A Reminder Why the Quello Center Net Neutrality Impact Study is Important

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September 5th, 2015

In the past week or so I’ve seen several articles that remind me how important the Quello Center’s empirically-grounded study of net neutrality impacts is for clarifying what these impacts will be—especially since net neutrality is one of those policy topics where arguments are often driven by ideology and/or competing financial interests.

As far as I can tell, this series of articles began with an August 25 piece written by economist Hal Singer and published by Forbes under the following headline: Does The Tumble In Broadband Investment Spell Doom For The FCC’s Open Internet Order? Per his Forbes bio, Singer is a principal at Economists Incorporated, a senior fellow at the Progressive Policy Institute, and an adjunct professor at Georgetown University’s McDonough School of Business.

Singer’s piece was followed roughly a week later by two op-ed pieces published on the American Enterprise Institute’s web site. The title of the first AEI piece, authored by Mark Jamison, was Title II’s real-world impact on broadband investment. This was followed a day later by Bronwyn Howell’s commentary Title II is hurting investment. How will – and should – the FCC respond?

What struck me about this series of op-ed pieces published by economists and organizations whose theoretical models and policy preferences appear to favor unregulated market structures was that their claims that “Title II is hurting investment” were all empirically anchored in Singer’s references to declines in ISP capital spending during the first half of 2015. As a member of the Quello Center’s research team studying the impacts of net neutrality, I was intrigued, and eager to dig into the CapEx data and understand its significance.

While my digging has only begun, what I found reminded me how much the communication policy community needs the kind of fact-based, impartial and in-depth empirical analysis the Quello Center has embarked upon, and how risky it is to rely on the kind of ideologically-driven analysis that too often dominates public policy debates, especially on contentious issues like net neutrality.

My point here is not to argue that there are clear signs that Title II will increase ISP investment, but rather that claims by Singer and others that there are already signs that it is hurting investment are not only premature, but also based on an incomplete reading of evidence that can be uncovered by careful and unbiased review of publicly available information.

I hope to have more to say on this topic in future posts, but will make a few points here.

The crux of Singer’s argument is based on his observation that capital spending had declined fairly dramatically for a number of major ISPs during the first half of 2015, dragging down the entire sector’s spending for that period (though its not clear from the article, my sense is that Singer’s reference to “all” wireline ISPs refers to the industry’s larger players and says nothing about investment by smaller companies and the growing ranks of publicly and privately owned FTTH-based competitors). He then briefly reviews and dismisses potential alternative explanations for these declines, concluding that their only other logical cause is ISPs’ response to the FCC’s Open Internet Order (bolding is mine):

AT&T’s capital expenditure (capex) was down 29 percent in the first half of 2015 compared to the first half of 2014. Charter’s capex was down by the same percentage. Cablevision’s and Verizon’s capex were down ten and four percent, respectively. CenturyLink’s capex was down nine percent. (Update: The average decline across all wireline ISPs was 12 percent. Including wireless ISPs Sprint and T-Mobile in the sample reduces the average decline to eight percent.)..

This capital flight is remarkable considering there have been only two occasions in the history of the broadband industry when capex declined relative to the prior year: In 2001, after the dot.com meltdown, and in 2009, after the Great Recession. In every other year save 2015, broadband capex has climbed, as ISPs—like hamsters on a wheel—were forced to upgrade their networks to prevent customers from switching to rivals offering faster connections.

What changed in early 2015 besides the FCC’s Open Internet Order that can explain the ISP capex tumble? GDP grew in both the first and second quarters of 2015. Broadband capital intensity—defined as the ratio of ISP capex to revenues—decreased over the period, ruling out the possibility that falling revenues were to blame. Although cord cutting is on the rise, pay TV revenue is still growing, and the closest substitute to cable TV is broadband video. Absent compelling alternatives, the FCC’s Order is the best explanation for the capex meltdown.

I haven’t had a chance to carefully review the financial statements and related earnings material of all the companies cited by Singer, but did take a quick look at this material for AT&T and Charter since, as he notes, they experienced by far the largest percentage drop in spending.  What I found doesn’t strike me as supporting his conclusion that the decline was network neutrality-driven.  Instead, in both cases it seems to pretty clearly reflect the end of major investment projects by both companies and related industry trends that seem to have nothing to do with the FCC’s Open Internet order.

My perspective on this is based on statements made by company officials during their second quarter 2015 earnings calls, as well as capex-related data in their financial reporting.

During AT&T’s earnings call, a Wall Street analyst asked the following question: “[T]he $18 billion in CapEx this year implies a nice downtick in the U.S. spending, what’s driving that? Are you finding that you just don’t need to spend it or are you sort of pushing that out to next year?” In his response to the question, John Stephens, the company’s CFO, made no mention of network neutrality or FCC policy decisions. Instead he explained where the company was in terms of key wireless and wireline strategic network investment cycles (bolding is mine):

Well, I think a couple of things. And the simplest thing is to say [is that the] network team did a great job in getting the work done and we’ve got 300, nearly 310 million POPs with LTE right now. And we are putting our spectrum to use as opposed to building towers. And so that aspect of it is just a utilization of spectrum we own and capabilities we have that don’t require as much CapEx. Secondly, the 57 million IP broadband and what is now approximately 900,000 business customer locations passed with fiber. Once again, the network guys have done a great job in getting the Project VIP initiatives completed. And when they are done…the additional spend isn’t necessary, because the project has been concluded not for lack of anything, but for success.

