The Frequently Attempted, But Rarely Successful Identification of Causation

           First, thanks to anyone who sees a daunting title like this one and nevertheless reads on. I want to discuss whether and how researchers can correctly isolate variables and determine how impactful they are on consumers, competition, and the marketplace.

           For example, former FCC Chairman Ajit Pai and others claimed in that imposing network neutrality obligations on Internet access providers created a substantial, unassailable adverse effect on carrier investment in infrastructure:

           “So what happened after the Commission adopted Title II? Sure enough, infrastructure investment declined. Among our nation’s 12 largest Internet service providers, domestic broadband capital expenditures decreased by 5.6% percent, or $3.6 billion, between 2014 and 2016, the first two years of the Title II era. This decline is extremely unusual. It is the first time that such investment has declined outside of a recession in the Internet era.” Remarks of FCC Chairman Ajit Pai at the Newseum, “The Future Of Internet Freedom” (Washington, D.C, April 26, 2017); https://transition.fcc.gov/Daily_Releases/Daily_Business/2017/db0426/DOC-344590A1.pdf.

           After relentless repetition of this assertion, it became gospel truth and expanded to become a given that a single major regulatory initiative, by itself, can trigger multi-billion dollar reductions in carrier capital expenditures.

           Never mind that this isolation of a single causal (so-called dependent) variable simplifies a quite complex issue about the many factors directly impacting a carrier’s decision to invest in plant, that may take years to recover, if at all.  Politicians and sponsored researchers like to remove complexity and identify a single cause for all types of ills, particularly ones that possibly constrain profitability of important benefactors, requiring them to work harder. 

           Regulators were presented with “proof” that their work had harmed consumers and the public interest.  Publications, like the Wall Street Journal, showcase the research followed by a strongly worded editorial castigating the FCC for its poor work product.

           Currently, another variable isolation process is underway, this time to prove that mergers and acquisitions enhance consumer welfare and promote competition.  Dr. Tom Hazlett, Hugh H. Macaulay Endowed Professor of Economics, Clemson University, and Dr. Robert Crandall, Senior Fellow, Technology Policy Institute, have written a comprehensive paper concluding that TMobile’s $26 billion acquisition of Sprint in 2020 did not trigger a cascade of anticompetitive outcomes, but in fact achieved great things. See https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4736059 [hereinafter cited as Hazlett and Crandall 2024 Paper].

          The paper supports the premise that reducing the number of U.S. facilities-based wireless carriers from 4 to 3 did not result in a variety of terrible outcomes, predicted by the Justice Department, many state Attorneys General, and yours truly.

          In another blog entry, I may attempt to identify questionable assertions made in the paper which I suspect will get much promotion given the stature of the authors, the persuasive nature of the paper, and the ongoing campaign to shut down any initiative at the Federal Trade Commission and elsewhere to become more aggressive antitrust law enforcers.

          Right now, I would like to identify a curious and probably unanticipated result of the paper: two eminent researchers have provided ample evidence that U.S. wireless carriers always have made the necessary investments in plant to stay competitive, regardless of whether one or more regulatory initiatives might make cost recovery more difficult:

“Increases in total bandwidth and network investment accelerated in the post-merger period. These measured trends – each requiring costly actions by the competing mobile service carriers -- are the reverse of what would occur in the “cozy oligopoly” scenario predicted by opponents of the transaction.” Hazlett and Crandall 2024 Paper at p. 26.

           Simply put, wireless carriers capex invest decision are driven largely by technology cycles, whether a carrier has to invest in next generation network plant and bid billions of dollars for more spectrum to accommodate growing bandwidth demand, or not.  Wireless carrier capex has grown even after the election of President Biden and the resulting Democratic majority of FCC Commissioners starting in January 2021.

           Wireless carriers made extraordinarily high capital investments during the upcycle rollout of 5G technology, despite Covid 19 reductions in revenues and stock values, and temporary declines in average revenue per user. If Chairman Pai was correct, wouldn’t it follow that the carriers would have conserved capital during times when marketplace conditions were pointing to delayed or possibly nonrecoverable capital investment?

           Can we at least agree that there are many factors that determine marketplace outcomes? It appears quite unlikely that one event, no matter how profound, can singularly alter market-driven behavior.

Neutrality Regulatory Uncertainty and Wireless Carrier Capital Expenditures

            FCC Chairman Ajit Pai, a host of “coin operated” researchers and their sponsors relentlessly claim network neutrality rule created substantial and measurable disincentives for wireless carriers to invest in infrastructure.  According to these stakeholders, regulatory uncertainty caused by the rules and judicial appeals to reverse them trump even the technology investment cycle.

            I never could understand how regulatory uncertainty occasioned by the appeal of the Restoring Internet Freedom has not had the same effect. Chairman Pai claims that investment has returned to pre-network neutrality levels thanks solely to his deregulatory efforts.  Never mind that these efforts have triggered the same kind of appellate litigation as when a prior Chairman sought to regulate broadband access.

