The Net Neutrality Stir Over Comcast's Deal is Seen as Unwarranted

Despite a widening spread on shares of Time Warner Cable Inc. (TWC) following President Barack Obama's endorsement of the toughest net neutrality options on the table, whatever action the Federal Communications Commission takes on the broadband policy isn't likely to have much affect on the company's planned acquisition by Comcast Corp. (CMCSA) .

Comcast has already pledged to adhere to some measure of tougher rules governing broadband providers' carriage of other companies' content and was expected to accept whatever added requirements the FCC would impose as a condition for approving the $67 billion deal. Among those added requirements, some observers have predicted, would be a ban on interfering with content provided by so-called over-the-top TV providers that rely on cable's broadband pipes to deliver content.

Netflix Inc. (NFLX) is the most recognized over-the-top provider but some like Sony Corp. (SNE) and Viacom Inc. (VIA) are planning to offer programming from multiple networks in direct competition to cable.

Following remarks by Obama Monday, the Time Warner spread widened Tuesday to $17.10, or 12.8%. That would represent an annualized return of 33% if the merger closes March 31.

The president said he favored regulating Internet traffic under telephone-style rules authorized by Title II of the Communications Act.

How Internet traffic should be classified is central to how far the FCC, led by Chairman Tom Wheeler, can go in writing net neutrality rules. The FCC is in the middle of writing new net neutrality rules after two previous incarnations were struck down in federal court.

The most recent FCC defeat occurred Jan. 14, 2014, when the federal appeals court in Washington struck down the FCC's industry-wide rules, which prohibited Internet providers from prioritizing their own Web traffic or charging extra fees to content providers that want their offerings carried at top speeds. The rules that were struck down were nearly the same as requirements imposed on Comcast as a condition of federal approval of Comcast's 2011 acquisition of NBC Universal. The court's ruling didn't affect Comcast's constraints, which remain in effect until 2018. Comcast has offered to extend its net neutrality obligations to broadband network it is acquiring in the TWC deal.

At the heart of the commission's dilemma is its 2010 decision not to classify Internet service as a common carrier service akin to telephones and instead regulate high-speed Internet under its authority to promote the deployment of broadband services under Section 706 of the Telecommunications Act of 1996.

As a result of the classification, when challenges to the commission's net neutrality rules reached the federal appeals court, the court found that the rules were too close to telephone-style regulation authorized under Title II and ordered the FCC to rewrite them for Section 706 or reclassify the Internet as a common carrier service.

Since Obama's election in 2008, public advocacy groups have been pushing the FCC to reclassify broadband under Title II despite opposition from industry and many GOP lawmakers.

Wall Street saw the president's stance as a negative for the merger because cable and telecom providers are vehemently opposed to classifying broadband as a common carrier service because in theory that could subject broadband to a host of regulatory burdens, including rate regulation. A telecom industry lawyer earlier this year told The Deal that Wheeler would be instigating "World War III" with broadband carriers by subjecting broadband service to Title II regulation.

But others tracking the net neutrality more closely said there's no reason for Comcast to walk away from the deal even if the FCC follows the president's cue — and following remarks Tuesday by Wheeler that he's still trying to stake out some middle ground — there's no guarantee it will.

"I don't think the agency has made any decision and probably wants more time and input to figure out what to do," said Paul Gallant, an analyst with Guggenheim Securities LLC. "If the downdraft on Time Warner Cable shares is based on fears of the FCC imposing price regulation, that scenario is unlikely. I don't think Wheeler is inclined to regulate prices."

"It's an over-reaction to think net neutrality or classification under Title II will have a significant impact on the merger," added John Bergmayer, senior staff attorney at Public Knowledge, an advocacy group for consumers' digital rights. "In terms of the merger, some sort of open Internet rules are bound to happen. People are getting worked up over nothing."

In Comcast's favor, industry-wide net neutrality rules would put it on a more even playing field with other broadband providers following the merger because the industry-wide regime would likely resemble whatever requirements Comcast will have to accept to get its deal approved.

However, John C. Hodulik, an analyst for UBS Securities LLC, cautioned that cable operators generally will face stricter rules than wireless broadband providers. "The FCC has made it clear that it will apply net neutrality principles differently to wireless," he wrote in a report Tuesday.

Although Republicans in Congress loudly protested Obama's support for the toughest option on net neutrality, lawmakers have little leeway to affect the FCC's ultimate decision.

The FCC is an independent agency that is not bound by suggestions from either the White House or Congress. Congress, now that both chambers are soon to be in GOP control, could pass legislation tying the FCC's hands on net neutrality but any effort most likely would take years and would be vetoed by Obama if it passes while he's still in office.

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