Yes, Internet Regulation Negatively Impacts Wireless Broadband Investment

On September 26, 2017, the FCC adopted the Twentieth Wireless Competition Report, which found that the market for mobile wireless broadband is effectively competitive. Commissioner Mignon Clyburn issued a dissenting statement in which she claimed that the Report manipulated data to support the narrative that the Open Internet Order decreased investment. She also said that the Report did not include investment data that she specifically requested. Nevertheless, when considering the data Commissioner Clyburn cites in her dissenting statement, the evidence is clear that the Open Internet Order discouraged wireless providers from investing in broadband networks.

In her dissenting statement, Commissioner Clyburn said:

For one, the discussion of investment in the mobile wireless services industry is fundamentally flawed. By highlighting a decrease in investment between 2015 and 2016, this section was clearly written to support the false narrative that the 2015 Open Internet Order deterred wireless carriers from investing in their networks. Despite my office’s request, this Report does not include data from the 19th, 18th, and 16th Competition Reports, which showed investment from all commercial wireless companies declined from $33.1 billion in 2013 to $30.9 billion in 2015. In case you missed it, those reports predated the 2015 Order.

According to CTIA’s data, wireless investment grew substantially from $20.4 billion in 2009 to $33.1 billion in 2013. Commissioner Clyburn is correct; wireless investment dropped from $33.1 billion in 2013 to $32.1 billion in 2014. But keep in mind, the FCC’s Open Internet proceeding began in early 2014. In May 2014, the FCC adopted a Notice of Proposed Rulemaking inviting comments on bright line rules and the possible imposition of Title II regulation. And in November 2014, President Obama encouraged the FCC to reclassify broadband under Title II of the Communications Act.

Therefore, the writing was on the wall throughout most of 2014 that the FCC would impose some type of more stringent Internet regulation than the regulations then in place. The regulatory uncertainty hovering over broadband Internet service providers during this time discouraged them from investing in network infrastructure.

Also, Commissioner Clyburn undermines her argument when she says “investment from all commercial wireless companies declined from $33.1 billion in 2013 to $30.9 billion in 2015.” The Open Internet Order was adopted in February 2015 but investment data includes all of 2015, meaning wireless providers had almost a full year to decrease their planned investments due to the impending regulatory costs imposed by the Order. When you consider the regulatory uncertainty of 2014, along with the imposition of Title II regulation in early 2015, it is no surprise that wireless providers decreased investment by $2.2 billion from the end of 2013 to the end of 2015. (As you can see in the graph below, CTIA’s data shows a decline of $1.2 billion over this same period.)

As I stated in a May 2017 blog, overall broadband capital investment has declined by $5.6 billion since the adoption of the Open Internet Order. And as we illustrate in this infographic, the steep decline in wireless broadband investment is consistent with the adoption of the Open Internet Order, dropping by $6.7 billion from 2013 to 2016.

The data that Commissioner Clyburn requested to be included in the Twentieth Wireless Competition Report provides no evidence that the imposition of Title II regulation has not harmed broadband investment. The Commission will recognize the negative investment impact of Internet regulation when it considers Chairman Pai’s Restoring Internet Freedom proposal to return to a light-touch regulatory framework.

Effective Wireless Competition

FCC Proposed Wireless Report Should Acknowledge the Market's Competitiveness

At its September 26 public meeting, the FCC is scheduled to consider for approval its Twentieth Wireless Competition Report. Data cited in the draft report solidly demonstrate the effectively competitive state of the commercial mobile services market. After several years of avoidance, the Commission is finally set to reach the commonsense conclusion that there is effective competition in the market for commercial mobile services.

The competitiveness of the commercial mobile services market bolsters the case for the Commission to adopt its Restoring Internet Freedom proposal to remove its Title II public utility regulation of broadband Internet access services. The Commission should restore the light-touch regulatory environment in which mobile broadband services have thrived and which best matches today's competitive conditions.

