After years spent fighting the Wheeler FCC, in court, Congress and the states, cable is finally willing to negotiate.
The FCC's Unlock the Box plan, which was followed by a court ruling approving net neutrality, has caused a sea change at Comcast (NASDAQ:CMCSA) and its colleagues. The result has been a letter proposing the creation of HTLM5 apps that will let consumers ditch cable hardware while maintaining cable control of the resulting software.
One Democratic commissioner, Jessica Rosenworcel, has jumped in to say that the FCC's original proposal has "flaws" and praised the industry move. This is the key point. Without Rosenworcel, Wheeler can't move forward, meaning the final rules will have to be delayed until either an agreement is made or isn't. That means the rules may not become final until next year when, regardless of who is elected Wheeler will likely be headed out the door, giving the industry another bite at weakening (or eliminating) the rules in Congressional hearings.
Control over set-top boxes is not just about the money people pay to rent the things. It is about controlling what is offered, how it's offered, and under what conditions it's offered. If set-top boxes become the "Wild West" then control over your choices passes to whoever sells you a set-top box - that could be Amazon.com (NASDAQ:AMZN), Alphabet (NASDAQ:GOOGL), Apple (NASDAQ:AAPL) or someone else. So long as the software remains under cable control - and their proposal maintains this - then there is a way to keep customers locked-in to the industry's choices.
Cable believes it deserves this lock-in because its capital created the network the customer is using. I suspect customers, on the other hand, would rather they have full freedom to build their own bundles of Over the Top services, perhaps with some sports layered on, and save money over what cable is presently offering. Note that if the apps live in a cable app store, that store could take a cut of the apps' action. The trade group representing the Internet companies is suspicious of the new proposal.
If Alphabet (NASDAQ:GOOG) (GOOGL) could control your cable experience by simply offering a box or software, on the other hand, why would it then go to the expense of building out its own local fiber networks? If cable becomes a dumb pipe, why would competitors overbuild at all? Wouldn't they be better off, in that case, to close-out their capital commitments and just build apps based on the software cable is offering?
This is the key point that the FCC will have to consider. Is this overbuilding a good thing? Should some urban homeowners have three choices for Gigabit Ethernet while suburban and rural consumers have none? Would capital be better allocated improving service to all, rather than upgrading the lucky few?
My guess is it's all enough to create the delay the industry wants. The status quo will continue into the next Administration. That is very good news indeed for incumbents like Comcast, AT&T (NYSE:T), Verizon (NYSE:VZ) and Charter (NASDAQ:CHTR), which just bought out Time Warner Cable last month and is still digesting it. If you want a short-term speculation, Charter is the play.
On the other hand this is bad news for Alphabet, for Amazon, for Apple, and for anyone else who thinks that cable is about to become a dumb network. I would discount those efforts for at least the next year and, if Republicans maintain control of the Senate, indefinitely.
Disclosure: I am/we are long AMZN, GOOGL, CMCSA.
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.