New Internet rules set up industry's next battle

Telecom companies such as AT&T and Vodafone have convinced U.S. and European regulators, finalizing so-called "net neutrality" rules, to allow them to dedicate network capacity to services such as providing connectivity to driverless cars and facilitating the exchange of medical data between patients and health professionals.

Whether this proves to be a loophole or a necessary protection will only be known later.

The industry will be able to develop such "specialized services" as long as they do not hurt the delivery of the normal Internet to homes and businesses. The firms expect such services could generate billions in revenue one day as everyday tasks are increasingly connected to the web.

Telecom and cable companies argue being able to charge for different services and speeds would help fund network upgrades and develop new industrial uses for the web, such as smart electricity meters.

Silicon Valley and net neutrality activists counter that such treatment would lead to a two-speed system where telecom and cable groups could prioritize their own content and squeeze out start-ups who cannot pay.

Antonios Drossos, a net neutrality advocate at consultancy Rewheel Ltd in Finland, said the U.S. FCC and European regulators would handle the issue of what was permitted under "specialized services" on a case-by-case basis.

"It comes down to whether you trust the network operators. Do you believe they want to do health care and connected cars, or are they just looking for a loophole around the net neutrality?"

The debate about whether all web traffic should be treated equally has become a hot issue because of disputes between network operators and bandwidth-hungry services such as Google's Youtube and Netflix and attempts by some telecom and cable companies to block services like Skype and file-sharing software Bit torrent.

The issue will be one focus of discussion this week at Mobile World Congress, the telecoms industry's annual conference, where U.S. Federal Communications Commission (FCC) head Tom Wheeler will speak on Tuesday.

Some European telecoms executives believe that the region will take a more accommodating stance on net neutrality in the future than the U.S., where the FCC on Thursday expanded its powers to police broadband companies.

The new European Commission under President Jean-Claude Juncker wants to spur growth by encouraging telecoms firms to invest in faster broadband infrastructure, so is advocating a softer regulatory line on the industry.

The FCC voted in the U.S. to regulate broadband as a utility-like service, ending decades of a light-touch approach to companies like Verizon and Comcast.

A high-level European telecom executive said European carriers could jump ahead in developing new businesses that use their networks to collect mountains of sensor data from everything to connected cars to factory production, while their U.S. peers are mired in regulatory uncertainty.

U.S. Internet service providers or their trade associations are expected to challenge the new regulations in court, potentially dragging into 2016.

"There is a real opportunity to re-launch European innovation in the so-called industrial Internet," said the executive. "A window will exist for Europe to take the lead in connected devices if policymakers set the right net neutrality rules."

A U.S. telecoms lobbyist acknowledged that development of such services could be slowed if companies felt that regulators were looking over their shoulders.

"I think when we talk about a connected fridge, we don't yet know -- lots of future products are unclear," the person said.

"If there are robust protections for non-Internet broadband services, we'll continue to innovate and remain ahead of Europe. If I don't know which bucket my service is going to fall into... that's not a great answer to have."

The political environment on net neutrality in the U.S. and Europe is very different. While U.S. network operators are up in arms about the FCC taking new regulatory authority on broadband, their European peers are more accustomed to harsher regulation.

Europeans also have more choice of broadband providers because of rules forcing former state-owned telecom groups to share their line into homes with rivals, while Americans typically only have a choice between a local cable monopoly and a telecom carrier.

Tom Phillips, who heads regulatory affairs for telecoms trade group GSMA, said European carriers can live with the coming net neutrality rules because a patchwork of different national laws would be worse.

The Netherlands and Slovenia have their own net neutrality rules. Dutch regulators in January fined carriers KPN 250,000 euros and Vodafone 200,000 euros for breaking the rules.

"The European operators are pragmatic and would prefer to get a European policy done so as not leave a vacuum for member states to fill," said Phillips.

A challenge for regulators globally will be policing whether telecom and cable companies are using "specialized services" as a way around the obligation to treat traffic equally.

The European Parliament, which passed net neutrality rules last April now being negotiated with member states, tried to build in protections against this issue. But those are likely to be watered down in the final version of the law, experts say, under pressure from industry.

(Additional reporting by Alina Selyukh in WASHINGTON; Editing by Elaine Hardcastle)