Network Neutrality: What If They Really Mean It?

Late Friday, details from the speech that FCC Chairman Julius Genachowski is going to give on Monday showed up in the Wall Street Journal.  I hesitate to say ‘leaked’ because I rather doubt it was unintentional, having such news out over the weekend gives the market time to absorb the news.  The message:  the FCC plans to propose new rules enforcing network neutrality, apparently preventing all service providers, whether wired or wireless, from blocking or otherwise interfering with over-the-top traffic.  I never thought it would get this far this quickly, but clearly the time has come to take stock of how this changes things. 

Obviously over-the-top content providers will be ecstatic, as this will disperse a few of the storm clouds that have long sat above their future business models.  Also, anyone in the bandwidth business who does not serve the consumer last mile will also be very happy, although they will hide their smiles.  I am talking of carriers like Cogent Communications (NASDAQ:CCOI, news, filings) and Level 3 Communications (NYSE:LVLT, news, filings),  as well as CDNs like Akamai (NASDAQ:AKAM, news, filings) and Limelight Networks (NASDAQ:LLNW, news, filings) who stand to make more money from those over-the-top content providers and simply benefit generally from ubiquitous toll-booth-free bandwidth.

However, we should recall that on the ground nothing changes in the wired arena.  Currently I don’t know of any cable or DSL provider that is blocking or slowing traffic for any internet application.  They have threatened to do it, claimed the right and the need to do it, and even tested means of doing it.  But they have been unwilling or unable to withstand the backlash of actually doing it.  For the vast majority of traffic right now, therefore, network neutrality rules are a solution for a potential problem only.  It does change the weather, per se, as over the top providers may have greater assurance about the future.  They will be emboldened, while service providers will have to find some other way to make their economics work or take their chances in court.  Perhaps we will see the return of usage caps and bandwidth limits in a more virulent form than ever, and congestion management systems will find ways to stretch the rules.  Or maybe the battle will just shift to the courts.

The key immediate concern, however, is what happens in the wireless space, where network neutrality is decidedly not in force right now.  If the FCC declares network neutrality immediately, there are third party applications ready to be unleashed that could change the face of telecom.  The fears of the wireless carriers fall into two camps:

• Bandwidth devouring applications: If carriers determine the applications available on wireless phones, they can make sure that one way or another bandwidth demands remain within expected ranges and don’t overwhelm the infrastructure.  If third parties don’t need permission for their apps, then they no longer need to care about minimizing bandwidth usage.  They only need to please the consumer with an app they like, and if they succeed then the carrier gets to deal with the bandwidth it generates.  Fundamentally, wireless carriers vastly oversell data bandwidth in order to make money off it, and therefore depend heavily on low usage.  If they can’t control usage, they can’t match infrastructure costs to subscriber growth, and something will have to give eventually.
• Competiton for voice dollars: VoIP doesn’t use much bandwidth even for wireless, carriers use that as an excuse because they can’t or won’t admit reality.  Skype, Vonage, and Google Voice are primed and ready to challenge all or parts of the traditional wireless voice domain, threatening to siphon off dollars that currently go to the wireless carriers while still using the same infrastructure.  Wireless voice is very vulnerable, it doesn’t have the five 9’s of reliability or superior voice quality with which to scoff at VoIP like traditional PSTN voice did in the early years of consumer VoIP.  We are already accustomed to trading reliability for convenience when it comes to mobile phones. Hence there is no truly compelling case against the invasion.  To compensate, wireless carriers may simply have to restructure their pricing plans, raising prices for data and lowering prices for voice even if their customers hate it.

My biggest question about the proposed rules is this:  if it applies to carriers, cable MSOs, and ISPs, what about device makers?  Right now, AT&T (NYSE:T, news, filings) doesn’t actually filter VoIP on the iPhone, rather it is Apple that does the job.  Apple isn’t filtering traffic, they are controlling what applications can run on an operating system.  Does the FCC have the ability to control this kind of thing without some really major side effects?  It may be a technicality, it actually wouldn’t be a violation of network neutrality but of operating system neutrality.  MicroSoft got in trouble for that sort of thing, but only because it could be accused of abusing a monopoly-like position by over-bundling.  Apple’s iPhone has been amazingly successful, but I haven’t heard anyone call it a monopoly yet.  But Apple doesn’t really care about this, they only hold back VoIP applications because AT&T needs that clause in the contract.  So maybe it’s a moot point, and the FCC will invalidate that clause somehow.

Proposing a rule does not mean it is in force yet of course, there will be some time for industry responses etc.  In other words, this is probably going to get messy quickly.

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Categories: Government Regulations · Internet Traffic