Capital Expenditures by US Broadband Providers Surged in 2021

Capital expenditures by U.S. broadband providers surged to over $86 billion in 2021, according to US Telecom's 2021 Broadband Capex Report. US Telecom's report was released on July 18. 

The $86.1 billion annual capex total is particularly remarkable considering the economic difficulties that broadband providers faced in 2021, including microchip shortages, labor shortages, supply chain problems, and the ramping up of inflation. The $86.1 billion in capex for 2021 significantly exceeded the $79.4 annual expenditure total for broadband providers in 2020. (For more on that, see US Telecom's 2020 Broadband Capex Report.) According to US Telecom's 2021 report, U.S. broadband providers have invested over $2 trillion in network infrastructure since 1996. In past reports, US Telecom has pointed out that these estimates likely are conservative because they exclude annual investment by small U.S. broadband providers as well as U.S. satellite broadband providers.

Continuing strong investment is clear indicator of a healthy and competitive broadband services market. (On July 1 of this year, the Free State Foundation offered many other data points about the market's vibrancy in comments it filed in the FCC's 2022 Communications Marketplace Report proceeding.) Importantly, the massive capital expenditure reported by US Telecom is expanding access to next-generation broadband services and delivering faster and more reliable speeds to more Americans.  

Strong U.S. Wireless Investment in 2019 Enabled Solid Performance Amidst Lockdowns

Today, CTIA released its 2020 Annual Survey. The survey highlights show stunning growth in mobile wireless networks and performance in 2019, including $29.1B in U.S. capex in wireless networks, about 46,000 new cell sites built, over 20 million new U.S. wireless subscriptions for a total of 442.5 million subscriptions, and 37.1 trillion megabytes of wireless data consumption. Importantly, the tremendous investment by the U.S. wireless industry in 2019 helped ensure that mobile wireless networks successfully accommodated surging data and wireless traffic in early 2020 amidst the first several weeks of lockdowns. That accomplishment sets U.S. networks apart from other nations in which speeds declined when faced with rising traffic. Be sure to check out the wireless industry's 2020 Annual Survey Highlights at CTIA's website. 

New Report Highlights the Economic Impact of the "4G Decade"

If you're old enough to remember a time before cellphones, you likely have a general appreciation of the transformative role that mobile connectivity has played in American life. But have you ever tried to express that impact in economic terms? A July 29 study, prepared by CTIA — The Wireless Association and Recon Analytics, does just that. And the takeaways are impressive.

"The 4G Decade: Quantifying the Benefits," as its name suggests, details the impact of 4G wireless technology on investment, Gross Domestic Product (GDP), jobs, and consumer welfare during the ten-year period that began in 2010. One data point, in particular, drives home the overarching theme: based upon contributions to GDP ($690.5 billion in 2019 alone), were the U.S. wireless industry its own country, it would rank as the 21st largest economy in the world.

Some additional conclusions worth noting:

• Wireless providers invested $261 billion in 4G networks over the last ten years;
• During that same timeframe, wireless GDP grew by 253 percent — and was responsible for nearly 10 percent of the total increase in U.S. GDP;
• 4G networks support 20 million American jobs — one out of every six — making wireless the top industry in terms of job contribution; and
• Prices have dropped significantly, saving consumers $130 billion annually. The same unlimited plan that cost on average $114 in 2010 today can be purchased for just $65 — while speeds, coverage, and device capabilities all have improved substantially.

As noted by Roger Entner, Analyst and Founder of Recon Analytics, "[t]he trajectory of U.S. 4G development should serve as a guide to consider — and to enable — the full transformational power of the coming 5G decade."

On the topic of 5G's potential economic impact, James E. Prieger, Professor of Economics and Public Policy at the Pepperdine University School of Public Policy and a Member of the Free State Foundation's Board of Academic Advisors, recently weighed in. In a June 1 Perspectives from FSF Scholars, "An Economic Analysis of 5G Wireless Deployment: Impact on the U.S. and Local Economies," he concluded that:

8.5 million jobs will be created over 2019-2025 compared to a counterfactual 4G-only world, with an average of 1.2 million new jobs each year. The workers filling these new jobs will earn more than $560 billion during that time, create $1.7 trillion in additional output, and add over $900 billion to U.S. GDP.

