Fitch: No Near-Term Revenue Hit from Net Neutrality

According to Wall Street analyst firm Fitch Ratings, the U.S. Court of Appeals for the District of Columbia's decision to uphold the FCC's Open ...

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According to Wall Street analyst firm Fitch Ratings, the U.S. Court of Appeals for the District of Columbia's decision to uphold the FCC's Open Internet Order net neutrality rules could affect telecom investment plans, but will have no immediate impact on revenues, according to Fitch Ratings.

Fitch believes there will be no immediate effect on the credit profiles of cable and telecom companies in its rated universe as providers are likely to appeal to the Supreme Court or request an en banc review before the full DC Circuit. In the longer term, Fitch believes that unless the rules are overturned, the major telecom and cable operators are likely to constrain investments in potential new growth areas affected by the net neutrality rules.

The reclassification of mobile broadband services under Title II regulation was allowed to stand and, to some degree, unexpected. Thus the new rules, in their entirety, apply to both fixed and mobile broadband services. In principal, telecom and cable providers had generally agreed to operate under the Open Internet rules, but the imposition of Title II regulation was the greater concern.

Fitch believes there will be very little near-term effect on revenues or operating profits from existing services. Ultimately, Title II rules could change the way Internet traffic is managed, as well as affect future revenue opportunities and business models.

Operators are concerned that Title II opens the door for much greater regulation of the Internet in the future. The FCC is expected to refrain from enforcing numerous provisions of Title II and other regulations, known as forbearance, but, in the future, regulators could further ramp up regulation. For example, the order forbears from rate regulation, tariffs and last-mile unbundling, but a future commission could decide to enforce the provision. Additionally, the FCC could establish rules regarding the protection of private user information and the practice of "zero-rating" certain wireless data services.

Another negative aspect for investors in the long term would include the reduced opportunity for wireline or wireless operators to benefit from potential new business models that deliver targeted advertising. Such operators could potentially be at a disadvantage relative to edge providers such as Google (NASDAQ:GOOG) or Facebook (NASDAQ:FB).

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