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5 Free Internet Losers

By Rick Munarriz - Updated Apr 5, 2017 at 7:04PM

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Free nationwide connectivity is a vote -- and bid -- away.

If FCC head Kevin Martin has his way, we'll have more free Internet than you can shake an Ethernet stick at.

Later this month, regulators will vote on the rules attached to the sale of a chunk of spectrum that may call for the winning bidder to set aside 25% of the purchased airwaves to introduce free Internet access to 95% of the country.

I took a look yesterday at a few of the likely winners if this comes to pass. Today I'm going to go over the likely losers.

Free online access isn't going to necessarily kill Internet service providers. There will always be demand for superior, premium-priced connectivity. However, the future won't be pretty, since the same companies will chase fewer potential accounts.

EarthLink is clearly vulnerable. It's not like United Online (NASDAQ:UNTD), the parent company of Juno and NetZero that has spent the past few years diversifying through acquisitions like floral giant FTD and the social networking site. Access now makes up just a quarter of United's business. EarthLink's eggs are all in one basket, and it's going to be a hard basket to keep together.

Cable providers are going to get hit from two different sides. Market leader Comcast is naturally not just a huge player in digital cable but also a major provider of broadband Internet access.

Free connectivity is an obvious threat to the company's cable broadband business, but it can get worse. If couch potatoes warm up to free Internet, isn't it just a matter of time before some of Comcast's more tightfisted subscribers axe their digital cable plans? Most of the major networks are now streaming their primetime shows on demand in a free ad-supported platform. It will clearly be a lot cheaper to just join Netflix (NASDAQ:NFLX), take advantage of the Web streaming of flicks at no additional cost (which should be huge in a few years), and soak in the ad-supported programming for free.

GameStop (NYSE:GME)
If I singled out video game consoles and software developers as big winners of wider connectivity, it follows that a hard goods retailer like GameStop will be hurting. Web-tethered games will give game makers the opportunity to not only put out lower-priced, ad-supported games, but also to bypass physical distribution entirely.

This is already happening, and GameStop has held up well. However, as more publishers come up with ways to market add-on downloads it will dry up traffic at GameStop and result in fewer used game trade-ins (since the add-ons can't be resold and make the original games more valuable).

In the same vein as Comcast, AT&T is going to get pinched all over. It's not just DSL broadband service. How many folks will cancel their landlines when they know that they can turn to Web-based voice chat services like Skype? How will wireless companies justify their pricey unlimited data plans when free Wi-Fi is everywhere?

Blockbuster (NYSE:BBI)
Does anyone remember the Blockbuster ads from just a year ago, mocking rival Netflix subscribers as having to wait a few days for their mail-delivered movies? It's not much of a message these days. Netflix and so many other digital giants are now delivering flicks via cyberspace.

Blockbuster is here too, with the recent rollout of its MediaPoint set-top box, but it's no fun when Blockbuster has to market a set-top box in a level playing field. I trust the stores will evolve away from DVD rentals, but the company's recent strength has been in brisk video game merchandise sales. If you want to know the pitfalls there, go a few paragraphs back and reread the GameStop entry.

Waiting is the hardest part
Sure, it's a lot more fun to think about the winners. However, for every feast there's a famine and investors may as well begin brushing up on where their companies will be in a few years.

Even if the FCC slips and blows it, all it does is push out the finish line a bit. Access is going to continue to get more ubiquitous and noticeably cheaper. The writing is on the firewall.

Why free connectivity?

Netflix and GameStop are Motley Fool Stock Advisor recommendations. Try any of our Foolish newsletters today, free for 30 days.

Longtime Fool contributor Rick Munarriz sees strange shapes in the clouds, but not in cloud computing. He does not own shares in any of the stocks in this story, save for Netflix. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

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Stocks Mentioned

Netflix, Inc. Stock Quote
Netflix, Inc.
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Comcast Corporation Stock Quote
Comcast Corporation
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AT&T Inc. Stock Quote
AT&T Inc.
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GameStop Corp. Stock Quote
GameStop Corp.
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