In December 2017, the FCC voted to remove rules that regulated the companies that connect users to the internet. These Network Neutrality rules forced internet providers to treat all internet traffic equally. Whether video, email, instant message or website, a carrier would have to transport all bits (a bit is the smallest unit of information) the same.
Without regulation, it is possible for an Internet Services Provider (ISP - generally your cable or phone company) to block some services, degrade other services, or force services to pay for access. Imagine if your cable bill priced internet access to Facebook separate from access to Netflix. Imagine if the Fox News website wouldn’t load but the New York Times website did. Imagine if, to launch a new website, you had to negotiate a separate agreement with the ISP in each geography you wanted to serve. It isn’t likely that ISPs would do something so obvious or controversial, but they now have the power to do so.
In Europe, this question was answered by ‘local loop unbundling’ where the government forced telecom providers to lease their physical infrastructure to any company that wanted to offer service. This process led to an explosion of competition, a decline in incumbent telecom stocks, and a wealth of new competitors. The Europeans decided that the economic benefits of cheaper and open internet access overruled the interests of telecom investors. Today, broadband rates are generally much cheaper in Europe.
From an investor’s viewpoint, there are two ways to approach this:
1. From the perspective of a telecom investor;
2. From the perspective of a technology/media investor.
The infrastructure that operates the internet only exists because of constant investment which is necessary to continue the evolution of the internet. That evolution brought us from dial-up internet to the 100+ megabit services available to many people today. If investors cannot be assured that they can control the assets they own, they are less likely to invest and development in new internet access technologies could falter. It was the growth of broadband access that made the internet as we know it possible today.
The other view is that the so-called ‘last mile’ of the internet is a natural monopoly. Investing to build out more than one set of identical infrastructures is wasteful, and therefore, this should be a regulated resource. Open and unfettered access to the internet fosters new internet and media services and will allow the internet to continue to be the tremendous growth engine it is today.
As investors, we are agnostic about net neutrality since it provides opportunities for us either way. As consumers, we are curious to see what the lack of regulation will bring about.
What do you think? Give us your thoughts in the comment section below.
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As international equity investors, the team at R Squared Capital Management (former team at Julius Baer / Artio Global) utilizes fundamental and macro analysis in our quest to correctly identify structural tailwinds and headwinds at the geographic, sector and company levels.
FROM THE DESK OF HARRY POLISHOOK
Harry Polishook is a Partner and Analyst at R Squared Capital Management.
Prior to joining R Squared, Harry was a Portfolio Manager and Analyst with the International Equities team at Artio Global Management. In 2000, he joined the firm, which was part of the Julius Baer Group, after serving six years as a Securitization Programmer at Deloitte and Touche.
Harry received a Bachelor of Science in Computer Science and Applied Math from the State University of New York at Albany.
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