Verizon (VZ) had been fighting the Federal Communications Commission (FCC) in the U.S. Court of Appeals over a rule requiring broadband Internet providers to treat all Internet traffic equally — net neutrality, as it’s commonly known.
The Court ruled against the FCC. Freed of their “common carrier” shackles, this opens the door for broadband providers like Verizon, Comcast (CMCSA) and AT&T (T) to begin tiered Internet service. Unless overturned, the ruling has the potential to shake up the Internet as we’ve come to know it, impacting consumers and posing a serious threat to companies like Netflix (NFLX) that have built their business around cheap and readily available bandwidth for all.
In Plain English, What Does This Mean?
Under net neutrality, the company providing your Internet connection is supposed to provide a consistent connection, no matter what you do with that connection. If you choose to use your bandwidth to play games, post videos to YouTube, surf the web or watch Netflix, it doesn’t matter — you get the same speed and pay the same price.
(Note: There have already been rulings in the U.S. that have taken steps in this direction, including Comcast’s Xfinity streaming not counting against bandwidth caps when viewed via Xbox, but these used loopholes intended for private IP networks. The ruling will open these sort of arrangements for all Internet access.)
The ruling against the FCC means Internet providers could begin to shape traffic and develop tiered access plans, ending net neutrality. That means they could slow the connection speed for specific services, for example, charge based on what you use the Internet for, or block some services altogether.
The classic example — primarily because it accounts for nearly one third of all U.S. Internet traffic during peak hours and its content has been a thorn in the side of cable TV — is Netflix. The potential is now there for a cable provider to make its own online video service a smooth viewing experience, while slowing down Netflix to make it unwatchable. Maybe for an extra monthly fee, that Netflix speed would be boosted.
What Could Happen? Ask Canada
As a Canadian, I can give you some idea of what can happen from a consumer point of view when net neutrality enforcement slides. (The concept exists in Canada, but enforcement of infractions can take years).
Rogers Communications (RCI) is Canada’s largest cable television provider and second-largest broadband Internet provider. The company has been in the news repeatedly for practices involving traffic throttling. For years Rogers has been throttling (slowing the speed of) peer-to-peer traffic, justifying the practice as an attempt to cut down on bandwidth being used by illegal BitTorrent downloads.
These tactics don’t just make BitTorrent frustratingly slow, it’s made life miserable for other services. Throttling has made online gaming a subpar experience for many Canadians, with many users complaining about sluggish performance of titles played over Microsoft (MSFT) XBox Live and slow responses in Blizzard’s (ATVI) World of Warcraft.
Rogers is currently prepping a Netflix competitor for its Canadian customers and there are allegations it plans to exempt its own video streaming service from bandwidth caps, giving it a significant advantage over Netflix. Bell Mobility (BCE) is already under fire for doing the same thing, offering customers 5GB of free video monthly from its own Bell Mobile TV service, while charging them $40 in bandwidth usage fees if they viewed the equivalent using Netflix, Hulu or Apple’s (AAPL) iTunes.
So, who wins and who loses?
Winners and Losers if Net Neutrality Ruling Sticks
The big winners will be the Internet service providers who will be free to experiment with different pricing and content delivery schemes. The cost of network expansion could be more easily pushed to customers and the Internet services that are driving the bandwidth requirements. Expect to see more products like AT&T’s Sponsored Data plan that allows content providers to pay for customers’ data usage (encouraging use of their product) — but in the home, as well as mobile.
On the surface, the ruling looks like a bad thing for any company or service that relies on the cheap, fast Internet connections. Netflix, YouTube, Facebook, Amazon (AMZN), Apple and Microsoft (not just for Xbox Live, but also for Skype) come to mind as immediate losers in this scenario.
But there’s a catch. These established player all have relatively deep pockets. They could likely afford to eat some additional cost to keep their service at current levels. It may or may not cost their customers more (depending on how much of that cost they choose to pass on), but they could leverage their financial strength to keep smaller competitors and startups from gaining traction.
In other words, if Google paid ISPs to make YouTube a high-speed, no-data-charge service, how would a potential future alternative hope to compete if U.S. viewers faced slower speeds, choppy video and the possibility of having to pay for the bandwidth consumed?
So the biggest losers out of all of this look to be consumers. Yes, there are possible carrots — again, the AT&T Sponsored Data plan. But overall, if the net neutrality ruling sticks, consumers are likely to be paying more for Internet access, one way or another. Or, their Internet experience will be degraded compared to what they have today. The potential for stifling of innovation and competition to existing services would also be a blow to consumers.
As the Wall Street Journal points out, net neutrality has a champion in the Obama administration, and the FCC might yet appeal the ruling. In the meantime, ISPs are scrambling to reassure customers they won’t take it on the chin — at least for now.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.