What’s the Deal with Net Neutrality?

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What’s the Big Deal with Net Neutrality?
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Today’s column is about free speech; it’s also about money, markets, technology, politics, and more.  The key phrase is “Network Neutrality.”

At the heart of the matter is the question of whether all entities should have equal access to the Internet or whether entities that pay more should get premium access.

If you answer the former, you align yourself with groups like Moveon.org, AARP, American Library Association, Gun Owners of America, the Christian Coalition, Vinton Cerf (“father of the Internet”) and Tim Berners-Lee (the inventor of the World Wide Web).  Also on this side are major content providers like Google, Yahoo!, eBay, Amazon, IAC/InterActiveCorp and Microsoft.

If you answer the latter, you side with FreedomWorks Foundation, National Black Chamber of Commerce, Competitive Enterprise Institute, Progress and Freedom Foundation, Citizens Against Government Waste, the National Association of Manufacturers and Bob Kahn (the inventor of Transmission Control Protocol, or TCP).  Also on this side are major Internet service providers like AT&T, Verizon, Time Warner and Comcast.

Be careful how you answer.  Consider the arguments first, and think about it.

Right now, we generally have network neutrality.  If you send a picture of a litter of cute puppies to your aunt in Oregon, it gets the same level of treatment as it passes through the Internet’s connections as a video that’s being streamed from Netflix (one entity with big pockets) to the home of Bill Gates (more big pockets).

In effect, the Internet currently functions as a “dumb network,” where neither the content of the message nor the identities of the sender and recipient matter.  In this simple system (which is, in reality, quite complex, with numerous participants), the job of the service providers is to “Deliver the Bits, Stupid” and let the end-users deal with the content that the bits represent.

Proponents of network neutrality say that they want to preserve this state of affairs by enacting new legislation, and thus permanently protect the system from the corrupting effects of companies like AT&T and Verizon, which are increasingly tempted to charge more to the biggest users of their networks … and whose dominance is growing.

Proponents furthermore claim that the open nature of the Internet has always fostered innovation by players large and small, and that allowing network operators to provide preferential treatment based on financial clout would reward the current big players while disadvantaging younger, smaller competitors.  At worst, say some, it would end up looking like cable TV!

Opponents say that no more regulation is needed, that providers of Internet service already have an incentive to satisfy all their customers, and that no more incentive is needed.  Opponents furthermore say more regulations would stifle innovation and that any attempt at regulation would be clumsy and lead to unintended consequences, in part because no member of Congress can understand how the system works now, let alone look ahead and anticipate how it will work in the future.

Before you decide, let’s take a look at the past, just to get a better view of the landscape.

Exactly 150 years ago, in 1860, a U.S. federal law (the Pacific Telegraph Act of 1860) was passed to subsidize the construction of a telegraph line that joined San Francisco to the eastern part of the country.  Part of that law stipulated, “messages received from any individual, company, or corporation, or from any telegraph lines connecting with this line at either of its termini, shall be impartially transmitted in the order of their reception, excepting that the dispatches of the government shall have priority.”

That turned out pretty well … unless you worked for the Pony Express.

Today, the telegraph network is obsolete.  In its place we have the telephone network, which is governed by similar “common carrier” laws.  These not only require that the networks treat calls from and to all entities equally, they provide the carrier with legal protection from the content that travels on its system.

Moving to the Internet, when DSL (Digital Subscriber Line) service was introduced, it was categorized as a telecommunications service, and subject to common carrier regulations.  (Cable modem Internet access has always been categorized under U.S. law as an information service, and not a telecommunications service, and thus has not been subject to common carrier regulations.)  However, on August 5, 2005, the FCC reclassified DSL services as information services rather than telecommunications services, and replaced common carrier requirements on them with a set of four less-restrictive Net Neutrality principles.

These principles say:

To encourage broadband deployment and preserve and promote the open and interconnected nature of the public Internet, consumers are entitled to:

1) Access the lawful Internet content of their choice.

2) Run applications and use services of their choice, subject to the needs of law enforcement.

3) Connect their choice of legal devices that do not harm the network.

4) Competition among network providers, application and service providers, and content providers.

These points are often summarized as “any lawful content, any lawful application, any lawful device, any provider.”

However, these principles are not FCC rules, and therefore not enforceable requirements.

To date, there have been five attempts to legislate certain network neutrality provisions.  Each of these bills sought to prohibit various variable pricing schemes by Internet service providers, a practice known as tiered service in the industry, and as price discrimination by economists.