            Wouldn’t it stand to reason that judicial appeals of deregulatory or regulatory initiatives would have the same disincentives?  Of course, it would, if one could creditably determine that network neutrality rules and litigation over them have a significant—or worst yet—a single and direct effect on network plant investment. 

            In several blog posts, I have stated the view that the cycle of next generation network investment matters regardless whether litigation exists.  Lo and behold here’s an article that confirms the obvious: carriers make substantial investments in next generation plant, such as 4G, then there is a lower investment burden as the new technology gets deployed and turned on. 

            Right now, after making a sizeable investment in 5G, Verizon can throttle down as it turns on its new network.  See Fierce Wireless, Amid 5G rollout, Verizon reduces spending on network (Oct. 23, 2018), available at: https://goo.gl/tgDreK.

            Someday, I hope stakeholders will realize that blatantly wrong assertions do not support their cause, nor does it convert skeptics.

Regulatory Uncertainty and Investment Incentives

            According to sponsored researchers, FCC Chairman Ajit Pai and some incumbent telecommunications carriers, uncertainty about the future nature and scope of government regulation has a BIG TIME toxic affect.  Recently, the list has grown to include threats to national security and global leadership in wireless technology and ecommerce.  Earlier, we heard the relentless, but empirically unproveable claim that the regulatory uncertainty has a direct and negative affect on incentives to make new capital expenditures.

            Let’s consider the regulatory uncertainty created by the FCC’s on-again, off again embrace of network neutrality as well as the constant stream of court appeals and different holdings.  When the Democrats had an FCC majority, the minority railed against the network neutrality as triggering a certain, severe and immediate disincentive for carriers to invest in plant subject to open access requirements.  With a Republican majority, regulatory uncertainty apparent has become a non-issue as capex allegedly has increased thanks to a restoration of Internet freedom.

            Here’s my bottom line: stakeholders accept regulatory uncertainty as relatively minor, ongoing factor in doing business.  Regulatory theories, economic philosophies and political party majorities come and go.  What drives capital expenditure is business necessity and the real, or perceived opportunity to acquire greater market share and profits. 

            Just now, Verizon and other wireless carriers are accelerating their fifth-generation wireless network investments.  See, e.g., https://www.theverge.com/2018/9/11/17847640/verizon-5g-first-home-broadband-internet-service-installations-october-1.  We might even reach a point where wireless subscribers do not bother switching from their data plan to “free” Wi-Fi because the cost and technical performance have reached parity.  If that occurs true inter-modal competition between wired and wireless broadband will have occurred.

            Expediting the rollout of next generation networks has little—if anything—to do with the state of network neutrality regulation.  Carriers made 4G investments in the thick of more certain open Internet regulation.  If a downturn in capex actually occurred, we can largely attribute it to the fact that there are peaks and valleys in investment based on the life cycle of the technology.  After installation of 4G facilities, carriers can pull back on the investment throttle until the competitive need and business plans support ramping up and installing the next generation.  Whether network neutrality regulation exists has little impact, particularly in light of the fact that court appeals were filed after the onset of regulation and later the onset of deregulation.

            Uncertainty whether the regulatory status quo will persist is a recurring challenge to telecommunications ventures.  Lucky for us, they know how to deal with it, despite the breathless angst of certain government officials and sponsored researchers.

So Why Would Verizon and Other Carriers Want to Spend Yet More Billions on Content?

            Perhaps you’ve read the relentless and false recitation of an assertion that the Wall Street Journal, American Enterprise Institute and others have treated as the gospel truth: that incumbent carriers such as Verizon and AT&T have substantially reduced capital expenditures this year solely because of the FCC’s Open Internet Order. 

            It strikes me that there has not been enough pushback against the bogus notion that would not pass muster with peer review.  First, one can detect a reduction in capex if and only if the definition of capital investment is limited only to transmission facilities.  Only with a narrow and ludicrous definition can one find a reduction of any sort. Using a widely accepted definition, incumbent carriers have continue to make sizable investments, this year particularly through mergers and acquisitions.

            Just now there is speculation that Verizon might acquire portions of Yahoo’s assets.  Why would Verizon waste billions of dollars on content, if it thought that regulation and/or regulatory uncertainty would somehow prevent it from profitably delivering the content?

            The capex false claim becomes down right fraudulent when experts, who ought to know better, attribute their calculation of reduced capex, as solely caused by a single regulatory event.  So help me out here: how did they narrow 100% of causality to a single regulatory event?  How did they eliminate other variables such as the possibility that this particular year did not require a major upgrade in wireline or wireless broadband plant?  How did they managed to ignore the billions invested in companies whose business plan assumes ample ways to deliver product to paying subscribers?

            As the hearing about the FCC’s Open Internet Order begins, I hope the court applies the rule of law and not advocacy masquerading as statistics. I have major problems with the FCC’s tactics and strategies, but I hope empiricism matters more than a clever and deceitful “outreach campaign.”