Is net neutrality
a game changer?


Interview with Quirien Lemey, CFA Fund Manager International Equity at Degroof Petercam Asset Management (DPAM)

The net neutrality rules were approved by the FCC in 2015. The intention was to keep the internet open and fair. Internet service providers were required to treat all online content equally. On June, 11th 2018 the repeal of net neutrality regulation officially took effect. The concern among net neutrality supporters is that internet providers will have too much control over the way online content is delivered. They plead that it may also make it harder for online services to compete if they have to pay more to be placed in a so-called internet fast lane.

Could you give us some hints on the net neutrality latest regulation decisions?

In Europe and US, internet service providers (ISPs) are not allowed to give preferential treatment to some websites or some apps, they all need to be treated equally, and they all need to have the same speed. The question is: did they do so in the past? No. Actually, some broad band providers in the US, when they started a discussion on the topic (around two years ago) with players as Netflix, it started to slow down its network speed. And when they found a resolution and Netflix agreed to pay for some network build outs, suddenly the speed was up again.

Now in the US, the FCC has decided to remove those net neutrality rules. Every ISP can now prioritize web traffic if they choose to do so, they can create the so called “fast lanes”. They could go and ask Netflix for a higher price and if not paid, customers can still receive the service, but at lower speed. More likely, they could ask Netflix for reimbursement in exchange for being put on the fast lane (instead of being cut on speed). However unlikely, they could even ask the consumer for a higher price if they want quality speeds for certain services.

The FFC does not have the power anymore to intervene in this case. The result is that ISPs are not obliged to provide equal treatment anymore, they only need to disclose about it.

ISPs communicated that they will not slow down any website. However, even if it has not been said, they may create fast lanes instead of slowing down the existing ones. Which is actually twice the same thing. Since the total speed of many networks is limited, if they create fast lanes, theoretically all the rest goes down.

And which is the stance of the other parties?

From the perspective of a telecom operator, they invest considering amounts of money in creating a network and then companies as Netflix and Youtube use up 30% of the capacity of this network without paying anything. From their point of view, the situation is not balanced. They risk becoming nothing more than dumb pipes, a commodity through which value added services are delivered.

Taking the point of view of the consumer, the quality of the networks must be guaranteed, because it is their choice to decide to allocate their network connection to online content platforms and they pay for it. They expect that the speed and the quality address these needs. For them it is the job of the telecom provider to deliver what the customers need.

Telecom operators, especially in Europe, have faced structural pricing pressures and regulatory pressures for over a decade. In US, certainly regarding the latter, it is a better environment to operate in.

Therefore, they are always eager to find new things. Theoretically net neutrality could be of high importance, but typically, I do not think it is. The move to 3G, then to 4G and now to 5G with potential IoT revenues. There is always competition that tends to outdo the benefits.

Personally, I am in favour of the principles of net neutrality, but we do not know what will happen in an environment of no net neutrality. The odds of a driver of huge future performance of telecom operators are pretty slim. As long as the business model of these companies does not change, we do not see this happening.

Nonetheless, net neutrality rule elimination is a very unpopular measure, and in the end consumers have the power in a customer centricity world. The other relevant factor is competition, which is quite fierce in US since T-Mobile US started being the disruptor a few years ago.

In the context of net neutrality, we will not see any change anytime soon. This will be slow progress because of the unpopularity of the measure.

Given competition as one of the main drivers together with client centricity, can you give us more details on the competition landscape for the telecom operators sector in US?

There are four operators in the US market: Sprint Corporation, T-Mobile US, Verizon Wireless and AT&T Mobility.

The market is changing and competition is becoming increasingly fierce. Sprint and T-Mobile have announced a merger which has not been approved yet. However, the acquisition of AT&T buying Time Warner has just been approved and closed, which has buoyed M&A optimism.

People think that the odds that Sprint and T-Mobile will merge, have increased. But AT&T and Time Warner merger is a vertical merger whereas Sprint and T-Mobile is a horizontal one. At the same time, share prices have not done well. T-Mobile argues they need this merger in order to compete with the big two, AT&T and Verizon. However, one could easily argue that T-Mobile has done just fine the last couple of years as a stand-alone… Moreover, the US antitrust authorities might be more desperate to “win” after the recent approval of the AT&T and Time Warner merger. Therefore, we still doubt that Sprint and T-Mobile will be allowed to merge.

If the outcome is positive, the market will have three players and content will be the game changer. AT&T is buying content with its latest move, and Disney and Comcast are trying to buy 21st Century Fox because it remains as the big content player around. Disney have just announced a renewed bid for 21st Century Fox, going above the Comcast bid and offering a larger cash component.

Content is the big topic now and for a telecom operator any new source of revenue is welcome.


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