There's a shift happening in the cable television industry. Cable companies like Time Warner Cable (NYSE:TWC) and Comcast (NASDAQ:CMCSA) used to sell more video subscriptions than broadband Internet, but this summer the top cable providers sold more Internet connections than video for the first time ever.
It wasn't a lot more subscriptions, but it points to a change in the cable industry and it makes upcoming FCC rules on net neutrality all the more important.
What's the FCC deciding on?
The FCC is considering classifying cable providers under Title II of the Communications Act, which would treat broadband providers more like utilities and make it easier for lawmakers to regulate them. The main point of contention is that under Title II broadband providers couldn't charge businesses (like Netflix) for faster or better Internet delivery.
This is the core of net neutrality: that Internet speeds and quality should be the same for everyone (depending on which speed you actually purchase) no matter what type of content users view.
House Minority Leader Nancy Pelosi said this summer that broadband should be treated as a telecommunications service under Title II, and other Congressional leaders have suggested the same.
It's not that all companies are against net neutrality; AT&T, Verizon and Comcast have all said they're not against net neutrality, but that broadband shouldn't be reclassified in a way that could hurt how those companies set up "commercially reasonable" deals with businesses like Netflix.
The business of broadband
Peter Kafka said in recent Re/code article that, "The future for the pay TV guys isn't selling you pay TV -- it's selling you access to data pipes, and pay TV will be one of the things you use those pipes for." Long story short: Cable companies are becoming broadband companies.
This is even more evident with the proposed Time Warner Cable and Comcast merger. If the deal goes through Time Warner and Comcast will control 35%-40% of the U.S. broadband market.
The shift to broadband from video could end up being a pretty sweet deal for cable providers. The oft-cited profit margin for broadband Internet comes in at a whopping 97%, according to Bernstein Research analyst Craig Moffet. To be fair, this number likely doesn't include all the upfront costs of building out broadband networks or maintaining them.
Still, there's no debating the high profitability of broadband. David Heger, an analyst at Edward Jones told Bloomberg this week, "From the point of view of a cable company, you really want to see broadband growth more so than cable-TV growth because it's much more profitable."
Why this is such a big deal
Clearly, Comcast and Timer Warner want the ability control how they price their services. But it's not as if they won't be able to price higher-speed broadband at tiered pricing for consumers (like they do now), it's that they wouldn't be able to give preference to content or businesses that pay for faster delivery, or throttle ones that don't.
Net neutrality advocates argue that if the FCC doesn't regulate broadband Internet delivery, it will create a fast lane and slow lane for Internet users -- with companies and consumers with the most money receiving a superior Internet.
So far, the FCC has received nearly four million submissions about its open Internet rule, the most commented in the history of the FCC. Couple that with members of Congress suggesting the FCC change how it views broadband providers, and it appears Internet service providers should be a bit nervous about the agency's upcoming rulings.
Chris Neiger has no position in any stocks mentioned. The Motley Fool recommends Apple and Netflix. The Motley Fool owns shares of Apple 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.