Tue Nov 11 2014
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Cable Stocks Plunge On Net Neutrality Talk

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Yesterday, President Obama called on the Federal Communications Commission (FCC) to make a radical change in the way the government treats high-speed broadband service and Internet Service Providers (ISP). The proposed regulations can drastically alter the entire business model of the ISP industry.

Obama has asked the FCC to reclassify high-speed broadband (Internet) as a public utility under Title II of the 1934 Communications Act instead of treating Internet  under section 706 of the 1996 Telecom Act. The reclassification will allow the government to strongly regulate ISPs.

Net Neutrality

Net neutrality implies an open-Internet atmosphere which will prohibit ISPs, especially the telecom and cable TV operators, from discriminating against applications. As of now, these companies can restrict any device, application, service, or content from running through their respective networks.

In order to control the flow of bandwidth-consuming applications such as video streaming, the ISPs were discriminating against several web-based contents and applications. The content developers have to pay heavy sums to ISPs for accelerated data transfer. The FCC recommendation will prohibit this discriminatory practice by wireless, wireline, or cable TV operators from either blocking or slowing access to any video services.

Arguments vs. Net Neutrality

All ISPs, along with several cable and telecommunications industry bodies, have vehemently opposed net neutrality. Republican senators are also not in favor of this newly proposed directive from the president. These groups believe that a slight law reformation under section 706 of the 1996 Telecom Act will be enough to enforce net neutrality.

The major argument, however, stands the ISPs have to expend several billion dollars to install and upgrade high-speed mobile broadband networks. 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.

Losers and Gainers

As soon as Obama’s speech went public, cable MSOs stocks started losing value. Yesterday, Comcast Corp. (CMCSA – Analyst Report), Time Warner Cable Inc. (TWC – Analyst Report), Charter Communications Inc. (CHTR – Analyst Report) and Cablevision Systems Crop. (CVC – Analyst Report) lost around 4%, 5%, 6% and 2% respectively.

Meanwhile, telecom behemoths Verizon Communications (VZ – Analyst Report) and AT&T (T – Analyst Report) have decided to challenge the new regulation in court if FCC ultimately considers the President’s proposition.

On the other hand, content providers and consumer groups are poised to benefit from the proposed law. Netflix (NFLX – Analyst Report), Google (GOOGL – Analyst Report), Amazon (AMZN – Analyst Report) and Hulu are some of the companies who will gain if FCC reclassified broadbandunder Title II of the 1934 Communications Act. At present, these companies pay special charge to ISPs for speedy transmission of their contents.

Finally, the proposed $ 45.2 billion merger deal between Comcast and Time Warner Cable may be jeopardized if the FCC reclassified mobile broadband as public utility. The combined entity currently has more than 33 million high-speed broadband subscribers. The deal is currently under FCC review and the regulator may demand more concession from Comcast once net neutrality is imposed.

Final Outcome Still Cloudy

The FCC is an independent regulatory body and is not under any compulsion to pass a judgment on net neutrality immediately. In Jan 2014, Verizon won a federal court case challenging the FCC’s previous set of net neutrality rules. The court barred the FCC from implementing stringent rules on ISPs as the industry is classified as an informative service. The Congress can intervene and overturn the new rule; however, the President enjoys the power to veto such legislation.

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