Title II Regulation and Investment

As the FCC continues its effort to reversing Title II regulation, I’ve seen the carriers renewing their argument that Title II regulation has reduced their willingness to invest in infrastructure. However, their numbers and other actions tell a different story.

The FCC put broadband under Title II regulation in February of 2015 and revised the net neutrality rules a few months later in April. So we’ve now had nearly three years to see the impact on the industry – and that impact is not what the carriers are saying it is.

First, we can look at annual infrastructure spending for the big ISPs. Comcast spent $7.6 billion upgrading its cable plant in 2016, its highest expenditure ever. Charter spent 15% more in 2016 compared to what was spent on it and the cable companies it purchased. Even Verizon’s spending was up in 2016 by 3% over 2015 even though the company had spun off large fiber properties in Florida, Texas, California and other states. AT&T spent virtually the same amount on capital on 2015 and 2016 as it had done in 2013 and 2014.

I’ve seen a number of articles that focus on the overall drop in investment from the cellular industry in 2015. But that drop is nearly 100% attributable to Sprint, which pulled back on new capital spending due to lack of cash. All of the big cellular companies are now crowing about how much they are going to spend in the next few years to roll-out 5G.

It’s important to remember that what the big ISPs tell their investors is often quite different than what they say when lobbying. As publicly traded companies the ISPs are required by law to provide accurate financial data including a requirement to warn stockholders about known risk factors that might impact stock prices. I’m one of those guys that actually reads financial statements and I’ve not seen a single warning about the impact of Title II regulation in the financial reporting or investor press releases of any of the big ISPs.

But the lobbying side of these businesses is a different story. The big ISPs started complaining about the risks of Title II regulations as far back as 2013 when it was first suggested. The big companies and their trade associations have written blogs warning about Title II regulation and predicted that it would stifle innovation and force them to invest less. And they’ve paid to have ‘scholarly’ articles written that come to the same conclusion. But these lobbying efforts are aimed mostly at the FCC and at legislators, not at stockholders.

The fact that big corporations can get away with having different public stories has always amazed me. One would think that something published on the AT&T or Comcast blog would be under the same rules as documents formally given to investors – but it’s obviously not. AT&T in particular tells multiple stories because the company wears so many different hats. In the last year the company has taken one position as an owner of poles that is diametrically opposed to the position it takes as a cellular company that wants to get onto somebody else’s poles. Working in policy for the big ISPs has to be a somewhat schizophrenic situation.

It seems almost certain that this FCC is going to reverse Title II regulation. The latest rumor floating around is that it will be on their agenda on the day before Thanksgiving. That may lead you to ask why the ISPs are still bothering cranking out the lobbying arguments against Title II if they have already won. I think they are still working hard to get a legislative solution through Congress to kill Title II regulation and net neutrality, even if the FCC kills it for now. I think they well understand that a future FCC under a different administration could easily reinstate Title II regulation – particularly now that it has passed muster through several court challenges. The ISPs understand that it will be a lot harder to get a future Congress to reverse course than it might be if Democrats are back in charge of the FCC.

Until recently I always wondered why the ISPs are fighting so hard against Title II regulation. All of the big companies like Comcast, AT&T and Verizon have told stockholders that their initial concerns about Title II regulation did not materialize. And it’s obvious that Title II hasn’t changed the way they invest in their own companies.

But recently I saw an article and wrote a blog about an analyst who thinks that the ISPs are going to drastically increases broadband prices once Title II regulation is gone. Title II is the only tool that the government can use to investigate and possibly act against the ISP for rate increases and for other practices like data caps. If true, and his arguments for this are good ones, then there is a huge motivation for the big ISPs to shed the only existing regulation of broadband.

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