Archive for November, 2015

ISP Capital Expenditures in the Title II Era

Here is a quick update to my survey of changes in ISP capital expenditures (“capex”) since the dawn of the Title II era.

Some #TechReporters are claiming that Title II is associated with a “spike” in broadband investment, and that “investment is doing just fine.” Others claim that investment is up at select ISPs such as Comcast, Time Warner Cable, and the wireless division of Verizon. Still others claim that we should ignore changes to ISP capex in the first quarter of 2015, despite the fact that ISPs knew which direction the FCC (and President Obama) were heading since November 2014.

The updated table below compares capex for the largest ISPs—those investing at least $300 million in the first nine months of 2014—for the nine-month period ending in September 2014 (the pre-Title II era) with the nine-month period ending in September 2015 (the Title II era).

capex

As the table shows, capex was down significantly in the first nine months of the Title II era for AT&T (-21%), Charter (-23%), and US Cellular (-11%). Although some ISPs experienced an increase in capex, this lift was not sufficiently large to offset the aforementioned declines.

On net, capex fell by a staggering $2.9 billion across the largest ISPs excluding Sprint, T-Mobile, and US Cellular (the pure wireless ISPs). Including the pure wireless ISPs still results in an aggregate decline of nearly $2 billion relative to the same period in the pre-Title era.

Critically, the nearly four percent decline in ISP capex in the Title II era is highly abnormal since the end of Great Recession. According to USTelecom, broadband capex increased every year since 2009. Indeed, broadband capex increased by nearly 10 and 3 percent in 2013 and 2014, respectively. What some call a “spike” in ISP capex in 2015, others would call a U-Turn.

Strong net neutrality was supposed to stimulate investment at the “edge” of the network among content providers, without discouraging investment at the network’s “core.” But large content providers such as Google, Microsoft, and Amazon are also pulling back on capex in the Title II era. So far, the FCC’s grand experiment in market design (and overt favoritism for edge providers) isn’t going according to plan.

When confronted with this gloomy data, the naysayers claim we don’t need any more investment because the days of broadband upgrades are over. Like Fukuyama’s “The End of History,” which posited that Western liberal democracy was the most advanced form of government, the “End of Technology” posits that LTE 4G wireless and DOCSIS 3.0 are the most advanced broadband technologies. (Let’s not inform them of 5G wireless or DOCSIS 3.1.)

Funny how the “End of Technology” just happened to coincide with the dawn of the common carrier era.

Twitter: @halsinger

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The FCC’s New Internet Taxes, Revisited

Expanding the federal universal service fund (“USF”) rate base to include broadband service does not depend on reclassification. So why is the Federal-State Joint Board on Universal Service (the “Joint Board”) delaying its vote on USF contribution reform?

While the Joint Board dilly-dallies, the contribution factor on voice services—a shrinking pot of money—just rose to nearly 17 percent and will soon exceed 18 percent for the first time. Whatever the reason for the delay, the Joint Board is willing to stick voice customers with a massive rate hike to forestall Internet taxes.

In December 2014, there was a small tremor in the telecosm when I predicted that reclassification of Internet services as “telecom services” would activate telecom-based fees at the state and local level. Michelle Ye Hee Lee of the Washington Post “fact checked” politicians who quoted a then-outdated estimate of the potential tax liability, and later chastised the Chairman of the FCC for having “misused the fact check” during a House Appropriations Committee budget hearing in March.

Well, the FCC reclassified broadband providers as common carriers providing a telecom service in February 2015, and to date there are no state fees showing up on our Internet bills.

Prediction proved wrong? Hardly.

Right before the FCC’s vote, certain states like Vermont were champing at the bit to impose telecom-based fees on broadband providers, who would in turn pass along those fees to broadband customers. To prevent this train wreck, in the agency’s February Open Internet Order, the FCC preempted states from moving forward with their own telecom-based fees for universal service (“USF contributions”) unless and until the FCC imposed such fees at the federal level.

The preemption language (paragraph 432) reads as follows:

With respect to universal service, we conclude that the imposition of state-level contributions on broadband providers that do not presently contribute would be inconsistent with our decision at the present time to forbear from mandatory federal USF contributions, and therefore we preempt any state from imposing any new state USF contributions on broadband—at least until the Commission rules on whether to provide for such contributions. We recognize that section 254 expressly contemplates that states will take action to preserve and advance universal service, but as discussed below, our actions in this regard will benefit from further deliberation. (citations omitted)

That the FCC felt compelled to preempt states from moving forward with state-based fees is strong evidence that the agency itself recognized this downside risk associated with reclassification. Why else preempt the states?

In a footnote (1471), the Order states that “the Commission has referred the question of how the Commission should modify the universal service contribution methodology to the Federal-State Joint Board on Universal Service (Joint Board) and requested a recommended decision by April 7, 2015.” (emphasis added).

It’s now seven months past its due date, and the Joint Board still has not offered a recommendation. What gives?

Last week, FCC Commissioner Jessica Rosenworcel was asked by Senator John Thune during her re-confirmation hearing why the Joint Board had not voted on this pressing issue. According to The Hill, Rosenworcel responded that the Joint Board, on which she sits, will not vote until there is more “legal certainty” about the classification of broadband service, particularly given that resources were “constrained” at the Commission.

Someone not following the debate closely could think that if the D.C. Circuit vacates the Open Internet Order—oral arguments are set for early December 2015—then the entire effort to impose USF fees on broadband providers becomes a moot point. Put differently, any efforts the government had made at that point to roll out broadband fees at the federal level would then have to be rolled back.

But this logic presumes incorrectly some nexus between reclassification and subjecting broadband providers to USF fees. In fact, the FCC does not need to reclassify Internet service to expand the revenue base for USF.

The FCC has authority under section 254(d) the Communications Act to require contributions from information service providers: “Any other provider of interstate telecommunications may be required to contribute to the preservation and advancement of universal service if the public interest so requires.” Because information services are defined as being provided via telecommunications, this section allows the FCC to require contributions from information service providers.

So if expanding the federal USF rate base to include broadband services does not depend on reclassification, why is the Joint Board stalling?

A more compelling explanation for the delay is that any assessment of fees on broadband providers at the federal level will end the preemption of state fees erected by the Open Internet Order. Imagine the political dynamics of a state like Vermont imposing state-based USF fees on broadband providers before the D.C. Circuit ruled on the FCC’s reclassification scheme! Not only would the FCC have to defend the capex meltdown that just happens to coincide with reclassification, but also the state-based tax implications. Consideration of these hidden costs could tip the cost-benefit calculus performed by the court.

By delaying the vote that would end the preemption, the Joint Board spared the FCC of this potential embarrassment during oral arguments. And the agency’s willingness to punt on any reform consideration while the contribution factor on voice services continues to rise is an abdication of its statutory responsibilities to ensure the stability of universal service.

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