U.S. telecoms sector braces for Democratic change

WASHINGTON (Reuters) - A Democratic sweep in Tuesday's U.S. elections may clear the way for changes to Internet policy sought by Google Inc <GOOG.O that would bar Internet providers from discriminating against some Web content.

The "net neutrality" issue pits Internet service providers (ISPs) like Comcast Corp (CMCSA.O) and AT&T (T.N) against content companies like Google and Microsoft Corp (MSFT.O).

"Probably the thing that scares the industry the most about a Democratic administration is regulating the Internet," Dan Hesse, chief executive of Sprint Nextel (S.N), said in a speech in Washington on October 24.

Prices for cable television, Internet advertising and privacy are other issues likely to move forward if the Democrats win more seats in Congress, as expected. A win by Democratic presidential candidate Barack Obama in the November 4 poll would add further steam and give Democrats a majority on the Federal Communications Commission.

Obama takes the side of net neutrality backers, who say ISPs should not be able to discriminate against certain types of Internet traffic requiring more bandwidth, such as the downloading of movies, or block certain content altogether.

But Internet providers say government involvement in the Internet will amount to its nationalization and they need to be able to take reasonable steps to control traffic. Republican presidential candidate John McCain opposes net neutrality.

A bill mandating some network requirements failed to move in Congress this year, and Comcast sued the FCC, saying the agency exceeded its authority by ruling Comcast violated net neutrality principles by blocking certain applications.

Google Chief Executive Eric Schmidt is one of Obama's supporters and backs a law on neutrality.

"We prefer a law. At the same time, there are lots of ways to promote market discipline and the threat of law may go a long way toward getting us there," said Alan Davidson, Google's chief lobbyist.

TRACK RECORD

McCain led the powerful Senate Commerce Committee for several years beginning in the late 1990s. He was the sole Senate Republican to vote against a 1996 law requiring big phone companies to lease their phone networks to rivals to spur local competition.

He also sponsored a bill that would have taken away the FCC's ability to halt telecom mergers that were not in the public interest.

"In general, McCain takes the side of the telecom companies," said Nicholas Thompson, a fellow at the New America Foundation and writer for Wired magazine. He wrote a recent article with the opening sentence: "John McCain is an AT&T guy; Barack Obama is a Google guy."

Indeed, donors associated with AT&T were the seventh biggest bloc giving to McCain in the current election cycle and Google-linked donors were the fifth biggest group of contributors to Obama, according to the Center for Responsive Politics, which tracks political spending.

An industry official, who is a self-described Democrat, cautioned against broad assumptions about the candidates, pointing to Obama's use of the Internet to raise money, and his pledge to use broadband to spur economic development.

"It's wrong to think an Obama Administration would be knee- jerk against the very companies that are building the platform for growth," this person said.

Obama has also called for using funds that now finance universal telephone service to bring broadband to places where it is not economically viable, like rural areas.

The bits, bytes and bandwidth of telecommunications policy have traditionally been less partisan issues in Washington than defense or healthcare, said analysts and industry sources.

"Certainly if a member has a vibrant technology sector in their state or district, by definition they will have a pretty good understanding of the role that high technology plays in the economy," regardless of party, said Jack Krumholtz, Microsoft Corp's (MSFT.O) chief lobbyist.

COMMITTEE FLUX

Even if Democrats improve their majorities in Congress as expected, major changes are expected in the leadership of the Senate Commerce Committee that oversees communications issues.

"That will be one thing to affect the industry the most from a Congressional standpoint," said another industry source.

A game of musical chairs could take place in the next Congress come January if current commerce chairman, Democratic Sen. Daniel Inouye of Hawaii, were to move to the appropriations panel. Under various scenarios, the commerce chairmanship could go to either Sen. John Kerry, John Rockefeller or Byron Dorgan.

Changes may also be in store for Republicans on the Senate Commerce Committee. The current ranking Republican, Sen. Ted Stevens of Alaska, may not survive a tight reelection fight after being recently convicted on felony corruption charges.

Internet privacy issues are likely to receive continued attention next year. Democrats held a hearing this year on whether consumers should be able to stop their online behavior from being tracked.

AT&T and Verizon have agreed not to track consumer behavior online unless consumers "opt-in" to do so. Google says it can't be compared to Internet providers and backs self-regulation.

Cable companies like Comcast have reason to fear a McCain presidency. He has pushed for them to sell individual channels to customers "a la carte," so they can get just the programing they want, a proposal the cable industry fervently opposes.

The demand for regulation in the turbulent financial sector could also spill over into communication issues.

"If one looks at macro trends, regulation is making a comeback," said Blair Levin, an analyst at Stifel Nicolaus and once a chief of staff to former Democratic FCC Chairman Reed Hundt. "The default position of 'we don't know what to do, let's deregulate' is fading away."

(Additional reporting by Diane Bartz; Editing by Tim Dobbyn)