Later on in the call, another analyst asked Stephens “[a]s you look out over the technology roadmap, like 5G coming down the pipeline, do you anticipate that we will see another period of elevated investment?”

While Stephens pointed to a potential future of moderated capital spending, he made no reference to network neutrality or FCC policy, focusing instead on the investment implications of the company’s (and the industry’s) evolution to software-defined networks.

I would tell you that’s kind of a longer term perspective. What we are seeing is our move to get this fiber deep into the network and getting LTE out deep into the wireless network and the solutions that we are finding in a software-defined network opportunity, we see a real opportunity to actually strive to bring investments, if you will, lower or more efficient from historical levels. Right now, I will tell you that this year’s investment is going to be in that $18 billion range, which is about 15%. We are certainly – we are not going to give any guidance with regard to next year or the year after. And we will give an update on this year’s guidance, if and when in our analyst conference if we get that opportunity. With that being said, I think there is a real opportunity with some of the activities are going on in software-defined networks on a longer term basis to actually bring that in capital intensity to a more modest level.

Charter’s large drop in capital spending appears to be driven by a similar “investment cycle” dynamic. During its 2Q15 earnings call, CFO Christopher Winfrey noted that Charter’s year-over-year decline in total CapEx “was driven by the completion of All-Digital during the fourth quarter of last year,” referring to the company’s migration of its channel lineup and other content to an all-digital format.

A review of the company’s earnings call and financial statements suggests that a large portion of the “All-Digital” capital spending was focused on deploying digital set-top boxes to Charter customers, resulting in a precipitous decline in the “customer premise equipment” (CPE) category of CapEx. According to Charter’s financial statements, first-half CPE-related CapEx fell by more than half, or $341 million, from $626 million to $285 million. Excluding this sharp falloff in CPE spending driven by the end of Charter’s All-Digital conversion, the remainder of the company’s capital spending was actually up 3% during the first half of 2015. And this included a 7% increase in spending on “line extensions,” which Charter defines as “network costs associated with entering new service areas.” It seems to me that, if Charter was concerned that the Commission’s Open Internet order would weaken its business model, it would be cutting rather than increasing its investment in expanding the geographic scope of its network.

To understand the significance of Charter’s spending decline, I think it’s important to note that its 29% decline in first half total CapEx was driven by a 54% decline in CPE spending, and that the company’s non-CPE investment—including line extensions—actually increased during that period.  I found it odd that, even as he ignored this key dynamic for Charter, Singer seemed to dismiss the significance of Comcast’s CapEx increase during the same period by noting that it was “attributed to customer premises equipment to support [Comcast’s] X1 entertainment operating system and other cloud-based initiatives.”

I also couldn’t help notice that, in his oddly brief reference to the nation’s largest ISP, Singer ignored the fact that every category of Comcast’s capital spending increased by double-digits during the first half of 2015, including its investment in growth-focused network infrastructure, which expanded 24% from 2014 levels.  Comcast’s total cable CapEx was up 18% for the first half of the year, while at Time Warner Cable, the nation’s second largest cable operator, it increased 16%.

While these increases may have nothing to do with FCC policy, they seem very difficult to reconcile with Singer’s strongly-assserted argument, especially when coupled with the above discussion of company-specific reasons for large CapEx declines for AT&T and Charter.  As that discussion suggests, the reality behind aggregated industry numbers (especially when viewed through a short-term window of time) is often more complex and situation-specific than our economic models and ideologies would like it to be.  This may make our research harder and messier to do at times, but certainly not less valuable.  It also speaks to the value of longitudinal data collection and analysis, to better understand both short-term trends and those that only become clear over a longer term.  That longitudinal component is central to the approach being taken by the Quello Center’s study of net neutrality impacts.

One last general point before closing out this post. I didn’t see any reference in Singer’s piece or the AEI-published follow-ups to spending by non-incumbent competitive providers, including municipally and privately owned fiber networks that are offering attractive combinations of speed and price in a growing number of markets around the country. While this category of spending may be far more difficult to measure than investments by large publicly-owned ISPs, it may be quite significant in relation to public policy, given its potential impact on available speeds, prices and competitive dynamics.

Expect to see more on this important topic and the Quello Center’s investigation of it in later posts, and please feel free to contribute to the discussion via comments on this and/or future posts.