Report Highlights Mobile Wireless Advancements and the Future of 5G

For info-rich insight into the current state of the mobile wireless market as well as a glimpse at the 5G future, check out GMSA's report, "The Mobile Economy, North America 2019." The report identifies ongoing subscriber migration from 2G and 3G to 4G and, increasingly, to 5G, and the immediate economic opportunities offered by 5G fixed wireless residential broadband and 5G enterprise services. Additionally, the report charts recent and projected capital expenditures and job creation directly as well as indirectly related to wireless services. 

Robert Crandall: Legislators and Regulators Must Exercise Humility

In August, Dr. Robert Crandall, a member of the Free State Foundation’s Board of Academic Advisors, authored a report titled “The Effects of Rapid Technological Change on Regulatory Policies in the Communications Sector.” Dr. Crandall discusses how regulation in industries characterized by rapid technological change often leads to counterproductive constraints on firms.

The report examines four cases studies of regulation in the communications sector:

• The artificial distinction between “local” and “long-distance” calling in telecommunications regulation

• The 1996 Telecommunications Act’s costly failure with regard to local network unbundling

• Deregulation, reregulation, and deregulation of cable television rates

• The AOL-Time Warner Merger

Dr. Crandall uses these examples to explain how well-intentioned regulation can lead to unintended consequences that have detrimental effects on consumers, like foregone investment in broadband infrastructure. He states:

In each of these examples of policymaking in the communications sector, technological change – and the associated market changes – helped to render a policy decision unnecessary or irrelevant. In each case, legislators and regulators could not predict the future changes in market conditions brought about by changing technologies and consumers’ adaptation to these changes, leading to serious policy errors with adverse effects on consumer welfare.

Dr. Crandall concludes that regulators should be careful not to impede investment in new technologies, like 5G, through regulatory interventions. And in the context of mergers, agencies generally should not impose regulatory conditions of approval because oftentimes technological innovation quickly renders the conditions outdated or irrelevant.

As I stated in a blog last week, U.S. mobile data traffic is projected to grow fivefold from 2017 to 2022 and the deployment of 5G technology is expected to create 3 million jobs, $275 billion in investment, and $500 billion in annual economic activity. In order for consumers to enjoy these projected economic benefits, as Dr. Crandall states, legislators and regulators must exercise humility when considering laws and regulations in the dynamic broadband marketplace.

Charter's New Wireless Service "Spectrum Mobile" Increases Competition

Last month, Charter Communications launched a new mobile wireless broadband service, Spectrum Mobile. Spectrum Mobile’s unlimited data plan starts at just $45 a month. Consumers will enjoy the benefits of over $27 billion in technology and infrastructure invested by Charter since 2014. Spectrum Mobile consumers who also use Charter’s fixed broadband service will enjoy high-speed connections at home and on the go.

This new wireless offering solidifies Charter as one of the leaders in both wireline and wireless broadband, and it spurs further competition in the broadband market. Charter joins Comcast as the other major cable provider to enter into the mobile wireless market. This benefits consumers by putting downward pressure on wireless prices and by encouraging additional network investment from wireless competitors.

SPEED Act Would Promote Broadband Deployment in Underserved Areas

On October 19, 2017, Senators Roger Wicker (R-MS) and Catherine Cortez (D-NV) introduced the Streamlining Permitting to Enable Efficient Deployment of Broadband Infrastructure Act of 2017 (SPEED Act), which would expedite federal permitting processes for the deployment of next-generation broadband technologies. Specifically, the bill would exempt from environmental and historic reviews currently required by the FCC and other federal agencies for proposed broadband deployment in public rights-of-way areas. This regulatory relief would promote the expansion of broadband access in rural and underserved areas.

The introduction of this legislation was praised by FCC Commissioner Michael O’Rielly who said: "This bipartisan effort to ease and accelerate the deployment of broadband technology would put an end to some of the excessive delays industry experiences when siting facilities." Moreover, Kelly Cole, Senior Vice President of Government Affairs at CTIA, stated: “This legislation will streamline the federal regulatory review process for wireless infrastructure and pave the way for significant investment in next-generation 5G wireless. Quick passage of this legislation will improve access to jobs, education and healthcare for Americans in rural and urban communities in Mississippi and Nevada, and across the country.” (See October 20 edition of TRDaily.)

