Wall Street Journal, January 6, 2006
By Dionne Searcy and Amy Schatz

Large phone companies, setting the stage for a big battle ahead, hope to start charging Google Inc., Vonage Holdings Corp. and other Internet content providers for high-quality delivery of music, movies and the like over their telecommunications networks.

BellSouth Corp. said it is in early talks with Internet movie companies and at least one gaming company with the aim of striking agreements on fees to guarantee fast content delivery over the Internet. Movielink LLC, a joint-venture of five major movie studios that offers movies to consumers over the Internet, said it has discussed the issue with BellSouth. Meanwhile, AT&T Corp. executives have expressed support for charging companies to ensure that their content gets priority delivery, and Verizon Communications Inc. Chief Executive Ivan Seidenberg yesterday said he might favor reaching deals with companies to do the same. "We have to make sure they don't sit on our network and chew up our capacity," Mr. Seidenberg told reporters.

The phone companies envision a system whereby Internet companies would agree to pay a fee for their content to receive priority treatment as it moves across increasingly crowded networks. Those that don't pay the fee would find their transactions with Internet users — for games, movies and software downloads, for example — moving across networks at the normal but comparatively slower pace. Consumers could benefit through faster access to content from companies that agree to pay the fees.

The size and structure of the fee systems remain to be worked out, and the regulatory implications aren't clear. But already, the phone companies are meeting heavy resistance from companies that say making them pay for priority delivery of their content amounts to holding them ransom, thus hurting competition and, ultimately, the consumer.

"They want to charge us for the bandwidth the customer has already paid for," said Jeffrey Citron, chief executive of Vonage. Customers who already pay a premium for high-speed Internet access, he said, will end up paying even more if online services pass the new access charges to consumers. "The customer has to pay twice. That's crazy."

Mr. Citron said he thinks that if the Bells tack on extra charges, cable companies that also provide broadband will soon follow. Vonage said it hasn't so far held talks with any phone companies about paying Internet access fees. Google executives have said they worry that broadband providers will exert too much power over content that travels on their networks if they start charging providers for delivery.

Smaller companies say they may not be able to afford paying for premium network access. And as the phone companies start to offer their own Internet-based content such as video and Internet-based phone services, they could gain an unfair advantage over rivals who are paying them fees to offer the same services.

The phone companies are motivated by a need to find new ways to make money from their networks as more and more customers turn to cable or Internet-based companies for less-expensive phone service. Further, the telecom companies argue that they have spent billions of dollars through the years to upgrade their networks so that users can effortlessly download content from Web sites such as Google and Yahoo — with little benefit to the phone companies themselves.

"During the hurricanes, Google didn't pay to have the DSL restored," said BellSouth spokesman Jeff Battcher. "We're paying all that money."

Indeed, the phone companies' share prices have sunk as investors have fretted over the costs of network upgrades even as they have snapped up the shares of companies using those same upgraded networks. Verizon's market capitalization is about $88 billion today, compared with $111 billion a year ago. Google, which relies in part on Verizon's network to deliver services to its many users, has seen its market capitalization balloon to about $133 billion from $53 billion a year ago.

Whether Wall Street will welcome the phone companies' effort to find new sources of revenue remains to be seen. But it has already sent ripples of concern through Washington, where regulators and lawmakers are sensitive about any proposals that could affect Internet access.

"We need a watchful eye to ensure that network providers do not become Internet gatekeepers, with the ability to dictate who can use the Internet and for what purposes," said Commissioner Michael Copps of the Federal Communications Commission. He helped press to get the FCC enforcement power over issues of "net neutrality" as a condition of recent mergers in the telecom industry. "Net neutrality" is the idea that owners of phone and cable networks can't dictate how a consumer uses the Internet or discriminate against any Internet content, regardless of the source.

The looming battle between phone companies and Internet content providers has parallels with the fight between local and long-distance phone companies of the 1990s, when upstarts sought free access to the regional phone companies' networks. Until recently, phone companies were required to treat all data sent across their high-speed networks equally and without discrimination. But last year, a Supreme Court decision cemented the FCC's authority to decide the rules for broadband Internet lines. The agency promptly deregulated Internet services, dropping rules that prevented the type of pricing plans now being proposed.

Historically, network providers have agreed to deliver Internet traffic on a "best efforts" basis without guaranteeing various levels of quality of service. That hasn't been a problem for the most popular Internet services, like email and Web surfing, because they aren't dependent on uninterrupted streams of data. Real-time videogames, phone service and video, however, demand more reliable quality, and network operators are trying to prioritize Internet traffic to meet increasing demand for those services.

Under a two-tier Internet system, the phone companies would be under pressure to provide an even higher-quality of service because paying for premium access would demand more than a "best efforts" guarantee. Cable and phone companies have already started offering multitiered pricing of broadband for consumers. And some cable companies have looked into ways of curtailing individual broadband customers from using too much bandwidth.

William Smith, chief technology officer of BellSouth, said he envisions charging content providers a fee based on the volume of material they send over BellSouth's network, as well as the bandwidth the content takes up. He compared his model to that used by Google, which charges advertisers more for ads with better display. BellSouth said it intends neither to restrict consumer access nor to block providers.

BellSouth said it has floated the idea of seeking a small percentage of the $2 to $5 that Movielink, the consortium of five studios, charges for every movie download. In exchange, customers could download the movies faster. "What we're saying is the application you want requires performance, and we'll make that available," Mr. Smith said.

Movielink thinks it could benefit from high-quality delivery of its products. "Movielink is certainly interested in increasing the quality of service to customers," said Chief Executive Jim Ramo, adding that the talks with BellSouth are still in the conceptual stage. "We're willing to explore a commercial relationship where we can get that done."

Critics of these ideas say that smaller Internet companies will be squeezed out of being able to offer their products at all. "They want to radically change the way they sell telecommunications service," said Mark Cooper, research director of the Washington-based Consumer Federation of America. "We're afraid that they're simply going to pick and choose who's going to win and lose."

This article is copyrighted material, the use of which has not been specifically authorized by the copyright owner. We are making such material available in our efforts to advance understanding of environmental, political, human rights, economic, democracy, scientific, and social justice issues, etc. We believe this constitutes a 'fair use' of any such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. For more information go to: http://www.law.cornell.edu/uscode/17/107.shtml. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.