Analysis: U.S. seen moving toward controversial broadband step

WASHINGTON (Reuters) - Regulatory uncertainty looming over telecommunications companies is likely to intensify after Verizon Communications Inc and Google Inc forged an Internet traffic deal that could push the Federal Communications Commission toward controversial measures on how to oversee broadband.

Unable to forge a consensus on those rules among phone, cable and Internet companies, FCC Chairman Julius Genachowski now has limited options if he wants to retain oversight over the entire broadband industry.

The FCC on Thursday halted closed-door meetings with industry stakeholders to hammer out a deal on a set of Internet traffic principles, called net neutrality.

The hope among FCC officials and the stakeholders was that if they could solve the net neutrality conundrum then the FCC could drop a proposal to reclassify broadband under stricter carrier rules.

The meetings were suspended after reports of the side deal between participants, Verizon and Google, who came together on ways to route Internet traffic without the rest of the group.

"It was wishful thinking for investors that this issue was just going to go away. The likely outcome is that this proceeds to (broadband) reclassification," said Bernstein analyst Craig Moffett who predicted that such a move by the FCC would inevitably lead to a court battle with operators.

"What happens in court is anybody's guess," he said, noting that the uncertainty could mean telephone and cable operators have to think twice about how they invest in Web services.

"It would be naive to believe this level of regulatory uncertainty won't hurt capital investments in the foreseeable future," he said.

In June, the FCC launched a process to determine whether the agency should reclassify broadband regulation under existing phone rules -- typically considered a stricter regulatory regime.

The move came after a U.S. appeals court ruled that the agency lacked authority to stop cable television company Comcast Corp from blocking bandwidth-hogging applications.

The talks at the FCC focused on how net neutrality, a set of open and free Internet principles, could be applied to land lines and wireless devices with a potential enforcement mechanism.

The underlying idea of net neutrality is that broadband providers should not be able to block or slow down content, or charge Web sites to pay for a fast lane to reach users.

It has the backing of public interest and consumer groups and Internet companies.

But hopes stakeholders would reach consensus were dashed by the Verizon-Google side deal, which one stakeholder said "tainted the well" because under their deal net neutrality would not apply to wireless devices. That forced the FCC to halt talks.

Piper Jaffray analyst Christopher Larsen said the issue will eventually be determined by Congress.

"For carriers this is the best case outcome for right now. The question is what happens from here. I think it's going to end up back in Congress which means nothing happens at least until after the elections and possibly 2011," he said.

ONE MORE PUSH

Analysts believe that Genachowski will continue try to forge a consensus to avert reclassification, which Moffett previously called the "nuclear" option.

"We do not believe the end of the stakeholder talks as currently structured mean that a deal cannot still be worked out," Concept Capital analyst Paul Gallant said.

He said the FCC might delay the September open meeting date by a week or two so the agenda could include a vote to reclassify broadband while another attempt on net neutrality is made to find a solution.

Some Democrats in Congress are urging Genachowski to move ahead with reclassification, with a general consensus that Congress is not likely to have time or political will to get to the issue this year.

"While this is an imperfect solution, it's his only real option to maintain the proper role of government oversight in communications," said John Kerry, a senior member of the Senate Commerce Committee.

"Congressional stalemate is making a legislative solution look increasingly unlikely in the near term," he said.

Genachowski, a Democrat, however faces the potential of going against more Republicans in the next session of Congress and they will likely oppose his efforts if he delays a decision until next year.

But if he acts before the November elections, Republicans running for Congress can complain that the Obama administration is trying to regulate the Internet.

"Net neutrality is deeply contentious, the stakeholders are influential, and the battle is increasingly being viewed through the unprecedented prism of how the FCC might affect upcoming congressional elections," Gallant said.

(Additional reporting by Sinead Carew; Editing by Bernard Orr)