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The Federal Communications Commission on Tuesday approved its net neutrality proposal, aiming to protect the free flow of information over the Internet and limit the power of Internet service providers (ISPs) to act as Web gatekeepers.
Net neutrality means providers like Comcast Corp. (Nasdaq: CMCSA) must treat all Internet content equally and cannot interfere with legal Web traffic. It also prohibits "unreasonable discrimination," meaning ISPs can't deliver Amazon.com Inc. (Nasdaq: AMZN) faster than eBay Inc. (Nasdaq: EBAY), or block bandwidth-straining Netflix Inc. (Nasdaq: NFLX).
The rules also require ISPs to provide customers with more information on download speeds and usage limits, and give the FCC power to reject "paid priority" agreements where a content provider like Google Inc. (Nasdaq: GOOG) would pay Comcast more for faster delivery.
"We must take action to protect consumers against price hikes and closed access to the Internet – and our proposed framework is designed to do just that: to guard against these risks while recognizing the legitimate needs and interests of broadband providers," FCC Chairman Julius Genachowski wrote in a blog posting earlier this month.
The law is a milestone in the Internet industry because the FCC has never before had the authority to regulate Web management.
While bandwidth has done well adjusting to technology evolution in the past, it hasn't seen anything like the Internet explosion happening now. Networking specialist Cisco Systems Inc. (Nasdaq: CSCO) estimates Internet traffic will quadruple by 2014 and 90% of it will be online video, gaming and mobile services. Netflix alone accounts for 20% of all Internet traffic on a given evening, according to network solutions provider Sandvine Corp.
Increased Internet usage could lead to significant online disruption if not managed properly.
"It's only a matter of time before the train wreck happens," Michael Howard, co-founder of market researcher Infonetics, told BusinessWeek.
Some ISPs considered slowing specific types of Web traffic, like Skype or Netflix Inc. usage, to cope with congestion.
In 2007, Comcast blocked the use of some of its networks that were used to transmit larger files with high-definition content. The FCC ordered Comcast to stop, but a U.S. court of appeals ruled in April 2010 that the FCC didn't have authority to do so.
The FCC wanted to act before more battles arose, but its new framework comes with vague language and wide loopholes. The need to compromise left everyone – ISPs, content providers and consumers – with a mixed bag of pros and cons, and put a lot of interpretation in the FCC's hands.
"The problem is that there's so much ambiguity in the rules," Brad Burnham of Union Square Ventures, whose investments include Twitter and Foursquare, told The Wall Street Journal.
One ambiguous term critics are focused on is the "reasonable network management" ISPs are allowed to exercise. This could mean providers like Comcast could navigate around the language and provide faster service for some content, like news sites, and slower for others like video as long as they don't discriminate within similar content.
Internet operators are also likely to offer different tiers of service, charging more for higher users than others, although it's unclear how and when these changes would occur. This prompted consumer advocate groups to claim the rules give too much leeway to ISPs.
"These rules appear to be flush with giant loopholes, and the FCC chairman seems far more concerned with winning the endorsement of AT&T and the cable lobbyists than with listening to the millions of Americans who have pleaded with him to fix his proposal," Craig Aaron, managing director of the nonprofit media reform group Free Press, said in a statement.
Aaron called the plan "fake net neutrality."
Cable companies and Internet operators like Comcast, Verizon Communications Inc. (NYSE: VZ) and AT&T Inc. (NYSE: T) weren't happy with the FCC's final outline. AT&T said the plan was "not ideal" and Verizon said it was "deeply concerned" over the commission's decision. Content providers like Netflix were upset that the FCC didn't do more to protect them.
The ambiguity in the rules and the financial interests at stake are likely to prompt legal attacks against the FCC and its proposed oversight.
"The FCC is making an overall pronouncement about its authority, but undoubtedly, there's going to be litigation against it," Rebecca Tushnet, a Georgetown University professor specializing in digital media, told CNNMoney. "One of the grounds of attack against the FCC will be that it can't do this without congressional approval."
With Web congestion bringing a financial disparity between carriers' Internet revenue and traffic, it's likely broadband providers will fight the FCC if they aren't allowed to charge customers as much as they propose for higher usage.
A study from Juniper Networks Inc. (NYSE: JNPR) reports that carriers will get a 5% jump in Internet revenue through 2020 while traffic will increase by 27% annually. The monthly broadband fee covers all types of use regardless of size.
This means carriers' "revenue-per-bit" will decrease over time. Some experts say by 2014 carriers' pricing models will break down because the investment needed to maintain service will exceed revenue.
"The carriers are faced with an incredible deflationary spiral," Craig Moffett, an analyst with Sanford C. Bernstein, told BusinessWeek.
Moffett expects revenue per megabit to fall from 43 cents this year to two cents in 2014.
News and Related Story Links:
- Money Morning:
Net Neutrality Tested by Comcast-Level 3 Netflix Dispute
- The Wall Street Journal:
'Net Neutrality' Rules Set to Pass
- The Wall Street Journal:
Internet Gets New Rules of the Road
Gimmie YouTube! What Net neutrality means for you
Will Netflix Kill the Internet?