Yesterday, Federal Communications Commission (FCC) Chairman Tom Wheeler proposed new net neutrality laws which will classify high-speed broadband (Internet) as a public utility under Title II of the 1934 Communications Act instead of section 706 of the 1996 Telecom Act.
The reclassification will allow the government to strongly regulate ISPs (Internet Service Providers). Notably, the five-member regulatory body will vote on this proposal on Feb-26.
In Nov 2014, President Obama strongly endorsed net neutrality to bring out a radical change in the way the government treats high-speed broadband service. Net neutrality implies an open-Internet atmosphere which will prohibit ISPs, especially telecom and cable TV operators, from discriminating against applications. As of now, these companies can restrict any device, application, service, or content from running on their respective networks.
In order to control the flow of bandwidth-consuming applications such as video streaming, the ISPs have been selective about several web-based contents and applications. The content developers have to pay heavy sums to ISPs for accelerated data transfer. The latest FCC recommendation aims to prohibit this discriminatory practice by wireless, wireline, or cable TV operators from either blocking or slowing access to any video service.
ISP Stocks Rally Despite Net Neutrality
The day President Obama recommended net neutrality, the stock prices of all ISPs had fallen significantly. However, in sharp contrast to that, when FCC chairman finally proposes the laws, the stock price of ISPs moved upward.
The uptrend likely came on the back of the fact that the proposed law does not include retail price controls on broadband services. Net neutrality does not include rate regulation, tariff regulation and last-mile unbundling. In fact, ISPs will enjoy the upper hand in levying charges on some specialized broadband services.
As a result, the stock price of all major ISPs including Verizon Communications Inc. ( VZ ), AT&T Inc. ( T ), Comcast Corp. ( CMCSA ), Time Warner Cable Inc. ( TWC ), Cablevision Systems Corp. ( CVC ) and Charter Communications Inc. ( CHTR ) were up immediately.
Earlier, ISPs, along with several cable and telecommunications industry bodies, had vehemently opposed net neutrality. The major argument stands that the ISPs have to expend several billion dollars to install and upgrade high-speed mobile broadband network.
Disallowing discriminatory pricing policy will significantly reduce their revenues and margins which will in turn result in lower investment for mobile broadband. Consequently, broadband equipment service providers will suffer (due to lesser investment by ISPs) and lot of jobs will be eliminated from this sector.
Possible Effect on Big Ticket Mergers
The FCC is currently scrutinizing two large merger proposals in the broader telecom industry. AT&T's proposed acquisition of DIRECTV for $48.5 billion and Comcast's planned acquisition of Time Warner Cable for $45.2 billion are currently awaiting regulatory approval.
Meanwhile, the FCC raised the download and upload speed of the Internet to be deemed as broadband (high-speed data). Together with this, the initial concern of strict net neutrality laws raised questions on these mergers. However, a not so hard law may pave the way to clear regulatory hurdles for these deals.
The Bottom Line
The proposed net neutrality rules can significantly alter online access charges of contents including video, music, email, photos, social networks and maps for consumers. Although the final outcome is still not clear, implementation of net neutrality may discourage large investment in the telecom sector whereas it may uplift the financial condition of end-users as the cost of online access may go down since content providers will no longer need to pay extra fees.
Telecommunications is a necessary utility. The need for telecom in both rural and urban areas as well as its role in the infrastructural development of economy is of vital importance. However, it is to be seen how the government manages a trade-off between the two.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.