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Net Neutrality

The idea that Internet Service Providers (ISPs) should treat all content and users on the internet equally and fairly

What is Net Neutrality?

Net neutrality is the idea that Internet Service Providers (ISPs) should treat all content and users on the internet equally and fairly. It is to avoid discrimination against certain types of content and keep the internet “open” by preventing ISPs from imposing certain restrictions on usage.

 

Net Neutrality

 

In other words, net neutrality encourages all types of legal internet traffic – data exchanged and transferred over the internet, including messages, files, and content – to be treated equally by ISPs. It is the principle that ISPs should provide access to all sites without preferential treatment and under the same conditions.

 

History of Net Neutrality

The term “net neutrality” was coined in 2003 by Tim Wu, a law professor at the University of Columbia, whose paper aimed to address the concern over ISPs discriminating online and restricting innovation in the long term.

The U.S. Federal Communications Commission (FCC) passed laws that supported open internet in 2010. The federal initiatives were challenged and overturned by Verizon after a legal case in 2014, after which another set of laws was introduced in 2015 to combat the issue.

However, after the change in political administration, the FCC rules from 2015 were replaced with new regulations relaxing the restrictions on ISPs, while enforcing transparency of their practices, as of 2017.

 

Components of Net Neutrality

 

1. No throttling or “fast lane” creation

Internet service providers have the incentive to charge premium prices to consumers and/or corporations (e.g., Netflix) for faster connection speeds. It implies that some companies that pay higher prices are prioritized over others that cannot afford to pay for premium services.

Throttling is disadvantageous for:

  • Small businesses and start-ups that wish to grow their online presence but cannot afford the premium prices;
  • Companies with high bandwidth usage, i.e. popular websites that host a lot of data, such as Google, Netflix, YouTube, and Facebook, which require fast speeds due to the high volume of users; and
  • Companies that are incurring higher costs may pass them on to the consumer in the form of increased prices. Therefore, throttling presents a threat to consumer welfare.

 

A prime example of throttling comes from Comcast Corporation’s deal with Netflix. During negotiations, the connection and streaming speed for Netflix users was slow, but as soon as a deal was agreed between the companies, the speed increased exponentially.

It shows how ISPs and telecommunications providers can monopolize the market to charge premium prices.

 

2. No blocking or banning

Certain websites that host content that an internet service provider does not agree with may be blocked. Similarly, the ISP may ban the use of certain websites or technologies. For example, AT&T banned the use of Wi-Fi routers before facing mass criticism.

In the long term, such practices may limit the use of breakthrough technologies and innovation. At the same time, information costs increase for consumers who want access to websites that are blocked, reducing welfare. Therefore, net neutrality demands that legal content should not be blocked by the ISP, and that all content should be treated fairly.

 

Factors For and Against Net Neutrality

Proponents of net neutrality include software companies (e.g., Amazon), social networking companies (e.g., Facebook), and online streaming service providers (e.g., Netflix and Hulu), along with other net neutrality advocates.

A crucial argument for net neutrality and equal access is that it allows small start-ups and seed-stage businesses to grow online, incentivizing individuals to innovate and create new products and companies. By charging higher prices, ISPs are constraining the growth of small innovative start-ups that cannot afford premium prices.

For example, Facebook might not have replaced Myspace if it was charged high prices for a larger number of users. Similarly, Netflix might not have grown so much if it was constantly charged for better streaming quality.

Supporters of net neutrality also argue that democratic, unrestricted exchange of information and content on the internet is important for countries that identify as democracies.

Internet service providers tend to be against the idea of adopting net neutrality, which is exemplified by lawsuits filed against the FCC by various ISPs and telecommunications companies. One of the primary reasons behind it is the efficiency that traffic shaping brings.

Traffic shaping refers to ISPs allocating higher bandwidth and connection speed to websites that generate more revenue, and lower bandwidth and speed to websites that do not. The practice increases their overall profitability and also incentivizes them to fund research and development and innovate in the long term.

 

The Future of Net Neutrality

Net neutrality is an important principle and an idea that must be preserved and supported for advocates of an “open internet.” For telecommunications companies and ISPs, it presents an obstacle that harms their profitability.

It is reinforced by the fact that such companies spend millions of dollars on lobbying and supporting political campaigns so that rules are overturned in their favor. Ultimately, the future of net neutrality lies in the hands of leaders and politicians who are responsible for creating rules that benefit society as a whole.

 

Related Readings

CFI offers the Certified Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

  • Corporate Strategy
  • Competitive Advantage
  • Market Segmentation and Targeting
  • Startup Valuation Metrics

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