Friday, August 05, 2016

FCC Actions Exacerbate the Decline in Business Investment

You probably saw the dismal figures for business investment released late last month in conjunction with the government’s most recent report on GDP, which itself was dismal. If you didn’t take note, you should have.
In reporting on the latest government data, the lead in the July 29, 2016, Wall Street Journal story declared that “declining business investment is hobbling an already sluggish U.S. expansion.” According to the WSJ, Gregory Daco, an economist at Oxford Economics, stated, “weakness in business investment is an important and lingering growth constraint.” MarketWatch’s July 29 story gloomily declared: “Businesses cut fixed investment by 3.2%, the biggest drop since 2009….Nor do companies show any sign they soon plan to ramp up investment, one of the three main pillars of economic growth.” Many other reports were to the same effect.
In the face of well-documented declining capital investment by businesses, now hovering near all-time lows, actions by the Federal Communications Commission that discourage further investment are far from harmless to the nation’s economy or to its consumers. It is surprising that in such a persistent, low-growth, low-investment economic environment, the agency continues to propose policies that discourage further investment by Internet service providers, despite the fact that from 2000 – 2015, ISPs had been leaders in capital investment in the United States.
Economist Hal Singer has shown in a report that, for the twelve largest ISPs, capital expenditures declined by 0.4% from December 31, 2014 through December 31, 2015. This represents a reduction in investment of about $250 million year-over-year. While not suggesting that the FCC’s decision in February 2015 to classify ISPs as common carriers subject to public utility-like regulation is solely responsible for the decline in ISP investment, Mr. Singer does say: “[W]hen investment theory is corroborated by evidence, as it is here, it is reasonable to infer that reclassification of ISPs as Title II common carriers was not a good thing for investment.” And according to Mr. Singer’s very recent calculations, early (but still incomplete) data for the first six months of this years indicate that the decline in investment by ISPs is likely to continue.
Unfortunately, in addition to the FCC’s Title II classification determination, the Commission’s proposed action in the “special access” (now renamed “Business Data Services” or “BDS”) proceeding, if adopted, likely will further deter capital investment by broadband services providers. The reason is simple – and widely-acknowledged by regulatory economists: Rate regulation mandating that incumbent telephone company providers give competitors access to their facilities at below-market rates discourages investment in facilities by both incumbent providers and new entrants. This depressive investment effect is the likely result of any Commission action in the BDS proceeding that forces the telephone companies to reduce the rates for network inputs sought by competitors.
Thus, for example, it should not be surprising that cable companies, new facilities-based entrants trying to gain a further foothold in the BDS market, oppose Commission actions that will force incumbent telephone company rate reductions. Lower incumbent rates for BDS services and inputs will only make it more difficult for cable operators and other non-incumbent competitors to compete – thereby discouraging capital expenditures for new network facilities by competitors and new entrants and incumbents alike.
The Commission would do well to consider the separate opinion of Justice Stephen Breyer in the Supreme Court’s landmark AT&T v. Iowa Utilities Board (1999) decision criticizing the FCC’s Unbundling Network Element (UNE) rules mandating excessive sharing of incumbents’ network facilities at below-market regulated rates. (Remember the FCC’s years-long UNE fiasco in which the FCC for years artificially propped up hundreds of non-facilities-based “competitors”? Or, like many, perhaps you’ve been trying to forget!)
Here is what Justice Breyer had to say:
“Even the simplest kind of compelled sharing, say, requiring a railroad to share bridges, tunnels, or track, means that someone must oversee the terms and conditions of that sharing. Moreover, a sharing requirement may diminish the original owner’s incentive to keep up or to improve the property by depriving the owner of the fruits of value-creating investment, research, or labor.”
“Nor can one guarantee that firms will undertake the investment necessary to produce complex technological innovations knowing that any competitive advantage deriving from those innovations will be dissipated by the sharing requirement.”

“It is in the unshared, not in the shared, portions of the enterprise that meaningful competition would likely emerge. Rules that force firms to share every resource or element of a business would create, not competition, but pervasive regulation, for the regulators, not the marketplace, would set the relevant terms.”

I wonder why it is so difficult for the Commission to acknowledge that, in a marketplace environment such as the BDS market where meaningful competition already exists in most locations and potential competition looms in the others, that forced sharing of network infrastructure inputs at regulated rates actually discourages capital investment and facilities-based competition?
I can’t answer that question. But I do know this: At a time when capital investment by American businesses is declining, FCC actions that exacerbate that decline in investment – even if it is just a matter of slowing the rate of growth – are not good for our nation’s economy or its consumers.