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FCC chief backs some rationing of Internet traffic

WASHINGTON (Reuters) - Internet service providers would be allowed to ration web traffic on their networks under a strategy unveiled by the top U.S. communications regulator that no longer focuses solely on open access.

A worker prepares a server in a file photo. REUTERS/Hannibal Hanschke

Federal Communications Commission Chairman Julius Genachowski proposed banning the blocking of lawful traffic but allowing Internet providers to manage network congestion and charge consumers based on Internet usage.

The rules would be more flexible for wireless broadband, Genachowski said in a speech on Wednesday, acknowledging that wireless is at an earlier stage of development than terrestrial Internet service.

Wireless carriers seem pleased with how they would fare under the regulations, but online content providers could struggle under the proposal.

“The outline proposed by Chairman Genachowski appears to be a fair and balanced approach to a difficult issue,” said Vonya McCann, senior vice president of government affairs for Sprint Nextel, the No. 3 U.S. wireless carrier.

But analysts at Stifel Nicolaus said wireless carriers like No. 2-ranked AT&T Inc would not hesitate to “push back hard” if commissioners seek to toughen the rules’ wireless elements.

The proposal has been placed on the agenda for a December 21 FCC open meeting.

Some analysts said usage-based pricing could benefit landline Internet providers like Comcast Corp and Time Warner Cable Inc, with them charging more for data-intensive activities like the downloading of movies.

“The tacit endorsement of (usage-based pricing) is, in our view, the biggest news of the day, and must be viewed as very positive for terrestrial broadband operators,” Bernstein Research said in a note to investors.

A senior FCC official said usage-based pricing would bring added choice and flexibility to consumers while the agency would police against any arbitrary, anti-consumer or anti-competitive practices.

MF Global analyst Paul Gallant said new Internet access pricing could represent a blow to content providers like online movie rental site Netflix Inc.

“Depending on where the tiers were set, usage-based pricing on wireline broadband could end up deterring some people from dropping cable for over-the-top video,” Gallant said in a research note.

Broadband providers say they should be able to freely manage their networks, but some public interest groups and content providers argue that there should be a level playing field for all Internet users.

Level 3 Communications, a company that helps Netflix stream videos online, accused Comcast this week of violating open Internet principles after the cable company levied fees at Level 3 for delivering content like movies to Comcast subscribers.

Comcast countered that the fees were in line with the increase in traffic that Level 3 would send over Comcast’s network.

Shares of Netflix closed down 2.8 percent on Wednesday, while Comcast’s stock rose 4 percent.

LEGAL BASIS

The FCC’s ability to regulate the Internet has been in doubt since an appeals court in April said the agency lacked the authority to stop Comcast from blocking bandwidth-hogging applications.

Genachowski’s proposal will not seek to reclassify broadband services under existing telephone rules, referred to as Title II and generally considered to be a stricter regulatory regime.

A senior FCC official said the agency has “sufficient legal authority” to proceed without reclassification and will invoke legal arguments not pursued during the Comcast case.

But Republicans opposed to onerous Internet regulation are questioning the FCC’s legal footing.

Representatives Joe Barton and Cliff Stearns demanded in a letter on Wednesday that the FCC spell out its legal authority to them by December 10, or else stand down on its rules.

CHALLENGES ABOUND

“The proposed framework would prohibit the blocking of lawful content, apps, services, and the connection of non-harmful devices to the network,” Genachowski said in his speech, streamed over the Internet.

It is unclear whether Genachowski’s middle-ground approach will be sufficient to win over the five-member FCC.

Democrats hold a majority on the panel and have supported the concept of net neutrality, but could withhold support from any measure they view as too weak.

Republican Commissioner Robert McDowell issued a statement saying the proposed rules would upend three decades of consensus that the Internet is best able to thrive in the absence of regulation.

Lawmakers have also threatened to challenge the FCC.

Senator Kay Bailey Hutchison, the top Republican on the Senate Commerce, Science, and Transportation Committee, said she would work to halt any FCC rules governing the Internet.

Even Democratic Senator Maria Cantwell, a supporter of net neutrality, was skeptical of the proposal, albeit for different reasons.

“I am concerned that it is not as bold as it should be. We need a bold plan,” she said in a statement.

Jeffrey Silva, a telecommunications policy analyst with Medley Global Advisors, warned that a decision to act without consensus in Congress “could play out in an animated -- if not downright hostile -- manner in congressional oversight and appropriations settings in 2011.”

Even if the rules are adopted, the agency could also face further legal challenges.

“The open Internet debate has advanced in a tortured manner to a new stage, but it is likely far from over,” Silva added.

Additional reporting by Emily Stephenson; Editing by Tim Dobbyn

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