Verizon Weighs in on Comcast Net Neutrality Dispute

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Verizon ( VZ ) recently announced its support to Comcast ( CMCSA ) in the cable company's dispute against content delivery network provider Level 3. Verizon competes with AT&T ( T ) and Sprint ( S ) in mobile business as well as with AT&T & cable providers like Comcast and Time Warner Cable ( TWC ) 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 core customers.

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 data ARPU .

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.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: CMCSA , S , T , TWC , VZ

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