Unnecessary regulations impede efforts to expand broadband deployment and negatively impact broadband investment. We commend Senators Wicker and Cortez for their bipartisan effort to remove unnecessary federal regulations and to promote broadband deployment in underserved areas, creating access for Americans on the wrong side of the digital divide.

FCC Paves the Way for More Satellite Broadband Deployment

Yesterday, the FCC adopted a Report and Order to modernize rules facilitating deployment of next-generation satellite systems. In a June 2017 Perspectives from FSF Scholars entitled “The Problem with Municipal Broadband and Solutions for Promoting Private Investment,” Ted Bolema and I discussed how satellite broadband is an emerging technology that could be a viable solution to closing the gap of the digital divide. Satellite broadband is accessible to 99.1% of Americans at 10Mbps down and 1 Mbps up, but innovation has enabled consumers to access speeds of 25 Mbps down and 3 Mbps up. By simplifying regulatory approval processes and relaxing requirements for antenna pointing and frequency-band usage, this Report and Order will allow satellite broadband providers to experiment with consumer-friendly innovations and deliver high-speed broadband access to rural Americans.

Broadband Investment Slowed by $5.6 Billion Since Open Internet Order

For years Free State Foundation scholars have declared that Internet regulation increases costs for broadband providers and ultimately crowds out resources that otherwise would be used for capital investments to build-out and modernize network infrastructure. They made this point very clear, especially with regard to Title II public utility regulation, in their initial comments and reply comments during the Federal Communications Commission’s (FCC) Open Internet proceeding in 2014.

Nevertheless, in February 2015, the FCC adopted the Open Internet Order, which reclassified broadband as a telecommunication service and imposed Title II public utility regulation on broadband providers. The FCC stated confidently in the Order that “[h]istory demonstrates that this careful approach to the use of Title II will not impede investment.” The Commission also asserted in the Order that “our rules will not disrupt capital markets or investment.” After adoption of the Open Internet Order, FSF scholars have observed multiple times that these unnecessary regulations have, in fact, chilled investment from Internet service providers (ISPs). (See here, here, and here.)

In his address on April 26, FCC Chairman Ajit Pai cited FSF research estimating that the Open Internet Order "has already cost our country $5.1 billion in broadband capital investment." Just two years after the FCC adopted the Open Internet Order, I estimate that broadband providers significantly slowed investment, despite the claims by the FCC that the opposite would occur. Taking into account the latest USTelecom investment data, I now estimate that foregone investment in 2015 and 2016 was about $5.6 billion, an amount providers likely would have invested in a business climate without Title II public utility regulation.

Here is how I calculated that figure.

USTelecom publishes data on broadband capital expenditures (capex) for each year dating back to 1996. Using this historical data, I collected figures on the previous twelve years before the Open Internet Order was adopted in February 2015. I picked 2003 as the first year because the market had just collapsed from the dot-com bubble and total broadband capex was at its lowest point since 1996. I established a trend line from 2003 to 2016, which created a linear pattern over the first 12 years before the Open Internet Order and estimated what we could have expected broadband capex to be in 2015 and 2016 without Title II public utility regulation.

I also collected broadband capex data on sixteen of the largest ISPs for years 2014, 2015, and 2016. My sample found a 2.46% decline from 2014 to 2015 and a 4.69% decline from 2015 to 2016, totaling an overall decline of 7.04% from 2014 to 2016. These figures are pretty close to economist Hal Singer’s finding that a sample of twelve ISPs declined broadband capex by5.6% from 2014 to 2016.

In 2014, according to a December 2016 research brief by USTelecom, broadband capex totaled $77.4 billion. Therefore, a 2.46% decline over the following year means that total broadband capex in 2015 was $75.5 billion. The same research brief finds that broadband capex totaled $76.3 billion in 2015, but it says that “investment figures are rounded [to the nearest billion] due to the inevitable estimation involved in producing them.” In other words, USTelecom’s standard practice is to round this figure to $76 billion in 2015, so my estimate of $75.5 billion seemed to be right on track, suggesting my estimate for 2016 should be reasonably reliable. Despite the fact that my 2015 capex estimate seemed reasonable, I wanted to be conservative so I used the unrounded USTelecom estimate of $76.3 billion for 2015, and applied an additional decline of 4.69% from 2015 to 2016. Therefore, broadband capex in 2016 was about $72.7 billion.

But the important question is: how do these figures compare to the trend of broadband investment during the twelve years before the Open Internet Order was adopted?

