Net neutrality's impact on Internet capital spending not clear

17 May 2017. By Mike Swift and Xiumei Dong.

The debate over the US Federal Communications Commission's 2015 net neutrality order has centered on whether it slowed investment in the broadband networks that deliver the Internet to consumers. The evidence, however, remains inconclusive.

With the FCC poised to vote Thursday on Chairman Ajit Pai's proposal to renounce the commission's 2015 decision, all the talk has been about capital spending to justify or oppose the expected regulatory rollback. Yet another voice entered that pitched debate Wednesday.

At a news conference, the Internet Association, an industry group whose members include Internet mainstays such as Amazon, Airbnb, Yahoo and Yelp, released new research claiming that capital spending by publicly traded broadband companies grew by 5.3 percent, or $7.3 billion, from 2014 to 2016, a period that straddled the 2015 Open Internet Order, which classified consumer broadband services as a "common carrier" under Title II of the Communications Act of 1934.

Citing research based on a somewhat narrower sample of the 12 largest US Internet service providers, FCC Chairman Ajit Pai argues the Title II classification must be abandoned because it has triggered a 5.6 percent, or $3.6 billion, reduction in capital spending for broadband services.

But another analysis, by the Internet rights group Free Press, backed up the Internet Association, saying capital spending was up 5.3 percent from the 2013-2014 two-year period to the subsequent 2015-2016 period.

MLex took a look at the numbers too, using data provided in the securities filings of the 12 largest US Internet service providers. The MLex analysis, which looked at the broad category of all capital expenditures, showed huge volatility in capital spending by individual companies from one year to the next.

For example, AT&T's capital spending declined by $1.4 billion from 2014 to 2015. But the company's spending grew by about $1.5 billion from 2015 to 2016.

Overall capital expenditures for the twelve companies rose from $62.4 billion in 2014 to $70.2 billion in 2016.

Given that the Open Internet Order is barely two years old, that annual variability highlights the difficulty in drawing a direct causal link between one regulatory order and capital spending trends by the largest US telecom companies.

Many ISPs mentioned the Title II order in their annual reports as having a potential impact on capital spending. But they also mentioned a plethora of other factors: weather, financial conditions such as interest rates, mergers and acquisitions and the need to modernize aging equipment.

Perhaps most telling, no ISP said in a securities filing this year that the 2015 FCC order had caused them to spend less on infrastructure. Several ISPs said that "may" or "might" happen. None said it actually did. Several ISPs said, in fact, that the FCC order could cause them to increase capital spending, while warning that it could also increase their costs, limit profits, drive the choice of the products they offer, or affect operations in other ways.

Top ISP executives have also made conflicting statements about the impact of the net neutrality order. Several times, they have said the FCC order will hurt capital spending, as AT&T CEO Randall Stephenson did in 2014, saying the company would forgo deployment of fiber optic cable in 100 cities because of the regulatory uncertainty around net neutrality. Other times, they have said it doesn't much matter.

"This does not influence the way we invest. We're going to continue to invest in our networks and our platforms, both in Wireless and Wireline [fiber optic services] where we need to," Verizon's chief financial officer, Francis Shammo, said in 2014. "I mean if you think about it ... we were born out of a highly regulated company, so we know how this operates."

Thursday vote

There is little doubt about what will happen at Thursday's FCC meeting. Pai has the votes to begin the formal legal process of replacing the strict Title II before-the-fact prohibitions against ISPs blocking or giving paid prioritization of mobile apps or website traffic.

In theory, the sole Democrat on the FCC, Mignon Clyburn, could block Thursday's vote by not skipping the meeting or abstaining from the vote, denying the commission a quorum. But an action like that would be temporary, lasting until the Trump Administration appoints commissioners to fill the two vacant seats on the commission.

There is also little doubt about what will follow Thursday's expected 2-1 FCC vote. There will be a court challenge to the US Court of Appeals for the DC Circuit to Pai's plan to regulate ISPs with a "light touch," on a case-by-case basis under Title I of the Communications Act.

"We don't want to predict the future too much, but if you look at what happened in 2015, [the net neutrality order] was passed out [of the FCC] and then it was immediately challenged at the DC Circuit," Abigail Slater, the general counsel of the Internet Association, told reporters Wednesday. "We might expect the same thing to happen here. I think it's safe to say that past is prologue."

So, the debate over capital spending may well be moot, and the outcome will ultimately be decided by the DC Circuit or the US Supreme Court. There are also growing calls to have Congress step in to legislate net neutrality rules, ending regulatory uncertainty for the entire Internet industry.

Inconclusive spending totals

Pai's estimate of a 5.6 percent decline in broadband spending is based on the work of Hal Singer, an economist who is a senior fellow at George Washington University's Institute for Public Policy.

Singer cites Internet DSL services delivered over telephone lines that were regulated under Title II in the 1990s and early 2000s.

"It turns out that cable experienced faster capital accumulation than did telco over this time," Singer told MLex. "Economists call this a difference in difference analysis. It depends on a few assumptions (e.g., nothing happened that uniquely affected cable or telco but not both during this period), but if they are satisfied, it is a nice way to isolate the impact of the treatment variable" — in this case, Title II regulation.

The late 1990s were a very different period in the development of the Internet, however, predating contemporary broadband uses such as "Over the Top" streaming video by Netflix and Amazon, and before smartphones and tablets became a platform on which to watch movies and television. It isn't clear that it is valid to compare regulatory policies now and then.

The Internet Association on Wednesday reported other data, including a 58 percent increase in telcom patent applications since 2012 and a 10-fold increase from 2009 to 2016 in the volume of annual Internet data, to 7.9 zetabytes in 2016, to argue that infrastructure development has not been harmed by the FCC order.

"There is no evidence whatsoever from a statistical standpoint that there is any effect on investment," said Christopher Hooton, the association's economist.

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