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20 thoughts on “A Reminder Why the Quello Center Net Neutrality Impact Study is Important”

  1. William Dutton says:

    Very useful focus on industry rationales and comments. I think your argument would be stronger if you acknowledge that equally strong claims are being made by the proponents of net neutrality, using recent mergers or investments to argue their case that NN has encouraged investments. While you are trying to support the need for more systematic and longer term analysis, you risk appearing as an another advocate. That said, your focus on particular decisions is great and a nice complement to quantitative trends tracked overtime. We clearly need to have to triangulate on any expected benefits from different methodological perspectives.

  2. I haven’t read anything claiming NN has encouraged ISP investment but have seen several things claiming it hasn’t hurt it. But if there are such arguments being made, I’d agree that, like Singer’s, they are premature at best, and without sufficient empirical backing.

    In either case, I think (at least at this point in time) the burden of evidence is higher for claims of any impact (in either direction) vs. an assumption that current levels of ISP investments are being driven by other factors that have been at play for a longer period of time.

    Because Singer made such a strong claim with what I believe is questionable empirical support, and his claim was echoed by others sharing his economic philosophy and with some influence on policymakers and public opinion, I felt it was important to dig below the surface of the data he cited to explore whether his claim was as empirically solid as these op-ed pieces strongly suggested. As my blog post explains, I found it wanting in that regard.

  3. Mike Watza says:

    A comment from the bleachers: The Industry has in fact been investing large sums of cash. But on acquiring each other rather than infrastructure, given that no one is pushing them to actually do the infrastructure piece and, in light of the fact that the financial game they are playing is apparently more profitable for them than improving their product. To that point: Comcast reportedly spent $336 million on the failed Time Warner bid see http://www.digitaltrends.com/home-theater/comcast-spent-$336-million-on-failed-twc-merger/
    I suspect at&t spent similar $$$ on the recently successful DirectTV merger and Charter is likely spending similar $$$ on its renewed Time Warner bid. That starts to look like a billion dollar spend that could have gone a long way toward improving much needed infrastructure.
    But no worries, since the industry has just been handed $1.5 Billion in federal dollars by the FCC Connect America phase II funding (CAF), See http://www.ustelecom.org/blog/ustelecom-members-commit-rural-broadband-expansion
    The ongoing issue is not the lack of available cash, whether tax dollars, USF dollars or subscriber dollars overpaid to the industry. It is the near total lack of front end and follow up enforcement with these dollars, compelling the industry to actually make the intended, promised and much needed investments in infrastructure. So I applaud the effort the Quello Center is undertaking. It is much needed empirical science necessary to define some much needed truth in this important debate.

    In brief reply to Bill Dutton’s comment, it does sometimes appear that anyone daring to challenge the carefully choreographed cacophony of policy wind-blown (and financed) by the communications industry commentators, is in fact just another equally biased advocate for an opposing view. And I think great effort is employed by the industry to support that view. However, because of the sheer volume and force of the industry policy front, even when that opposing view, as here, is actually an honest effort to simply define and keep the ball in the center of the field of truth, it can look like a biased advocacy position. But here it should be recognized as a noble and worthy academic act of advocacy for truth, rather than just more heavily financed policy posturing.
    Mike Watza

  4. Mark Jamison says:

    Hi, Mitch. Thank you for commenting on my blog post. Sorry that it struck you as ideological, biased, and a few other things. I’ll focus on the analysis.

    As I said in my post, each ISP decline represents a single data point and so cannot be understood as statistically significant. So you and I (and anyone else) are left with trying to draw inference with incomplete data. This is hazardous, but necessary if one is to try to understand policy and regulation in real time.

    Your approach is to look to the narratives the ISPs offer. This is essentially a case study approach. It has value in that it is rich in information, but suffers from an information asymmetry with the ISPs, qualitative rather than quantitative information, and subjectivity driven by the researcher’s dependence on his or her ex ante models of how things work. I started down that path before writing my blog, but decided the problems were too great with such limited information.

    My approach was to observe the data points as a cross section and consider what exogenous forces might the ISPs share that would lead them to behave similarly. This approach has the advantage of being driven by quantitative data, but suffers from there being too little data for an econometric analysis. This means I had to rely upon economic and finance theories of investment, and on previous econometric studies of investment under regulation, to draw possible interpretations. I believe the theories are clear that restricting business options and increasing uncertainty diminish investment incentives. Also, we now have two decades of econometric studies in telecommunications and energy that support the theories.

    As to your last claim that there are issues, such as government investment, that I did not cover, I am certainly guilty as charged. Analysis by its nature is always bounded. I have examined the crowding out issue in other studies and would refer you to those.

    To wrap up, I won’t make the claim that my approach revealed reality and that yours did not. We have too little information for that. And even if we had sufficient data for a proper study, there would still be errors. That said, I would be glad to work with you and/or your colleagues on a study once sufficient data are available. I think the issue of how asymmetric regulation affects markets is an important one.

    Mark Jamison

    1. Thanks Mark for your thoughtful reply. As your comment suggests, there’s a lot we need to study and understand, and I look forward to being part of an effort in that direction.

      And, in case it’s not clear, the views and arguments I express on this blog are my own only. Other members of the Quello Center team focused on this subject have a range of perspectives, which is part of why I’m glad to be part of it and expect to learn a lot from a broad collaboration that encourages active yet respectful debate on a topic that too often attracts more heat than light.

