Archive for June, 2017

Tales from Econ Cloud Cuckoo Land

I’ve been called many bad things. Global elitist (or just “telecom elite“) is a popular slight these days for economists and others with advanced degrees. But not until this morning has someone said I commute to “Econ Cloud Cuckoo Land.” That really stings.

Harold Feld’s latest blog characterizes (and mischaracterizes) some of my opinions about the harms from Title II. For example, he neglects to mention that, aside from investment effects, the harm from a bright-line ban on paid priority (secured by Title II) is that certain efficient arrangements between ISPs and content providers might never be struck, and certain real-time applications (in need of higher quality of service) might never come to market.

My head might be above the econ clouds, as Harold suggests, but my feet are firmly planted on solid empirical ground. Let’s take apart some of these zingers, which are set off below in block quotes:

So, after diligently pruning away all investment that “real” economics said doesn’t count, Hal Singer and others found that there had been a measurable drop in carrier investment, which therefore proved that Title II was bad for investment in infrastructure, which therefore proved that Title II was eventually going to cause slowerworsebroadband.

Yes, in reaching my investment figures for 2015 and 2016, I did “prune away” AT&T’s investment in Mexico, as well as its investment made through DIRECTV, both of which (unfortunately) are included in AT&T’s top-line capital expenditures. I have yet to hear a good argument for why these investments should be included in any measure of broadband capital. Recall, we are testing the hypothesis that common-carrier regulations chased investment from the core of the BROADBAND network in THE UNITED STATES OF AMERICA. If an Internet service provider (ISP) moved its investment from broadband to some other sector (say, movie making) or some other country as a result of Title II, we wouldn’t raise a glass of champagne.

The same logic dictates that one “prune away” Sprint’s short-lived investment in wireless handsets. In its financials, Sprint breaks this spending out separately from its network investment. If Sprint did not step in between the customer and handset maker for a nano-second, as it does now, the same amount of money would be spent on Sprint’s handsets. Put differently, Sprint is not increasing aggregate spending in the broadband ecosystem via this accounting measure. And even if you could convince yourself that handset capitalization was really incremental broadband capital (it’s not), Sprint did not embrace this policy until the fourth quarter of 2014. Because 2014 is the benchmark year–against which one compares investment during the Title II regime–one cannot make an apples-to-apples comparison by including Sprint’s handsets. Period.

With respect to causation (Harold’s last point in the block quote), I’ve said repeatedly that comparing 2014 ISP investment levels to those in 2015 or 2016 is not a proof of regulatory impact. Shall I say it again? Other things may have changed during the experiment that affect capital formation in the sector. This is why I like to point to the natural experiment of the late 1990s/early aughts, in which telcos were uniquely subject to Title II, and telco capital formation was outpaced by cable capital formation.

Folks in [Econ Cloud Cuckoo Land] have responded, rather predictably, by saying that if you junk all that real world stuff and use the “real economics” favored in ECCL, you see that Singer does a much better analysis than Turner, so there! This prompts much applause and beatific smiles in Econ Cloud Cuckoo Land.

Doug Brake at ITIF recently compared my investment data to that of Free Press, and determined that the two studies arrive at nearly the same place if one controls for the things I mentioned above (AT&T in Mexico, AT&T via DIRECTV, and Sprint’s handsets). George Ford at the Phoenix Center found that Free Press inappropriately combined 2015-16 data to mask a downturn in 2016 by Free Press’s own accounting. USTelecom replicated my 2016 analysis on a larger database of ISPs (mine was limited to the 12 biggest ISPs) and reached a similar conclusion to mine (a four percent decline in ISP investment in 2016 relative to 2014). And PPI replicated my 2015 analysis and reached a similar conclusion (a modest decline in ISP investment in 2015 relative to 2014).

Do all of these folks commute to Econ Cloud Cuckoo Land? Maybe so. But it’s also possible that Free Press is the outlier. Recall that Free Press famously misled the Commission into believing that Title II caused telco investment to increase in the late 1990s/early aughts, because telco investment increased during the period. (See footnote 1210 of the 2015 Open Internet Order.) Never mind that (1) the dot.com boom coincided with the Title II period, contaminating the experiment, and (2) as noted above, capital accumulation for cable operators outpaced that of telcos during this period, implying that Title II actually retarded telco capital formation.

All of this finally brings us back to the question I expect readers really care about — what does all this mean for Pai’s plan to kill net neutrality? Frankly, it means that the primary pillar Pai points to as supporting roll back is going to be a big fat flop in court if he decides to go that way. Why? You may have heard of a critter called a honey badger who, thanks to this delightful Youtube video, has the tag line: “Honey badger don’t care; he don’t give a f—.” That describes the attitude of judges when reviewing the economic evidence from Econ Cloud Cuckoo Land. Judges don’t care, they don’t give a f—.

I agree with Harold that the D.C. Circuit will not likely care about what happened to broadband investment in response to Title II. To the chagrin of the dissenting opinion from Judge Williams, the D.C. Circuit’s decision approving reclassification by Wheeler’s FCC had zero to do with economics. The court determined that the expert agency was owed deference in these matters. Indeed, when asked about a change in circumstances that would warrant a change in classification, the FCC’s attorney was tongue-tied during oral argument. By symmetry, there is no reason why Pai’s FCC should be (uniquely) compelled to demonstrate a change in circumstances now.

And this is precisely why legislation locking in a light-touch regulatory regime is needed. In its absence, we can count on over-enforcement of net neutrality rules under a Democrat-led FCC, and (potentially) under-enforcement under a Republican-led FCC. (Based on the NPRM, which preserves several options, we don’t know which way Pai is heading. It is a misstatement, however, for Harold to say that Pai’s plan is to “kill net neutrality.”) With luck, even Harold will agree that major reversals in FCC rules every four or eight years is not conducive to attracting capital to the broadband sector.

In the meantime, I encourage Harold to come visit me in Econ Cloud Cuckoo Land. The commute to and from the D.C. suburbs is a breeze. During downtime, we enjoy personal yoga instructors. And when we’ve exhausted our econ brains, we rest our heads on little pillows made from clouds, and snuggle under the 1000 thread-count sheets.

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