Broadband case goes to Supreme Court

Though chiefly a consumer issue, a case before the U.S. Supreme Court could determine the pace of next-generation enterprise service rollouts from carriers and cable companies.

The court is hearing National Cable and Telecommunications Association (NCTA) vs. Brand X Internet Services, a case where a group of ISPs oppose the FCC's attempts to classify cable modem service as an unregulated information service instead of a regulated telecom service.

The former would effectively shut out ISPs from riding on cable broadband networks and selling services to cable modem users. But the latter might discourage cable operators, and telcos, from investing in infrastructure upgrades to support new services. That was always the complaint of the RBOCs, which have had to provide competitors low-cost access to their facilities for years.

"It could shape [cable and telco] decision making as they evaluate the business case for moving forward for the types of services they roll out to their enterprise customers, as well as their consumer and residential customers," says Carol Mattey, a director in Deloitte & Touche's U.S. Technology, Media and Telecommunications industry practice.

The plaintiffs, which include ISPs Brand X Internet and EarthLink, argue that U.S. broadband customers would have more choices of providers, and that competition could reduce prices, if the Supreme Court rejects the FCC's attempt to classify cable modem broadband as an unregulated information service. Supporters of the FCC action say broadband adoption in the U.S. would slow if cable providers were forced to share their networks with competing ISPs.

"If the cable companies lose this, the risk would be that [firms] would see a delay in deployment of Ethernet services and would probably face higher prices for the services," says Thomas Nolle, president of consultancy CIMI.

Currently, cable companies are not big players in the enterprise services market. Some of the larger cable multisystem operators (MSO) serve small and midsize businesses (SMB) in their regions, but the residential sector is their bread and butter.

In the U.S. alone there are approximately 5.4 million SMBs, about 98% of which are passed by upgraded cable facilities, according to Current Analysis. U.S. businesses spent roughly $3.2 billion on cable modem services in 2004, as compared with an estimated $3.3 billion for DSL services, according to In-Stat/MDR.

Telcos compete with cable multiservice operators (MSO) for residential and SMB broadband services, but are increasingly targeting the enterprise network market as well. This was the impetus behind SBC's purchase of AT&T and Verizon's acquisition of MCI. A ruling in favor of the ISPs in NCTA v. Brand X might be the catalyst for further expansion into the market.

"Enterprise is the next venue for the cable operators," says Bruce Leichtman, president and principal analyst at Leichtman Research Group. "It's an area the operators have to look more at as the consumer side gets more price competitive."

Even though they are staunch competitors, telcos are siding with the cable MSOs in this case. Incumbent carriers traditionally have faced regulation, including requirements in the Telecommunications Act of 1996 that share access to their networks with competing carriers.

However, the FCC has relaxed some of those policies in an effort to stimulate investment. In February 2003, the FCC voted to phase out rules requiring the large incumbent telcos to share residential DSL lines at discounted rates with competing ISPs. In March 2002, the commission ruled that cable modem service was an information service not subject to the same regulation as telecom services - but that decision was overturned by the Ninth Circuit Court of Appeals in San Francisco in October 2003.

"If the Supreme Court upholds the Ninth Circuit [ruling], I expect that the cable companies and the DSL providers will both be pressing the FCC to [avoid] applying traditional common carrier regulations to those services," Mattey says. "If the FCC and the cable industry prevail, there will be increasing pressure for similar rulings on the telco side for their DSL services."

Things may have already gotten off to a shaky start for the cable providers and telcos. During oral arguments in the case last week, the Supreme Court questioned why the FCC would classify cable broadband as an unregulated information service while it regulates DSL and other services that carriers offer.

But Justice Stephen Breyer also questioned if the court should overrule the FCC and attempt to draw its own lines or leave the matter to the commission.

A ruling on the case is expected in June.

Grant Gross, a correspondent with the IDG News Service, contributed to this story.

Copyright © 2005 IDG Communications, Inc.

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