CHICAGO--(BUSINESS WIRE)--Newly proposed Federal Communications Commission (FCC) rules regarding net neutrality are adding an element of uncertainty to the cable and telecom sector, according to Fitch Ratings.
On May 15, the FCC issued a Notice of Proposed Rulemaking, "Protecting and Promoting the Open Internet," its follow-up to a decision in January 2014 by the U.S. Court of Appeals for the District Court of Columbia Circuit striking down elements of the FCC's 2010 Open Internet Order. The 2010 order had been appealed by Verizon Communications.
Under a road-map offered by the Court, the FCC is seeking comments on the use of section 706 of the Telecommunications Act of 1996 as a basis for issuing its new rules. Fitch views positively the FCC's tentative conclusion to use section 706 as the most expedient way to implement new rules.
However, the FCC has also solicited comments on the reclassification of broadband services as telecommunications services subject to common carrier regulation under Title II of the Communications Act (as amended) as a basis for its legal authority. The Court had noted that the FCC could use its authority under Title II as an alternative to section 706. A reclassification under Title II will, in Fitch's opinion, lead to further court appeals and legal challenges and, assuming it survives the appeal process, would be negatively viewed by Fitch.
The FCC is also soliciting comments on whether paid prioritization arrangements should be banned, an issue that did not receive attention in its 2010 order. Under such arrangements, telecom providers could gain revenues from providers of bandwidth-intensive services, such as video, which would provide support for network investment and share some of the costs for broadband services currently falling on consumers and other end users. Under these arrangements, many cable and telecom companies could benefit, although Fitch notes that Comcast, as part of the approval process to acquire NBCUniversal, agreed to adhere to the previous rules through January 2018, with the company offering to expand adherence as part of its proposed merger with Time Warner Cable.
Conversely, if paid prioritization arrangements are banned, Fitch believes telecom operators will lose a future revenue stream, as well as the ability to develop new business models. A more negative effect on operators could result, in Fitch's view, if the "heavier handed" Title II regulation is implemented (assuming it passes legal challenges). Under Title II, the level of network investment could be materially reduced, as well as future revenue opportunities and operating cash flows.
The proposed rules will be subject to a four-month comment period, and prior to a decision expected by the end of the year, the FCC is likely to make adjustments to its final order. Until the final rules are developed and implemented, the near-term impact on companies' operating profits and cash flows will be minimal.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.