On
August 25, 2015, Hal Singer, an economist at the Progressive Policy Institute, published
a piece in Forbes that appears to
confirm what Free State Foundation scholars have said over and over again for
years – that rigid regulation of broadband Internet services providers (ISPs)
almost certainly will discourage investment. From a sample of some of the
largest ISPs in the United States, Mr. Singer finds that broadband (wireline
and wireless) infrastructure investment fell by 8% in the first half of 2015
compared to the first half of 2014. Investment by wireline providers alone fell
by 12%.
According
to Mr. Singer, this is only the third time that capital expenditures by major
Internet providers have gone down from the previous year. The first two times
followed the “dot.com” bubble burst in 2001 and the Great Recession in 2009. Of
course, now there are no such exogenous events to explain the investment
drop-off. Because GDP increased over the same period and ISP revenues do not
appear to be falling, Mr. Singer concludes the FCC’s adoption of public
utility-like regulation of Internet providers in the 2015 Open Internet
Order
is the most plausible explanation for the reduction in capital expenditures.
Mr.
Singer, Free State Foundation scholars, and many others who opposed the
imposition of public utility-like common carrier regulation on Internet
providers warned that broadband investment would be adversely affected if the
agency ignored the warnings. It looks like we may have been correct and, if so,
the decrease in capital expenditures below what they otherwise would have been
harms the nation’s overall economy, reduces the number of jobs available, and
adversely impacts the quality of consumers’ Internet services.
Over
the last decade, we at the Free State Foundation have said countless (yes, I really do
mean countless!) times that common carrier-like regulation of ISPs would stifle
investment. Therefore, I can’t say we are surprised that broadband investment
already appears to have declined substantially. It was apparent for several
months in advance of the Commission’s meeting that, come what may, FCC Chairman
Tom Wheeler and his two Democrat colleagues were determined to apply the public
utility model to Internet providers.
Here
is just a sampling of the comments Free State Foundation scholars submitted to
the Commission over the years in which we too specifically warned that rigid
regulation of ISPs likely would discourage broadband investment.
In
July 2014, Seth Cooper and I submitted comments in the matter
of “Protecting and Promoting the Open Internet.” We said the following in response
to the Commission’s May 2014 Notice
of Proposed Rulemaking (NPRM):
Today, there is
no evidence of marketplace failure or demonstrable consumer harm in the
Internet ecosystem, including the Internet service provider market segment.
Instead, there is competition among Internet service providers employing
various technological platforms. And investment in network facilities is
strong, and innovative business models are thriving. If new net neutrality
mandates are adopted, there is a substantial risk that this new regulatory
action will disrupt, or at least inhibit, the innovation and investment that
has characterized the Internet ecosystem for the past decade or so. This, in
turn, and most significantly, will harm consumer welfare.
In
September 2014, Seth Cooper and I submitted reply comments in the matter
of “Protecting and Promoting the Open Internet.” We said: “A Commission-imposed
regulatory regime, which in the name of preventing ‘discrimination’ would
enforce the effectual subsidization of heavier users by lighter users and
thereby deter investment in facilities, would by no means necessarily be
consumer-friendly.” In response to commenters asking the Commission to impose
Title II regulation, Seth Cooper and I warned: “There is a long history
demonstrating that Title II regulation represses investment and innovation and
limits consumer choice.”
In
January 2010, Seth Cooper and I submitted comments in the matter
of “Preserving the Open Internet and Broadband Industry Practices.” We criticized
the Commission’s efforts to apply century-old regulations to Internet providers:
“If adopted as proposed, this new Internet regulation – which, in effect, would
be much like the public utility regulation that applied to last century's
voice-only telephone companies and the nineteenth century's railroads -- almost
certainly would discourage investment and job creation, stymie innovation, and
harm overall consumer welfare.”
In
July 2010, Seth Cooper and I filed comments in response to
the Commission’s Notice of Inquiry in
the matter of “Framework for Broadband Internet Service,” suggesting that
reclassifying broadband as a telecommunication service “would be harmful to
broadband innovation and investment.”
