Push for Regulated Internet Could Affect Investment Plans

Push for Regulated Internet Could Affect Investment Plans

Push for Regulated Internet Could Affect Investment Plans

The FINANCIAL -- New York -- President Obama's call to the U.S. Federal Communications Commission (FCC) to act on rules regarding net neutrality could affect the investment plans of cable and telecom companies, according to Fitch Ratings. The FCC is likely to delay its rules until next year.

The push for a utility-like regulated internet could ultimately change the way internet traffic is managed, affecting future revenue opportunities and business models if it survives challenges in court. Verizon has said publicly that the proposed regulation plan would face strong legal challenges and not stand up in court. We agree that it will be contested. However, near-term impact on revenues and profits is unlikely until the final rules are developed and implemented.

Fitch expects that the regulatory review of pending merger and acquisition activity, wireless spectrum policy issues and internet neutrality will dominate the FCC's agenda as the commission focuses on distribution-related, more so than media-related, issues but there will also be continued regulatory and legislative activity, according to Fitch Ratings.

In December 2010, the FCC issued its Open Internet Rules to ensure that internet openness, or net neutrality, will continue and provide certainty for future usage and investment in the internet. The rules addressed transparency, blocking, and unreasonable discrimination. Industry representative have raised concerns that this FCC action went beyond its authority. The rules went into effect in November 2011. In January 2014, an appeals court vacated the anti-blocking and anti-discrimination portions of the FCC's Open Internet Rules. The FCC has stated it will not appeal and is working on rewriting net neutrality rules.

Comcast Corporation's (Comcast) proposed $45.2 billion all-stock merger with Time Warner Cable, Inc. (TWC) along with AT&T's proposed $48.5 billion acquisition of DIRECTV are currently under regulatory review by the FCC in tandem with a review by the U.S. Department of Justice. Both transactions certainly hold the potential to further transform the media, telecom, and cable landscape and challenge regulators and each is expected to draw a high level of regulatory scrutiny.

Fitch views Comcast's merger with TWC as strategically sound and believes it should create significant opportunity to realize operating and capital spending efficiencies. Comcast has agreed to divest cable systems serving approximately 3.9 million video customers, which will enhance its ability to secure required regulatory approval. Additionally, Comcast and TWC do not overlap service territories, so the two companies do not compete directly. Vertical issues (control over Comcast/NBCUniversal content across a larger distribution base) as well as net neutrality issues will likely be the focus of the review, according to Fitch Ratings.

The FCC's focus is on ensuring that edge providers (any individual or entity that provides any content, application, or service over the internet, and any individual or entity that provides a device used for accessing any content, applications, or service over the internet) that deliver goods and services on the internet can reach people. The FCC will strive to ensure that edge providers are not unfairly blocked, explicitly or implicitly, from reaching consumers as well as ensuring that consumers can continue to access any lawful content and services they choose. The no-blocking rule will recognize that broadband service providers and edge providers can enter into agreements for service levels above a minimum level of access to a broadband provider's subscribers. Fitch notes that any such arrangements for priority treatment would be subject to the proposed commercial reasonableness test and would be prohibited if the arrangement is found to harm internet openness.

Additionally, within the scope of the no-blocking rule, the FCC is also soliciting comments on whether paid prioritization arrangements should be banned. Under such arrangements, telecom providers could gain revenues from edge providers of bandwidth-intensive services, such as video, which would provide support for network investment and share some of the costs for broadband services currently falling on consumers and other end users.

The FCC's proposals attempt to balance the creation of individualized service agreements between broadband providers and edge providers with prohibiting broadband provider practices that threaten internet openness. The FCC proposes to utilize an enforceable legal standard of conduct and adopt a rule requiring broadband providers to use commercially reasonable practices in the provision of internet services. Generally, the standard would prohibit practices that threaten to harm internet openness, according to Fitch Ratings.