In August 2015, Hal Singer, the Progressive Policy Institute economist, released a Forbes article showing the correlation between the FCC’s 2015 Open Internet proceeding and a $3.3 billion decline in broadband infrastructure investment from the first half of 2014 to the first half of 2015. The article received a lot of press attention from both proponents and opponents of the FCC’s 2015 Open Internet order. After reviewing the rebuttals to Mr. Singer’s analysis, his explanation that the recent Open Internet proceeding and order likely had a negative effect on broadband investment is probably correct.
Free State Foundation President Randolph May also released a pair of follow-up blogs in response to Mr. Singer’s analysis. The first blog entitled “We Told You So: Title II Regulation Harms Investment” recites the many times FSF scholars have warned the FCC about how Internet regulations can stifle broadband investment. The second blog entitled “All the Investment We Cannot See” discusses the unseen investment loss that is likely to result from the FCC’s Open Internet order. Mr. May declares that infrastructure investment will be less going forward than it otherwise would be absent the FCC’s new Internet regulations.
Proponents of Title II regulations have raised concerns about the validity of Mr. Singer’s analysis. Free Press released a fact sheet reciting its concerns. It claims that the decline in broadband investment is because AT&T’s capital expenditures returned to “normal levels” after recently finishing Project VIP, which the company had announced would happen back in 2012. This seemingly is a fair point considering that AT&T had the largest decline of all the providers in Mr. Singer’s sample. However, Mr. Singer responded to this in a follow-up blog. He stated that AT&T itself (in the same 2012 announcement) projected it would invest $22 billion annually through November 2015, yet the company is currently on track for roughly $18 billion in 2015. He also added that “normal levels” of investment for AT&T prior to Project VIP (in years 2010 to 2012) averaged $20.5 billion annually, not $18 billion.
Free Press also claims that Mr. Singer should have compared the second quarters of each year, as opposed to the first halves of each year, because the second quarter of 2015 was the first full quarter after the FCC’s Open Internet order was adopted. Free Press says that if Mr. Singer did this he would see that investment has actually increased. But Mr. Singer said that the “writing has been on the wall” since President Obama announced his support for Title II reclassification back in November 2014, giving ISPs plenty of time to react to the regulations before they were even adopted. Mr. Singer added that AT&T CEO Randall Stephenson specifically announced that such uncertainty from the Open Internet proceeding makes it “prudent to pause” broadband investment.
FSF scholars have submitted comments to the FCC in the past explaining that merely proposing Internet regulations by the FCC can cause uncertainty and stifle investment from ISPs. In February 2008, President Randolph May submitted comments in the matter of “Broadband Industry Practices,” responding to petitions from Free Press and other organizations asking the Commission to initiate a rulemaking to clarify what constitutes “reasonable network management” for broadband network operators. Mr. May 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.” With this perspective, it seems reasonable for Mr. Singer to have used the first half of each year in his sample, as opposed to the second quarter of each year.
In a September 2015 Forbes article, Harold Furchtgott-Roth tackled the FCC’s recent court brief in which the agency uses data from 2011 to 2013 to suggest that the FCC’s 2010 Open Internet order had a positive effect on broadband investment -- thus implying that the 2015 order will also have a positive effect. But Mr. Furchtgott-Roth explained that the correlation of investment increasing over a period of time does not necessarily mean that the 2010 order caused a positive effect. He said that while capital expenditures in the information economy grew by 8.2 percent annually from 2010 to 2013, capital expenditures in the remainder of the economy grew by 10.7 percent.
This is why Randolph May’s recent blog is very important to consider. Sure, broadband investment may grow over the next few years, but that does not mean it is growing as quickly as it would grow absent the new public utility-like regulation of Internet providers. The requirements of the FCC’s Open Internet order certainly disincentivize (on the margin) ISPs from expanding, upgrading, and developing new networks. And Mr. Furchtgott-Roth stated that in the information economy that margin can be worth billions of dollars annually in terms investment, innovation, and consumer welfare.
Chief economic strategist at the Progressive Policy Institute Michael Mandel released a September 2015 report entitled “U.S. Investment Heroes of 2015: Why Innovation Drives Investment,” which ranks the top 25 companies by their estimated domestic investment in their most recent fiscal year. Seven of the top 25 are classified in the information economy, four of which were in Mr. Singer’s broadband investment sample. Two of them (AT&T and Verizon) decreased investment in the first half of 2015 as compared to the first half of 2014. The four companies in Mr. Singer’s sample invested almost $50 billion into the U.S. economy last fiscal year. But how much more investment would we see without the FCC’s costly new Internet regulations? If Internet regulations are harming the broadband market’s largest participants, they are almost surely harming the smallest ones.
Mr. Singer’s Forbes article is simply an analysis of correlation between the FCC’s 2015 Open Internet order’s imposition of public utility style regulation and broadband investment. It will likely be several years before there is enough data in the sample to truly estimate the causal effect of Title II regulations on broadband investment. But, for now, there is enough in the way of correlation to worry about the absolute loss to the economy of “all the investment we cannot see.”