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Why the FCC Just Botched Net Neutrality

If you want to see a Washington bureaucrat, tech giant, or telecommunications activist froth at the mouth, just mention two words to them…

Net neutrality.

In simple terms, net neutrality is a guarantee that big cable companies and internet service providers will treat all data equally.

For example, they can’t deliver Google’s (GOOGL) data at different speeds than Yahoo!’s (YHOO). They can’t block sites that they deem offensive… or keep consumers from visiting their competitors’ web pages.

The idea sounds great in theory. And net neutrality proponents shouted loud enough and long enough that they finally got what they wanted.

The Federal Communications Commission (FCC) just reached a historic decision to accomplish its net neutrality goal.

Great news, right? Not so fast.

The FCC has made a massive mistake…

The Idea of Equality

“All animals are equal. But some animals are more equal than others.”

So goes George Orwell’s famous line in Animal Farm.

The net neutrality debate follows a similar theme.

To achieve equality – or neutrality – the FCC designated internet service providers as “common carriers.”

The idea of a “common carrier” isn’t new. It dates as far back as the 15th century, when wagons offered to carry people or goods on predefined routes without discrimination. A prince and a pauper had an equal right to travel on a common carrier (as long as the pauper had the fare, of course).

Later, common carrier status was conferred on railroads, airlines, trucking companies, pipelines, and finally, on phone companies. The idea is that – in exchange for privileged access to things like rail lines, routes, roads, pipeline rights-of-way, and telephone poles – common carriers agree not to discriminate among customers. In other words, the president’s phone call isn’t privileged over yours.

And in terms of net neutrality, it was the standoff between Netflix (NFLX) and Comcast (CMCSA) that largely triggered the current push for equality…

The Netflix-Comcast Debacle

In 2013, Netflix subscribers using Comcast found that their streaming speed was slowing, affecting video quality.

Nexflix blamed Comcast. Comcast blamed the internet providers that Netflix was using. And poor customers, caught in the middle, became angry.

The issue was only resolved when Netflix agreed to make a direct connection to Comcast and pay the company an undisclosed fee.

But the damage was done. Angry internet users soon demanded some form of “net neutrality.”  They didn’t want big internet providers like Comcast controlling their access.

For their part, Comcast and the other internet providers consistently rank last in customer service among Americans. Even worse than airlines and health insurers!

Meanwhile, companies in favor of net neutrality – like Netflix and Google – are wildly popular. And even when they do something customers don’t like, they have a reputation for responding to concerns. Cable companies that tried to win the net neutrality argument on “facts” had no hope. Nobody trusts them or their “facts”!

However, the facts are important ­– whether we like them or not…

You Can’t Handle the Truth!

For example, at peak times, Netflix was responsible for up to 30% of internet activity. In fact, usage was so heavy at times that it actually slowed down speeds for everyone, not just its own customers.

Think about it: A Netflix customer streaming a movie in high definition sucks up hundreds of times more internet capacity than a neighbor who’s just checking his stock prices… but pays the same amount for access.

Here’s another hard fact…

Despite the protests of net neutrality advocates, the truth is, some data is just more important than other data. Or at least more time-sensitive.

Think about emergency situations… the stock market… or situations that involve Homeland Security, the defense sector, or NASA.

But in granting “common carrier” designation to internet service providers, the FCC – at the behest of the Obama administration – has made a huge mistake. Some applications are so big that by treating them “equally,” it would essentially crowd out other users.

Perhaps that’s why a couple of important applications – like internet heart-monitoring services – are exempted from the FCC’s order.

But what about new services that haven’t even been invented yet? For example…

  • Why should an internet provider have to plead with a bunch of bureaucrats to get permission to give fire alarms priority?
  • Less importantly, how about online gaming? It’s a huge industry in the United States. Why shouldn’t Sony (SNE) or Microsoft (MSFT) be able to give some of their revenue to internet service providers in exchange for eliminating “lag” – thus improving the gaming experience for PlayStation and Xbox users?
  • Why shouldn’t E*TRADE (ETFC) be able to throw some of its revenue to internet service providers to ensure that stock prices and orders from its day-trading customers aren’t delayed while a neighbor uploads pictures of his cat?

The telecommunications industry is waking up to the fact that digital data is different from crude oil or something you’d put on a UPS (UPS) truck. Unfortunately, most of the industry has woken up too late.

The ink was barely dry on the FCC’s decision before one of its primary proponents, Netflix CFO, David Wells, decided that he and his government-loving friends had unleashed a monster. At Morgan Stanley’s (MS) Technology, Media and Telecom Conference, he said that if it were up to him, the FCC wouldn’t have gone as far as it did.

Even Wall Street Daily Founder, Robert Williams – a net neutrality advocate – was surprised at how far the FCC has gone here.

Netflix is now trying to “clarify” Wells’ remark. But it’s already out there.

Besides, he’s not alone. Net neutrality was a big topic among wireless providers at the recent Mobile World Congress in Barcelona. That’s because the looming disaster is even more pronounced in the wireless world…

The FCC Just Squashed Internet Innovation

Yes, the FCC included wireless providers in its order.

Right now, it doesn’t matter much, since the carriers already manage their data by charging customers instead of content providers. But with the onset of 5G (which I’ll focus on in an upcoming article), there will be many new services fighting for priority.

I don’t imagine that a customer riding in a driverless taxi will be grateful for net neutrality when his car is competing with his Twitter feed to get data!

In addition, a general theme at the conference was that many new products and services that could be developed right here in the United States will now be developed elsewhere, due to net neutrality requirements.

In time, there may be a case for the FCC to ensure that all providers can reach all consumers. After all, it’s not like internet providers haven’t deserved their poor reputations.

But the day for that action hasn’t come. In the meantime, the FCC’s decision was a massive overreaction to a problem that largely hasn’t occurred yet. Its only real effect will be to slow the innovation of wired and wireless internet products in the United States.

To living and investing in the future,

Greg Miller

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