Tag Archives: Title II Regulation

Big ISPs Argue Against Regulation

Big ISPs have been using the same arguments against being regulated for the last decade. These arguments were used to justify killing Title II regulation under the Ajit Pai FCC and have been resurrected today to try to get Congress to override the FCC’s decision to reimpose broadband regulation. From my perspective, their arguments have gotten stale and out of touch with the way the market really operates. Consider the four major arguments big ISPs make against regulation.

Prices are Down. The big ISP trade associations have been telling the public for years that broadband prices have been falling in ‘real terms’. But anybody buying broadband from a cable company over the last decade knows otherwise. Big cable companies have raised prices year after year at a rate faster than inflation. The ISP argument rests on slight of hand that measures broadband price per megabit of speed. By that logic, when the cable companies unilaterally increased download speeds a few years ago from 100 Mbps to 200 Mbps, customers saw an instant 50% rate reduction. In ‘real terms’, that customer undoubtably got another rate increase that same year and paid more for the faster speed.

If you wonder how they can make this argument when people realize it’s not true, this argument is not aimed at the general public who pays the ever-higher rates but is a lobbying tool to give politicians a flimsy excuse for supporting large ISPs.

Broadband Investment has Accelerated. The big ISPs are peddling the story that having no broadband regulations spurs ISPs to invest more. They point to broadband investments made since Ajit Pai killed Title II regulation. The trouble is that there is no real-world evidence that lack of regulation had any impact on ISP investments. I work with or know many ISPs who are currently expanding fiber networks. I’ve never heard one of them talk about regulation or lack of regulation. Most ISPs see regulation as a minor nuisance that doesn’t cost much, and it’s not an issue that impacts how they operate the business. Carriers build last-mile fiber because they and their financial backers believe there is an opportunity to compete against cable companies and their inflated $100 broadband (oops, I thought prices were down).

Consider the big telcos that have been investing heavily in fiber. I listen to and read their announcements of quarterly earnings and track speeches given by their CEOs. These companies are investing in fiber for their survival. The copper networks are dead and dying, and fiber is their only path forward.

Cable companies are investing in faster networks far sooner than they had planned to. They are reacting to the fact that customers now believe that fiber is a better technology, and because lower-priced fiber and FWA companies are taking their customers.

Wireless companies made a sizable investment in 5G but quickly pared that back investment far below announced intentions when they realized that people like faster cellular speeds but aren’t willing to pay more for 5G features.

I don’t think there is any evidence that any of these ISPs worried about regulation when making these decisions. If they did, then investor calls and annual reports would be full of concerns about regulation – but they aren’t.

Competition Has Intensified. This is the same argument as the one above, just stated in different words. There is more competition as ISPs are building fiber and wireless networks to compete against the cable monopolies. However, it’s worth noting that the big ISP industry has overstated the case for the presence of competition. For example, FCC Commissioner Brandon Carr said earlier this year that 295 million Americans now have access to at least two high-speed ISPs. He’s relying on FCC mapping data to make that statement, but we all know the FCC broadband maps have a lot over overstated speed claims. There are a lot of ISPs claiming exactly 100/20 Mbps capability in the FCC maps that can’t deliver that speed. A huge number of broadband customers do not believe they have a choice of fast ISPs.

Internet Speeds are Up. Speeds are up for two different reasons. First, every major broadband technology has seen big improvements in the underlying technology. We’re now talking about 10-gigabit fiber speeds in the home. Fixed wireless radios have gotten much faster also aided by better bands of spectrum. Cellular speeds are way up.

One of the primary reasons for faster average broadband speeds is that the public demand for faster speeds is up. One-third of all U.S. households now subscribe to gigabit broadband, even when they have options to buy slower speeds. More than half of all homes buy broadband from cable companies. While we’re on the cusp of seeing cable companies increase network speed capacity, most of the faster speeds being delivered by cable companies come because of customers subscribing to faster speed tiers.

The big ISPs have been so steadfast in making these claims that I’ve taken the time every few years to see if these claims are somehow true. There is some truth in all of their claims except for lower prices – but I can’t find any evidence that regulation has anything to do with the changes over time in competition, broadband speeds, or broadband investment.

The Definition of Broadband

This is a blog aimed at people who look at the nuances of regulation. But like many such issues, it has implications for some ISPs. Today’s blog talks about the definition of broadband. You might not think that’s important, but as the FCC reinstates Title II regulation, the definition of broadband defines what is and isn’t directly regulated.

