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. 

Want to figure out how to profit on business analysis like this? The key is to learn how to turn business insights into portfolio gold by taking your first steps as an investor. Those who wait on the sidelines are missing out on huge gains and putting their financial futures in jeopardy. In our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal finance experts show you what you need to get started, and even give you access to some stocks to buy first. Click here to get your copy today -- it's absolutely free.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers