Tuesday, May 15, 2018

Broadband Capital Investment Increased Significantly from 2016 to 2017

Free State Foundation scholars have contended for years that heavy-handed regulations generally will depress investment in broadband infrastructure. After the FCC adopted Title II public utility-style regulations in the February 2015 Open Internet Order, I illustrated in a May 2017 blog and graph how broadband capital investment declined by $5.6 billion in the two years following that order.
As broadband providers anticipated the repeal of the Open Internet Order and its Title II public utility-style regulations with the December 2017 Restoring Internet Freedom Order, broadband capital investment increased significantly from 2016 to 2017. Using data collected from annual reports of thirteen large broadband providers, I estimate that total annual broadband capital investment increased by nearly 14% from the end of 2016 to the end of 2017.
The FCC’s adoption of the Restoring Internet Freedom (RIF) Order reclassified broadband as a Title I information service, thereby restoring a light-touch regulatory framework for broadband providers. While only five months have passed since the RIF Order was adopted in an open meeting, the proposal was announced back in April 2017. When FCC Chairman Ajit Pai announced the proposal, he cited the Free State Foundation’s initial estimate on broadband investment, stating that the Open Internet Order "has already cost our country $5.1 billion in broadband capital investment.” Given the voting history of the new Republican majority at the Commission, it was fairly clear then that a significant portion of the heavy-handed Title II regulations would be overturned.
Although the RIF Order will not become fully effective until June 11, 2018, broadband Internet providers have now had a year since the proposal’s announcement to prepare for a more investment-friendly regulatory environment. So, even though broadband providers needed to abide by the Obama-era rules imposed by the Open Internet Order throughout 2017, the data shows that competition in this dynamic marketplace encouraged additional investment activity. My sample of thirteen large broadband providers found that capital investment increased by 13.95% from the end of 2016 to the end of 2017. In my view, this increase is likely due, at least in part, to the prospect of a return to light-touch regulation.
USTelecom reported in October 2017 that industry-wide aggregate broadband capital investment, which is comprised of capital expenditure data for wireline telecommunications, wireless telecommunications, and cable broadband providers, totaled $76 billion in 2016. Therefore, an increase of 13.95% would mean that broadband capital investment increased throughout the industry by $10.6 billion to $86.6 billion in 2017. That is likely a high estimate for just a one-year increase. However, given that broadband providers invested $5.6 billion less than they otherwise would have in 2015 and 2016, industry-wide broadband capital investment should increase dramatically especially now that the new rules will create a more investment-friendly environment.
In fact, from the end of 2011 to the end of 2014 my sample of annual broadband capital investment grew by 14%. However, from the end of 2014 to the end of 2017, my sample of broadband capital investment grew by only 6%. Similarly, USTelecom data show that aggregate broadband capital investment for the U.S. industry grew by over 15% from the end of 2011 to the end of 2014. If industry-wide broadband capital investment totaled $86.6 billion in 2017, that would equate to a 10.5% increase from the end of 2014 to the end of 2017.
In my sample of broadband providers, I have companies like Comcast and Charter, which comprise nearly half of all wireline broadband subscriptions. I also include Verizon, AT&T, T-Mobile, and Sprint, which comprise a large majority of all wireless subscriptions. I note that the $68.8 billion in investment by these 13 companies is 79.4% of the $86.6 billion in industry investment I estimated above, so these companies account for a very large share of total industry investment. So while my estimate of a 14% increase in capital investment should be considered a fairly rough estimate of industry-wide broadband investment, I am very confident that from 2016 to 2017 broadband providers significantly increased capital investment. In fact, any increase in broadband capital investment from 2016 to 2017 is worth noting because investment declined in both 2015 and 2016.
The graph below shows broadband capital investment from 2011 to 2017 by the 13 large broadband providers in my sample.
When regulatory costs increase, as they did with the imposition of the Open Internet Order, broadband providers will invest less than they otherwise would have absent such regulatory costs because the additional costs reduce the return on investment. Although the RIF Order does not take full effect until June 2018, the mere prospect of the FCC returning to a light-touch regulatory regime, along with strong competition among many broadband providers and technologies, appears to have played an important role in encouraging additional capital investment throughout 2017.
There is little doubt that broadband capital investment will continue to increase in 2018 so long as the RIF Order is not overturned by Congress. (See this recent blog by Randolph May.)