In 1973, the Edgar Winter Group scored a Top 20 hit with “Free Ride.” In 2016, Competitive Local Exchange Carriers (CLECs) are trying to score a free ride from the FCC via heavy regulation of special access rates.
While the CLECs like to claim there is a monopoly in the business broadband market, investment numbers say otherwise. Hundreds of billions are being invested in broadband networks, and all that money is not coming from CLECs. No wonder they want the FCC to impose heavy regulations on special access. The CLEC business model is to rely on the regulatory hammer to give them access to networks others have built, and as networks across the nation are upgraded to run on all-IP — and businesses require ever-faster broadband — the CLECs are quickly finding their business model is on thin ice — with spring around the corner.
Still, they continue to bend the FCC’s ear, which is why I continue to write about special access. It’s also why the organization US Telecom has launched a new initiative called “Innovate With Us” to remind policymakers that the broadband market in America is thriving across the board, and in order to keep the good times — and investment dollars — rolling, sensible regulations need to be in place. Or, as US Telecom succinctly put it in the intro to the initiative:
[T]he FCC should champion pro-investment policies that work for business customers, not specific companies, and look beyond yesterday’s technologies toward the networks of the future.
“Competition” is one of those words that make policymakers tingle. And yet, time and time again, private industry finds itself wrestling with regulations that not only harm competition but — in the most extreme cases — actively benefit one party over another.
Case in point: wireline broadband competition. Providers have invested billions to expand the reach and speed of their networks, and yet recent actions taken by the FCC are threatening to stifle ongoing investment. But don’t just take my word for it. Check out this latest study from the American Consumer Institute titled “Concentration by Regulation: How the FCC’s Imposition of Asymmetric Regulations Are Hindering Wireline Broadband Competition in America.”
Yes, that title is quite the mouthful (as most study titles are), and to be honest, unless you’re someone who enjoys diving into studies (with charts) on regulations, investment, and the economy, you might find the report’s 18 pages a bit of a slog. But those of us who do read through ACI’s study will find a convincing — and rather damning — case that the FCC is mistepping rather badly as it continues to amass more and more power over broadband. For example, here’s what the report has to say about one of the biggest regulatory marks the Commission made in 2015:
Title II regulations are preserving and maintaining duplicative and costly copper networks. That cost is an impediment to fiber deployment that keeps ILECs more reliant on older copper-based DSL technologies. Instead of the FCC relieving non-dominant ILECs of Title II regulations in more competitive markets, the FCC has recently chosen to make broadband service providers subject to Title II regulations.
Unless there is action soon, the shift in concentration is likely to be permanent. A decade ago, the rollback of asymmetric regulations permitted modest rebound in broadband services for ILECs, because there was brisk growth in subscribers. Today, because the broadband market is so widespread, growing slower and more mature, asymmetric broadband regulation will likely have longer term consequences that could permanently displace and weaken wireline competition. Even if a rebound is possible, ILECs will face a major cost to win back customers. Regulations are costly and delays in lifting these regulations will be even more costly.
Translation: Old regulations that effect some providers and not others are forcing companies like Verizon and AT&T to invest billions in the copper networks of old. Meanwhile, other providers don’t face such regulatory roadblocks, even as they aim to invest in the very same thing legacy providers are investing in — fiber-backed, high-speed broadband networks. Not exactly the spirit of competition, is it?
The ACI study isn’t all doom and gloom for America’s communications infrastructure, though, for the group has thoughtfully included a three bullet points that can help level the playing field:
• Policymakers need to end Title II regulations for all providers.
• There needs to be less emphasis on regulation of wholesale services. Less regulation will encourage more facility-based investments, which will lead to the natural development of a healthy, wholesale market; and
• If regulators truly believe that some regulation of wholesale services is necessary – and that may be the case in some rural markets – then regulators need to apply these regulations on a symmetrical and competitively neutral basis.
In short, get rid of the bad regulations, be careful when imposing new ones, and make sure everyone is playing under the same rules. Wise words, but the question is: Will the FCC listen?
