Did Verizon Just Kill the Internet?

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It was 2010 when Comcast was told by the Federal Communications Commission (FCC) to stop secretly withholding technologies that blocked certain Internet-related interactions. Made sense: The Internet wasn't meant to be regulated by carriers, as is the case with cable TV. But Comcast wasn't done arguing its case for limiting what its Internet customers could see.

Unhappy with the results of its pleas to the FCC, Comcast appealed to the circuit courts -- and won. In answer to Comcast's "victory," and more importantly the public's response to allowing Internet service providers (ISPs) to determine what users can and can't see, the U.S. congress gave the FCC the power to regulate "telecommunications services." Turns out, that was a bad choice of words.

Fast forward to today
The U.S. Court of Appeals in Washington, D.C., handed down its ruling in the Verizon v. the FCC case yesterday. Verizon (NYSE: VZ  )  argued that the FCC didn't have the authority to demand "net neutrality" of the company, or any other broadband provider, because they are an "information service" provider. Net neutrality is the notion that carriers can't pick and choose what Internet users can see. Essentially, the court ruled the FCC couldn't enforce the rules and regulations that it had put in place.

As a result of its ruling, the appeals court did away with two key regulations: one, carriers couldn't discriminate between sites; and two, choose to block access to a legal site. After Tuesday's ruling? The choice of what Internet users are able to see, and how quickly sites load, is up to Verizon and the other broadband providers.

Verizon's general counsel, Randal Milch, was quick to post a press release on Tuesday reassuring its customers: "One thing is for sure: Today's decision will not change consumers' ability to access and use the Internet as they do now. The court's decision will allow more room for innovation, and consumers will have more choices to determine for themselves how they access and experience the Internet." Really? So, remind me again why Verizon took a U.S. federal agency to court?

The implications
The bigger issue is the potential a ruling like this has on Internet users' freedom to view what they want, when they want, without having to pay an extra fee, or put up with slow-loading pages because a site isn't on Verizon's "good" list. But there are other possibilities that should concern investors, particularly of online-video providers like Google (NASDAQ: GOOGL  ) and Netflix (NASDAQ: NFLX  ) .

Verizon's concerns are centered on the overload of users and data during high-volume times, such as after work. That, in conjunction with the bandwidth needed to download videos and movies, was the impetus for Verizon's suit.

In spite of Verizon's "reassurances," it's easy to imagine multiple scenarios that would negatively impact a user's Internet experience -- and hurt Google's and Netflix's bottom line. And as the number one and two video sites, Google's YouTube and Netflix could be particular targets.

Citing the effect that streaming content from Netflix and its nearly 56 million monthly average users (MAUs) puts on its bandwidth, Verizon could decide to charge an override fee for each downloaded movie. As of Tuesday, not only is a Netflix override charge feasible, it's likely, at least versus charging Verizon's customers directly.

And what about Google, with its approximately 900 million YouTube MAUs? With an estimated $5.6 billion in revenues expected in 2013, YouTube has quickly become a significant source of revenue for Google. But what happens if Verizon opts to charge Google for each video watched? Barring that, Verizon could simply slow the download speeds of YouTube videos to a snail's pace, or not allow them at all.

Final Foolish thoughts
Before pushing the panic button, the FCC does have a couple options to avoid putting folks like Verizon in a position to dictate who sees what and for how much. The FCC can appeal the circuit court's ruling to the Supreme Court or, better still, change the verbiage to cover "common carriers" -- like Verizon -- and simplify the FCC's regulations. Whichever alternative it pursues, the FCC better do something or the Internet as we know it will be gone.

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Tim Brugger

Tim has been writing professionally for several years after spending 18 years (Whew! Was it that long?)in both the retail and institutional side of the financial services industry. Tim resides in Portland, Oregon with his three children and the family dog.

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