The Market Response to Regulating the Internet? Not good.
By Roger Entner on November 11, 2014
After several failed attempts to come up with a net neutrality proposal that reasonably addresses legal, industry and consumer advocate concerns around the optimal legal foundation for net neutrality, the FCC made public last week it wanted to pursue a new “hyrbrid” approach that would apply both Title II and Section 706 regulations on Internet providers. While the policy elite inside the Beltway pondered what a hybrid approach would look like and how it would operate, the White House ushered in yet another layer of political complexity and confusion to the debate. On Monday morning, in an unprecedented move, President Obama announced in a video address that he had asked the FCC to classify all internet services – mobile and fixed – as Title II under the 1934 Communications Act. Never before has a President publically directed the FCC, an independent agency, to do something this specific on a policy issue within the FCC’s oversight. While the President did note that the FCC is an independent agency and that ultimately the decision is theirs alone, his message couldn’t be any clearer. Anyone who is or ever has been in a relationship knows what the “the decision is ultimately yours alone” line really means.
The market response was swift, and predictable. The video address had the effect of resolving the uncertainty about whether the FCC was really, truly, seriously going to do Title II. Within hours of the announcement, the NYSE saw a drop of 4.5% to 7.6% in value among the largest ISPs by the close of the bell Monday. Some investment analysts such as Wells Fargo’s Marci Ryvicker estimate that the downside risk for cable stocks can be as much as 23% of their current value. And why did investors react so negatively to the President’s message? Simple. A Title II world minimizes future growth opportunities for ISPs. Equally scary to investors, a Title II world at this point in time spells regulatory chaos and legal wrangling for years to come, a scenario antithetical to low cost of capital and high investment.
President Obama’s foray into broadband policy could represent a major turning point in telecommunications and internet policy both for the United States and the world as a whole, if the FCC adheres to what the President requested. In a world where prices decline, services improve, and choices increase, this country’s most senior leader has decided that a heavy-handed regulatory framework developed 80 years ago is the right vehicle to grow jobs, attract investment and catalyze innovation in the digital economy. Unfortunately, the most likely scenario is that regulations designed for a monopoly world will bring us back to the regulated monopoly times where every incentive to exceed the government requirements was eliminated.
Governments in other countries, both democratic and less than democratic, will see this decision of the US government as an endorsement of their own efforts to more closely censure and close down the Internet within their borders.
By pursuing Title II, the government is hobbling a part of the most vibrant segment of the economy. How interfering into such an interdependent system with a bludgeon like Title II can lead to an improvement for the overall system is difficult to see. Title II was introduced into a steady-state, innovation-free system that did not change for the next 50 years as there was no incentive to change. The “strongest possible rules” that President Obama asks for is the same type of corset that will probably suffocate innovation and investment in mobile and fixed internet. For a thriving internet, both technologies and business methods of all players need to evolve, small and large alike. Innovation dies when it has to ask for regulatory approval. Adding insult to injury, Title II does not cure the alleged problem, paid prioritization. Title II does not prevent paid prioritization as long as the prioritization is available to everyone who purchases the exact same service.
The market has made it clear that it does not have an appetite for draconian government interventions here. Whether the FCC will appreciate the signals the market is sending is an open question, as is whether the FCC cares what the market thinks. For the record, the agency should care. Pushing out high speed broadband to more than 95% of the US population is a key objective of this Administration. A Title II world could very likely preclude that from ever happening if the market decides the regulatory risk is too high.
Roger Entner and his analysts are known around the globe as some of the most respected telecom experts.Full bio →
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