Tuesday, September 11, 2012

FCC's Pro-Regulatory Broadband Policy Risks Investment and Jobs

In August, the Federal Communications Commission released its Section 706 Report measuring the availability of advanced telecommunications services. The 706 Report's data shows that approximately 95% of all Americans now have access to broadband services. And the 706 Report acknowledges the tens of billions of dollars in broadband infrastructure investment being made each year by the private sector.
Regrettably, the pro-market data points presented in the 706 Report were trumped by FCC's pro-regulatory gloss and its interventionist approach to the broadband market. Taking what has been called a "glass is 5% empty" approach, the FCC included in its 706 Report a finding that broadband is not being deployed in a "reasonably timely" manner to all Americans.
But if anything is not reasonably timely it's the FCC's negative broadband deployment finding. Controversially, the FCC regards Section 706 as a source of special regulatory power, triggered by its negative broadband deployment findings. By choosing to subject the economically vibrant broadband market to added burdens, such as net neutrality regulations, the FCC runs the risk of diminishing incentives for private investment, slowing deployment, and inhibiting job growth.
According to the 706 Report's numbers, some 19 million people – or 6% of the population – live in areas lacking broadband access. So 94% of the population has access to broadband by the 706 Report's measurement. That figure is impressive in its own right, considering that the FCC's prior 706 Report estimated that as many as 26 million Americans lacked access to broadband. Moreover, data cited by the FCC's Omnibus Broadband Initiative (OBI) indicates that broadband was deployed to only 15%-20% of Americans in 2003.*
But even the 94% estimate fails to take account of 3G wireless broadband. "[I]t is clear," the FCC recognizes, "that higher-speed mobile broadband services have been significantly deployed since our last report." Taking 3G wireless broadband into account shrinks the number of unserved down to 5.5 million people – just 1.7% of the population.
The 706 Report concedes that "[p]rivate industry is continuing to build out broadband and has invested significantly into broadband networks to date." According to figures cited in the 706 Report, between the years 1996 and 2010 wireline broadband providers invested $41 billion annually in expanding their networks. That's north of half-a-trillion dollars in broadband investment over a fifteen-year period. CTIA estimates for the years 1996-2010 show that cumulative capital investments for wireless providers totaled more than $277 billion, with wireless providers investing another $25 billion in 2011.
Given such positive deployment and investment data, the FCC's determination that broadband isn't being deployed in a reasonable and timely fashion is certainly hard to explain, let alone justify. But the FCC's finding can be more easily explained in light of the agency's pro-regulatory philosophy, including its interventionist approach to the broadband market.
The FCC continues to push the controversial view that a negative finding regarding broadband deployment under Section 706(b) gives the agency additional regulatory powers. And the FCC shows itself all too eager to use those assumed powers. The FCC's latest 706 Report finding simply renews the agency's additional regulatory power claims.
The 706 Report highlights the FCC's network neutrality regulations among its marketplace interventions, suggesting these regulations were undertaken ostensibly to accelerate broadband deployment and remove barriers to infrastructure investment. According to the 706 Report, net neutrality regulations were adopted "to ensure the continuation of the Internet’s virtuous cycle of innovation and investment, and the Commission must continue to prioritize those efforts consistent with the mandate of section 706."
Now if the FCC's net neutrality regulations really removed barriers to infrastructure investment, one would naturally expect to find corroborating data. But the 706 Report contains no data indicating actual increases in annual broadband investment following the adoption of those regulations. 
FSF President Randolph May and I pointed out in last September's Perspectives from FSF Scholars essay "New FCC Regulations Reduce Investment and Hinder Job Creation," that there is evidence suggesting that net neutrality regulations, in particular, actually raise barriers to broadband infrastructure investment. Our essay directed attention to Gerald R. Faulhaber’s and David J. Farber's 2010 paper "The Open Internet: A Customer-Centric Framework." Faulhaber and Farber compared higher winning bid prices for the 700 MHz band's unencumbered A and B blocks with lower bid prices for the C block, which was subject to  "open access" or net neutrality-like use restrictions. According to Faulhaber and Farber, "[n]etwork neutrality regulation thus decreased the value of the spectrum asset by 60%...reduc[ing] the affected telecommunication asset and thus reduc[ing] the incentive to invest in such assets."
In sum, the FCC's negative finding regarding broadband deployment flies in the face of two critical indicators: first, the rapid deployment of broadband over the last several years; and second, the heavy financial investment in infrastructure made by marketplace providers over that same timeframe. Taken together, those indicators suggest that the broadband market is a potent source of economic growth and job creation. In today's weakened economy, this success shouldn't be ignored, much less denigrated.
Where markets thrive, government should stay its hand to best promote economic growth and efficient results. But once more the FCC has positioned itself to second-guess the workings of the expanding, investment-heavy broadband market through regulatory restrictions. The agency risks injecting economic dislocations and investment disincentives into the market. In an economy clamoring for investment and new jobs, regulating a growing and competitive market is neither reasonable nor timely.

[* CORRECTION AND CLARIFICATION: This post previously attributed 2003 deployment data to the National Broadband Plan instead of OBI work prepared in support of the Plan.]