  5. Martyn Roetter says:

    Hal Singer’s argument and those of the two AEI economists that the FCC’s Open Internet Order announced in late February has allegedly caused a decline in broadband investment in the first six months of 2015 is just the latest in a series of analyses concluding that Title II reclassification of broadband is a negative influence on investment. These analyses have been endorsed and submitted to the FCC by the industry association USTelecom. For example the Hassett/Shapiro report touted by the industry association USTelecom (“Title II’s Long-Term Impact Harmful, Hassett-Shapiro Study Shows” – http://www.ustelecom.org/blog/title-ii%E2%80%99s-long-term-impact-harmful-hassett-shapiro-study-shows) claims that Title II regulation as in the Open Internet Order will lead to a reduction of up to 30% and perhaps even more in broadband investment. It can only reach this finding through the misuse of the tools of statistics (correlation does not mean causation) applied moreover to a highly selective subset of data without any consideration of the obvious factors other than regulation (e.g. perceptions of demand and potential revenues) that drive investment decisions. Dr. Singer might also have considered the implications of the much higher valuation of Time Warner Cable – a significant broadband operator – in the transaction announced by Charter in 2015 after the Open Internet Order was passed – compared to its valuation in 2014 by Comcast prior to this Order. Furthermore Singer, like Hassett/Shapiro ignores a fact that contradicts the thesis of the harmful impact on investment of Title II regulation, namely the use of Title II benefits by Verizon to support its FiOS deployments, as Bruce Kushnick has documented. According to Verizon Title II is a bad idea, except when it benefits Verizon. Mark Jamison’s dismissal of this point in his reply to Bruce Kushnick associated with one of the AEI op-ed pieces referred to to is unjustified. He states that the validity of his analysis is not negated because Version uses its FiOS fiber to carry traditional Title II services. But Bruce’s point is that Verizon has used the rights and benefits available to it (which is perfectly legal) under Title II to help alleviate the burden of its investments in FiOS. So how can Verizon then argue that Title II which it has exploited to support its ability to invest in FiOS is simultaneously an obstacle or harmful to this investment? I agree with the observation that advocates of Title II are not arguing (another false equivalence) that it will lead to a material surge in investment or one comparable in size (but of opposite sign) to the “findings” of Hassett/Shapiro. There is no credible evidence that Title II will lead to undesirable declines in investment. Title II is justified on the grounds that it will sustain competition by protecting the rights of other players in the market as well as the rights of customers against abuses of market power by the broadband incumbents. I realize that the defenders of incumbents and the incumbents themselves deny that that they enjoy or command market power sufficient to enable them to abuse it, i.e. “market forces” are strong enough to eliminate this anti-competitive risk and undesirable consequences for consumers, but that is another discussion.

    1. Mark Jamison says:

      Hi, Marty.

      Looks like I should clarify here my reply to Bruce at http://www.techpolicydaily.com/internet/title-ii-broadband-investment/. I have no doubt that Verizon uses its legal status as a telecommunications provider to obtain the rights of way, etc. that it finds useful for FiOS. I cannot tell you which provisions of which laws Verizon is leveraging to do this, nor did I track Verizon’s filings before the FCC, so I cannot tell you whether Verizon is being consistent in its arguments.

      What I was saying to Bruce is that regardless of whether or how Verizon is using that legal status, it still holds that imposing utility-style regulations on ISPs diminishes their incentive to invest.

      Mark

  6. Hal Singer says:

    Mitchell,

    Thanks for the comments.

    Before getting into the merits, a brief word on your ad hominem. You claim my “policy preferences appear to favor unregulated market structures,” and that it is “risky it is to rely on the kind of ideologically-driven analysis that too often dominates public policy debates.” Had you been following my commentary during this debate, you would have noticed that I support a (lightly) regulated environment along the lines that were spelled out by the D.C. Circuit in the Verizon decision. To create your free-market ideologue, you portray two stark (yet false) choices for policymakers: No regulation or Title II regulation. Among the regulatory options, you neglect the best choice available–namely, subjecting paid priority arrangements to ex post, case-by-case review pursuant to the FCC’s 706 authority. In the same (ideological) vein, you intentionally conflate “net neutrality impacts” with Title II impacts. Title II is the problem, not net neutrality.

    Now onto the merits. You promise to bring “in-depth empirical analysis” and “longitudinal data collection and analysis” to the debate. Yet your empiricism ultimately boils down to your interpretation of what two Chief Financial Officers (CFOs) had to say about regulatory impacts during earnings reports. This is the opposite of empiricism. If you want to know how much I credit such statements when it comes to modeling economic impact, see https://haljsinger.wordpress.com/2014/12/19/what-to-make-of-a-cfos-musings-on-regulatory-hypotheticals/. In a nutshell, asking a CFO about how a change in regulatory classification might affect investments is like asking a football player how a change in the TV blackout rule might affect stadium ticket prices. Although they both are “experts” in their respective fields, they lack the tools needed to assess a complicated economic problem. CFOs crunch historical returns in Excel all day; they are not scouring the economics literature on the impact of unbundling (or in this case, the threat of unbundling) on investments. Of course, you could find a CFO with some background in economics, but even then, mapping changes in policy into investment impacts is outside of their portfolio. Name me a CFO that has been invited to speak on a net neutrality policy panel.

