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Internet service providers (ISPs) are facing increasing government intervention over how they monitor the types of traffic that run over their networks. Content owners have long been pressing for greater efforts to stop online piracy of music and movies, but ISPs have tended to insist they are not willing or able to start policing their users.
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The legal arguments are largely untested, with ISPs and media companies offering differing interpretations of existing law. ISPs say that their role as "mere conduits" of information is enshrined in the E-Commerce regulations of 2002, adding that existing copyright law should provide sufficient protection for content owners.
But media lawyer Simon Baggs, a partner at Wiggin, says that European legislation also enables rights owners to secure an injunction against ISPs, requiring them to take action to stop infringement when they know it is occurring. "The 'mere conduit' defence is not a shield" against such injunctions, says Mr Baggs.
So media owners are joining file-sharing networks to capture data about computers swapping songs, and passing them onto ISPs with demands for action. Mr Baggs says that ISPs have been too slow to act on this information by warning infringing users, or throwing them off their networks. This apparent failure is prompting the government to threaten legal sanctions if ISPs don't curb piracy by spring 2009.
Data from a recent Wiggin survey of 1,600 internet users suggests that 70 per cent would cease "pirating" if they received a warning from their ISP. Nonetheless, ISPs argue it is technologically difficult to police their networks without impairing customers' experience.
Specialist network equipment providers - including London-listed Endace and Sandvine - say that their products could help to monitor web traffic. But hopes that they may be able to cash in on new UK regulations may be dampened by legal arguments in the US, which are tending in the opposite direction.
At a recent hearing, the Federal Communications Commission has been exploring allegations that cable operator Comcast has been acting inappropriately by blocking file-sharing traffic. The debate, while inconclusive thus far, has raised the profile of "net neutrality" advocates, who say telcos should not be allowed to discriminate against certain kinds of traffic.
Endace's customers are more diversified than Sandvine's; it recently partnered with Reuters to sell its network monitoring equipment into banks to monitor algorithmic trading speeds. But in general, these regulatory trends seem unhelpful to both London-listed telcos and filtering equipment providers.
This regulatory intervention could increase costs and legal risks for all UK ISPs; Carphone Warehouse, already a Sandvine customer, remains a sell (310p, 1 February 2008) at 304p. The US hearings have taken their toll on Sandvine's shares; they're now down 70 per cent on our sell tip (259p, 7 December 2007) following another warning today, and are high enough at 75p.
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-IC-1.9.0c-prod - 15/05/2009 11:00:33 - stuart.turner
