A Repeal Of Net Neutrality Could Undo The Net Gains Of The Tax Bill

On December 14, the Federal Communications Commission is scheduled to debate regulations that were put in place just two years ago. At the heart of the hearing is whether the internet should be treated as a utility for communication or an information service. This might not seem like a big deal, but trust me it is.

As it stands right now, internet service providers are not allowed to block, throttle or prioritize sites potentially based on compensation or lack thereof. If net neutrality is repealed, we could see ISPs doing all of the above. You can compare it to your television services. If you have cable or satellite services you have likely lost a few of your favorite channels, at least temporarily, as the cable or satellite service provider negotiated with the station operators as they debated how the payments were to be divided.

I live in South Florida and a few years ago we lost our local Fox station temporarily as DirectTV and the station owners debated, and of course it was during the NFL season which is when I watch Fox the most often. Just this year in Indianapolis the same thing happened with the cable provider and the CBS affiliate that shows the Colts games. You can see where this is going with the ISPs and how they could prioritize, throttle or even block certain websites if they aren’t compensated by the sites.

My internet provider is Xfinity and if net neutrality is repealed, it is possible that Xfinity could take the same approach with websites that it does with television stations. Xfinity provides the service and I pay them a fee for their cable service where stations like Fox, ESPN and Bloomberg provide the content. In the case of the internet, Xfinity provides the internet connection and sites like ESPN, Bloomberg, Yahoo and others provide the content.

So now that you understand how it works, how could things change? Are their companies that could benefit and companies that could lose out if net neutrality is repealed? Of course there are and you can imagine how the companies align.

Of those that support maintaining net neutrality and treating the internet as it is treated now are the main content providers: Google, Facebook, Amazon, Twitter and 200 other internet sites. Those that oppose the current status are the main internet service providers: AT&T, Verizon, Comcast, Sprint and T-Mobile. Perhaps the most important supporter of repealing net neutrality is FCC Chairman Ajit Pai.

One of the more interesting cases of how views have changed comes from Comcast. Back in 2014, Comcast’s view towards net neutrality was expressed on its own website with the following statements:

  • COMCAST IS COMMITTED TO AN OPEN INTERNET
    • Comcast won’t block access to lawful content.
    • Comcast won’t throttle back the speed at which content comes to you.
    • Comcast doesn’t prioritize internet traffic or create paid fast lanes.
    • Comcast’s Internet Essentials will make the internet more accessible to low income families.
    • Comcast will inspire innovation, promote learning, create access to jobs.

Those statements remained on their site until April 26 according to an article on Yahoo. That is the exact date when Chairman Pai announced his plans to repeal net neutrality. After that date, the following statements appear on Comcast’s site now:

  • Comcast is committed to an Open Internet.
    • We do not block, slow down or discriminate against lawful content.
    • We believe in full transparency in our customer policies.
    • We are for sustainable and legally enforceable net neutrality protections for our customers.

Notice the changes? The second one seems like it was written by a member of the legal department while the first seems like it was written by a member of the marketing department. You may have also noticed that the phrase about “prioritize internet traffic or create paid fast lanes” was completely removed. What do you think that might be setting up for, another revenue source for the company perhaps? Pay us a higher fee and your content will be delivered to readers faster and will be prioritized. Seems kind of like how commercials airing during the Super Bowl are more expensive than ones appearing during the local news.

Obviously the major internet service providers- Verizon, AT&T, Comcast, Sprint and T-Mobile would benefit if net neutrality is repealed or changed. Internet companies like Amazon, Facebook and Twitter would suffer to some degree. Imagine how many subscribers Facebook would lose if you had to pay $5 a month to access it. How about Twitter and ESPN.com? Even Bull Market Rodeo could be hurt if net neutrality is repealed. For instance, Verizon owns Yahoo and they could block sites like Bull Market Rodeo and then redirect people to Yahoo Finance.

While the Trump Administration has stated that they are in favor of less regulation, what they are looking at doing to the internet industry is adding regulation instead of allowing it to operate as a free-market enterprise as it is now. There are tons of small businesses that have been launched in the last 15 years that were successful because of the relative ease and cheap advertising available through the internet. If the ISPs are allowed to block sites that compete with their offerings or charge premiums to access sites like Facebook, Twitter and LinkedIn, it will hurt many entrepreneurs.

With three Republicans and two Democrats on the commission, it is almost certain that the FCC will recommend changing the current status. There is a rumble in Congress that could have an impact on the process. If the ISPs are given the power to decide what can and can’t be accessed, it will hurt the burgeoning online economy. It will hurt me personally as the service I provide to different financial publishers won’t be in demand as much as it is now. I have been writing investment publishing content for 17 years and as an independent provider for the last eight years. I am even considering launching my own newsletter, but I will now have to wait until this ruling comes down as it could have an incredible impact on my ability to market the newsletter.

While some people in Washington are viewing the proposed change as a means to controlling suspicious activity, like the activity accredited to Russian agencies during the last election, there has to be a better way of controlling that than placing the power in the hands of a few major corporations. While the White House and Republicans have been trumpeting the boost the economy would get with the passage of the tax bill, they have not addressed the net neutrality change and the damage that it would do to the economy. It would most certainly cause layoffs in the internet industry and it would certainly affect the thousands of self-employed content providers like me.