Based on the trend, we should have expected total broadband investment to be about $76.6 billion in 2015. Even without the imposition of the Open Internet Order, a small decline in investment from 2014 to 2015 was possible because of the extent to which investment had increased beyond the trend line in the two years prior. (The graph below shows this pattern.) The difference between what was expected ($76.6 billion) and what actually occurred ($76.3 billion) was $300 million in foregone investment.

For 2016, I estimated total broadband capex to be $72.7 billion, but the trend estimated that the market should have invested about $78 billion. That is a difference of $5.3 billion in foregone investment. Summing that with 2015, broadband providers invested $5.6 billion less than what we could have expected before the Open Internet Order. (See the trapezoid in the graph below.)

This is not a regression analysis, so I cannot say by how much the regulatory uncertainty and costs imposed in the Open Internet Order negatively impacted broadband investment. But I can say, unequivocally, that if the FCC was right about broadband capital investment not being suppressed by the Open Internet Order, we should have expected the market to continue along or above its trend of investment growth. However, based on the latest information available, in the two years since the Open Internet Order was adopted, I estimate that broadband providers decreased investment by about $5.6 billion. That is very significant.

In a September 2015 blog, Free State Foundation President Randolph May said: “[W]e told you so: Title II regulation harms investment.” His conclusion was based on economist Hal Singer’s findings that broadband investment had declined during the first two quarters following the Open Internet Order’s adoption. Now, I think we can say, definitively, that we told you so. Broadband investment has declined since the imposition of Title II public utility regulation.

Congress Should Implement a Dig Once Policy

In an October 2015 blog, I urged Congress to pass the Broadband Conduit Deployment Act of 2015, which would have reduced the costs of broadband deployment by requiring most major highway projects to include the construction of broadband conduit. Unfortunately, the proposal did not pass, but a discussion draft version of the House bill, the Broadband Conduit Deployment Act of 2017, has emerged. Congress should implement a “dig once” policy and subsequently increase access to broadband throughout the United States.

If introduced and adopted, the draft legislation would require state governments to evaluate the need for broadband conduit with respect to covered highway construction projects. If there is any anticipated need in the next 15 years, the draft legislation would implement a so-called “dig once” policy. Along highways where conduit is needed, the Department of Transportation will install “an appropriate number of broadband conduits” at a size that is “consistent with industry best practices and is sufficient to accommodate potential demand.” In other words, a dig once policy means that the construction costs of digging up hard surfaces along highways to install conduit will be incurred once.

A dig once policy would streamline broadband deployment by reducing the costs of building infrastructure. According to a study by the Government Accountability Office, dig once policies can save 25% to 33% in construction costs in urban areas and approximately 16% in rural areas. By lowering construction and deployment costs for broadband providers, a dig once policy would avail more resources for innovative services, encourage investment in rural and remote areas, and invite competitors into the broadband marketplace.

Not only would a dig once policy help deploy advanced broadband networks in under-served areas and help close the gap of the digital divide, but it would pave the way for next-generation 5G networks. Increasing broadband deployment will create backhaul for the implementation of 5G technology and the emergence of “smart cities.”  As I stated in a January 2017 blog, 5G technology will create vast consumer benefits with regard to public safety, health care, and transportation, leading to a projected $275 billion in investment, 3 million jobs, and $500 billion in gross domestic product. A dig once policy would streamline the creation of these economic benefits by supplying a backbone for small and rural towns to rely on when employing 5G and smart technologies.

Dig once is a common-sense bipartisan policy. By lowering the costs of deployment for broadband providers, consumers throughout the United States will enjoy more competition, better service quality, and lower prices.

Congress should implement a dig once policy as soon as possible.

New IP Commission Report Shows Need for Strong IP Enforcement Efforts

On February 27, 2017, the Intellectual Property (IP) Commission released an update to its 2013 report entitled “The Theft of American Intellectual Property: Reassessments of the Challenge and United States Policy.” The report finds that the annual cost of counterfeit goods, pirated software, and theft of trade secrets to the U.S. economy is between $225 billion and $600 billion. Since the IP Commission’s 2013 report, the U.S. has suffered over $1.2 trillion in economic damages due to theft of American IP rights. It is important that Congress strengthen enforcement efforts and that more voluntary initiatives emerge to combat the growth of IP theft and to encourage more innovation, investment, and creativity in the U.S. economy.

