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FCC Plans to Abandon Net Neutrality -- Major Boon for ISPs

Zacks Equity Research
Ever since President Donald Trump elected existing Republican commissioner Ajit Pai as the chairman of the FCC in January 2017, the fate of Net Neutrality was at stake.

Is this the end of Net Neutrality, the most important telecommunications reform undertaken during the Obama regime? Yesterday, Ajit Pai, the Commissioner of Federal Communications Commission (FCC), revealed a draft plan for a complete roll back of Net Neutrality. The FCC is set to vote on the proposed changes at its next monthly meeting on Dec 14.

Ever since President Donald Trump elected existing Republican commissioner Ajit Pai as the chairman of the FCC in January 2017, the fate of Net Neutrality has been at stake. Pai, a staunch Net Neutrality opponent, has always maintained his view that consumers would be worse under Net Neutrality and should expect their bills to go up along with slow broadband speed. Notably, in May 2017, the FCC voted 2-1 to start the formal process of unwinding the Net Neutrality rules.

What is Net Neutrality?

Net neutrality implies an open-Internet atmosphere, which will prohibit ISPs (Internet Service Providers), especially the telecom and cable TV operators, from discriminating against applications. In order to control the flow of bandwidth-consuming applications such as video streaming, the ISPs have been discriminating against several web-based contents and applications. Content developers have to pay heavy sums to ISPs for accelerated data transfer.

In a historic decision, the FCC had approved Net Neutrality rules, on Feb 26, 2015, after a majority vote. The five-member regulatory body voted in favor of Net Neutrality with a 3-2 margin. However, the voting pattern was clearly divided along party lines, as three Democrat representatives voted in favor of Net Neutrality while the Republican representatives opposed it.

The new laws reclassified high-speed broadband (Internet) as a public utility under Title II of the 1934 Communications Act instead of section 706 of the 1996 Telecom Act. Importantly, these regulations were applicable to both mobile and fixed broadband networks. The reclassification of the Internet called for a radical change in the way the government treats high-speed broadband service. This gives the FCC increased control over the ISPs.

The implementation of the new law banned common ISP practices such as data traffic blocking, slowing any data traffic and paid prioritization. Notably, paid prioritization is a method through which content developers strike deals with ISPs for fast and smooth transmission of their data traffic. Net Neutrality rules also allow the FCC to supervise interconnection deals, in which content developers pay ISPs to connect with their networks.

Arguments Against Net Neutrality

All ISPs, along with several cable TV and telecommunications industry bodies have been vehemently opposing Net Neutrality. The major argument against the directive is that ISPs have to spend several billion dollars to install and upgrade high-speed mobile/fixed- mobile broadband network. Further, disallowing discriminatory pricing policy will significantly reduce revenues and margins which will in turn result in lower investments in the high-speed broadband sector. Consequently, broadband equipment service providers are likely to suffer (due to lesser investment by ISPs) and loss of jobs is also a likely scenario.

Per a recent study by USTelecom, investment in broadband infrastructure declined from its peak at $78.4 billion in 2014 to $77.9 billion in 2015 and $76 billion in 2016. According to USTelecom, the reclassification of broadband as a public utility under Title II of the 1934 Communications Act has resulted into precipitous lower investment in broadband infrastructure.

The Draft Proposals of Ajit Pai

Per the new proposals drafted by the FCC Chairman, the regulator’s sole concern will be transparency of ISP practices. This will ensure that consumers can buy service plans best suited to them. Also both large and SMB (small and medium business) enterprises can avail instant technical information for product innovation. The draft proposes the return of the Federal Trade Commission (FTC) in charge overseeing ISP practices for the protection of consumers’ online privacy.

Ajit Pai strongly argued that a light-touch regulatory measure generated higher investment in the overall telecom industry. He stated that in the last 20 years, private sector have invested a mammoth $1.5 trillion to install communications network throughout the country. This enormous expenditure took place primarily due to not-so-stringent rules implemented by the regulator. According to Pai, “Internet is inherently an interstate service”. Therefore, the new proposals will prevent state and local governments from creating their own Net Neutrality rules.

Who Will Benefit if FCC Dismantle Net Neutrality?

Trump himself is a strong critic of Net Neutrality. There is little doubt that if the new FCC scraps Net Neutrality laws, the ISP industry will be the major beneficiary. Leading ISPs including AT&T Inc. T, Verizon Communications Inc. VZ, Comcast Corp. CMCSA and Charter Communications Inc. CHTR strongly criticised Net Neutrality rules. Each of the above-mentioned stocks currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Even when the former FCC under the Chairmanship of Tom Wheeler adopted Net Neutrality, Republican senators were not in favor of this directive. These groups believe that a slight law reformation under section 706 of the 1996 Telecom Act will be enough to enforce Net Neutrality.

For example, establishment of Internet fast lanes become necessary for some critical scenarios. Remote healthcare applications and self-driving cars will require high-speed secured broadband connections with exceptional reliability. In these situations, FCC’s soft regulatory policies will enable ISPs to better serve the nation. The current FCC's less restrictive regulatory attitude may also pave the way for new merger and acquisition deals between ISPs and online digital media companies.

Who will Lose If FCC Scrap Net Neutrality?

Internet-based tech giants and content developers are the major beneficiaries of Net Neutrality rules. Netflix Inc. NFLX, Google of Alphabet Inc. GOOGL, Amazon.com Inc. AMZN, Hulu, Facebook Inc. FB and Twitter Inc. TWTR are a few of the companies in this league. The Net Neutrality rules have significantly alter online access charges of contents including video, music, email, photos, social networks and maps for consumers. As a result these companies were no more needed to pay special charge to ISPs for speedy transmission of their contents.

Bottom Line

Telecommunications is a necessary utility. The need for telecom in both rural and urban areas as well as its role in the infrastructural development of an economy is of vital importance. Net Neutrality may discourage large investments in the telecom sector but will cut down the cost of online access for end-users since content providers will no longer need to pay extra fees. However, it is to be seen how the government manages a trade-off between the two.

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