The debate on “net neutrality”, the principle that internet service providers should treat all data on the internet the same, has been a broad one, ranging from regulatory concerns to freedom of speech, to economic and financial implications. The battle lines are now drawn between the telecom carriers, who want to be the gatekeepers of the internet and charge for the privilege, and the supporters of free and open internet where everyone is equal.
Unequal online traffic
Online traffic has been dominated by a few internet services that are driving the associated investment and cost. According to web trafficking firm Sandvine, about 60 percent of the peak traffic in North America in 2016 were dominated by Netflix (35 percent), Google’s YouTube (18 percent) and other video streaming services such as Amazon Video and Hulu (7 percent). Yet, the cost of carrying this traffic is “socialized” across the entire industry. Hence carriers want to address this imbalance.
The stakes are high – in the past five years, there has been a disparity in the value attributed to telecom carriers and the “over-the-top” (OTT) service providers like Netflix or Google. Investors clearly value these online franchises; Facebook, Google and Netflix have a combined market-cap of almost a trillion dollars and reported strong profits.
A key driver of the demand for faster telecom connections is the appeal of Netflix/YouTube-type internet services, and the growth in higher speed, higher-price data packages (both fixed-line and mobile broadband) has been very helpful to the telecom industry’s revenues and profitability.
Innovations at odds
This raises a further interesting point — some of the innovations eagerly anticipated by the market and society in general are at odds with the principles of net neutrality, for example, telemedicine and connected cars.
Telemedicine offers the possibility for the remote delivery of diagnostics, treatment and even robotic surgery. This could make top-flight medical services accessible beyond the traditional centers of excellence. For connected cars, part of the vision for the future is autonomous or semi-autonomous driving, where cars can warn each other of dangers around the corner, or report accidents to the rescue services in real time.
Now the question is: should that traffic compete for bandwidth on equal terms with someone playing online games, reading Facebook or watching Netflix?
In reality, the traffic is already unequal. Some content providers are already paying up for being in the fast lane. One interesting development was that Netflix started paying Comcast, one of the largest internet service providers in the US, for the faster delivery of its video content to its subscribers. Without taking a view on the legal and technical intricacies of the case, an internet service provider asking the video content company to pay for the privilege of carrying its traffic with an acceptable speed and quality doesn’t exactly feel like net neutrality.
Change creates opportunities
A side effect of the increasing complexity in the internet ecosystem is more complex networks and an almost insatiable appetite for more capacity. This is also spurring innovation in semiconductor and network equipment industry.
As always, change creates opportunities and the implications of the evolving net neutrality debate on the internet, media and telecom ecosystem is likely to continue to generate attractive ideas for stock-pickers.
No matter which market or sector, the key to investing is to focus on positive fundamental change in companies and to identify the growth drivers which haven’t been fully appreciated by the market.
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