According to the report, in 2015, the U.S. imported counterfeit and pirated goods valued between $58 billion and $118 billion, and the U.S. exported counterfeit and pirated goods worth approximately $85 billion. An OECD study also estimated the sum of counterfeit goods imported into the U.S. and exported from the U.S. to be valued around $145 billion.

The proliferation of pirated software is a major problem because of the ease of downloading software. The IP Commission’s report finds that the value of pirated software exceeded $52 billion worldwide in 2015, costing the United States approximately $18 billion in economic activity. Furthermore, theft of trade secrets is difficult to measure because many companies do not even know that their IP has been stolen. The report estimates that theft of trade secrets cost the U.S. between $180 billion and $540 billion in economic activity in 2015.

The IP Commission’s report also outlines a number of actions taken by Congress and the Obama Administration since the 2013 report to help stop the theft of IP. Most recently, as I wrote in a December 2016 blog, the Office of the IP Enforcement Coordinator published a report which set four goals for FY 2017-2019 with regard to strengthening protections of IP rights. The goals are the following: (1) enhance national understanding of economic and social impacts from trade secrets misappropriation and IP rights infringement; (2) minimize counterfeiting and IP-infringing activity online; (3) secure and facilitate lawful trade; and (4) enhance domestic strategies and global collaboration.

Enforcing protections of IP rights and stopping online piracy are the deficiencies of United States’ robust IP policy framework. Despite the U.S. still leading the world in terms of strong protections of IP rights, GIPC’s 2017 International Index cites one of the United States’ weaknesses as “inconsistent enforcement against counterfeit and pirated goods, especially goods sold online.” As FSF scholars have stated for many years, theft of IP directly harms job growth in creative industries and discourages further innovation and investment by entrepreneurs. On the other hand, voluntary and governmental enforcement efforts restore the entrepreneurial spirit of creators by upholding strong IP rights protections.

In a February 2017 blog, Seth Cooper and I recommended two potential actions by Congress that could help increase enforcement efforts with regard to copyright. First, Congress should reform the Digital Millennium Copyright Act’s “notice and takedown system” under Section 512 to lessen the burden on copyright holders to monitor infringements of their content. Second, Congress should modernize the U.S. Copyright Office by updating the administrative technologies in order to maintain a searchable database of copyright registrations, to monitor infringements of IP rights, and ultimately to enhance the economic value of copyrighted works.

Voluntary initiatives also can have a large impact on combatting theft of IP online. The Copyright Alert System, TAG, and the Donuts-MPAA initiative all help notify large Internet companies when pirated content or counterfeit goods are being advertised or sold on their websites or networks. These types of initiatives often can have a substantial impact on reducing online piracy because websites and advertisers (in addition to the IP rights holders) have a monetary incentive to report IP rights violations.

A group of think tanks, organizations, and individuals recently submitted a letter to the Trump Administration and the 115^th Congress asking them to continue to promote strong protections of IP rights. IP-intensive industries comprise roughly 38% of all activity and 30% of all jobs in the U.S. economy. Strong protections and enforcement of IP rights are necessary for creators and entrepreneurs to continue to provide consumers with innovated goods and services and to encourage investment and growth throughout the U.S. economy.

Cisco Forecasts Continued Extraordinary Mobile Traffic Growth

On February 7, 2017, Cisco released its annual Visual Network Index (VNI) Forecast Report: Mobile Data Traffic Update, 2016-2021. This annual report is useful in helping policymakers, entrepreneurs, and consumers understand the forecasted growth of mobile devices and network technologies at national, continental, and global levels. It should be particularly useful in getting policymakers to focus on the need to remove impediments to the deployment of next-generation 5G network infrastructure.

The significant rise in mobile traffic experienced over the past several years is expected to continue for the next five years, as connections increase and networks expand. The proliferation of video applications is by far the biggest driving force behind exponentially increasing mobile traffic. On a global level, video traffic is projected to comprise 78% of mobile data in 2021, an increase of 30% from 2016. The United States has been a leader in the growth of mobile connections and traffic, with mobile traffic expected to rise fivefold by 2021. And as the graph below indicates, global mobile data traffic will increase sevenfold by 2021.

