When the Federal Communications Commission (FCC) in 2015 reclassified the internet as a public utility, the effort by telecom providers to squash the regulations appeared doomed. Past federal court rulings essentially had written the FCC’s latest effort to regulate broadband service.
Verizon Communications Inc. (NYSE: VZ) had sued the FCC in 2014, challenging the FCC’s proposed regulation of the internet as an “information service” and ended up with a ruling that vindicated the company but paved the way for the FCC to designate the internet as a “public utility.”
Verizon lost an appeal of that FCC decision earlier this year and it looked like the concept, called “net neutrality,” had carried the day.
Then Donald Trump was elected president, and now the tables may have turned again. Trump has on several occasions expressed his opposition to net neutrality, once calling it “another top down power grab.”
What’s at stake here is a telecom company’s ability to charge higher prices to the heaviest users of its backbone services. Companies like Netflix and Hulu would either have to pay more for a data “fast lane” or their customers might be watching videos with a number of stops and starts, which would very likely lead the customers to quit the service.
If the video company paid for fast lane services, it would then have to eat the difference or raise prices to its customers, neither of which is an appealing choice.
Given President-elect Trump’s dislike of net neutrality, it is reasonable to expect some changes at the FCC. Five FCC commissioners are appointed by the president for a term of five years, and the president designates one of the commissioners as chairman. Traditionally, the commission is divided so that the political party in power has three seats, including the chairman, and the other party has two seats. FCC Chairman Tom Wheeler’s term as commissioner expires in November 2018. Trump could strip Wheeler, who drove the net neutrality cause, of his chairmanship, but the first expiring commission term doesn’t come until next year, and that is Commissioner Ajit Pai, who opposed the net neutrality regulation.
The potential impact both on the fortunes of service providers like Verizon, AT&T Inc. (NYSE: T) and Comcast Corp. (NASDAQ: CMCSA) and on U.S. consumers is probably far greater than the impact on whether or not AT&T gets to complete its proposed acquisition of Time Warner’s media empire.
Service providers have long tried to break out of their basic business of offering nothing but “fat pipes” that carry billions of gigabytes of data at a (low) price to the edge of the backbone where the data then gains value as it is shipped on to consumers along the so-called last mile, where companies like Netflix and Hulu reap the majority of the benefits.
That’s what prompted Verizon to acquire AOL and make an offer on Yahoo — the desire to have content from which it could get a larger piece of the pie. It’s the same issue that drove AT&T to make its huge offer for Time Warner, and it’s why Comcast bought NBC Universal several years ago.
One particularly shrewd recent move (although announced before we knew who the next president would be) was CenturyLink Inc.’s (NYSE: CTL) $34 billion offer to acquire Level 3 Communications Inc. (NASDAQ: LVLT). Level 3’s global internet backbone network is among the world’s largest, and anything that lifts restrictions on what price the company can charge for sending over its network is a good thing for CenturyLink/Level 3. For shareholders it could sweeten CenturyLink’s already sweet dividend yield of 8.9%.
Presidential candidate Donald Trump said he would stop the proposed merger between AT&T and Time Warner, and that has put downward pressure on the company’s share price. The FCC also ruled recently that the company’s plan to exempt DirecTV and DirecTV Now services from its cellular phone customers’ data caps may be anti-competitive. Time Warner owns HBO, CNN and TBS, and it would enjoy a significant competitive advantage if its cellular customers did not have to pay for data.
The FCC at the end of October approved a new rule that requires service providers like Verizon, AT&T, Comcast and Level 3 to receive explicit consent from subscribers before selling data on the consumers’ online behavior to a third party. In practice this may not mean much, however. Do you read every word of the license agreement before you click the “Agree” button? We didn’t think so.