The Federal Communications Commission recently voted through a new set of rules to regulate broadband Internet services. Two weeks later, the FCC published the full decision, and it's a doozy.
Eight pages of actual rules are joined by 312 pages of clarifications and background, plus another 87 pages of statements from the five FCC commissioners involved in this 3-2 vote. Eighty of these final pages consist of dissenting opinions from Republican commissioners Michael O'Reilly and Ajit Pai.
You can read the entire 400-page tome, if you're looking for some light bedside reading. Start on page 283, where the actual rules are laid out under the label of Appendix A.
Or you can sit back and let me summarize the three most important rules coming down the pipe. Here we go:
No blocking, no throttling, no paid fast lanes
I'm bundling these three essential rules together as one, because they essentially address the same issue of unfair broadband service practices. This is actually the bread and butter of the entire order, since everything else just explains how the FCC plans to manage and enforce these provisions.
When these rules take effect, broadband service providers will not be allowed to:
- "Block lawful content, applications, services, or non-harmful devices,"
- "impair or degrade lawful Internet traffic on the basis of Internet content, application, or service, or use of a non-harmful device," or
- "engage in paid prioritization."
That's it. I'm not kidding.
These rules are all subject to one important caveat, allowing service providers to apply "reasonable network management" practices. You can expect cable and telecom companies to use this fuzzy clause whenever they want to dodge the actual rules. Other than that, the rulebook is both compact and clear as day.
These orders will ensure that American broadband subscribers get what they pay for. They safeguard full access to the global Internet, tell the ISP to keep their data pipes flowing, and stop them from setting up faster connections across the Internet backbone in return for premium payments.
That last bit is exactly what Netflix (NASDAQ:NFLX) was asking for last year, when broadband titans Comcast (NASDAQ:CMCSA), Verizon (NYSE:VZ), and AT&T (NYSE:T) all started throttling the digital video titan's access lines.
These bottlenecks weren't set up in the direct connection between the consumer and the service provider, but deep in the bowels of their nationwide networks. And they all went away when Netflix agreed to pay more for a higher-quality connection on the back end.
So the FCC is forcing the service providers' hands to provide better service without charging extortion-like fees for that privilege. This won't be good for Comcast's or Verizon's profit margins, which explains why the ISPs hate this FCC order with a passion.
Businesses that depend on low-cost access to an open network structure, on the other hand, may see their network costs dropping. More importantly, they absolutely should see network quality improving. Netflix, for one, applauds the order for setting up a workable policy for the Internet backbone.
But even Netflix isn't entirely pleased, and here's why.
You see, the commission took this opportunity to classify broadband services as "telecommunications services," falling under Title II of the Communications Act of 1934.
The FCC took this route to establish its authority to set networking rules at all. Critics argue that Title II will lead to oppressive regulation, heavy fees, and the end of broadband innovation as we know it. The CFOs of AT&T and Verizon said as much in their appearances at industry conferences last week.
"It's going to be more difficult to invest; it's going to be more difficult to innovate and deliver speedy solutions to the consumer because now you're going to have to navigate what is regulated, what isn't regulated, and all this other stuff," said Verizon CFO Fran Shammo at a Morgan Stanley confab. "You could probably take an assumption that there is going to be a lot of litigation around this when it's all said and done."
Interestingly, the FCC was largely forced to use the Title II option because of a legal win by Verizon in 2002. Back then, Verizon wanted favorable construction terms for its then-nascent fiber-optic network rollouts. Moreover, a "common carrier" under Title II may be heavily regulated, but it also gets to set high subscription fees -- particularly when the customer is a government entity. The cable industry was the enemy in 2002, and Verizon got its way -- fiber-based phone networks were shunted into the Title II category while the cable guys became a less cushy Title I "information service."
This time, the cable and telecom giants are allies and they have already built their high-speed backbone networks. So they'd much rather have less government control, even if it means fewer infrastructure construction incentives. Hence, times have changed. Title II is now their common enemy.
Verizon and friends want to have their cake and eat it, too. Their wireless networks already run under Title II rules, albeit with plenty of so-called forbearance exceptions that limit federal fees on your favorite smartphone operator's networks. But the fiber that connects those wireless towers to the rest of the Internet, well, that's all part of the hands-off Title I environment that just became another Title II item.
As for Netflix, the company appreciates the new rules but didn't exactly love the Title II move. Speaking at the same Morgan Stanley conference as cited above, Netflix CFO David Wells explained why:
"Were we pleased that it pushed to Title II, probably not, right?" Wells said. "I mean, we were hoping that there might be a non-regulated solution to it. But it seems like companies that are pursuing their commercial interests, including us, have to arrive at something like that."
So it's a compromise. Title II gets the job done, and in a sense, maybe it is the right idea:
"You know when you're as successful as the ISPs are at providing a service, essentially Internet has become a utility," Wells said. And in that case, utility-style regulations do seem to make sense.
More transparent billing
Finally, you should know that the new rules will force service providers to step up their billing practices.
The agency cited consumer complaints "that the speed of their service falls short of advertised speeds, that billed amounts are greater than advertised rates, and that consumers are unable to determine the source of slow or congested service." Moreover, ISPs often slow down or terminate user connections based on "excessive use," often to the surprise of the affected customer.
The FCC noted that service providers already do disclose plenty of information, but the old rules had lots of leeway for sweeping important details under the rug. So the new rulebook will force user bills and marketing materials to include the following information:
- Full monthly service charges, including the terms of promotional rates;
- All additional fees and surcharges, including modem rental, early termination fees, and taxes;
- Data caps with trigger conditions and additional fee structures; and
- Performance characteristics of the network service, including speed, latency, and packet loss statistics.
These details are sometimes hard to find on today's Internet service bills, and even tougher to spot in advertising banners. The new rules should help consumers make informed choices on which broadband service to use, and protect them from predatory billing tricks.
On the back end, broadband providers must also report their network practices to the FCC for further review, which will help the agency determine if they step outside the "reasonable network management" umbrella.
Anders Bylund owns shares of Netflix. The Motley Fool recommends Apple, Netflix, and Verizon Communications. The Motley Fool owns shares of Apple and Netflix. Try any of our Foolish newsletter services free for 30 days.