Reports have surfaced that the FCC wishes to create a free, nation-wide WiFi network in order to facilitate web and cellular traffic. Though plans are only in the initial stages (and we are not jumping to any conclusions), the government could provide the US with a high-speed network at no cost, helping to put the nation on par with the Internet service achieved in several other countries. The news does not alter our fair value estimates for companies in our coverage universe, pending new details regarding probability and timing of implementation.
Understandably, the companies that currently own spectrum and experience fantastic returns on networks are a bit upset about the possibility. The high margins achieved by wireless operators Verizon (click ticker for report: ), AT&T (click ticker for report: ), and to a lesser extent, Sprint (click ticker for report: ) could face pressure, though in the event the FCC does roll out free nation-wide WiFi, these firms could still win over subscribers that fear network congestion (or those that desire even faster data speed).
On one hand, the subsidization of Internet could provide consumers and businesses with considerably lower data expenses, boosting hiring and consumer spending in other areas. However, this plan could alter the entire mobile landscape. In the event free, nation-wide WiFi is implemented, we wouldn’t be surprised to see carriers completely phase out subsidies, which could hurt higher-end phones like the iPhone (click ticker for report: ) and Samsung Galaxy. However, if consumers do not need to sign up for relatively expensive data plans that can cost $1,000+ per year, perhaps stomaching a $700 iPhone won’t seem like such a terrible trade off. If Apple rolled out 12 or 24 month payment plans, the amount becomes even more manageable ($58/mo or $29/mo). Still, tablet sales could surge as connectivity becomes less of an issue, boosting the fortunes of the iPad and the Galaxy tablet.
Telecom equipment providers also seem to be negative on the plan, saying the FCC should instead sell spectrum to private enterprise. Telecom equipment providers benefit from continued network-efficiency investment, so changing the industry structure will certainly impact constituents (though exactly how remains unclear). The government might work with private enterprises to complete the network, boosting the fortunes of some firms at the expense of others, or it might not. Intel (click ticker for report: ), Qualcomm (click ticker for report: ), Aruba Networks (click ticker for report: ), and Cisco (click ticker for report: ) also joined the telecom providers in opposing the idea.
The auto industry also seems in opposition, believing the plan could interfere with the development of car-to-car communication that’s paving the way for self-driving vehicles. However, we don’t see the proposal impacting any automotive OEM at this time.
Several large technology firms, including Google (click ticker for report: ) and Microsoft (click ticker for report: ) support the initiative and view it as a way to drive innovation. Google has already begun experimenting with providing free WiFi as its Google Fiber network launched in Kansas City last year, and a free, nation-wide WiFi network would certainly boost the value and use of software and search.
There are plenty of other companies that may also benefit. Both Twitter and Facebook (click ticker for report: ) could see higher usage rates, and online ordering from companies such as Amazon (click ticker for report: ) and eBay (click ticker for report: ) could become even easier. With some extra money in their pockets each month, consumers could feel better about making discretionary purchases, boosting overall retail spending. Increased connectivity could also increase price transparency, further decreasing the gap between retail and online price discrepancies.
Of course, we think there’s also a large possibility that this may be a bluff on the government’s part to lower industry-wide economic profits (without enacting direct legislation). The threat of a large, subsidized, public competitor could spur the nation’s telecom giants to invest in network improvements or possibly provide lower rates (we think Verizon and AT&T would be much happier selling lower-priced $60 data plans rather than selling no data plans at all). However, the telecoms and telecom equipment providers seem to be taking this idea very seriously, so industry insiders must believe this network is a real possibility that could take years (not decades) to come to fruition.
Ultimately, the news does not alter the fair value estimates for any companies in our coverage universe. The plan is still in its very early stages, and we’d need significantly more details before accurately assessing its impact on the future cash flow streams of the various companies it could impact. Still, the proposition adds tail risk to all companies it could impact, and we’ll be closely monitoring the situation as it could have a transformative impact on the industry landscape from smartphones to chipmakers to the auto makers.