Net Neutrality: Caught in a web of lobbying and regulatory uncertainty

Posted on August 15, 2018

Aiswarya Baskaran
Aiswarya Baskaran
Analyst, Technology, Media & Telecommunications Research
Melissa Menzies
Melissa Menzies
Manager, Corporate Solutions

In June 2018, the US Federal Communications Commission repealed the network neutrality rules (Open Internet Order) that required Internet Service Providers (ISPs)[1] to treat all content on the internet equally, and to not discriminate based on any characteristic, such as who owns or created the content.[2] Specifically, ISPs were not allowed to block, slow or give preferential treatment to certain content. In this blog, we explore the implications of this repeal to users and investors, particularly in light of the recently announced mergers between distributors and content creators in the US.

Internet access in America: A market of oligopolies 

Telecommunications and internet distribution in America have traditionally been oligopolistic, primarily due to high fixed costs and regulation. The industry has also had a complex history of breakups, mergers, and acquisitions since the 1984 breakup of the Bell System was mandated, citing anti-trust concerns.[3] These conditions have led to limited consumer choice, with a majority (51%) of the US relying on one provider for fixed broadband services and 39% of the rural population with no provider.[4] They have also paved the way for telecom giants to influence policy through their pockets. In FY2017, some of the major players in the US market, such as Comcast, AT&T and Verizon, along with the Internet & Television Association, spent more than USD 5 billion on lobbying. Although it is difficult to isolate the lobbying spend on net neutrality by company, mentions of net neutrality in lobbying reports and a spike in donations in Q4 of FY2017 prior to the repeal suggests attempts by companies to exert their influence on policymakers.[5]

Telecom companies with lobbying prowess are further strengthened by mergers with content creators. For instance, the recently approved merger between AT&T and Time Warner brings together the largest distributor in America and the largest film studio, in terms of revenue, with AT&T holding 25.8% of the US video market.[6] With control of both content and distribution, companies could be compelled to give preferential treatment to the content they own or to offer paid prioritization.

US

Rural

Figure 2: Percentage of Americans with telecommunications providers(s), from FCC Broadband Progress Report 2016

 

Understanding the impacts

The repeal of net neutrality impacts a wide variety of stakeholders, including governments, competitors, and customers. Substantial lobbying expenditures (USD 110 million in 2017 alone by the telecom industry in support of the repeal) [7] highlight potential influence on the US democratic process, despite an influx of public criticism of the repeal of net neutrality during the FCC’s comment period.[8][9] Proponents for net neutrality contributed USD 39 million in lobbying expenses for the same period.[10]

The repeal of net neutrality gives ISPs enhanced pricing control which could be passed down to consumers by media companies facing these costs. Media companies could also give discounts, or preferential pricing, to content or networks that they own. Premium pricing to access the “fast lanes” of the internet could stifle competition, making it more difficult for smaller media companies to access viewers, potentially restricting innovation and limiting the diversity of content and technologies available to customers. While large media players like Netflix, Amazon, Google and Facebook will be able to absorb premiums from ISPs, startups in the media and technology space would bear those costs more dearly. Internet players Netflix and YouTube (owned by Alphabet) consume over 50% of peak time internet traffic in the US market; this raises further concerns around limited diversity of content, possible content censorship, and restrictions on freedom of expression.

Net neutrality regulation: a complicated regulatory landscape

In an attempt to circumvent the FCC’s stance on net neutrality, states including Oregon, Vermont and Washington, have proposed alternative legislation and mayors of some US cities have signed executive orders that require government officials to procure from ISPs that abide by net neutrality principles. In addition, the FCC faces more than 12 lawsuits, from individual corporations and consumer advocacy groups, further complicating the repeal process.[11] On the other hand, lobbying groups and trade associations, representing cable companies and telecoms, are supporting the FCC in defending these lawsuits.[12] Although telecoms and ISPs are no strangers to regulation, such divisive attempts at regulating the internet exposes companies to a complicated and changing regulatory landscape. Supporters of the net neutrality repeal argued that regulation is burdensome, is counterproductive to investment and innovation, and disproportionately affects small cable companies and ISPs.[13] It is difficult to quantify the effect of net neutrality on innovation; however, given the uncertain regulatory landscape and ongoing legal hurdles, one must wonder if the purpose of the repeal was satisfied.

Given potential limits to innovation, the roll-back of net neutrality could also hinder the growth potential of younger companies, such as small or micro-cap stocks.[14] These companies, previously driving creative business model shifts, may now face heightened costs with net neutrality repealed. While the impact on consumers is yet to be seen, institutional investors with diversified portfolios and universal ownership are likely to be affected by the repeal and associated regulatory uncertainty.

Notes

[1] Internet Service Providers (ISPs) refer to both telecommunication and cable companies that provide internet services

[2] The Open Internet Order was passed by the Obama government in 2015. See https://www.fcc.gov/document/fcc-releases-open-internet-order for additional information.

[10] Of note, on 7 August 2018, the Office of the Inspector General (OIG) reported that the outage of the FCC’s comment system were not due to alleged distributed denial of service (DDoS) attacks which the FCC stated was the cause of the outage. The OIG suggests this claim was unsubstantiated, and rather traffic volume and design flaws contributed to the outage. The FCC’s Chairman Ajit Pai will be questioned as part of this ongoing investigation on 16 August 2018. See the OIG’s report here https://www.fcc.gov/sites/default/files/fcc-oig-roi-ecfs-ddos-08072018.pdf, and https://www.businessinsider.com/fcc-ajit-pai-debunked-ddos-attack-senate-hearing-net-neutrality-john-oliver-2018-8 for additional details.