In an op-ed originally published by The Street, our Co-Chairman Bruce Mehlman warns that the FCC’s is taking the wrong approach when it comes to encouraging broadband competition. An excerpt:
Federal Communications Commission (FCC) regulators, purportedly eager to promote competition, keep stifling the investment needed to advance it meaningfully. Case in point, the Commission recently opened a tariff investigation on “special access” rates in the business data services market. For many observers, this political inquiry is unwarranted by the facts on the ground, driven instead by companies whose business models are dependent on government protection for “rent-seeking,” or ongoing access to the networks that others built.
In this bonus edition of Let’s Get Nerdy, our Co-Chairman Bruce Mehlman breaks down how the business special access marketplace has changed since the 1990s, and discusses whether FCC special access rules are still necessary.
In today’s installments, our Co-Chairman Bruce Mehlman continues to focus on Special Access and regulations. Here he talks about what the U.S. can learn from a decade of empirical data collected by the European Union on wholesale access regulation.
Rounding out the discussion, Mehlman talks about the likely impacts of the FCC requiring that IP services replacing copper be offered to CLECs at wholesale rates.
Late last week, our Co-Chairman Bruce Mehlman penned an op-ed for Morning Consult on the need for the FCC to rely on data as it reforms special access. An excerpt:
For a decade, the FCC has had an effective policy of “new wires, new rules.” Relying on that policy, the Incumbent Local Exchange Carriers – even though forced by the special access rules to subsidize a second network of non-competitive older technology – eagerly invested billions to roll out the faster broadband network people want to compete with cable, wireless and fiber networks. Now, some CLECs want to toss deregulation out the window, changing the rules in midstream without a formal data analysis and imperiling that needed investment.
That’s just wrong. Why would the FCC want to re-impose regulation on a competitive environment without understanding the marketplace? And what about the ILECs’ reliance on the FCC’s regulatory promise of “new rules” for new wires – does that just get washed away?
Recently, our Co-Chairman Bruce Mehlman talked with Amir Nasr of the Morning Consult about the problems with the FCC’s pricing rules for high-grade network lines. An excerpt:
FCC Chairman Tom Wheeler said the rule “preserves competitive choices as the technology transitions move forward… Competitive providers rely on these inputs to serve hundreds of thousands of businesses and other enterprise customers at competitive rates, often offering customized services not offered by incumbents.”
Mehlman said some in the industry are frustrated at the FCC’s apparent shift in thinking after the agency left the matter alone for over a decade. “They promised no regulation for over 10 years, and now they’re proposing to fundamentally change the game,” he said.
FCC Commissioner Ajit Pai, a Republican and outspoken adversary to the agency’s Democractic majority, decried the pricing proposal in a recent speech at the center-right American Enterprise Institute. “These regulatory roadblocks are bad for consumers, bad for infrastructure investment, and bad for our nation’s economic competitiveness,” he said.
Mehlman concurred. “As long as you have regulations on some providers, forcing them to help their competitors at regulated rates, you will have less investment because there is a meaningfully lower return,” he said.
Exciting news for those who appreciate how vibrant and competitive today’s telecommunications market is… and perhaps even bigger news for those who don’t yet believe it.
According to this morning’s Wall Street Journal, Comcast has set up a new unit to sell data services to large businesses across the country, including (and this is the important part) outside Comcast’s regular footprint, by negotiating wholesale agreements with other cable providers to sell Comcast data services. In short, the cable guys are taking on the telco guys and setting up a new national provider to offer meaningful competition, so that national businesses would be able to choose cable as an alternative where they have been reluctant to do so before.
As the Journal notes, the new arrangement “threaten[s] the longtime status quo in the cable industry, where operators historically haven’t competed with each other for customers in the same geographic area.”
Some industry observers anticipated this move. As I wrote in the spring, an article in FierceWireless commented that cable is entering the special access market, claiming that “[t]he presence of cable operators could potentially shake up the wholesale special access space where incumbent telcos… have enjoyed a monopoly position for decades.”
