Net Neutrality Battle Overshadows Larger Concerns Over Control Of Bandwidth Allocation In Telecom Industry: Who Will Be Winners And Losers?

• On 9:04 am EST, Monday November 9, 2009

67 WALL STREET, New York - November 9, 2009 - The Wall Street Transcript has just published its Telecommunications Services & Equipment Report offering a timely review of the sector to serious investors and industry executives. This 20 page feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Telecom Carriers VS. Telecom Equipment Vendors - Increased Competition Hurts Profitability Among Telecom Carriers - Net Neutrality Battle - New Telecom Players Apple & Google - High-Growth Opportunity In Latin American Market - Rural Local Exchange Carriers - Fierce Wireless Competition - Significant Deceleration In Wireless Subscriber Growth - Upgrade To 4G - Secular Decline In RLEC Sector - Regulatory Environment - Unlimited Pay-In-Advance Segment Is Fastest-Growing In Wireless

Companies include: Ciena Corporation (CIEN); AT&T (T); Alcatel (ALU); Apple (AAPL); CenturyLink (CTL); Clearwire (RLWR); Comcast (CMCSK); Consolidated Communications (CNSL); ERF Wireless (ERFW.OB); Frontier Communications (FTR); Google (GOOG); Intel (INTC); Iowa Telecom (IWA); Knology (KNOL); Leap Wireless (LEAP); Liberty Global (LBTYA); MetroPCS (PCS); Millicom (MICC); NII Holdings (NIHD); Nortel (NTL); Sprint (S); T-Mobile (DT); Telefonica (TEF); Tellabs (TLAB); Time Warner Cable (TWC); Time Warner Cable (TWX); TracFone (AMX); Verizon (VZ); Wal-Mart (WMT); Windstream (WIN).

In the following brief excerpt from just one of the in depth articles in the Special Report, a former hedge fund manager discusses the outlook for the Telecommunications sector and for investors.

Chandan Sarkar is an Analyst who covers the telecom sector at Auriga, USA. Prior to joining Auriga, Mr. Sarkar founded Balistes Capital Management, a hedge fund focused on the telecommunications industry. Previously, he worked for PAW Partners, a billion-dollar technology hedge fund in Greenwich, Conn. During the 1990s, Mr. Sarkar worked at sell-side research boutique SoundView Technology Group as a Telecommunications Equipment Analyst. Mr. Sarkar began his career in industry as a Design Engineer at AT&T Bell Laboratories. He holds three patents in the telecommunications field.

TWST: What is the net neutrality battle about?

Mr. Sarkar: Net neutrality refers to the principle that carriers would not discriminate between different types of traffic that is carried on their networks. In other words, the government wants the carriers to be neutral about the applications on the Internet. This has a major impact on AT&T; it has an impact on the cable companies and even has an impact on companies as far away from Telecom as Apple and Google.

Let me give you some examples. Today certain cable companies block BitTorrent traffic on their networks. BitTorrent is a wildly popular protocol that is used to download movies. Over 90% of these downloads are illegal, a lot of it is X-rated. It is an application that takes a disproportionate amount of traffic on the Internet today. By some estimates it now makes up about 25% of all the traffic that's going on the Internet. The reason the number is so high is that it is one of the few data-intensive applications that run even when the user is not present - most users keep it running on their computers in the background, 24 hours a day. Some cable companies have taken the position that because this activity is mostly for illegal purposes, they have a right to block it. The interesting thing is that not all BitTorrent downloading is illegal; a small part of is legitimate. There is even a Web site called legaltorrents.com, which features content that is in the public domain. But cable companies do not discriminate because they can't tell which BitTorrent downloads are legal and which are illegal, they just choose to block it all. With net neutrality, the cable companies would not be allowed to discriminate based on a specific application like BitTorrent. That is one example.

Another example is that sometimes carriers would like to block traffic to particular destinations. So for example, Google, who is not a traditional phone carrier, has an application called Google Voice, which sure makes them look like a phone company. Currently, Google blocks access to certain destinations if they deem that the termination fees they will be charged by the terminating carrier are too large. Since Google Voice is a free service, Google believes that they should not be obliged to complete every call if it is going to be too expensive for them to do so. They argue that because they are not a traditional phone company, they should not be regulated as such. AT&T is making the counter argument that, "Hey, if we are going to be forced to be net neutral, then everyone should have to be net neutral, including Google."

I saw a funny headline today suggesting that AT&T recently sent a letter to the FCC complaining, "Google is not only blocking pornography, they are also blocking access to nuns trying to communicate." That referred to a story about some nuns that live in a rural village that had some high call-termination fees. Most of the high termination fees today are associated with calls that are placed to rural communities. Because there's less competition there, the rural carriers sometimes charge some exorbitant fees for terminating those phone calls. So Google has decided that, based on their own profit and loss, not to terminate some of those phone calls. But AT&T is saying if you're going to have a fair playing field, it has to be fair for everyone. The government should not be in a position to say, "AT&"T, you have to be net neutral, but Google, you can do whatever you want because you are the new guy on the block." So that is the fundamental disagreement between Google and AT&T.

Google has other concerns though regarding net neutrality. They are worried that carriers may one day start to charge different companies different rates for Internet access based on how much traffic they generate or the priority of their traffic. We may also get to a point where phone company customers start paying extra fees for prioritizing their traffic on the Internet. Some would call that discrimination, while others would see it as the free market at work. This is another facet of the net neutrality argument.

The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This 20 page special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online .

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