On June 14, a federal court of appeals ruled once again that high-speed internet can be regulated as a utility. The decision is a win for consumers, but how will internet service providers like Comcast (NASDAQ:CMCSA), Century Link (NYSE:LUMN), and Time Warner Cable (NYSE: TWC) be affected? Here is what investors need to know.
The story behind the decision
Last February, the Federal Communications Commission (FCC) voted in favor of net neutrality rules, paving the way for the FCC to be able to regulate internet service providers (ISPs) as a traditional utility, like electric, water, or telecommunication companies.
Net neutrality refers to the concept that all content and applications on the internet should be equally accessible. The FCC's decision to regulate the internet this way involves preventing ISPs -- which control the "traffic lanes" that carry information and media content to users -- from creating a pay-to-play system. Regulators want to work against a situation where ISPs charge some media companies to use fast lanes, while putting everyone else in a slow lane.
People also fear the fact that many ISPs, like Comcast, also offer cable TV packages, meaning potential conflicts of interest for them as they provide television but also provide the lanes for competitors such as Netflix (NASDAQ:NFLX) and Alphabet's (NASDAQ:GOOGL) (NASDAQ:GOOG) YouTube.
The FCC vote allows for regulation to ensure the free and fair distribution of content and media on the internet.
ISPs challenged the decision from last February, which led to the latest appeals court proceedings. The court found that high-speed internet can be defined as a utility, rather than a luxury, meaning stricter government oversight is in order. Even though the court upheld the original decision, petitioners say they will try to appeal the decision once again to get out from under the new FCC regulation. ISPs claim they do not tamper with net neutrality, but their concern is that the ruling could lead to future government intervention, like pricing regulation, and hamper investment into internet infrastructure.
How internet providers are affected
The FCC thinks the new regulations will help the internet, making high-speed access available to more rural areas of the country and lowering costs. ISPs claim that the regulation will raise costs on consumers, prevent the expansion of high-speed internet to new markets, and limit competition from entering the market. ISPs claim that limiting competition will stifle innovation and investment in the internet business.
"Regulatory rate reductions for broadband data services in the highest cost areas will prevent or slow competitive growth and make it difficult for current providers to continue with planned upgrades and future investments," CenturyLink, Fairpoint, and Frontier said in a joint statement.
Most ISPs are claiming to be in favor of net neutrality. On its corporate website, Comcast claims it is committed to an open and fair internet that doesn't block access, and it doesn't support paid-for fast lanes.
If this is truly the case, the FCC regulation shouldn't make any difference to ISPs' businesses.
How the new rules will actually work still remains to be seen, especially with companies still fighting the ruling. As for the possibility of further regulation in the future, I see no need for investors to worry about what is merely speculation at this point.
The possibility of new rules shouldn't affect innovation, either, unless players in the ISP industry decide to stop offering services. Internet service is a highly competitive business, with players offering multiple solutions to consumers. Phone, cable, and wireless companies offer similar but competing services and continue to dump money into networks to improve reliability, speed, and accessibility.
Alphabet's Google Fiber and Comcast's Gigabit Pro ultra-high-speed access is available in a small but growing number of cities. Even Verizon (NYSE:VZ) has its own fiber optic service, Fios. Despite the initial net neutrality ruling, the investment into these businesses continues. As an example, Comcast's investing expenditures increased 60% year over year in the first quarter. I see the ruling having a minimal effect on the growth of the internet service provider industry.
The real battle to be paying attention to
Even though the internet is only 20 years old, it has grown to be an integral part of everyday life. Plenty of businesses are out there, hard at work developing faster internet speeds, increasing geographic access, and reducing cost. Now that the internet has developed to this point, the real potential for investment growth lies in services offered via the internet rather than the internet itself.
Why else would net neutrality be an issue in the first place? It makes sense that ISPs would want to hinder the progress of disruptive companies threatening to change the face of the industry. Netflix, for example, poses a serious threat to cable networks, some of which also operate as ISPs. Slowing down or attempting to block access to new competition makes good business sense if you're the incumbent business defending your turf.
Now that net neutrality and political bickering over its proper treatment have taken over conversations surrounding ISPs, the real issue has become which companies can move quickest into internet media and content distribution. For many internet service providers, the net neutrality ruling is a nonissue as they've already limited themselves to being a boring old utility years ago.