Congressional Democrats are attempting to force the Federal Communications Commission's hand on net neutrality.
The proposed new rules would force the FCC to use its authority to make sure that Internet service providers don't speed up certain types of content (like video from Netflix (NASDAQ:NFLX) or Hulu) at the expense of other content. The proposed rules would essentially mandate the commission to enforce net neutrality, the practice of treating all content equally no matter what it is or where it comes from.
Net neutrality had been the de facto law of the land until a federal court ruling in January made it quasi-legal for ISPs to charge content providers for faster delivery speeds.
The ISPs claim that they do not currently slow down service from specific companies. Netflix believes they do and has claimed that various Internet providers have intentionally made using Netflix a bad experience by slowing download speeds for people attempting to use the streaming video service. They do that, Netflix has alleged, in order to force the company to pay for faster service.
If that was the plan, it worked. Netflix has reached deals with Comcast (NASDAQ:CMCSA) and Verizon (NYSE:VZ) to pay for improved service. Paying for faster service has worked with Comcast. As soon as that deal was signed the Netflix experience improved for Comcast customers. Since the Verizon agreement was reached, download speeds for that ISP's customers attempting to use Netflix have actually gotten slightly worse.
Verizon says it's working on the issue and speeds will improve. (I wrote about the ongoing problems between the two companies in Netflix and Verizon Take Their Bandwidth Battle Public.)
The proposal in Congress was put forward by Senate Judiciary Committee Chair Patrick Leahy (D-Vt.) and Rep. Doris Matsui (D-Calif). Named the Online Competition and Consumer Choice Act, the proposal would not give the FCC any new powers but it would give the board political cover to prohibit what consumer advocates say would harm start-up companies and Internet services by requiring them to pay extra fees to ISPs, The Washington Post reported.
"Americans are speaking loud and clear," said Leahy. "They want an Internet that is a platform for free expression and innovation, where the best ideas and services can reach consumers based on merit rather than based on a financial relationship with a broadband provider."
It seems unlikely that the proposal will ever be voted on in the Republican-controlled House, but just the act of proposing it puts pressure on the FCC to act. It also sheds more light on an area that many Americans had been unaware of. This overall pressure has forced the FCC -- which is run by former cable industry lobbyist Tom Wheeler -- to reconsider its current proposal, which allows pay-for-service deals.
How would the new rules work?
The Leahy/Matsui proposal only applies to the connections between consumers and their ISPs as that is the part of the Internet governed by the FCC's proposed net neutrality rules. ISPs handle only the last step in a piece of content or data's journey to a customer. The cost of moving content from wherever Netflix or another company houses it is carried by that company.
Netflix Vice President of Content Delivery Ken Florance explained on a company blog how that works.
Usually that [carrying data over distances] is done by companies called transit providers, but Netflix has decided to be its own transit provider and carries the expense of moving its data around. Comcast and other ISPs however control the so-called "last mile," the actual gateway to customers.
Comcast is not charging Netflix for transit service. It is charging Netflix for access to its subscribers. Comcast also charges its subscribers for access to Internet content providers like Netflix. In this way, Comcast is double dipping by getting both its subscribers and Internet content providers to pay for access to each other.
What Florance is saying is not generally how many consumers assume the Internet works. The ISPs are essentially local deliverymen but they have made no effort to disabuse people of the notion that they are long-haul truckers. If Comcast or another ISP provided the whole pipeline between a bandwidth hog like Netflix and end users it might be justifiable to charge for the heavy load placed on the system. That is not the case and Netflix (and other content providers) are already paying to have their data "trucked" long distances.
The FCC's current proposal specifically allows for the creation of a tiered Internet for content companies, though the commission seems shamed by media attention and public opinion into reconsidering that plan. The FCC has asked for public input as to whether it should ban the practice as "commercially unreasonable."
What this means to you
If Internet service providers can charge content providers to ensure a decent user experience for their customers then they will. This means that consumers will not only ultimately get stuck with the bill, they will likely have fewer choices for content.
If an established content provider -- perhaps WWE (NYSE: WWE) with its video-rich network -- sees customers having a bad user experience then it would have to pay to fix that. Assume that deal costs millions for each major ISP and the numbers pile up quickly (though no details of what Netflix is paying Comcast and Verizon have been made public). That added expense will have to be passed onto customers one way or another. The company could raise the $9.99 per month price of WWE Network or it could spend less creating content. Either way the customer is getting less value for his or her money.
Of course that same person is paying the ISP for access and it's unlikely those companies will lower the cost of monthly Internet services should this new pool of riches be unlocked. A pay-for-faster-access system will also likely create a barrier to entry for new or struggling services, which would lack the funds to pay the ISPs (even though the FCC would force them to make equal deals with any and all content companies willing to pay).
Basically, unless the FCC revises its proposal and moves back to true net neutrality, the consumer loses.
Will it matter?
The net neutrality debate has generally fallen along party lines with Democrats supporting a completely open Internet and Republicans favoring the creation of a two-tiered system.The Leahy/Matsui proposal is essentially a grandstand move but it's an important one because it supports the rising tide of public opinion, which now sees how the FCC was attempting to push through rules that aren't good for the public.
The FCC does not need to cede to the wishes of the public. Shining a spotlight on their activities has apparently at least made Wheeler feel guilty about so blatantly siding with one group of businesses over the regular people the commission is supposed to represent. Whether that is enough to force the FCC to do the right thing remains to be seen.
It's hard to see how an Internet fast lane benefits anyone expect the ISPs, which are eager to find new revenue sources as they lose subscribers on the cable and phone side of their businesses. It seems likely with a nudge from public opinion and a kick from the congressional democrats that the FCC may begrudgingly find a way to either restore net neutrality or push the issue into the courts, leaving others to make the decision.
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Daniel Kline has no position in any stocks mentioned. The Motley Fool recommends Netflix. The Motley Fool owns shares of 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.