Incumbents’ Incentives and Disincentives to Invest in Existing and Next Generation Networks

            Recently anti-network neutrality researchers and advocates have made an assertion that does not make sense to me.  First, they claim incumbent carriers have substantially curbed capital expenditures in plant.  Then they attribute the decline as largely resulting from the FCC’s Open Internet Order.

            Such work would not pass muster under peer review, nor does it pass an informal “smell test.” On the latter screen, why would both AT&T and Verizon make multi-billion dollar investments in legacy content distribution (DirecTV) and content (AOL) if they did not think they could use access to a far larger set of consumers as a way to provide more service bundles?  Put more simply: why would a legacy carrier skimp on its infrastructure after having paid handsomely for content that needs distribution to consumers?

            AT&T touts the DirecTV acquisition as making it possible to offer a “quad-play” bundle of video, wired broadband, wireless broadband and voice; see: http://www.att.com/gen/general?pid=18235#fbid=jUSgILGxbqx. Verizon sees AOL as providing a way to diversify into content and improve its web advertising service skills.

            Even as certain stakeholder want regulators, legislators and judges to think an open Internet would shut the investment tap, they also want to tout how much more plant investment we have vis a vis other nations and regions.  Who needs a universal service subsidy mechanism when we lead the world in 4G and fiber deployment?  Recently Verizon announced an expedited schedule for 5G research and development. See http://www.fiercewireless.com/tech/story/verizon-test-5g-2016/2015-09-08.

            As a professor, I have the luxury of time to review everything I possibly can.  I make an effort to maintain an open mind on each and every subject.  I pay a high premium for not having “cast my lot” with one or the other camp and for having an independent (if unreliable) point of view.

            So if you don’t care to rely on my unsponsored perspective on the matter of whether incumbents suddenly have stopped investing in the future consider this from a clearly right of center source, the Financial Times:

            “AT&T is a big spender, investing more in infrastructure in the first half of this year than any other corporation in the US. Over the past five years it has ploughed nearly $140bn into its network, and it plans to spend a further $21bn this year and more still in 2016.

           “‘I fundamentally believe if you are not a number one or two investor in this industry, you get left behind,’ Mr Stephenson recently told analysts.’”  See David Crow, Telecoms: Showtime for AT&T, FINANCIAL TIMES (October 15, 2015); available at: http://www.ft.com/intl/cms/s/0/70c15980-7321-11e5-a129-3fcc4f641d98.html#axzz3p1qj8qH3.

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.