Tuesday, January 06, 2015

Increased Fees Caused by Title II Regulations Will Depress Investment

There have been many recent discussions about how Title II reclassification of broadband would adversely impact investment from Internet Service Providers (ISPs). In this regard, Kevin Hassett and Robert Shapiro used empirical evidence to test this theory in a November 2014 paper entitled “The Impact of Title II Regulation of Internet Providers On Their Capital Investments.” Their findings go as follows:
  • Internet Service Providers (ISPs) will invest more than $218 billion over the next five years if no regulations are adopted.
  • Imposition of Title II regulations would reduce broadband infrastructure investment by 12.8 to 20.8 percent.
  • Imposition of Title II regulations would reduce broadband infrastructure investment by $28.1 billion to $45.4 billion.
Hassett and Shapiro used panel data from Infonetics to model the investment levels of all U.S.-headquartered broadband providers and project trends over the next five years. Then, the authors used investment data from Incumbent Local Exchange Carriers (ILECs) as a model for how Title II regulations would affect all broadband investment, because these former-monopoly telephone companies have already been subjected to the requirements under Part II of Title II of the Communications Act.[1]

Of course, the FCC is only considering (at the moment) imposing Title II regulations on wireline providers, but because Hassett and Shapiro found a causal relationship between wireline and wireless investment, the projected reduction of total broadband investment by 12.8 to 20.8 percent affects both wireline and wireless investment. Additionally, Hassett and Shapiro specifically said that if the FCC were to impose Title II regulations on wireless providers as well, the total reductions in broadband infrastructure investment “would be far larger than those predicted if Title II regulations were applied only to wireline services.”

Hassett and Shapiro used a number of different regressions before they settle on their final results. The authors decided to weight “ISPs by the number and implicit growth rate of their subscriptions, which helps them plan their capital expenditures based on projected demand.” Subscription data includes wireline, mobile and wireless, access lines, and Voice over Internet Protocol. Weighting ISPs by the number and growth rate of subscriptions scales the regression results to control for outlier bias. As with the investment data, the authors used historical subscription data to project trends over the next five years. Ultimately, Hassett and Shapiro estimated that Title II regulations would adversely impact broadband infrastructure investment by 12.8 to 20.8 percent and these results were statistically significant.

Interestingly, Hassett and Shapiro put their last finding this way: “We believe that these effects would be even larger if one were to account for the impact of Title II regulation on innovation.” This makes for a great segue to another report about the negative impacts of Title II regulations.

In December 2014, Robert Litan and Hal Singer released a Progressive Policy Institute policy brief which estimates the amount of fees consumers would have to pay as a result of Title II regulations. Their findings go as follows:
  • Imposition of Title II regulations could add as much as $15 billion in annual fees.
  • The average annual increase in state and local fees levied on wireline and wireless broadband subscribers will be $67 and $72, respectively.
  • The annual increase in federal fees per household will be roughly $17.
Of course, Litan and Singer’s policy brief came out after Hassett and Shapiro’s paper. But I thought it would be interesting to combine the two paper’s findings. If fees are to increase by this much, consumers necessarily will demand less broadband service at the higher price. Some consumers may unsubscribe from their broadband plan, while other unconnected individuals may no longer consider subscribing. Either way, an increase in the price of broadband would adversely impact consumer demand, and thus, the number of subscriptions.

Therefore, if the data could take into account these fees that Litan and Singer have estimated, then we could also estimate subscription data to be less than that which Hassett and Shapiro used in their regressions. Controlling for this new data, it is likely that we would then see that Title II regulations would reduce broadband investment by significantly more than what Hassett and Shapiro estimated. This is because providers would be disincentivized to invest in networks if fewer people are subscribing, or even if the growth rate of subscribers is decreasing.

It is hard to say how much Title II fees would negatively affect investment. But when Hassett and Shapiro said that the effects of Title II regulations are likely to be greater when taking into account the impacts on innovation, they likely were aware of these fees and other harmful requirements, such as traditional public utility rate regulation. If we were able to account for the adverse impacts these increased fees would have on the number of subscriptions, we could then project even lower levels of investments by ISPs.

These two papers considered together provide theoretical and empirical evidence that Title II regulations would depress broadband investment. Even though the exact amount of such reductions in investment may be difficult to quantify with precision, the adverse impact is clear.

[1] Hassett and Shapiro state that their “estimates of the impact of Title II regulations on investment are likely to be conservative,” one reason being that if ISPs are regulated under Title II, they likely will be subjected to more requirements than what ILECs are currently subjected to.