The Federal Reserve should do Congress’ net neutrality work

Next Wednesday the Board of Governors of the Federal Reserve will meet in Washington to announce whether the central bank has raised its target for interest rates that its member banks charge each other for overnight loans. Rate changes can have a ripple effect throughout the economy where rates paid on mortgages or savings accounts may start to inch up or down depending on the Federal Reserve’s decision.

For example, rates on three-year certificates of deposit inched up .05 percentage points over the past month. Mortgage rates on a 30-year fixed loan also moved up .04 percentage points. Some analysts expect the Federal Reserve to raise rates as it starts ridding its holdings of mortgage and asset backed securities that it purchased in order to release more cash into the monetary system leading to a reduction in interest rates. This policy, referred to as quantitative easing, was put in place by the Federal Reserve to reverse the ravages of the 2007-2008 disruption in the credit markets.

What I’ve overlooked is that in the aftermath of the crisis, the U.S. economy saw the emergence of the “sharing economy”, where firms started using mobile software applications to disrupt long-standing industries such as cab services and hotels. We have seen the emergence of Airbnb, Lyft, and Uber disrupt common carrier services, while Netflix destroyed Blockbuster with an old, mail-based delivery system for videos, it has, post financial crisis, leveraged the internet and streaming video technology to disrupt the cable television business.

All of these services took advantage of the open network architecture of the internet and their subscribers use wire-line and wireless broadband to reach them. They also, as I pointed out earlier, emerged in a low interest environment. Uber, for example, has reportedly gone through 15 rounds of financing since its inception in March 2009, raising $12 billion in financing. With a valuation of $70 billion and revenues of $6.5 billion in 2016, the company is still not yet profitable.

I am wary of how Uber and other post-crisis business models that leverage other people’s capital will do in a rising interest rate environment. Uber’s investors may decide to withdraw their capital and move it to higher yielding activity. Attracting new capital may become increasingly difficult for this reason.

These relatively new companies that deliver information via the internet and broadband have spearheaded efforts to have broadband companies follow a set of principles known as net neutrality. These companies want broadband access providers like AT&T, Comcast, and Verizon to allow their subscribers to view all legally available content; to allow content providers access to subscribers without interference; and to provide consumers and content providers alike with information on how broadband access providers are managing their traffic.

But as rates go up, net neutrality might be the last thing on the minds of those in e-commerce, especially companies that own very little if any hard assets. If Uber or Netflix can’t find cheap capital to grow, they won’t be able to compete with firms that have hard assets that can be used as collateral for financing. Uber and Netflix may find themselves paying a premium on increased rates in order to settle the nerves of investors who are already queasy about their business models. If they can’t borrow, they are out of business, and net neutrality would be a moot point.

About Alton Drew

Alton Drew brings a straight forward and insightful brand of political market intelligence. Alton Drew graduated from the Florida State University with a Bachelor of Science in economics and political science (1984); a Master of Public Administration (1993); and a Juris Doctor (1999). You can also follow Alton Drew on Twitter @altondrew.
This entry was posted in apps, broadband access provider, capital, commerce, e-commerce, Economy, Federal Reserve, media, net neutrality and tagged , , , , . Bookmark the permalink.

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