This is a large issue with many nuances, and one that has valid concerns on both sides of the issue.
To get to the heart of this matter, you need to understand that the Internet is not a single entity. It is made up of a large number of individual networks that are inter-connected.
A consumer pays an ISP to connect their personal network to the ISP's network. The ISP may be paying another service provider (often more than one) to connect to their network or the ISP could be a major carrier themselves (i.e. providing large bandwidth connectivity over large geographic areas). These larger carriers interconnect (or peer) with each other at multiple peering points (data centers where they each have a presence). The services to which the consumer wants access are either consumers themselves or may operate large networks of their own.
The other concept to understand is that the internet was largely built on an "over-subscription" model to keep costs low. What this means is that if a ISP/carrier had a certain amount of network capacity, they might sell 10-30 times this amount of bandwidth to customers, knowing that customers don't use all the capacity they pay for 100% of the time.
With "always on" internet and consumers using their bandwidth more (both total and average), this ability to over subscribe has been significantly diminished. Since ISPs/carriers are looking to expand their network capacity and don't want to increase costs to customers (who may choose to move elsewhere if they do), they are looking at other ways to increase revenues to offset the additional costs.
Some of the ways that parties are looking to increase revenues involves treating traffic differently based on the source and/or destination of the traffic. The intent of net neutrality policies would be to prevent providers from treating traffic differently, no matter where it is sourced or destined.
So let's use an example to illustrate some of the issues. To get information from a service such as Netflix a request goes from the consumer's network, to their ISP's network, possibly to one or more carrier networks (for this example, let's say A and then B), and finally to the Netflix network. For simplicity, we will assume the reverse path is the same.
Consumer <--> ISP <--> Carrier A <--> Carrier B <--> Netflix
If both the consumer and Netflix were connected to the same ISP/carrier, there would be no issue as the ISP/carrier would be getting paid by both parties. However in the example I provided, the ISP is paid by the consumer and Carrier B is paid by Netflix. Carrier A isn't compensated directly by either the consumer or Netflix, even though it may carry the data further geographically than anyone else along the path.
Let's look at a few potential cases that already have their seeds in real world practices:
Carrier A is passing a lot of data that isn't originated or destined for someone on their network. They are not getting paid by either party directly.
Carrier A feels that since there is a large amount of data from Netflix passing through it's network (neither sourced or destined for their network), it feels that they should be further compensated for this, and wants Netflix (or possibly Carrier B) to pay them for this traffic.
Netflix doesn't see a need to pay Carrier A, so Carrier A looks at some of the things it can do (to reduce costs for running their network, make their network better for their customers, and/or make it more desirable for Netflix to pay them):
- They can slow down Netflix's traffic unless they pay.
- They may choose to prioritize their traffic and anyone else's that chooses to pay them, leaving Netflix and other traffic to suffer (mainly during peak times when excess capacity may be low).
- They may route Netflix traffic over older/slower infrastructure to leave newer/faster infrastructure for those who paid them for it.
- They may refuse to carry any Netflix data, making it traverse over a longer route (i.e. instead of Carrier A data now must pass through Carrier C, Carrier, D and Carrier E before getting to the ISP).
2-ISP with Netflix
The ISP on the other hand, while getting paid by the consumer notices that the vast majority of the traffic is coming from outside it's network and going to the consumer. The increased bandwidth usage means they need to expand the capacity of their network, but they don't want to increase prices to consumers, and believe Netflix should compensate them.
This results in the same situation as above, with the ISP thinking along the same lines as Carrier A.
3-ISP with Consumer
The ISP decides to offer a "premium" service to consumers, if they want to pay more. This would give the premium consumers' traffic priority during peak times when the ISP's network might be short on capacity. Non-premium customers may notice increased latency and lower speeds during these times.
In my mind, this is an artificially created revenue stream, much like some ISPs that charged a premium for "always on" DSL/cable service. They are creating a perceived need that isn't really necessary so their customers feel better about paying more for the service. Basically, it allows them to raise their rates in a way where the consumer feels better about what they are paying for rather than getting upset.