It is a fundamental truth in economics and finance that lower returns or higher risks decrease incentives to invest. Combining the two spells double trouble. The FCC delivered just such a double whammy with its Open Internet Order (0) when it chose to place new, yet often unspecified restrictions on Internet Service Providers (ISPs). Almost as if on cue, investments in broadband dropped (1) in the US.
In a February vote along party lines, the FCC decided to classify ISPs as providing telecommunications services, thus implying that they should be regulated under Title II of the Telecommunications Act. The new regulations included outright bans on some possible ISP activities (no blocking of legal content and services, throttling of lawful traffic, or paid prioritization (2)), vague new standards for interventions in broadband-provider-interconnection disputes, a case-by-case approach for applying an unclear “‘no-unreasonable-interference/disadvantage’ standard” on whether ISPs are hindering customers’ and edge providers’ abilities to obtain and provide content or applications, and, of course, more broadband subsidies.
Regulations in search of a problem
The FCC was quite clear that it was not concluding ISPs have market power. In footnote 12 on page 6 of the order, the FCC said, “…these rules do not address, and are not designed to deal with, the acquisition or maintenance of market power or its abuse, real or potential.” It further explained this point in footnote 151 on page 33 that, “Indeed, our reclassification decision is based on whether [broadband Internet access service] meets the statutory definition of a ‘telecommunications service,’ and not any additional economic circumstances.”
Not only does applying such restrictive regulations when there is no proof of market power (3) run counter to the history of utility-style regulation in the US (4), it also means that the FCC is restricting practices that it believed a well-functioning market – one where customers can choose among competing ISPs, who would adopt practices that are both profitable to the ISPs and valuable to customers – would generate.
As any student of business knows, and as has been supported in numerous academic studies (5), prohibiting the opportunity for activities that are mutually beneficial for ISPs and their customers necessarily decreases investment by shrinking the potential profits. Furthermore, vague rules also decrease investment because they can be subjectively and politically applied, which increases investment risk.
The FCC claimed (6) that its decision would encourage broadband investment. In footnotes 34 and 35 of its decision, it even quoted Wall Street analysts and ISP CEOs indicating that regulation would not affect investment. However, as Hal Singer reports in Forbes (7), the FCC appears to have been unable to suspend the laws of economics.
Title II’s impact on investment
Singer reports that AT&T’s capital expenditures (capex) in the first half of 2015 was down 29 percent compared to 2014. AT&T wasn’t alone. Charter’s capex decreased by the same amount, Cablevision’s decreased 10 percent, CenturyLink’s was down 9 percent, and Verizon’s went down 4 percent.
Singer notes that year-over-year declines in investment have been rare in broadband. Only the dot.com bust and the Great Recession have triggered such declines in the past. We can now add to these the FCC’s great re-regulation.
Admittedly, each of the 2015 declines is a single data point and therefore has no statistical significance. But it is hard to identify other reasons why there has been such a decline: As Singer points out, GDP grew at the same time ISP capex declined, ISP revenues grew relative to their capex, and cord-cutting continued, likely driving more video traffic to the Internet. We could add to his list continued low interest rates and a Fed policy of quantitative easing that makes it relative easy to raise capital.
What economists observed decades ago remains true today: (1) Limiting businesses’ options decreases investment value; and (2) There is a need to put distance between the short-term political priorities and long-term infrastructure investment planning. If we continue to fail in that, we will shackle our broadband infrastructure.