Net Neutrality Rules Get Nixed: Key Facts and Opinions to Consider

The FCC’s net neutrality rules just got nixed by the federal court, clearing the way for ISPs to offer tiered bandwidth-based pricing schemes. Will customers ultimately benefit or suffer from this radical change?

Jan 16, 2014 at 8:29AM

Net neutrality, a term coined by Columbia professor Tim Wu in 2010, is back in the spotlight after a federal court struck down several key Federal Communications Commission (FCC) rules that prevent Internet service providers (ISPs) from slowing down or blocking access to legal web content.

This was a stunning reversal of the original 2010 decision, which allowed the FCC to maintain an "open Internet" by barring ISPs from playing favorites or denying access to certain websites.

Image

Pro net neutrality banner. (Source: toonk.nl)

The court decision, which the FCC plans to appeal, claims that the government has the right to oversee crucial utilities such as electricity, water, and telephone services, but Internet access should not be considered a utility.

The net neutrality decision could cause some serious power shifts among ISPs, streaming service providers, and websites -- and these shifts could have some dire consequences for customers.

Why the customer could be the biggest loser

To understand the huge impact of the net neutrality ruling, consider this scenario.

Comcast (NASDAQ:CMCSA), the largest cable provider and ISP in the United States, owns a large stake in streaming video service Hulu. Netflix (NASDAQ:NFLX), Google's (NASDAQ: GOOG) YouTube, and other services compete directly against Hulu.

To encourage its customers to use Hulu, Comcast could potentially throttle connection speeds to Netflix and YouTube so they are only capable of streaming lower-quality video, while allowing Hulu to stream its content at full 1080p HD.

To make matters worse, the largest ISPs in America -- Comcast, AT&T (NYSE:T), Time Warner Cable (NYSE:TWC), and Verizon (NYSE:VZ) -- could introduce tiered or metered pricing schemes to websites, with streaming media sites paying the most for the extra bandwidth.

In other words, they could charge both customers and companies higher bandwidth and content-dependent prices.

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This spoof ad illustrates the controversial possibilities of tiered pricing. (Source: Appleinsider.com)

Those tiered pricing schemes would mean higher expenses for companies, possibly translating into higher monthly fees for media streaming services like Netflix, Redbox, Pandora, or Spotify. As a result, the customer could end up paying higher fees to both the ISP and the streaming service.

What the ruling means for the future of TV vs. the Internet

The net neutrality ruling also represents a major victory for cable service providers over streaming media. Since Comcast, AT&T, Time Warner Cable, and Verizon all offer television services, streaming media poses a serious threat to their business models.

After all, why would customers sign up for premium channels when they can simply stream their favorite shows and movies over the Internet from a set-top box or connected computer? Who still needs pay-per-view when you have Netflix? In addition, new smart TVs are being built with web connectivity, not cable connectivity, in mind.

Therefore, giving ISPs the power to selectively throttle streaming media is troubling for both the companies and their customers.

To understand just how important the combination of high-speed Internet and cable networks are for these top ISPs, let's check out a part of Comcast's third quarter earnings:

Cable Segment

3Q revenue

YOY growth

Percentage of Comcast Revenue

Video

$5.13 billion

2.9%

31%

High-speed Internet

$2.59 billion

7.9%

16%

Source: Comcast 3Q earnings report.

Comcast's top line growth in cable services looks decent, but consider this -- Netflix's revenue jumped 22% year-over-year to $1.1 billion last quarter. Comcast's single-digit growth looks a lot less impressive by comparison.

Meanwhile, a long rumored deal between Comcast and Netflix, which would have added the latter's streaming service as an app to Comcast's set-top boxes, looks less likely to happen now that the FCC rules have been nixed.

Yet things may not be as bad as they seem

It's easy to see why web activists are in an uproar over the court decision -- after all, it seemingly violates the concept of the free American Internet.

Yet a future without net neutrality might not be as bleak as web activists would have you believe. Here are four top reasons that the public could be overreacting:

  • Comcast, Verizon, AT&T, and other ISPs recently issued a statement that the Internet would remain "free" and "open," and that its customers wouldn't be affected.

  • Fierce competition will keep the leading ISPs from making major changes. After all, which company wants to be vilified as the one that throttled YouTube or Netflix?

  • Smaller local ISPs, free from those corporate strings, could capitalize on the opportunity by offering cheaper packages with unrestricted, non-tiered access.

  • Although ISPs now have the power to hit streaming service providers with tiered pricing, those companies can strike back as well -- Netflix can simply charge a higher price to Comcast customers than AT&T or Verizon ones.

Moreover, if ISPs start offering tiered pricing plans, customers can choose from a wider selection of plans better suited to their needs. If priced fairly, the monthly bills could drop substantially for lighter bandwidth users while heavier users pay a slight premium.

Lastly, the end of net neutrality won't kill Netflix and other streaming services.

In fact, it could lead to new partnerships between cable companies and Netflix, which holds a 76% market share in streaming video with 29.2 million viewers. That lucrative market is far too valuable to scare off with petty rivalries.

The bottom line

In closing, even though the major ISPs haven't shown their hands yet, it's likely that they're simply awaiting the outcome of the upcoming FCC appeal. It would be foolish to announce some industry-changing strategy before the ink has even dried on the decision.

There are two ways to look at the net neutrality ruling -- while it's true that ISPs will gain more power and customers could suffer, it could also spur competition and lower prices across the board.

What do you think, dear readers? Please share your thoughts in the comments section below!

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Fool contributor Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Google and Netflix. The Motley Fool owns shares of Google and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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