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.

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.

Make Versus Buy in Telecommunications—Verizon/Yahoo

        In a matter of days, Verizon will likely add to its inventory of content by acquiring much of Yahoo.  This deal and the earlier acquisition of America Online confirms the trend that deep-pocketed incumbents see the benefit in acquiring content, rather than growing their own.

            Many years ago, soon after divestiture from the Bell System several Regional Bello Operating Companies threw millions of dollars at becoming content creators, with little to show for it (pun intended).  Now incumbent telephone and cable television companies see the benefit in overnight vertical integration.  You can call it defensive, in light of declining margins and revenues for core, “legacy” business lines.  Alternatively, you can call it prudent recognition that in-house talent might not have necessary mindset and creative skills to flourish in Hollywood.

            The billions of dollars recently invested by companies such as Comcast, Verizon and AT&T confirm that regulatory uncertainty and the “scourge” of network neutrality have not and will not stop investment and capital expenditures.  No company will invest in content if its managers conclude that they should not also make the necessary, concomitant investment in the physical plant needed to deliver content to consumers.  The new, or upgraded infrastructure will exploit technological innovations, such as the fifth generation cellular radio.  Some desirable technologies will not become ubiquitous simply because a profitable business case cannot be made for rural market penetration.

            Let us put to rest the red herring that today’s regulatory wingspan stymies investment in telecommunications.  Ask any senior executive—off the record—and she or he will acknowledge that the regulatory climate falls well below key financial and marketplace variables.  When regulation enters the calculus, too often incumbents use it as a vehicle to stymie innovation and competition. 

            I still do not understand how choice in set top box interfaces with broadband networks somehow hurts consumers and competition.  It does not, but incumbents can cast themselves as victims of bullies like Google and throw sand in the works.  Meanwhile managers at these very same companies proceed with multi-billion dollar acquisitions.  They seem quite optimistic about their staying power and ability to identify and capture new revenue streams.

The Myth of Broadband Investment "Disincentivization"

            Some people, who really should know better, have combined one questionable statistic with an absolutely unreasonable inference.  Ostensibly to bolster their argument that the FCC’s Open Internet Order will either enslave or impoverish carriers, sponsored researchers and one or two easily-persuaded FCC Commissioners make this unsustainable leap of faith:

            Wireline broadband providers have reduced plant investment following the FCC’s Open Internet Order.  Therefore, the entire cause of this diminution investment results from the Order.

            Might there be alternative statistics that identify where the money is going and what, if anything, has caused this sudden conservation of capital?

            First, when considering capital expenditure by companies such as Verizon, converging markets and technologies, surely require an examination of the many places money might go.  Verizon might perceive no competitive necessity to invest in wireline broadband.  Additionally the company might prioritize investments in wireless plant, as part of a major strategy to migrate from wired to wireless content distribution technologies.  Verizon is aggressively jettisoning its wireline plant and state franchises.

            Speaking of content, didn’t Verizon recently come up with a cool $4.4. billion to buy AOL whose major assets are content-based?  Would Verizon skimp on all content distribution technology after having just made a significant investment in content?  Didn’t AT&T just get conditional approval to spend over $45 billion to acquire DirecTV, whose major asset combines access to content and broadband distribution of it?

            On the issue of incentive to invest, just today I read how Verizon already wants to commit substantial funds for next generation, 5G wireless broadband distribution technology. See http://www.verizon.com/about/news/verizon-sets-roadmap-5g-technology-us-field-trials-start-2016.  Bear in mind that Verizon Wireless operates under the Title II, common carrier, telecommunications service provider “public utility” regulatory model that some consider such an investment buzz kill.  Verizon seems to well tolerate this regulatory burden and still manage to invest billion in plant.

            It bears repeating time after time: competitive necessity constitutes the major catalyst for capital expenditures, including next generation network plant. 

            Verizon knows it has to enhance the value proposition for wireless broadband.  And it surely knows the lack of competition means it does not have to extend its FiOS plant, or rush to add funds to wireline technologies about which it does not care.