In
October 2010, Seth Cooper and I again filed comments in response to
the Commission’s Further Inquiry in
the matter of “Preserving the Open Internet and Broadband Industry Practices.”
We advocated for a minimalist regulatory approach to “ensure that investment
and innovation in new broadband platforms and Internet services continues to
grow, subject not to regulatory dictates, but rather to the dictates of the
marketplace.”
In
February 2008, I submitted comments in the matter
of “Broadband Industry Practices,” responding to petitions from Free Press and a
number of other organizations asking the Commission to initiate a rulemaking to
clarify what constitutes “reasonable network management” for broadband network
operators. I wrote that “the uncertainty created by the mere initiation of a
rulemaking proceeding that likely would result in overly broad prohibitions
will chill necessary new network investment.” I added that “the FCC must not
impose common carrier-like regulations that eliminate or reduce private sector
investment incentives.”
In
other words, during this decade-long debate, FSF scholars have been consistent
regarding the potential adverse impact of imposing common carrier-like
regulation on Internet providers. (See the Further Readings below, dating back
to 2006.) This is why we are not surprised that it appears that broadband ISPs already
have reduced their investment. Assuming for the sake of argument that the FCC’s
2015 Internet regulation order remains in place, it is not likely that there
necessarily will be continuing straight-line year-over-year declines in capital
spending. But it is likely – and this is the important point, even though it is
difficult to measure – that there will be less investment than there otherwise
would have been.
If new net
neutrality mandates are adopted, there is a substantial risk that this new
regulatory action will disrupt, or at least inhibit, the innovation and
investment that has characterized the Internet ecosystem for the past decade or
so. This, in turn, and most significantly, will harm consumer welfare.
We
don’t really relish saying “we told you so.” But we did.
Further
Readings
Randolph J. May,
“The Net
Neutrality Controversy: A Historical Perspective,” FSF Blog (January 27, 2015).
Michael J.
Horney, “Increased Fees
Caused by Title II Regulations Will Depress Investment,” FSF Blog (January 6, 2015).
Michael J.
Horney, “Title II Would
Not Just Harm Consumers, It Would Harm Workers Too,” Perspectives from FSF Scholars, Vol. 9,
No. 43 (December 17, 2014).
Randolph J. May,
“Thinking the
Unthinkable: Imposing the ‘Utility Model’ on Internet Providers,” Perspectives from FSF Scholars, Vol. 9,
No. 32 (September 29, 2014).
Randolph J. May,
“FSF Scholars
React to DC Circuit’s Net Neutrality Decision,” FSF Blog (January 15, 2014).
Gus Hurwitz, “Two Sides of the
Internet’s Two-Sidedness: A Consumer Welfare Perspective,” Perspectives from FSF Scholars, Vol. 8,
No. 25 (September 30, 2013).
Seth L. Cooper,
“FCC’s
Pro-Regulatory Broadband Policy Risks Investment and Jobs,” FSF Blog (September 11, 2012).
Randolph J May
and Seth L. Cooper, “New FCC
Regulations Reduce Investment and Hinder Job Creation,” Perspectives from FSF Scholars, Vol. 6,
No. 22 (September 13, 2011).
Randolph J. May,
“Overregulating
the Internet "Net Neutrality" Would Discourage Investment and
Innovation,”
Perspectives from FSF Scholars,
Vol.5, No. 2 (January 14, 2010).
Randolph J. May,
“Riding the Back
of the Internet Public Utility Tiger,” FSF
Blog (August 10, 2009).
Randolph J. May,
“Don’t Let Net
Neutrality Go Airborne,” Perspectives
from FSF Scholars, Vol. 2, No. 17 (June 14, 2007).
Randolph J. May,
“Illogical Net
Neutrality Idea,”
Perspectives from FSF Scholars, Vol.
2, No. 10 (February 26, 2007).
Randolph J. May,
“Sidestepping the
Net Neutrality Boondoggle,” Perspectives from FSF Scholars, Vol. 2,
No. 2 (January 9, 2007).
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