Net neutrality in Europe may come with a cost, says Fitch

Enforcing net neutrality rules in Europe may boost customer bills as the region's Internet service providers seek ways to pay for network investment and limit further pressure on cash flows, according to Fitch Ratings.

Neelie Kroes, vice-president of the European Commission responsible for the digital agenda, outlined proposals to prevent ISPs from blocking or throttling data speeds of customers using, for example, Microsoft's (NASDAQ:MSFT) Skype, Google's (NASDAQ:GOOG) YouTube or Netflix. In a speech to the European Parliament, Kroes noted that a 2011 study by European regulators showed that in Europe online services are often blocked or degraded, with the practices impacting one in five fixed lines and more than one in three mobile users.

Ending the practices could be costly for ISPs, said Fitch. "Forcing ISPs to treat all data traffic equally would prevent them from transferring some of the costs to the content providers by charging premium rates to carry or prioritize their traffic. It would also reinforce the trend of services such as Apple's (NASDAQ:AAPL) iMessage and Skype video calls taking over from mobile operators' own messaging and voice-call services, which is already hurting revenue," said the ratings firm.

Fitch added that tariff increases would likely be insufficient to fully cover the cost of ongoing network investment, and this could affect cash flows.

"These cash flows are already under strain, particularly among southern European incumbents such as Portugal Telecom, Telecom Italia and Telefonica, which have made substantial cuts to shareholder dividends, partly to protect their network investment plans. The pace at which content streaming, smart devices and bandwidth-hungry social media are growing is likely to maintain this pressure for investment by operators," said Fitch.

Net neutrality is a contentious issue in the United States. Under rules passed by a 3-2 party line vote in December 2010, the FCC barred wireless carriers from blocking services such as Google Voice and Skype that compete with their own voice and video offerings, as well as those in which they have an attributable interest. However, wireless carriers do not face the same tight restrictions as wired operators, which are banned from unreasonable discrimination in transmitting lawful network traffic.

Verizon Wireless (NYSE:VZ) is now the sole challenger to the rules in a U.S. court of appeals. Arguments for the case have not been set.

For more:
- see this Fitch release
- see this Kroes speech transcript

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