    Notwithstanding my reluctance to credit these CFO statements, the statements are not that helpful for your cause. That AT&T’s John Stephens did not mention the FCC’s decision in his (snap) answer as to why his firm’s capex fell by a whopping 29 percent does not rule out the possibility that a more restrictive regulatory environment had a negative effect at the margin. And the answer that he gave–that technology has basically run its course–is unsatisfying in a market as dynamic as the communications sector. Was 4G the final technology for wireless? Was fiber-to-the-node the final technology for wireline? Hardly. (Charter’s CFO made a similarly unsatisfying claim that Charter’s conversion to an all-digital format was complete.) Stephens’s notion that “software-defined networks” need less capex could have some explanatory power, but these technologies weren’t likely deployed in 2015 for the first time–recall we’re trying to explain a drop in capex as opposed to a level–and it is doubtful that they could account for a $3.3 billion savings in capex in any event.

    And while we’re engaged in “in-depth empirical analysis,” why not mention the statements by AT&T’s CEO Randall Stephenson about the likely impact of reclassification? In November of 2014, when President Obama announced his preference for Title II, Stephenson announced a “pause” in his company’s fiber investment. This is about a close as you can get to cause and effect. In May 2015, Stephenson further explained the pause: “The exact comment I made was we’re going to put a pause on our new broadband deployment plans until we see how these rules came out. We have seen how the rules came out. As we read those rules, we do believe they’re subject to modification by the courts and remand by the courts to the FCC.” In other words, AT&T was hedging its bets on U.S. investment during the first half of 2015; on a going-forward basis, AT&T will have discount the threat of unbundling by the (strong) likelihood that the regulatory regime will be vacated by the courts. One wonders whether some of the $3 billion investment AT&T announced for Mexico would have found its way into the United States in a world absent Title II?

    I encourage you to bring “longitudinal data collection and analysis” to the Title II debate. But spinning selected CFO statements does not amount to “in-depth empirical analysis.” Offer an alternative hypothesis as to why capex fell for five of the top seven ISPs and test it with data. With 5G and Gig networks on our doorsteps, the notion that we’ve reached the end of technology is not a viable alternative.

    Hal

    1. Hal,

      Apologies if I misrepresented your perspective on regulation. And my comment about ideology had a broad target, including those I tend to agree with and, at times, myself.

      I’m not ruling out long-term negative impacts of the Title II decision, nor was that the intention of my post, something I thought I made very clear. The motivation for my post was that you and the two other economists I referenced in it made very strong claims as to short-term impacts of Title II based on weak evidence, particularly since these claims were mainly anchored in large declines by two companies whose chief financial officers explained that the declines reflected dynamics unrelated to the FCC’s Title II decision (as I said in the post, I haven’t yet had time to review the financials of the other companies you referenced, though I thought it was important to mention the CapEx increases by Comcast and TWC, since you either ignored or downplayed them).

      You said “That AT&T’s John Stephens did not mention the FCC’s decision in his (snap) answer as to why his firm’s capex fell by a whopping 29 percent does not rule out the possibility that a more restrictive regulatory environment had a negative effect at the margin.” I suppose that’s true, but claiming “the possibility of some negative effect at the margin” is not very different from saying “there’s no clear evidence it had any impact, but we can’t prove a negative, and my models predict it had some impacts, so I’ll keep arguing that it does.”

      The revised “we can’t rule out some negative impact at the margin” statement you make in your response to my post strikes me as very different in tone and substance from the message of your Forbes piece. To be honest, it was the fact that you made such a dramatic argument with such confidence but based on such weak evidence that made me suspect some ideological predisposition (or at least a reliance on theoretical models rather than real-world data and facts) was driving what struck me as notably premature conclusions.

      I strongly disagree with you about the value of CFO comments, especially about decisions being made today, which is what we are discussing here—two quarters of real-world CapEx, the nature of and reasons for which I think a company CFO understands far better than an economist developing theoretical models rather than managing a business.

      I think your analogy between CFOs and football players is way off base and, frankly, is insulting to the CFOs that manage billion dollar businesses in the face of great challenges and long-term uncertainty. In my nearly 30 years as an industry analyst I’ve found that they understand their business, its risks and its options far better than economists spinning models that typically assume away or ignore large segments of reality in order to have something to say about it.

      And though I’m sure you’ll disagree with me, I’m more inclined to believe what CFO Stephens says to Wall Street analysts (generally too savvy to take political posturing statements very seriously) than a public statement CEO Stephenson makes in response to a politically-charged policy statement by the President. Making a politically-motivated “I’ll stop spending if you do that” threat is not the same as making a decision about what’s best for your company in the face of pressures from competition and Wall Street investors. Title II may end up being a factor in the latter decisions, but I strongly disagree with you that the first six months of 2015 provide anything close to clear evidence of this. And, as far as I can tell, the presence of clear evidence for these short-term impacts was the main thrust of your Forbes piece.

