) recently announced its support to Comcast (
) in the cable company's dispute against content delivery network
provider Level 3. Verizon competes with AT&T (
) and Sprint (
) in mobile business as well as with AT&T & cable providers
like Comcast and Time Warner Cable (
) in pay-TV and broadband business.
Level 3 recently won a contract with Netflix to deliver its
streaming to its customers. As a result of significant expected
increase in Level 3's traffic, Comcast is demanding extra fee from
Level 3 to deliver additional traffic over its pipes. While Level 3
states that Comcast is taking advantage of its large customer base
and reach, Comcast mentions that it is reasonable in its demand as
increase in traffic will violate the current peering agreement
between Comcast and Level 3. The dispute points to the issue of net
neutrality, which has been a hot topic for quite sometime.
Our price estimate for Verizon stands at $31.69
which is about 9% below the current market price.
The Rising Din Over Net Neutrality
Net neutrality is the ideas that ISPs must give equal preference
to all the data over their network. In other words they should
neither block legal content nor should they give more privilege to
certain data sources. FCC has been pushing for net neutrality for
quite sometime and has faced both support and opposition from the
industry. One can argue that it is possible for big internet
companies like Comcast, Time Warner Cable, etc. to give
preferential treatment to their own on-demand content thus
mitigating competition from likes of Netflix (NFLX) who are feared
to be one of the reasons that people are thinking about cord
cutting. Of course these companies can not afford to lose their
Additionally the companies like Verizon and AT&T have been
in the industry for long time and one can argue that they may also
be willing to resort to preferential treatment to benefit certain
long-standing content providers who might be willing to pay more so
as to compete better. This especially hampers newcomers who don't
have enough cash to please the giants.
How Verizon is Impacted?
The FCC is taking a semi-approach to net neutrality wherein most
of the rules will be applied to wireline broadband networks. On the
other hand, wireless networks are given more flexibility as they
are in a nascent stage and have their own technical issues and it
might not be apt to force net neutrality regulations to them as
well. However wireless networks will be required to disclose the
network management practices they employ.
Verizon operates both kinds of networks, but its primary
dependence is on wireless. Wireless networks have faced increased
network congestion due to proliferation of smartphones and tablets.
Thus it becomes necessary to control the traffic in different ways
so as to avoid disruption of data services. With the iPhone coming
to Verizon, it becomes even more important for the company.
Verizon could control traffic by employing data caps but that
can potentially slowdown data revenue growth as consumers will be
paying less for limited data usage. Thus, having the flexibility to
employ other means to manage traffic allows companies like Verizon
to continue to extract more revenues for its data services and will
ensure good growth of
Above you can see how a faster or slower growth in data ARPU can
impact Verizon's price estimate.
You can see
the complete $31.69 Trefis price estimate for
Verizon's stock here.