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Net Neutrality Threatens the Business Models of Cell Phone Operators, Wall Street Analysts Say

Most of the arguments against net neutrality rules for wireless providers have centered around capacity. Opponents say there just isn't enough bandwidth to absorb the onslaught of video and other data-intensive applications coming to mobile devices. Carriers need to be able to manage such traffic congestion to prevent their systems from clogging, according to some network engineers and mobile service operators.

But if you ask Wall Street analysts, the biggest risk to carriers is how neutrality rules would upend their business models. It's not about video, they say, but about their cash cow: voice service. Last week, Federal Communications Commission Chairman Julius Genachowski announced a proposal that would codify and expand guidelines for Internet service operators to ensure that consumers get access to any legal content or service of their choosing.

That would mean if you want Skype or Google Voice on your iPhone, a carrier could not stand in your way.

And that has worried mobile service operators such as AT&T, Verizon Wireless, Sprint Nextel and T-Mobile, analysts say, because those services would cut into their greatest source of revenue: voice. And because voice applications don't use up much bandwidth, wireless carriers can't make up the lost revenue by charging more for the data those services use, analysts say.

Craig Moffett, an analyst at Sanford C. Bernstein breaks it down this way:

Cable and telecom Internet service operators can continue to make money even as their networks are open to competing applictions like video services by charging consumers by the amount of data they use.

"That doesn't solve the problem for wireless," Moffett said in a telephone interview. "For wireless, the arbitrage risk comes from low bandwidth applications like Skype and Google Voice, but unfortunately for the voice business, almost all the revenue today comes from low bandwidth voice and data applications. So it's a risk that simply can't be managed by the adoption of usage-based pricing schemes."

"So up to now, operators have managed that risk by simply prohibiting certain applications. In net neutral world, they wouldn't have that luxury," Moffett said.

To be sure, bandwidth constraints are an issue and will be a bigger problem in the future as more people buy smart phones, analysts say.

The carriers say they are already seeing huge a surge in mobile broadband use. CTIA-The Wireless Association filed a petition Tuesday with the FCC asking for 800 mhz of additional spectrum over the next six years so carriers can beef up their networks. High-tech titans Microsoft and Google have pushed for the use of unlicensed radio waves -- known as white spaces -- as an alternative to carriers' networks for accessing the Web.

U.S. wireless networks are "facing incredible bandwidth strains, and which require continued private investment at very high levels, and pro-active network management, to ensure service quality for 270 million customers," said Jim Cicconi, AT&T's senior executive vice president of external and legislative affairs in a statement after the FCC announcement last week.

Genachowski said last week when he proposed the new rules that the agency would take those concerns into account as it draws up final rules over the next few months.

By Cecilia Kang  |  September 29, 2009; 2:51 PM ET  | Category:  Cecilia Kang
Previous: Worth Reading: Apple Blocks Political iPhone App? Plus, a Look at AT&T's Attack on Google Voice | Next: Former FCC Chairman Kevin Martin Heads To Patton Boggs

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Net neutrality sounds so grand and utopian. But at the end, those clamoring for net neutrality and the ones most benefit from it, e.g. Google, Amazon, MSFT, ... Since smart-phone apps store is an "infrastructure" that enables smart-phone, should there be app-store neutrality? Should Apple be forced to give up control of the iPhone apps store (using the same logic as Net Neutrality), or that the iPhone development platform be opened up to other development platforms? Where do you draw the line? Of course, net neutrality is beneficial to customers. But if the "infrastructure" companies cannot control the properties they acquired with HUGE upfront costs, why should any companies in the future consider projects that require huge up-front in case the benefits get "confiscated". It's like Hugo Chavez voided all those oil deals struck with oil companies and nationalized the oil fields to benefits his citizens.

Posted by: ryip | September 29, 2009 7:28 PM

ryip, net neutrality isn't "grand and utopian" - it's simply needed by us customers for basic freedom of communication and commerce.

WE, the customers, are the ones who most benefit from it - not Google, not Amazon, not Microsoft.

Under net neutrality, infrastructure companies still control the infrastructure they purchased under net neutrality. They can manage, and charge for, network utilization and bandwidth. They can charge different amounts for different levels of usage.

What network neutrality PREVENTS is allowing those ISP's to control what web sites I can visit.

