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Monday, May 10, 2010

Julius Caesar of the Internet

The Wall Street Journal

The FCC puts another industry under political control.

A federal appeals court ruled last month that the Federal Communications Commission lacks the authority to regulate the Internet. No worries, mate. This week the Obama Administration chose to "reclassify" the Internet so it can regulate the Web anyway. This crowd is nothing if not legally creative.

For the past decade, broadband has been classified as an "information service" and thus more lightly regulated than traditional telephone services. This has led to an explosion of new investment and Web innovation, but it hasn't sat well with Democrats who want more control over the telecom business, as well as with some Web companies (Google) that want more leverage over Internet service providers like Time Warner or Verizon.

FCC Chairman Julius Genachowski did their dirty work this week by announcing that he plans to reclassify broadband lines so his agency can regulate them under rules that were written for Ma Bell in the 1930s. This means subjecting the Internet to new political supervision—from the federal government and 50 state public utility commissions. The goal is to put one more industry under Washington's political thumb.

Even Bill Clinton's FCC, under Chairman Bill Kennard, had refused to go this far. "Classifying Internet access as telecommunication services could have significant consequences for the global development of the Internet," said Mr. Kennard in a 1998 speech. "We recognized the unique qualities of the Internet, and do not presume that legacy regulatory frameworks are appropriately applied to it."

Mr. Genachowski says he's merely hewing to the political middle, pursuing a "third way" on regulation that will "allow the agency to move forward with broadband initiatives that empower consumers and enhance economic growth, while also avoiding regulatory overreach."

But Mr. Genachowski's promise to put in place safeguards so broadband companies are subjected to "only a handful" of phone regulations is hardly reassuring. Even if he keeps his word, what prevents future FCC Chairmen from reversing course? If Google or some other big political donor doesn't get its way, its lobbyists will descend on the White House or Congress, which will lobby the FCC, which may well do their bidding.

Our reporting suggests that something like that may have happened in this case. All indications early this week were that the FCC wouldn't take such a drastic step. But when a Washington Post story reported that news, the liberal "consumer" lobbies went to the barricades, and Mr. Genachowski's team sequestered itself from other FCC commissioners for most of Tuesday. Late Wednesday, he broke the "reclassify" news. Perhaps they all had overnight epiphanies.

In any case, Mr. Genachowski has provided no evidence that the current regulatory approach is failing. The Supreme Court's 2005 Brand X decision reconfirmed cable broadband's current classification as an information service, and that regulatory certainty has led to a burst of capital investment and competition.

In the past five years, U.S. companies have invested $576 billion in communications equipment and structures, according to Bret Swanson of Entropy Economics. Add computers and software, and U.S. capital expenditures on information technology since 2005 have totaled $2.2 trillion. Telecom accounts for nearly half (47%) of all non-structure capital investment in the U.S.

The FCC decision adds a new element of political risk to these investments, which can only make companies more cautious. At a minimum, the FCC action will be challenged in court and introduce years of uncertainty at a time when the economy needs all the risk-taking and investment it can get.

At worst, it will lead to a new era of political meddling in Internet investment, bandwidth allocation, and no doubt much more. Google and others who are cheering now may not like where this ends up when, say, religious right groups start demanding FCC content regulations during the next GOP Administration.

Autos, health care, energy, Wall Street and now telecom. Is there any American industry this Administration doesn't want to run?