The FCC seems to have all the power at the moment -- more than Comcast (NASDAQ:CMCSA), Sprint (NYSE:S), and AT&T (NYSE:T) combined. What it decides to do with that decision-making authority could determine who gets rich and who doesn't over the next five to 10 years.
The battle is on
The FCC's decision-makers control three key battlegrounds that could make or break telecom companies, especially Comcast, AT&T, Sprint, Time Warner, DirecTV (NASDAQ:DTV), and T-Mobile (NASDAQ:TMUS).
First, the FCC will enact policies that determine how the precious resource of spectrum is parceled out to different companies. Second, it will decide net neutrality rules that control how broadband providers pump content through their pipelines. Finally, it will give the thumbs up or down on three key mergers: Comcast/Time Warner, Sprint/T-Mobile (still unfiled), and AT&T/ DirecTV.
Net neutrality is the idea that all websites should have equal access to the Internet and Internet service providers should not have the power to hinder or stop this access. For example, AT&T, an Internet provider, should not be able to impact the speed of access for a company like Netflix on the Internet.
Under a new FCC proposal announced last week (pending a four-month period of public comment), net neutrality would be mostly maintained. However, a key provision would allow Internet providers, like AT&T or Verizon, to charge companies like Amazon or Netflix for "fast lane" access. In other words, companies that need faster access could get it, but they would have to pay extra for it. The policy also leaves on the table the option of reclassifying broadband as a utility, which would lead to increased government regulation and rate-setting, as with the telephone companies. None of the broadband providers want this change.
The old adage of "he who owns the gold, makes the rules" is quickly changing to "he who has the spectrum, will own the gold." In other words, the FCC's policies for buying spectrum (the invisible pipeline that moves data and content via radio frequencies) will ultimately determine whether the big boys, like AT&T and Verizon, will continue as the broadband top dogs or whether smaller companies will have a shot at upending the market leaders. In a nutshell, the more spectrum a broadband provider has, the faster and more reliably its network will work. This gives the big spenders a clear competitive advantage over smaller, less spectrum-endowed providers.
A true auction means those with the most money (usually the biggest companies) will be able to add to their broadband advantages and create stronger market positions and even monopolies. On the other hand, policies that level the playing field give competitors like Sprint and other smaller broadband companies the opportunity to disrupt the market. Currently, the playing field favors the market leaders as we head to the next spectrum auction.
However, the FCC did recently vote to limit AT&T's and Verizon's ability to participate in the upcoming spectrum auction that's scheduled for 2015, with the hopes of giving Sprint and T-Mobile better bargaining posture.
The FCC rejected a merger of AT&T and T-Mobile in 2011 citing the concern for less competition in the marketplace. It also appears that FCC Chairman Tom Wheeler is using his bully pulpit to deter Sprint from filing for a merger with T-Mobile.
However, there is still a chance that the merger could be done, especially if some of the Democratic members of the FCC like Jessica Rosenworcel -- who has indicated she is open to the merger because Sprint and T-Mobile's survival as a competitor may hinge on it -- could swing the merger vote.
Winners and losers
Obviously, if the merger went through Sprint would have a better opportunity of gobbling up spectrum in an auction and catching or surpassing Verizon or AT&T. Softbank and Sprint Chairman Masayoshi Son has already vowed to fight a price war with the Big Two if the merger goes through. If it doesn't, both Sprint and T-Mobile would have a tough time launching a meaningful initiative against either front-runner.
If telecoms are reclassified as utilities, the broadband providers across the board will lose power and value, but the ability to charge companies like Facebook, Google, and Netflix for faster access would give them a competitive advantage over those same companies.
Fool's bottom line
Betting on the outcomes of these decisions is a slippery slope as politics may have much to do with the outcomes. The best course of action a smart investor can take is to stay informed on how the policies develop and be ready to act quickly as new information becomes available.
Chris Brantley has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, DirecTV, Facebook, and Google (C shares). The Motley Fool owns shares of Amazon.com, Facebook, and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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