Net neutrality will have major implications for the Internet going forward, but the market might be missing one of the biggest opportunities.

netneutrality

Net neutrality is all the rage of late. My colleague Jay Taylor provided a solid crash course on the subject earlier this week.

On one side you have the likes of Netflix (NASDAQ: NFLX) and much of Silicon Valley calling for reform and regulation of Internet service providers.

On the other hand, there’s the question over whether government involvement is really the best solution. Government regulation destroys the notion of free markets.

The major cable and Internet companies, such as Comcast Corporation (NASDAQ: CMCSA), Time Warner Cable Inc (NYSE: TWC), Verizon Communications Inc. (NYSE: VZ) and AT&T Inc. (NYSE: T), all moved lower on President Obama’s endorsement for increasing government regulation and oversight of Internet service providers.

If Obama’s recommendation holds up, Netflix and other companies that use a lot of Internet bandwidth would be big winners.

Without getting into the net neutrality debate too heavily, there is one conversation that’s being overlooked.

Net neutrality promises to provide Internet equally, regardless of the user or application.

But think about this: If all applications and customers are treated equally, it’ll be first come first serve. There’s nothing wrong with that – it’s what Obama, Netflix and Silicon Valley support.

Yet, one thing to keep in mind is that even the cars that are near the front of the line still move at a snail’s pace during a traffic jam.

Regardless of what happens, net neutrality should shine a brighter light on the current state of Internet infrastructure. That’s because the one certainty going forward is that Internet bandwidth demand will only continue to increase.

Data-center sizes are rising as cloud computing becomes a greater reality for all businesses. Plus, Time Warner is bringing HBO to the Internet and the new standard for TVs includes Internet capabilities.

Applications using the Internet will put an even greater strain on the current Internet infrastructure. I’m not talking about your Netflix and YouTube apps. I’m more referring to the idea of driverless cars that use the Internet, or hospital and health care facility applications that use the Internet for diagnosis and treatment, including surgeries.

It all means that there should be a focus on beefing up the current infrastructure going forward.

That brings me to a stock we highlighted last week, Level 3 Communications, Inc. (NYSE: LVLT). Mason Hawkins’ Southeastern Asset Management profiled Level 3 at the fifth annual Invest for Kids Conference. But in thinking about net neutrality and the current state of Internet infrastructure in the U.S., it makes the bull case for Level 3 even more compelling.

Level 3 is a transporter of information. Its infrastructure connects consumers with the Internet. It has a large fiber network, something that Google (NASDAQ: GOOG) is also working on building.

Level 3 already has fiber networks that cover nearly 120,000 intercity route miles, and 60,000 metro route miles in 170 markets. Southeastern Asset’s valuation puts Level 3’s fair value at over $60 a share – considerably below its current  $49 share price. And that valuation does not include its dark fiber assets, which Hawkins say are worth billions of dollars.

Facebook (NASDAQ: FB) has already started using dark fiber cables to open data centers. Amazon.com, Inc. (NASDAQ: AMZN) and Microsoft Corporation (NASDAQ: MSFT) are also heavily investing in network infrastructure to support their cloud computing businesses.

I will leave you with this: Regardless of what happens with net neutrality, the real lesson is that our current Internet infrastructure needs help. It’s come a long way over the last decade, but it’s time for another upgrade.

The big winners of net neutrality should be infrastructure companies like Level 3.

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Published by Wyatt Investment Research at