Net Neutrality Isn't Doom For The Cable Companies

Earlier this week, President Obama announced that he would like the FCC to reclassify internet service providers as "common carriers," which would make them much more like a utility provider under the eyes of the law.

Currently, they're classified as "information service" providers, which means they are not held to the high standards for providing access of what's known as a common carrier (like a gas or electric company). For more, see The Oatmeal's cartoon explaining the idea.

Here are the main ideas in President Obama's proposal: 1) no blocking as long as the site is legal; 2) no throttling, or intentionally slowing down or speeding up specific content; 3) increased transparency, and 4) no paid prioritization (Netflix or Hulu can't receive either faster or slower service based on whether the company pays a fee to the ISP).

What does this mean for the cable companies' business as it currently exists? Shares of companies like Comcast, Time Warner Cable, and Charter Communications all tumbled on the news.

However, Morgan Stanley's cable/satellite industry research team doesn't see much pain, largely because not much will change. The President's proposal mostly keeps things as they are, mandating that cable companies can't take steps to slow down the internet. There isn't a lot of evidence that they have really done this yet, other than to Netflix during the beginning of 2014. And even without prioritizing certain traffic the cable companies aren't exactly hurting for revenue. So cable companies will continue to make as much money as they had before, just maybe not a ton more.

The real winners of a fast lane on the internet, Morgan Stanley says, would be the Hulus and the Netflixes of the world - companies big enough to be able to pay for prioritization on the web. (These companies, by the way, are publicly against net neutrality.)

Here's an excerpt from Morgan Stanley analyst Benjamin Swinburne's research note:

...these specific four asks are extremely benign and would have essentially no impact on the outlook for broadband revenue growth. We believe this to be the case because first, #1-3 are already essentially in place, and second, because we have never expected any material revenue lift from charging for prioritization in our outlook for cable. In fact, the primary beneficiaries of paid prioritization would be scale content providers such as OW rated Netflix and EW rated Google, which have the financial position to pay for prioritized traffic to differentiate versus smaller competitors.

Here you can see that Morgan Stanley projects that high speed data (HSD) will continue to become a larger part of the cable companies' profit margins in the years ahead, even without charging for a "high speed" lane on the web.