In the latest Order that reinstated Title II regulation, the FCC notes that it continues “ to define “broadband Internet access service” as a mass-market retail service by wire or radio that provides the capability to transmit data to and receive data from all or substantially all Internet endpoints, including any capabilities that are incidental to and enable the operation of the communications service, but excluding dial-up Internet access service.” It’s a short definition, but it raises some interesting regulatory questions.

The first term in the definition to understand is mass-market. The FCC defines that to be “a service marketed and sold on a standardized basis to residential customers, small businesses, and other end-user customers, such as schools and libraries.” The FCC contrasts retail service with wholesale services, where carriers sell service to other carriers, and enterprise services, which are specialized broadband services sold to large businesses. Mass-market implies standardized products and services sold to many customers.

I think that from a practical perspective the FCC’s definition is out of touch of the market when looking at broadband sold to small and medium businesses. The FCC definition assumes that most businesses are buying a mass-market product at a standard range of speeds and prices. That’s not my experience in looking at real business broadband. My consulting firm has been working with communities to understand broadband, and for years we’ve heard from businesses that some ISPs charge a wide range of prices for what seems like the identical product. I’ve talked to businesses in the same market where the price for a 100 Mbps connection from a cable or telephone company network might vary from $75 to $500 – with no apparent technical differences, other than the ability of a salesperson to talk a business into paying a higher price. The apparent price discrimination would seem to mean that broadband for small businesses in such markets is something other than mass-market.

The same is true for schools and libraries, particularly those that participate in the E-Rate program that subsidized broadband rates for schools that have a significant percentage of students participating in a school lunch program. My experience is that such schools often pay a much higher price for broadband than would a business in the same community that buys the same service. ISPs can charge more since the FCC’s Schools and Libraries Fund pays most of the bill, not the schools. In my experience, schools are definitely not buying a mass-market broadband product.

The next interesting word in the definition is ‘retail’. That obviously means a broadband service that an ISP markets and sells directly to end user customers. There are non-traditional customer arrangements in the market that don’t fit neatly into the traditional retail mold. Consider Utopia and other open-access network providers. A broadband customer on the Utopia network gets a bill from Utopia for using the network and another bill from their chosen ISP for the broadband connection to the Internet. It’s muddy from a regulatory perspective about which regulatory requirements apply to the fiber network owner versus the broadband provider.

What is most interesting about the definition of broadband is that anything that doesn’t fit neatly under the definition of broadband is not directly regulated by the FCC. The FCC dealt with these situations in the recent Order, which said that while wholesale services and enterprise services are not directly regulated, “the Commission would be able to take action to address them pursuant to its Title II authority . . . That wholesale services do not fall within the definition of BIAS does not mean that they do not fall within the ambit of Title II in some circumstances or otherwise may be subject to the Commission’s oversight under section 201(b), which provides the Commission authority to ensure that all practices “in connection with” BIAS are “just and reasonable.” The FCC goes on to say more specifically that Title II rules give the FCC the authority to intervene in disputes between wholesale providers and customers. This FCC approach creates uncertainty for ISPs that only operate in the wholesale or enterprise space. They will have to somehow decide which FCC rules apply to them and which don’t.

A Tale of Two Markets

I wrote a blog the other day that got me thinking about the huge disparity in regulating two distinct but highly intertwined industries – broadband and voice. Before you stop reading because you might think voice is no longer relevant, voice regulation includes the cellular business, and in terms of revenue, the voice market is larger than broadband. JD Powers reported in April of this year that the average household is spending $144 for cellular per month.

I call these industries intertwined because the players at the top of both industries are the same. The big ISPs are Comcast, Charter, AT&T, and Verizon. The biggest voice players are AT&T, Verizon, and T-Mobile. Comcast and Charter are making aggressive moves to develop a wireless business, and T-Mobile is aggressively selling broadband.

The two markets are intertwined in a household. Most people connect their cell phones directly to landline broadband when they are home. The primary use for cell phones is to connect to the Internet. My twenty-something daughter is amazed that I predominantly use my cell phone to actually talk to people.

This handful of giant companies control the lion’s shares of both the voice and broadband industries. Yet we’ve decided to regulate the two business lines completely differently. You must admit that this it’s an odd national decision to regulate AT&T’s voice business but not its broadband business, particularly considering how intertwined the two businesses are. Comcast and Charter are proof of the link between the two industries since the companies will only sell cellular plans to customers who are buying broadband.

A regulatory expert from another country would look at the U.S. regulatory environment with incredulity. They would instantly wonder how we can treat the two industries so differently since they engage in such similar business lines, particularly since the same companies lead both markets.

The average American has no idea of how differently we treat the two industries and would be just as confused as a foreign regulator expert. It’s really hard to explain the difference in regulations since that quickly devolves into a discussion of things like Title II regulation, and the average person listening will quickly have no idea what you are talking about.

The easiest way to explain the difference in regulation is that we don’t regulate according to common sense but base regulation on the original legislation that established regulations for each industry. Voice is still regulated because, in the past, various pieces of federal legislation, like the Telecommunications Act of 1996, specifically mention voice. There were also laws that specifically defined how to regulate cable TV – but there has never been a definitive legislative declaration that broadband must be regulated.

This all started when interest in home broadband mushroomed. AOL, CompuServe, and others created a robust ISP industry that took off rapidly when DSL and cable modems increased speed to the point that people could do useful things with broadband. In those early days, there was a lot of discussion about regulating broadband, but the consensus among legislators was that regulators should leave the fledgling new broadband industry alone until it grew large enough. No doubt, this hands-off approach was whispered into the ears of legislators by lobbyists for the big ISPs.

With no direction from Congress, the FCC and various States tried to find ways to regulate broadband over the last few decades. But as hard as it is to believe, we weren’t even able to define what broadband is without legislative direction – is broadband a telecommunications service or an information service? All of the wrangling about regulating broadband ultimately comes down to this simple designation.

Regulation gets really bizarre the deeper you go into the details. Cell phones calls are regulated for voice, but the broadband on a cellphone is considered to be an information service. What is the regulatory regime of a cell phone call that is handed off to a broadband network through WiFi but then eventually reconnected with the cellular network? The average cell phone user regularly bounces between regulated and unregulated functions.

The title of the blog refers to A Tale of Two Cities, which opened with, “It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness”. That’s as good of a description of our odd regulatory environment as anything else I can think of.

Revisiting the Impact of Killing Net Neutrality

Ajit Pai recently wrote an article in the National Review where he talks about how his decision as head of the FCC to repeal net neutrality was the right one. He goes on to claim that repealing net neutrality was the driver behind the current boom in building fiber and upgrading other broadband technologies. He contrasts the progress of broadband in the U.S. with Europe and says that the FCC’s action is the primary reason we are seeing a fiber boom in the U.S.

He points out that his opponents who wanted to keep net neutrality made all sorts of crazy claims about how killing net neutrality would mean killing most of what people like about the Internet. He’s right that the arguments for keeping net neutrality got wrapped into politics, and most of the predicted consequences of ending net neutrality were exaggerated by those in favor of net neutrality. But the claims of the benefits for killing net neutrality were also badly exaggerated by the big carriers.

Why is he writing this now? With the possibility of seating a fifth Commissioner, he knows that the issue of reinstating net neutrality and Title II authority is going to be raised at the FCC. Killing net neutrality was his crowning achievement at the FCC, and he’s defending it as a way to lobby against bringing back net neutrality. I think we’re going to see a lot of this kind of rhetoric this year about how repealing net neutrality was the right thing to do. The big ISPs will be repeating the same rhetoric being told by Pai.

But Pai is not telling the real story. Industry insiders and experts didn’t expect much change to come from repealing net neutrality. The CEOS of all of the big cable companies admitted that keeping or killing net neutrality would have almost no impact on their businesses.

The real purpose of killing net neutrality was to kill Title II authority over broadband. That is an esoteric policy wonk issue and rarely got discussed during the debate. The Ajit Pai FCC gave up all rights of the agency to regulate broadband except for a few rules that are mandated by Congress. While there was a huge noise on both sides of the argument about killing net neutrality, the big ISPs only cared about killing regulation. That was the number one agenda item for Ajit Pai, and he handed the big ISPs everything on their wish list. If you want to understand the net neutrality issue from the big ISP perspective, substitute the word regulation for net neutrality every time they talk about the topic.

Pai cannot say with a straight face that there have been no repercussions about the end of broadband regulation. Consider Comcast and Charter, the two largest ISPs that together have over half of the broadband market. Since the end of Title II regulation, Comcast has raised rates for basic broadband to around $100, Charter is over $90 and is in the process of catching up to the Comcast rates.

At the same time, the FCC dropped all semblance of representing the public. The FCC complaint process for broadband customers might as well not even exist since nothing happens when a customer complains about mistreatment by an ISP.

Pai is taking credit for the boom in broadband competition. I’ve been advising ISPs on their expansion plans for decades, both before and after the death of Title II regulation, and I’ve never heard an ISP consider regulation as part of any discussion of expanding to a new market. Perhaps Pai can take credit for making it easier for others to compete against big cable companies since they have been free to raise rates at will – but I don’t think that’s something he wants to claim out loud. The real impetus for broadband competition came from the pandemic when many millions of customers found out that their broadband was inadequate. That experience has convinced people that they need fiber broadband and faster speeds, and fiber overbuilders are reacting to that market demand. The cable companies are rushing to upgrade speeds in response to the pressure from fiber competition.

None of the fiber boom is due to killing regulation. All that killing regulation did was allow big ISPs to run roughshod over customers without consequences. The FCC can’t even pull ISPs in to talk about their bad broadband behavior.

Ajit Pai’s accomplishment was not killing net neutrality – it was handing the reins of the broadband business to the big ISPs by allowing the ultimate regulatory capture of having the FCC walk away from its regulatory responsibilities. I’m sure that Pai is quite happy with that outcome, but you’ll never see Pai talking about what really happened.

A New National Broadband Plan?

Senator Edward Markey (D-Mass) introduced a bill that would require that the FCC create a new National Broadband Plan by July 2021. This plan would lay out the national goals needed for broadband going forward and also provide an update on how the COVID-19 crisis has impacted Internet access. I am not a big fan of the concept of a national plan for many reasons.

Can’t Trust FCC Data. The FCC would base any analysis in a new plan on the same flawed data they are using for everything else related to broadband. At this point, the best description of the FCC’s broadband data is that it is a fairy tale – and not one with a happy ending.

Gives Politicians Talking Points rather than Action Plans. A national broadband plan gives every politician talking points to sound like they care about broadband – which is a far cry from an action plan to do something about broadband. When politicians don’t want to fix a problem they study it.

Makes No Sense if Broadband is Unregulated. Why would the government create a plan for an industry over which the government has zero influence? The FCC has gifted the broadband industry with ‘light-touch regulation’ which is a code word for no regulation at all. The FCC canned Title II regulatory authority and handed the tiny remaining remnant of broadband regulation to the Federal Trade Commission – which is not a regulatory agency.

The Last National Broadband Plan was a Total Bust. There is no need for a National Broadband Plan if it doesn’t include a requirement that the FCC should try hard to tackle any recommendations made. Almost nothing from the last broadband plan came to pass – the FCC and the rest of the federal government stopped even paying lip service to the last plan within a year after it was published. Consider the primary goals of the last National Broadband Plan that were to have been implemented by 2019:

  • At least 100 million homes should have affordable access to 100/50 Mbps broadband. Because the cable companies implemented DOCSIS standards in urban areas, more than 100 million people now have access to 100 Mbps download speeds. But only a tiny fraction of that number – homes with fiber, have access to the 50 Mbps upload speed goal. It’s also impossible to make a case that US broadband is affordable – US broadband prices are almost double the rates in Europe and the far East.
  • The US should lead the word in mobile innovation and have the fastest and most extensive wireless network of any nation. US wireless broadband is far from the fastest in the world – our neighbor Canada is much closer to that goal than is the US. Everybody acknowledges that there are giant areas of rural America without good wireline broadband, but most people have no idea that cellular coverage is also miserable in a lot of rural America.
  • Every American Community should have gigabit access to anchor institutions such as schools, libraries, and government buildings. We probably came the closest to meeting this goal, at least for schools, and over 90% of schools now have gigabit access. However, much of that gain came through poorly-aimed federal grants that paid a huge amount of money to bring fiber to anchor institutions while ignoring the neighborhoods around them – and in many cases, the fiber serving government buildings is legally blocked from being used to help anybody else.
  • Every American should have affordable access to robust broadband and the means and the skills to subscribe. A decade after the last National Broadband Plan there are still huge numbers of rural homes with no broadband, or with broadband that barely functions. Instead of finding broadband solutions for rural America, we have an FCC that congratulates itself each year for being on the right trajectory for solving the broadband gap.
  • To ensure that America leads in the clean energy economy, every America should be able to use broadband to track and manage their real-time energy consumption. I can’t come up with anything other than a facepalm for this goal.

As hard as I try, I can’t think of even one reason why we should waste federal dollars to develop a new national broadband plan. Such a plan will have no teeth and will pass out of memory soon after it’s completed.

It’s Hard to Like AT&T

Over the last year, I’ve said some nice things about AT&T. It was nice to see AT&T wholeheartedly embrace their commitment to build fiber past 12 million homes as they had promised as part of the conditions of buying DirecTV. In the past, they might have shrugged that obligation off and faked it, but they’ve brought fiber to pockets of residential neighborhoods all over the country. It seemed that they were unenthusiastic about this requirement at first, but eventually embraced when somebody at the company realized that new fiber could be profitable.

