April 28, 2006, 12:00 AM

Tug of War

(Page 2 of 3)

Not surprisingly, the telecommunications industry takes a completely opposite view. Faced with a trillion-dollar-plus expense of expanding the Internet’s backbone in the U.S. with the latest fiber optic lines into homes as well as businesses, the industry is pressed to find new revenue streams, says David McClure, president and CEO of the U.S. Internet Industry Association, a trade group representing telecommunications companies and others involved in providing Internet services and equipment.

“Telecommunications companies need to build broadband Internet lines to connect to local addresses on top of what they’ve already spent and they need to find creative ways to fund that,” McClure says.

AT&T; CEO Edward Whitacre suggests that telecommunications companies could a provide premium service for a higher rate, much the same as FedEx Corp. offers overnight deliveries at a higher fee than regular ground shipping.

It sounds harmless enough. Indeed, Whitacre and others in the telecommunications industry make no apologies for the suggestion, even after it caused an uproar among web site operators over the potential impact on network neutrality. “It’s not a bad idea, because e-commerce companies are now getting content distribution for free,” McClure says, echoing a statement by Whitacre. “They do nothing to help the network they depend on.”

Taking that argument a step further, McClure notes that consumers bear most of the cost of maintaining the public Internet through Internet access fees. “If we make business pay a little more, while even letting consumers pay less, we could more easily cover the cost of building more broadband,” he says.

But the idea of providing a special Internet pipe for transmitting preferred content for a higher price-while leaving lower-tier Internet content providers gasping for transmission speed-is too impractical to ever carry out, McClure says, adding that Whitacre was only speaking hypothetically.

“Nobody owns the Internet, which is a network of 1,000 networks that agree to work under a common set of protocols,” McClure says. “If I’m AT&T; and want to create a system to give expedited transmissions for Amazon.com, I can possibly do that on my own network. But Amazon doesn’t just travel on my network; any transmission could travel over a hundred networks that AT&T; has no control over. A packet of data traveling from Washington, D.C., to Richmond, Va., may go by way of Ukraine.”

Because the Internet is made up of hundreds of smaller networks, any Internet-wide system of setting usage fees would require cooperation among all of them, McClure says. “We don’t see any way to make that work, and we’ve been looking at it for a long time,” he says.

While the telcos need to devise new means of raising revenue, it’s unclear yet how they’ll do that, he says, adding: “Network neutrality is a phantom problem.”

Hornets’ nest

But Thompson and others working to protect network neutrality on behalf of retailers are unconvinced of the phantom argument. The fact that AT&T; would raise the prospect of charging a fee for premium Internet usage, hypothetical or not, combined with the telcos’ need for new revenue streams, is reason to be wary of AT&T;’s and Verizon’s long-term intentions, Thompson and others say. Throw in the fact that recent government action has reduced regulatory oversight of the telcos’ Internet role, and the phantom problem turns all too real, they say.

Moreover, the lack of clarity regarding the telcos’ plans for raising their Internet revenue is raising suspicion and turmoil among those out to guard network neutrality.

“The telecommunications companies have created a hornets’ nest, and the hornets are buzzing about,” Thompson says. “On the one hand, the telecommunication companies say they’d like to experiment with new business models and new revenue streams, but they then give no real insight into what value-added service they’d offer.”

Regardless of recent statements by Whitacre and other telco executives, there are other reasons retailers should be concerned, Thompson adds.

For one thing, the federal government has loosened oversight over telecommunications providers regarding the Internet. In its “Brand X” decision last year, the U.S. Supreme Court upheld a Federal Communications Commission finding that broadband cable companies providing cable modem Internet access were exempt from the common carrier regulation designed to support network neutrality by preventing telecommunications companies from restricting access to telephone lines. The FCC, to provide parity between cable and telecommunications companies regarding Internet access, then issued its “Wireline Broadband Internet Access Order,” which effectively deregulated broadband services offered by the telcos. “So cable modem and DSL are on an equal playing field as two deregulated monopolies,” Corbett says.

Further concerns

Those deregulatory actions have set the stage for further concerns. At a recent Congressional hearing, telecommunications executives were asked if they could guarantee that they would not block Internet services or in any way favor some users over others, Corbett says. “They did not promise,” she says.

Moreover, telcos, which stand to lose market share in their traditional telephone network markets to new Voice over Internet Protocol telephone services, have been clear about their interest in getting involved with providing content over the Internet, Corbett says, noting that Verizon is working with The Disney Co. to provide TV programming over its fiber optic lines.

With TV programming beginning to merge more with retail e-commerce-a trend expected to mushroom as the new IPTV television-over-web standard becomes common and makes it easier to let viewers click to a retail web site to purchase something featured in a TV program-the telcos could be in a position to control both TV and online retail content, experts say. “All roads lead to IPTV,” Corbett says. “The telecommunications companies want to get into the TV market.”

Reducing the Internet’s value

The importance of keeping the Internet open goes beyond the interests of any single retailer or group of companies, The Merrick Group’s Krim and others say. Indeed, if the issue were just whether some companies would have to pay more than others to use the highest levels of broadband, retailers like Amazon, eBay and IAC/InterActive might not have the same incentive to support network neutrality.

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