Cisco Forecasts 49 Exabytes per Month of Mobile Data Traffic by 2021

Here are some key findings regarding the growth of mobile connections and traffic throughout the world:

• Almost half a billion (429 million) mobile devices and connections were added in 2016.

• Mobile network (cellular) connection speeds grew more than threefold in 2016.

• Average smartphone usage grew 38% in 2016 from 1,169 MB per month in 2015 to 1,614 MB per month in 2016.

• Global mobile data traffic will increase sevenfold between 2016 and 2021.

• By 2021, 4G will be 53% of connections, but 79% of total traffic.

• The average smartphone will generate 6.8 GB of traffic per month by 2021, a fourfold increase over the 2016 average of 1.6 GB per month.

The graph below shows the extraordinary global growth projected across all Internet-enabled devices.

Global Mobile Devices and Connections Growth

Here are some of the key findings for the United States:

• Mobile data traffic totaled 1.3 exabytes per month in 2016, the equivalent of 334 million DVDs each month or 3,687 million text messages each second.

• Mobile data traffic will grow fivefold from 2016 to 2021, a compound annual growth rate of 35%.

• Mobile data traffic will grow 2 times faster than fixed IP traffic from 2016 to 2021.

• Mobile traffic per user will reach 18,617 megabytes per month by 2021, up from 4,604 megabytes per month in 2016, a compound annual growth rate of 31%.

North America, predominantly the United States, has been a global leader in mobile device innovation and the deployment of mobile broadband networks. Advanced 4G networks offer exponentially superior reliability, capacity, speeds, and security for mobile data traffic compared to previous mobile network technologies. By 2021, 53% of all global devices and connections will have 4G capability. But 63% of devices and connections in North America will have 4G capability.

The United States’ strong protections for intellectual property (IP) rights have encouraged a proliferation of mobile device brands and new video content. Indeed, mobile video currently comprises 60% of mobile data in the United States. It is important for device manufacturers, app designers, content creators to have secure copyrights and patent rights in order to incentivize returns on creation and investment. The prospect of profitable returns sustains new product and service innovation, encourages investment by competitors, and invites new entrants into the market—ultimately leading to more choices and lower prices for consumers. As further explained in a new February 15 blog, Free State Foundation Senior Fellow Seth Cooper and I discussed the findings of the GIPC’s 2017 International IP Index and why the United States should take steps to expand its global leadership in IP rights protection.

The United States’ leadership in developing mobile broadband networks, devices, and content apps has also been facilitated by a predominantly light-touch regulatory environment. The Omnibus Budget Reconciliation Act of 1993 – and key FCC deregulatory decisions in the two-plus decades that followed – removed regulatory barriers to entry and avoided onerous rate controls. This light touch regulatory regime spurred entrepreneurial investment in new mobile services and products, facilitating the creation and widespread availability of mobile services in finance, health, and transportation. Indeed, we are now on the cusp of 5G mobile network technology, which will deliver speeds 10 times faster than 4G and enable “smart cities” to more efficiently use local services such as energy, utilities, transportation, and public safety. Future deployment of 5G technology is expected to create 3 million jobs and $500 billion in annual economic activity. 

Unfortunately, the previous light touch environment for mobile services became more intrusively regulated during FCC Chairman Tom Wheeler’s tenure. Ensuring that ongoing 4G deployments to all Americans take place in a timely manner and facilitating future 5G advancements requires that Congress or the FCC reverse the Open Internet Order’s imposition of public utility-style regulation on mobile broadband services. Congress or the FCC must also repeal the anti-innovation, unnecessarily prescriptive regulations adopted in the Broadband Privacy Order. The Federal Trade Commission should instead be empowered to protect privacy across all types of online services platforms according to a consumer welfare-oriented standard.

More licensed and unlicensed spectrum is needed to fully realize the tremendous economic potential of 5G technology. The proposed MOBILE NOW Act, if ultimately enacted in present or similar form, would make 500 MHz of spectrum available by 2021 and encourage the continued growth of innovative mobile services.

Cisco’s latest Mobile Data Traffic Update report should help U.S. policymakers appreciate that the extraordinary forecasted mobile data growth requires additional spectrum to match that growth and make its economic benefits a reality. To promote the next generation of mobile broadband, it is crucial that policymakers at the federal, state, and local levels avoid imposing new regulatory burdens and remove existing ones. Also, Congress and the FCC should remove or at least minimize impediments to wireless infrastructure investments in order to ensure continued innovation and growth in the indisputably competitive market for mobile services.