I also thought that AT&T was by far the most responsible wireless carrier in terms of not ridiculously exaggerating the supposed coming of 5G, although they finally gave in to their marketing arm and started labeling the latest version of 4G LTE as if it is 5G.

But overall, AT&T is hard to like as a company. AT&T puts stock prices and Wall Street above everything else and is probably as good of an example as any of large corporations gone amuck. AT&T clearly values the bottom line over employees, customers, and the public good.

If you look back a few years, you can find numerous times where AT&T lobbied against net neutrality and broadband regulation. The company repeatedly said that unfair regulation was stopping them from making capital investments and promised that if the government would lift regulations that they would invest more. The FCC handed them even more than they had publicly asked for when the agency eliminated Title II regulation along with net neutrality.

AT&T didn’t react to the end of regulation by increasing capital investment as promised. They instead laid off a lot of employees and in the year after net neutrality was eliminated spent about the same for capital – only due to big spending on their sole-source First Net contract. Then in 2019, capital spending dropped by $1.9 billion and they are planning to cut an additional $3 billion this year. The drop in capital spending is hard to reconcile with the supposed 5G race that we are supposedly waging against China.

AT&T also joined with other large corporations and publicly pledged that if the government would lower the corporate tax rate that they’d hire thousands of new high-paying tech jobs and again promised to increase capital spending.  The unions that work for AT&T claim that since the enactment of the 2017 tax act that AT&T has laid off nearly 38,000 employees and are down to under 248,000 employees. Rather than investing in new capital and people, AT&T has been spending billions to buy back their stock to help keep stock prices high. The company used excess cash to buy back almost $2 billion of its stock in the fourth quarter of 2019 and had announced $4 billion of additional buybacks this year that was just recently put on hold due to the COVID-19 pandemic.

Meanwhile the company significantly raised consumer prices. There were moderate rate increases for broadband and cellular customers, and larger ones for video customers. But the biggest increases came when AT&T ended promotional pricing on video and expected customers to pay full price at the end of contracts. This move raised video rates significantly and led 4.1 million customers to drop DirecTV, U-verse TV, and the online AT&T TV in 2019. The company has said they were glad to be rid of low-margin customers.

In the summer of 2019, AT&T was sued in a class-action suit alleging that the company was selling real-time customer location data for cellular customers, even though the company had repeatedly told customers that they were not doing so. A series of reports by Motherboard showed that AT&T, Sprint, and T-Mobile had continued selling customer data even after promising to stop the practice.

AT&T recently made headlines by dropping data caps during the COVID-19 crisis. What’s worth noting is that the company has perhaps the most restrictive data caps in the country, particularly on DSL and fixed-wireless. The data caps at AT&T are clearly in place to make money over and above any rates promised to subscribers. Hopefully, there will be a huge public outcry when the company quiets puts the data caps back in place.

During all of the above, the company has significantly increased compensation for its CEO Randall Stephenson. His salary in 2019 was more than $32 million, up from $29 million the year before. However, much of that number is based upon stock bonuses, and shares of AT&T closed under $29 last week, down from over $39 at the start of this year. The company announced a new CEO last week and we’ll have to wait to see how he is compensated.

It’s honestly hard to say much nice about AT&T these days. I think back to when I worked at the company pre-divestiture, when the company made a steady, but unspectacular monopoly profit. The company and employees in those days were proud of the US communications network which was second to none in the world. It’s been clear for a long time that none of that old Ma Bell thinking is left in the company that now is driven to maximize stock price over everything else.

Reconsidering Brand X

Jon Brodkin recently wrote in Ars Technical that Supreme Court Justice Clarence Thomas has reconsidered and regrets his original position on the Brand X decision in 2005. The Brand X decision supported the FCC’s decision in the early 2000s to classify broadband as an information service.

There was a government push during the Bush administration to protect the newly burgeoning broadband industry. The FCC, and federal politicians all thought correctly that broadband was going to become a huge economic driver of the economy. This story was pushed by the lobbyists of both the cable companies and the big telcos, because at that time the broadband from both telcos and cable companies was functionally equivalent with similar speeds. At that time, the US was in front of the rest of the world in broadband adoption and the unified story out of Washington DC was that overregulation might squelch the new broadband industry.

The primary fear in Washington DC (and among lobbyists) was that states were going to regulate broadband. At the time there were already investigations by many state regulatory commissions about regulating broadband in the same manner that telephone service was already regulated. Since broadband was regulated under FCC Title II, state regulators felt they had the full authority to also regulate broadband prices and the actions of ISPs.

