Genachowski, Man Up! And Silicon Valley, Wake Up!

FCC Chairman Julius Genachowski

The Federal Communications Commission (FCC) just called off the “closed door” network neutrality negotiations it was conducting between major ISPs, Google (s GOOG), Skype and the Open Internet Coalition, after news broke Wednesday afternoon that Google and Verizon (s VZ) had reached an independent deal on the issue outside of the FCC negotiations. The end of these talks, which had been roundly criticized because they were being held in secret, may be a sign of hope for the FCC to push ahead with the public debate. However, it’s more likely another example of how powerless the agency has become. The FCC released a statement today from Edward Lazarus, FCC chief of staff, saying:

“We have called off this round of stakeholder discussions. It has been productive on several fronts, but has not generated a robust framework to preserve the openness and freedom of the Internet – one that drives innovation, investment, free speech, and consumer choice. All options remain on the table as we continue to seek broad input on this vital issue.”

The FCC decision comes less than 24 hours after hysterical and confused reports of a Google and Verizon deal on net neutrality began circulating around media outlets and Washington. I wish I could tell you what’s going on behind the scenes and how exactly Google and Verizon plan to compromise, but the general framework seems to abandon the idea of network neutrality for wireless networks and may involve some pay for prioritization.

So far, Google and Verizon have reportedly come to an agreement that discriminating against some traffic will be permitted on wireless networks, but not wireline networks (which we should have realized already given how closely the success of Google’s Android platform is tied to Verizon’s wireless business). The deal may or may not involve paying for prioritization of content. (For a closer look of the issues they’re likely discussing check out this filing from January when Google and Verizon laid out their points of agreement and disagreement.)

Aside from the details, the bigger issue is that the FCC has been neutered, and Silicon Valley had a small part to play in the operation. Technology companies didn’t hold the knife, but they’re not protesting either, at least not in an effective way that Washington understands. All the net neutrality videos hosted on YouTube aren’t going to change things; votes and lobbying will. So, if in the not-too-distant future, Google and the big ISPs are the gatekeepers to the Internet for media, video and applications, here’s how it all went down:

The Beginning of the End for the FCC
When President Obama named Julius Genachowski the head of the FCC in the middle of 2009, the agency was in sorry shape after years of effectively kowtowing to the big telecommunications firms. The U.S. broadband network was in sad shape as well, unless one was lucky enough to live in an area with a cable provider that was deploying DOCSIS 3.0 or within range of Verizon’s fiber network. An FCC survey this year discovered that 78 percent of the U.S. has only two broadband providers to choose from, while 13 percent have only one.

The numbers are important, because one of the bulwarks against nefarious activity in terms of discriminating against certain types of content is robust competition. The line of thinking is that if AT&T blocks certain files, the customer can simply find an ISP that doesn’t. In practice, this isn’t a very effective threat because in some areas, the alternatives are crappy DSL lines, satellite broadband or nothing.

The new FCC ,with Genachowski at its head, was going to change all that. He was a businessman. He worked with startups. He decided to champion network neutrality, not only for wireline, but also for wireless access. He was going to be a thorn in the side of the big incumbents and agitate for innovation, consumer rights and change. At night, he snuggled up to an iPhone and an Android handset.

Right. Genachowski may not be the quintessential politician, but his agency lives within the political system where the incumbent ISPs are accustomed to fighting, and this is where he failed. The mortal wound to net neutrality — and the FCC as an agency — came in April, when a federal appeals court struck down the FCC’s ability to make rules pertaining to broadband. This decision, ironically, was tied to the previous FCC’s one moment of consumer advocacy: its decision to censure Comcast for blocking P2P files on its network.

Comcast (s cmcsa) sued, and the results of that lawsuit kicked off the mother of all fights for the FCC: reclassification. At issue was whether the FCC could regulate broadband as an information service (GigaOM Pro sub req’d) , considerably weakening the agency’s ability to do anything with regard to broadband, or as a transport service. Reclassification could have given the FCC all kinds of powers that it currently exercises over the analog phone lines. Basically, could the FCC as an agency move its regulatory powers into the modern age?

The “Third Way” is a Path to Purgatory

Suddenly, the issue of reclassification became far more important than network neutrality. The telecommunications firms pulled out the big guns and went to Congress. Congress obliged and started sending the FCC letters saying that it shouldn’t “regulate the Internet” and that any changes in telecommunications law needs to come from Congress, rather than the FCC.

The FCC proposed a compromise path that would give it more powers but also leave the ISPs relatively unregulated in ways that would be anachronistic, calling the path the “third way”. This third way would give the FCC the authority it would need for network neutrality, Universal Service Fund reform, privacy regulation, and other issues. But now, the FCC was stuck between a rock and hard place. Congress was on one side and on the other, years of legal wrangling in the courts if the FCC implemented its third way plan and ISPs subsequently sued (which they would).

So in an attempt to get something out of this mess, the agency focused on network neutrality and toned down its reclassification efforts. Basically, it decided that instead of stitching its mortal wound shut, it would apply a very public Band-Aid and live to fight another day. But given its weak position after the Comcast ruling, that Band-Aid took too long to apply, and Google and Verizon went out on their own. Now it looks like the FCC may not get a bandage after all.

Instead, it will lie there bleeding while the industry takes over the network neutrality regulations and comes up with a compromise that works for Google, Verizon, and possibly those who met behind closed doors at the FCC. Those folks include representatives of Skype, AT&T (s att), the National Cable and Telecommunications association, and the Open Internet Coalition, which is also somewhat neutered because Google is a member, and Google is now in bed with the ISPs.

What it Means for the Valley and Consumers

As Google and Verizon work out their compromise and promote whatever version of network neutrality works for one of the largest telecommunications companies and the largest driver of web traffic, the effect on the startup ecosystem and consumers may take a while to appear. But warning signs are already planted. For example:

Consider what paid prioritization means for the nascent web television industry, which right now sometimes uses Google’s YouTube as a distribution platform. It’s great that Google may pay for their shows to get prioritization, but what happens if Google doesn’t like a show, or maybe it wants to run ads the creator doesn’t like? The Internet as an equal opportunity distribution platform is subtly changed.

If wireless is utterly exempt from the network neutrality debate, the FCC’s hope that mobile broadband will save folks from a lack of competition becomes moot, because a wireless network that can discriminate against traffic becomes sub-par compared with a wireline network that doesn’t.

The FCC has abdicated itself from deciding on these issues by backing off reclassification and and now shutting secret negotiations to broker a deal on net neutrality. Perhaps Chairman Julius Genachowski knows the efforts to broker a net neutrality deal are a lost cause, so it may as well be lost out in the open. But absent any agreement, the bigger players in this fight are making their own deals. Instead of acting like a powerful regulator protecting web innovation, Genachowski is letting others take the helm.

But by staying out of Washington politics and pinning its hopes on grassroots efforts, Silicon Valley is squandering its opportunity to have a voice. Right now, Google is the primary voice Silicon Valley has, and as it stands, Google appears to be selling the Valley down the river.