Reclassification Seen on Wall Street as Bigger Threat than Net Neutrality

If the commission votes to impose net neutrality rules, along the lines of what has been proposed in legislation by Rep. Henry Waxman, D-Calif., without reclassification, some CEOs probably would consider that at least a partial victory, industry and FCC officials said. But concerns remain about how the rules would apply to wireless, a subject of continuing negotiations between industry and staff for Chairman Julius Genachowski, the officials said.

Whether the FCC will vote on net neutrality rules to be imposed under its Title I authority in December remains to be seen. (See related story in this issue.)

A commission official said financial concerns are a key reason negotiations have continued this week at the FCC among major industry players, FCC Chief of Staff Edward Lazarus and others working for Genachowski. The discussions have gone on despite pressure from Republicans in the House for companies not to strike a deal on net neutrality, industry and agency officials said this week. Verizon Executive Vice President Tom Tauke confirmed that point in a recent interview (CD Nov 23 p 1).

As a sign that the chairman’s office is working hard to cut a deal, senior Genachowski adviser Rick Kaplan sent around an e-mail Wednesday asking the other commissioners if it would be all right for the chairman to circulate orders for the meeting a day late on Wednesday night instead of Tuesday, which is three weeks before the December meeting date, FCC officials said. That would give the chairman’s office extra time to work out an agreement. Discussions are expected to continue into next week, agency and industry officials said.

"For wired operators, at least, the real risk of reclassification is price regulation, not net neutrality per se,” said Sanford Bernstein analyst Craig Moffett. “Net neutrality under Title I would be a relatively welcome compromise. For wireless carriers, it’s a bit more complicated. They're genuinely concerned about the implications of net neutrality, which could open the door to bandwidth arbitrage, or the substitution of high priced voice and text services with low cost data applications."

"I think an FCC Title I compromise based generally on the Waxman legislative framework would obviously be regarded by investors as vastly more preferable than Title II reclassification, and the FCC could point to such a outcome as advancing its policy aspirations in very difficult political environment,” said Jeff Silva, a Medley Global Advisors analyst.

Scott Wallsten, vice president of the Technology Policy Institute, said the effect on the stock price of major industry companies if the FCC approves net neutrality rules remains to be seen. “On the one hand, a lot of uncertainty is built into their stock price at the moment,” Wallsten said. “Any decision that reduces the uncertainty has a positive effect. On the other hand, anything that potentially reduces their returns, increases costs, et cetera, has a negative effect on prices.”

Information Technology and Innovation Foundation President Robert Atkinson said the fallout will depend on “what kinds of rules, if any,” the FCC imposes. “If they impose rules that would limit reasonable network management, that could end up hurting consumers, and by extension the carriers,” he said. Free State Foundation President Randolph May said, “It is true that imposing net neutrality regulation under a Title I approach might be less harmful than under Title II. But, ultimately, acting in a somewhat ‘less harmful’ fashion should not be the FCC’s test for sound policy.” ITIF Senior Research Fellow Richard Bennett said, “It’s … critical that any new regulations don’t ban the sale of premium transport in non-discriminatory way. New applications emerging on the Internet, such as immersive video conferencing and telemedicine, need specialized treatment from network operators to function correctly."

"Investors have focused more on reclassification, perhaps because they felt they understood the implications better,” said Paul Gallant, an analyst with MF Global. “There’s been less attention to net neutrality just because no one knows for sure how it will affect carriers’ return on their network investments, he said. The debate over reclassification and net neutrality has mattered particularly to cable operators, because some investors have decided that Title II is a precursor to rate regulation of cable broadband, Gallant said.

Public Knowledge Legal Director Harold Feld questioned whether reclassification or net neutrality would hurt carriers on Wall Street long term. “What companies really need is for there to be an actual rule, whether it’s one they like or one they don’t like,” he said. “Then they could at least figure out what their business model looks like. But as long as there is no rule, companies will live in perpetual uncertainty. That doesn’t impact their valuations, but it does impact their actual value and willingness to invest.” Feld said many have a “ridiculously inflated view of what an FCC decision would mean for financial markets and the economy generally.” Any reaction “would be fairly short lived and have virtually no long term impact,” Feld said. “But I recognize no one else believes that.”

Wall Street sees reclassification and net neutrality as essentially two parts of the same issue, said Jonathan Chaplin with Credit Suisse. Wall Street is more opposed to reclassification in general because it would provide an opening to do much more than enforce net neutrality, such as imposing new rate regulation, Chaplin said.

Regulatory uncertainty has certainly hurt telecom stocks, Chaplin said. It has been a much bigger factor for cable stocks, but for much of the summer, investors in general were clearly very focused on and worried about Title II reclassification, he said. Chaplin said he hasn’t seen any reduction in investment in infrastructure by the carriers. The carriers have continued investment in the expectation that the FCC won’t prevail, he said. Net neutrality is a narrow issue for investors, said John Hodulik of UBS. Price and bundling are the issues that investors are most concerned about, he said.