While President Obama is being all but vilified by broadband operators Comcast (CMCSA) and Verizon (VZ) for asserting that the Internet be regulated like a public utility, the real countering force for the country's largest telecommunications companies lies in Silicon Valley in the headquarters of the world's largest Internet content providers.
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"People have long underestimated the political pressure that an aggregate of Google, Facebook, LinkedIn (LNKD) , Netflix, AOL (AOL) , Yahoo! (YHOO) and a lot of others have had in pressuring politicians to reconsider their 'net neutrality' stand," said Anthony Wible, media analyst at Janney Montgomery Scott, in a phone interview from New Jersey. "You really have to question if the pressure from voters is starting to change that momentum away from the broadband and cable-operators."
Obama on Monday weighed into the already contentious debate over government regulation of the Internet at a time when the Federal Communications Commission is debating, and attempting to write, new rules that oversee how the Web is administered. Obama said that while he opposes rate regulation, he wants the FCC to write rules to prevent broadband operators from blocking, slowing or creating "fast lanes," so-called paid prioritization for users willing to pay higher fees.
Because Google, Facebook, Netflix and about 30 other large content and content distribution companies account for more than half of all Internet traffic, they want to limit the ability of Internet Service Providers led by Comcast and Verizon to control which content moves at what speed and at what price. Advocates for start-up companies similarly worry that they wouldn't be able to compete with larger, wealthier companies that dominate their industries if they're forced to pay extra for speed and access.
Obama's decision to speak out on net neutrality, the principle that all broadband users regardless of size or wealth be treated equally, follows more than a year of public rallies held in Washington by advocacy groups that have coordinated e-mail campaigns that have generated more than 4 million messages to the FCC in favor of expanded government oversight. The rants of comedian John Oliver, host of the popular Last Week Tonight with John Oliver show on Time Warner's (TWX) HBO, in favor of net neutrality have led to the FCC's Web site crashing not once but twice.
Netflix CEO Reed Hastings, more publicly than other CEOs in Silicon Valley, has repeatedly called for the FCC to enact rules that support net neutrality. In March in a blog post, Hastings insisted that the commission enact rules so that "AT&T (T) and Comcast don't restrict, influence or otherwise meddle with the choices consumers make."
To press its case before Congress, Google, more than tripled its spending on political lobbying in 2013 compared to just three years earlier, according to the Washington-based Center for Responsive Politics. Facebook's lobbying expenses rocketed from less than $500,000 in 2010 to more than $7 million for 2014. By comparison, Comcast's lobbying has remained above $12 million since 2008, according to the Center.
By coming down firmly within the camp of so-called net neutrality advocates, Obama has heightened pressure on the FCC and Chairman Tom Wheeler, a former cable-TV industry lobbyist, to fashion rules that give the public greater oversight into how Comcast, Verizon and others operate their sprawling broadband networks.
One immediate impact on the cable-TV industry has been the loss of about $12 billion in market capitalization since the White House on Monday released Obama's statement calling for the Internet to be regulated like a public utility.
Comcast (CMCSA) shares extended their two-day decline on Tuesday to 5.7% while would-be merger partner Time Warner Cable (TWC) was falling 7.9% for the week. Charter Communications (CHTR) , the St. Louis-based third-largest U.S. cable-TV company, was posting a 7.8% loss over the two days.
The decline in market value among cable-TV stocks reflects rising sentiment that the FCC will slap harder conditions on Comcast's proposed $45 billion all-stock proposal to acquire Time Warner Cable, a deal that would combine the country's two largest cable-TV providers, said Jeffrey Wlodarczak, media analyst at Pivotal Research Group. That deal is opposed by Netflix as well as consumer advocacy groups such as Common Cause and Public Knowledge.
"The concern now is that the FCC has been painted into a corner where maybe they have to take a more drastic approach to actually regulate the Internet or the broadband providers with the full-on controls given to utilities," Wlodarczak said in a phone interview from New York. "But even though Obama has thrown out price controls, the concern is that some administration in the future utilizes reclassification to oversee pricing."
To carry out Obama's call to regulate the Internet as a public utility, the FCC would have to reclassify the Web as a telecommunications service under Title II of the 1934 Communications Act. Such action, Wlodarczak said, would unleash a torrent of court challenges that would likely put off a resolution of the topic for two or three years, or unless Congress was able to pass applicable legislation. Verizon's challenge of the FCC's 2010 net neutrality proposals, upheld by a Washington court's ruling, forced the commission into its current course of having to rewrite those regulations.
In recent weeks, FCC's Wheeler has hinted at a hybrid approach whereby connections between the broadband providers such as Comcast and content producers such as Netflix would be regulated by Title II while the connections between the broadband providers and the end-users would be classified by the 1943 Act's more lenient Title I statute.
"The frustrating part for the industry is that these problems of blocking, slowing and 'paid prioritization' don't actually exist," Wlodarczak said. "It's a solution in search of a problem."
Yet whether Comcast's lobbyists like it or not, the business of the Internet has become a political issue. Administration of the Web has moved from being a wonky policy concern to a matter of public debate. The Internet, unlike electricity or water distribution, has become a personal issue given greater weight by the heightened place that Facebook, LinkedIn and Netflix have on public life, Wible said.
"It's as if Google and the others had a button on their screens that said 'the most-hated company in the country wants to double your data bill, press here,'" Janney Montgomery Scott's Wible said. "That's a political nightmare for the cable-TV industry, and that's where we are."
- Written by Leon Lazaroff in New York
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