Court Tosses Rules of Road for Internet
Federal Regulations on 'Net Neutrality' Are Voided, Clearing Way for New Fees
Updated Jan. 14, 2014 7:52 p.m. ET
A federal court has tossed out the FCC's "open internet" rules, and now internet service providers are free to charge companies like Google and Netflix higher fees to deliver content faster. Gautham Nagesh reports on digits. Photo: Getty Images.
WASHINGTON—A U.S. appeals court on Tuesday threw out federal rules requiring broadband providers to treat all Internet traffic equally, raising the prospect that bandwidth-hungry websites like Netflix Inc. NFLX -0.49% might have to pay tolls to ensure quality service.
The ruling was a blow to the Obama administration, which has pushed the idea of "net neutrality." And it sharpened the struggle by the nation's big entertainment and telecommunications companies to shape the regulation of broadband, now a vital pipeline for tens of millions of Americans to view video and other media.
For consumers, the ruling could usher in an era of tiered Internet service, in which they get some content at full speed while other websites appear slower because their owners chose not to pay up.
"It takes the Internet into completely uncharted territory," said Tim Wu, a Columbia University law professor who coined the term net neutrality.
Adopted in 2010, the Federal Communications Commission rules said that companies like Verizon Communications Inc. VZ -0.37% andComcast Corp. CMCSA 0.00% had to treat all similar content on their networks equally, whether it was a YouTube video or a home video posted on a personal website.
Deciding a lawsuit brought by Verizon, a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit struck down the rules. The court said the FCC saddled broadband providers with the same sorts of obligations as traditional "common carrier" telecommunications services, such as landline phone systems, even though the commission had explicitly decided not to classify broadband as a telecom service.
"Given that the Commission has chosen to classify broadband providers in a manner that exempts them from treatment as common carriers, the Communications Act expressly prohibits the commission from nonetheless regulating them as such," Judge David Tatel wrote for the court.
Though the FCC said it might appeal, the ruling for now means Internet-service providers are free to experiment with new types of pricing arrangements, such as charging content companies like Google Inc. GOOG -0.49% or Netflix higher fees to deliver Internet traffic faster. Or, they could choose to degrade the quality of certain online content unless its creators were willing to pay up.
Netflix and Google declined to comment.
Tony Wible, an analyst at Janney Capital Markets, said Internet companies would mount a fight to avoid paying new fees, but he said it was inevitable that over time some of the burden of paying for Internet infrastructure to handle bulging traffic would shift to content providers or consumers in the form of usage-based billing.
"You need to put forth an economic model to finance that investment," he said. "The question is over the price point and who is going to set it."
The ruling also poses a dilemma for the FCC and President Barack Obama, who has pushed for equal treatment of Internet traffic going back to his first presidential campaign.
Supporters of net neutrality had urged Mr. Obama's first FCC chairman, Julius Genachowski, to reclassify broadband as a telecom service. But the commission balked in the face of strong Republican opposition, a decision that ultimately weakened its legal position.
The current FCC chairman, Tom Wheeler, has said he is against regulating broadband Internet in the same manner of the landline phone system. Such regulation could expose broadband providers to a panoply of new federal rules on pricing and service—which critics say would lead to excessive control of the industry by Washington.
"In the Internet's infancy, the commission made the right decision to leave it free from the interference of government regulators. Today's ruling vacates the commission's attempt to go back on this policy and to smother the Internet with rules designed for the monopoly telephone network," House Energy and Commerce Chairman Fred Upton (R., Mich.) and Rep. Greg Walden (R., Ore.) said in a statement.
The ruling left some room for FCC action by finding the agency had the authority to police broadband use, albeit not through the method it used in 2010. Bolstered by that finding, Mr. Wheeler's FCC could choose to bring enforcement actions on a case-by-case basis against companies that act in an allegedly anticompetitive manner.
Mr. Wheeler suggested as much in a speech last week. He said "history instructs us that not all new proposals have been benign" and said the government retained the ability to intervene if companies were abusing their market power.
On Tuesday, he issued a statement saying he was "committed to maintaining our networks as engines for economic growth, test beds for innovative services and products, and channels for all forms of speech protected by the First Amendment."
The FCC also could weigh in on the issue when it considers cable-industry mergers, by imposing conditions on big players. Speculation that a wave of cable mergers is in the offing has been fueled in recent months by Charter Communications Inc. CHTR -0.50% 's pursuit of Time Warner Cable Inc. TWC +0.31%
Silicon Valley companies criticized the ruling and called on Washington to respond. Telecom companies "are now in a position to not only make considerable sums of money but, in many ways, they are one of the most important arbiters of culture and speech and what is or isn't going to be on the Internet," said Eric Klinker, chief executive of BitTorrent Inc., a website that allows people to swap digital movies.
If Tuesday's ruling stands, it could throw a wrench into the business models of Netflix, Google and others, potentially raising prices for consumers.
Netflix accounts for 32% of peak Internet traffic in North America, the most of any content provider, according to Sandvine, a broadband-services company. That has made Netflix a target for some cable-industry executives, who have argued the company should be subsidizing the costs of delivering its service to consumers.
In an interview last summer, Charter Communications Chief Executive Tom Rutledgenoted that all broadband capacity was "paid for by the consumer," but "you could argue that it would be more efficient for consumers if the people who are taking the bandwidth for a product were paying for the bandwidth in some fair and proportional way."
A Charter spokesman declined to comment on the ruling.
Netflix's business model assumes it will need to make large investments to acquire the rights to TV shows and movies that it offers and also factors in some costs related to moving data efficiently on the Internet's backbone. But a new fee charged by Internet providers, if it were sizable, could dent the company's profit or force it to raise prices for consumers.
The spotlight also is on Google, whose YouTube site accounts for 19% of peak Web traffic, and other major streaming-video sites.
Both are part of the Internet Association, a coalition of Web companies that supports the approach taken by the FCC. The association's president, Michael Beckerman, said Tuesday that the group supported an open Internet free from "discriminatory, anticompetitive actions by gatekeepers."
Verizon and other Internet-service providers said the ruling would have little impact on the way consumers experience the Internet. "Verizon has been and remains committed to the open Internet which provides consumers with competitive choices and unblocked access to lawful websites and content when, where, and how they want," said Verizon Executive Vice President Randal Milch.
Comcast had agreed to abide by the FCC's open Internet rules for seven years as part of a deal to win regulatory approval for its purchase of a controlling stake in media company NBCUniversal from General Electric Co. GE -2.28%
"We remain comfortable with that commitment because we have not—and will not—block our customers' ability to access lawful Internet content, applications or services," said Comcast Executive Vice President David L. Cohen in a statement.
—Ryan Knutson contributed to this article.
Write to Gautham Nagesh at gautham.nagesh@wsj.com and Amol Sharma atamol.sharma@wsj.com
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