Net neutrality debate powers up

E*TRADE Securities2

05/18/17

The fate of Internet open access is in the media with new Federal Communications Commission (FCC) leadership looking to modify existing regulations designed to ensure equal online opportunity for individuals and businesses alike. What’s at stake? In short, that funny cat video could take longer to load, among other, you know, important things. This week we highlight potential opportunities and pitfalls for investors as the FCC looks into changing the Internet landscape, for service providers in particular. 

Understanding equal net traffic

It could be argued the Internet is a fairly level playing field today, with individual users and businesses alike operating under the same conditions. Basically, it’s log on and go—explore new content, do business, or create a platform. Back in 2003, Tim Wu, at the time an associate professor at the University of Virginia, put forth the concept that such access speaks to what is now widely known as net neutrality.1 In essence, it’s a concept that calls for Internet service providers to treat web traffic equally, enabling access to all content and applications without favoritism.

Skip ahead to 2015 when, with a more powerful and vast Internet ecosystem, the FCC approved the first formal regulations around net neutrality. Notably, the vote classified wireless and fixed-line broadband service providers as Title II carriers of telecommunications services, and not information services. That Title II label allows the FCC to treat the providers more like public utilities, and thus enables closer oversight of the industry. 

Up to their own devices, maybe

The current FCC regime favors a return to a “light-touch” regulatory approach that largely leaves it up to the market to decide how Internet service providers (ISPs) go about their offerings to the public.2 Should the FCC remove the Title II designation with the proposed approach, some companies could benefit more than others: 

  • Big ISPs poised to capitalize. Big service providers, such as AT&T, Comcast, and Verizon, among others, may get a boost if a repeal leads to new investment and revenue opportunities. Notably, this comes amid a trend of consumers opting to ditch traditional cable offerings for online streaming.3 With providers increasingly getting into the content game themselves, some believe they could look for ways to prioritize their own content.    
  • Smaller tech prefer status quo. Some say that without the current controls, the big service providers could negatively affect the ability of smaller technology companies and content providers to compete. One way the rules keep Internet users on the same plane is that they prevent providers from striking deals with companies to push their content ahead of others. Another way is that they look to prevent zero rating practices, where users are enticed to engage the service provider’s owned content by not counting it against data limits. Market observers believe larger companies, such as Facebook and Google, would likely have enough clout to negotiate favorable deals with the providers. But a company like Snap, for one, cited a rollback of protections as one of the biggest risks to its business upon filing its initial public offering.4   

Something to bookmark

The FCC voted to move forward with its plan to repeal Title II today. The next step in the process is a period of public input, followed by the FCC’s response to the public’s comments by mid-August, and final vote proceedings thereafter.

Internet chatter promises to heat up further as the process moves forward, and investors would be wise to follow the developments—if not for potential investment opportunities related to their long-term financial goals, at least for the fate of those cat videos.

  

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1. Puzzanghera, Jim. “A brief, strange history of net neutrality (including a ‘series of tubes,’ a dingo and James Harden),” The Los Angeles Times, 3 May 2017. http://www.latimes.com/business/la-fi-net-neutrality-timeline-20170502-htmlstory.html

2. Nicola, Stefan and Hyde, Caroline. “FCC Will Return to ‘Light-Touch’ Regulation, Chairman Says,” Bloomberg, 28 Feb. 2017. https://www.bloomberg.com/news/articles/2017-02-28/fcc-will-return-to-light-touch-regulation-chairman-pai-says

3. Greenstein, Shane; Peitz, Martin; and Valletti, Tommaso M. “Net Neutrality Rules Will Make Winners and Losers out of Businesses,” Harvard Business Review, 27 Jun. 2016.  https://hbr.org/2016/06/net-neutrality-rules-will-make-winners-and-losers-out-of-businesses

4. Snap, Inc. Form S-1 Registration Statement, 2 Feb. 2017. https://www.sec.gov/Archives/edgar/data/1564408/000119312517029199/d270216ds1.htm