Section 332(c) of the Communications Act provides that the Commission shall provide an analysis of "whether or not there is effective competition" in the commercial mobile services market. The Commission has dodged the congressional directive for the last six reports by preparing analyses devoid of any effective competition determinations. Much to the Commission's credit, this time around it appears the Wireless Competition Report will fulfill Section 332(c)'s mandate with a positive determination.

Several key data points contained in the Commission's draft report offer clear and convincing evidence to support a determination that the commercial mobile services market is effectively competitive:

• Consumer connections and data consumption have risen. Wireless connections rose from 378 million at the end of 2015 to 396 million at the end of 2016. At the end of 2016, monthly data usage per smartphone subscriber reached an average of 3.9 GB, up 39% from year-end 2015.

• Prices have decreased. In 2016, Average Revenue per User (ARPU) fell 7%, from $44.65 to $41.50. Between 2012 and 2016, while the overall consumer price index (CPI) rose 4.5%, the annual Wireless Telephone Services CIP decreased 8%.

• Consumer access to advanced network capabilities has increased. At the start of 2017, 92% of the U.S. population had access to four or more service providers offering 3G technology or better, up from 82% at the start of 2014. And 89% had access to at least four service providers offering 4G LTE technology, up from 41% in mid-2015. Between 2013 and 2016, nearly 4,000 new cell sites were added. Further, service providers increasingly have deployed small cells and DAS sites to improve coverage and prepare for 5G network deployments. Mobile service providers have also begun trials for 5G networks.

• Speeds have increased. Mean LTE download speeds increased to 23.5 Mbps in the first half of 2017, up from 14.4 Mbps in the first half of 2014. Over that same span, median LTE download speeds increased to 15.5 Mbps, up from 11.0 Mbps.

• Increased availability of pro-consumer pricing options. In 2016, "unlimited" data plans became widely available to consumers once again. Also, in 2016 and early 2017 free data plans became much more widely available. Free data plans exempt certain types of content, especially streaming video, from subscribers' monthly data allowances. Meanwhile, consumers enjoy choice among postpaid as well as prepaid plans. Prepaid offerings include Cricket and MetroPCS brands offered by national mobile broadband ISPs as well as popular offerings by mobile virtual network operators (MVNOs) such as TracFone.

In addition to being proof positive of the effectively competitive state of the commercial mobile services market, the foregoing data points undermine the "virtuous cycle" or "gatekeeper" rationale for imposing public utility regulation on mobile broadband Internet access services. The Title II Order (2015) posited that broadband Internet access service providers (ISPs) control the point of Internet access between edge content providers and consumers and thereby possess the incentive and the ability to harm consumers by blocking content or discriminating against content providers. Yet, as explained in the Free State Foundation's public comments in the Restoring Internet Freedom proceeding, the plausibility of the virtuous cycle theory depends on broadband ISPs possessing market power. For its part, the Title II Order failed to provide any evidence that broadband ISPs possessed such power. Now draft report data regarding the availability of choices among mobile broadband service providers – including 89% of the population having access to at least four service providers offering LTE – highlights once more the non-existence of broadband ISP market power and the implausibility of the virtuous cycle theory for public utility regulation.

Additionally, the draft report’s observation that "service providers have offered various promotions designed to partially or fully compensate consumers' switching costs," contradicts the Title II Order's claim that high "switching costs" create gatekeeper power. Consistent with the draft report, the Eighteenth and Nineteenth Wireless Competition Reports recognized that trends have reduced or eliminated switching costs. Providers have phased out term contracts and offer early termination fee buyouts to attract new customers.  

Unfortunately, the Title II Order has negatively impacted mobile infrastructure investment. Using a baseline of actual capital investment from 2003 to 2014, the Free State Foundation's Michael J. Horney found broadband investment decreased $5.6 billion in 2015 and 2016 as a result of the Title II Order. Consistent with those findings, data cited in the draft report indicate that mobile service providers invested an incremental $28.0 billion in 2016, a decline of 9% from the $30.9 billion invested in 2015. Further, "AT&T, Sprint, T-Mobile, and Verizon Wireless spent a combined $27.5 billion in 2016, $30.3 billion in 2015, and $31.2 billion in 2014." Capital investment by those four major providers account for nearly 100% of industry investment.

