Yes, the fate of March Madness is decided tonight, but we aren’t talking about the basketball net but instead the hot topic in cable: Net Neutrality. The U.S. Federal Communications Commission (FCC) – which regulates interstate and international communication – recently adopted Net Neutrality rules to reclassify retail broadband services as public utilities while at the same time forbearing from any rate regulation. (Sorry, your broadband bill will not be reduced by this.) Supporters claim the Internet is a public necessity and should be regulated while detractors claim this will stifle investment and innovation.
First off, what is Net Neutrality? Net Neutrality is grounded on the principle that the Internet should be fast, fair and open. Regulators have three bright-line bans: no blocking of content, no slowing down of Internet traffic and no paid prioritization or “fast lanes.”
What does this mean for the cable and telecommunications industry? The short answer is not much in the near term. Broadband providers were already abiding by these standards. Looking beyond two years, however, broadband providers paint an ugly picture given the ambiguity in the rules regarding specialized services and the ability to introduce broadband rates, among other subjective definitions.
While the threat of rate regulation spooks investors, we believe the ultimate chances of this are small. First, the validity of these rules will be litigated in the courts for years and, if they survive that, a more active FCC committee would have to be willing to overturn previous orders of rate forbearance. Additionally, the FCC does not have the infrastructure or the resources to engage in rate regulation.
Consequently, we don’t think Net Neutrality will doom the cable/telecommunications companies and we remain constructive on the credit sector given the stable subscription-based revenue streams and high barriers to entry. Consumer demands and explosive growth in data will force broadband providers to continue to invest in the integrity of their product. Keep in mind, wireless companies have been operating under similar regulations for years and it has not stifled their willingness to invest. Broadband providers cannot afford to stand still.