The Battle over Net Neutrality is Over: The FCC Wins


Broadband regulation is likely to be resolved in a positive way for industry and investors. This is exactly the opposite of what’s being priced into industry stocks. Along with these companies’ secure cash flows and pole positions in the race to cash in on the ongoing global connectivity explosion, it’s a major reason why I remain so bullish on the group.

AT&T (NYSE: T), Comcast (NasdaqGS: CMCSA) and Verizon (NYSE: VZ) are all superb bets that should get a big boost when the FCC dispute is settled.

Roger Conrad – Utility Forecaster

Last week on September 1st, the Federal Communications Commission (FCC) solicited further comments on its proposal to subject broadband (i.e., high-speed) Internet service to common carrier regulation. This ensures that a final decision will not occur until after the mid-term Congressional elections. The delay illustrates how contentious this issue has become and how technologically complex it is.

Common Carrier Regulation is Broadband’s Future

Common carriers are subject to Title II of the Communications Act (p. 35 et seq.), which applies to communications services that are offered to the public and are deemed essential. It’s a bit funny to think of something that didn’t exist 25 years ago as essential, but the Internet has transformed American life. We get our news online (I haven’t watched 6:30 PM national TV news in years), shop online, telecommute to work online, trade stocks online, communicate with friends and family online, get driving directions online, and even watch movies online.

No doubt about it, the Internet is an essential service that should be regulated by the FCC in order to ensure fairness to all. Currently, only dial-up Internet is considered a common carrier service but – come on – who uses dial-up anymore?  I know, the existence of United Online (NasdaqGS: UNTD) with its NetZero and Juno dial-up brands means some people are still using it, but they would prefer broadband if it were available at a reasonable price.

Congress Has Mandated a National Broadband Plan for All Americans

It is for this reason that in 2009 as part of the huge $787 billion economic stimulus law, the U.S. Congress directed the FCC — codified in 47 U.S.C. sec. 1305(k) — to develop a National Broadband Plan to “ensure that all people of the United States have access to broadband capability.” As of now, one-third of America — approximately 100 million people — does not have broadband Internet at home.

The concept of “net neutrality” means different things to different people, but at its heart is the concept of fairness and non-discrimination. Who could be against such principles? Operators of broadband networks, such as Comcast and Verizon, that’s who!  Roger Conrad, editor of the Utility Forecaster investment service that focuses on companies providing “essential services,” describes the opposition to net neutrality this way:

Operators and builders of broadband networks are focused on earning a return from the enormous investment they’ve made and continue to make. They want the ability to run their networks in the most efficient and profitable way possible, including the right to charge more for more intensive usage. This latter point is becoming increasingly important, as applications become more complex and existing bandwidth more stretched.

The problem with the network operators’ argument is that they are providing an essential service and do not face competition. Sorry, but the U.S. does not permit monopolists and oligopolists to “run their networks in the most profitable way possible.” According to the National Broadband Plan, only 15% of Americans have access to two robust high-speed Internet service providers. Count me in the other 85% — my choice is Comcast or nothing.

Consumers Need Regulatory Protection from Broadband Monopolists

Cable companies like Comcast or Time Warner Cable (NYSE: TWC) have a cable monopoly in their franchise areas, leaving the only competitor the monopoly phone company.  My monopoly phone company is Verizon and it doesn’t offer its FIOS Internet service in my area. And don’t waste your breath arguing to me that direct broadcast satellite companies (DBS) provide Internet competition. DirecTV partners with ViaSat’s (NasdaqGS: VSAT) WildBlue to provide satellite-based Internet, but its service is not really high-speed (512kbps for the basic service).

To those who argue that the industry should be allowed to regulate itself, let me quote FCC Commissioner Michael Copps:

I, for one, am worried about relying only on the good will of a few powerful companies to achieve this country’s broadband hopes and dreams,” he said. “We see what price can be paid when critical industries operate with unfettered control and without reasonable and meaningful oversight. Look no further than the banking industry’s role in precipitating the recent financial meltdown or turn on your TV and watch what is taking place right now in the Gulf of Mexico.

Industry self-regulation has been completely and irreversibly discredited by the bad behavior of Goldman Sachs (NYSE: GS), Moody’s (NYSE: MCO), and BP (NYSE: BP).

Broadband’s Discriminatory Tactics

The FCC’s recent move to regulate broadband Internet as a common carrier service wouldn’t have been needed if the telecommunications industry hadn’t tried to unfairly discriminate among Internet users. But they did. For example, AT&T arbitrarily banned voice-over-Internet (VoIP) services like Google Voice and Skype from its 3G wireless network, before reversing itself under heavy pressure. Similarly, Comcast has engaged in massive and discriminatory throttling (slowing down) of some of its Internet users since 2007. At first Comcast lied about it, saying it wasn’t engaged in throttling. Subsequently, the company admitted that it did engage in throttling, but argued in Court that the FCC lacked authority to prevent its discriminatory practices. Can you imagine arguing in favor of discrimination? Unbelievable.

Even more unbelievable, the D.C. Circuit Court of Appeals agreed with Comcast, ruling that the FCC had previously classified broadband Internet as an unregulated “information service” back in 2002 and thus couldn’t impose regulations now.

The Law is on the FCC’s Side

What’s ironic is that back in 2002 the FCC had disagreed with a 9th Circuit Court of Appeals decision that classified broadband Internet service as a regulated telecommunications service!  The Commission was trying to tread lightly on this new technology and thought it could regulate broadband Internet via is Title I “ancillary” regulatory authority.

In fact, it’s pretty clear that the FCC would never have classified broadband Internet as an information service if it had known that a court would later rule that its Title I “ancillary” authority did not apply. Just goes to show you that good deeds do not go long unpunished. The FCC, in trying to cooperate with the telecommunications industry, ended up getting kicked in the behind by industry members like Comcast who took advantage of the information service designation. Give the monopolists a foot and they’ll take a yard. It makes me mad that Comcast would do that.

In 2005, the U.S. Supreme Court ruled that the FCC had the authority to regulate broadband Internet anyway it wanted to, either as an unregulated information service or as a regulated telecommunications service. Bottom line, net neutrality is a done deal once the FCC completes its rulemaking proceeding and reclassifies broadband Internet as a telecommunications service subject to common carrier regulation – something in retrospect it should have done back in 2002.

The broadband Internet industry shouldn’t have abused its “information service” regulatory classification. Now it’s going to pay the price with more stringent common carrier regulation. Congratulations Comcast for shooting yourself in the foot. It couldn’t have happened to a bigger corporate jerk.

Net Neutrality Does Not Mean Unfettered Access

Let me end by saying that net neutrality regulation will not mean that broadband network operators have no power to manage their networks. Nobody wants the FCC to follow the destructive practices of New Zealand and Great Britain, which imposed overwhelming and self-defeating network regulations on their incumbent telephone carriers. Just look at how poorly the stocks of these foreign national carriers have performed over the past five years compared to AT&T:

Source: Bloomberg

Many common carrier services have “metered” service, which charges heavy users more than light users. I’m pretty sure that the FCC will allow such metered service in the broadband Internet context as well. After all, the FCC has expressly stated that:

Broadband providers must be able to reasonably manage their networks, including through appropriate and tailored mechanisms that reduce the effects of congestion or address traffic that is unwanted by users or harmful to the network.

The key, however, will be reasonable restrictions. Comcast has proven it can’t be trusted to implement such reasonable restrictions on its own.

Get on With It!

So enough dilly dallying with notices of inquiry and comment periods. It’s time to make a decision, FCC. Let’s start regulating!