After nearly six years of exclusion from the political knife fight that has gripped Washington during President Obama's term, the Federal Communications Commission finds itself now thrust into the white hot crosshairs of politics and big business. Over the past year, two huge issues have landed on FCC Chairman Tom Wheeler's lap: the potential Comcast (NASDAQ:CMCSA) and Time Warner Cable (UNKNOWN:TWC.DL) merger, and net-neutrality rulemaking.
Call me a contrarian, but unlike most in the industry I feel the former is more consequential than the latter as it comes to Internet service providers. While many in the industry consider the words "Title II" to be a huge change, it's the application of the rules once the designation is levied (if it's even levied at all) that will determine how it shapes the future of the internet. As it stands now, the Comcast/Time Warner Cable merger holds huge ramifications for the broadband industry going forward.
Title II regulation, but really no changes
While it's important to note this is merely a proposal and subject to change, the actual substance is remarkably similar to what ISPs are doing. According to Gigaom, the brigh-line rules include no blocking, throttling, and paid prioritization, which gives net neutrality fans a win for strong rulemaking but doesn't really change the conditions on the ground. To be fair, there are some ominous clauses that come with a Title II regulation -- namely, pricing controls -- but the chairman specifically chose to forebear (read: not enforce) that power.
Another win for net-neutrality fans was the inclusion of interconnection activities. If you follow Netflix, you've probably heard the term "paid peering." Essentially, Netflix has to pay more to bypass congestion on the interconnection points between ISPs and transit providers. Because these issues happened before the ISP, although the ISP could alleviate them, they weren't included in rulemaking before. However, the fees aren't banned; the FCC merely gives an outlet for websites to argue. If the fees are considered "not just and reasonable," the FCC is allowed to take action.
BTIG Research thinks Comcast/TWC will be blocked
On the other hand, the FCC hasn't rules on the Comcast/Time Warner Cable merger approval. And if the zeitgeist is any indication, the deal has a worse chance of approval today than it had even three months ago. Still, many think the chances of approval are high -- but not BTIG analyst Richard Greenfield. In a recent report, Greenfield argues that the merger will be blocked.
While I agree with many of his assertions, particularly the overall synopsis of the landscape, I still think the deal will be allowed. But he paints a strong case for denial. If the federal regulators judge the deal on the basis of broadband Internet market power on a national level, it's entirely possible we could see a denial. Early critics focuses on the pay-TV market and noted that the two don't compete in the same geographies.
One is enforcing status quo, while the other prevents a market giant
If you don't agree with me and think Title II is a huge decision, I've got Charter Communications CEO Tom Rutledge on my side. Summing up the effects of Title II on his business, he said: "It doesn't look like it changes anything. ... We never had a problem with net neutrality; we've never been asked to prioritize content by any website." That said, he isn't a fan of the regulation in theory [emphasis added]: "This new approach is a heavy-handed regulatory solution for a problem that doesn't exist."
On the other hand, a merger by Comcast and Time Warner Cable would create an 800-pound gorilla in the broadband industry by commanding nearly 50% of that market. With a 50% market share, the Herfindahl-Hirschman Index for this company alone (not even including other large competitors) would be 2500. Generally, any merger that brings the HHI above 1800 raises antitrust and market concentration concerns. A denial could signify a more end-user-friendly FCC that has been accused of favoritism to cable providers and ISPs.
A word of caution
As a final note, it's important as investors to cut through the political rhetoric that disguises itself as financial reporting today. Unfortunately, what I'm seeing on the Title II issue is a great deal of philosophical opposition or support. It's perfectly acceptable for Americans to have these opinions, and it's even encouraged. You can think the government shouldn't regulate anything, or you can prefer a strong regulatory framework to prevent externalities.
That said, it's important to put those philosophies away when you're evaluating investments, because they can introduce biases to your thinking. Simply put, the market doesn't care about your opinion on Title II. It only cares how Title II truly affects the industry's business model. And as I see it, the merger decision will affect the broadband industry more than a Title II designation that substantively changes nothing.