While it isn’t trickle-down economics like many speak of, it would have the same effect, or at least the effect it is intended to have —fewer people in the workforce, self-employed people making less and therefore not having as much to spend. I am not making these points as a political statement, but as an entrepreneur and economist.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

5 comments

  1. It simply comes down to why should the internet carriers have to keep spending the capital to constantly upgrade capacity while anyone, and I mean anyone, gets to hook up to the internet for free. The problem comes down to a handful of “bandwidth hogs.” Particularly a company like Netflix. A frame of a film contains 64 thousand bits of information. One frame. For guys like you, writers, you don’t send enough data to even make a blip. For one two hour movie just imagine how many frames of information has to be sent through the network. This whole net neutrality argument only happened because the democrats did everything they could to help their silicon valley supporters. Interestingly, this whole “net neutrality” thing would have come along a lot sooner if it had not been for the big collapse in 2000. Unlike the recession of 2008, which left behind millions of homeowners with mortgages costing more than their houses were now worth, in 2000 what was left behind was a glut of fiber optic capacity. Companies like Global Crossing and many others invested 100’s of billions in fiber optic cable too soon and went bankrupt in the process. Finally, companies like Netflix, and other “bandwidth hogs” have now eaten up so much capacity that someone has to pay to constantly expand capacity. That’s the economics. Compare Netflix’s capital expenditures (next to nothing) with Comcast, or ATT (multiple billions every year) and you lay bare the crux of the problem. You say you are making your arguments as an “entrepreneur and economist.” If you are sincere about that, read the 10-k’s of those companies and the capital spending caused by the “bandwidth hogs” will become readily apparent. The carriers could care less about what’s being carried over the internet, just how much, because they have to spend their money to support Netflix’s, and other “bandwidth hog’s” business models.

    • I don’t know where you get to log in to the internet for free. I pay $70 a month to my ISP and pay an additional $250 a month to my mobile provider for an unlimited plan that I use as a hot spot when I travel or in case of an outage with my ISP. Between my cable bill, which includes my internet service, and my mobile bill, I pay just over $500 a month and I don’t even have HBO, Cinemax or Showtime. When my wife and I were first married, the mortgage on our two-bedroom house was just over $500. It seems like the ISPs are getting compensated already via the monthly charges they assess. I do understand your point about the bandwidth, but it isn’t like the ISPs are maintaining their lines and providing free internet to everyone. They are being compensated to provide a service.

      • You are mixing apples with oranges when you throw in the cable service and roaming services with another company. My point is that Netflix is “a bandwidth hog” that rides on the internet for free, slowing down the speeds by which individuals like you get your service. ISP’s could care less about what is being transmitted. They only care about you having extremely fast speeds because that is what you pay them for. They should charge the large Corporate “bandwidth hogs” to help defray their capital costs and their subscriber’s monthly costs. You may have noticed that Comcast announced it would spend $50 BILLION dollars over the next five years in capital investment. The vast majority of that money is to keep your internet service extremely fast because of the handful, and I really mean a relative handful of corporate “bandwidth hogs” that eat up so much capacity for their own business models. Look at Netflix’s market value. They buy old, cheap programming at wholesale and then sale it retail to their customers without paying anything for the transporting of that programming. If they had to build their own fiber network there wouldn’t be a Netflix, or Instagram or any of the individual film/picture sharing applications that travel over the internet for free. The ISP’s have to pay those capital costs and, collectively, they spend tens and tens of billion dollars annually to keep up with the increased traffic. The whole “Net Neutrality” debate has nothing to do with ISP’s being Neutral. That administrative ruling has only been in place for several years. I challenge you to name one organization who was censored of slowed down because of the nature of their content prior to the Obama era “Net Neutrality” manufactured issue. The Netflix’s of the world and the other Silicon Valley giants can handle themselves just fine commercially. They just saw a way, politically, to get what they should be paying for (to offset the ISP costs) for free and were able to do it. Even you bought into it. Why do you think Netflix has such a high market cap. What innovation did they create. They do just what cable providers do…buy programming wholesale and sell it retail. Only Netflix doesn’t have to pay for live sports programming. Live sports programming is what costs cable companies so much money. Now they are trying to do “original” programming to separate themselves but they only exist because they get free internet transport of the GLUT of bandwidth they eat up making your individual costs higher than they would be otherwise. That’s the beauty of the “Net Neutrality” debate. Guys like you argue in favor of Silicon Valley while at the same time you are paying some portion of the extra costs they force ISP’s to bear. I admire their intelligence and have owned their stocks because of it. But you shouldn’t be carrying their water for them or at least present a more balanced and accurate portrayal of the economics and why the current FCC ended it.

  2. It makes sense for companies to pay for the bandwidth they use. But, there should be no restrictions based on content or provider of content.

    • No, it makes more sense for the end users to pay for their bandwidth based on individual useage and preference.
      The content should be available no matter who you buy your bandwidth from.
      ISP and content should be separate entities.
      Kind of like how church and state should be separate entities.

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