The Brand X decision was the culmination of early FCC rulings and ensuing court cases. In 2000 the US Court of Appeals for the Ninth Circuit had ruled in AT&T Corp versus the City of Portland that broadband services are subject to Title II common carrier regulation, including tariff, interconnection and wholesale access obligations. The FCC reacted to the City of Portland ruling by declaring that cable modem service is an ‘information service’ exempt from Title II regulation. The Ninth Circuit reversed the FCC’s ruling based upon the City of Portland Ruling, thus leading to the appeal to the Supreme Court that resulted in Brand X.

Brand X was an interesting decision. The Supreme Court said that the FCC was free to classify broadband as either an information service or as a telecommunications service that would be regulated under Title II. The FCC only had to provide a rationale for any decision they reached.

Brand X has been the source of the mess that we’ve had at the FCC since then. Each subsequent FCC can invent a new rationale and reclassify broadband. The Wheeler FCC used Brand X to reclassify broadband under Title II and the Pai FCC used Brand X to go in the opposite direction.

What Justice Thomas realized is that the ruling gives federal agencies regulatory powers separate from Congress. An agency like the FCC needs to only concoct a good story and can then ignore laws passed by Congress. In the case of broadband, Congress has clearly conveyed that they want the FCC to monitor and regulate broadband, and yet Brand X gave the agency cover to do otherwise. Brand X is now being cited by other federal agencies defending decisions they make and is now the law of the land.

As Brodkin points out in his article, Brand X also ties the hands of courts, giving even more power to federal agencies to do whatever they want. The courts upheld the appeal of the FCC’s decision to kill net neutrality. In that decision Circuit Judge Patricia Millett said that the FCC’s rationale for killing Title II regulation was “unhinged from the realities of modern broadband service”, and yet she felt unable to rule against the FCC due to Brand X.

Justice Thomas’s change of heart doesn’t change anything for now. At best it means that if another case hits the Supreme Court testing the ability of a federal agency to hide behind Brand X that he might be ready to vote against it.

The other message that comes from the misuse of Brand X is that Congress has a responsibility to provide its intentions to agencies like the FCC. It’s somewhat unbelievable that Congress hasn’t taken any action concerning broadband since the days when we all were using dial-up. We’re long overdue for an update the Telecommunications Act of 1996, and Congress could reset the meter on many of the decisions the FCC is making. Unfortunately, that doesn’t look to be coming any time soon.

AT&T Cutting Capital Spending

AT&T announced it will be reducing capital spending in 2020. That news is significant for several reasons. AT&T’s capital plans are always big news because they have the largest annual capital budget of the big telcos and cable companies. The AT&T capital budget for 2019 was $23 billion. It’s big news when they are only planning on spending $20 billion in 2020.

It’s worth noting that some of AT&T’s capital spending is not being done with their own money. In 2020 they will be receiving the final installment of $428 million for the sixth year of the CAF II program. AT&T recently announced that they are 75% finished the construction of the FirstNet network for first responders, so the company should be receiving the last 25% of the $6.5 billion of federal funding next year. In future years AT&T will likely be collecting some significant share of the recently announced $9 billion 5G Fund paid out of the Universal Service Fund to bring better cellular service for the most rural parts of the country.

There are ripples throughout the telecom sector when AT&T increases or decreases its capital budget. For example, a significant slash of AT&T spending has a significant impact on the various major electronics vendors that will now have to lower their revenue expectations for 2020. While the whole telecom sector is busy, this still means lower revenues for the major telecom vendors.

This reduction in AT&T spending makes me wonder about the 5G war we are supposedly having with China. If you listen to the carrier-driven rhetoric in Washington DC, you would think that there is an urgent need to spend huge amounts of capital immediately on 5G infrastructure. It was that rhetoric that gave the FCC cover to double the size of the recently announced 5G Fund to $9 billion.

It’s hard to imagine that AT&T would be cutting its capital budget if 5G implementation was truly a national priority and a crisis. The truth about 5G can be seen by how the cellular carrier CEOs communicate with their stockholders – the big carriers are struggling right now to find an immediate business case that justifies huge spending on 5G. It turns out that much of the public isn’t willing to pay more for faster cellular broadband. Every carrier has a list of future benefits from 5G, but there are no applications that will create the quick revenues that would prompt AT&T to keep spending capital at historic levels.

This is not to say that AT&T and the other wireless carriers aren’t spending money on 5G – but AT&T is fitting 5G expansion into its shrinking capital budget. Contrary to everything that the carriers have been telling Washington DC, the carriers are not planning on spending massive amounts of their own money on 5G just yet.

