When it comes to broadband investment, AT&T is the largest Internet service provider (ISP) in the United States. So when AT&T redirects capital expenditures (capex) away from its domestic broadband operations, the whole ISP segment moves with it. This is key because policymakers are trying to figure out what happened to ISP capex since the FCC reclassified ISPs as common carriers in February 2015.
Try as Tom Wheeler might to obfuscate the facts, the relevant benchmark for comparison is 2014–the last full year in which ISPs were not subjected to common carrier regulations. In his farewell speech, Wheeler intimated that 2013 (his first year as Chairman) was the benchmark year against which any such comparisons should be made. Convenient, but wrong, as 2014 is a better predictor (relative to 2013) of 2015 and 2016 ISP investment in a world absent reclassification.
If you look at the top-line capex figures from AT&T from 2014 through 2016, it appears that capex increased (albeit slightly) from 2014 to 2016: $21.2 billion in 2014, $19.2 billion in 2015, and $21.5 billion in 2016. Title II is wonderful, right?
Wrong. There’s a problem in this comparison, and it’s similar to the one that complicates inferences about the impact of Title II on Comcast’s broadband investments. Recall that Comcast acquired NBCU, a content provider, and the deal was approved by regulators in early 2011. Fortunately, Comcast breaks out its annual capex relating to NBCU from its capex in infrastructure in its annual reports.
In the middle of 2015, AT&T acquired DIRECTV and some Mexican cellular properties. Unlike Comcast, however, AT&T does not break out capex related to these investments. To make an apples-to-apples comparison of AT&T domestic broadband capex from 2014-16, one must back out AT&T’s capex in satellite and in Mexico in 2015 and 2016. In particular, one must back out a half year of those investments in 2015, and a full year in 2016. The approximate annual capex over the last few years were $3 billion for DIRECTV and $750 million for its Mexico operations (equal to $3 billion spread over four years).
Accordingly, the best estimate for AT&T’s domestic broadband capex in 2015 is $19.2 billion (the top-line figure reported in its annual report) less $375 million in Mexico less $1.5 billion in DIRECTV, or $17.3 billion. And the best estimate for AT&T’s domestic broadband capex in 2016 is $21.5 billion (the top-line figure reported in its annual report) less $750 million in Mexico less $3.0 billion in DIRECTV, or $17.8 billion.
Relative to 2014, AT&T’s domestic broadband capex in 2015 declined by 18.2 percent ($17.3 billion versus $21.2 billion). And again relative to 2014, AT&T domestic broadband capex in 2016 declined by 16.2 percent ($17.8 billion versus $21.2 billion). Put differently, the imposition of Title II is associated with (but did not necessarily cause) an annual reduction of over $3 billion in capital in the broadband sector in each of the last two years. That’s a lot of capital to go missing.
This is not a legacy anyone should be proud of. I’ll be back with my full survey of the top 12 ISPs shortly. Stay tuned.
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Since posting the piece, Alex Byers of Politico asked me via Twitter about the impact of Project VIP on AT&T’s capex, which ended in 2014. It’s true that VIP caused a boost in capex. But AT&T’s guidance to investors in November 2012 was that capex would return to normal, “pre-VIP levels.” AT&T’s average capex from 2010-12 was $20.5 billion, which vastly exceeds the $17.3 to $17.8 billion range estimated above.