Moreover, the regulatory uncertainty posed by the Commission's investigation into free data plans based on its vague general conduct standard – adopted in the Title II Order – had the negative consequence of curtailing innovative pro-consumer offerings. Free data plans offer value-conscious consumers, especially including low-income consumers, unlimited streaming of video or other popular apps that do not count against their monthly data allowances. To its credit, under Chairman Ajit Pai's leadership, in early 2017 the Commission closed its inquiry and withdrew its misguided inquiry report on free data plans. As indicated in the draft wireless competition report, free data plan options are now increasingly available to consumers. Competitive choice among mobile broadband providers and pricing options available to consumers constitute further reasons why the Commission ought to restore a pro-innovation environment in which free data plans and other innovative offerings are readily available sources of value for consumers.

The Commission's proposed adoption of the draft Twentieth Wireless Competition Report – including its determination that there is effective competition in the market for commercial mobile services – is backed by a firm set of data points. After several years of ducking such determinations, the Commission's willingness to face up to the evidence of mobile wireless competition is surely welcome. Recognition of the effectively competitive state of the commercial mobile services market should lead the Commission to restoring a light-touch environment for wireless services. This result can be accomplished by adopting its Restoring Internet Freedom proposal and removing Title II public utility regulation of broadband Internet access services.

Time to Reconsider Reforming FCC Competition Reporting

On Friday, July 19, the FCC is expected to release its Fifteenth Video Competition Report in the course of its public meeting. I wrote about the Fourteenth Report in my Perspectives from FSF Scholars paper, "FCC's Video Report Reveals Disconnect Between Market's Effective Competition and Outdated Regulation." This new report should at least summarize more recent data on competitive developments in the video market.

The timeliness, scope, and frequency of FCC competition reports to Congress were all touched on during the U.S. House Subcommittee on Communications and Technology's hearing on "Improving FCC Process."

FSF President Randolph May provided testimony at that hearing. And his blog post, "FCC Regulatory Reform and Administrative Law," offers a further response to the hearing's discussions.

At the hearing, one of the discussion draft bills that Chairman Greg Walden called attention to a discussion draft bill that would consolidate the FCC's competition reports into a single, biennial "State of the Industry" report. In the 112th Congress, the House passed such a measure – the Consolidated Reporting Act of 2012 (H.R. 3310) – on a voice vote. Unfortunately, the Senate gave the legislation no consideration.

In my Perspectives paper, "Convergent Market Calls for Serious Intermodal Competition Assessments," I explained why I thought consolidated reporting legislation was ripe for reintroduction:

Combining disparate competition reports would structurally conduce to intermodal competition assessments. It should come as no surprise if the current system of separate FCC reporting on specific services results in largely silo-like analyses. That is what current law all but invites. A more comprehensive approach to digital age communications services – combined with a specific directive regarding intermodal competition assessment – could offer a better perspective on the competitive state of voice, video, audio, and data services as well as the substitutability of wireline, wireless, satellite, and other platforms. It could even shed light on the unnecessary and outdated regulatory burdens that now saddle communications services on a variety of platforms. Combined FCC reporting could also reduce the administrative burdens.

Combining future FCC reports is something that a June 25 GAO report also called attention to. And the forthcoming release of the FCC's Fifteenth Video Competition Report should likewise provide occasion to consider the benefits of reform.  

Panelists Take on Intermodal Competition in FSF Conference Transcript

The edited transcript of the FSF Fifth Annual Conference panel on "The Right Regulatory Approaches to Wireless and Wireline Broadband Providers" is now available online.

Discussion in this panel touched on such subjects as the place of the U.S. in international broadband rankings, the IP transition, universal service reform, and the role of state regulators in the broadband era. 