      Though this is a separate and legal issue, I disagree that relying on Sec. 706 authority is a better solution than Title II, since the evidence from prior DC Circuit decisions suggests it will be rejected based on their reading of the statute. My understanding of the FCC’s Open Internet order is that the Commission actually will rely heavily on case-by-case adjudication, but will do so under Title II, which will give it a much stronger legal foundation to defend its decisions if challenged in court (as they have so far been). Based on past court rulings, arguments that the FCC should rely mainly on Sec. 706 strike me as disingenuous in that they seem to be advising the Commission to continue wasting time and money on losing court cases when they have a much more effective and legally defensible regulatory tool to use instead. And as I explained in an earlier blog post, I’m convinced that the FCC’s approach to wireless regulation is a relevant precedent for what we can expect to see in terms of regulatory forbearance under its Open Internet Order (http://quello.msu.edu/please-help-me-understand-whats-wrong-with-title-ii/).

  7. Hal Singer says:

    You take your CFOs and your analysts, and I’ll take my economic studies on the impact of unbundling on investment. Also, it is unbelievable that you would credit CFO spin, but discredit CEO spin. You either credit both or neither.

    Perhaps you didn’t make it to the last line of my piece: “Put differently, if just three percent of the observed $3.3 billion decline in ISP capex in the first half of 2015 can be attributed to Title II, the Order fails a cost-benefit test.” I never claimed that 100 percent of the observed decline in capex can be put on Title II. That is a straw man.

    Also, your understanding of case by case (CBC) is wrong. The FCC will use CBC for interconnection and general conduct challenges. But CBC was inexplicably deemed “too cumbersome” for paid priority. Yet the FCC uses CBC to adjudicate discrimination complaints in the traditional video space.

    1. I stand corrected on the paid priority/CBC case and appreciate the clarification.

      I disagree about the straw man claim when taken in the context of your entire piece, given its dramatic tone and focus on companies with the largest CapEx declines. But I’ll certainly concede that you did make the statement about “just three percent.”

      But your conclusion that this would mean that the Title II order “fails the cost-benefit test” fails to take into account investments by other entities deploying infrastructure (e.g., publicly or privately owned fiber competitors, muni-wireless systems, etc.), as well as potential increases in investment and innovation by providers of web-based service and content, whose business prospects may be helped by the Title II decision (which, as I understand it, is where such increased investment would logically be expected).

      And while 3% is a lot less than 100%, you still don’t provide evidence to demonstrate that even that level of impact occurred, though I concede that it is a more modest assertion. And you also don’t address my observation that for the largest cable operators, their investment profile so far this year suggests they are increasing the amount of money they spend on extending their network, not reducing it.

      And lastly, having studied both for many years, I can’t agree with your view that statements made in earnings calls by CFOs have the same level of distorting “spin” as those made to regulators and the press on politically sensitive pending issues. So I don’t accept your claim that “you either credit both or neither.” Neither of them is “the whole truth and nothing but the truth,” but to claim they are equivalent “spin” makes no sense to me.

    2. Hal,

      I just read your post about CFO “gotcha” quotes and thought the bulk of your analysis made sense. But I don’t think it leads to the conclusion that the FCC’s Title II decision will necessarily lead to reduced ISP investment.
      https://haljsinger.wordpress.com/2014/12/19/what-to-make-of-a-cfos-musings-on-regulatory-hypotheticals/

      You said:

      “As any CFO knows, basic investment theory teaches that a firm invests in a project so long as the internal rate of return (IRR) on a project is greater than the minimum required rate of return, as measured by the firm’s the cost of capital. This is simple, folks: Line up your projects from highest to lowest IRR, and fund the ones that exceed your cost of capital.”

      That makes good sense to me.

      You then discuss the main two possible ways Title II reclassification could reduce IRRs for ISP investment projects:

      “External investors could demand a risk premium (over and above what they otherwise would demand) to compensate for the added risk associated with the new rules. An investor may ask: Why should I lend an ISP money for a new project if there is a heightened chance under reclassification that the ISP would be subject to rate regulation or mandatory sharing rules?”

      “Turning to the second mechanism, holding constant the cost of capital, reclassification could reduce the expected return of an array of investment projects by a certain percentage. This would not mean that all such projects would be abandoned. But if Project A’s IRR was reduced from 10 to 9 percent, while Project B’s IRR was reduced from 6 to 5.4 percent, and if the ISP’s cost of capital were 6 percent, then Project B would be abandoned.”

      You presented both of these negative impacts on investment as hypotheticals (i.e., they “could” happen), and I agree with that characterization. But my main point in all this is that you provide no evidence that they are happening or, as far as I can tell, any truly compelling arguments that they will happen. That, to me is the key question, and the arena where careful and prolonged empirical research will tell us more than theoretical arguments (on either side of the debate) backed by cherry-picked data (by either side).

