Opponents of the FCC’s Open Internet rules have frequently stated that the rules will stifle ISP investment and innovation, yielding “unintended negative consequences for consumers and various parts of the Internet ecosystem for years to come.” Though some opponents argued at Tuesday’s hearing before the House Energy & Commerce Subcommittee on Communications and Technology that Title II reclassification has already adversely affected broadband Internet investment, the debate during the hearing revealed that many of those arguments are unfounded or premature at best.
Chairman Walden (R-OR) set the stage for the hearing in his opening statement. He acknowledged that the “private sector will continue to invest in broadband build out and improvements,” but he also speculated the rules could decrease ISP investment while the rules are debated in the D.C. Circuit.
The question of the effect of Title II reclassification on the ISPs’ investment decisions was widely debated before the Open Internet Order, and has grown steadily in the intervening months. CCIA addressed many of these points in an amici curiae brief filed along with Mozilla in USTelecom v. FCC, which is currently pending in the D.C. Circuit Court of Appeals. The brief stressed that the Open Internet rules grounded in Title II are actually crucial to maintaining the “virtuous cycle.” Judge Tatel, who will be on the panel for the USTelecom case, explained the virtuous cycle last year in Verizon v. FCC:
Internet openness, [the FCC’s 2010 Open Internet Order] reasoned, spurs investment and development by edge providers, which leads to increased end-user demand for broadband access, which leads to increased investment in broadband network infrastructure and technologies, which in turn leads to further innovation and development by edge providers.
The problem is that without sufficient protections, like those promulgated in this year’s Open Internet Order, ISPs could force edge providers or end users to pay more for faster lanes, slow down or speed up traffic based on how much one pays, or block traffic altogether. This would raise higher barriers to entry for entrepreneurs seeking to move their products on the Internet, and potentially prevent customers from reaching that product, which would adversely affect the economy. The FCC in its 2010 Open Internet Order acknowledged that “[r]estricting edge providers’ ability to reach end users, and limiting end users’ ability to choose which edge providers to patronize, would reduce the rate of innovation at the edge and, in turn, the likely rate of improvements to network infrastructure.”
Are ISP Infrastructure Investments Really Falling due to Title II?
Some panelists and Committee Members pointed to industry statistics from this year as proof that the Open Internet rules and subsequent legal uncertainty are already forcing ISPs to pull back their infrastructure investments. However, further discussion during the hearing showed flaws in many of the Title II’s opponents’ arguments.
Panelist Robert Shapiro, Chairman and Co-Founder of Sonecon, LLC, stated: “Title II regulation of ISPs will increase costs and reduce investment.” Based on “available evidence,” he estimated that new rules could reduce investment by 5.5-20.8 percent per year, and “the ratio of investment to capital stock would be expected to decline by roughly that extent as well.” Frank Louthan, Managing Director – Equity Research for Raymond James Financial, added, “Title II is restricting overall investment and returns, is beginning to slow down and over complicate an industry in unnecessary ways, and has yet to see the full effect while the court case is pending.”
Many Title II opponents cited an article in Forbes by Hal Singer, a Senior Fellow at the Progressive Policy Institute, who claimed that the FCC’s new Open Internet Order is already hurting investment because “AT&T’s capital expenditure (capex) was down 29 percent in the first half of 2015 compared to the first half of 2014.” He also noted that Charter’s capex decreased by the same amount, Cablevision’s decreased 10 percent, CenturyLink’s decreased 9 percent, and Verizon’s decreased 4 percent. While those numbers may be jarring, some have dug deeper, questioning Singer’s analysis. Free Press went to great length not only debunking Singer’s analysis, but also claims made by FCC Commissioner Ajit Pai, noticing that “[a]lmost all of the observed first-quarter/second-quarter declines are due to AT&T. AT&T’s decline is due to its finishing Project VIP and returning to ‘normal’ capex levels. AT&T told investors to expect this temporary bump and decline as far back as 2012.” In an exchange with Congressman Doyle (D-PA), Prof. Nicholas Economides of NYU’s Stern School of Business pointed out that a recent article from two months ago in Barron’s announced that AT&T has changed course, revising its prior guidance from $18 billion to now $21 billion, including “an incremental $1.4 billion of net new spending.” This would certainly make up for any shortfall from the first two quarters of this year.
Tim Karr, also of Free Press, has further explained the deficiencies in Singer’s analysis: “Investment in 2015 is actually up at many companies, including Comcast, Time Warner Cable, Frontier, Cincinnati Bell, Verizon Wireless, Sprint, T-Mobile and others.” Free Press noticed that Singer left Comcast out of his article even though it’s the nation’s largest ISP. In fact, Free Press found that “Comcast’s cable capex (i.e., capital spending excluding NBCU) is up 18 percent for the first half of 2015 compared to this period in 2014.” During the hearing, Ranking Member Eshoo (D-CA) also pointed out Singer’s lack of clarity.
ISP Investment Is Simply Not Close to Where It Was Pre-2002.
Another discrepancy that was apparent during the hearing and the debate leading up to the Open Internet Order was the amount that ISPs have invested in their broadband infrastructure. The Majority Memorandum rightly mentioned that “United States broadband providers invested $78 billion in 2014 alone, a $3 billion increase over figures from the previous year.” However, USTelecom’s own figures show that ISPs invested significantly more with their broadband capital expenditures before the FCC began deregulating the Internet in 2002 with the Cable Modem Order.
As CCIA and Mozilla’s amici curiae brief stated:
Between 1996 and 2000, U.S. broadband capital expenditures increased markedly every year, reaching a peak of $118 billion in 2000. However, in 2002, when the FCC for the first time reclassified cable modem service as an “information service,” investment dropped off precipitously to $72 billion. In the intervening twelve years, investment has never exceeded $80 billion – hovering around $70 billion in most years.
USTelecom and the petitioners in their reply brief called this assertion “similarly misleading” with this spin: “Broadband Internet access services were never subject to Title II; moreover, pre-classification investment was primarily in non-Title II services.” However, the facts remain that capex investments have never even been close to where they were from 1999-2001 before the 2002 Cable Modem Order’s reclassification.
It’s Imprudent to Jump to Conclusions.
While Title II opponents have quickly judged the FCC’s actions a hindrance to broadband investment, discussion from the hearing revealed that some judgments have been too hasty. Notably, corporate investment decisions, especially those in capital-intensive industries like telecom won’t change overnight. Indeed, despite his belief that the ISPs will not be “as attractive to capital as [they] had been in the past,” Louthan did note that “[t]he full impact (of the FCC’s actions) is unlikely to be known for some time.” After questioning from Eshoo, Louthan also noted that though carrier spending could change in the future, their spending is not necessarily changing now just because of Title II. Shapiro stated that economists can’t say at this point with direct data, but he attributes the supposed decline in ISP capex to regulatory uncertainty. Regarding the regulatory uncertainty, Prof. Economides further explained that telecom regulations often reach the Supreme Court, so “It would not be prudent for telecom and cable companies to change their long run decisions on investment before the legal process ends.”
CCIA and Mozilla’s amici brief recognized that “[a] lack of Open Internet rules would create market uncertainty that would stymie the very venture capital investment that has fueled this remarkable growth . . . ” Entrepreneurs and businesses that rely on the Internet need assurances that ISPs will not arbitrarily throttle their Internet access or charge fees for “fast lanes.” Ranking Member Eshoo concluded the hearing by saying that it’s the ISPs that created uncertainty by taking the Open Internet rules to court.