet connections across the country through a vast network of wiring.

Some executives from the telecom industry have publicly floated the idea of charging Web companies fees for the use of their networks. These telecoms say net neutrality legislation would discourage them from investing to upgrade their networks at a time when the popularity of weighty content like streaming video is clogging up the information highway, lowering the quality of access for consumers and keeping prices high.

Meanwhile, Web giants like Google and eBay have been joined by an unlikely band of small businesses, Web gurus, consumer advocates and grassroots activists in supporting net neutrality. They argue that if the telecom industry is allowed to negotiate fees for certain content providers for premium access to their networks, the Internet will become a patchwork of corporate relationships that resembles cable television, relegating the countless Web pioneers springing up all over the online frontier to the cyber slow lane.

Since the Internet's surge in popularity in the 1990s, content providers have paid fees to telecom companies for hosting their Web sites. But under the 1996 Telecommunications Act, network operators were restricted from offering Web companies premium access to their users in return for payment by provisions. Last year, the Supreme Court ruled that Internet service providers using cable modems and DSL were exempt from those provisions.

"The Internet has had net neutrality rules in the past, and we think that's been the key to making the medium an unrivaled arena for free speech, democratic participation and economic innovation," says Craig Aaron, communications director for a group supporting net neutrality called SaveTheInternet.com.

"We've had a truly free market when it comes to content, and we don't want to hand this immense gatekeeper power to a couple of phone and cable companies so they can basically pick and choose who the winners and losers on the Web are going to be based on the business relationships they negotiate," he adds.

Such rhetoric fuels the appeal for regulation that could save Internet giants from sharing their profits with the telecom industry. But currently there is little hard evidence to back up the credibility of the dire warnings coming from net neutrality supporters.

"The cable industry stands behind a level playing field for everyone," says Joy Sims, a spokeswoman for the National Cable & Telecommunications Association. "There's no evidence of a problem right now, therefore cable is opposing regulating the Internet. An unregulated Internet has been a success and has encouraged billions of dollars of investment. Putting government regulation on something usually means stifling innovation and creating more problems."

Craig Moffatt, an analyst with Sanford Bernstein, says cable and telecom companies are routinely punished by Wall Street for considering capital investments to upgrade their networks. With net neutrality, investors have little reason to believe those investments will improve their returns, and regulation solidifying Internet's stance would add to that pessimism.

"The industry is justifiably skeptical of Congress' ability to craft intelligent legislation on this complicated, amorphous topic," says Moffatt. "While it sounds very populist to say that net neutrality regulation is consistent or even necessary for the protection of the First Amendment, the truth is that it's potentially a highly disruptive regulation on a business model that is losing ground already. People have to be very careful of the unintended consequence of trampling innovation, depressing investment and increasing consumer prices."

Aaron counters that bad policy decisions in the past have led to a situation where network providers hold near monopolies in their respective markets. He says history shows that an unregulated Internet will lead to lower prices and better service for consumers is wishful thinking.

"Once

telecom companies have built a two-tiered Internet that favors their business partners, we're not going to be able to go back and fix this thing," says Aaron. "If we don't have meaningful and enforceable regulation policy soon, we're going to lose the free and open Internet as we've always known it."

The telecom reform bills that are currently beached in Congressional gridlock are designed to promote competition for network providers. Among other things, they would open the way for phone companies to more quickly offer pay-television services in markets where they compete with cable companies, who have rolled out digital-phone services in a bid to grab market share.

The telecom giants pushing for the bill are aligned with Republican leaders in both legislative branches who say consumers will benefit from increased competition.

The House of Representatives passed a version of the bill that was stripped of net neutrality language months ago, but the Senate bill hit a snag when it received a split vote in the Commerce Committee and Democrats threatened to filibuster if net neutrality provisions were not added in.

After the Democratic Party's victories in the mid-term elections, chairmanships in the relevant committees in both houses likely will change hands, and many of the Republicans who opposed net neutrality will be looking for a new line of work.

Also, while cable companies oppose net neutrality, they're in no rush to see legislation enacted that would help phone companies compete.

"Cable companies aren't lifting a finger to pass this bill," says Aaron. "It's very unlikely that the legislation goes anywhere now, and they'll be starting from scratch next year. At that time, leaders in Congress will be much more amenable to net neutrality regulation."