      And, as to Shammo’s “clarification” on the Verizon blog, it strikes me as another case of a too-honest statement made to analysts by a company exec being “corrected” by the PR and/or lobbying teams, using exaggerated (though well-crafted) language like “permanent regulations inflicting Title II’s 1930s-era rules on broadband Internet access.”

      To claim the FCC’s Internet Order is imposing 1930s-era rules when it has made its forbearance intentions quite clear (and not acknowledging the latter), strikes me as something crafted by a member of the political PR team, whose wordsmithing is driven by what is internally deemed to be politically correct and useful, though probably incomplete, often misleading and sometimes downright false. And, as my earlier comments suggested, I’d definitely trust the spontaneous statements of a CFO in a Q&A session with savvy Wall Street analysts more than those of a PR staffer tasked with “fixing” an overly frank and politically unhelpful statement by that CFO.

  8. Ev Ehrlich says:

    I’m impressed with the venom that Singer’s comments have generated, but there’s a sad silliness to them. Consider the things being said.

    For one, folks who wouldn’t believe that 2 and 2 was 4 if it came out a corporate executive’s mouth are now using her or his conference calls as dispositive evidence. If he’d said, “The FCC is kicking our ass and we’re dying out here,” would you have used that to support Singer? Would you rather they have said “Our business is trouble because some wingnuts want to nationalize us?” Sorry, it doesn’t wash.

    Or that this sudden, abrupt decline in capex is part of a long-held plan by these providers that coincidentally occurred when the order when out. Didn’t this kind of conspiracy thinking go out with Jim Garrison and Clay Shaw? Alternatively, are you surprised that the order had this effect? Are you arguing that the order shouldn’t have had such an effect?

    And then there’s the loose slinging of charges of monopoly and profiteering. I might as well accuse you of being a “bicycle” or a “cherry pie.” These “monopolists” are the primary drivers of innovation in the Internet system but get little of the reward. — go to the financial pages and look at the profits of Comcast, Verizon, and ATT versus those of Apple or Netflix. Do you like your iPhone? You have it because the mobile carriers invested and innovated and improved their signal to the point when an iPhone became possible. Does 4KTV look good? Then thank the companies that brought enough bandwidth to your home to support its dense signal.

    And how on Earth is the FCC’s order going to fix that? Do you want to go back to the days of common carriage, when everyone offered the same DSL that stagnated without any investment or innovation behind it? Do you recall taht you only got today’s broadband when that regime was disassembled, or that Europe, which has many elements of it, has half the investment per capita that we did before the order?

    You may love to hate the providers of the broadband Internet, but sloganeering without understanding the markets that comprise the Internet is silly. And you might not have liked the Little Red Hen, but you all like bread.

    1. Just to clarify. Ev…is your comment meant as a response to my post and follow-up comments, or to things other people have written? If the former, can you clarify what I said that you’re referring to? Thanks.

      1. Matt Wood says:

        I had no idea that Mr. Ehrlich was such an expert in this new field of C-Suite Psychoanalysis, but he’s welcome to his wild speculations about how CFOs lie to their investors and the SEC.

        But when a CEO or a CFO tells investors in **2012** — as AT&T did — that its capex will rise for two years to complete a project and then go down again in 2015 when the project is complete — should we believe them then? Or should we just blame nasty old Title II for AT&T completing its project as it told everyone it would?

        In the meantime, we’ll just occupy ourselves with knocking down all of Singer’s claims based on the numbers and based on the facts.

        p.s. Nice touch with the wingnuts label. Ev and Hal and these guys are supposed to be the “left-leaning” progressive economists, I know, yet anyone who actually looks at the numbers and disagrees with them is a wild-eyed lib’rul.

  9. Harold Feld says:

    As a net neutrality advocate, I must correct Bill Dutton’s impression that network neutrality advocates have claimed that there has now been a massive upsurge in investment based on reclassification of broadband as Title II. Advocates have pointed to certain eye-popping figures not as evidence of investment, but as falsification of the claim that capital is fleeing the market. For example, AT&T spent approximately $18 billion on AWS-3 spectrum licenses, while Verizon spent $10 billion. These are not, technically, “capex” investments as listed in SEC disclosures. But they are still large investments in a field that is supposed to be depressed by strangling regulation.

    Similarly, the recent purchases by AT&T of DIRECTV and of TWC by Charter, the need of wireless carriers to horde money and avoid debt for the upcoming incentive auction. The upcoming shift by Comcast and other cable providers to a new DOCSIS protocol, all provide more than adequate explanation for a single point in time decline in the very specifically declined category (for publicly traded companies) of “capex,” as opposed to the broader question of overall investment in the broadband industry.

