FCC Will Tame the Internet--Or Kill It

For almost two decades the U.S. government has kept its meddlesome mudhooks off the Internet, freeing it to spread its kudzu-like tendrils into the global economy. And it worked.

The FCC took a big step this week to end all of that. For the first time, the Federal Communications Commission proposes using a set of 75-year-old phone regulations to oversee the Net of the 21st century—and have a say in the prices that companies like AT&T and Comcast can charge. And set rules for what traffic they must carry. (Comcast is acquiring a 51 percent stake in NBC Universal' CNBC's parent company. The deal is awaiting regulatory approval.)

Some telecom execs say the FCC’s agenda is downright radical. It could thwart high hopes for the wireless Internet, centerstage of the next digital revolution. The agency assault could restack the pecking order of winners and losers and reshape their stock prices, affecting the portfolios of millions of retirees and investors. It would impose new burdens on big carriers, while granting new power to content purveyors like Google (Nasdaq: GOOG) and Yahoo (Nasdaq: YHOO).

At stake is billions of dollars that carriers like Verizon (NYSE: VZ) and AT&T (NYSE: T) spend each year to spruce up their networks to carry more digital bits. They will slash their spending if the feds restrain their upside; that could hurts jobs growth in high-tech, which employs well over two million people in the U.S.

If the FCC foray is imminent, “We have to re-evaluate whether we put shovels in the ground,” is how AT&T’s chief executive, Randall Stephenson, put it this week.

The last time the FCC tried such a major incursion, in the mid-1990s, Stephenson, then the company’s chief financial officer, cut annual capital spending by more than half, from $12 billion to $5 billion dollars a year. That cut lasted for four years, until the courts threw out the FCC overreach.

This time around, the agency’s push is in direct contradiction to a ruling in April from the U.S. Court of Appeals in Washington. The backstory: In 2008 the FCC had chastised Comcast for slowing traffic from one particular website—BitTorrent, used for massive video downloads of movies and TV shows. Comcast (Nasdaq: CMCSA) sued, arguing the FCC had legal standing to dictate how the company handles its Internet traffic.

Two months ago the DC appeals court unanimously agreed: the FCC had no such authority.

What to do? Make it up!

To do that, the FCC proposes a nifty little change in definitions. It wants to re-classify the Internet and say it no longer is an “information service”—which gets a light hand. Now the Net shall be called a “telecommunications service”—a phone service, basically, that gets subjected (and subjugated) to a lot more government oversight.

Four feet good. Two feet better!

Technically, the FCC wants to take Title II of the Communications Act—first adopted when the agency was formed 75 years ago to regulate phone service—and slap it on the Internet.

“It's so archaic. It's a regulation that was written for the old rotary dial telephone back in 1934,” AT&T’s Stephenson said on CNBC’s new show, “The Strategy Session,” earlier this week.

It is “a terrible idea,” Verizon’s regulatory chief, Tom Tauke, says in a company statement, predicting “severe . . . ramifications for decades. It is difficult to understand why the FCC continues to consider this option.”

Google played a key role in sparking this spat, under the well-crafted buzzwords “net neutrality.” The search behemoth basically wants the FCC to guarantee that a big carrier can’t refuse to deliver Google’s content on its network.

But wait a minute—why does Google, a preternaturally fearsome, multibillion-dollar profit machine, need special protection from a feeble and backward-looking government bureaucracy? If Comcast blocked access to a hotspot like Google, millions of customers could quit and force the company to cave in. Free-market enforcement, guys.

The FCC, prodded by Google, wants to dictate that giant carriers must charge the same fee for all kinds and sizes of traffic, whether it’s a fat video downloaded from YouTube or a slender little photo zapped from your cell phone.

Wouldn’t Hugo Chavez in Venezuela be proud? The shareholders of AT&T and Verizon and Comcast and Time Warner Cable (NYSE: TWC) paid to build those fat pipes—not government. And the carriers made that investment without monopoly protection, unlike the phone networks erected over a century ago.

Some telecom execs privately have signaled to the FCC that they may accept some new FCC rules on wireline service into homes, if the FCC would back off and let the mobile Internet remain unfettered and footloose.

Don’t bet on it. The Obama Adminstration’s FCC, backing off an opportunity to expand its regulatory hegemony over a trillion-dollar industry? Why would we ever believe this FCC is capable of doing a wise thing like that?