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The media is filled today with dark talk about the end of "net neutrality."

One of my favorites is this one, from the lobbying group Public Knowledge. They claim that Netflix' (NASDAQ:NFLX) decision to buy access to Comcast (NASDAQ:CMCSA) (NASDAQ:CMCSK) bandwidth represents the first act in the shaking down of content by last mile ISPs.

But that's not really what is happening.

What is actually happening, as Dan Rayburn of the Streaming Media Blog points out, is that Netflix has decided that buying bits is cheaper than buying pipes.

Rather than buying capacity from Cogent (NASDAQ:CCOI), one of several long-distance fiber companies that connect its servers to local networks, it's going to buy bit delivery through Equinix (NASDAQ:EQIX), which runs fiber interconnects between core Internet Service Providers (ISPs).

Yes, the bits Netflix is buying come from Comcast. The traffic running between the movie rental house and the country's largest last-mile ISP is mainly one-way traffic - customers download from Netflix, they don't upload to it. So the normal "peering" arrangement, which is based on both sides of a digital transaction requiring equal capacity, won't do.

By buying through Equinix, Netflix has a way of measuring its needs. It's buying transit. By buying through Cogent, it only gets a rough estimate. It's buying capacity.

This makes tremendous financial sense for Netflix, and more important for any other Internet "broadcaster," a company whose traffic is mainly moving in one direction, from the service to the consumer.

Network neutrality, as an issue, doesn't enter into it. This is the way peering is designed to work. Netflix pays Equinix for the bits it needs, and Equinix pays Comcast.

But there is a lesson here for investors. Equinix, which is down over 9% over the last year, is starting to look like a better investment. Cogent, which has risen 41.5% over the last year, as well as other third party deliverers of core capacity such as Level 3 (NYSE:LVLT), which is up 91% over the last year, suddenly have a problem.

Netflix, and other Internet broadcasters, are always looking for the best deal. If it makes sense to switch from buying bits from a third party to buying bits directly through a switch, that is what they are going to do. Verizon (NYSE:VZ) is now ready to trumpet the "death of net neutrality," believing that Netflix will shortly do a deal to "buy" bit traffic from its network, but that will only happen if Netflix feels it is in its financial interest to do so.

The lesson for investors should be clear. Follow the money, and ignore the rhetoric. The Internet will be fine, so long as there is competition in its core. As buyers arbitrage between solutions, you can take advantage of their search for bargains.

Source: A Better Way To Play Net Neutrality