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The U.S. telecom regulator, Federal Communications Commission (FCC), recently closed the window for comments and replies after receiving 22 million comments on Net Neutrality rules. The regulatory body will examine these suggestions before taking a final call. However, the FCC Chairman Ajit Pai is yet to announce a deadline for finalizing the rules. Notably, in May 2017, the FCC voted 2-1 to start the formal process of unwinding the Net Neutrality rules.

What is Net Neutrality?

Net neutrality implies an open-Internet atmosphere which will prohibit ISPs (Internet Service Providers), especially the telecom and cable TV operators, from discriminating against applications. In order to control the flow of bandwidth-consuming applications such as video streaming, the ISPs have been discriminating against several web-based contents and applications. Content developers have to pay heavy sums to ISPs for accelerated data transfer.

In a historic decision, the FCC had approved Net Neutrality rules, on Feb 26, 2015, after a majority vote. The five-member regulatory body voted in favor of Net Neutrality with a 3-2 margin. However, the voting pattern was clearly divided along party lines, as three Democrat representatives voted in favor of Net Neutrality while the Republican representatives opposed it.

The new laws reclassified high-speed broadband (Internet) as a public utility under Title II of the 1934 Communications Act instead of section 706 of the 1996 Telecom Act. Importantly, these regulations were applicable to both mobile and fixed broadband networks. The reclassification of the Internet called for a radical change in the way the government treats high-speed broadband service. This gives the FCC a stronger control over the ISPs now.

The implementation of the new law banned common ISP practices such as data traffic blocking, slowing any data traffic and paid prioritization. Notably, paid prioritization is a method through which content developers strike deals with ISPs for fast and smooth transmission of their data traffic. However, with the implementation of the law, the FCC can now closely monitor and put a check on all such deals. Moreover, the FCC can also supervise interconnection deals, in which content developers pay ISPs to connect with their networks.

Arguments Against Net Neutrality

All ISPs, along with several cable and telecommunications industry bodies have vehemently opposed Net Neutrality. Notably, Republican senators were also not in favor of this directive. These groups believe that a slight law reformation under section 706 of the 1996 Telecom Act will be enough to enforce net neutrality.

However, the major argument against the directive is that ISPs have to spend several billion dollars to install and upgrade high-speed mobile/fixed broadband network. Further, disallowing discriminatory pricing policy will significantly reduce revenues and margins which will in turn result in lower investments in the high-speed broadband sector. Consequently, broadband equipment service providers are likely to suffer (due to lesser investment by ISPs) and loss of jobs is also a likely scenario.

Gainers of Net Neutrality

Content developers and consumer groups are poised to benefit from the implementation of Net Neutrality rules. Netflix Inc. (NFLX - Free Report) , Google of Alphabet Inc. (GOOGL - Free Report) , Amazon.com Inc. (AMZN - Free Report) , Hulu, Facebook and Twitter are a few of the companies poised to take advantage of this change. At present, these companies pay special charge to ISPs for speedy transmission of their contents. The new rule will significantly alter online access charges of contents including video, music, email, photos, social networks and maps for consumers.

Ajit Pai at the Helm of FCC – Close Scrutiny on Net Neutrality

In January 2017, President Donald Trump elected existing Republican commissioner Ajit Pai as the new Chairman of the U.S. FCC. Appointment of Pai as the head of the regulatory body appears to put Net Neutrality back on the front burner as he is a staunch Net Neutrality opponent. According to Pai, Net Neutrality is “a solution that won’t work to a problem that doesn’t exist”. In 2015, Pai (the then FCC commissioner) said that consumers would be worse under Net Neutrality and should "expect their bills to go up, and they should expect that broadband will be slower going forward." In December 2016, he stated that the Trump administration would “fire up the weed whacker and remove those rules that are holding back investment, innovation and job creation.”

Who will Benefit if FCC Abandons Net Neutrality?

Trump himself is a strong critic of Net Neutrality. There is little doubt that if the new FCC scraps Net Neutrality laws either fully or partially, the ISP industry will be the major beneficiary. Leading ISPs including AT&T Inc. (T - Free Report) , Verizon Communications Inc. (VZ - Free Report) and Comcast Corp. (CMCSA - Free Report) decided to challenge the Net Neutrality laws in Supreme Court. All the three above mentioned stocks currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Bottom Line

Telecommunications is a necessary utility. The need for telecom in both rural and urban areas as well as its role in the infrastructural development of an economy is of vital importance. Net Neutrality may discourage large investments in the telecom sector but will cut down the cost of online access for end-users since content providers will no longer need to pay extra fees. However, it is to be seen how the government manages a trade-off between the two.

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