We are getting close to a final tally on ISP capex in 2015, the first year of the Title II era. Here is the latest scorecard.
As of this post, Suddenlink had not reported its 4Q-2015 results. So I’m using its data through the third quarter of 2014 and 2015 as a placeholder.
Across this sample of the twelve largest ISPs, capex growth was slightly negative in 2015. The net change for the year was -0.4 percent, down nearly a quarter of a billion from 2014 levels.
It’s important to put this finding in context: According to USTelecom, which uses a larger sample of ISPs, broadband capex increased by 8.7 percent in 2013 (from $69 billion to $75 billion), and by 4.0 percent in 2014 (from $75 billion to $78 billion). Those were sizable gains. (Across the twelve ISPs in my sample, the increase in capex was slightly above four percent in 2014.) What happened in 2015 that caused capex growth to stagnate?
If a firm’s earnings growth followed this trajectory, its managers would likely be canned. Yet in several Title II anniversary pieces, the FCC’s defenders at Consumerist, Techdirt and Huffington Post are popping champagne. They build their cases by selectively choosing ISPs (like Comcast) that increased their capex in 2015, rather than looking at the bigger picture. Alas, the aggregate investment data do not paint a rosy picture.
This is not to suggest that Title II solely caused capital accumulation to stagnate. Several factors could be at play. But when investment theory is corroborated by evidence, as it is here, it is reasonable to infer that reclassification of ISPs as Title II common carriers was not a good thing for investment.
The theory provides a crisp prediction: Reclassification is a prerequisite for price regulation and mandatory unbundling, both of which are recognized in the economics literature to cause capital flight. Although the FCC promises to forbear from engaging in Title II-based price regulation of broadband services, so long as ISPs don’t believe that promise, capital formation should slow. Unfortunately, this FCC has no way to bind itself or future Commissions to obey this promise. In the language of game theory, the FCC lacks a “commitment mechanism.”
Indeed, just a few months after reclassifying ISPs, the FCC broke its promise with respect to unbundling of super-fast broadband services to businesses (called “Ethernet services”). In August, the FCC issued a Technology Transition Order that sought to extend the FCC’s unbundling obligations into fiber-based broadband connections for business customers. In particular, the FCC adopted a rule that required telcos “that discontinue a TDM-based service to provide competitive carriers reasonably comparable wholesale access on reasonably comparable rates, terms, and conditions during the pendency of the special access proceeding.” In other words, if a telco seeks to replace its copper-based broadband connection to a business, it now faces a fresh disincentive to invest in fiber, in that the wholesale-access requirements will extend to its Ethernet services provided over a fiber-based network. So much for forbearance.
In his dissent to the order, Commissioner Pai explained that “the Commission now leverages its discontinuance authority to get a foothold in the Ethernet market, exporting its legacy economic regulations into an all-IP world.” Commissioner O’Rielly similarly recognized the threat to fiber investment: “Providers that had voluntarily agreed to offer a commercial wholesale platform service to ease the transition for competitive carriers after the obligation to provide UNE-P was struck down by the Courts are now being forced to carry it forward into an IP world for a to-be-determined duration.”
The ISPs have good reason to doubt the FCC’s promise not to act opportunistically under Title II.
And as investment slows, the Obama Administration has good reason to be concerned that the fears about Title II depressing investment are coming true, putting into question the ability of the Administration to deliver on its promise to encourage broadband investment and extend the reach of broadband networks to areas not currently served.