Why Net Neutrality Doesn’t Really Matter to Wall Street

net neutrality
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Net neutrality — the idea that broadband operators should be barred from discriminating against content carried over their pipes — is a cause célèbre among the Internet masses.

The Federal Communications Commission received more than 677,000 comments as of Monday from individuals, companies and organizations about its proposal for revised net-neutrality rules. Credit for the relatively high volume goes in part to John Oliver, who on HBO’s “Last Week Tonight” in early June rallied viewers to voice their support of strong net neutrality — andmay have crashed the FCC’s commenting system.

But on Wall Street, the sentiment is markedly different. According to financial analysts, whatever rules the FCC adopts as a result of the latest proceeding will be, well, neutral to the economics of the Internet biz.

“We do not believe the enactment of FCC rules on net neutrality will have any material impact on the distribution of value between large, established Internet companies and ISPs,” Bernstein Research analysts wrote in a July 9 research note.

SEE ALSO: FCC Extends Net Neutrality Deadline to July 18

Why the shrug of the shoulders?

For one thing, the analysts said, the FCC’s previous Internet Order had been in place from 2010 until January 2014, when key provisions were overturned by an appeals court — and those rules “had little, if any, effect on business models.” According to the Bernstein researchers, “We see no reason to believe that their next incarnation will be any more constraining.”

Regardless of how the FCC’s rules play out, ISPs will continue to try to increase the amount of fees they collect from Internet content companies like Netflix, Google and Facebook — as well as content-delivery network providers — for higher-quality interconnections.

The Market for Bandwidth

That’s been happening for years, and it’s how the Internet bandwidth economy has always worked. Netflix, for example, has reached such deals with both Comcast and Verizon. And although Netflix doesn’t believe it should have pay those fees and has tried to tie the issue to net neutrality, FCC chairman Tom Wheeler has said interconnection and peering agreements are unrelated to the focus of net neutrality.

The parties involved in the interconnection debate (content owners, delivery networks and ISPs) have acknowledged that the cost to upgrade ports for interconnection “is immaterial,” BTIG tech analyst Rich Greenfield wrote in a recent blog post.

Netflix and others fear that the market power of big ISPs — especially Comcast, if its takeover of Time Warner Cable is approved — will give the Internet providers free rein to set the price of interconnection to whatever they please.

That’s not a major concern, according to the Bernstein analysts. For the most part, the big content companies have equal clout in such negotiations. “In general, we believe that large Internet companies such as Google, Facebook, Amazon, eBay and Netflix, which have established consumer products, have considerable leverage and the market power of ISPs relative to them is limited,” they wrote. Greenfield, meanwhile, observed that content providers aren’t prevented by any government rules from withholding their content, pointing to CBS’s blocking of video access to Time Warner Cable customers during the companies’ contract feud last summer.

Much of the public furor over Wheeler’s revised net-neutrality rules has been specifically about the proposal to allow ISPs to charge content providers for a so-called “fast lane.” But Greenfield argued that offloading bandwidth-hungry traffic like video onto a separate fast lane “should actually ease congestion on the existing lanes rather create ‘slow lanes.'”

Netflix: Marginally More at Risk?

But here’s a caveat: Netflix is the biggest consumer of downstream bandwidth on the Internet in the U.S. Compared with Google and others, “Netflix is a smaller company, generating much more traffic, with a service that may be perceived by MSOs and telcos as a greater threat, and hence faces (on the margin) more risk, in our view,” the Bernstein analysts wrote.

Indeed, Netflix’s stock dropped after the FCC’s previous net-neutrality rules were overturned, as investors worried that its delivery costs would increase if ISPs played hardball. But as noted earlier, interconnection deals weren’t governed by net neutrality anyway. Netflix has disclosed that the cost increases from the Comcast deal were de minimis, and its shares have since hit record highs.

Now, what happens if Comcast or other ISPs decided to try to hit Netflix or another content provider with exorbitant cost increases?

Analysts say that’s highly unlikely, because it would invite the government to exert a much heavier regulatory hand. Wheeler has warned ISPs that the agency would consider reclassifying broadband as a Title II service if they misbehave, which would among other things impose price controls on the industry. And, Greenfield noted, “Title II regulation would be devastating to ISP public market valuations.”

The Bernstein team, led by Paul de Sa and Carlos Kirjner, noted that their conclusions that net neutrality will have minimal effect concern only large-cap Internet and telecom companies. “We do not consider the impact of net neutrality and interconnection regulation (or lack thereof) on the ‘public interest’ (which would include, for example, the impact on consumers, startups and small companies as well as broader policy goals such as the preservation of free speech),” they said.

Wall Street, after all, is an engine of capitalism — concerned with the bottom line of large companies. The fast-lane carve out could let Google or Netflix guarantee delivery of their content, whereas a tiny Silicon Valley startup wouldn’t have the bucks to pay for that.

“Under the FCC’s proposal, broadband providers like AT&T and Comcast could charge online companies like Vimeo to deliver traffic (such as video uploads and plays) to their customers in a timely manner,” Vimeo director of support and community Darnell Witt wrote in a blog post about the IAC-owned vidsite’s submission of comments to the FCC. “We think this will create a two-tiered Internet — fast tubes for those who can afford to pay a hefty toll and slow tubes for everyone else — and will ultimately harm innovation and creative expression.”

But that’s just business. Google has the cash to build enormous data centers around the world to ensure sub-second response times. Should it be banned from doing that?

In the course of the Internet’s history so far — with or without net neutrality –user adoption, the speed of network connections and the companies that profit form it have grown at a healthy pace. It strains the imagination to foresee a scenario in which the government would throw a monkey wrench into the equation that would disrupt the balance that exists today in a major way.

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