Special Reports Innovation and National Broadband Policies: Facts, Fiction and Unanswered Questions

Larry F. Darby
Joseph P. Fuhr Jr.

“Innovation” has emerged as a pivotal element in the debate over whetherthe Federal Communications Commission (FCC) should impose newconstraints on managers and providers of broadband network infrastructures. This study brings to bear facts and analysis emergingfrom a review of much of the literature on innovation and especiallythat bearing on claims by advocates of “net neutrality,” “open networks”and related notions.

We find that innovation is thriving at both the core and the edge of thenetwork in the current policy environment, which has fundamentallyallowed the Internet to evolve with little government involvement.Further, we find no evidence that greater FCC involvement in markets forbroadband services would protect or promote innovation in the InternetEcosystem. Indeed, we believe that such intervention is more likely todiscourage innovation than to stimulate it. In addressing these issues,the study finds and presents support for the following conclusions:

Responding to incentives and opportunities availed within the prevailing scheme of regulatory forbearance, network infrastructure providers have compiled an impressive record of innovation reflected in a cascade of new transmission and switching technologies; new local distribution and devices; an impressive array of new services; dramatically increased functionality; and adoption of creative business practices tailored to the changing topology of networks;

By any reasonable assessment, core cable, wireline and wireless networks reflect enormous historical and ongoing innovation as marked by the adoption of new technologies, incorporation of advanced equipment
and software, expansion and improvement of services offerings, and the introduction/diffusion of new business models;

Presence of pervasive complementarities among services dictates that core innovations in network platforms have enabled, encouraged and increased the value of important edge innovations that would otherwise
have been impossible;

While good and unambiguous measures of innovation are often lacking, there is an undeniable link between diffusion of network innovation and the enormous network investments now being made by
broadband infrastructure providers;

Many of the innovations now apparent at the edge reflect investment and business model applications of services first introduced by Internet
Service Providers at very early stages of the development of the Internet;

Imposing common carrier type regulation on network providers would diminish network providers incentives and opportunities to continue historic trends in innovation and investment;

There is no analysis or data in the literatures on innovation and regulation to prove claims that the proposed net neutrality rules would on balance promote innovation in the Internet Ecosystem;

Net neutrality proponents incorrectly characterize the incidence of innovation activities and accomplishments, particularly with respect to core v. edge innovation; and

The proposed net neutrality rules might be expected to reduce innovation in broadband networks and those that would be enabled at the edge. They would do so to the extent that new constraints on broadband
network providers would increase uncertainty and risk, reduce prospects for growth, and undermine network managers’ incentives and opportunities to adapt to rapidly changing technical and economic conditions in the
Internet Ecosystem.

This study finds no support in theories of innovation, innovation practice, or reviews of numerous empirical studies, of drivers of and constraints on innovation, for the main contentions of net neutrality supporters. Available data and analysis do not establish: a) the absence of network innovation in general; b) the primacy of innovation at the edge over the core; or most importantly; c) that greater ex ante regulation of markets for broadband infrastructure is needed, or can reasonably be expected to increase the rate of innovation and consumer welfare creation by network providers and elsewhere in the Internet Ecosystem.

Our review finds no significant market failure attributable to insufficient innovation by network providers or superior innovation outside network infrastructures. As to the need for new regulations, the public interest would be well served were the Commission to heed the wisdom of Hippocrates: “First, do no harm!”

Read more: Innovation_and_National_BB_policies_3210.pdf

Special Reports The Internet Ecosystem: Employment Impacts of National Broadband Policy

This study addresses some unexplored investment and job impact implications of new Net Neutrality regulations recently proposed by the Federal Communications Commission. The rationale for doing so has consistently been cast in terms of maintaining open networks, preserving end-to-end principles, ensuring neutrality, and other equally vague and essentially irrebuttable objectives. In context of a weak economy and bleak jobs outlook, the widely recognized, but limited, ability of monetary and fiscal policies to create jobs, and the increasing economic and political costs of citizens without jobs, this study suggests a third path – regulatory forbearance toward broadband networks – as a means of stimulating investment and job creation. The study concludes:

• By eliminating business options successfully practiced by proponents of more regulation, the Commission’s proposals would dramatically increase market risk, lower expected growth, suppress network investment, and dampen opportunities for network providers to maintain and create jobs.

• The proposed change from Ex Post to Ex Ante regulation would create lengthy regulatory delays and increase regulatory risk for investors, while dampening prospects for new job creation in the Internet sector and in others it supports.

• These and other threats to investment incentives and job creation opportunities are out of line with both the emerging national broadband policy and the growing imperative to create more good, permanent jobs.

• Historical data suggest that for every $1 billion in revenue, “core” network companies provided 2,329 jobs, while non-network “edge” companies provided 1,199 (about half as many). This indicates that Net Neutrality rules that reduce revenues and growth for network companies, and transfer benefits (revenue or growth prospects) to non-network companies, are a barrier to job creation.

• In short, these regulations will shift risk, returns, growth and opportunity away from “core” network providers and in favor of “edge” applications and content providers. SEC data show that, historically, “core” companies earn at lower rates, invest more and create more jobs per dollar of value received in the market than do “edge” companies. Regulation that shifts value away from network providers to non-network providers will reduce investment in network infrastructure and citizen access to broadband while dampening creation and preservation of jobs. This conflicts with consensus requirements of a National Broadband Policy and with our macroeconomic policy goals.
In support of these conclusions, the study sets out financial and economic principles linking Net Neutrality style regulations, investment and jobs; it presents data (filed by firms with the Securities and Exchange Commission) depicting the record of broadband network providers and selected applications providers; and it projects those relationships into the future as guides to the potential responses of firms in the Internet Ecosystem to Net Neutrality type regulatory interventions.

Read more: Jobs_Study_Final_.pdf

Special Reports The Economic Impacts of Declining Broadband Investments

Digital infrastructure, specifically broadband, supports jobs both within the broadband industry and throughout the economy. If capital expenditure falls, either through unfavorable market conditions or regulatory or other actions taken by government investment levels will decline and jobs will likely be lost, at least in the short term.

Read more: http://www.itif.org/files/10.20.09.Broadband_Investment_and_Jobs.pdf

Special Reports The Substantial Consumer Benefits of Broadband Connectivity for US Households

A new study from Jonathan Orszag, Mark Dutz and Robert Willig finds that American consumers receive more than $30 billion in benefits each year from using broadband at home.

Read more: CONSUMER_BENEFITS_OF_BROADBAND.pdf