Net neutrality has been a hotly contested issue this year, beginning with a federal appeals court's January ruling striking down the Federal Communications Commission's existing net neutrality rules.
Internet freedom advocates have warned that without strong net neutrality regulations, Internet service providers will block or "throttle" content from companies that do not pay them exorbitant fees. This would give an advantage to entrenched companies, while small start-ups could not afford the tolls.
Netflix has been the most vocal advocate of strong net neutrality rules. Photo: The Motley Fool.
Internet service providers have been the primary backers of weaker net neutrality rules, while big content providers such as Netflix (NFLX +0.13%) have been the foremost proponents of strong regulations. But this raises a key question: Why are the companies that would theoretically benefit most from "fast" lanes so opposed to them?
Net neutrality: the basics
The net neutrality rules struck down earlier this year had prohibited Internet service providers from discriminating in any way between different content sources as they traveled over "last-mile" connections to consumers' homes.
Many people believe the U.S. needs even stronger regulations than those that were struck down. Netflix has led the charge for strong net neutrality, arguing that ISPs should also be required to provide adequate "peering" connections (where data is transferred from content providers and data transport companies to the ISP's network) at no charge.
ISPs have pushed back, claiming that more regulation will hurt consumers by discouraging investment and stifling innovation. They also note that it has been standard in the industry for companies delivering significant amounts of data (like content delivery networks) to pay for "peering" connections to the ISPs' networks, and that hasn't hurt the Internet's development.
Consumers have overwhelmingly sided with Netflix. The FCC received more than 3.9 million comments on its proposed new net neutrality rules this year, the vast majority opposing any sort of "fast lanes." Last month, President Barack Obama came out publicly in favor of strong net neutrality, saying, "No service should be stuck in a 'slow lane' because it does not pay a fee."
Something else is going on
Supposedly, the point of net neutrality is to promote innovation by ensuring established companies can't pay for priority access while start-ups with limited resources are confined to slow lanes.
Video streaming is the main driver of peak-hour data consumption in the U.S. Not surprisingly, streaming leader Netflix is by far the nation's No. 1 user of bandwidth, accounting for more than a third of peak-period downstream traffic.
Netflix is by far the biggest source of peak Internet traffic in the U.S. Photo: The Motley Fool.
Netflix isn't a start-up anymore; it has annual revenue of more than $5 billion and a market cap of $21 billion. If net neutrality is really about preventing big companies from locking in their dominance by paying ISPs for priority access, then Netflix should oppose net neutrality.
As the dominant streaming video company, Netflix would benefit from being in a fast lane while potential competitors were stuck with slow service. This would ensure its long-term dominance of the bandwidth-intensive streaming video market. Instead, Netflix is the biggest defender of strong net neutrality.
It's all about the money
It's true that without net neutrality rules, ISPs could theoretically block or throttle access to some sites to extort fees, promote their own services, and so on. But in practice, such abuses of market power have been extremely rare.
In reality, the net neutrality debate is about how costs will be shared to improve the Internet for everyone. Peak-hour Internet traffic surged 32% in 2013, according to Cisco. To meet consumers' appetites for more bandwidth, ISPs are spending hundreds of billions of dollars on network expansion and fiber deployments.
In the U.S., Netflix is a key driver of traffic growth. Not only is the company adding subscribers, it is also encouraging existing subscribers to spend more time watching Netflix, allowing families to stream multiple shows at once, and promoting higher-quality video streaming, including 4K TV (also known as Ultra-HD).
Netflix encourages all of these behaviors because they will lead to a larger, more loyal, subscriber base, which will boost the company's profit in the long run. Yet they all will require a hugely expensive Internet capacity that does not exist today.
ISPs like AT&T want data-heavy services like Netflix to help fund investments in faster broadband. Photo: The Motley Fool.
Internet service providers want companies such as Netflix -- which are the primary beneficiaries of faster Internet service -- to chip in for these upgrades. Netflix believes the ISPs should shoulder the full costs, which would ultimately be spread among all Internet users, whether or not they subscribe to Netflix.
Understandably, most Americans don't want to pay more for Internet service. But the possibility of tougher regulation on broadband service has spooked ISPs, which don't want to invest tens or hundreds of billions of dollars unless they can be sure of recouping their costs. AT&T recently froze its plans for a massive investment to expand its high-speed fiber network.
This underscores the point that people should not worry so much about ISPs artificially slowing their service or blocking some websites to make way for priority users. The real concern is that ISPs won't invest enough money to keep pace with the extraordinary growth in Internet traffic, especially for peak periods.
Unfortunately, until ISPs, content providers, and the government agree on who will share in funding the hundreds of billions of dollars of investment needed to drive a step-change in U.S. broadband speeds, more and more people will find themselves stuck in "slow lanes."
