Cable stocks are down again today, which suggests that a lot of investors remain anxious about President Obama’s recommendation yesterday for the FCC to enact tough net neutrality rules — including a reclassification of the Internet so it can be regulated as a phone-like utility. But several Wall Street analysts say not to worry: the proposed changes would have less impact on cable and phone companies than they and others who oppose the president claim.
A ban on blocking or throttling certain content providers, and providing greater transparency about pricing and practices — three of the president’s four specific recommendations — “would have essentially no impact on the outlook for broadband revenue growth,” Morgan Stanley’s Benjamin Swinburne says. And the fourth proposal, to outlaw paid prioritization – offering so-called “fast lanes” to favored sites – would be a nonevent. They “do not exist today” and investors “have effectively zero future revenue expectations.”
He and Bernstein Research’s Paul de Sa say the FCC probably won’t try to set broadband prices. Obama urged regulators to explicitly “forebear” price regulation. That makes sense since the FCC “does not regulate any meaningful retail services today and so does not have the institutional capabilities to do so,” de Sa says. That’s why “the downturn in cable stocks based on mistaken assumption that [reclassification] is synonymous with price regulation likely represents a buying opportunity” for investors.
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Wunderlich Securities’ Matthew Harrigan specifically believes that Wall Street over-penalized Comcast, Time Warner Cable, and Charter. Investors feared that the administration’s tough talk about net neutrality might lead Comcast to walk away from its $45 billion planned acquisition of TWC, and tack-on agreement to sell and swap systems with Charter. Yesterday Comcast was down 4.0% while TWC dropped 4.9% and Charter slipped 6.2%.
Harrigan isn’t worried, though: The transactions’ financial terms are so attractive that “the companies have major incentive to work with Washington.” In the meantime, he expects FCC Chairman Tom Wheeler to “resist implementing an ex cathedra approach dictated by the Administration” – especially since Verizon and others have said that they would ask the courts to overturn a reclassification of the Internet. Wheeler might be able to sidestep this by applying the net neutrality mandates to Comcast, as a condition for approving the TWC deal, which could then “constitute a de facto standard for the broader cable industry.”
Wells Fargo Securities’ Marci Ryvicker also continues to “view broadband as a significant growth driver in an increasingly OTT [over-the-top] world” even if the FCC reclassified the Internet. But she warns that the Street should expect a bumpy ride. Regulators probably will wait at least until February to decide whether to reclassify, she says. If the FCC sides with the president, then opponents would go to court in March or April. “In this case the appellate decision could come as early as late 2015, but more likely in early 2016 – with an ultimate Supreme Court decision (if we get that far) potentially in 2016-17,” she says.
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