Tim Wu has an intriguing piece in Slate Magazine in which he ponders the implications of AT&T’s announcement that it is seriously considering plans to examine all the traffic it carries for potential violations of U.S. intellectual property laws. (A similar idea is about to be foisted on UK ISPs by Gordon Broon & Co.)

“No one knows exactly what AT&T is proposing to build”, he writes. “But if the company means what it says, we’re looking at the beginnings of a private police state. That may sound like hyperbole, but what else do you call a system designed to monitor millions of people’s Internet consumption? That’s not just Orwellian; that’s Orwell.”

That’s just the civil libertarian aspect of the idea. The interesting thing is that the commercial downsides could be catastrophic — for AT&T.

The most serious problems for AT&T may be legal. Since the beginnings of the phone system, carriers have always wanted to avoid liability for what happens on their lines, be it a bank robbery or someone’s divorce. Hence the grand bargain of common carriage: The Bell company carried all conversations equally, and in exchange bore no liability for what people used the phone for. Fair deal.

AT&T’s new strategy reverses that position and exposes it to so much potential liability that adopting it would arguably violate AT&T’s fiduciary duty to its shareholders. Today, in its daily Internet operations, AT&T is shielded by a federal law that provides a powerful immunity to copyright infringement. The Bells know the law well: They wrote and pushed it through Congress in 1998, collectively spending six years and millions of dollars in lobbying fees to make sure there would be no liability for “Transitory Digital Network Communications”—content AT&T carries over the Internet. And that’s why the recording industry sued Napster and Grokster, not AT&T or Verizon, when the great music wars began in the early 2000s.

Here’s the kicker: To maintain that immunity, AT&T must transmit data “without selection of the material by the service provider” and “without modification of its content.” Once AT&T gets in the business of picking and choosing what content travels over its network, while the law is not entirely clear, it runs a serious risk of losing its all-important immunity. An Internet provider voluntarily giving up copyright immunity is like an astronaut on the moon taking off his space suit. As the world’s largest gatekeeper, AT&T would immediately become the world’s largest target for copyright infringement lawsuits….

Tim Wu is a great commentator on this stuff, and this is an especially good piece.