Network neutrality PREVENTS those ISP's from making one video on demand provider (say, Netflix) fast and a competitor slow.

Network neutrality PREVENTS ISPs from charging a kickback from web site owners every time their site is visited.

No benefits from legitimate investment are being confiscated. What is being prevented is allowing near-monopolies from leveraging their position as a service provider to control what web sites I can visit, what merchants I can purchase from, what information I can see, and what small startups can survive.

Preventing that sort of gross corporate misbehavior is nothing like Hugo Chavez. Companies that behave reasonably have nothing to fear.

Investing in infrastructure, and getting a good return on infrastructure, is one thing.

Using that infrastructure to choke off the access to the Internet that I pay for - to control what web sites I can see, what legal content I can download, what legal applications I can use - is a gross infringement on the right of a free society to freely communicate and do business.

What ISP's want to do is equivalent to AT&T not letting you call Sprint customers - or not letting you call Macy's with a good connection unless Macy pays them a kickback - or blocking calls to VOIP customers.

We don't permit telephone utilities that sort of abusive behavior.

ISPs are the telephone companies of tomorrow. They deserve a good return on their bandwidth investment. They are not entitled to a stranglehold on free communication in our society.

We did not permit telcos to do this, and we cannot permit ISPs to do so either.

Posted by: VirginiaGal2 | September 29, 2009 8:57 PM

"VirginiaGal2," I am an ISP, and I resent your assertions that I want to block anyone from doing anything -- other than abusing the network or ruining it for others. Your unwarranted ad hominem attacks are inappropriate.

Posted by: squirma | September 29, 2009 9:47 PM

Squirma, you are opposing rules that keep the Internet free and fair.

Network abuse can still be prevented with network neutrality.

"Ruining the network for others" can still be prevented with network neutrality.

Reasonable network management has been included in EVERY proposal made thus far.

I have not given any ad hominem attacks whatsoever - which would be especially difficult re you given that I WASN'T TALKING TO YOU.

Bottom line is, network neutrality is essential to protect our freedoms of expression, thought, and commerce.

That is not an ad hominem attack. I'm afraid if you take a bad position, you have to live with the valid criticisms of it.

Posted by: VirginiaGal2 | September 29, 2009 10:21 PM

The Internet has flourished thus far without regulation, and there is no reason at all to think it would not continue to do so. The calls for regulation are false alarms, raised by corporate lobbyists seeking to regulate the Internet -- and harm consumers -- to benefit those corporations' bottom lines.

Do you trust Google -- the number one source of spyware cookies on the Internet? The company which reads every e-mail message it handles, compiles a dossier on its users, and uses this information to target advertising at them? Google just happens to be the funding source for all of the DC lobbying groups which are pushing for "network neutrality" regulation. Ever wonder why? Because, among other things, it would stop ISPs from doing anything about these intrusions on behalf of consumers. It also would prevent competitors from arising to challenge Google's monopoly.

Don't believe the scare stories. ISPs are working for consumers -- and we know well that if we don't, customers can and will go elsewhere. Don't tie our hands with anti-consumer regulation that would increase the cost of Internet access, lower quality of service, and kill competition.

--Brett Glass

Posted by: squirma | September 29, 2009 11:22 PM

Brett, the Internet has flourished as a place where information flows freely and businesses are not strangled by ISPs.

Regulation to preserve that freedom, and to prevent unfair and unreasonable actions by ISPs should be no threat whatsoever to ISPs that do not intend to do that unfair and unreasonable things.

The concerns are not false alarms - they are based on actual abuses by actual ISPs. I'm in the IT industry, so don't claim scare tactics when I know the concerns are real.

The concerns have been repeatedly discussed in industry publications, which I read regularly, and are frequently raised by experts in computing.

The IT industry press and most industry groups - except for the ISP providers - have been practically ecstatic over the new proposed rules - a fact that you conveniently leave out.

Most of what we think of as the Internet - the web sites, the applications, the news feeds - are FOR these rules - to protect the Internet from unfair and monopolistic strangling of competition.

Scare tactics about Google are a waste of time. I don't claim to think Google is good, bad, or indifferent. In this case, however, if they are for net neutrality, in my book they're on the side of the angels.

And it is blatantly and grotesquely untrue to claim that Google is the only group lobbying for net neutrality.

