U.S. Markets closed

Obama's call for net neutrality spells trouble for Time Warner Cable-Comcast deal

Aaron Pressman
Obama's call for net neutrality spells trouble for Time Warner Cable-Comcast deal

The fight for an open Internet just got a lot stronger, as President Obama waded into the fray and issued a call for utility-style regulation to limit the power of phone and cable companies.

The president isn’t likely to get his way entirely, with strong opposition already coming from those industries and Republicans in Congress. But Obama's move also reduces the odds that regulators will approve Comcast's (CMCSA) $45 billion take over bid for Time Warner Cable (TWC).

The Federal Communications Commission, headed by Obama appointee Thomas Wheeler, has been working on new “net neutrality” regulations after courts struck down previous efforts intended to prevent Internet service providers from discriminating against web sites and other online content. Without such protection, regulators fear companies that dominate delivering Internet connections to consumers will be able to thwart new services and stymie innovation. The FCC, which has received almost 4 million comments on its open Internet proceeding, isn't expected to take action until next year.

"I believe the FCC should create a new set of rules protecting net neutrality and ensuring that neither the cable company nor the phone company will be able to act as a gatekeeper, restricting what you can do or see online,” the president said in a surprise statement on Monday. Cable and phone companies should be banned from slowing down or blocking web sites and services, as well as charging more to give some faster access to consumers, Obama said.

Stocks of leading cable and telecom carriers quickly dropped as much as 7% before recovering somewhat. Time Warner Cable, Comcast and Charter Communications (CHTR) were down 4% or more each at midday, while Cablevision Systems (CVC) lost 2%. Shares of Netflix (NFLX), a poster child for net neutrality after it was forced to pay some big Internet providers for better connections to its customers, gained almost 1%.

Shares of major cable companies dropped after President Obama announced a plan to strengthen net neutrality rules.

[Get the Latest Market Data and News with the Yahoo Finance App]

But as some investors hit the panic button, here are three quick thoughts to keep in mind before open Internet nirvana arrives:

1. Just because the president wants it doesn't mean it will happen. Republicans just solidified control of the House and won majority in the Senate. They’ve never been fans of regulating the Internet like a utility and have close ties to big telecom and cable firms. (Sen. Ted Cruz is already calling the plan "Obamacare for the Internet.") Also, the federal courts would have a field day over any FCC action. They dismantled much of the force of the 1996 Telecommunications Act -- a vast effort to create more competition in the cable and telecommunications markets -- piece by piece until there was nothing left but a gutted shell.

Verizon (VZ) already released a statement saying Obama’s plan “will likely also face strong legal challenges and would likely not stand up in court.” Despite the passive voice, it is Verizon and its allies that are most likely to file a lawsuit.

Still, even if the full proposal is blocked or watered down, it should invigorate and widen the debate, which will likely make the end result closer to what proponents of an open Internet seek. FCC chairman Wheeler has been discussing focusing heavier regulation on Internet connections among big companies, including cable and telecom companies, web sites like Netflix and network wholesalers like Level 3 Communications (LVLT), not consumer connections. He reacted with caution to Obama's statement. "We must take the time to get the job done correctly, once and for all, in order to successfully protect consumers and innovators online," Wheeler said.

2. The proposed merger of Time Warner Cable and Comcast is in big, big trouble. As much as setting out an Internet regulatory policy, Obama’s statement also signals significant concerns with the amount of power cable companies already have over the Internet, even before the proposed merger. And the pending mega-deal would give the resulting company control over some 35% of consumer Internet connections. Federal regulators, all appointed by Obama, alone can block the merger, or impose onerous conditions. Odds of that $45 billion deal going through just fell through the floor.

3. On the other hand, Obama is not seeking to regulate the Internet to the same degree as traditional telecommunications rules. While anti-discrimination rules would be enforced, Obama said he did not favor pricing regulations or other “less relevant” types of rules. The ultimate impact on cable providers may be less than Wall Street fears, even if the entire proposal is fully adopted.

Related Video: