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Has net neutrality decision impacted trading in the telecom sector?

Today the United States Court of Appeals-District of Columbia gave the Federal Communications Commission a victory, holding that the agency has the statutory authority to reclassify broadband providers as telecommunications companies as opposed to the industry favored status of information service providers. Broadband providers and their supporters have vowed that the fight is not over, telegraphing the probability of obtaining a ruling from the full bench of the appellate court or, going all the way to the United States Supreme Court.

The telecommunications services sector seemed to have shrugged off the ruling. The Thomson Reuters G7 Telecoms Sector Index registered a .06% decline at the end of the trading day. The sectors biggest players, AT&T and Verizon, saw their stock values increase .47% and .80% respectively. The response is not surprising since broadband operators such as AT&T, Verizon, and Comcast have been providing their high-speed access services pursuant to an open internet philosophy for decades. Their primary argument has been that broadband regulation should be conducted with a light touch and that throttling access speeds or discriminating against certain content or websites would be bad for business given the level of competition that they face.

Wall Street, unlike the Commission, has not been afraid to declare how competitive the telecommunications sector is. Charles Schwab analyst Brad Sorensen had this to say in a recent report about the telecommunications services sector:

“The telecom sector is certainly not what it was a couple of decades ago, although some investors may not realize it yet. The days of near-monopolistic control of landlines are long gone. These days the sector is driven by fierce competition, with new ways of communicating continually entering the market, and consistent—and expensive—upgrade cycles. To us, this reduces the traditional defensive appeal of the telecom sector.”

The court avoided the question of market power and deferred to the Commission’s predictive judgment on telecommunications companies willingness to invest in broadband network deployment. Although the sector has long left the monopoly environment existing prior to the passage of the Telecommunications Act of 1996, should traders consider not only a throwback to the regulatory world of the 1990s that the court’s ruling has cemented but reorganization of the sector that resembles the Ma Bell days?

The 1990s were the pre-convergence days. Carriers followed a silo model separating, in the case of larger local exchange companies, their long distance operations from their local exchange operations. In order to avoid the disruption that may ensure from increased complaints regarding perceived throttling, suspected paid prioritization, and misunderstood network management techniques, what if larger carriers like AT&T and Verizon decided to spin off their newly created “utility” pieces and focused on providing backbone, mid-mile, advertising, content delivery, and special access services? State public utility commissions, long shut out of the broadband regulatory game, may now view the courts ruling as permission to re-enter the regulatory fray.

Spinning off the telecommunications component and leaving them subject to state and federal regulation may allow AT&T, Comcast, and Verizon to focus on the content and data business and go head to head with Google or Facebook, edge providers, who, though subject to the Federal Trade Commission’s privacy regulation, don’t have to suffer the FCC’s Title II regulation.

A spin off may be good for traders especially if the utility components are subject to rate-of-return regulation thus providing the certainty of fixed-income behavior while the unregulated portions, while subject to the volatility of competition, may generate higher rewards that come with the greater risk.

It’s still early and in the immediate term broadband providers will be focused on continued appellate court action. The long term potential restructure stemming from this action is something traders should keep in mind.

 

With all the talk of pending recession, why implement net neutrality rules?

So far 2016 has not been the best year for the equity markets. Over the past four weeks the Dow Jones average has fallen almost three percent and year-to-date decline is approximately 8.7%.  The telecommunications, media, and technology sector hasn’t fared much better. The NYSE TMT Index has seen a fall of 13.72% over the last twelve months. In the past four weeks, the index fell 2.38%. Last month the investor adviser firm Charles Schwab rated the telecommunications sector as under-performing due in part to the sectors move away from the steady cash flow of a monopoly land line business to the cut throat competitiveness found in the wireless arena.

Just about the only thing that has slowed down capital expenditures in the digital economy has been recessions. Capital expenditure outlays in the information sector, which includes television, radio, publishing, wireless and wireline telecommunications and internet portals, peaked in 1999 at an annual $120.1 billion. The impact and aftermath of the 2000-2001 and 2007-2009 recessions were the two major economic bumps in the road that caused decreases in capex. After hitting a bottom of $87.7 billion in capital expenditures in 2009, the information sector, of which roughly 74% is made up of wireline and wireless telecommunications, has seen an uptick in investment from $97.4 billion in 2010, to $99.7 billion in 2011, to $105.5 billion in 2012.

This increase in spending has occurred when broadband while broadband has been treated as an information service. But if talk of recession becomes solidified over the next twelve months, a slowdown in spending can be aggravated where a recession is compounded by rules that go back to the depression-era 1930s.

Depression-era rules applied during a pending recession. The irony.

