Supreme Court Ruling Victory for Cable Industry, Phone Giants

In a victory Monday for the cable TV industry and four regional phone companies seeking deregulation of their DSL networks, the U.S. Supreme Court upheld an FCC ruling that frees cable operators from requirements to open their broadband lines to other Internet service providers.

The high court ruled that the FCC had the right to treat cable-modem service as an information service, a classification that is subject to fewer regulations than what regional phone carriers such as Verizon Communications Inc. must abide by.

The 6 to 3 ruling overturning the U.S. Court of Appeals for the Ninth Circuit dealt a blow to Brand X Internet LLC, a California-based Internet service provider, and other ISPs such as Earthlink Inc. seeking access to the cable broadband networks controlled by Comcast Corp., Time Warner Cable and other large cable operators.

It also gave the biggest local phone companies fuel to lobby the FCC to deregulate their DSL networks.

We look forward to working with [FCC Chairman Kevin Martin] and the entire commission to move forward at full tilt with its nearly four-year-old proceeding to provide the same flexibility to the broadband service of phone companies, said Forrest Miller, group president of SBC Communications Inc., the second-largest local phone company.

Following the ruling, Martin indicated the commission planned to treat all broadband providers the same.

This decision provides much-needed regulatory clarity and a framework for broadband that can be applied to all providers, he said. We can now move forward quickly to finalize regulations that will spur the deployment of broadband services for all Americans.

The Supreme Court decision also marked a potential setback for other companies, including Web content providers like Yahoo! and Internet phone providers like Vonage Holdings Corp., Legg Mason analysts said in a research note. Vonage and other Internet phone carriers need access to the phone and cable broadband networks to deliver voice service.

While obviously reassuring and helpful to cable, we see the decision as having more potential upside for the Bells given their existing broadband telecom regulation and overhang, with potential downside for the edge players, which will probably lose leverage for network access, Legg Mason analysts stated.

Jessica Zufolo, a analyst covering telecommunications policies with Medley Global Advisors, also said Internet phone providers could suffer under the Supreme Court ruling.

VoIP providers like Vonage also lose because they too need non-discriminatory access to cable’s broadband network. Without such access, VoIP providers are vulnerable to “port blocking” by which an incumbent broadband provider may choose to block their packets from being transmitted to the end user, Zufolo said in a research note. Today’s ruling would also preclude the FCC from taking enforcement action against cable operators if port blocking occurs.

Phone companies whose current form of broadband DSL has been classified as a telecommunications service must open their high-speed networks to other ISPs on non-discriminatory terms and follow other common carrier rules.

Three years ago, however, federal regulators indicated plans to deregulate the DSL market. The FCC tentatively concluded wireline broadband Internet access services are information services, with a telecommunications component, rather than telecommunications services. But the federal appeals court in San Francisco put a wrench in any anticipated change in policy when it ruled in 2003 that the FCC had improperly classified cable-modem transmission as an information service.

Consumer groups voiced alarm Monday that the FCCs rulings could choke innovation by exempting the phone companies and cable operators from requirements to open their networks to other Internet providers.

The Supreme Court decision threatens to cement the cozy duopoly of cable modem and DSL service that has made a mockery of competition in American broadband markets and prompted hundreds of communities across the country to build their own local networks, the Consumer Federation of America and Consumers Union said in a statement released Monday.

One member of Congress overseeing telecom policies supported the high courts ruling, but said federal lawmakers needed to go further to clarify the regulation of broadband services.

“While I am pleased that the court has removed the clouds of uncertainty regarding the proper regulatory framework for broadband services, this decision and the uncertainty that has existed in the market since the Ninth Circuit’s erroneous decision demonstrate why Congress needs to modernize the Communications Act, said Rep. Joe Barton, the Texas Republican chairing the House Committee on Energy and Commerce. Congress needs to remove the ambiguity regarding what broadband services are and how they should be regulated.