Market Insight

Net neutrality rules dismissed by US appeal court

January 15, 2014

James Allison James Allison Principal Analyst, Consumer Devices, IHS Markit

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The US Court of Appeals for the District of Columbia has issued a blow to net neutrality rules, declaring that FCC rules on net neutrality were impermissible. The court declared the rules impermissible because they required broadband providers to serve the public indiscriminately, giving operators no flexibility in managing their networks. The FCC rule that prevented ISPs from blocking internet traffic was also quashed. Two of the judges suggested that by classifying broadband internet as a telecommunications services, the FCC may be able to apply net neutrality laws again.

The biggest impact the ruling will have is on streaming video providers such as Netflix and YouTube. Streaming video accounts for more than half of peak-time traffic in the US, and therefore a major capacity constraint across ISPs networks. With broadband ISPs now able to manage their networks as they see fit, ISPs, particularly cable operators, could throttle Netflix bandwidth claiming that they are responsibly managing their networks, but with the objective of discouraging cord cutting.

The ideal situation for ISPs would be for video-on-demand providers to pay the major ISPs to deliver content faster, or see service levels degraded. There is also nothing to stop ISPs from blocking traffic outright, to boost their own services. Should content providers refuse to pay for their upstream traffic, ISPs can now look to tier their broadband packages by service; for example, with access to ISP run services on lower-priced tiers with services such as Netflix and YouTube only available on higher-priced tiers.

The outcome of this would leave any company, for example Sony with its recently announced pay-TV service, competing with a triple-play provider at a substantial disadvantage. Margins for streaming video services are already low, with the removal of net neutrality rules likely to add costs. Ad funded service providers will be hit the worst by the changes, with even slimmer margins

ISPs will be heartily welcome the changes. IHS expects that ISPs will reduce their investment into capacity upgrades as they have less incentive to invest in their networks, with network congestion less of an issue. Tepid competition at local level will add to the lack of network investment by ISPs.

Mobile networks will be unaffected by the changes, with the 2010 rules, exempting mobile networks from net neutrality rules. With this extra freedom, mobile operators have been exploring new avenues to boost average revenue per user (ARPU). AT&T plans to launch a sponsored data program, allowing content providers to subsidise the cost of data for consumers, with data billed to the content provider, rather than being taken off the consumer's data cap. With an increase in prevalence in data caps on fixed-line data caps, this is an area ripe for exploration by fixed-line broadband providers.

President Obama has been an advocate of net neutrality regulations since his first presidential campaign. For this reason, IHS expects that the FCC will try another means of legislating or regulating the industry to enforce net neutrality rules. Classifying broadband services as a telecommunications service would allow the FCC to place the same restrictions which are placed on "common carrier" telecoms services. However, the move would be difficult politically, and open to further challenge by ISPs. In Europe, the European Commission is aiming to enshrine net neutrality principles in law, with the aim of preventing the blocking or throttling of internet traffic based on content or type.

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