Actually, I was wrong — I thought that cable might seek a more mid-market position rather than going after the largest customers, but now cable is doing just that, even more proof of the competitive nature of the market.
So the question naturally arises: if Comcast can do this, why can’t the CLECs who are pleading for continued “special access” regulation? Why can’t the CLECs challenge their own “status quo” as well? CLECs still maintain that they want to continue their current business model, forcing network providers to subsidize their antiquated, copper-based technology, for “decades” more (even though the transition to an all IP-network is supposed to happen this decade). Even worse, they now seek to expand their price regulated access to new fiber facilities built by investment not traditionally subject to regulation.
Comcast estimates the potential size of this new market at $40 billion. By any standard, that’s real money. It’s another nail in the coffin of an old uneconomic business model that is being propped up only by regulation. Why wouldn’t the CLECs want to go for that market rather than relying on a protected business model selling antiquated technology?
And isn’t it time for the FCC to note what’s happening in the marketplace?
Over at Fierce Telecom, Sean Buckley chatted with our own Bruce Mehlman about the FCC’s current stance on legacy copper and TDM-based networks. An excerpt:
Bruce Mehlman, co-chairman of the Internet Innovation Alliance, told FierceTelecom in an interview that what’s troublesome about the regulator’s proposals is that it’s a step backwards.
He said that competitive carriers should focus more of their attention on building their own network infrastructure versus trying to leverage existing facilities built by incumbent telcos.
“There are folks that have had a decade of notice that if they wanted more advanced structure they needed to be part of the solution of building network infrastructure, but they chose business models that were based on riding investments that were made by other folks,” said Mehlman. “Everybody’s has been notice for over a decade.”
Citing the move by Google Fiber to build out a new FTTH network infrastructure supporting 1 Gbps broadband and video services, Melhman added that “it seems like a mistake to offer a ‘new wire, new rule’ incentive to get all the investment you thought you would and then to say we’re considering going to ‘new wire, old rules.’”
Our Co-Chairman Bruce Mehlman has a piece in Bloomberg BNA on regulation the FCC is considering as America transitions to all Internet-based networks. An excerpt:
The nation’s historic transition away from the copper wire toward a modern Internet Protocol-based (“IP”) communication system represents a critical technological leap forward. The United States aims to complete this transition by 2020; indeed, the impetus for this effort actually first came from FCC Chairman Tom Wheeler, then in his role as head of an advisory board on technology transition.
This transition will ultimately bring consumers new technology, billions of dollars in new infrastructure, and faster and better broadband services and applications. Today, test trials for the transition are underway in Alabama and Florida to work out technical issues and ensure superior service quality for consumers.
Recently, however, Chairman Wheeler publicly outlined his proposed next steps for the IP transition that include applying old monopoly-style telephone rules to favor and advance certain carriers’ business models. Applying such rules to IP-based broadband communications networks of the future would benefit companies that serve businesses, yet provide little to no benefit to the average consumer.
Specifically, in response to the supposed need to “preserve competition in the enterprise market,” the FCC plans to require that “replacement services be offered to competitive providers at rates, terms and conditions that are reasonably comparable to those of the legacy services.”
Update: You can read Commissioner Michael O’Rielly’s full remarks here.
The Role for Regulators in an Expanding Broadband Economy
Innovation, convergence and rapid technological advances are rapidly reshaping the Internet ecosystem and how Washington’s legislators and regulators approach national broadband policymaking. Ongoing consideration of new policies will shape the future of an Open Internet for the 21st century.
The Internet Innovation Alliance invites you to join a policy discussion that will address:
• The appropriate role for regulators in an expanding broadband economy;
• The impact of different regulatory approaches toward the Internet and its meaning for the broadband economy;
• Congress’ role going forward in setting clear rules of the road for the Open Internet;
• The interrelationship between regulation and investment in broadband, and what, if any, impact it will have on potential legislative action going forward.
