Why Is Verizon Suing the FCC?

Verizon (NYSE:VZ), along with AT&T (NYSE:T), has sued the Federal Communications Commission (FCC) over its recent decision to introduce net neutrality rules. The telecom companies are following the likes of USTelecom, Alamo Broadband and others who also recently filed suits against the regulatory agency. Although the rules have yet to come into effect, the biggest concern for telecom and cable companies is that the FCC may now have the ability to control prices and limit business offerings according to what it deems reasonable. ^[1]

Even though the FCC has promised to refrain from heavy handed tactics such as directly regulating prices, the telecom majors believe that such a provision risks hurting the industry as a future commission might not share the current one’s approach. There are also allegations that the FCC was unduly and illegally swayed by political interference from the White House following President Obama’s call for the strictest regulation. ^[2] ((Rep. Jason Chaffetz Grills FCC Chairman On Net Neutrality: We’re Supposed To Believe This Didn’t Come Up At The WH, March 19, 2015, realclearpolitics.com)) This theory is lent credence by the fact that the rules were originally not so stringent but were tightened after Obama said he preferred tougher rules. The FCC chairman even acknowledged during a recent hearing that Obama’s statement was one of his influences during the rule-setting process.

Verizon offers broadband services (including high-speed Internet, FiOS Internet and FiOS Video services) to residential and small businesses as part of its Wireline business. FiOS services represented about 33% of total Wireline revenues and about 10% of overall company-wide revenues in 2014 and it accounts for about 11% of the company’s value, according to our estimates. If the net neutrality laws come into effect, Verizon may not be able to freely manage Internet traffic as it has in the past, which is likely to curtail its ability to charge more for certain services and thus put a cap on profits. This could deter its investments in broadband services going forward. The company currently has 9.2 million broadband subscribers, of which over 6.6 million (72%) use the faster FiOS Internet services. It accounts for about 10.5% of the 93 million subscriber strong broadband Internet market in the U.S. led by Comcast (23.6%), AT&T (17.2%) and Time Warner Cable (13.2%).

We have a price estimate of $56 for Verizon’s stock, which is about 10% ahead of the current market price.

See our complete analysis for Verizon

The Net Neutrality Debate

The net neutrality debate has been raging for well over a year between net neutrality supporters and cable and telecom companies. Net neutrality is a principle related to the way Internet traffic should be treated. It advocates that Internet service providers (ISPs) and governments should treat all data on the Internet equally, not discriminating or charging differently by user, content, site, platform, application, type of attached equipment, or mode of communication.

The net neutrality debate resulted in the FCC receiving a record 4 million comments on the issue, and President Obama himself called for adoption of the strongest set of rules possible on this subject. The FCC has adopted a new set of net neutrality rules after a federal court rejected the previous version in January 2014. The agency is looking for a significant expansion of its authority with these new rules. It wants to reclassify broadband services as more aggressively regulated “telecommunications services”, as opposed to the lightly regulated current official classification of “information services”.

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1. FCC Confirms New Net Neutrality Rules Give Government Control Over Internet Rates, March 18, 2015, The Daily Caller [↩]
2. FCC Chairman Says Obama’s Net Neutrality Statement Influenced Rule, WSJ, March 17 2015 [↩]