Honestly, Brett, I've been in IT well over 20 years - do you think I fell off a turnip truck yesterday? Don't insult my intelligence. I know the IT and industry groups advocating for net neutrality.

ISPs are businesses. They aren't working for consumers - they're working for shareholders.

Net neutrality is pro-business and pro-consumer. It is business neutral for the ISPs. They can thrive with it or without it. It does cost them the potential to leverage monopolistic power.

And I'll point out - most of us consumers don't have a place to go. ISPs are largely monopolies - with one or perhaps two choices even in many large urban areas.

Net neutrality will not increase the cost of Internet access. Net neutrality will not lower the quality of services. Net neutrality will not kill competition.

You need to respect the intelligence of your audience here. DC has one of the largest IT communities in the country. We know better. You may be able to fool the editorial board, who are not techies - but you've got a pretty large geek population reading this.

Posted by: VirginiaGal2 | September 29, 2009 11:48 PM

VirginiaGal2, you're spouting Google's corporate lobbying agenda -- complete with its fearmongering about "evil" ISPs -- very well. No, Google isn't the only source of funding for the inside-the-Beltway lobbyists who are lobbying to regulate the Internet -- just the biggest one. Other large corporations -- none of which have consumers' interests in mind -- are funding them as well.

The fact is that "network neutrality" regulation would serve no one but large corporations such as Google (which, by the way, is the most insidious invader of consumer privacy on the Internet today; it's the number one source of spyware "tracking cookies"). "Network neutrality" regulation would increase the price of broadband; drive small, rural, and competitive broadband providers out of business (leaving consumers with fewer choices); harm quality of service (no one would be able to rein in the bandwidth hogging kid, downloading illegal video, who slows down service for the entire neighborhood); and deter innovation.

The Internet started and has flourished without regulation, and this trend shows no sign of changing. And it won't, unless the lobbyists, lawyers, and reguators -- all serving corporate masters -- are allowed to step in and ruin the incredible resource that the Internet has become.

Posted by: squirma | September 30, 2009 10:26 AM

"VirginiaGal2," the "geek population" which is reading this string of comments knows quite well how the lobbying game is played, and that large corporations are pulling most of the strings. They also know just how rich Google is -- and how much money it's investing in Washington lobbyists. And they don't want their hands tied, or their ability to innovate eliminated, by stifling regulation.

Remember: the Internet has flourished for 26 years without regulation, and the innovation shows no sign of stopping. The only thing that could stop it would be lawyers, lobbyists, and unnecessary regulation.

Posted by: squirma | September 30, 2009 11:21 AM

Can you 2 stop...

squirma, you read like a PR guy so no one reading this article or thread is going to trust you anyways.

virigniagal2, you're not sounding much better after the 3rd post.

I don't trust ISPs good will and I don't trust Google either.

However, if Comcast or VZ can "shape" my network traffic then I know the end of the Internet as we know it is around the corner. There already monopolistic behavior will be exacerbated if net neutrality is not allowed to continue, regulation or not.

Posted by: ihatethisplace | September 30, 2009 12:58 PM

"ihatethisplace," actually I am the CEO, CFO, CTO, chief cook and bottle washer for my company. (Yes, I guess that this means that, technically, I am the PR guy too.) It's a small "mom and pop" business, and I manage its day-to-day operations. I'm a genuine small businessman serving my local community. No big, faceless corporations. And the buck stops here. My customers trust me, and I do my darnedest to earn that trust. Every day.

So, you might call me a real life "Joe the Plumber." (Or maybe it'd be more apt to say "Mario the Plumber," because I'm constantly fighting off 900 pound gorillas -- the cable and telephone companies.) I'm the one who fits the pipes and fixes the leaks.

As for traffic shaping: it's a necessary part of network management. If ISPs did not do it, the kid down the street running BitTorrent -- uploading and downloading illegal copies of music and movies day and night -- would be the one who "shaped" your traffic by slowing your Internet connection. If abusers were not reined in, it really WOULD be the end of the Internet.

You don't have to "trust" me on this; it's a simple consequence of the laws of physics and information theory.

Don't prevent me from running my network the best I can. It's tough enough as it is -- with no access to licensed spectrum, anticompetitive pricing for my Internet backhaul, and increasing noise on the unlicensed radio bands. Regulation that prevented me from breaking even would be the last nail in the coffin.