Commissioner, Federal Communications Commission
Followed by a panel discussion including
Stuart N. Brotman
Nonresident Senior Fellow, Center for Technology Innovation
The Brookings Institution
Randolph J. May
President, Free State Foundation
Senior Vice President of Government Affairs,
Telecommunications Industry Association (TIA)
Susan Bitter Smith
Chairman, Arizona Corporation Commission
Bruce Mehlman (Moderator)
Co-Chairman, Internet Innovation Alliance
Earlier today, IIA sent a letter to FCC Chairman Tom Wheeler expressing our support for the Commission’s upcoming rulemaking proceeding soon to be initiated to advance Lifeline reform. From that letter, signed by IIA Chairmen Rick Boucher, Bruce Mehlman, Larry Irving, and Jamal Simmons:
“In the U.S., consumers with economic means have nearly ubiquitous access to broadband, yet almost two-thirds of our nation’s low-income community continues to seek that similar opportunity. Without broadband availability, low-income families face an uphill battle in obtaining the American dream.
“In bringing Lifeline into the 21st century, broadband should be included as an integral, more affordable offering of the program, and consumers should be empowered by providing the subsidy directly to eligible people instead of companies. Moreover, to enhance administrative efficiency, we urge the FCC to shift program eligibility verification away from companies that are not accountable to the American people, and instead allow states to verify eligibility for Lifeline at the same time they determine consumer eligibility for other federal low-income programs. Such ‘coordinated enrollment’ would benefit consumers by streamlining the eligibility process and ultimately enable subsidy recipients to receive a ‘Lifeline Benefit Card’ where consumers could apply the funds to the provider of their choosing. These reforms would make program participation for all service providers more attractive, thereby broadening consumer choice and stimulating competition for the low-income consumer purchasing power.
“IIA applauds the Commission for quickly moving forward to initiate a new proceeding aimed to advance Lifeline reform this year. The time for reform is now, the need is great, and the goal is achievable.“
Our Co-Chairman Bruce Mehlman penned an op-ed for Multichannel News on how increased competition in Special Access is active proof that the free market is working. An excerpt:
[I]n a smooth functioning market, there will be many providers offering a variety of options, including different options based on speed. Not everyone wants to pay for the fastest speeds available. Though inconsistent with the Washington narrative of regulate-to-prevent-“inequality”, as we’re seeing in health care and some tax proposals, in the real world consumers and businesses prefer to choose what’s best for them.
So with cable joining the fray, incumbent telcos are now facing greater competition in special access, just as one would predict in a market that is working well – something for regulators to remember the next time competitors come knocking on their door seeking government intervention and stricter regulations as a means to help subsidize their business model. Markets work, if we will just let them.
Recently I had the privilege of participating in Georgetown University’s look back at the National Broadband Plan and its impact. Although far less high-profile than many made-for-the-media-circus endeavors, the National Broadband Plan (NBBP) proved a model of creativity… efficient, effective government, your tax dollars well-spent. Much credit goes to NBBP’s fearless and far-sighted leader Blair Levin, and Blair happily enjoyed a victory lap while heaping praise upon his many able lieutenants and soldiers… both outcomes to be expected by those who know Blair well!
While others dove deep into the specific recommendations made and outcomes achieved in the report itself, I took away four core conclusions from the five-years-after look back:
1. People Matter. Being the government is not a barrier to efficiency, innovation or effectiveness… given the right team and right processes. Blair gathered a “best and brightest” of policy analysts to research and write NBBP. He neither relied on outside experts alone nor eschewed career professionals. Instead he blended a team of thoughtful go-getters such as Pew’s John Horrigan, with leading thinkers at several agencies, a “best and brightest” approach that paid dividends.
2. Process Matters. The NBBP planning efforts were highly inclusive, hearing from all sides of most issues and inviting every sector to participate. No ideological or political litmus tests applied, maximizing ideas and enthusiasm. Concurrently NBBP was highly transparent, minimizing suspicions or criticisms of the ultimate product (lessons from the failed-and-far-less-transparent 1993 “HillaryCare” and 2001 “Cheney Energy Policy”).
