Which is the Primary Driver of Telecom Investment: Strategic Opportunities or Deregulation?

Incumbent carriers have spent millions on a campaign aiming to convince legislators and regulators that regulation all but eliminates incentives to invest in plant—particularly next generation networks.  The campaign also tries to make deregulation appear as the single greatest “incentivizer” for such investments.

Forget about strategic opportunities, the broader business cycle, the cost of capital, technological change and declining market share in core industry sectors.  What really matters is coming up with a way to dislodge the FCC and other government agencies from regulating.  Then and only then can the market drive investment decisions.

So let’s look at recent instances where incumbent carriers want to make investments.  Using the simplistic premise these ventures have spent millions to pitch, money should flow more freely into sectors recently subject to less regulation.  If deregulation is the primary driver—or apparently the only one—then investment should take the route where regulation offers the least degree of resistance and “disincentivization.”

           
Consider the primary multi-billion dollar investment goals of Comcast and Bell Canada Enterprises, the largest phone company and 9^th largest corporation in the country.  If deregulation drives investment decisions, then Comcast must want to acquire NBC because Congress and the FCC have streamlined and reduced regulatory oversight.  Similar deregulation must be occurring in Canada as BCE wants to acquire complete control of CTV, a major broadcast television network.

           
In reality two major cable and telephone companies wants to vertically integrate and acquire content for strategic reasons having quite little to do with regulation and recent changes in the scope of government oversight.  Broadcast deregulation did not make NBC and CTV more attractive.  The long term viability of Comcast and BCE drove these companies to think control of content might provide greater profitability in the long run.  

Comcast and other incumbents have successfully framed regulation and deregulation as the primary drivers of whether such companies will employ more people, and invest more money at the very same time as billions in retained earnings flow to buying still highly regulated assets.

           

Stealth Deregulation

Wireless carriers in the United States and elsewhere appear to have come up with a clever new strategy to achieve deregulation: assume that it exists even in the absence of official agency action. Unlike the doubtful ploy of “think and grow rich,” carriers need only assume an outcome and act as though it has occurred. Absent contradiction by a regulatory agency or court the deregulatory assumption may stick.

Consider the example of wireless text messaging. Is this an extension of what common carrier paging companies offered, or has this basic service some how transformed into an information service? Bear in mind that the wireless carrier simply delivers alpha- numeric characters to a wireless handset. There is no information processing, no format conversion, no data manipulation, and no extensive storing and forwarding. Short messaging looks everything like paging attached to a handset capable of providing telephone calls.

So here comes the sleight of hand: because wireless telecommunications has become so popular, its success apparently justifies a regulatory hands off approach—the old “if it isn’t broke, don’t fix it approach.” But aggressive advertising budgets, large baskets of SMS minutes, and anything else contributing to wireless service popularity has nothing to do with whether an alpha-numeric transmission loses its telecommunications service characteristic. Nor does the popularity of a service somehow convert the service provider from a common carrier, subject to title II of the Communications Act, to an unregulated information service provider. And by the way just what costs and burdens would having to provide the service on a common carrier basis impose in the first place?

Common carriers probably do not have to accommodate every alpha numeric content source which seeks point-to-multipoint, “batch” distribution of a message. By analogy not every seeker of a short code NXX telephone number, like 611 access to a telephone company’s customer service department, can get them. But a refusal to provide service, as occurred when Verizon said no to the pro-life organization, NARAL, has to have some basis other than “we don’t want to carry your traffic based on the nature of the content or message transmitted.”

Public relations concerns, and not the threat of regulatory sanctions, prompted Verizon to rethink its refusal to provide service. This temporary embarrassment will not prompt wireless carriers to redouble their common carrier service commitment. Quite the contrary: expect wireless carriers to gear up their considerable in-house and funded third party resources to perpetuate the myth that alpha-numeric messaging no longer constitutes a telecommunications service.

The State of Telecom Policy Discourse in Washington

This week I accepted an invitation of Educause to appear on a panel discussing network neutrality. See http://www.educause.edu/about. As in my writing I try to offer an unbiased perspective that can see both sides particularly in light of the fact that I avoid financial sponsorship of my academic work.

Scott Cleland, a paid network neutrality opponent and agent provocateur attended and had particularly obnoxious and inappropriate comments about my presentation. See http://www.precursorblog.com/node/397. In a nutshell Scott could not come up with anything substantively incorrect about my presentation so he dissed it by writing that he could not understand it and that it offered nothing substantive.

I soon will post the presentation on my web site at:http://www.personal.psu.edu/faculty/r/m/rmf5/. Additionally I wrote Scott the following:

Hello Scott:You are sorely mistaken if you think I am an "ardent" supporter of net neutrality.As a matter of fact you know damn well I expressed clear support for most types of price and service discrimination and that my point of view does not jibe 100% with the net neutrality folks. Did you not hear me characterize the save the net folks as viewing change as "curtains for the free world."?

I know it does not make good copy to give me some credit for a fair and balanced perspective, but that is exactly what I offer as an unsponsored and unbiased observer.It is both unfair and obnoxious to deem my presentation and thoughtful commentary on network neutrality as nothing you can understand. Why not review the presentation and paper substantively and in the true spirit of peer review get back to me on areas with which you have a problem. I will need your email address to send you the presentation, but in the event I never hear from you I'll attach it here in any event.

Two papers I have written on the subject that quite frankly lies midway between Mssrs. Wu and Yoo are available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=893649 andhttp://www.personal.psu.edu/faculty/r/m/rmf5/Internet3.htm.

So here's the state of play in D.C.: hire a junkyard dog to spew vitriol and personal attacks. Is there any wonder why the level of discourse and analysis is so low? I take time out to prepare a fair and balanced point of view that Scott from his bully pulpit deems as echoing the collective brilliance and moral superiority of the panel. Ouch. I like to come across as self-effacing.