Telecom & Wireless

What a New FCC Chairman Means for the Nation's Big Internet Service Providers

The first news that President Donald Trump was about to appoint a new chairman of the Federal Communications Commission (FCC) hit the wires on Friday with a report from Politico that current commissioner Ajit Pai was the president’s choice to head the agency. Most observers believe Pai’s appointment will mark the end of what is known as “net neutrality.”

Net neutrality means that internet service providers must treat all web traffic equally and prohibits cable and telecom carriers from establishing a “fast lane” for which they could extract higher payments. Internet users who post a photo to Instagram must be treated the same as a company that streams videos. The big internet providers -— AT&T Inc. (NYSE: T), Verizon Communications Inc. (NYSE: VZ) and Comcast Corp. (NYSE: CMCSA) — have fought such a rule for years, and if Pai is named chairman, net neutrality is a virtual certainty to be discarded.

Current FCC Chairman Tom Wheeler still has two years to run on his appointment to the FCC, and while Trump cannot replace Wheeler until his term expires, the president does have the authority to strip Wheeler of the chairmanship and appoint a new chairman in his place. In addition to being the obvious choice based on his record, Pai would also be able to forego Senate confirmation because he was vetted by the Senate at the time of his original appointment.

Last June the Washington, D.C., federal circuit court voted by a margin of two to one to uphold the FCC’s net neutrality regulations. Commission Pai said he was “deeply disappointed” in the ruling  and continued “to believe that these regulations are unlawful, also calling them “unnecessary and counterproductive.”

Last week, Netflix Inc. (NASDAQ: NFLX), long a support of net neutrality, said that it no longer has a dog in the fight. In its shareholder letter the company said:

Weakening of U.S. net neutrality laws, should that occur, is unlikely to materially affect our domestic margins or service quality because we are now popular enough with consumers to keep our relationships with ISPs stable.

In other words, if service providers try to raise rates on Netflix, the company can go shopping for a better deal somewhere else because it is now big enough to push back. Despite the tough talk, Netflix has had signed contracts in place with the service providers for at least two years under which they are guaranteed certain levels of access to bandwidth and speed.

Pai’s ascension to the FCC chairmanship, when it is announced, likely will be just a small shot in the arm for the big internet service providers. All three have done pretty well already. Since the November election, AT&T shares are up 12.5% as of Friday’s close, while Verizon has seen a gain of 10.6% and Comcast has jumped nearly 18%. Big is better in the brave new world.

When CenturyLink Inc. (NYSE: CTL) completes its $34 billion buyout of Level 3 Communications Inc. (NASDAQ: LVLT), a fourth significant internet backbone carrier will enter the market. CenturyLink’s dividend yield Monday morning is 8.45%, sharply higher than the yields of around 4.7% for AT&T and Verizon, and miles ahead of Comcast’s 1.5%. By market cap, CenturyLink will still be way behind the three bigger players, but roughly even with Sprint Corp. (NYSE: S).

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