Lower capital spending by AT&T also takes the wind out of the sails of the FCC’s argument that net neutrality was holding back the big ISPs from making capital expenditures. This was the primary reason cited by FCC Chairman Ajit Pai for killing net neutrality and Title II regulation. He argued that overregulation was stopping the big carriers from investing, and he’s still making this same argument today to justify his decision. If Chairman Pai was right, we should be seeing AT&T increase capital spending rather than cutting it.

The idea that there is a direct correlation between capital spending and regulation was always fictional. Big ISPs spend money on capital that they think will increase future returns – it’s hard to imagine regulations that would stop the big companies from pursuing good business ideas. AT&T’s capital spending is much more related to what its competitors like Verizon, T-Mobile, and Comcast are doing. When the FCC killed Title II regulation and net neutrality, the agency was removing the last regulations major from a broadband industry that was already barely regulated. It’s hard to think that change had much impact in the Board room or the business development groups at the big ISPs.

It’s worth noting that AT&T has now joined many other big US corporations and is using free cash to buy back its own stock. The company already announced plans to buy back $4 billion of its own stock in the first quarter of 2020 – retiring roughly 100 million shares. I’m sure that decision had some impact on the capital budget. This might mean that AT&T upper management values stock buy-backs to increase earnings per share more than they value capital spending.

Court Upholds Repeal of Net Neutrality

The DC Circuit Court of Appeals ruled on the last day of September that the FCC had the authority to kill Title II regulation and to repeal net neutrality. However, the ruling wasn’t entirely in the FCC’s favor. The agency was ordered to look again at how the repeal of Title II regulation affects public safety. In a more important ruling, the courts said that the FCC didn’t have the authority to stop states and municipalities from establishing their own rules for net neutrality.

This court was ruling on the appeal of the FCCs net neutrality order filed by Mozilla and joined by 22 states and a few other web companies like Reddit and Etsy. Those appeals centered on the FCC’s authority to kill Title II regulation and to hand broadband regulation to the Federal Trade Commission.

Net neutrality has been a roller coaster of an issue. Tom Wheeler’s FCC put the net neutrality rules in place in 2015. An appeal of that case got a court ruling that the FCC was within its power to implement net neutrality. After a change in administration, the Ajit Pai FCC killed net neutrality in 2017 by also killing Title II regulation. Now the courts have said that the FCC also has the authority to not regulate net neutrality.

The latest court order will set off another round of fighting about net neutrality. The FCC had quashed a law in California to introduce their version of net neutrality and this order effectively will allow those California rules to go into effect. That battle is far from over and there will be likely new appeals against the California rules and similar rules enacted in Washington. It wouldn’t be surprising to see other states enact rules in the coming year since the net neutrality issue is overwhelmingly popular with voters. It’s possibly the worst of all worlds for big ISPs if they have to follow different net neutrality rules in different states. I think they’d much prefer federal net neutrality rules rather than different rules in  a dozen states.

The reversal of net neutrality rules only went effect in June of 2018 and there have been no major violations of the old rules since then. The ISPs were likely waiting for the results of this court ruling and also are wary of a political and regulatory backlash if they start breaking net neutrality rules. The closest thing we had to a big issue was mentioned in this ruling. Verizon had cut off broadband for firemen in California who were working on wildfires after the firemen exceeded their monthly data caps. It turns out that wasn’t a net neutrality violation, but rather an enforcement issue on a corporate cellular account. But the press on that case was bad enough to prompt the courts to require the FCC to take another look at how ISPs treat public safety.

This issue is also far from over politically. Most of the democratic presidential candidates have come out in favor of net neutrality and if Democrats win the White House you can expect a pro-net neutrality chairman of the FCC. Chairman Pai believes that by killing Title II regulation that a future FCC will have a harder time putting the rules back in place. But the two court appeals have shown that the courts largely believe the FCC has the authority to implement or not implement net neutrality as they see fit.

While net neutrality is getting all of the press, the larger issue is that the FCC has washed its hands of broadband regulation. The US is the only major economy in the world to not regulate the broadband industry. This makes little sense in a country where are a large part of the country is still controlled by the cable/telco duopoly, which many argue is quickly becoming a cable monopoly. It’s easy to foresee bad behavior from the big ISPs if they aren’t regulated. We’ve seen the big ISPs increase broadband rates in the last few years and there is no regulatory authority in the country that can apply any brakes to the industry. The big ISPs are likely to demand more money out of Google, Facebook and the big web companies.