3. Policy Matters. Even the best process and smartest people would not have counted if they failed to ask the right questions and offer the right answers. In this case, they did both, highlighting the critical need for more spectrum for broadband services, for example, along with creative methods for finding it. NBBP likewise helped illuminate the need for and value of driving fiber deeper into networks, urging an “if you build it they will come” approach that has largely matched reality. And NBBP supplied vision of a broadband-enabled world for those many policy makers less familiar with the end-game opportunities.
4. Politics Matters. In this case, avoiding the unnecessary political morass named Net Neutrality. To have observed the President on the campaign trail, one might have concluded that the #1 broadband issue was Net Neutrality and preventing some nefarious monopolists from hijacking the “People’s Internet.” To its great credit, the NBBP recognized the difference between serious policy questions and partisan political hype in search of marketplace realities and assiduously avoided the issue. (Officially, these political appointees deferred to the FCC that wanted to take the issue head on… yet while the FCC spent a year stuck in the political mud, the NBBP charged forward). In reality the NBBP planners understood that the light-tough regulatory approach identified by President Clinton and maintained by President Bush paid extraordinary dividends, as we saw in a roaring broadband economy. Recent decisions to roll back those long-standing policies are a gamble at best, and an unnecessary one. Broadband and especially wireless has thrived in a light-touch regulatory framework, but we’ve just plucked a whole bunch of feathers from the golden goose. Maybe it won’t impact egg production, but maybe it will. Time will tell.
The need for a permanent legislative solution to guarantee an open Internet against all risks, present and hypothetical, has been greatly enhanced by the confusion and lack of clarity that Title II proponents have created, perhaps unavoidably, as we break with 20+ years of bipartisan support for light-touch regulation of the Internet and charge forward on treating the most innovative sector of our economy as if it’s among the least. Even net neutrality champions have seemed flummoxed.
For example, one of the loudest champions supporting public utility style regulation for the nation’s broadband ecosystem was Netflix. Netflix publicly pushed the White House and the FCC to embrace Title II as a means to achieve marketplace concessions and prevent assignment of higher costs for consumption of greatest bandwidth. Yet, when Netflix’s Chief Financial Officer was asked at an investment conference this week, “Were we pleased it pushed to Title II,” he replied: “Probably not. We were hoping there would be a non-regulated solution.”
Netflix’s CFO was hardly alone in expressing concern for the potential harms that could cascade from treating the most dynamic and innovative sector of our economy as the most in need of Washington’s control. CloudFlare CEO Matthew Prince eloquently shared his “deep concerns” that the use of Title II to achieve net neutrality protections could well snatch defeat from the jaws of victory – “proponents of a free and open Internet may look back on today not as a great victory, but as the first step in what may turn out to be a devastating loss”. According to reporting by the Wall Street Journal, erstwhile net neutrality champion Eric Schmidt even lobbied the White House against use of the thermonuclear Title II option.
The lack of appreciation for the harms associated with the FCC’s decision to impose public utility style regulation (Title II) on broadband has not been limited to Netflix. During a recent CNBC interview, Title II proponent David Karp, founder and CEO of Tumblr, similarly made statements regarding the proposed Net Neutrality regulations that ironically affirmed why a “light-touch” regulatory approach is superior to Title II to maintain the current open, robust, and investment-friendly Internet. Mr. Karp and others have been led down the proverbial primrose path to believe that Title II is the only solution to keep any potential abuse at bay. However, it is worth reviewing many assertions made by Mr. Karp and other Title II advocates and the realities that contradict them.
The Title II rules will not “slow down innovation.”
Not true. Innovation developed at the Internet’s ‘edge’ by companies like Tumblr depends on robust high-speed broadband wired and wireless networks to reach consumers. Innovative success stories such as Tumblr thrived precisely because Title II was not applied to the Internet ecosystem. Title II regulations that slow broadband investment by Internet service providers will ultimately harm Internet innovation by those hoping for robust and rapidly-improving service.
New rules are needed to achieve “a competitive market for carriers where they’re competing to deliver us the fastest, best Internet.”
