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Comcast (s cscma) said Monday that the content streamed over Microsoft’s (s msft) Xbox won’t count against user’s 250 gigabyte monthly usage cap prompting outrage among cap-hating websites and consumer groups. But the reality of the situation is that Comcast is within its rights. While we can lament the FCC’s failure to implement network neutrality rules that didn’t give Comcast a legal loophole, the regulations don’t ban such behavior directly.

The technical realities.

Comcast says streaming its video on demand service via the Xbox won’t count against its monthly caps because the traffic doesn’t go over the public Internet. And that’s true. Because Microsoft has ceded a lot of control to Comcast in order to get the authentication and other technical pieces it needed to make the Comcast Xfinity service available through its console, the traffic routed through the Xbox is fully managed by Comcast. It comes directly from Comcast’s private IP network to the authentication hardware inside the console and then is played on the TV.

Unlike content coming in from a service like HBO Go or Netflix (s nflx), which does go over the top using the public Internet, this travels from Comcast’s servers over its network, to hardware authenticated by Comcast to your TV. If you used your password to connect to Xfinity via an iPad in your home or on someone else’s home network you leave the Comcast network confines and those packets will count against your cap. Technically it’s an argument that holds water, but should it?

The legal waffling that led to this point.

What Comcast has done through its agreement with Microsoft is to create a specialized path through the public Internet. By conceding to Comcast’s demands over authentication and whatever else, Microsoft has extended Comcast’s network onto its device and created a fast lane over which Comcast bits can travel. I wrote about the theoretical worries with these managed services back in 2009, when the FCC was weighing whether or not those services should exist on a neutral Internet. From that post:

For example, AT&T allocates a chunk of its pipe for delivering IPTV and won’t let other web traffic interfere with that. In practice, this means a set percentage of AT&T’s pipes are walled off from regular web traffic so customers paying for the telco TV product get a great service. But it also means that when the percentage allocated for the regular web is congested, regular service degrades. … If taken too far, then carriers could protect their revenue streams and get around any net neutrality provisions by allocating more of their network for managed services rather than for the public Internet. The FCC is worried that a neutral public Internet that gets forced through a smaller pipe so that carriers can invest more on upgrades and capacity for managed services won’t be able to support the innovations of tomorrow.

The FCC gave up the fight on managed services because it’s hard to regulate a theoretical, especially one with so many potential benefits for subscribers. Instead the net neutrality rules punted on the managed services topic, focusing on the definition of broadband access which left wireline providers free to offer managed services for enterprise customers. On the consumer side offering specialized services seems okay provided it was on a limited number of a devices and in a few other special cases.

So where will this fight take consumers and the net neutrality rules?

But opponents looking at Comcast’s decision are focused instead of the section of the net neutrality order that deals with discrimination, as opposed to what constitutes the broadband services actually protected by the regulations. For example, Michael Weinberg, from Public Knowledge says it’s important to look at how to adapt the rules going forward as the web changes. “If managed services can mean anything as long as you can imagine them in the cable landscape circa 2010 it becomes this huge loophole.”

He stressed that Public Knowledge isn’t done forming a legal argument to fight Comcast’s behavior, but in his view it’s clearly a violation of the spirit, if not the letter, of the net neutrality regulations: In this case Comcast’s private IP network used to stream Xfinity packets is only private because Comcast owns the last mile. And the reason Microsoft may have ceded some control over to Comcast — and will enforce the pay TV status quo — is because it realized that without Comcast’s participation it might never get the chance to add value for Xbox buyers by bringing them the content they want.

For all of these reasons, any legal action that could stem from this spat will be worth watching. It will not only help define how network neutrality will work in an evolving broadband ecosystem, but it will show us where the power will lie in the new TV landscape governed by IP.