ANALYSIS - Telecom sees offense as best defense against FCC

WASHINGTON (Reuters) - U.S. telecom giants fear a "nuclear option" that the Federal Communications Commission might turn to after a court ruling this week threatened the government's bold plan to revolutionize broadband use.

The plan would upgrade Internet access for all Americans and shift spectrum from television broadcasters to support the huge demand for smartphones and other wireless devices.

The big players in the industry -- AT&T Inc, Verizon Communications Inc and Comcast Corp, the biggest U.S. cable provider -- are afraid the agency will assert its authority over broadband by reclassifying it under an existing, tighter regulatory scheme.

That option is seen as among the most enticing for the FCC because it bypasses Congress and the Supreme Court -- the other two options, which could drag on with uncertain results.

The reclassification option would mean moving broadband to an existing set of rules governing telephone services rather than its current status as a lightly regulated information service.

For broadband providers, the option could mean more restrictions on pricing and a directive to share lines with competing Internet service providers.

Hints that the White House and FCC are considering the reclassifying option have sent the giant companies scrambling to mount multiple offenses -- through Congress and the courts.

"This third option has been called by some 'the nuclear option,'" wrote Craig Moffett, a telecom analyst with Bernstein Research.

The FCC might be willing to unleash that bomb, however, as it tries to ensure it has legal ground to carry out the broadband plan it unveiled last month.

A court ruling put aspects of the plan in limbo.

On Tuesday, a three-judge U.S. appeals court panel ruled that the FCC failed to show that it had the necessary authority to stop Comcast from blocking the use of online applications for distributing television shows and other large, bandwidth-hogging files.

The FCC acknowledged this week that the ruling does indeed question its authority over broadband, but it has vowed to press ahead.

PARALLEL TRACKS

With the ruling still fresh, AT&T and Verizon are studying the potential impact of the court decision on their businesses, but at the same time they are preparing for various scenarios.

Analysts say that the carriers will try to dissuade the FCC from reclassifying broadband and instead try to work within the current framework for light regulation of broadband.

Reclassification "would bring back a raft of regulatory obligations from the days of the monopoly telecommunications regulation," Moffett wrote.

The carriers will also prepare for a legal battle against reclassification move by the FCC. Legal challenges could take years to settle and bring uncertainty among companies trying to decide if they should make investments.

"If the FCC does reclassify broadband the carriers will be highly motivated to persuade Congress to replace reclassification with a broader revamp of the telecom laws," said Paul Gallant, an analyst with Concept Capital.

"Both (legal strategy and Congress) will take some time but they can pursue them on parallel tracks," he said.

Experts are unsure if the ruling in the end is a win or a loss for Comcast due to the potential for more regulations.

"They (Comcast) are victims of their own success," said Ben Scott, policy director at Free Press, which along with other public interest groups is urging the FCC to apply some of the basic common carrier principles to broadband networks.

Industry sources said AT&T and Verizon are not likely to accept any reclassification move by the FCC even if the agency explicitly states it will not require rate regulation and line sharing.

Analysts said companies are reluctant to accept those reassurances because they can be pulled in another administration.

"Bottom line, although (the court) decision is an immediate victory for broadband providers, they may have won the battle only to face a larger war," Stifel Nicolaus analyst Rebecca Arbogast said.

(Additional reporting by Sinead Carew and Yinka Adegoke in New York; Editing by Gary Hill)

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