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The new net neutrality rules set to take effect in the middle of June are likely to limit certain activities and potential profits of Internet service providers (ISPs). So it should come as no surprise that on Tuesday, the day after the rules were officially published with the Federal Register, the Federal Communications Commission (FCC) was sued for its net neutrality rules.
So far only one of the major ISPs, AT&T (NYSE: T), has joined the lawsuit. However, three industry groups that represent telecom and wireless providers have each filed lawsuits against the FCC challenging the new net neutrality rules.
If successful, ISPs would win the right to offer paid prioritization of certain kinds of Web traffic. For example, Comcast (NASDAQ: CMCSA) could essentially extort Netflix (NASDAQ: NFLX) by making it pay extra for “fast lanes” to enable interruption-free streaming.
According to the graphic below, Comcast has done this in the past during a period of negotiations with Netflix.
The new FCC net neutrality rules would reclassify broadband as a “public utility,” which would require ISPs to treat all Internet traffic equally, regardless of type or origin.
So far, lawsuits filed in March by the United States Telecom Association and Internet provider Alamo Broadband have been joined by lawsuits filed by AT&T, the National Cable and Telecommunications Association, the American Cable Association and the Cellular Telephone Industries Association.
Considering that ISPs could soon be required to offer Internet rates on the same “just and reasonable” terms as is required of phone companies, I would assume that individual ISPs that will be affected most by the new net neutrality rules will file their own lawsuits in the coming days.
This list of companies includes: Comcast, AT&T, Verizon (NYSE: VZ), Sprint (NYSE: S), T-Mobile US (NYSE: TMUS), Dish Network (NASDAQ: DISH), DirecTV (NASDAQ: DTV), Time Warner Cable (NYSE: TWC), Charter Communications (NASDAQ: CHTR) and more.
Though I consider net neutrality to be in the best interests of consumers, it is worth noting that the new net neutrality rules will probably hurt ISP stocks. By regulating ISPs as “public utilities,” the new rules will cut off the brave new world of potentially lucrative “Internet fast lanes” before it even gets up and running. It could also begin to affect the actual pricing of Internet services.
These new rules are of great importance to investors in these companies, as they could significantly limit the amount of profit the ISPs are able to earn.
The telecom companies are clearly taking the matter very seriously. One of the industry trade groups, the National Cable and Telecommunications Association, has hired Ted Olson, a former Solicitor General who is probably most famous for his representation of candidate George W. Bush before the Supreme Court in Bush v. Gore.
The FCC has tried to enact net neutrality before, but the 2010 rule change was quickly struck down in circuit court. The FCC’s new net neutrality rules rely on the FCC having greater authority over ISPs because of their reclassification as “public utilities.” In theory, the new rules are more likely to stand up to legal challenges.
Without legal intervention, the new net neutrality rules will take effect on or around June 13, which is 60 days from when they were published in the Federal Register.
Buyer beware – ISP stocks are likely to move based on the direction of these lawsuits.
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