In early 2015, the Federal Communications Commission opted to base its net neutrality regulations on Title II of the Communications Act. The bet made by then-Chairman Tom Wheeler was that investment at the core of the network would not be fazed by common-carrier rules, and innovation among edge providers would flourish.
The bet has proven to be wrong in hindsight. As noted by current Chairman Ajit Pai at the Mobile World Congress in Barcelona this week, the United States “experienced the first-ever decline in broadband investment outside of a recession,” and broadband investment “remains lower today than it was when the FCC changed course in 2015.” His statement is backed by two studies—one by USTelecom, another by PPI—showing broadband investment declined slightly in 2015 relative to 2014.
New data from 2016 suggest an even larger impact from the draconian rules, which effectively barred Internet service providers (ISPs) from raising revenues from edge providers. Domestic broadband capital expenditure (“capex”) declined sharply in 2016 relative to 2014, the last year before reclassification as a common carrier. Relative to 2014 levels, the twelve largest ISPs invested $3.6 billion less in domestic broadband in 2016, a 5.5 percent decline. Eight of the twelve ISPs have withdrawn capital from the sector, while four have added capital. (A firm-by-firm breakout of the data is available here.)
The largest domestic-broadband capex declines occurred at AT&T (down $3.4 billion or 16.2 percent relative to 2014) and at Sprint (down $2.4 billion or 62.7 percent relative to 2014). AT&T moved capital from domestic broadband into satellite distribution and Mexican cellular properties. (The details of my derivation of AT&T’s domestic broadband capex are described here.) In a January 25 earnings call, Randall Stephenson, AT&T’s CEO, expressed his view of the impact of Title II on investment:
In terms of regulatory, in terms of what to expect, all I can base my thoughts on, John, are Ajit Pai’s writings and his comments. And he obviously was not a fan of the Title II regulation that was imposed on the industry. He felt like it had gone entirely too far; we obviously tend to agree with him on that. We happen to be advocates of net neutrality, just the concept of neutrality but placing utility style regulation on our mobility and internet businesses. There is no way anybody can argue that that is not suppressive to investment.
Recall that back in November 2014, Stephenson called for an investment “pause” when the rules were previewed by then-Chairman Wheeler. To be fair, AT&T promised a drawdown of investment after its Project VIP campaign ended, but the promise was a return to “pre-VIP levels,” which exceeded current levels of domestic broadband investment by roughly $3 billion.
Despite its intentions to infuse infrastructure partner Mobilitie with capital for “small cell” deployments, Sprint appears to be abandoning broadband infrastructure. It previously gave guidance of $5 billion of investment per year, but came in at a measly $1.4 billion in network infrastructure in 2016. Analyst Walter Piecyk of BTIG Research warned that Sprint’s “low level of capital investment was last seen in 2008/2009 during the financial crisis.”
The largest capex increases occurred at Comcast and at Charter. Charter’s network investment is tricky to estimate because the new conglomerate lumps Charter, Bright House, and Time Warner Cable (TWC) together. Assuming that Bright House and TWC invested the same amounts in the second half of 2016 as they did the first half, however, one can infer that Charter’s investment in 2016 exceeded 2014 levels by roughly $884 million, a 39.9 percent increase. Comcast’s 2016 network investment increased by $1.2 billion relative to 2014, a 19.2 percent increase.
Some analysts have argued that, by foreclosing ISPs from employing certain innovative arrangements with edge providers, the Title II rules cemented the status quo market structure, thereby assisting (in relative terms) dominant cable operators. Smaller cable operators, such as Time Warner Cable and Cablevision, both withdrew capital from the broadband sector.
That the two largest cable operators increased their capex is not proof, of course, that Title II caused them to invest more than they would have in a world with less-invasive regulations. Comcast’s CEO Brian Roberts gave some clarity to that counterfactual in a January 26 earnings call:
I think regulatory certainty for investors is the same as it is for management: it helps you have the confidence to make long-term plans. And the kind of discussion we've been having this morning, whether it's fiber or other investments in in-home equipment and what your business opportunities are, the more uncertainty, the less encouraging it is to want to invest. So we are encouraged by the prospect of rules that we believe will encourage that investment, stimulate investment, whether that's tax decreases or revisiting the authority of the government to go to places that they said they weren't going to but legally they could go to in the Open Internet order with Title II.
The statement is consistent with the claim that Comcast would have invested even more in the absence of Title II.
Had the FCC allowed economic analysis to inform its views when drafting the 2015 Open Internet Order, the impact of Title II could have been predicted and avoided. Unlike DSL service, which was subject to common carrier rules in the late 1990s and early aughts, cable modem service was classified as an information service during that era. A simple “difference-in-differences” model reveals that Title II was responsible for slowing telco investment by roughly $1 billion per year compared to cable operators, or a 5.5 percent decline relative to the telcos’ 1996 capex.
Several alternative factors, such as the timing of the conversion from LTE to 5G wireless networks, could explain the capital flight from broadband. But it reasonable to conclude that some portion could have been avoided with a less-invasive form of net neutrality rules. Rather than banning paid arrangements for preferential treatment between ISPs and edge providers, the FCC should have reviewed these deals on a case-by-case basis. Critically, to avoid the need for reclassification, any deal for preference should have been deemed presumptively non-discriminatory, but subject to challenge in a complaint-driven process. An edge provider that felt it was discriminated against by the arrangement could reverse that presumption at a hearing before a neutral arbitrator.
Regardless of the cause of the investment drawdown, ISPs have shown a willingness to look beyond the broadband sector for new investment opportunities. Like other good capitalists, they are chasing the highest returns. It’s time to make investing in broadband attractive again. And that begins with a repeal and replacement of the FCC’s Title II rules.
Hal Singer is a Senior Fellow at the George Washington Institute of Public Policy. You can follow him on Twitter @halsinger.
