On Monday, President Barack Obama took a firm stance on the concept of “net neutrality,” the idea that all internet traffic should be treated equally by Internet Service Providers (ISPs). Obama urged the Federal Communications Commission (FCC) to take a clear and decisive stance in favor of net neutrality so there will be no legal grey area for ISPs in the future.
President Obama outlined his case for net neutrality in a YouTube video Monday.
Net neutrality has become an increasingly controversial topic over the last year, as a conflict between Netflix, Inc. (NFLX) and Comcast Corporation (CMCSA) over Netflix users’ suffering connection speeds resulted in NFLX paying an undisclosed sum to Comcast in order to resolve the issue.
What The President Asked For
In Obama’s net neutrality statement yesterday, the president asked the FCC to ban paid prioritization — a ban that would have prevented the NFLX-CMCSA agreement from ever taking place. The last of the four rules he asks for from the FCC reads as such:
- “No paid prioritization. Simply put: No service should be stuck in a slow lane because it does not pay a fee.”
The three other rules Obama asked the FCC to implement were:
- “No blocking. If a consumer requests access to a website or service, and the content is legal, your ISP should not be permitted to block it.”
- “No throttling. Nor should ISPs be able to intentionally slow down some content or speed up others — through a process often called ‘throttling’ — based on the type of service or your ISP’s preferences.”
- “Increased transparency. The connection between consumers and ISPs — the so-called ‘last mile’ — is not the only place some sites might get special treatment. So, I am also asking the FCC to make full use of the transparency authorities the court recently upheld, and if necessary to apply net neutrality rules to points of interconnection between the ISP and the rest of the Internet.”
So what do Obama’s requests mean for stocks? Let’s take a look.
“Unprecedented and Surprising”
Wall Street wasn’t expecting the president’s strongly worded missive in favor of net neutrality yesterday. A research report from BernsteinResearch analysts Paul de Sa, Ian Chun, and Julia Zheng even said that yesterday’s “level of detailed intervention is both unprecedented and surprising.”
While the firm doesn’t believe Obama’s public stance will affect industry in the long-term, the BernsteinResearch analysts said the executive branch’s actions yesterday could have a minor impact on the stock market:
“We think the noise around the net neutrality debate will intensify over the coming weeks, pressuring cable — and to a lesser extent telco — stocks. On a fundamentals basis, however, we don’t think that the risk of broadband price regulation has changed.”
The one potentially lasting effect that investors should mind is the proposed merger between Time Warner (TWX) and Comcast, which the research report noted will be “complicated” by Obama’s stance yesterday.
One thing is certain: Netflix doesn’t want to see the TWX-CMCSA merger happen, and NFLX stock could get a long-term boost if ISPs like Comcast, Verizon (VZ), AT&T (T) and others are prohibited from charging Netflix fees for delivering content online. In the meantime, expect ISPs and their lobbyists on Capitol Hill to vehemently defend the industry from any further regulations.
This could get ugly, folks. Prepare for some vitriol.
For now, investors should just sit back and watch the debate hash itself out. While a formal decision by the FCC on net neutrality would mean slightly less favorable economics for ISPs in the future, the practice of paying for traffic prioritization is still fairly nascent, so its impact on the stock prices of cable companies shouldn’t be earth-shattering.
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As of this writing John Divine held no positions in any of the stocks mentioned. You can follow him on Twitter at @divinebizkid.
