Shares of both Comcast (NASDAQ: CMCSK) and Time Warner Cable (NYSE: TWC) have been falling all month long on account of a rather complicated issue that reaches well beyond the two companies, potentially touching cyberspace itself, along with all the businesses and people who use it – including you.
Internet and cable provider Comcast has made a $45 billion offer to purchase video content owner and cable provider Time Warner Cable in a match made in entertainment heaven – in which an internet provider would gain a tremendous library of entertainment programming to distribute to its customers.
Shortly before the mid-September market correction, TWC was trading at $155 a share, putting the company’s worth at approximately $43.6 billion, making the $45 billion offer by Comcast appear very reasonable. But a recent wrangling behind the scenes that reaches as far as the office of the Chief Executive of all the land – President Barak Obama himself – has caused both stocks to plunge, cutting TWC’s price to $136 a share and reducing its market cap to some $38 billion, bringing into question Comcast’s purchase of TWC at the still-unchanged $45 billion bid.
Yet Comcast chief executive Brian Roberts remains confident the merger will take place as planned in the first quarter of next year. “We take it one day at a time,” he expressed. “I am excited by TWC as I sit here today. We’re all full steam ahead.”
Investors, however, are not as confident as he. They believe a certain issue being debated throughout the industry might prompt Comcast to lower its price for TWC, or perhaps even kill the merger all together. The reason? The very nature of the internet could be reclassified as a public utility.
If the internet is so reclassified, internet service providers including Comcast would stand to lose a great deal of money. Here’s why…
The Internet As We Know It
Although we generally view the internet as not owned by anyone and belonging to everyone, the truth is the internet is owned by the companies whose computers we are accessing. After all, what we are doing when we surf the web is merely jumping into someone else’s computer, which is owned by an individual or company. To get to those computers, we travel through cables, which are themselves owned by companies, or internet service providers. Technically, then, every part of the internet is owned by someone or some company.
That being so, anyone can charge anything they want to grant us access to all those computers linked by all those cables. Websites are free to charge us for entering their sites, internet hosts can charge us to access their servers where all those website are stored, and internet service providers can charge us to use their cable networks as we travel around cyberspace.
Yet they can do more than simply charge us. Internet service providers, for instance, can even block access to certain sites.
“As it stands today, there are no laws or rules that prevent your ISP from blocking anything it likes, or creating a pay-for-priority fast lane,” explains ExtremeTech.com. “If Verizon wanted to block The Pirate Bay, or some site that sells antique buttons, it could do that. If the CEO of an ISP happened to be really religious and took offence to a popular atheism website, he could just tell the network admin to block it.”
Of course, providers will rarely arbitrarily block sites, since they want as many users as they can get. But they are doing something else which is annoying and even infuriating companies, consumer groups, individuals and officials alike – including President Obama himself. What are they doing that has raised such a ruckus?
In part, they have created “pay-for-priority fast lanes” as mentioned above, where companies can pay a little more to enjoy faster connection speeds with their customers, allowing anyone visiting their sites to get in much more quickly, while companies who don’t pay the extra fee are stuck with slower accessibility to their sites.
Internet access providers have also been charging companies for using exceptionally large amounts of bandwidth, such as video content sites like Netflix, as well as slowing down the speed of some peer-to-peer networks which allow users to bypass much of the providers’ infrastructure.
Can internet service providers really do that? Give priority service to some, while deliberately slowing down the traffic to others? They sure can. And it’s all because of their current classification.
“At present, broadband providers are classified as ‘information services,’ which are not obligated to provide the same service to everyone,” explains Gawker.com.
Because of this classification, they are free to charge users for all those little extra perks. Think of it as an airline charging more for first class seating, or charging a little extra for priority boarding. As annoying as it may be for those who can’t afford it, it is quite legal none-the-less.
For some companies, however, it’s more than just annoying, it is actually hurting their business. Sure, the larger companies can afford to pay for the extra-fast preferential treatment. But not the little guys. Smaller businesses simply don’t stand a chance competing with the big boys, and ultimately get stuck with slower accessibility given to their visitors and shoppers.
Yet it’s not just the little businesses who are frustrated with the current arrangement. The big broadband users like Netflix are furious for being forced to pay more simply because they have more traffic at their sites.
It’s like one store being charged more in city taxes simply because there are more people walking up and down their portion of the sidewalk. Their argument is, “The sidewalk is here for everyone. For all shops and customers who use it. So why should one shop have to pay more than another shop to gain access to the sidewalk?”
Sounds like a great argument, doesn’t it? Yes, but the internet providers have a pretty convincing rebuttal. “The sidewalk is ours. We own it. We can charge anyone, anything, anytime.”
And they do have a point, don’t they? We see this all the time in other infrastructure projects. Take company-owned bridges, for instance, where the company building the bridge is allowed to charge a toll to all motorists using it in order to recoup their costs. Or even long distance carriers who are allowed to charge customers according to the amount of time they spend using their services. The more they use, the more they pay.
The Internet As It Might Become
The only difference with the internet, however, is that it isn’t simply a roadway that you can bypass by taking another route if you don’t want to pay the toll. The internet is just one internet, with all internet service providers’ cables connected to one another, and all companies’ and individuals’ computers connected to one another. There really is no other alternative. The internet is one.
That makes it sound a lot more like a utility, doesn’t it? Like the electricity grid, for instance. Although there are a number of companies generating electricity which they make available to the grid, and there a number of individuals and companies using electricity from the grid, there still exists only one grid that all are connected to – regardless of how many different utility companies own all the cables that the grid is comprised of.
And because the grid is only one grid despite being comprised of thousands of companies and individuals, all users are still treated equally without preferential treatment given to anyone.
Of course, we all still pay for our electricity according to our use; the more electricity we use the more we pay, like in the case of long distance calling. But no one has “better” access to electricity than anyone else, or “faster” electricity than anyone else. We all enjoy the same power and speed of the electricity we use.
Hence, President Obama’s position on the internet issue: “Mr. Obama specifically called for the FCC to reclassify broadband Internet access as a utility, and then to ban broadband providers from blocking or slowing down traffic, or striking deals to give some websites special treatment,” reported the Wall Street Journal. “He also argued that any rules should apply to both mobile and fixed networks, a departure from the FCC’s previous set of ‘net neutrality’ rules in 2010.”
The two sides of this “net neutrality” debate are logically positioned according to their own interests: its opponents being internet service providers like Comcast and Verizon who wouldn’t be allowed to charge more for faster service, and its supporters being… well… pretty much everybody else.
What happens now? “On Monday, in response to a popular petition on WhiteHouse.gov, Obama announced that he was urging the FCC’s chairman, Tom Wheeler, to implement net neutrality rules by reclassifying ISPs as common carriers. Obama does not have the authority to change the FCC’s rules, so we may be waiting on any kind of action or decision for the forseeable future,” informs Gawker.
Something tells me the reclassification of the internet as a utility won’t happen overnight. Just a hunch.
For investors, however, things do happen overnight, as we are witnessing with the stocks of Comcast and TWC. Anyone holding these and other internet service providers like Verizon, AT&T, and others, should be aware that any headline one way or the other will move these stocks greatly, and in very short time too. This will be a long drawn-out battle, which means a long period of volatility in these stocks ahead.
Source: Wall Street Journal
Joseph Cafariello
