Why AT&T's Victory Also Comes With A Warning For Investors

| About: AT&T Inc. (T)


With the rise of streaming media has come a rise in “zero-rating” - a term that applies to companies offering content that doesn’t count against customer’s data-caps.

"Zero-rating” had caught the eye of the FCC which worried it would stifle competition.

Of the main companies impacted by “zero-rating,” AT&T has the biggest profile as a lot of the appeal of its DirecTV Now service is the data-free possibility for dual customers.

President Trump’s new appointees to the FCC have taken a stance counter to their predecessors and decided not to investigate the matter which is a win for companies like AT&T.

While the FCC turnabout is a victory for AT&T, it could also lead to a repeal of net neutrality rules which has longer term and wide-reaching effects, especially for investors.

With each new political administration comes a period of uncertainty to investors in every sector. The telecom and media realms are no exception as the prior outgoing government seemed ready to dive into their industry's practices - for better or worse. However a new ruling by the FCC seems to signal a change of pace is coming and that's of utmost importance to investors, especially ones with an interest in AT&T (NYSE:T).

First to bring everyone up to speed.

The original topic that spurred a lot of what the FCC was examining was what is referred to as "zero-rating." Essentially that's just a needlessly complicated way of saying certain content won't count against your data plan.

A number of telecom companies have been dabbling in that area but the one with the most to potentially lose would have been AT&T, had it been regulated more stringently.

AT&T's big-swing entry into the streaming TV market, DirecTV Now, hinges very delicately on the ability to offer the service to AT&T users without impacting their data plans. It's also arguably the biggest use of the technique among the companies targeted by the FCC, which also includes Verizon (NYSE:VZ), T-Mobile (NASDAQ:TMUS) and Comcast (NASDAQ:CMCSA).

The big question proposed by former FCC Chairman Tom Wheeler and his team was "does 'zero-rating' impact competition in a negative way?" In other words, if one company is offering data-free access to certain services, is that unfair to customers of another?

It's a subject that veers heavily into the whole "net neutrality" debate. For those unfamiliar with net neutrality, I highly suggest checking out John Oliver's in-depth (and entertaining) overview, but to simplify, the term refers to a belief that Internet service providers (ISPs) should enable unfiltered access to all things related to the Internet, regardless of which provider used and not discriminate by charging based on select factors.

A big fear was that different ISPs could throttle speeds of users who were using too much of a certain service. Net neutrality would legally prohibit them from lowering your speed based on excessive use over a small period of time. It would also not allow them to charge you more to access the same service simply because you use it more.

That's where this new zero-rating wrinkle comes into play. The question becomes if an ISP teams with a streamer to allow for truly unlimited use, does that make it unfair to people who don't use both services and thus don't qualify?

For example, take Verizon and the NFL. If I wanted to stream NFL games on my phone and I have Verizon, I could watch without incurring any hits to my data plan, but if I had Sprint (NYSE:S) it would impact my data count (and in some cases I may not even be able to access the feed).

The concerns harken back to when a proposed two-tier system was in play that would essentially allow a company to pay more to ensure its customers got data faster, which would hurt smaller rivals from entering the marketplace.

The whole thing is a tricky subject and again it all depends on where/how you watch. Where AT&T investors were particularly interested was how it would impact the company's new DirecTV Now service. After all, for a service that is basically offering unlimited streaming live TV, not having it count against a data limit is a very attractive feature.

Yet, is it monopolistic to make that offer? Wheeler believed that was a question worth exploring. Obviously that news worried AT&T's investors, which are also aware the company had to tread carefully so its proposed merger with Time Warner (NYSE:TWX) wouldn't be caught in the middle.

Yet new FCC chairman Ajit Pai just put those shareholders at ease by rescinding Wheeler's investigation. The FCC recently sent four similar letters to the big four companies in the center (which you can see here) and said the inquiry is over and they are moving on.

Pai later released a statement further explaining the decision.

"These free-data plans have proven to be popular among consumers, particularly low-income Americans, and have enhanced competition in the wireless marketplace. Going forward, the Federal Communications Commission will not focus on denying Americans free data. Instead, we will concentrate on expanding broadband deployment and encouraging innovative service offerings."

Personally I don't disagree with the move as I don't see an issue with zero-rating… if anything I see it as enhancing competition. Conversely, though I do support net neutrality as I don't believe ISPs should have the right to charge people more to use the same Internet. It's a weird line to walk as technically aspects of zero-rating do go against the net neutrality rules, but there are important differences.

In one scenario, you are offering a perk to subscribe to a service which again to me is the same thing as saying I'm choosing to subscribe to HBO over Showtime because HBO has Game of Thrones. In that case I'm choosing HBO because of its programming not because of how I choose to access the programming.

Yet that then ties back into the original debate. You can see it from both perspectives as it becomes a very slippery slope because now it goes beyond a simple content preference, but it is still a preference and they are linked.

The zero-rating ruling could also open the door to fully repeal more of the 2015 net neutrality laws that the telecom industry has been lobbying against in recent years. On the surface that would be another big win for AT&T but here's the thing, its shareholders may not be as lucky as guess who those costs get passed along to in the end?

Yes, if the company (and in turn the stock) performs well they see the benefits, but if net neutrality goes away it could cost them more money monthly in the longer run.

I'm not trying to call out AT&T specifically, as this applies to all the providers, but AT&T is the one that has the most gain from zero-rating and also finds itself in the biggest quandary with regard to looking for more leverage. Executives would love net neutrality to go away, but they can only push their luck so far. You can't cry poor and then spend billions to acquire a giant company.

Remember, the Time Warner merger still is very much in limbo and even though President Trump's new FCC appointee sided with the company this time, Trump himself is still not sold on the actual merger itself. AT&T needs all the support it can get and rocking the boat won't help.

Company rivals will say this merger makes AT&T more of a monopoly while AT&T says this is in the public's best interest. In truth, this is really more in AT&T's best interest as it needs the Time Warner content and IP to help sustain its future, but that's not to say customers couldn't eventually see better package deals as a result.

Of course, packaging is part of what got us to where we are at present. As I wrote last year the combination of AT&T and Time Warner is fascinating because here you have Time Warner, which is interested in expanding its mobile footprint, and AT&T which already has a solid mobile footprint but needs content to supply it.

It's a perfect marriage of convenience, but again the rub is that without net neutrality, it could cost customers more to access that content and that may mean they look elsewhere to spend that disposal income.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.

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