The 5G Wireless Utopia Just 6 Months After the Obama Investment Downer

            Today’s Wall Street Journal continues the commitment to framing a fake, alternative reality in the telecom/Internet ecosystem.  See Holman W. Jenkins, Jr. Comcast vs. the 5G Frenzy; available at: https://www.wsj.com/articles/comcast-vs-the-5g-frenzy-1499188939.

            Just months after President Obama allegedly engineered an unprecedented decline in broadband infrastructure investment, Mr. Jenkins sees a “frenzy” in superfast fifth generation wireless network rollouts and a “dramatic restructuring of the cable and mobile broadband industries.”

            Wow!  Just a few months ago, the Journal and various sponsored researchers bemoaned the decline in broadband capital expenditures, solely generated by the FCC’s insistence on Mr. Jenkin’s characterized “1934-style utility regulation.” Now, wireless carriers like AT&T and Verizon have opened their pocketbooks to invest in new plant, at the same time as they spend billions to acquire content providers like AOL, DirecTV, Time-Warner and Yahoo.

            Here are some inconvenient and ignored truths: Congress mandated common carrier regulation of wireless carriers and that designation has NOT created any investment disincentive.  Broadband carriers have spent billions on content providers surely based on the assumption that ample capacity and transmission speed can accommodate ever growing video demand.  These very same carriers have spent additional billions on radio spectrum.

            So much for the FCC’s frenzy killing network neutrality regulation on investment, innovation and employment.

            Mr. Jenkins implies that the telecom/Internet marketplace will grow even more competitive, apparently not likely to suffer when additional acquisitions reduce the number of national wireless carriers to three and other mergers further concentrate other markets.  If not now in the new 4G environment, the future 5G environment will make wired and wireless networks interchangeable.

            Maybe, but Mr. Jenkins seems to ignore additional inconvenient truths.  Unlimited wireless—now and in the future—does not truly fit the term.  Unlimited plans have limits which if exceeded result in a major degradation of service to second or third generation network speeds that cannot provide video carriage. This occurs when a subscriber exceeds a cap of 20-30 Gigabytes and when the top few percentage power users take service from a congested tower. Wireless carriers also down-convert high definition video streams from 1080 lines of resolution to 480 lines.

            Currently, wireless carriers do impose hard and soft data caps while wireline carriers do not, or have a soft cap at more than 500 Gigabytes. Now, wireless carriers charge substantially more than wireline carriers on a per Gigabyte rate. We will see true intermodal competition when wireless broadband subscribers do not bother to program their smartphones to shift from their wireless carriers to available Wi-Fi options.

            So for the time being, Mr. Jenkins has lobbed yet another canard to discredit skeptics of an unregulated marketplace and to vilify network neutrality advocates.

The Impact of Regulation on Broadband Investment

           Several sponsored researchers have floated the notion that network neutrality and Title II common carrier regulation constitute the major reason why U.S. broadband carriers apparently have reduced capital expenditure in new and replacement physical plant.  Does this pass the smell test?  Is there any empirical data proving causality?  Would these allegation pass muster under appropriate peer review?

           Let’s get one principle straight: capex in most industries primarily correlates with competitive necessity and the life cycle of sunk investments.  In the U.S., wireless cellular radio companies bear the burden of streamlined Title II common carrier regulation.  Such regulation has not dissuaded these carriers from sinking billion in spectrum auctions and in plant investment.  The FCC swears that broadband access providers will encounter even less regulatory oversight than wireless carriers.

           Similarly, a year over year analysis of capex might have little to do by way of regulation impact on the incentive to invest and much more on whether and when a carrier needs to invest in new, or replacement infrastructure. Ventures with very high plant investments typically also have capacity that comes online or offline in very large increments.  For example, a satellite company like Intelsat, Dish, Sirius-XM and DirecTV will show a significantly higher plant investment in years when it has to replace an in-orbit and soon to be deactivated satellite.  Variability in capex has nothing to do with whether regulation ebbs and flows in terms of severity, or burden.

          I will concede that telecommunications management may tinker with capex as political leverage for less regulation.  AT&T CEO Randall L. Stephenson has said as much, but do you really think he would ration capex if it would render his company and its services comparatively inferior to what other wireless carriers offer?

          Telecommunications carriers and their sponsored researchers also like to trot out “regulatory uncertainty” as a capex disincentive.  In the same breath, they also like to claim regulation operates as an unconstitutional “taking” of their property and the capex they previously made.  Newsflash: regulation in telecommunications constitutes a cost of business that incumbents and prospective market entrants alike have to take into consideration.

          Bottom line: regulation and uncertainty about the future of regulation has limited impact on capex decision making.  If a carrier can make do with less investment it will do so.  Right now most airlines are replacing kerosene guzzlers with more efficient and cheaper models.  They might also “right size” inventory with smaller aircraft.  Such a reduction in overall passenger capacity and in investment responds to marketplace conditions not whether aviation regulators have become more aggressive.  The same concept applies to telecommunications.

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.