A federal appeals court swept aside government regulations designed to ensure equal access to the Internet, raising the prospects of higher fees for consumers and more barriers for start-ups seeking to compete online.
The decision Tuesday could allow AT&T Inc., Verizon Communications Inc. and other Internet service providers to charge the likes of Netflix and YouTube more money to deliver movies and video to their customers.
The ruling also throws into disarray the efforts of the Federal Communications Commission to limit telecom and cable firms from discriminating against certain Internet traffic by slowing speeds, impeding access or raising fees.
The issue, known by the wonky term "net neutrality," involves complex technical and policy rules. But at its core, the concept comes down to a classic debate about how far government could and should go to ensure a level digital playing field.
"There is the potential for the world to change substantially" in terms of how the Internet is run, said Jeffrey Eisenach, director of the Center for Internet, Communications and Technology Policy at the American Enterprise Institute think thank. "This is a big deal."
The FCC, which long has made net neutrality a top priority, faces once again a tricky calculation about how to balance the need for consumer and small-business protections against a desire to let the free market run its course.
"I am committed to maintaining our networks as engines for economic growth, test beds for innovative services and products, and channels for all forms of speech protected by the 1st Amendment," FCC Chairman Tom Wheeler said.
The agency will consider appealing the decision or taking other options, he said, "to ensure that these networks on which the Internet depends continue to provide a free and open platform for innovation and expression and operate in the interest of all Americans."
In the short term, the ruling left big telecom companies, small businesses, government agencies and consumers scrambling to understand its effect and making their cases about how they believe the FCC should proceed.
The fear among net neutrality supporters is that absent strong regulations requiring service providers to treat all traffic equally, the Internet eventually becomes a realm of digital haves and have-nots.
Telecom companies could let big Internet companies with deep pockets pay for fast lanes on the Internet and pass those costs on to their customers, while other online companies are stuck at slower speeds.
Or they could block access to certain apps or Web services that compete with their own. Or they could levy extra charges on consumers who spend more time streaming or downloading big files over the Internet.
The telecom and cable industry has fought net neutrality rules repeatedly over the years. The carriers said that building and maintaining the infrastructure that runs the Internet were costly. As such, they needed flexibility in the way they charged for those services to recoup their investment and continue to improve services.
Despite the ruling, Verizon, which filed the court challenge, and Comcast Corp. said they would continue to support an open Internet. Comcast is obligated to follow open Internet rules into 2018 as part of a settlement it signed when it acquired NBC Universal in 2011.
Verizon also reiterated its commitment to keeping the Internet open, but it said the ruling would allow for improvements.
"Today's decision will not change consumers' ability to access and use the Internet as they do now," the company said. "The court's decision will allow more room for innovation, and consumers will have more choices to determine for themselves how they access and experience the Internet."
Last week, AT&T disclosed a new plan it called Sponsored Data that would charge Netflix, YouTube and other content providers more money to allow AT&T mobile customers to stream movies and videos without exceeding data limits. The company insisted the plan did not violate net neutrality rules.
Tuesday's ruling will open the door to more of those types of sponsorship deals, said David Kaut, an analyst at the investment firm Stifel, Nicolaus & Co.
The ruling by a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit stems from the FCC's latest attempt to thread that needle between free market and consumer advocates with its open Internet regulations.
The 2010 rules were designed to force telecom and cable companies to treat all online traffic equally. The agency had been forced to revisit the issue at that time after losing an earlier high-profile net neutrality case to Comcast.
Entrepreneurs insist that a level digital playing field is essential to guaranteeing that the next generation of entrepreneurs has a shot at unseating giants such as Google Inc. and Facebook Inc.
Lee Olds, a 53-year-old retired software developer, said losing net neutrality means it is less likely for small companies to disrupt established business models in the way that Twitter Inc. and Amazon.com Inc. were able to do.
"If a company wants to do something like that, they'll have to be affiliated with somebody who is providing access to the houses, like one of the big cable companies," he said.
Democrats and Republicans, who have been fighting over Internet access rules for nearly a decade, seized on the latest ruling to bolster their cases.
Democrats, including President Obama, said that the FCC needed to step in with clear rules preventing broadband providers from charging some companies higher prices to carry their content — or even worse, from blocking it — and that those rules would keep the Internet open for innovation by small entrepreneurs.
Republicans argued that there had been no widespread abuses. They said network neutrality rules were a regulatory solution in search of a problem and could squelch innovation by opening the door to more regulation.
Besides appealing the case, which many legal observers said was unlikely, the FCC could take a wait-and-see approach to track whether carriers make any changes that harm consumers or start-ups. That could result in a backlash, which might lead to more popular and political support for tougher rules.
Consumer advocates hope the FCC also will reconsider reclassifying Internet service providers as Title II common-carrier services, like telephone companies, rather than keep them classified as information services. In its ruling, the court said the FCC exceeded its authority because of the way these companies were classified.
If the FCC were to reclassify Internet providers, they argued, it would be able to apply the anti-discrimination and anti-blocking rules that were struck down Tuesday without fear of being invalidated again.
"There's no legal challenge — there's a political challenge" to that strategy, said Michael Weinberg, acting co-president of Public Knowledge, an open Internet advocacy organization. "Internet service providers are strongly against Title II regulation, and members of Congress have spoken out against Title II regulation."
Khalil Brown, a 20-year-old information technology student at the New Jersey Institute of Technology, said he didn't think Internet providers should be able to pick winners and losers based on what content company gets preferential treatment.
"You can get into a situation where someone like Verizon has a disagreement with Netflix, for instance," he said. "They could theoretically throttle Netflix's services and that would be a big issue."
O'Brien reported from San Francisco, Puzzanghera from Washington and Rodriguez from Los Angeles.Copyright © 2014, Los Angeles Times