Thursday, February 5, 2015

What’s Certain About the Regulatory Uncertainty Debate


            Incumbent carriers, such as AT&T, Comcast and Verizon, have made countless “curtains for the Free World” assertions in the Network Neutrality debate.  They claim that if the FCC reclassifies as common carriage aspects of Internet access, it will create “regulatory uncertainty” and “disincentive investment.” 

            Not one of the countless sponsored researchers funded by incumbents has provided a shred of empirical evidence to support these assertions.  In fact, senior management officials at these carriers readily acknowledge that capital expenditures are based on marketplace conditions.

            These managers act like children in the back seat of a car driven by a parent.  Assuming the parent cannot hear them, kids say very candid things.  So do senior telecommunications managers when discussing capital expenditure with buy-side Wall Street analysts.  AT&T CEO Randall Stephenson has “warned that he could hold off on many of his company's capital investment plans -- including fast new fiber lines -- if uncertainty persists over how the US government will regulate the Internet.” See http://www.cnet.com/news/at-t-ceo-net-neutrality-uncertainty-puts-a-pause-in-investing/.

            Mr. Stephenson and other senior managers would not dare understate future capex in statements to the financial community, or to the Securities and Exchange Commission.

            In my mission to find and tell the truth, here are some inconvenient facts:

Congress Created Regulatory Uncertainty

            Regulatory uncertainty results when Congress fails to legislate despite changed circumstances, or when its laws lack clarity.  Congress last created telecommunications in 1996, before the Internet changed everything.  In that kinder and less partisan time, the legislature achieved consensus, albeit one rife with compromises that translated—over time—into statutory ambiguity.

            The FCC has acted in light of the vacuum generated by congressional inaction.  On two separate occasions, the FCC has failed to convince a reviewing court that its statutory interpretation is reasonable and that the judiciary should defer to its expertise in making sense out of an outdated and ambiguous statutory mandate.

Incumbents Use Regulatory Uncertainty as a Lobbying Tool

            Incumbents sustain regulatory uncertainty based on an assumption that the FCC will raise their cost of doing business and somehow limit their ability to maximize profit.  Yes these carriers will need plenty of staff and expensive lawyers to litigate and perpetuate uncertainty, but where are the constraints on profits?  Broadband access generates triple-digit returns.  Comcast can generate over $1 billion a year in cable modem and set top box rentals, largely because the FCC can’t seem to apply the longstanding Carterfone policy that obligates even private carriers to permit consumers to attach their own devices.

            Regulatory uncertainty is a red herring, because incumbents surely know that if the FCC oversteps, a reviewing court will overturn the rules.  The FCC may fail to convince a reviewing court that circumstances support reclassification of Internet access as common carriage, but the predicate for regulatory uncertainty lies with Congress that created it by not doing its job and by incumbents exploiting it for an uncertain monetary gain.

Competitive Necessity Drives Capex

            AT&T and other incumbent cannot carry out their threat to reduce or stop investing in infrastructure.  The decision to raise, lower or maintain capex results from a strategic assessment of competition.  Competitive necessity forces wireless carrier incumbents to acquire more spectrum, whether to use it, or to warehouse it to prevent market entry.  The lack of competitive necessity makes it possible for wire carriers, like Verizon, to cherry pick and red line the geographical areas where it chooses to offer fiber optic broadband service.

This Debate Increasingly Looks Like a “Tempest in a Teapot”

            The network neutrality debate has triggered the worse sort of exaggeration and hype. Incumbents have not and cannot prove any measurable short and long run harm to their bottom line, but their vigorous and effective claims trigger false positives, i.e., the assumption of harms such as capex disincentives.

            Recent market entrants deem common carriage rules, subject to forbearance of most regulations, as minimally necessary to safeguard competition and innovation.  Maybe, but the real possibility exists that they have identified false negatives, i.e., harms to competition and consumers. 

            Today, tomorrow and for the foreseeable future the remedy to network neutrality concerns likes in having a far more robustly competitive broadband ecosystem, something incumbents strive everyday to thwart.

4 comments:

Ben Cramer said...

Do not Believe any company that complains about lost profitability when they are willing to pay teams of elite lawyers for years and years.

Also, I wonder if the big telecom incumbents have ever pondered that that maybe they brought this all on themselves through their rock-bottom customer service records and shameless campaign contributions. If you don't want to be targeted by regulators, trying flying under the radar for a change. Or in other words, try not to suck so hard.

Warren said...

Agreed, it is indeed well past due for Congress to step up again. Some of us us have been arguing a step beyond the 96 Telecom Act was needed...since say 1995 : )

And point taken re oligopolists using uncertainty to help sustain profitability, so it is indeed Congress and special interests fault. And ourselves for tolerating. But regulatory ambiguity did coincide with the innovations and growth of the Internet economy, so we can't willy-nilly mess with the model or risk many many many - unintended consequences. What all those will be we can only speculate now, but this whole effort is focused mainly on an imaginary problem and not on the reality that a gazillion companies offer some form of - paid prioritization already; the only questions is if EVERYONE providing those services is also a Title II-regulated firm. Or not.

But it is about degrees of regulatory uncertainty - and the FCC throwing another piece of regulatory spaghetti against the courthouse wall, chopping up favored and disfavored parts of the 1996 Telecom Act to define regulations on access to the Open Internet...sorry bound to lose in court is my prediction. Just too much legal precedent. since the 1960s of classification of - data services - as Title I information services to manage this way.

So here we go, it's deja vu all over again.

Rant out : )

Tom A said...

Well, this is certainly another DC regulatory attorneys' full employment act!

Richard Bennett said...

Here's some evidence that Titie II-style public utility regulation throttles investment: Europe.

Glad I could help.