But every attempt has failed.

Which means that every ISP (Internet Service Provider) has the power today to discriminate (or “prioritize” to use a less politically charged word) on the basis of the type of content, applications or services and the level of service purchased by the user.

Generally, however, they don’t.  Yes, some ISPs sell tiered bandwidth; the more you pay the faster your connection.  But excepting that, the universal practice is all-you-can-eat.

There was a period, some years ago, when peer-to-peer (P2P) networks were growing in power, that some ISPs reduced service to the biggest users (abusers) … typically students illegally sharing large amounts of songs and movies.  

But in recent years, the use of P2P networks has grown less significant, in part because companies like Apple, Amazon and Google (owner of YouTube, a major bandwidth hog) have made it so convenient to acquire and view content legally.

For example, five years ago, Internet traffic was proportionally distributed among tens of thousands of networks. Two years ago, 15,000 networks accounted for about 50% of online traffic. Today, 100 networks out of over 35,000 contribute 60% of all online traffic.

The largest source of traffic is Google, which accounts for 6% of all Internet traffic globally.

Fifty-two percent of online traffic is Web (HTTP) traffic, up from almost 42% in 2007.  And somewhere between 25% and 40% of that Web traffic is video … which is not to say that 25% to 40% of Internet users are watching video but that video is so data-intensive a medium that is uses a disproportionate share of the available bandwidth.

In the meantime, there’s been a steady decline in the price of data transit, from $120/Mbps in 2003 to $12/Mbps to an estimated $1.20/Mbps in 2014.

And there’s little doubt these trends will continue … and the major content providers, like Apple, Google, Amazon, Netflix, eBay, Microsoft and Yahoo! will continue to account for a growing percentage of the total.

So what’s the best course?

In principal, I’m against increased legislation; I generally trust the market to adapt to the need of customers.  Imagine how the Internet might work today if the government controlled it!

On the other hand, I’m sensitive to the fact that Google (like the other big content providers) benefits mightily from its leadership position.  Google loves that the Internet appears free, so you keep clicking on the ads and links that generate its profits ($1.6 billion in the third quarter).  But bandwidth is paid for by the service providers!  To use a lousy metaphor, Google is driving its trucks on highways that we’re all paying to maintain, and it’s not paying its “fair share.”

So far, the Internet has grown so fast, and the benefits have been so broad-based, that putting throttles on the system by charging extra for heavy access wasn’t deemed necessary.  But as time goes by, and the growth slows and the heavy users become more identifiable, that is likely to change, and schemes that feature bandwidth restrictions and usage-based pricing are likely to proliferate.

In fact, if I look at where my money goes today, I find that my ISP and my local landline phone service are the only places where I get unlimited usage for one flat fee.  Otherwise, usage-based pricing is the norm.  We use it for cell phone calls, if we go over our minimum.  And we use it when we drive on toll highways, and when we consume electricity, water and natural gas.  Yes, we get “free access” when we drive on municipal roads, and when we use public parks, but those are owned by governments, and thus paid for by taxes.

So, the real question to ask the proponents of network neutrality appears to be this.  “Is the Internet so unique that it merits special legislation that forbids the practice of pricing systems that discriminate based on usage?”  I think not.

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As for the stock market, it’s now in a well-deserved correction.  After a 10-month advance, the market needed to calm the emotions of some investors who were getting a little over-exuberant.  And the cooling-off has already helped.  In time, I fully expect the bull market to reassert itself, and leading stocks to move to new highs.

But when?

That’s the $64,000 question.

For guidance, I suggest you turn to our in-house expert on market timing, Michael Cintolo, who’s just been named to the list of top long-term timers by Timer Digest.  Specifically, Mike’s timing in Cabot Market Letter has beaten the market in 2007, 2008 and 2009, putting him near the head of the pack for the past one-year, three-years, five-years and 10-years.

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Yours in pursuit of wisdom and wealth,

Timothy Lutts
Cabot Wealth Advisory

P.S. As promised on Saturday, we’re bringing you the Cabot Weekly Review video today. In it, Mike Cintolo discusses how to determine the stock market’s trend and which stocks are breaking down, and which are holding up, in the current correction. Featured stocks: Apple (AAPL), Green Mountain Coffee Roasters (GMC), Insulet (PODD), Buffalo Wild Wings (BWLD), Rino International (RINO), EnerNOC ENOC, Sanina (SANM) and Plexus (PLXS).



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