Wednesday, September 15, 2010

Which is the Primary Driver of Telecom Investment: Strategic Opportunities or Deregulation?

Incumbent carriers have spent millions on a campaign aiming to convince legislators and regulators that regulation all but eliminates incentives to invest in plant—particularly next generation networks.  The campaign also tries to make deregulation appear as the single greatest “incentivizer” for such investments.

Forget about strategic opportunities, the broader business cycle, the cost of capital, technological change and declining market share in core industry sectors.  What really matters is coming up with a way to dislodge the FCC and other government agencies from regulating.  Then and only then can the market drive investment decisions.

So let’s look at recent instances where incumbent carriers want to make investments.  Using the simplistic premise these ventures have spent millions to pitch, money should flow more freely into sectors recently subject to less regulation.  If deregulation is the primary driver—or apparently the only one—then investment should take the route where regulation offers the least degree of resistance and “disincentivization.”
           
Consider the primary multi-billion dollar investment goals of Comcast and Bell Canada Enterprises, the largest phone company and 9th largest corporation in the country.  If deregulation drives investment decisions, then Comcast must want to acquire NBC because Congress and the FCC have streamlined and reduced regulatory oversight.  Similar deregulation must be occurring in Canada as BCE wants to acquire complete control of CTV, a major broadcast television network.
           
In reality two major cable and telephone companies wants to vertically integrate and acquire content for strategic reasons having quite little to do with regulation and recent changes in the scope of government oversight.  Broadcast deregulation did not make NBC and CTV more attractive.  The long term viability of Comcast and BCE drove these companies to think control of content might provide greater profitability in the long run.  

Comcast and other incumbents have successfully framed regulation and deregulation as the primary drivers of whether such companies will employ more people, and invest more money at the very same time as billions in retained earnings flow to buying still highly regulated assets.