A Sector Change for Tech: Net Neutrality and What Investors Should Know

It’s been hard to avoid a discussion about net neutrality this week as FCC chair Ajit Pai prepares to vote for the repeal of net neutrality on December 14, 2017. The initiative has received countless criticisms from internet users worried of the effect that a passing vote will have on their browsing habits, internet speeds, and content to which they will have access to. Despite the media heavy presence of pro-net neutrality advocates not much has been said towards understanding the macro-implications of net neutrality’s repeal insofar as its effect on U.S. stocks.

The internet is more than a medium for the exchange of content, it serves as its own environment for countless  companies that rely heavily upon it’s open-ended frameworks. Furthermore, the technology products and services sector weighs heavily on the US economy and stock indices – as if nobody had learned anything from the Dotcom bubble. The Standard & Poor 500 index comprises of 501 companies (M&A’s and splits in effect), and serves as good proxy for U.S. stocks.  However, 10% of it’s companies make up 50% of its capitalization, and five of the eight largest companies focused on technology and the internet.  The Dow Jones Industrial and Nasdaq Composite averages are also weighed heavily in tech stocks.

Although there is a strong cultural support for net neutrality, the opposition holds a large corporate support: Comcast ($CMCSA), AT&T ($T), Verizon ($VZ), IBM ($IBM), and Intel ($INTC) – to name a few.

Internet service providers, broadband and telecommunication companies would all profit from the repeal of net neutrality. Controversially, the content providers on which anti-net neutrality companies rely upon, such as YouTube, HBO, and even Netflix could be hurt by the law.

This puts investors in a difficult situation since this bill largely affects everyone. While broadband providers stand to increase their profits significantly at face value, they may experience investor and customer outflow from those that morally object to the practice of throttling and filtering of content.

From an innovation perspective, ISP companies have argued that without the prioritization and regulation of internet broadband large-cap companies are far less likely to invest in the development of fiber-optic networks since their ROI period would be much longer. Offering preferential treatment through tiered services on the internet would allow companies to grow faster and invest more in communications infrastructure that would ultimately benefit consumers.

In a net neutral scenario broadband is accessible to any company, even if they did not fund its network development. Marc Anderson illustrated this point in 2014:

“If you have these pure net neutrality rules where you can never charge a company like Netflix anything, you’re not ever going to get a return on continued network investment — which means you’ll stop investing in the network. And I would not want to be sitting here 10 or 20 years from now with the same broadband speeds we’re getting today.”

 

Despite the seemingly well-justified argument of the anti-net neutrality agent there is still an undeniable downside. The internet has introduced e commerce, which provides an alternative solution to brick-and-mortar storefronts which in the pre-internet era has been a large barrier of entry for small businesses. The repeal of net neutrality may find many content providers hindered by broadband fees and cause many small-cap internet businesses to go belly up. However, those companies that have made it past the early days of inception and have grown to mid-cap and large-cap will be protected by the net neutrality’s repeal. In part, this is the reason $NFLX equity still managed to outperform US markets and hasn’t gone belly up – there’s not that much to fear (for now).

In short; the repeal of net neutrality may incite groans and boos from the general public, however it may spell additional growth for the U.S. economy and large cap tech, but make it more difficult for small-cap companies. Consumers may see themselves hurt in the short run, due to increased filtering and provider prioritized content, and may need to shell out an extra penny for services, but will see their quality content options and internet infrastructure grow. Finally, increased earnings and growth of ISP, semiconductor, and telecommunications industries will likely act as a push for U.S. indices given their tech equity weight – assuming American’s don’t all boycott the internet and move to net neutral Slovenia.

 

 

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