Ajit Pai Appointed Chairman of the FCC

Congratulations to Ajit Pai, who was appointed Chairman of the Federal Communications Commission by President Donald Trump. My colleagues and I agree that this is an excellent and deserving appointment. Given his resume as Commissioner, Chairman Pai will continue to push for free-market policies in the communications field, enabling competition, innovation, and investment in this space.

FSF is grateful that Chairman Pai recently spoke at FSF’s 10^th anniversary luncheon in December 2016. We wish him the best of luck as FCC Chairman!

No Signs of Slowing Down in the North American Mobile Economy

A new GSMA study entitled “The Mobile Economy: North America 2016” finds that mobile technologies contributed $710 billion in economic activity (3.6% of GDP) to North America in 2015 and will grow to almost $1 trillion in economic activity (4.5 of GDP) in 2020.

Here are some of the key findings regarding mobile technologies in North America:

• In 2015, the mobile ecosystem supported 2.3 million jobs.

• In 2015, the number of unique subscribers was 284 million and the mobile economy had a penetration rate of 79%. By the end of 2020, those figures are expected to grow to 315 million and 85%, respectively.

• In 2015, smartphones represented 74% of mobile connections and 4G represented 55% of mobile connections.

• Venture-capital investments in mobile and telecommunication services totaled $16.5 billion in 2015, a 41% increase from 2014.

• The mobile economy will invest nearly $170 billion in spectrum and network deployment from 2015 to 2020.

• In 2015, the mobile economy raised $82 billion in the form of general taxation and an additional $46 billion in government revenues from spectrum auctions.

There are no signs of slowing down in the North American mobile economy. Despite the FCC’s Open Internet Order, which imposed substantial regulatory costs on mobile broadband providers, the GSMA study shows that competition and innovation in the mobile economy will create more benefits than the FCC’s regulations will create costs. That being said, the regulatory costs are very burdensome and the mobile economy likely would grow even faster if not for the FCC’s unnecessary regulations.

CTIA Survey Shows Decline in Wireless Capital Investment

CTIA – The Wireless Association released its Annual Wireless Industry Survey on May 23, 2016. From the end of 2014 to the end of 2015, wireless data usage increased by 138 percent, the number of wireless subscribers increased by 6.3 percent, and wireless penetration increased by 5.7 percent. Also, wireless-only households slightly increased by 1.3 percent, which is consistent with findings from a recent NTIA study and a Pew Research report that consumers are substituting mobile broadband for fixed broadband.

Most importantly, CTIA’s annual survey finds that capital investment declined by 0.3 percent from the end of 2014 to the end of 2015. This is not a huge drop, but after a 3.0 percent decline over the previous year, it seems as if capital investment is trending in the wrong direction.

FSF scholars have often stated that Internet regulation harms capital investment. This negative trend in broadband capital investment is consistent with the regulatory uncertainty surrounding the FCC’s Open Internet proceeding. The costly regulations levied on wireless providers and the regulatory uncertainty regarding the legality of the Order (because it is currently under appeal) likely has crowded out private investment leading to a decline over the past two years. Hopefully, the D.C. Circuit Court will overturn the FCC’s Open Internet Order, freeing up resources for broadband providers to invest and innovate and allowing consumers to enjoy more access and better connections.

Regulatory Uncertainty Harms Broadband Investment and the Economy

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.

Adverse Impact on Investment of Title II Public Utility Regulations

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Remove Barriers, Reallocate Spectrum, and Benefit Consumers and the Economy

In his testimony during the October 28 hearing on “Breaking Down Barriers to Broadband Infrastructure Deployment,” before the House of Representatives’ Energy and Commerce Committee, Scott Bergmann, VP of Regulatory Affairs at CTIA – The Wireless Association, stated that “sound infrastructure policy is a necessary complement to good spectrum policy.” Since 1996, U.S. Internet Service Providers (ISPs) have invested $1.4 trillion in broadband infrastructure. With each passing year, ISPs will likely invest more and more, but there are barriers that constrain private investment. Of course, costly Internet regulations create investment barriers. But other rules at the federal, state, and local levels regarding approval and construction stifle broadband investment as well.

