“Net neutrality” sounds like the latest brainless Nic Cage movie, but is actually a rather complex issue that could have a major impact on the telecommunications sector in coming months. In the latest battle between phone and cable companies and the FCC, the stakes are high, and the ultimate resolution could have affect the daily lives of millions of Americans who use wireless internet.
On Monday, FCC Chairman Julius Genachowski presented six “open internet” principles that he will likely seek to codify in October. The proposed FCC actions would mean that any Internet provider would be prohibited from blocking or slowing down access to video or phone services for any customer. The Wall Street Journal notes this regulations would mean that “Comcast or AT&T couldn’t feed video to a subscriber from one of their online video services faster than they allow feeds from a rival service, such as Netflix.” Regulations limiting the ability of providers to manipulate transmittal access or speed through hard-wired cable and DSL connections have already been discussed, but the FCC is now proposing applying similar limitations to wireless networks.
Reaction from major ISPs came rather quickly, and in general major players like Comcast, AT&T, and Verizon expressed similar sentiments: while they won’t object too strenuously to regulations on landlines, wireless networks will be a different story. “And that makes a lot of sense,” writes Larry Dignan. “There’s limited bandwidth in wireless; there’s unlimited data plans in theory; and wireless networks aren’t nearly as developed. If the FCC goes too heavy on new regulations there could be unforeseen wireless repercussions.”
Not surprisingly, the debate over net neutrality is divided down party lines. Republicans generally oppose the plan, and moved to eliminate FCC funding for developing and implementing new Internet regulations. Genachowski was appointed to the FCC by Obama, and has received support of his plan from many Democrats in Congress.
The FCC has said it will work with phone companies to develop rules that won’t create problems for wireless details, but details on any plans have been slow to emerge. One scenario involves Internet providers charging high volume users more for service.
ETF Plays On Net Neutrality
The debate over net neutrality is likely to heat up in coming months, as consumer groups who supported Obama during his campaign push for regulation ensuring all Internet traffic is treated equally. The impact on ISPs depends on the ultimate form that regulations take, and the extent to which wireless connections are included in any new rules. Here’s a look at three ETFs that could be in focus as this situation develops (for more ideas for ETF plays on recent headlines and upcoming events, sign up for our Free ETF Newsletter):
- PowerShares Dynamic Telecommunications & Wireless Portfolio (PTE): This ETF tracks the Dynamic Telecommunications & Wireless Intellidex Index, an “intelligent” index that uses a proprietary model to evaluate companies on a variety of factors and select its holdings. With significant allocations to Sprint (5.3%), Comcast (5.1%), AT&T (4.7%) and Verizon (4.4%), PTE will likely receive a lot of attention from investors as the debate over government regulation of Internet traffic continues.
- iShares Dow Jones U.S. Telecommunications Sector Index Fund (IYZ): This ETF tracks the performance of the telecommunications sector, including fixed line and wireless communications. AT&T (18%) and Verizon (13%) are IYZ’s two largest holdings.
- Merrill Lynch Telecom HOLDRS (TTH): With significant holdings in both T (57%) and VZ (27%), expect this ETF to see some very high volumes and perhaps big price swings as the net neutrality dispute plays out.
Disclosure: No positions at time of writing.
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