The FCC’s roll-back of net-neutrality regulation sparked intense political debate about how the internet should be governed, in particular how ISPs handle and price content transmission. But the internet’s rapid evolution, the ISPs vertical integration into content, the bargaining power of the tech and media giants and anticipated 5G investment returns largely supersede regulatory shifts.

The U.S. Federal Communications Commission (FCC) recently voted to rescind the 2015 “net-neutrality” regime that had effectively re-classified lightly regulated internet service providers (ISPs) as more heavily regulated telecommunications companies. The reclassification prohibited service providers from offering fast or slow access “lanes” and required them to give equal treatment to customers large and small.

Opponents of the net-neutrality roll-back, which passed 3-2 along party lines, said it would harm consumers and stifle innovation by raising prices and slicing access back into disparate slow and fast lanes.

Proponents countered that it would increase access and choice of internet providers for both households and small businesses by enabling smaller ISPs to better compete with larger regional providers, mainly major telecom and cable companies. They also argued it would restore innovation and ISP investment growth. “In the two years after the FCC’s decision, broadband network investment dropped more than 5.6%—the first time a decline has happened outside of a recession,” FCC Chairman Ajit Pai recently wrote, citing data from GW Institute for Public Policy economist Hal Singer.

Market Insights talks with Thornburg’s Connor Browne about the decision to rescind the Title II application of the 1934 Communications Act, its implications for investment in the space, as well as for the players within it.

Q: How do you view the impact? Do you think small content and video streaming service companies will now be crimped by the likes of Netflix, Alphabet/Google, Facebook and Amazon, which have the financial resources to take advantage of paid prioritization transmission options?

CB: Honestly, it’s complicated. The internet is a mess of equipment and cables owned by different parties, with bits of information constantly seeking out the best path from one place to another. To get around the mess, content delivery networks (CDNs) have been developed to push content closer to the end user. Akamai is the largest independent operator of a CDN. But each of the large internet companies operates its own CDN, which connect with ISPs such as Comcast directly through peering relationships. Even under the net-neutrality regulation, some companies had the resources to push their content closer to the end user and provide a more reliable service—for example, Google’s YouTube or Netflix—and other companies didn’t.

Q: The traditional media, telecommunications and cable company landscapes have been shifting for several years, effectively melding into one another. Comcast merged with NBCUniversal in 2011. Verizon acquired AOL and Yahoo. Now we have Disney’s $52.4 billion purchase of various 21st Century Fox assets, T-Mobile’s acquisition of Layer3 TV, and AT&T’s proposed merger with Time Warner, which the Justice Department is suing to block. Will the repeal of Title II facilitate the evolution, innovation and subscriber churn in a market that seems to move faster than regulators? It also appears far less vulnerable to anti-trust concerns when affected companies are investing or poised to invest in content creation, including a la carte streaming bundles, as well as in wireless and wireline broadband infrastructure expansion?

CB: As you point out, these markets are evolving rapidly. I don’t think regulation will be nearly as important as technological change. If you look at the traditional pay-tv “bundle,” for example, near monopolies have charged too much and provided poor customer service for too long. As broadband speeds have increased, a big opening has been created for over-the-top (OTT) streaming services such as Netflix. The big content houses (e.g. Disney) are in a predicament because they rely too much on fees generated by both the traditional bundle (e.g. Comcast or DirecTV paying for content per subscriber), but also fees generated when Netflix and Amazon Prime buy their older content. The real way forward is to migrate to “direct-to-consumer” products (e.g. a Disney streaming app that would include all its content). But to do so all at once would decimate current revenue and earnings.

Q: Interestingly, in the wake of the FCC vote, the big content and streaming companies that might be expected to suffer as a result of greater pricing flexibility for broadband access finished the day’s trading session mixed, with Facebook’s share price closing flat while those of Netflix, Amazon and Alphabet ended up. Conversely, the major internet service providers, which could be expected to benefit, also finished mixed, with Comcast ending higher, but Verizon and AT&T ending lower. How much does the rollback of Title II actually affect the broadband providers and the content companies?

CB: Generally, I think the broadband market is competitive, especially if you view it in the context of a bundle (wireline broadband, phone, television and wireless service). The biggest wireless, cable and telecom companies are all colliding head-on, and it may get worse in a 5G wireless world. In a reasonably competitive environment it will be hard for the network providers to try to extract economic rents to provide fast lanes. I don’t think their customers would stand for it. Further, Comcast has already admitted partial defeat to Netflix; Comcast’s inclusion of Netflix services on its X1 box gives you a sense for how much Comcast customers value their Netflix service. Given the current state of play, I’m not sure that the repeal of net-neutrality will have a significant impact in the near term.

Q: Do you expect the new light-touch regulatory regime to accelerate investment in 5G infrastructure?

CB: We’ll see. Mostly, I think telecom and infrastructure companies will make investments based on predicted rates of return without baking in too much expectation for opportunities created by recent regulatory change. Politics, especially these days, is erratic. Assuming too much about future regulatory regimes when making multi-year investment decisions would increase risk. Who decides to participate in 5G will likely be the biggest driver of how much investment takes place. Will the cable companies cooperate to launch a wireless service of their own? Today they offer wireless but rent capacity from traditional telecom companies. Perhaps the recent regulatory changes will persuade a large tech company or two (Alphabet, Amazon?) to decide they want to build out their own 5G networks. Will T-Mobile and Sprint each go it alone, or will they merge or combine with other players in the future? In my opinion, these big questions will drive how much investment is made, more than the recent changes in regulation will.

Q: As part of the FCC net-neutrality removal, the Federal Trade Commission’s previous role in policing anti-competitive, deceptive or unfair behavior has been restored. And the FCC has also renewed its transparency rules obliging carriers to explain their pricing and access terms in detail. Are there sufficient safeguards in place to protect consumers and smaller businesses from anti-competitive practices?

CB: Hopefully. But we will see. Egregious abuses might include Comcast, which owns NBCUniversal, blocking a Disney streaming product from their broadband customer households. The FTC would almost certainly pay close attention to such an abuse. But again, I don’t think Comcast broadband customers would stand for such an action. That makes such an abuse much less likely to occur.

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