The FCC--which has long sought to foster a competitive and unregulated information services industry--has radically changed course. Since 1980, the FCC’s Computer Rules have required local telephone companies (such as Verizon and the former SBC) to provide ISPs with stand-alone transmission service on just, reasonable and nondiscriminatory terms. At the same time, the commission has vigorously protected ISPs from the sort of economic and social regulation that has long been imposed on conventional telephone companies. However, in recent months, the FCC has adopted new rules governing “broadband wireline Internet access services” that remove regulatory obligations on the local telephone companies, while imposing regulation on ISPs. The results could have a significant effect on the market for broadband information services, such as Voice over Internet Protocol (“VoIP”), Internet access and content-based online services.

In the Broadband ISP Order, the FCC ruled that, following a one-year transition period, local telephone companies that provide broadband Internet access over their own facilities will no longer be required to comply with the Computer Rules. As a result, ISPs will no longer have a legal right to purchase broadband transmission services from the local telephone companies at regulated, tariffed rates.

The FCC justified this action by stating that the Computer Rules were developed for the “one wire” world of the 1980s, in which ISPs had to obtain transmission service from a local telephone company in order to reach their customers. The commission asserted that the Computer Rules are no longer necessary because “a wide variety of competitive and potentially competitive providers and offerings”--such as cable broadband transmission, satellite, wireless and power line--are “emerging.” The Commission went on to conclude that the Computer Rules actually harmed ISPs by decreasing operators’ incentives to invest in broadband infrastructure. The Commission also noted that elimination of the Computer Rules would result in telephone companies being regulated in the same manner as cable operators, which generally are not required to provide “open access” to ISPs.

At the same time that the FCC released the wireline carriers from their historic regulatory obligations, the agency asserted that the Communications Act gives it the right to impose on currently unregulated ISPs regulatory obligations that “mirror” those traditionally imposed on telephone companies. In particular, the FCC asserted that the Communications Act gives it authority “for any consumer protection, network reliability, or national security obligation that we may subsequently decide to impose on wireline broadband Internet access service providers.” The FCC also asserted the right to require wireline broadband ISPs to make payments to the Universal Service Fund, and to comply with disability access requirements that “mirror those that Congress applied to telecommunications carriers” in the Communications Act.

The FCC’s decision is likely have a far-reaching impact. Rather than purchasing broadband transmission services from local telephone companies at regulated, tariffed rates, ISPs that want to provide a high-speed service will need to either: (1) negotiate commercial agreements with telephone companies and cable operators; (2) deploy their own transmission facilities; or (3) be acquired by a facilties-based operator. Negotiating commercial agreements may be difficult. Several major telcos are already discussing the possibility of charging premium prices to ISPs that use their network. The end result is likely to be significant consolidation in the U.S. information services market. This, in turn, could lead to higher prices, reduced innovation and less service diversification.

At the same time, introduction of new regulations could slow deployment of new services, such as VoIP, which have generally been treated as unregulated information services. The FCC has already ruled that “interconnected” VoIP providers must comply with existing rules--previously applied only to telephone companies--requiring operators to provide emergency operator services and assistance to law enforcement. Because the FCC has not adopted a definition of what entities constitute “wireline broadband Internet access providers,” the FCC could seek to apply these regulatory requirements to any service provider that offers a suite of IT/information services that includes the ability to access the Internet over a broadband wireline connection.

The FCC’s move is part of a larger trend. The agency appears to have abandoned efforts to foster services-based competition, in order to create incentives for telephone companies, cable operators, and wireless providers to deploy infrastructure. At the same time, the agency seems intent on “leveling the playing field” by imposing certain types of telephony regulation on services-based providers, especially VoIP and Internet access providers.

The FCC appears to be taking a very different approach than European regulators. In the United Kingdom, for example, Ofcom has pressed British Telecom to agree to a sweeping network reorganization, which will effectively separate the wholesale and retail parts of the company. The stated goal of this reorganization is to facilitate the entry of new services-based competitors into the market. Over time, Ofcom hopes, some of these entrants may choose to deploy their own infrastructure.

The FCC’s order eliminating the Computer Rules has been appealed. A court decision is expected later this year. The U.S. Congress is also considering legislation that would restrict facilities-based providers’ ability to limit customer access to non-affiliated ISPs.

Jonathan Jacob Nadler is a partner at Squire, Sanders & Dempsey LLP.