Internet Neutrality and Market Competition

Many consumer advocates expressed concern last week when a federal court judge struck down regulations that required the “net neutrality” of internet service providers. Without such regulations, the advocates fear that telephone and cable companies that provide access to the internet may begin to wreak havoc on the existing system of web services.

On the one hand, they do have valid cause for concern, given that service providers now possess the right to manipulate web traffic patterns. But on the other hand, a little chaos in the short run may possibly benefit consumers in the long run.

What, exactly, is net neutrality? It’s the longstanding policy, first established by the Federal Communications Commission of the United States, that internet service providers must provide equal and open access to all web sites and services. Comcast Cable, for instance, had been prohibited from strengthening the competitive position of its own NBC Universal programs by slowing down or blocking rival video streaming services like Netflix or Google’s YouTube.

But as a result of last week’s court decision, internet service providers now possess the right to engage in such brazen tactics. What would be the outcome of this type of bare knuckled competitive activity?

It’s not difficult to foresee that producers of content might retaliate by developing new technologies for reaching their audiences. Google, for instance, has already introduced its own fiber based internet service network in Kansas City, Missouri. It has announced plans to introduce similar networks in Austin, Texas and Provo, Utah as well.

It’s also possible that producers of content might retrofit and then customize traditional systems of data transmission for digital use. When the original analog television broadcast spectrum was upgraded to transmit digital signals, a “digital dividend” of unused spectrum was set free for alternative uses. This unused spectrum can now be utilized for new broadband networks.

Such blending of traditional television broadcast technologies and web based data streaming services would be consistent with today’s newly emerging delivery systems. Aereo, for instance, is currently battling the legacy television broadcast networks for the right to capture free television signals via antennae, and then to stream the video (without paying royalties) over the internet to its customers.

In other words, although the deregulation of the internet service industry may strengthen the competitive positions of entrenched providers in the short term, it may incentivize new rivals with far deeper pockets to develop innovative delivery systems in the longer term.

If you were the investment director of a telecommunications industry mutual fund, would you buy or sell the stock of Comcast and other internet service providers in light of the recent net neutrality court decision?