The U.S. Federal Communications Commission has proposed the creation of a free, nationwide 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 U.S. 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 we cover, although we await details on the 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 that wireless operators Verizon (VZ), AT&T (T) and to a lesser extent Sprint (S) are achieving could face pressure. Though in the event the FCC does roll out free nationwide WiFi, these firms could still win subscribers who fear network congestion (or who desire even faster data speed).
On one hand, subsidization of the 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 that free, nationwide WiFi is implemented, we wouldn't be surprised to see carriers completely phase out subsidies, and that could hurt higher-end phones such as the Apple's (AAPL) iPhone and the Samsung Galaxy.
However, if consumers do not need to sign up for relatively expensive data plans that can cost $1,000 or more 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 a month or $29 a month). 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 would certainly affect 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 (INTC), Qualcomm (QCOM), Aruba Networks (ARUN) and Cisco (CSCO) have 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 affecting any automotive OEM at this time.
Several large technology firms, including Google (GOOG) and Microsoft (MSFT), 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, nationwide WiFi network would certainly boost the value and use of software and search.
Plenty of other companies could also benefit. Both Twitter and Facebook (FB) could see higher usage rates, and online ordering from companies such as Amazon (AMZN) and eBay (EBAY) could become even easier. Consumers who have some extra money in their pockets each month 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, all this could 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 (Verizon and AT&T would be much happier selling lower-priced $60 data plans than selling no data plans at all). However, the telecom companies 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.
The plan is still in its very early stages, and we'd need more details before accurately assessing its impact on the cash-flow streams of carriers and telecom-equipment companies. Still, the proposition adds tail risk, and we'll be closely monitoring the situation, as it could have a transformative impact on the industry, from smartphones to chipmakers to the automakers.