Posted by: squirma | September 30, 2009 3:44 PM

squirma, none of us care about Google. Instead of trying to get people worked up about "Google is for this, Google is evil, therefore this must be evil", maybe you could actually debate the issues.

In fact, the wireless ISPs alone are spending nearly twice what Google is to oppose this (via CITA. The wireless ISPs are also large corporations that also care about their stockholders first.

I personally do not care about the various corporate positions and I am at a loss as to why you think the rest of us should care.

Network neutrality is in no small part advocated by techies and by groups that are interested in freedom of the press and speech. Say what you will about the ACLU, I don't think they are primarily advocating for corporate interests here, nor do I think that was their motivation in testifying in favor of net neutrality at the FCC hearings.

Network neutrality has no reason to increase the price of broadband. Increase the odds of metered Internet, yes - increased prices for most people, no.

Net neutrality should have no effect whatsoever on small, rural, and competitive broadband providers, because they can charge for usage - net neutrality isn't "free regardless of how much you use". You can charge for usage.

Charging more for using more works remarkably well to regulate consumption of electricity, water, gasoline, designer clothes, nice cars, and all the other goods in our society.

Net neutrality does not enable the bandwidth hogging kid, because he's going to have to PAY for the usage of that bandwidth. And I'll point out that downloading legal video - which along with realtime gaming are the main growth right now in bandwith usage - takes up just as much space as downloading pirated video.

The Internet has operated under de facto net neutrality - and that's why it's flourished. The proposed regs are to preserve that freedom.

Posted by: VirginiaGal2 | September 30, 2009 8:18 PM

"VirginiaGal2," you're spouting the entire litany of lies right out of the Google lobbyists' playbook. While you have not identified yourself as I have (why the secrecy?), you are obviously a Google lobbyist. Let me guess: Are you Megan Tady? Gigi Sohn?

As for some of your latest bogus assertions: "The wireless ISPs" are not rich at all, and are not represented by CTIA. (CTIA is a cellular industry trade group, and cellular providers are not WISPs.) And "network neutrality" isn't advocated by any techie who is knowledgeable about the proposed regulations, their origins, or their effects. No engineer wants his or her hands tied, which is exactly what this regulation would do. See the wise words of David Farber, "grandfather of the Internet" (he mentored many of its early developers) at

Also, as an ISP, I can tell you with authority that "network regulations" would not only be costly; they'd drive many ISPs -- especially small, competitive, and rural ones -- right out of business. ISPs in high cost areas must ration bandwidth, prioritize and shape traffic, and prohibit bandwidth hogging to keep their prices reasonable. If those prices are forced to increase (and the regulation would do this), users will depart and these ISPs will be out of business. No, the solution isn't to "charge more" -- and your assertion that it is demonstrates your lack of concern for consumers. We care about our customers, and want all of them to get the highest quality of service for the least money. We've developed many innovative ways to do that. Outlaw those practices, and your patron, Google, might prosper but consumers will suffer.

--Brett Glass, LARIAT

Posted by: squirma | September 30, 2009 9:47 PM

Brett, honestly, you on Google and birthers on the birth certificate are peas in a pod.

Your whole argument appears to be "Google evil, Google for net neutrality, net neutrality must be evil." Which, BTW, would be an awesome example of an ad hominem attack, were Google a hominem.

While I'm slightly flattered that you think my arguments are of lobbyist quality, I am a middle aged computer geek who is not a lobbyist, does not work for a lobbyist, does not work for a company with a "dog in this fight", and has no interested in becoming a lobbyist.

I do care about First Amendment rights on the Internet - a lot - and I do care about people running around spouting misinformation about it.

Re CTIA, representing Verizon, AT&T, Sprint, et al, are spending nearly twice what Google is - and that's just one lobbying group. There are dozens of powerful companies arguing against net neutrality and for their own corporate interests.

Net neutrality actually is advocated by many techies. Point of fact, while David Farber was the counterpoint in the Communications of the ACM article, Barbara van Schewick was the point. Perhaps if you addressed her points with rational arguments, rather than calling her names and misstating her arguments, I would be a bit less skeptical.

Bottom line is, ISPs are already admitting that they will do okay with net neutrality.

