Abrupt reversal precedes FCC announcement of network neutrality proposals

Here is one of those little coincidences that make Washington such an interesting place to work.

Regular readers know about the friction among Apple, maker of the iPhone; AT&T, the iPhone’s broadband provider; and Google Voice, a VoIP service (among other things) that seeks to carry the calls of iPhone users.

The iPhone and its close competitors, like the Palm Pre, have two ways to access broadband: a “3G” channel provided by the carrier and paid for as part of the subscriber’s data plan; and Wi-Fi, much like that in a laptop, which of course works only at Wi-Fi-equipped locations. Apple has long allowed VoIP on the iPhone’s Wi-Fi link, but never on the 3G channel. This matters to users, because relatively few of the locations where a person might want to place or receive a call have Wi-Fi service. AT&T, in responding to an FCC inquiry, was blunt about why it (and Apple) block VoIP from 3G: VoIP is a much cheaper substitute for minutes of voice service. Its use thus cuts into carrier revenues, including the revenues needed to recover the subsidy that lets Apple price the iPhone at far below its actual cost. Read more here.

But now AT&T has abruptly reversed course.

It will allow VoIP on the iPhone 3G channel after all. If you hear loud cheers from the general direction of Mountain View, CA, that’s the Google folks breaking out the Red Bull. Apple still has not formally approved the Google Voice app, but a big obstacle is now out of the way.

The coincidence? Exactly one day before AT&T’s about face, the FCC announced the date, two weeks from now, on which it will formally propose its network neutrality rules. One of the key factors that precipitated the current surge of interest in network neutrality was a 2007 request from Skype, a VoIP company, asking the FCC to prohibit wireless companies (like AT&T) from blocking VoIP service. So the rules that might eventually be adopted, a year or two from now, may require action along the lines that AT&T took today.

Down here in the bunker we are a little surprised at the news. The wireless carriers have been erecting a protective wall of press releases that say network neutrality rules will bring about the end of technical innovation, social progress, and cheap cell phones. And AT&T’s decision may fundamentally change the economics of wireless phone service. We can expect vigorous marketing of VoIP services to iPhone users. That will probably cause a significant drop in paid-for voice minutes. Will AT&T start charging more for its data plan? Will Apple abandon the subsidy on the iPhone and start charging customers what the phone actually costs? AT&T may have brought us a little closer to a system in which customers have free choice and pay only for what they choose.

Sometimes the FCC can get the results it wants without actually regulating. Sometimes just announcing the date on which it plans to begin to consider regulating is enough.