FCC “Drops Net Neutrality Bomb” on Carriers

Netflix being ruined by an un-neutral net

Tom Wheeler, Chairman of the Federal Communications Commission (FCC), is moving to reclassify internet connections as a utility (“telecommunications service”) in a huge victory for Net Neutrality, consumers and businesses. We expect internet costs to keep dropping and for both producers and consumers of internet content to enjoy faster speeds with less interference from the carriers, a problem currently impacting a range of high tech firms and their customers.

Netflix being ruined by an un-neutral net

This is why we need Net Neutrality. We only get a couple hours a day to not work. Don’t ruin this time, Verizon, AT&T, Comcast, Charter, TimeWarner, et al.

Telecom carriers and cable companies wanted some convoluted system of tiered internet pricing to, essentially, grab some of the earnings of Netflix, YouTube and other content providers that are eating television’s lunch. They want you to go to their lame home pages when you go to a browser, they want to block or harass third party service providers for telephone service that are crushing their own subpar product offerings right now, and they want to ding you with penalties as a business or consumer for using their product a lot. If you haven’t followed the controversy, this is a good primer.

Bloomberg broke the story yesterday and Wheeler posted an op-ed in Wired. Astute stock watchers will note that Comcast, ATT and Verizon stock is all up this morning, which surprised me as they should all be tanking given that this is a huge loss for the carriers.  The Bloomberg article points out that the quid pro quo to keep the telecom carrier lobbyists from completely losing their minds, and, fairly, to keep internet providers, well, providing internet and investing in their own products, is that the FCC will remove tariffs on internet access and, most important of all, will not force last-mile unbundling, a huge change in policy from current telecom internet access.

Currently, with Ethernet over Copper, T1 and PRI internet and phone service, AT&T or Verizon provide the physical circuit that connects your business to the Internet or Public Switched Telephone Network (PSTN). Companies like TelePacific and Windstream then rent that circuit wholesale from one of the Bell descendants and resell it to retail customers. The FCC is not going to require this going forward for internet circuits, which includes the geese laying golden eggs for the telecom carriers right now: fiber connections and cable internet.

We will see if in the long run this ends up re-creating a monopoly or duopoly for internet service, which is what happens with utilities in other aspects of our lives. I don’t have any choice in what power company or trash service I use at home. But, if I am getting 1Gbps at Google Fiber prices without getting dinged for using the internet a lot, I won’t care. I mention Google Fiber because it proves that ‘a better city is possible’ and that with the right kind of investment, telecom companies can yield affordable, blazing fast internet.

The end result for our voice over IP customers in Los Angeles, Orange County, Ventura, Riverside, San Diego and San Bernardino is that we ought to see faster service with less content blocking. We are – admittedly anecdotally – seeing suspicious problems with TimeWarner in particular, where VoIP traffic is not performing to spec across different platforms we sell. I can’t help but wonder if VoIP traffic is being slowed on purpose on otherwise fast connections.

For consumers, internet service ought to become cheaper, startups can continue to thrive in Silicon Beaches, Valleys and Alleys building new software and services to use, and I can keep on binging on Netflix and my other favorite digital content.

Windstream’s Fiber & Copper REIT

I’m just fascinated by this move by Windstream (articles from Bloomberg and WSJ) to spin off their physical network assets into a new entity.  Windstream is taking their fiber and copper assets and reclassifying them as real estate and spinning them off, raising some cash to pay down their mountain of debt and improve their cash flow.

While the press is up in arms about this move as some more of corporate America’s tax chicanery (New York Times with the outrage and the retort by Forbes), I think there is a more interesting aspect of this, at least from a telecom cost perspective.  If more telecom companies follow suit, bandwidth truly becomes a commodity, sold as white label bandwidth in bulk to carriers and put into corporate structures that resemble utilities or resource extraction LLPs. It is interesting to note that the Windstream spin-off will have a total of 25 employees running a $650M a year operation – similar in staffing to a REIT managing apartments, or a natural gas pipeline.

The end result could be less pressure from the likes of Verizon and AT&T to throttle bandwidth from companies like Netflix, helping the Net Neutrality cause. I say this because if the carriers are simply leasing white label bandwidth from a telecom REIT or REITs, they may not need to worry as much about spare capacity, peak load times, or intercity routing when pricing services for customers. Similarly, the barrier to entry for new carriers is lowered even further, as you just need to cut a check instead of lay miles of fiber to get in the game, putting further pressure on pricing and on carriers to differentiate their offerings to deliver value to their customers.

For our business customers, this financial maneuver signals that telecom costs will continue their downward slide.