Triumph Of The Stupid Network

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Includes: CMCSA, GOOG, GOOGL, NFLX, T, TMUS, VZ, YHOO
by: Dana Blankenhorn

Summary

A Court of Appeals panel has ruled the FCC's net neutrality rules legal.

For now, sponsored or zero-rated content deals by wireless carriers are not impacted.

Earnings power limited to increasing prices in monopoly areas, vertical integration for now.

A "stupid" network, one dedicated only to moving bits rather than defining "services" the network can charge for, has been a network architect's dream for nearly two decades, practically since the Web was spun.

Services, Dave Isenberg wrote in 1997, should be defined by endpoints, either servers or clients attached to the network, rather than the network itself. It was this ideal of networking that was the big winner in this week's net neutrality decision.

The financial implications of this could prove massive. Companies like Comcast (NASDAQ:CMCSA) and AT&T (NYSE:T) may still create services, but they can't favor them over others, for instance by slowing down Netflix (NASDAQ:NFLX) to sell Hulu subscriptions. Netflix is the obvious big winner in this decision.

The new decision applies only to wired networks, but the court made clear it might also accept the premise behind the decision on mobile networks, which presently ignore the neutrality concept by doling out "free" content based on contracts with content providers. T-Mobile (NASDAQ:TMUS) was the first to jump in here, but others are following - if you see "zero-rated" or "sponsored" data you're seeing a mobile provider ignoring net neutrality.

The 2-1 Court of Appeals decision puts industry opponents between a rock and a hard place. Their natural allies are Republicans, many of whom spoke out in opposition to the decision. Congress could try to overturn the FCC's rule-making, but it's in re-election mode now. The industry could appeal to the full Court of Appeals, but that group is unlikely to overrule its panel. The decision could be appealed to the Supreme Court, but the court may not take the case and it is divided 4-4 anyway.

All this means business decisions will have to be made, between now and early next year, based on an assumption the rules will stay in place.

This does not mean the networks have no means by which to raise more cash from customers. They can buy services for re-sale, which is why both AT&T and Verizon (NYSE:VZ) are bidding for Yahoo (NASDAQ:YHOO), and why Comcast has a controlling interest in so many Internet news services like Vox. They could use those sites' editorial power, which is increasing while that of traditional media fades, to try and change public opinion.

For now, the carriers have to worry more about Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG) overbuilding in growing urban markets like Atlanta (and now Dallas). Alphabet began its Fiber builds as a protest on behalf of net neutrality, but it might change its mind on the subject, if it becomes dependent on subscriber dollars and sees threats to the rest of its business model.

These, however, are long-term propositions. Right now, it's far more likely that the wireless carriers will be facing an emboldened FCC next year on the sponsored content issue than they will be to get relief from network stupidity. That means the outcome is likely to be higher prices for Internet services, especially where carriers hold a monopoly, and more complaints about suburbs and rural areas being left behind on broadband investment.

I personally own shares of Comcast and Alphabet, the former due to its content plays like NBC and Universal, the latter due to its dominance in vital Internet services. I don't expect a lot of growth there - these are hedges against general market volatility.

For now you're far more likely to get growth over the next year from Internet clouds than from Internet access.

Disclosure: I am/we are long CMCSA, GOOGL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.