That market exists today. It’s the very market in which Tumblr has thrived. The U.S. benefits from robust competition among both wired and wireline Internet providers – competition that exceeds that in Europe, which today maintains Title II-like regulations on Internet providers.
Concerns that Title II will restrict investment “have been disproven.”
There is currently “a lot of artificial throttling going on, [even though broadband providers] have the bandwidth to deliver this.”
Not really. Allegations of throttling are hypothetical. In fact, the FCC found only four instances of alleged anticompetitive throttling behavior, and all occurred before 2010. The core challenge remains: Managing the exponential explosion of content and data generated by “killer content”, such as Netflix’s popular “House of Cards.” Carriers desperately search for more spectrum for mobile broadband services, which is why wireless companies just spent $45 billion at the recent FCC spectrum auction gobbling up airwaves to provide mobile Internet services. But broadband providers, and new entrants such as Dish, may not make such desperately-needed investments in the future if they believe that Title II will inhibit their ability to recoup.
Title II will “move further in breaking down the near-monopoly situation we have right now.”
What monopolies? No broadband company has as much market share as the leading search engine or many of the leading tech players. Today’s broadband market is vibrantly competitive as consumers have multiple Internet options in markets across the U.S. Title II does not “break down” monopolies, since it was crafted to manage and regulate the one service provider that existed in the 1930s monopoly telephone market.
Despite Title II, providers will continue to build the broadband Internet at faster speeds and that the carriers are “just lying” when they claim otherwise.
Really? Public Internet service companies are responsible to their shareholders and logically invest only in markets where they have an ability to recoup their capital. Investment suffers in markets—like Europe—where a Title II-like regulatory regime prevails.
Our Co-Chairman Bruce Mehlman and Larry Irving have a column in USA Today warning that the FCC risks stunting progress on the Internet. An excerpt:
[T]he war reached new heights this week, as FCC Chairman Tom Wheeler proposed regulating our most advanced companies based on the rules designed for our oldest.
For a majority of innovators and entrepreneurs around the nation, partisan paralysis is unwelcome news, likely to spawn years of litigation, cloud investment certainty and potentially slow our economy’s most powerful engine. For objective policy analysts, the partisan intensity surrounding the net neutrality debate is unnecessary and counterproductive. Bad politics is making for bad policy.
As with most heated debates, the current net neutrality kerfuffle has been heavy on rhetoric and light on facts.
Sure, those of us who believe the Internet has thrived — and will continue to thrive — without the heavy mitts of regulation point to study after study after article (most recently from the Progressive Policy Institute, of all places) warning that Title II reclassification would do much more harm than good for the open Internet, but facts and research aren’t nearly as effective as facetious cries about a “two-tiered Internet!” and “They are coming for your Netflix!”
That being said, since I’m a glutton for punishment I’m going to highlight yet another article, this one penned by economist (and IIA friend) Bret Swanson for the Wall Street Journal.
Swanson’s piece has a blunt title — “The U.S. Leads the World in Broadband” — and rather than shouting about the Internet sky falling, he crunches some numbers to show that… well, just what the title says.
Mr. Obama recently called on the FCC to impose “the strongest possible rules” on Internet service providers to make sure they don’t “limit your access to a website” or “decide which online stores you should shop at or which streaming services you can use.”
Neither of these rationales for regulatory intervention is true, however, and there’s a simple way to show it. An international comparison of Internet traffic can tell us about the quality of broadband networks and the vibrancy and openness of content markets. Traffic represents all the bits flowing over our networks—email, websites, texts, chats, photos, digital books and movies, video clips, social feeds, searches, transactions, cloud interactions, phone and video calls, interactive maps and apps, software downloads, and much more.
And just what did the numbers tell Swanson?
What I found was that at 18.6 exabytes (18.6 billion gigabytes) a month, the U.S. generates far more traffic per capita and per Internet user than any other major nation save South Korea, which is a vertical metropolis and thus easy to wire with fiber optics. U.S. traffic per capita is 2.1 times that of Japan and 2.7 times that of Western Europe. Several years ago, U.S. and Canadian traffic measures were similar, but today the U.S. has raced ahead by 25%.
