Broadband Cable Association of Pennsylvania


May 13, 2014

With activists camped outside his headquarters and the nation's top technology companies bashing proposed Internet rules, Federal Communications Commission Chairman Thomas Wheeler is facing a backlash over his plan to create Internet fast lanes and slow lanes.

Opponents of the proposal say Wheeler has sold out to the telecom lobby, and warn of Internet haves and have-nots. But supporters say Wheeler is constrained by a federal appeals court ruling and is adapting existing laws to a modern communications technology. His proposal will be released when the FCC meets Thursday - if he has the votes. The proposal has reignited the national debate over "net neutrality" and whether to regulate the Internet. Net neutrality, or open Internet, is the principle that all Internet traffic should be treated the same by network operators such as Comcast Corp.

More than 34,000 public comments have been submitted to the FCC since mid-February, when the agency announced it would consider new rules. Wheeler seems to have been surprised by the reaction to his fast-lanes, slow-lanes proposal, and on Monday retreated somewhat. An agency official confirmed that Wheeler's proposal had been reworked and would be circulated to commissioners. "It's a huge gift to Verizon and the other [Internet service providers] because it is exactly what they have been asking for since 2006," Marvin Ammori, an adviser to technology start-ups and a Washington telecommunications lawyer, said of Wheeler's proposal to designate lanes.

Comcast is the nation's largest residential Internet broadband provider and has proposed to buy Time Warner Cable Inc. for $45.2 billion. Federal regulators are separately evaluating an interconnection arrangement between Comcast and Netflix in which the online-streaming company now pays to connect directly to Comcast's network to access Xfinity broadband subscribers. David Schaeffer, the top executive at Cogent Communications, has said Comcast is using its size to exact a virtual toll on Internet traffic with the Netflix deal. Schaeffer testified last week at a House Judiciary Committee hearing against the proposed Comcast acquisition of Time Warner Cable.

Comcast argues that the Netflix interconnection deal benefits Netflix and that Schaeffer is upset because Cogent previously provided Internet services to Netflix that are no longer necessary. Under Wheeler's proposal, Internet companies could pay cable companies and Internet network operators fees to deliver bits of information faster to subscriber homes. Some say this could give competitive advantage to established companies that can afford to pay for faster Internet lanes and hurt resource-poor start-up companies that would be stuck in slow lanes, businesses have said.

The nation's largest technology companies - Amazon, Dropbox, eBay, Google, Netflix, Microsoft, and others - sent a letter on May 7 to Wheeler and the FCC commissioners saying fast-lane/slow-lane rules could "enable phone and cable Internet service providers to discriminate both technically and financially against Internet companies and to impose new tolls on them." The letter added that this could be "a grave threat to the Internet." The FCC says Wheeler's proposal will encourage investment in the Internet and contains safeguards against abusive practices.

Wheeler needs the support of two FCC commissioners in addition to himself. They most likely would be the two Democrats. But one of those, Jessica Rosenworcel, said last week the proposal should be delayed a month. The other Democrat is Mignon Clyburn. Wheeler also is a Democrat. The commission's two Republicans, Ajit Pai and Michael O'Rielly, are unlikely to support Wheeler's proposal, observers say. Once released to the public, Wheeler's proposal will undergo a lengthy review. Wheeler was appointed to head the FCC by President Obama. He previously headed the cable industry's trade association. Washington observers say it appears that he has lost control of the issue; an unnamed FCC official has called it a "debacle."

Popular Resistance, an Occupy Wall Street-type group, is protesting Wheeler's proposal outside the FCC headquarters and calling for the agency to regulate the Internet like an old-fashioned phone company as a "common carrier." Kevin Zeese, a protester, said a handful of people had been sleeping outside the FCC in tents and a lean-to. "The key concern is that [Wheeler] is not confronting whether the FCC serves the public interest or whether the FCC serves corporate interests," he said. Philadelphia Inquirer

AT&T Inc. is close to sealing a takeover of DirecTV that could put a value of nearly $50 billion on the satellite-television provider, people familiar with the matter said. The two sides are discussing a deal that would involve a mix of cash and AT&T stock, these people said. Dallas-based AT&T would likely pay a premium to DirecTV's share price Monday, one of the people said. An agreement could be reached in two weeks if not sooner, according to the people. DirecTV's shares were up 5%, or $4.57, at $91.73 in after-hours trading after finishing down less than 1% at $87.16 in 4 p.m. Nasdaq Stock Market trading on Monday. The parties are discussing a price for the El Segundo, Calif., company in the low to mid-nineties per share, one of the people said. At $95 a share, a deal would value DirecTV at nearly $48 billion according to a share count in DirecTV's latest quarterly report.

AT&T is expected to pay for any deal mainly with stock, one of the people said. For AT&T, using stock to help pay for such a transaction has the benefit of limiting its borrowings and thus helping protect its credit rating. But the more stock it issues, the greater its dividend obligations, which is another consideration the company is grappling with, some of the people said. A deal could boost the flow of cash that AT&T could use to pay its dividend and fund a build out of its broadband Internet infrastructure, analysts have said. It also comes as AT&T increasingly views video-whether via pay TV service or delivered over the Web or its wireless network-as central to its future.

Adding satellite TV capabilities also could allow AT&T to free up valuable bandwidth on its Internet connections to customer homes. Barclays estimates a deal could be financially attractive to AT&T at a price of up to $105 a share, depending on how deeply the companies can cut costs and the mix of stock and debt used to pay for any acquisition. For DirecTV, a deal comes as its subscriber growth has slowed sharply in recent quarters, reflecting a broader stagnation in the U.S. pay TV market. While cable companies have been able to offset declines in video subscribers by selling broadband, satellite operators can't offer Internet access services at speeds that are competitive with cable and phone companies, due to technological constraints. A tie-up with AT&T would give DirecTV a way out of the broadband dilemma.

The talks come after Comcast Corp. shook up the broader telecom and pay TV industries in February with an agreement to buy Time Warner Cable Inc. for $45 billion, a deal that would create a giant dominating the country's major markets. Dish Network Corp. Chairman Charlie Ergen sees the logic of his company-the other major competitor in the satellite TV market-merging with DirecTV, but openly declared last week that he can't afford to outbid AT&T. DirecTV and Dish attempted to merge more than a decade ago, a combination that was squashed by regulators. There is no guarantee AT&T and DirecTV will strike a deal in the time frame envisioned. The companies have come close to striking a combination before, only to see it fall apart over issues including price, one of the people said.