Google's (NASDAQ: GOOG) (NASDAQ: GOOGL) YouTube has recently started shaming underperforming Internet service providers (ISPs) with "report cards" for poor connection speeds.
A blue bar now appears under choppy videos on YouTube, with a prompt reading, "Experiencing interruptions? Find out why." Clicking the prompt displays an ISP's speeds and the quality of video users can expect. Moreover, it allows users to compare their ISPs' connection speeds to other providers in the area, along with information about how videos are streamed.
Google's move is clearly a protest against the controversial court ruling on net neutrality in January, which nixed Federal Communications Commission (FCC) rules barring ISPs like Verizon (NYSE: VZ), AT&T (NYSE: T), and Comcast (NASDAQ:CMCSA) from intentionally throttling Internet speeds.
The ruling could let ISPs treat Internet data as a utility instead of an information service, allowing them to charge customers higher fees for faster connections. While paid "fast lanes" have not been officially approved yet, a previous vote in May indicates that the new rules could go into effect by September.
A passive protest
Google signed a net neutrality compromise with Verizon less than four years ago. The original deal stated that net neutrality would be enforced for wired networks, but not on wireless ones. Now, with net neutrality across all networks threatened, Google is leveraging its 1 billion unique monthly viewers -- 20% of whom are from the U.S. -- to publicly shame ISPs.
It's a surprisingly passive approach for the world's largest Internet company, but it could be preferable to tackling ISPs head-on, as Netflix (NASDAQ:NFLX) recently learned. Earlier this year, Netflix signed deals with Comcast and Verizon for "paid peering" connections to their networks. Peering refers to a direct connection to an ISP's network for less congested connections. Netflix isn't the first to enter such a deal -- Google and other major companies have traditionally paid ISPs or content delivery networks (CDNs) like Akamai for faster connections via paid peering. Paid peering should not be confused with the end of net neutrality -- the former only applies to content providers for direct connections, while the latter means that ISPs can charge consumers for tiered or metered speeds.
Yet even after Netflix signed those deals, Netflix customers on Verizon reported poor connection speeds. After Verizon refused to address the issue, Netflix posted a warning message on buffering videos, declaring that "the Verizon Network is crowded right now."
Verizon issued a cease and desist letter to Netflix regarding the warning. Netflix eventually complied, but maintained that Verizon offered poorer quality streaming connections than other ISPs. Speeds on Comcast, for example, reportedly improved 65% after the deal.
ISPs argue that streaming video congests the network for lighter web users. A video on Netflix, for example, consumes 0.3GB per hour on the lowest setting, 0.7GB on medium, 1GB on high, and 2.7GB on the maximum 1080p setting. To put that into perspective, a "light" Internet user who only browses the web and checks email could browse roughly 10,500 web pages with a mere 1GB of bandwidth.
Could Google Fiber be the answer?
In May, Google issued a statement against Comcast and Verizon via a blog post, stating that it would never charge content providers like Netflix additional fees for direct connections to its own Internet and broadband TV network, Google Fiber.
Google Fiber is currently available in four cities, but Google announced that it had chosen 34 additional cities for expansion in February.
Google has invited content providers to connect their networks to Fiber to establish a large scale, free peering network. Since Google's YouTube pays major ISPs for peering services, launching an in-house ISP of its own could help it save a lot of money in the long run.
Netflix has its own peering service, known as Netflix Open Connect, which allows ISPs to install Netflix hardware in their facilities to establish direct connections. Many European ISPs and smaller American ISPs have signed on with Netflix Open Connect, essentially giving Netflix free peering, which would alleviate congestion, but Comcast, Verizon, and AT&T have adamantly refused, since it would disrupt their own businesses of paid peering.
Therefore, if the major ISPs launch paid "fast lanes" for customers and content providers, Google Fiber could flourish very quickly as an alternative ISP that offers both customers and consumers high-speed connections without catches like paid peering or tiered speeds. Evercore Partners, an independent investment banking firm in San Francisco, estimates that Google Fiber could have 3 million customers within seven to nine years, which would make it one of the nation's top 10 ISPs.
The Foolish takeaway
In conclusion, major ISPs should realize that nixing net neutrality, establishing tiered fast lanes, and pressuring companies into paid peering agreements could result in a loss of both content providers and customers. In the past, content providers might have been reluctant to cut peering altogether due to the loss of speed, while customers might have simply bounced around between the big three service providers.
Google and Netflix's "ISP shamings" might not have made a huge impact on users yet, but if Google lures more content providers like Netflix to Fiber with promises of free peering and a lack of speed caps, Verizon, Comcast, and AT&T could lose a lot of customers over the next decade.
Leo Sun owns shares of Google (C shares). The Motley Fool recommends Google (A shares), Google (C shares), and Netflix. The Motley Fool owns shares of Google (A shares), Google (C shares), 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.