The U.S. lead is similar in traffic per Internet user, which tends to reflect how intensely people use broadband and mobile connections. The U.S. outdoes its closest European rival, the U.K., by 57%. The U.S. outdoes all of Western Europe—the best comparison in terms of geography, population and economic development—by a factor of 2.5.
All due respect to my friends and colleagues on the other side of the Title II debate, but does that look like the U.S. broadband market is hurting? Is the Internet really in need of saving by the unelected officials at the FCC?
Perhaps the most exacerbating thing about the Title II argument is the fact that both sides want essentially the same thing — for the Internet to stay open and thriving. What we disagree on is which tool, if any, the FCC should use.
Given the very real threats of reduced private investment in, and increased prices for, broadband that Title II could usher in, the choice should be simple. As Swanson writes:
The U.S., with 4% of the world’s population, has 10% of its Internet users, 25% of its broadband investment and 32% of its consumer Internet traffic. The U.S. policy of Internet freedom has worked. Why does Washington want to intervene in a thriving market?
“The Impact of Title II Regulation of Internet Providers On Their Capital Investments” is a 22-page study penned by economists Kevin A. Hassett and Robert J. Shapiro. It was submitted to the FCC as part of an ex part by the US Telecom Association. If you care about the future of the Internet, you need to add it to your reading list.
For the study, Hassett and Shapiro approached the question of Title II reclassification armed with numbers. Specifically, an alarming drop in projected private investment should the FCC choose to reclassify. As the economists write:
If the status quo continues, with data services unencumbered by Title II regulation, the several ISPs in our sample are expected to spend approximately $218.8 billion in new capital investments over the next five years in their wirelines and wireless networks. In contrast, under Title II regulation of all wireline data services, these ISPs’ wirelines and wireless capital investments over the next five years would drop an estimated range of $173.4 billion to $190.7 billion. Title II regulation of ISPs thus reduces these companies’ total investments by $28.1 billion to $45.4 billion (between 12.8 percent and 20.8 percent) over the next five years. Wireline investment by these firms would be 17.8 percent to 31.7 percent lower than expected.
That’s a lot of numbers with the word billion attached, but the main focus should really be on the percentages. You don’t have to be an economist to realize that a reduction of total investment dollars of 12.8 percent to 20.8 percent (and wireline investment dollars of 17.8 percent to 31.7 percent) would have a profound effect on America’s communications infrastructure. And by profound, I mean decidedly negative — not just for network expansion and upgrades, but for innovation across the Internet board.
The blow to innovation, Hassett and Shapiro argue, would be particularly hard on wireless networks. Again, from the study:
[T]he network managements practices which Title II regulation would potentially bar enable wireless investment and innovation, because wireless networks face serious capacity constraints. Thus, regulations that discourage or bar those practices raise the risk of introducing new products and applications: Without those practices, carriers would be less able to manage unpredictable changes in network demand associated with their introduction, and so maintain the quality of network services for all of its users.
In other words, the next big app or service could cripple wireless networks, and under Title II, providers would be hamstrung by regulations to solve the problem in a timely manner. Want to launch an innovative new streaming video app? Good luck gaining users when your app meets a road block of network congestion.
Too often the debate surrounding net neutrality is one of extremes, and I freely admit the above scenario falls within that category. But also too often, the economic realities of building, upgrading, and maintaining networks are either ignored or downplayed. Net neutrality doesn’t have to be an emotional issue; we all benefit from the Internet continuing to be open. The question is, how best do we ensure that happens while at the same time encouraging the investment necessary to keep networks growing. As Hassett and Shapiro’s study makes clear, the numbers show Title II would do more damage than good.
Many proponents of “net neutrality” routinely declare the Internet sky is falling. That if the government — specifically, the Federal Communications Commission — doesn’t take far greater control of the Internet, then the very platform itself will all but collapse.
Such scare tactics may rile up Americans, but ironically, it’s the very solution proponents are now pushing that could deal the most devastating blow to the free and open Internet.
