Will Net Neutrality Kill Telecom Investment?

Numismatics_and_Notaphily_iconThe big telcos keep saying that the proposed net neutrality rules will kill their desire to make investments in broadband networks. Is there anything about the proposed rules that would give them reason to say that, or is this just political maneuvering to try to defeat the ruling?

Verizon is still claiming that net neutrality is going to force them to cut their investments in broadband, even though last month their CFO was quoted as saying that it wouldn’t. AT&T made the same claims in December, even though they have backed off a bit.

But for every company that has complained about Title II regulation there are others who have said it is no big deal. In the fiber world Google has said that the rules don’t seem to give them any problems and they like the fact that it would give them easier access to poles. And Sprint has come out supporting the net neutrality rules as a wireless carrier.

I have a hard time thinking that net neutrality rules are going to somehow make broadband unprofitable. I saw just this past week that Time Warner claimed in their annual report that their broadband product has a 97% margin. That surprised me a bit, since it’s the highest margin I have ever seen claimed, but many of my smaller clients have 90% margins on broadband products. Perhaps Time Warner’s higher margin comes from the economy of scale of having millions of customers. I would think that margins that high would make telcos want to expand their networks regardless of regulatory rules.

Today, the big carriers claim to be making major investments in broadband. For instance, the USTelecom web site says that the wireline, wireless, and cable industries together spent $75 billion on broadband in 2013, which was up 10% over 2012. It’s worth noting that $33.1 billion of that number was spent by the wireless carriers, and we can debate all day if wireless data is really broadband and if that should count as broadband investment.

I took a hard look at the proposed net neutrality rules to see if I could figure out which part of it would make Verizon and AT&T cut back on building infrastructure. Here are a few things the new rules won’t do, and I assume that the ISPs view these as positive:

  • The new rules impose no new taxes on the carriers or on their customers. Broadband will not be taxed by the Universal Service Fund. And there won’t be any future taxes unless Congress someday has a change of heart about taxing the Internet (and note that Congress could decide to tax broadband even without Title II).
  • Broadband won’t be subject to any of the rules that are a regulatory burden for big telcos – no tariffs, no rate approval, no unbundling, no administrative burdens or accounting standards.

But there are a few new rules that will enforced with net neutrality and it must be one of these that makes the carriers not want to not build new networks:

  • No blocking of access to legal content on the Internet.
  • No throttling of Internet traffic on the basis of content, applications, services, or devices.
  • No paid-prioritization which would favor some Internet traffic over other content.

These rules basically stop the big companies from devising schemes to bill customers extra to get access to content that they have already paid for in their base rate. The carriers that are against net neutrality must not be happy with a data product with a 90%+ margin and they want to impose rules that will let them charge customers even more.

There is another rule coming out of the order that they also might not like: the FCC will have the ability to intervene in disputes between ISPs and content providers concerning interconnection. This provision means that ISPs cannot extract extra payments from companies like Netflix to deliver their content. I can see why carriers wouldn’t like this, because they want to charge at both ends of the network – to companies like Netflix when content enters their network and to customers when content leaves their network.

The final rule from the order just reiterates one that was passed a few years ago but that has never been fully enforced. It has to do with transparency. Under these rules ISPs are supposed to disclose things to customers like the real data speeds they are delivering. I can see why carriers don’t like this because it will stop them from advertising one speed but delivering something much slower.

But I don’t see anything in those rules that would stop an ISP from investing. That is of course unless an ISP was counting on making a whole lot of money from charging companies like Netflix for bringing content and then charging customers a lot more to get that same content. Any ISP that delivers the speed that a customer purchases regardless of the source of the content is not going to see drastic changes, or even what I would consider as annoying changes from these new rules. So I guess the ISPs who say the new rules will force them to reduce network investments are the ISPs who were planning to screw their customers. That’s what I always figured, but looking at the proposed rules confirms it.

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