Net Neutrality: A Look Behind the Telecom Price War

Aggressive price cutting by AT&T has the market spooked about lower revenues for the telecom giants, but ignore the bears. If you want to understand what's really going on, take a look back at the history of net neutrality.

Feb 5, 2014 at 1:37PM

In a monumental court case with far-reaching consequences, Verizon (NYSE:VZ) successfully challenged the Federal Communications Commission's rules on Internet fairness. Before I get to why this is awesome for the company and horrible for the Internet, here's everything you need to know about "net neutrality."

A brief history
Aside from being the newest alliteration-happy sound bite, net neutrality happens to be a bedrock principle of Internet usage. It means that Internet service providers (ISPs) can't charge you different rates or change the speed of your Internet depending on what you happen to be doing at that moment.

For instance, I may check up on Twitter after finishing this article, but I expect my Internet speed to remain constant. Even though I'm moving from a content management system to a microblogging platform, Internet performance does not cross my mind. Sure, waiting for a video to buffer can cause you to curse your ISP, but the reasons it happens are fairly innocent. It depends on the quality of the Internet package (low mb/sec, maybe), how old the router is, or if distance is weakening the signal. In any case, the causes are not deliberate. 

But that's about to change.

Verizon managed to convince three judges on an appellate court that the FCC's mandate, as outlined in the 1996 Communications Act, does not extend to regulating the Internet. In the decision, Judge David Tatel wrote, "Given that the Commission has chosen to classify broadband providers in a manner that exempts them from treatment as common carriers, the Communications Act expressly prohibits the Commission from nonetheless regulating them as such."

What does that mean, you ask? Translated into plain English, it means that Verizon found a gaping loophole. Back in 1996, the only way for end users to browse the web was through dial-up … yeah, I'd rather forget that existed too, but it's relevant to the story. Anyways, dial-up fell under the FCC's most stringent regulations – known as Title II restrictions for common carriers -- for the exact same reason we all hated it. Answering a phone call would disconnect your Internet (oh, the painful memories!), because telephone wires were the common infrastructure for both activities.

Why integrated information is bad

Regulating the Internet might be contentious, but transmission of those signals through telephone lines kept it squarely within the FCC's ballpark. This meant that the FCC had full authority to regulate them as before. And then came broadband.

With broadband, the FCC chose not to distinguish the "transmission and processing of information as distinct services," opting instead to think of it as "a single, integrated information service."

Big mistake.

According to Judge Tatel, "because cable broadband providers were thus not telecommunications carriers at all, they were entirely exempt from Title II regulation." It's important to note the awkwardness and ambiguity of this classification, because it's caused countless headaches for the FCC. Like when complaints began pouring in about Comcast's (NASDAQ:CMCSA) interference with certain peer-to-peer networking applications. In keeping with its commitment to maintain a free and open Internet, the FCC did try to rein the providers in, but the court of appeals ruled it outside their jurisdiction. Sound familiar? The problem is that broadband providers aren't technically held to Title II standards, but neither can the FCC let them run wild.

In response to the Comcast decision came an Open Internet Order to establish ground rules for Internet fairness, but it was far too late. The loophole had been exposed and Verzion was quick to challenge any proposed restrictions.

Fast-forward to today.

The D.C. Circuit Court sides with Verizon, nullifying any real effect of the Open Internet Order and dealing a hammer blow to the idea of net neutrality. It's no surprise, really. The FCC had backed itself into a corner. Short of reclassifying broadband providers in line with common carriers, or Congress expanding the FCC's mandate, the commission's legal reasoning was on thin ice.

Some eternal optimists believe that a permanent fix is on the horizon, but I doubt it it'll come soon enough. The FCC has continuously shied away from redefining ISPs and a Republican House remains insurmountable for Internet advocates. 

What it means for investors

The effects of this ruling can't be overstated. It quite literally gives ISPs the authority to impair or improve your access to a website depending on how it benefits them.

Here's some food for thought: if Verizon decides to challenge Netflix (NASDAQ:NFLX) by expanding its FiOS TV programming, what's to stop Verizon from skewing end-user access in its favor? Assuming Verizon can beef up its selection of shows and movies, it makes sense for consumers to go where the streaming is smoothest.

Netflix's problem is that the integrity of its product -- entertainment on demand -- can now be controlled by a potential competitor. That may not be fair, but it is legal for now.

With this in mind, AT&T's (NYSE:T) new pricing strategy -- a massive reduction in the cost of data plans, introduced this week -- may be more than it seems.

A price war among the telecom giants starts right after net neutrality is struck down? That can't be coincidence. By luring subscribers with ultra-low data plans, you can sell them more of your other products. Everyone knows that. It's business school 101.

But what's at play here is a little more subtle -- Verizon, AT&T, and their counterparts all realize that a wider subscriber base doesn't just translate to higher cross-selling revenues. The real gold mine is the greater leverage they have when negotiating deals with content creators. It means that ISPs can demand that Netflix pay a premium to ensure smooth delivery of its product. And the bigger the subscriber base, the bigger the premiums.

So, ignore the bears and understand that ISPs are now running the table. The corporatization of the Internet has begun. 

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4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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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