Federal Communications Commission (FCC) Chairman Julius Genachowski has developed a “middle-ground” framework for “preserving the freedom and openness of the Internet” that subjects broadband internet service providers (ISPs) to certain sections of the decades old Telecommunications Act normally reserved for wireline and cable operations.

This is a big win for supporters of the net-neutrality movement or those who want rules in place that prevent ISPs from dictating what content consumers have access to and at what speeds. 

Mr. Genachowski stated that his “third way” falls in-between heavy-handed regulation that can chill investment and innovation, and a do-nothing approach that could leave consumers unprotected and competition unpromoted.

The plan comes a month after the D.C. Circuit Court of Appeals ruled that the FCC did not have the legal authority to order Comcast Corporation (CMCSA) to stop blocking and delaying customers from uploading data through peer-to-peer file sharing protocol BitTorrent.

In a stroke of irony, the government agency did not pay much mind to the illegal nature of most movies, mp3s, video games, and software being transferred through the BitTorent network, and merely objected to Comcast’s use of content filtering technology.

Comcast defended its actions by claiming that if its network is not properly managed, users of bandwidth intensive P2P sites may inhibit other customers’ ability to watch videos, play video games online, or use VoIP services like Skype and Vonage (VG).

The appeals court’s view was supported by a 2002 Bush Administration decision to propel a nascent broadband industry by calling the Internet an “information service” and leaving it largely unrestricted.

The FCC thought its “ancillary” power would be sufficient to carry out its mission of preventing ISPs from “restricting lawful innovation or speech, or engaging in unfair practices” and allow it to institute its National Broadband Plan, which was released on March 16, 2010.

However, the Commission’s hopes were dashed when the court decision effectively stripped the FCC of its ability to interfere with ISPs’ operations.

This will likely change when the FCC commissioners vote whether or not to adopt the proposal since three of the five have already voiced their support. The three proponents, including Mr. Genachowski, are all Democrats and the two opponents are Republicans, which underscores the intensely partisan nature of the issue.

In a joint statement, the two Republicans, Robert McDowell and Meredith Baker, said, “This proposal is disappointing and deeply concerns us” and, “It is neither a light-touch approach nor a third way."

Content providers Google (GOOG), Amazon (AMZN), Netflix (NFLX), eBay (EBAY), and other members of the Open Internet Coalition, praised the commissioner’s plan as it ensures that they won’t be forced to pay extra for preferential access to service providers’ pipes.

For years, cable, DSL, and fiber providers have claimed that these companies are “free riding” on their network by gobbling up enormous amounts of bandwidth but not chipping in for operating costs or the extraordinarily expensive infrastructure build-outs.

In addition to content providers’ obvious motivation to avoid added expenses, they claim that paid prioritization would end up stifling innovation, and in turn, hurt consumers. In a February 2009 comment to the FCC, Google’s legal representatives argued, “While broadband providers’ own services and incumbent players who can afford to pay will get access to a special “fast lane,” start-up innovators, small businesses, non-profits, individual users, and many other players will be effectively consigned to the “slow lane”… Rather than an Internet in which new ideas succeed or fail based solely on their own merits and what user’s desire, innovation will be driven by which entrenched entities can cut the best deals with broadband providers.”

Verizon (VZ) also voiced its opinion to the FCC, saying that consumers will be forced to bare the entire brunt of network costs if the company is not permitted to charge content providers. Representatives go on to say that this effect, combined with the uncertainty regarding the financial repercussions that increased regulation may have on their business, will cause delays in capacity and network functionality investment, which will subsequently lead to reduced innovation.

Verizon and AT&T (T) have already confirmed their willingness to fight the plan in court, and it could be years before the matter gets resolved. Tom Tauke, Verizon executive vice president said this in a statement, “We believe that the chairman’s stated approach is legally unsupported.  The regulatory and judicial proceedings that will ensue can only bring confusion and delay to the important work of continuing to build the nation’s broadband future.”

Comcast and Time Warner Cable (TWC) took more of a wait-and-see stance with the former saying, “we are prepared to work constructively with the Commission to determine whether there is a 'third way' approach that allows the Commission to take limited but effective measures to preserve an open Internet and implement critical features of the National Broadband Plan, but does not cast the kind of regulatory cloud that would chill investment and innovation by ISPs."
Mr. Genachowski believes his new rules will lead to further build outs in the nation’s broadband network, advancing the United States in the worldwide broadband penetration rankings. Gartner Research reported that at the end of 2008, the percentage of American households connected to the broadband Internet was 60%, putting the U.S in 14th place worldwide.
The commissioner says that classifying broadband Internet as a “telecommunications service” will allow the FCC to take some of the $9 billion of funds currently dedicated to legacy telephone service, and realign them toward broadband development.

The National Broadband Plan highlights some other ways the government might facilitate infrastructure deployment, including expediting the resolution of rights-of-way disputes or conflicts over ISP’s installing infrastructure in certain areas, as well as “dig once” policies that would allow joint deployment among providers.

The commission made clear that it does not intend to regulate broadband prices, force ISPs to share infrastructure or give itself greater authority than it had pre-Comcast. It also said measures will be put into place to prevent regulatory overreach.

Assurances aside, investors will likely remain skeptical that the FCCs new role won’t hinder ISPs results until the legal process commences and the plethora of questions buzzing around the telecom world get some answers.