Title II reclassification may seem simple — just make the Internet a public utility! — but as a new paper from Anna-Maria Kovacs shows, reclassification would have far greater consequences for the Internet than its supporters let on.
Kovacs’ paper, “Regulations in Financial Translation: Investment Implications of the FCC’s Open Internet Proceeding,” is a dense 27-page read, but don’t let the length — or the dry academic title — deter you from digging in. In the paper, Kovacs takes the temperature of communication investors as the FCC continues to mull over reclassification. And while the majority of investors don’t expect the Commission to use the “nuclear option” of Title II, as it’s commonly known, that doesn’t mean they’re breathing easy. As Kovacs writes (all emphasis mine):
From the perspective of investors, Title II reclassification makes no sense. It does not solve the problem of paid prioritization that the vast majority of net neutrality advocates are demanding the FCC solve, but it carries the risk of enormous collateral damage to both infrastructure and edge providers. It would bring stultifying regulation that would choke the Internet ecosystem that has become on of the primary engines of economic growth for the U.S. and the world. It would encourage other governments to follow suit, endangering the success of American digital service — and application-providers abroad.
This stultifying regulation, Kovacs rightly argues, would be especially brutal to mobile broadband investment, where America leads the rest of the world by leaps and bounds. Kovacs again:
U.S. mobile Internet traffic is expected to grow at a compound annual rate of 50% per year between 2013 and 2018. Keeping up with that traffic will require ongoing capital investments as well as additional spectrum. During 2014-2015, mobile broadband Internet access providers (mobile BIAs) are expected to raise about $57 billion for spectrum purchases, as indicated by the FCC’s reserve price for the 2014 AWS-3 auction and the Greenhill report’s valuation of the broadcast spectrum the FCC hopes to sell in early 2016. That $57 billion is, of course, in addition to the $68 billion in capital investments that mobile BIAs will spend over those two years. Thus, for the FCC’s spectrum auctions to be successful, mobile BIAs will need to raise 84% more funding during 2014-2015 that they do in normal years. With increased price competition and a shrinking revenue base — something the wireline industry has endured for years but that is new to wireless — these companies are facing an increasingly skeptical investment community that will have little tolerance for regulatory shock, on either the fixed or mobile side.
That’s a whole lot of numbers (and acronyms) to digest, but boiled down it means a) Providers need more spectrum; b) Billions will need to be raised to purchase that spectrum; c) Investment dollars could easily dry up in the face of regulatory actions like reclassifying under Title II.
Kovacs goes on in the paper to make the case that the FCC has sufficient authority to ensure the Internet remains open under section 706, which makes it possible for the Commission to create rules specifically for this purpose. While those rules would still face judicial review, they would also keep the FCC (which, remember, is made up of appointed officials) from overreach. In contrast, Kovacs points out, Title II…
...automatically invokes price regulation, resale and interconnection obligations, customer privacy rules, and numerous other obligations, which have been implemented via many thousands of regulations at the FCC and various state commissions.
Thousands of government regulations. Does that sound like a free and open Internet?
But what about forbearance, the provision with mythical powers that Title II proponents point to as a counterpoint to the excessive regulations argument? Well, Kovacs makes plain why the idea of the FCC using forbearance powers doesn’t sit well with investors:
While the FCC is allowed to forbear from some of those obligations if it can justify the forbearance to the courts, investors who have watched the attempts of ILECs to obtain forbearance are all too aware of the difficulties of that process. For example, investors have watched ILECs lose most of their market share yet still be treated by the FCC and state commissioners as if they were dominant carriers for PSTN voice service. As a result, they have little faith that the FCC would apply Title II to BIAs but then forbear from all the regulations that come with that.
Look, when it comes down to it, we all want the Internet to remain open. It’s in the best interest of consumers and providers to keep it that way. But we also need to keep investment dollars flowing into our communications infrastructure. As Kovacs’ paper shows, Title II won’t really do either. Instead, it could have the complete opposite effect. Want the Internet sky to fall? Saddle it with regulations created when Franklin D. Roosevelt was in office.
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