Net Neutrality: It's All About Wireless

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The long-simmering net neutrality debate went into overdrive last week, after FCC Chairman Julius Genachowski argued that the FCC should formally adopt six principles in favor of the concept. Three of these effectively state that consumers should be able to access any legal Internet content or applications that they wish, and on any device that they wish. Just as importantly, another principle states that Internet Service Providers (ISPs) can't "block or degrade" any legal traffic, or "favor certain content or applications over others."

Meet the new broadband ... same as the old broadband
Unsurprisingly, following the pattern of the past few years, the vast majority of the debate since Genachowski aired his proposals has been about their impact on fixed-line broadband services such as cable, DSL, and fiber. Net neutrality supporters are giddy over how the new rules could protect Internet phone services such as those offered by Vonage  (NYSE: VG) and Skype, and online video platforms such as YouTube and Hulu, from fixed-line providers trying to push their own voice and video services.

But from where I stand, implementing these rules won't do much to improve on the status quo. Fixed-line service providers may theoretically have the power to degrade competing phone services right now, but there doesn't seem to be any evidence that it's happening often. And considering how successful they've been at competing with their own Internet phone services -- anyone seen Vonage's stock price lately? -- they don't have much reason to bother.

Likewise, fixed-line providers know that their customers will want to visit YouTube and Hulu regardless of how much they like the provider's own video content. It's not in their interest to throttle such services and risk customer defections. The same goes for peer-to-peer (P2P) file-sharing services. When Comcast (Nasdaq: CMCSA) was caught throttling P2P traffic a couple of years ago, it backed down after spawning a firestorm of consumer and government complaints.

But while net neutrality supporters are getting ahead of themselves, so are opponents who think that the rules will prevent ISPs from implementing policies needed to keep bandwidth-hungry apps such as video and file sharing from ruining service quality for everyone else. Nothing in the proposals stops ISPs from limiting the peak download speeds of a single user, and nothing stops them from putting a monthly cap on how much bandwidth a single user can consume.

When all is said and done, the imposing of net neutrality on fixed-line providers will mostly amount to business as usual. Life will continue to be good for all those cable and DSL "duopolies" out there, and it'll continue to be difficult for the likes of Vonage. And Google (Nasdaq: GOOG) will still have trouble turning a profit on YouTube.

The wireless carrier's dilemma
The wireless market, however, is a completely different animal. Wireless carriers have long treated their networks like royal fiefdoms in which their "subjects" (i.e. consumers) are steered toward a chosen set of products and services. And unlike fixed-line providers, wireless carriers have sought to get a large chunk of their data revenue through value-added services such as music downloads, GPS software, and, of course, text messages.

As long as cell phones were inflexible devices whose software couldn't be modified much by their users, the carriers could easily get away with this business model. But the arrival of smartphones throws a big wrench into the equation, since they allow consumers to install their own apps, some of which might let users do things that the carriers want them to pay a monthly fee for.

The carriers have often responded in heavy-handed fashion. Perhaps the best example of this is AT&T's (NYSE: T) attempts to cripple certain applications written for Apple's (Nasdaq: AAPL) iPhone, such as Skype (free Internet phone calls) and Dish Network's SlingPlayer software (free mobile TV), and to block the availability of Google Voice (free text messages) altogether.

If net neutrality becomes the law of the land, AT&T will have a much harder time getting away with such actions -- even if Apple is willing to help out. Rival carriers would also have to change their acts. It would be a brave new wireless world, one in which carriers would be much closer to being the "dumb pipes" for data services that their fixed-line broadband peers mostly are.

Winners and losers
AT&T and Verizon (NYSE: VZ) don't want to deal with such a landscape, hence their staunch opposition to net neutrality. But Sprint (NYSE: S) seems OK with it, as does 4G network operator Clearwire, in which Sprint owns a majority stake. Why the difference? Well, Sprint's been having a tough time against the competition; the company reported a net loss of 257,000 subscribers last quarter. And Sprint's responded by being especially aggressive in offering flat-rate service plans. Its $100/month Simply Everything plan includes unlimited voice and almost every cell-phone data service it has.

Sprint seems to think that it'll have a better chance competing against AT&T and Verizon in an environment where carriers are closer to being dumb pipes. In such an environment, Sprint might be able to use its pricing edge and Clearwire's superior spectrum holdings (which could allow for higher download speeds) to level the playing field, once 4G technologies begin appearing in cell phones in a couple of years. 

And if the FCC is serious about guaranteeing access to any device, it could get rid of the exclusive distribution agreements that carriers often strike for cell phones. That would likely benefit Sprint at the expense of its larger rival Verizon, whose phones use a similar 3G technology.

Net neutrality probably won't do much for Sprint over the short term. But it could give the company a needed boost over time. And right now, Sprint will take any help it can get.

Further Foolishness:

• Net Neutrality Redux: No Legislation Needed
• Dueling Fools: Net Neutrality