Pricing according to usage is not the same thing as "charging more" - charging more for bandwidth hogs prevents that behavior, and allows you to keep prices reasonable for everyone else. It's the same reason not everyone gets a Jag - some people pay for a Jag, most of us don't want to.

Suggesting charging more for bandwidth hogs does in fact show my concern for your customers - those with a reasonable level of usage pay no more, those that use a lot pay for that usage. Giving away bandwidth to hogs does not demonstrate customer concern.

The regs don't require that prices increase - you wanting it to be true, and refusing to see that it doesn't have to be, doesn't make it true. Bottom line is, a variety of ways to practically implement net neutrality have been put forward by experts.

Posted by: VirginiaGal2 | September 30, 2009 10:32 PM

VirginiaGal2, you're incorrect about the lobbying money. Google is spending hundreds of millions -- much of it filtered though foundations and/or given to "astroturf" groups -- on this. Far more than all of the other players combined. One has to ask why it thinks it's worth that much.

And ISPs won't "do OK" with network neutrality regulation. All of them will be harmed, as will their customers -- who will see higher prices and lower quality of service. Some of the larger ones, such as Verizon, are betting that the regulation will harm their smaller competitors more than it will hurt them (which is true), and are therefore not protesting very much. They figure that, in the end, the elimination of competition as well as cross-subsidies from their other lines of business will make up for the impact. But consumers will lose as small, competitive, and rural ISPs, which cannot survive the impact of regulations which prevent them from having sustainable business models, are put out of business and they have fewer choices.

--Brett Glass, LARIAT

Posted by: squirma | October 1, 2009 1:02 PM

squirma, I'm going by the publicly available lobbying dollar amounts. If you have sources that indicate "hundreds of millions" - rather than just making random accusations - by all means, please post them here.

I don't believe accusations not backed up by facts, and the facts I can find do not match what you are saying.

The publicly available numbers indicate 1.83 million. ONE wireless lobbying group spent 3 million lobbying against it, reported the same way in the same time period, but I don't see you railing about evil ISP money.

In fact, ISPs have no reason to charge more, and they have no reason to be harmed. In fact, per the EFF, most ISPs are managing their nets by usage, limiting how many any one user can do at a time, which is totally acceptable under net neutrality.

We are likely to wind up with charges for usage beyond a certain level - just as we have with phone lines. In other words, bandwidth pigs will pay more, which they should.

There is no reason for ISPs to charge more for people who don't use more. It isn't going to hurt your "business model."

Posted by: VirginiaGal2 | October 1, 2009 7:31 PM

VirginiaGal2, you are obviously unable to follow the money trail. Google spent about $10 million in one year on ONE lobbying group: the "New America Foundation," whose chairmanship it bought for its CEO (thus making the so-called "public interest" group a wholly owned subsidiary).

But then, it appears that you either work for Google or one of its lobbying groups yourself, and therefore are likely to try to cover this up.

Posted by: squirma | October 2, 2009 9:06 PM

squirma, I'm just less credulous than you are. The New America Foundation is a public policy think tank, not a lobbying group, headquartered in DC, with a president who's a former WaPo editor and board members including Fareed Zakaria, Laura D'Andrea Tyson, etc.

It covers a wide range of topics, including foreign policy, economics, education, etc.

Searching on it and "net neutrality", I came up with a grand total of 6 hits in the news. Doesn't appear to be doing a whole lot of lobbying or even public commenting on net neutrality. You get a lot more hits re it and the Iran election controversy (one of its fellows wrote a controversial opinion piece.)

I'll also point out that I have been a member of the WaPo online forum for some time, something that you would know how to check if you lived in the area and weren't just doing a driveby since August.

Now, there are two possibilities. One, I really am a middle aged, female geek and cancer survivor who lives in Virginia, used to work for a health insurance company, and has an interest in politics, technology, health care reform, and pets, and has posted on those topics for the past year and a half.

Or two, that my 17 months of posts are a consistent cover story elaborately built up because I am psychic and I knew one day you would show up here, and I'm really secretly a Google lobbyist here to rebut you.

I somehow don't think even you would think the latter. If someone were that foolish, and I don't think you are, they can always use the movie Signs as a nice tutorial on how to make a tinfoil hat.

Posted by: VirginiaGal2 | October 5, 2009 10:45 PM

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