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The FCC’s net neutrality hole

Posted January 4th, 2016 in net neutrality and tagged , by Alton Drew

As a regulatory agency it’s impossible for the Federal Communications Commission to avoid political discourse. When the likes of John Oliver goes about explaining net neutrality to the public (and getting it wrong in the process), the result is four million American consumers applying political pressure on the Commission to ensure that the agency preserve the democratic spirit of the internet; that each piece of content stand equally shoulder to shoulder no matter who produces the content or whether the content reaches one million people or one hundred. When it comes to the economics of the internet then network management be damned.

But for all its rhetoric on equality of access, the Commission appears to have dug a hole into which to throw economically disadvantaged consumers. As Mark Jamison argues in this piece for TechPolicyDaily.com, net neutrality has a negative impact on low income consumers who may not be accessing online content because of the cost of purchasing broadband. Net neutrality hurts the poor by:

1. Prohibiting pricing plans that help the poor pay for what they can afford;

2. Imposing injunctions on the free delivery of some content or zero-pricing; and

3. Prohibiting access to net work features such as fast lanes by fledgling firms.

If the Commission is serious about furthering the closure of the digital divide then it should not allow a delusional argument that all traffic should be treated equally to stop access by the poor to some online content for free. Supporting an erroneous political position as advocated by net neutrality proponents forces the Commission to take a public policy position that is adverse not only to its stated goals but to the poor.

Will the FCC be naughty or nice when it comes to sponsored data

The Federal Communications Commission wants to determine if broadband access providers such as T-Mobile, AT&T, and Comcast, are complying with the Commission’s net neutrality rules. A report in Reuters stated the following:

“As you may be aware, concerns have been expressed about these programs, for example, some have argued that sponsored data unfairly advantages incumbent content providers,” the letter to AT&T said. “We want to ensure that we have all the facts to understand how these services relate to the commission’s goal of maintaining a free and open Internet while incentivizing innovation and investment from all sources.”

FCC Chairman Tom Wheeler hasn’t posted any official statements on the Commission’s request for a January 15, 2016 meeting with AT&T, Comcast, or T-Mobile. Nor are there any docketed items addressing the matter of sponsored programs or other initiatives that allow consumers to use streaming or other data services while avoiding the application of this usage toward their data plans.

The Commission’s net neutrality rules do not speak specifically to a “1-800-number” approach to providing broadband access. The section of the rule that comes closest to addressing the concerns that sponsored data unfairly advantages incumbent broadband access providers is section 47 CFR 8.11.  This section reads:

“Any person engaged in the provision of broadband Internet access service, insofar as such person is so engaged, shall not unreasonably interfere with or unreasonably disadvantage end users’ ability to select, access, and use broadband Internet access service or the lawful Internet content, applications, services, or devices of their choice, or edge providers’ ability to make lawful content, applications, services, or devices available to end users. Reasonable network management shall not be considered a violation of this rule.”

A broadband access provider interfering with an end-user’s ability to select or access a competitor’s broadband access service or lawful content is not at issue here. Edge providers are arguing that they won’t be able to get their content in front of consumer eyeballs if larger content providers can leverage their content by offering it at a discount when they decide not to apply the data used against a data plan cap.

We can’t say whether there is a definitive political risk to the telecommunications sector since the Commission has yet to take any formal action. The “sit down” with broadband access providers is not for another three weeks and speculation at this point would be built on shaky ground.

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The markets don’t tell me that net neutrality rules are working

Posted December 9th, 2015 in Broadband, Federal Communications Commission, net neutrality and tagged , by Alton Drew

The telecommunications services sector is in the red, and has been in the red for the past year. If net neutrality was such an enabler of the virtuous innovation cycle as Federal Communications Commission chairman Tom Wheeler is fond of mentioning, then the concept gets an “F.”  The market value of the telecommunications sector is down 4.14%, according to The New York Times. Within the sector, the integrated telecommunications services industry (companies that provide telecom services minus wireless) has seen market value fall 5.05% over the last year.  The wireless industry didn’t fare that badly, falling 2.09% over the same period.

The irony regarding the Commission’s application of Title II/net neutrality regulation is that it assumes that the sector’s broadband operators are monopolist deserving of utility type regulation in order to protect consumers and grow competition.  On the contrary. Investors in the sector, while historically viewing the sector as a hedge during the valley of a business cycle, are wary of the sectors performance as companies face an increasing amount of competition. Title II/net neutrality policy doesn’t appear helpful to a sector that sees declining pricing power as consumers seek out better pricing plans; falling profits that come along with decreasing pricing power; rising expenses as broadband providers spend more to upgrade their networks; and heavy debt loads, given its position as having the highest debt-to-equity ratio of any non-financial sector, according to an analysis by Charles Schwab. With the Federal Reserve expected to increase rates next week, credit markets may get even tighter for the telecom sector.

If the Commission is really concerned about a robust, competitive telecom sector, Title II/net neutrality public policy is not where you start.