• by Diane Mermigas , May 7, 2010

The Federal Communication Commission's proposed regulation of broadband as a commodity aims squarely at achieving Net neutrality -- but at what cost?

It will be years before we know whether the FCC's controversial decision to conditionally reclassify broadband (like telephone) as a Title II service is worth risking what some say could be billions in Internet-related investment and revenues (at cable, teleco and likely wireless companies) lost to regulatory uncertainty and compliance.  Meanwhile, consumers will continue to demand, and pay more for, rich video services that require more bandwidth.

This so-called "nuclear" option is the fastest, surest way for the FCC to pursue its quest for open access, which is at the heart of its proposed National Broadband Plan and an Obama campaign promise. Clearly, the FCC is asserting the broadband regulatory authority that the DC Court of Appeals recently ruled it does not have to prohibit Comcast from blocking Bit Torrent's voracious bandwidth consumption.

This latest FCC twist is as personal as it is political.

Any other options, such as appealing to a woefully distracted bipartisan Congress or an unsympathetic judicial system for support, would indefinitely delay consumer and free-market protections regarding access, privacy and universal services.

But the FCC's proposed cherry-picking of only six of Title II's 48 provisions to apply to broadband is problematic, raising more questions than answers about how they will be interpreted and applied. Despite its intention to the contrary, the FCC could end up taking a backdoor into the sensitive areas, such as rate regulation and unbundling, in determining cases of "unreasonable denials of service and other unjust practices."

Applying the "carrier" classification to wireless providers and service networks such as Google, a strong proponent of Net neutrality, as well as cable and telco operators will require them to separately administer and charge for broadband transmission. That could result in interesting conditions to regulatory approval of Comcast's proposed takeover of NBC Universal. It is sure to be a hot topic at this week's annual cable convention.

Precursor analyst Scott Cleland estimates the potential financial liability of Title II could be " tens of billions of dollars a year on major asymmetric Internet traffic originators like Google-YouTube, but also others like Netflix, Amazon."

While the current FCC is promising to exclude broadband from other potentially adverse Title II provisions, there can be no guarantees such "forbearance" will hold. The breadth of unknowns, implied changes and anticipated legal challenges makes this an "unequivocal negative development" for broadband service providers, according to Bernstein Research analyst Craig Moffett. "There would be far fewer winners than losers," he says. It would allay concerns by satellite providers DirecTV and Dish Network about being squeezed out of the video business by bottleneck broadband providers.

Although most analysts concede there are long-term risks to the FCC's proposal, Merrill Lynch's Jessica Reif Cohen says fears that are pushing cable, telco and Internet stocks lower are overblown. She's taking the FCC at its word about adhering to a moderate broadband reclassification.

Certain legal challenges will only extend the uncertainty and chaos already plaguing the cable and Internet sectors, especially if the FCC's five commissioners, after volatile hearings, approve the proposed broadband regulation by simple majority vote before year's-end.

As the Internet and wireless services continue to be shaped by intensely competitive capitalist forces, there is an acute need for some regulatory structure assuring a level playing field, open access, fair pricing and other protections. Skirting the issues has its own liabilities, as witnessed by the growing concerns about breached Internet user privacy.

The FCC's proposed regulation of what broadband service providers can do with personal user information may not extend to user-posted personal data, exchanges and other material on Facebook and other social networks. Proposed congressional legislation and action by the Federal Trade Commission may not go far enough, fast enough.

There is the possibility that this contentious process and costly litigation could be avoided if major cable, telco and Internet players work with the FCC through back channels to create Net neutrality standards that everyone can live with. A real-time dialogue chain like Campfire, social media maps or contemplative computing on Wolfram Alpha  might actually help the painful process along. Better to use broadband to as part of solution rather than treating it like the problem.

More about Diane Mermigas consulting and speaking opportunities atMermigas on Media; more analysis atBNET and Seeking Alpha.