FCC Ruling On Net Neutrality Will Have Major Implications For The Internet Space

The Federal Communications Commission (FCC) is set to vote on Chairman Tom Wheeler’s proposed “net neutrality” rules today. At its core, the new set of rules seek to regulate broadband providers along the lines of the regulations imposed on traditional phone companies or other utilities. This event could be a potential game changer for Internet service providers such as Comcast (NASDAQ:CMCSA) and Time Warner Cable (NYSE:TWC) as well as streaming content providers such as Netflix (NASDAQ:NFLX). Let us take a look at what impact this decision could potentially have on the Internet service provider market.

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How Net Neutrality Gained Traction

The net neutrality debate has been raging for well over a year between net neutrality supporters and cable and telecom companies. Net neutrality is a principal related to the way Internet traffic should be treated. It advocates that Internet service providers (ISPs) and Governments should treat all data on the Internet equally, not discriminating or charging differentially by user, content, site, platform, application, type of attached equipment, and modes of communication. ^[1] The net neutrality debate resulted in the FCC receiving a record 4 million comments on the issue and President Obama himself called for adoption of the strongest set of rules possible on this subject. The FCC is planning to adopt a new set of net neutrality rules after a federal court rejected their previous version in January 2014. The agency is looking for a significant expansion of its authority with these new rules. It wants to reclassify broadband services as more aggressively regulated “telecommunications services”, as opposed to the lightly regulated current official classification as “information services” providers.

How It Will Impact The Internet Space

Chairman Wheeler has not publicly disclosed the details regarding the set of rules. However, if these rules come into effect, the companies that provide Internet service will not be able to freely manage Internet traffic as they have in the past. Historically, service providers have not given preferential treatment and increased speeds certain site over others.  They have, however, required sites responsible for heavy amounts of traffic to subsidize the investment in the back-end equipment used to transmit this traffic.  This involves mainly Google’s YouTube and Netflix, which together are said to account for over half of all peak evening Internet traffic in the U.S.  Disputes of this sort are sure to be governed to some degree by the proposed rules.

Comcast’s CEO Brian L. Roberts restated the company’s opposition to the idea of regulation and has called it antiquated. ^[2] He mentioned that there were “unnecessary risks associated with applying 1930 style regulations to something as dynamic as the Internet.” Comcast stands to lose out on the deals it currently makes with content providers such as Netflix if this regulation is passed. (Read More –Comcast-Netflix Deal Plants A Flag In The Sand Of Net Neutrality) The cable and telecom companies have expressed concerns that a highly regulated environment could deter their investments in broadband services. Critics of the regulations have also argued that the new rules could ultimately lead to price regulation. However, Wheeler has tried to address these concerns by proposing that there will not be any price regulations and tariffs. ^[3]

On the other hand, this ruling could be immensely beneficial for companies providing streaming video such as Netflix, Amazon (NASDAQ:AMZN) and Google’s (NASDAQ:GOOG) YouTube. These companies may not have to enter into deals with Internet providers such as the Comcast-Netflix deal we mentioned earlier. These companies have always argued that they should not have to pay for delivering content through Internet service providers as their subscribers already pay for the service. Internet streaming services have gained prominence over the years and a study shows that Netflix alone accounts for 34.9% of downstream traffic on North American networks in peak evening hours. ^[4] These regulations can reduce the costs of these companies will help them to expand further in the coming years.

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1. Net neutrality, Wikipedia Definition [↩]
2. Comcast’s (CMCSA) CEO Brian Roberts on Q4 2014 Results – Earnings Call Transcript, February 24, 2015, Seeking Alpha [↩]
3. U.S. FCC chief seeks tighter regulation of Internet providers, February 4, 2015, Reuters [↩]
4. Global Internet Phenomena Report, Sandvine [↩]