FCC Plans To Repeal Net Neutrality: Who Gains?

Ever since President Donald Trump elected Republican commissioner Ajit Pai as the chairman of the FCC (Federal Communications Commission) 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.

In May 2017, the FCC voted 2-1 to start the formal process of unwinding the Net Neutrality rules. On Nov 21, Pai 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.

Net Neutrality implies an open-Internet atmosphere. The 2015 Net Neutrality laws reclassified Internet as a public utility under Title II of the 1934 Communications Act instead of section 706 of the 1996 Telecom Act. This gives the FCC increased control over the ISPs (Internet Service Providers). Net Neutrality will prohibit ISPs from discriminating against applications. Earlier, these companies were allowed to restrict any device, application, service, or content from running on their respective networks. (Read: FCC's Net Neutrality Rules: Who Benefits the Most?)

Arguments Against Net Neutrality

Even when the former FCC under the chairmanship of Tom Wheeler had 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 would be enough to enforce 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 result in lower investments in the high-speed broadband sector. Consequently, broadband equipment service providers might suffer (due to lesser investment by ISPs) and loss of jobs is also a likely scenario.

Per a recent study by telecom industry body 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 in 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.

Pai strongly argued that a light-touch regulatory measure generated higher investment in the overall telecom industry. 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 country.

Pai further stated that in the last 20 years, private sector has invested a mammoth $1.5 trillion to install communications network throughout the country. This enormous expenditure happened 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. The current FCC's less restrictive regulatory attitude may also pave the way for new mergers and acquisition deals between ISPs and online digital media companies.

Who Will Benefit if FCC Revokes 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. (NYSE:T) , Verizon Communications Inc. (NYSE:VZ) , Comcast Corp. (NASDAQ:CMCSA) and Charter Communications Inc. (NYSE:T) 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.

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.

Today's Stocks from Zacks' Hottest Strategies

It's hard to believe, even for us at Zacks. But while the market gained +18.8% from 2016 - Q1 2017, our top stock-picking screens have returned +157.0%, +128.0%, +97.8%, +94.7%, and +90.2% respectively.

And this outperformance has not just been a recent phenomenon. Over the years it has been remarkably consistent. From 2000 - Q1 2017, the composite yearly average gain for these strategies has beaten the market more than 11X over. Maybe even more remarkable is the fact that we're willing to share their latest stocks with you without cost or obligation.

See Them Free>>

AT&T Inc. (T): Free Stock Analysis Report

Verizon Communications Inc. (VZ): Free Stock Analysis Report

Comcast Corporation (CMCSA): Free Stock Analysis Report

Charter Communications, Inc. (CHTR): Free Stock Analysis Report

Original post

Zacks Investment Research