Ari Fitzgerald and Dan Brenner explain the new FCC rules in our special video, whilst below, Dan goes on to focus on the "unreasonable discrimination" rule, the exemption of mobile operators and content delivery networks (CDNs).

FCC adopts network neutrality rules: What's next?

After months of contentious debate over its authority to act, the Federal Communications Commission (FCC) voted three to two last December to adopt network management rules for broadband Internet service providers (BSPs). The rules boil down to three concepts: transparency, no blocking, and no unreasonable discrimination for fixed broadband providers. Mobile broadband providers are subject to fewer restrictions, although the FCC will review those exemptions as mobile capacity grows through 4G.

Transparency. Fixed and mobile broadband providers must disclose the network management practices, performance characteristics, and terms and conditions of their services. This requirement will necessitate all BSPs to review disclosures made to customers, with particular attention paid as to how to describe performance characteristics.

No blocking. The FCC imposed a no-blocking rule on all providersas to lawful websites. As to applications, services, or devices, the "do not block" rule only targets fixed providers, with the proviso that mobile providers may not block VoIP or Skype-like applications. That means that mobile broadband providers may be able to block other applications or devices on their networks.

Non-discrimination. The prohibition on "no unreasonable discrimination" by fixed BSPs applies only to transmission of lawful network traffic. This appears to allow, but does not require, BSPs to intervene to stop pirated or child pornographic content. And while mobile BSPs were not subjected to the "no unreasonable discrimination" rule, it is unclear what forms of discrimination are now permitted regarding smart phones and the like.

The FCC Order declared that paid prioritization – where the BSP charges for a higher quality of service (QOS) or speed on its portion of an Internet transmission – is a cause for concern. At the same time, the FCC did not attempt to curb content delivery networks like Akamai – which many believe perform much the same paid priority function before traffic hits the BSP's network. Nor did the FCC apply transparency, no-blocking, or anti-discrimination rules to search engines like Google or applications like Skype, although some argued consumers would benefit by greater transparency and antiblocking regimes for these widely used information services.

On the other hand, the FCC gave BSPs considerable flexibility in relations with their end users (e.g., retail customers). Differential pricing based on speeds and bandwidth usage is permitted. Thus, a customer could arrange for QOS in downloading, say, a Netflix movie by paying its BSP more But, curiously, Netflix cannot make that deal with the BSP directly, on behalf of its customer, and bundle that enhanced download speed as part of its finished good.

The Order arose out of two proceedings: First was the FCC's "open internet" rulemaking, launched in 2009 as part of the Obama administration's effort to fulfil its 2008 "net neutrality" campaign promise. Second, the FCC tried to pick up the pieces left after the Comcast decision in April in the U.S. Court of Appeals. The Court found that the FCC lacked authority to regulate Comcast's treatment of Bit Torrent P2P traffic.

In response to Comcast and to put the FCC's authority on firmer footing, its Chairman, Julius Genachowski, proposed to reclassify BSPs as common carriers, referred to as "Title II" classification, on account of where carrier rules are found in the Communications Act. The FCC has explicit authority to regulate carriers. This would reverse the FCC's 2005 decision to classify BSPs as "information services" under Title I, a generally unregulated category. The FCC presented its proposal as a way to assure its authority, not a way to regulate the Internet heavily. It promised to forbear from applying most of Title II's rules in its reclassification. No matter; cable and telco ISPs bristled at the thought of reclassification and the potential for price regulation. And a majority of the House of Representatives sent letters to the FCC Commissioners stating that reclassification was a bad idea.

The FCC's December Order avoided reclassifying broadband Internet access as a Title II service, but instead maintained

the "information service" classification. It attempts to establish authority to impose net neutrality rules by referring to other provisions in the Commissions Act, as it must, under the "ancillary authority" doctrine. This courtmade concept permits the FCC to regulate, even without Congressional direction, if doing so allows it fully implement other responsibilities explicitly designated by Congress. In the Comcast case, the court found that the FCC hadn't attached its ancillary authority to any statute that justified its actions. The FCC tried to correct this in its December do-over.

This lack of air-tight ancillary authority was one of the two bases that the two Republican Commissioners found lacking in the Order, leading to sharply worded dissents. The view was seconded in January, soon after the Republican-controlled House of Representatives was sworn in. Hill leaders announced plans to annul the December Order, emphasizing that Congress has not delegated Internet management to the FCC.

The dissenters also pointed to a lack of "market failure" to justify the rules. In truth, only two net management complaints have really ever surfaced. There was a 2005 VoIP complaint (Madison River) that was quickly resolved. The other was the 2008 Bit Torrent case, which the parties had resolved well before the FCC issued its Comcast Order, an Order that manybelieve had all the subtlety of an "Angry Birds" attack.

With thin evidence of market failure, action was hard to justify on traditional grounds of regulating. The majority instead relied on its predictive judgment that rules were necessary to preserve an open Internet, given its more grievous view of past management incidents and incentives to repeat them. It emphasized that its rules struck a middle course, less onerous than the agency originally proposed.

Some major BSPs agree, as the Order tracks most of an October legislative compromise reached by many interested parties but not actually enacted. Some net neutrality advocates believe the Order falls far short of what the FCC should do. Nearly all agree that the grueling net neutrality debate sucked much of the oxygen out of the FCC, making it difficult to move forward on other issues.

The Order has broad implications. For instance, will EU authorities, which mandate third-party Internet service provider (ISP) access to create a competitive broadband market, nevertheless add U.S. net neutrality ground rules? Or is the answer to perceived unreasonable network discrimination by an EU ISP simply, switch your provider?

Other regulators may view the U.S. policy as a cue to greater Internet or media intervention. Consider the decision by China at the beginning of 2011 to restrict VoIP providers who compete with state-licensed wireline carriers. That result is the opposite of an open Internet. But it shares the view that the Government has an active role to play in Internet management to achieve desired policy outcomes. And the day before the FCC decision, the Hungarian Government adopted a media law allowing the party in power to fine broadcasters about 700,000 Euros for "unbalanced" coverage (the law may be rescinded.)

What's next? Any appeal will decide whether the FCC has underlying authority to adopt the Order, let alone whether these conditions were adopted arbitrarily in light of the record; or somehow violate a BSP's constitutional speech rights.

Expect, perhaps, a less definitive legislative result. Despite strongly expressed Congressional opposition, especially by Republican leadership, legislative success in undoing the Order is not likely. It would also require the President's signature or a veto override. But Congress could try to draft a new and improved version that would, at the least, end the dangling chad of FCC "ancillary authority".

In the meantime, those who favored even more stringent regulation will be looking for a test case to determine the limits of "unreasonable" discrimination in transmitting network traffic.