There are six pieces of draft legislation proposed in the House which would lower deployment costs and streamline some of the approval processes, including a “dig once” policy. But as Mr. Bergmann said at the hearing, infrastructure policy and spectrum policy are complements. Therefore, Congress must get it right on both ends for consumers to experience next-generation mobile broadband for years to come.

In 2012, the Congressional Budget Office (CBO) released a report regarding legislation that authorized the FCC to auction spectrum. The CBO estimated that the AWS-3 auction would either not happen or would not bring in any revenue. This turns out to be massively underestimated considering that the AWS-3 auction generated roughly $41 billion and the TV broadcasting auction scheduled for March 2016 is likely to generate another $30 to $40 billion. Currently, a new bill exists, the Federal Incentive Spectrum Act (FISA), which would allow federal agencies that relinquish spectrum to keep 1 percent of the proceeds from the sale. Hopefully, the CBO’s inaccurate 2012 report does not have a lasting effect on members of Congress as FISA moves forward, because reallocating spectrum is absolutely crucial for the economy.

Both spectrum policy and broadband infrastructure policy should be bipartisan issues. The current amount of spectrum allocated for private use will not be enough to keep up with mobile data traffic, which is projected to increase seven-fold from 2015-2019. Additionally, wireless broadband needs wireline infrastructure and many cell towers to deliver quality service. Therefore, Congress should focus on two policies in this space: 1) removing costly barriers so providers can install next-generation technologies throughout the country and 2) reallocating licensed spectrum for private use. Given the positive effect that mobile broadband has had on the economy as a whole and the benefits it brings to American consumers, both of these policies should receive bipartisan support from Congress.

As for the valuation of spectrum auctions, the CBO report was inaccurate. Not only did the CBO claim that the AWS-3 auction would not bring in any revenue, it also failed to realize that allocating more spectrum for commercial use would increase economic activity and create jobs. In a May 2015 Brattle Group and CTIA report entitled “Mobile Broadband Spectrum: A Vital Resource for the American Economy,” authors Coleman Bazelon and Giulia McHenry estimated that licensed spectrum has created $400 billion in economic activity, not including the value of mobile applications. Mr. Bazelon and Ms. McHenry also estimated that for every person employed in the wireless industry an additional 6.5 people will be employed in other sectors. (See my May 2015 blog for more on this.)

When economic activity and jobs are created, the tax base expands, thus creating more opportunities for the government to generate revenue. Therefore, in the long run, reallocating spectrum for private use is a win-win – a win for the economy and a win for taxpayers, because (all else equal) expanding the tax base marginally reduces the tax burden on each individual.

Mobile broadband is transforming day-to-day life in areas like medicine, education, and even policy decisions. For example, telemedicine allows patients to be monitored remotely and can send signals to doctors about possible health threats. Patients who require monitoring will need a mobile connection so doctors can monitor their status at any given time. The rapid growth of mobile data traffic increases the potential for network congestion. Patients who use telemedicine cannot afford to experience congestion or latency. Reallocating spectrum for private use and removing deployment barriers would increase the capacity of mobile networks, mitigate congestion, and potentially save lives.

Mobile technology has already changed the way teachers and students communicate, but with more spectrum and deployment, students will be able to utilize their time more efficiently. The 2010 National Broadband Plan set the goal of connecting all schools with high-speed Internet access, but the FCC has failed to accomplish the spectrum goals, a prerequisite for schools having access to 21^st century technology. According to the National Broadband Plan, the FCC should have reallocated 300 MHz of spectrum by 2015, but currently has only reallocated 149 MHz.

Additionally, it can take many years to get permission to build broadband infrastructure on federal property, which is often the only or best way to reach many rural schools. As state and local governments are attempting to fully equip schools with 21^st century technology, education curriculum is moving online and digital literacy is becoming a necessary skill. More spectrum and broadband deployment would allow professors to provide students with course work while traveling, teachers to enhance the learning experience of school field trips, and students to research in off-campus settings.

Importantly to members of Congress, constituents are using mobile broadband to engage themselves and others in the political process. Social media platforms, like Facebook and Twitter, are allowing people of all ages and demographics to have a greater voice in shaping policy.

The expansion of mobile broadband has positively impacted the economy, medicine, education, policymaking, and many other realms of American life. It is certainly time for Congress to act to remove barriers to further infrastructure deployment that, if not addressed, are likely to negatively impact the consumer experience in future years.