Biden's FCC may bring changes to broadband, net neutrality and 5G — what it means for telecom stocks

Published Thu, Dec 10 202011:10 AM EST

Key Points

Broadband regulation could become one of the most urgent tech policy issues in the early days of the Biden administration during the pandemic.
There are three areas to watch when it comes to broadband regulation: how the FCC and Congress get Americans connected to the internet, net neutrality and spectrum auctions for 5G.
Here's a breakdown of the key issues Biden's FCC will inherit and what it could mean for telecommunications stocks.

Many technology issues could take a back seat in the early days of the Biden administration as the incoming president seeks to tackle rising coronavirus case numbers. But one issue with the potential to grab some attention early is broadband regulation. Americans are relying on internet coverage more than ever as many workers and students log into the office and school from home. That's exacerbated existing challenges for many Americans who can't afford broadband service or live in areas with limited coverage. The pandemic has added urgency to these issues, making them ripe for a new administration and Congress to address them. How and when that happens could depend in part on the outcome of two Senate runoff races in Georgia that will determine the majority in the chamber. After Senate Republicans voted Tuesday to confirm Trump's new Republican FCC nominee Nathan Simington , deadlocking the agency for the start of Biden's term, it will become more urgent for Democrats to confirm a third commissioner from their party to advance their agenda. Tuesday's vote could mean that more partisan issues like net neutrality and even re-interpreting statutes providing internet access to under-served Americans, could be stalled until a tiebreaker joins the commission. Cable companies like Altice , CableOne , Charter and Comcast (which owns CNBC parent company NBCUniversal) stand to become more at risk from additional regulation if Democrats opt for a return to net neutrality rules under Title II of the Communications Act of 1934. But such a move would be unlikely to have immediate impacts on the companies, which haven't taken advantage of a rollback of the rules under the Trump administration. Plus, signals from the Supreme Court could mute the possibility or impact of a return to net neutrality rules. Major phone and wireless providers like AT & T, T-Mobile and Verizon will see their positions in the race to develop 5G infrastructure solidified through spectrum auctions offered by the FCC. T-Mobile starts in the most advantageous position based on its spectrum holdings but AT & T and Verizon's standings will be determined largely by an auction for mid-band spectrum currently underway. Here's a breakdown of the key issues Biden's FCC will inherit and what it could mean for telecommunications stocks: Getting Americans connected to the internet Keeping Americans online has been a high-profile concern that gained even more prominence in March when workers and students across the country were sent home to participate in remote work and distance learning. Early in the pandemic, FCC Chairman Ajit Pai introduced the Keep Americans Connected Pledge , a voluntary agreement signed by more than 800 companies to keep service going and waive late fees until June 30, 2020. But a voluntary pledge can only go so far, especially one that requires companies to forgo or postpone payments. While a sustainable solution would likely have to include a subsidy for broadband providers appropriated by Congress, there are still some things the FCC can do on its own to make it easier for Americans to stay online during the pandemic. One of those options is to reinterpret the FCC's E-rate program that provides discounted internet services for schools and libraries. Democratic Commissioner Jessica Rosenworcel, widely seen as a potential pick to lead the FCC under Biden, has been a major proponent of reinterpreting the statute to account for distance learning. By allowing funds to be directed toward the places where students are learning during the pandemic (i.e. their homes) rather than directly to school buildings, more students could benefit from affordable internet access during the public health crisis. Allowing funds to be used to fund home internet would be a plus for cable companies like Altice, CableOne, Charter and Comcast because it would expand service to homes that otherwise may not be able to afford it. Still, such a move may have to wait until a third Democratic commissioner is installed. The Republican-led FCC has not yet reinterpreted the statute and Simington offered no commitments on it in his Senate confirmation hearing. There could be opportunities for bipartisan agreement when it comes to expanding broadband access to rural America. Congress already passed the Broadband DATA Act , which was signed into law in March and directs the FCC to use new techniques to collect more granular data on broadband coverage, allowing the government to assess which areas need more investment. But the act remains unfunded months after passage. Analysts say any efforts to expand or subsidize broadband access would be a plus for the broadband providers themselves. "I think the cable operators that have traditionally been seen as regulatory targets by the Democrats are actually in a good position to prosper," said Craig Moffett, founding partner at MoffettNathanson, who covers communications stocks. "Right now, bridging the digital divide is the clearest priority of the incoming administration and cable is positioned to be a winner in that dialogue. So, far from being a sector to avoid under the Democrats, I think that this time around cable could actually be a surprise beneficiary." Net Neutrality Net neutrality was a hot button issue during the second term of the Obama administration. Obama's FCC made net neutrality come to life, only to be reversed under Trump's FCC Chairman Pai. Net neutrality is the idea that internet service providers (ISPs) should treat all traffic equally, meaning users or businesses shouldn't be able to pay for