The FCC handed off the authority to regulate broadband to the Federal Trade Commission. That means practically no regulation because the FTC tackles a single corporation for bad behavior but does not establish permanent rules that apply to other similar businesses. The FTC might slam AT&T or Comcast from time to time, but that’s not likely to change the behavior of the rest of the industry very much.

There is only one clear path for dealing with net neutrality. Congress can stop future FCC actions and the ensuing lawsuits by passing a clear set of laws that either implements net neutrality or that forbids it. However, until there is a Congress and a White House willing to together implement such a law this is going to continue to bounce around.

The big ISPs and Chairman Pai argued that net neutrality was holding back broadband investments in the country – a claim that has no basis when looking at the numbers. However, there is definitely an impact in the industry from regulatory uncertainty, and nobody is benefitting from an environment where subsequent administrations alternately pass and repeal net neutrality. We need to resolve this once way or the other.

Will Congress Be Forced to Re-regulate Broadband?

Last year the current FCC largely deregulated broadband. They killed Title II regulation and also handed off any remaining vestiges of broadband regulation to the Federal Trade Commission. The FCC is still left with broadband-related tasks associated with broadband. For instance, they still have to track broadband adoption rates. They are still required to try to solve the rural digital divide. They still approve electronics used to provide broadband. But this FCC has killed its own authority to make ISPs change their behavior.

I wrote a blog a month ago talking about the regulatory pendulum. Industries that become dominated by monopolies are always eventually regulated in some manner – governments either proscribe operating rules or else break up monopolies using antitrust laws. One only has to look at the conversation going on in Washington (and around the world) about somehow regulating Facebook, Google and other big web platforms to see that this is inevitable. Big monopolies always grow to trample consumers and eventually the public demands that monopoly abused be curbed.

It’s only been a little over a year since the FCC deregulated broadband and there are already topics looming that beg for regulation. There is nothing to stop this FCC or a future FCC from reintroducing regulation – the courts already gave approval for regulating using Title II. Regulation can also come from Congress – which is the preferred path to stop the wild swings every time there’s a new administration. Even the ISPs would rather be regulated by Congress than to bounce back and forth between FCCs with differing philosophies.

Over half of the states have introduced bills that seek to regulate data privacy. Consumers are tired of data breaches and tired of having their personal information secretly peddled to the highest bidder. A year ago the California legislature passed data rules that largely mimic what’s being done in Europe. The Maine legislature just passed rules that are even more stringent than California in some ways.

It’s going to be incredibly expensive and complicated for web companies to try to comply with rules that differ by state. Web companies are in favor of one set of federal privacy rules – the big companies are already complying with European Union rules and they’ve accepted that providing some privacy to consumers is the cost of doing business. Privacy rules need to apply to ISPs as much as they do to the big web companies. Large ISPs are busy gathering and selling customer data in the same manner as web companies. Cellular companies are gathering and selling huge amounts of customer data.

There are other regulatory issues that are also looming. It seems obvious that if the administration and the Senate turn Democratic that one of their priorities will be to reimplement net neutrality. The ISPs are already starting to quietly violate net neutrality rules. They are first tackling things that customers like such as sponsored video as part of a cellular plan – but over time you can expect the worst kind of abuses that were the reasons behind net neutrality rules.

I think that broadband prices are going to become a major issue. The big ISPs have all acknowledged that one of the few tools they have to maintain earnings growth is to raise broadband prices. Cord cutting is accelerating and in the first quarter the ISPs lost cable customers at a rate of 6% annually. Cord cutting looks like it’s going to go much faster than the industry anticipated as millions of customers bail on traditional cable each quarter. The pressure to raise broadband rates is growing.

We’ve already seen the start of broadband price increases. Over the last few years the ISPs have been raising rates around the edges, such as increasing the monthly price for a broadband modem. More recently we’ve seen direct broadband price increases such as the $5 rate increase for bundled broadband by Charter. We’re seeing Comcast and other ISPs start billing people for crossing data caps. Most recently we know that several ISPs are talking about significantly curtailing special rates and discount for customers – eliminating those discounts probably equates to a 10% – 15% rate increase.

At some point, the FCC will have to deal with rising broadband rates. Higher broadband rates will increase the digital divide as households get priced out from affording broadband. The public will put a lot of pressure on politicians to do something about ISP prices.

Deregulating broadband at a time when a handful of ISPs have the vast majority of broadband customers was one of the most bizarre regulatory decisions I’ve ever seen. All monopolies, regardless of industry need to be regulated – we’ve known this for over a hundred years. It’s just a matter of time before Congress is forced to step up and re-regulate broadband. It may not be tomorrow, but I find it highly unlikely that broadband will still be deregulated a decade from now, and I expect it much sooner.