net neutrality: Google, Verizon and the FCC’s “Third Way”

FCC call for comments

In mid-July, the FCC called for comments on its latest ideas on how it would oversee the internet and deal with net neutrality.  Formulated in May, the agency calls the proposal the “Third Way.”

What made the Third Way necessary was a Federal court decision in April, one I’ve commented on in an earlier post.  In 2008 Comcast had slowed the speed of customers’ access to BitTorrent, a peer-to-peer file-sharing service that Comcast said was hogging too much bandwidth.  The FCC ordered Comcast to stop doing this.  Comcast complied, but sued.  In the April decision, the court said that Congress had not given the FCC the power to issue the kind of order it did.

The first two “ways” the FCC thought it might proceed, but rejected, after the court ruling were:

–continue to issue orders to ISPs concerning their internet service, and run the risk it would lose in court again and again, or

–declare that it no longer considered ISPs to be “information services” but were actually public utility communication services like fixed-line telephone companies, thereby putting the commissions legal authority over ISPs on a firmer legal footing.

The first would be an exercise in futility.  Congress appears to have told the FCC in no uncertain terms that the second alternative was unacceptable.

Hence, the “third” way.

The Third Way

To my mind, the key clause in the wordy Way is:

” Protecting consumers and promoting healthy competition by, for example, providing greater transparency regarding the speeds, services, and prices consumers receive, and ensuring that consumers—individuals as well as small businesses—are treated honestly and fairly;”

In other words, the FCC’s job is to make sure the ISPs make it clear how much they are charging for what service, and that these rate and speed differences aren’t crazy.  This seems to me to be putting the best face possible on the court finding that the FCC doesn’t have the authority to regulate how ISPs control their traffic.  That’s because Congress hasn’t given it to them.  That situation could be changed in an instant,  but by Congess granting the FCC authority. But congress hasn’t done so.

rumored Google-Verizon deal

The story surfaced in the New York Times last week, and is amplified in a Wall Street Journal blog.  I think it’s likely to happen.  The purported agreement would have GOOG paying VZN a fee so that Android-based phones would have priority access to the VZN wireless system.

How is this consistent with net neutrality.  The explanation will turn in what, in my mind, is a semantic trick.  In the Comcast-BitTorrent instance, Comcast was implicitly offering two levels of service–regular and slow.  BitTorrent got the second, everyone else the first.  Although it’s understandable why Comcast would act the way it did, and the court said the company was within its legal rights to do so, advocates of net neutrality worry that this is the thin end of a wedge that would allow IPSs to slow down anyone’s access.  That would be a bad thing.

GOOG-VZN seem to want to define a third tier of service, call it “premium” or “extra-fast” or something like that, that’s faster than regular.  They will presumably argue that for GOOG to pay for this for Android phones is not a violation of net neutrality because no one in particular is being singled out for getting slower service.

The FCC Third Way manifesto suggests this argument will fly with it.  Newspaper reports suggest Congress will give a thumbs-up as well.

investment implications

First, let’s see if this actually happens.

It seems to me that a development like this is bad for AAPL’s iPhone, by giving the already attractive Android platform another positive attribute.  One might even imagine circumstances where GOOG would be willing to pay ATT for premium service on that network, forcing AAPL to either follow suit or maybe try to preempt with a larger payment.

In my earlier post on the court decision, I said that as a growth investor, my preferred way to try to benefit would be to buy makers of internet access devices.  If a GOOG-VZN deal emerges, an equally good (or maybe better) path will likely be through cash-rich content providers or through healthy ISPs.

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