    Sadly, Mr. Dutton seems stuck in the “centrist” fallacy, that reduces politics to two opposing forces making equally unsupported claims. If opponents of Title II and net neutrality are making ridiculous claims about the decline of capex the “true centrist” is supposed to chastise pro-Title II advocates for similar exaggerations and distortions — even where none exist. As Mr. Dutton says, the failure to critique both sides equally, even when only one side is actually engaging in such faulty reasoning, leaves one open to accusations of partisanship. It is perhaps most telling that Mr. Dutton does not produce evidence that pro-Title II advocates are making such outlandish claims, despite his apparent confidence to the contrary.

    To conclude, I applaud an academic debunking only those statements that deserve to be debunked, as well as recognizing the difference between a statement cited for falsification (spending a combined $28 billion on mobile data licenses, in addition to the future billions to clear the federal users and deploy new network equipment, disproves the argument that AT&T and Verizon are no longer investing in wireless broadband now that it is classified as Title II) as opposed to a statement cited as an affirmative proof (the $28 billion spent on wireless licenses is a *result* of reclassification).

  10. Matt Wood says:

    This whole comment thread is rather amusing, but for another sober look at the facts about investment please check out our fact sheet here:

    http://www.freepress.net/resource/107129/truth-about-isp-industry-investment-after-fcc-net-neutrality-vote

  11. This blog post is needed, but the commentary following by all the major pundits truly ices the cake.

    I am surprised AJit Pai has not dissented this blog post, this would be the perfect opportunity for him to retroactively claim that he has been right all along. Especially since there are now 3 juicy articles for him to choose from to continue his misleading propaganda.

    Ok ok, now that I got that off my chest, I want to point out, even though it has already been pointed out — The most important argument to be made is that Mr. Singer, Mr. Jamison and Mr. Howell’s evidence comprises of two quarters worth of analysis.

    Two quarters worth of analysis can barely describe a trend, let alone a correlation supported by causation. It is completely viable that a few of the major ISPs have wound down their programs supporting a minor downtick in Capex investment. But again, we are talking about two quarters of Capex which is too small a sample size to support anything.

    Can you even build an economic model with 2 quarters of data?

    All things considered, Comcast and Time Warner two companies that hate net neutrality are spending, and spending with authority, which also debunks the propaganda concerning Capex.

    I understand that Capex is a very important metric for broadband, but it is not the end all be all. As Mr. Feld, courageously pointed out (I say courageous because the spectrum auction is mired in controversy due to Dish’s bending the DE rules, which confuses the actual value of the spectrum itself) ISPs have spent record amounts of cash on Spectrum in the most recent auction.

    Although this is undoubtedly adjacent, it is prudent to point out that Edge Data Centers and caching, an outgrowth of the net neutrality era, which alleviates the congestion ISPs are ever so tempted to block and throttle, is growing like crazy. For an explanation check out: http://ripefordiscussion.com/net-neutrality-discussion/squirrels-cache-nuts-the-internet-caches-content — To say that net neutrality is destroying innovation is both premature and rediculous, and caching/edge data centers/colocation are just another example of how robust the market for broadband services has become.

    Mr. Singers article was a fun read, but it’s kinda like the weatherman describing a tropical depression in the atlantic… there’s no need to talk about going to walmart an buying hurricane supplies until at least a category 3 tropical storm exists.

    1. Mark Jamison says:

      Hi, Matt. Just saw your post, so I apologize in advance for replying late.

      I won’t speak for Hal, but I think all of us who have commented positively on his analysis have said that the data are insufficient for a statistical analysis. So on that point, I think you and I are in agreement. But that does not mean that we should ignore the data. The changes in capex are unusual from a historical perspective. And since they correspond with an significant change in regulatory policy, it seems important to examine now whether there may be some cause and effect, and not just wait for time to tell.

      Hal focuses on how the potential for unbundling requirements affects investment incentives. I think his points are well taken. My focus is on whether the data map to what we know about the impacts of other aspects of the FCC’s decision. We have good empirical evidence that decreasing business options and vague regulations both have negative impacts on investment incentives. Since these are features of the FCC’s decisions, it seems reasonable to conclude that the capex changes are mapping to some well-known economic theories that are supported by empirical studies.

      You comment that the data are noisy in that there are some upticks in capex and there are a number of factors that can influence capex. These are all good points. It seems to me, though, that such noise has existed in ISP capex throughout their existence, so the most important question is what is different now.

      Thank you for your comments. I hope that I am wrong and that companies will continue to develop these important networks and services as if nothing had happened. I suspect, though, that if the FCC does not somehow change course that a few years from now someone will be able to treat the events of the past several months as a natural experiment and find that it is once again true that requiring a network provider to lend investment to rivals, decreasing business options, and increasing risk do indeed suppress investment and that customers get less service than they would have otherwise.

      Mark Jamison

  12. Tim Karr says:

    I applaud the great attention to detail here. At Free Press we find Singer’s arguments to be built on a pretty flimsy foundation of wishful thinking and selective bias. We explain the many faults in his reasoning here and support our argument with a mountain of evidence:

    http://www.freepress.net/resource/107138/scare-quotes-and-scare-tactics-cannot-hide-truth-on-title-ii-and-investment

    Best – Tim

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