a "fast lane" or to slow another site or users' connection. The principle was achieved in 2015 by reclassifying ISPs under Title II of the Communications Act of 1934, which covers "common carrier services" subject to greater regulation than Title I services. Since its reversal, cable companies haven't made any of the major changes that digital activists once feared. That means there wouldn't be any immediate changes for the cable companies if net neutrality rules were to make a comeback. But the reason cable investors and executives still worry about net neutrality is because of the fear it opens the door to price regulation under Title II in the future. While there's no immediate sign this would happen, cable companies don't want to leave that question open to interpretation to this or any administration. "That would be more impactful for companies' bottom lines," said Doug Brake, director of broadband and spectrum policy at the Information Technology and Innovation Foundation. "I don't think the Biden FCC is likely to go much further than the 2015 rules toward that sort of utility model." Still, Raymond James analyst Frank Louthan has been warning clients that net neutrality is a real possibility under the Biden administration. "This is most negative for the cable companies because they've never been under Title II, except for the brief period of time under the Obama administration and also where the Obama administration lived up to their word to not enforce price regulation," Louthan said. "But they've never really had to live under a more onerous Title II type scenario. And ultimately it becomes a risk scenario that depresses multiples." While cable companies haven't taken advantage of the rollback of net neutrality rules, Louthan said he believes there's been more infrastructure investment "on the margins" because the companies feel they don't have to worry about the potential risk of price regulation. Price regulation could make it harder for them to get the return on investment they desire from these projects, he said. The Biden FCC may be deterred from returning to net neutrality rules, however, if they sense a threat from the Supreme Court. Conservative justices have raised doubts about the principle of Chevron Deference, by which the courts tend to defer to administrative agencies' interpretations of the law. A lawsuit over a new net neutrality push could create an attractive case for the Supreme Court to review. If the FCC lost such a hypothetical case, it could undermine its power to interpret statutes in a meaningful way in the future. Moffett said signals from conservative justices could lower the risk of reclassification under Title II, easing pressure on the broadband providers like Altice, CableOne, Charter and Comcast. Despite concerns over net neutrality, Moffett said cable companies could be in good shape under the Biden administration. "The irony of all of this is that I think early on when the odds of a Biden win started to rise, cable stocks started to sell off because there was a fear that Democrats would be bad for cable stocks. I think that view has softened quite a bit," Moffett said, attributing part of that to the Supreme Court signals as well as subsidy discussions for broadband. "Most of the things that the Democrats would like to do are probably good news for cable." The race to prepare for 5G Under the next administration, preparation for the next generation wireless network will continue to gain significance. The 5G network promises faster speeds, which could set the stage for accelerated innovation. Key to this expansion is a wave of spectrum commonly referred to as the "Goldilocks" spectrum. This mid-band spectrum is capable of covering dense areas, like low-band spectrum, and provides speed, like high-band spectrum excels at. Telecom carriers are currently bidding on a tranche of mid-band spectrum offered in an auction by the FCC. The outcome of that auction will be an important indicator of which companies are best positioned in the race to build out 5G infrastructure. "The carriers really need a large block of mid-band spectrum in order to be compete in 5G and this may be the last bite of the apple for a very long time," Moffett said. T-Mobile is already well-positioned in terms of mid-band spectrum due to its acquisition of Sprint completed earlier this year. But AT & T and Verizon could stand to gain more, making the auction especially significant for those two companies. "The difference between Verizon and AT & T is Verizon has money and AT & T doesn't," Moffett said. Moffett described the auction as "a high-wire act for AT & T," adding, "there's a very real risk that AT & T ends up on the outside looking in and 5G becomes a very close race." After this auction, another potential source of mid-band spectrum could come from the Department of Defense, which has been weighing if and how to open up some of its spectrum to auction. During the Trump administration, some floated a plan to offer a sharing arrangement on spectrum that would allow companies to license spectrum on a limited basis. Analysts interviewed for this article said such an arrangement could make it difficult for telecom companies to find the incentive to invest in long-term 5G infrastructure and expected it would not be a major consideration under the Biden administration. Disclosure: Comcast is the owner of NBCUniversal, parent company of CNBC. Subscribe to CNBC on YouTube. WATCH: The fight over the internet, under the sea

Parents work from home with their two sons due to the coronavirus outbreak in Paris in 2020.

Xavier Laine | Getty Images News | Getty Images

Many technology issues could take a back seat in the early days of the Biden administration as the incoming president seeks to tackle rising coronavirus case numbers.

But one issue with the potential to grab some attention early is broadband regulation.

Americans are relying on internet coverage more than ever as many workers and students log into the office and school from home. That's exacerbated existing challenges for many Americans who can't afford broadband service or live in areas with limited coverage.