On
November 30, 2015, in an article for the Wall
Street Journal, Eric Morath reported that capital expenditures within the
entire U.S. economy declined 3.8% through the first 10 months of 2015 compared
to the same period in 2014. Mr. Morath reported that lower levels of investment
in facilities and equipment have slowed U.S. productivity and output and that this
slowdown is a key reason why the overall economy has not grown faster than 2%
in recent years.
Mr.
Morath gives a couple of reasons why companies are not investing as heavily as
economists forecast just one year ago. Perhaps foremost, businesses have
hesitated to commit to projects due to consumer demand that remains uneven.
But, significantly, according to Mr. Morath, “concerns about the regulatory
environment” is another reason for the investment decline.
“Concerns
about the regulatory environment” is certainly worth considering with regard to
investment in broadband facilities.
There
does not seem to be uneven consumer demand in the broadband market. Indeed, demand
is increasing rapidly. In fact, mobile data traffic is projected to increase seven-fold from
2015-2019.
Consumers continue to use more data; acquire newer, more innovative devices and
applications; and consume ever more content. The cost savings (in time and
money) that Internet access provides consumers (through shopping,
transportation, work, education, entertainment, and myriad other applications) generally
more than offsets any nominal increase in the price of broadband service.
But
while broadband Internet providers may not suffer from the lack of demand
depressing other markets, they do confront an uncertain, more costly regulatory
environment that likely affects their forward-looking capital investment
decisions. The prospect of continuing Title II public utility-like regulation
may well cause broadband providers to invest less than they otherwise would. It
is often difficult to know with any precision how much a company would have
invested absent concerns regarding costly regulations. But sometimes there are
enough worrisome signs to suggest paying close attention – especially in the already
current slow investment, slow growth economic environment.
As
Free State Foundation Research Associate Michael Horney outlined in an October 2015
blog,
Progressive Policy Institute economist Hal Singer found a $3.3 billion decline
in broadband capital expenditures from the first half of 2014 to the first half
of 2015. This decline correlated with the conduct of the FCC’s Open Internet proceeding and the resulting order imposing public
utility-like regulation on the Internet service providers. And with regard to
regulatory uncertainty and its potential adverse investment impact, it is worth
acknowledging the inherent uncertainty created by the FCC’s new amorphous
“general conduct standard.”
On
November 5, 2015, Mr. Singer updated his earlier
figures to include the first three quarters of both 2014 and 2015. He determined
that capital expenditures for broadband fell year-over-year by $2.9 billion among
wireline providers alone and by $2 billion if wireless providers are included
in the sample.
In
September 2015, Michael Mandel, the Progressive Policy Institute’s chief
economic strategist, released a report, “U.S. Investment
Heroes of 2015: Why Innovation Drives Investment,” ranking the
top 25 companies according to their estimated domestic capital investment in their
most recent fiscal year. Here is the key chart from that report.
As
the chart shows, with respect to 2014 capital expenditures, four of the top 25
companies are broadband Internet providers that are now subject to Title II
regulation. AT&T and Verizon are the top two “investment heroes.” Both
of these broadband providers decreased investment in the first three quarters of
2015 compared to 2014’s first three quarters.
Summing
the capital expenditures of AT&T, Verizon, Comcast, and Time Warner Cable,
these four major broadband providers invested $48.7 billion in 2014. In other
words, over 28 percent of capital expenditures in Mr. Mandel’s top 25 ranking is
attributable to these four broadband providers. So if the regulatory
environment is having a negative effect on the broadband Internet provider “investment
heroes,” as may well be the case, then it surely will adversely impact
aggregate productivity and economic growth.
Moreover,
if the regulatory environment is causing the nation’s largest broadband
providers to curtail investment, it almost surely is doing the same with
respect to the smaller ones.
The
Court of Appeals for the D.C. Circuit just heard the appeal from the FCC’s Open Internet order. The ultimate fate, as a matter
of law, of the FCC’s reclassification of Internet providers as
telecommunications carriers subject to the Communications Act’s public
utility-like regime remains up in the air. But, in the meantime, on the ground,
it appears that the FCC’s action – the “concerns about the regulatory
environment” as the Wall Street Journal
reporter put it – already likely is negatively impacting the rate of
investment.
Needless
to say, as a matter of policy, this is not good for the overall economy or for
those looking for jobs that a more robust economy might create.
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