Not to be overlooked are the insights offered by then-Commissioner Robert McDowell regarding wireless and intermodal competition:

If I think back to 10 years ago, exactly right now, I was in the throes of the debate over the unbundled network element platform, "UNE-P," as we called it. That was all about trying to bring residential voice competition to wireline services. The best and the brightest on both sides of that debate did not foresee – did not foresee – the rise of cable telephony or the rise of wireless as a substitute.

That whole concept of wireless substitution was laughed at. It was said: "The quality of wireless isn't any good. Or calls get dropped. And there's not enough build-up in residential areas, not good enough reception. People are never going to substitute – never going to substitute – wireline for wireless or have wireless as a substitute for wireline."  
Now, more than a third of all U.S. households are 30 wireless-only. That's evidenced by a lot of what's pointed out in AT&T's petition. But 10 years ago, nobody saw the rise in rise in wireless competition happening. If you're patient as a regulator, or as a member of Congress, the markets will find a work-around. 

...Consumers are telling us that wireless broadband is a substitute – not in every case, not for every market. But it is a substitute. The fastest growing segment of the broadband market is wireless, with the vast majority of consumers having a choice of at least four wireless broadband providers. And that number will increase as we see the build-out of LTE continue. If LTE continues to spike it will be game changing, as we will get broadband in the car and things like that. We don't know what's coming over the horizon. And the last thing we want is the government to preempt or nip in the bud the innovation coming over the horizon. 

In my Perspectives from FSF Scholars paper, "Convergent Market Calls for Serious Intermodal Competition Assessments," I urged the FCC to look more closely to the effects of wireless substitution and cross-platform competition. An informed regulatory policy demands no less. To be sure, the FCC has opportunity to include a more detailed assessment of intermodal competition in its next Wireless Competition Report. And it should do so.

FCC Report Reconfirms the Reality of Wireless Innovation and Competition

On Friday, March 21 the FCC released its 16th Wireless Competition Report. Information and estimates compiled in the new Report cover the course of wireless innovation and competition since 2010. Report descriptions and data regarding wireless products and services put into concrete terms what anyone paying attention to the wireless market would already know; namely, the wireless market is indeed "effectively competitive."

Wireless market providers continue to create and make available to consumers new products, services, and pricing choices, with consumer prices decreasing in many instances. Meanwhile, the wireless market is characterized by heavy private investment, infrastructure deployment, and network upgrades. All this is spurring job creation, cutting business costs, and increasing workplace productivity to benefit the entire economy.

Dynamic markets like wireless are the success stories of free market enterprise. And their vibrancy is best preserved by a minimal regulatory environment.

Consider the following dozen indicators of wireless marketplace innovation and competition, as revealed in the FCC's report:

• Consumer choice among mobile service providers prevails. As of October 2012, 99.3% of the population is served by 2 or more mobile voice providers, 97.2% by 3 or more, 92.8% by 4 or more, and 80.4% by 5 or more. Additionally, as of October 2012, 97.8% of the population is served by 2 or more mobile broadband providers, 91.6% by 3 or more, 82% by 4 or more, and 68.9% by 5 or more.

• Mobile subscriptions continue to climb. "[A]t the end of 2011 there were 298.3 million subscribers to mobile telephone, or voice, service, up nearly 4.6 percent from 285.1 million" from a year before. Also, "there were 142.1 million subscribers to mobile Internet access services at speeds exceeding 200 kbps in at least one direction, up from the 97.5 million were reported for the end of 2010, and more than double the 56.3 million reported for year-end 2009."

• Upgrades to next-generation broadband wireless networks are proceeding. As of November 2012, "[Verizon's] LTE network covered more than 250 million POPs," with "[p]lans to expand LTE nationwide in 2013." As of November 2012, "[AT&T's] LTE network covered 150 million POPs," with "plans to deploy LTE to…250 million POPs, by the end of 2013, and to 300 million by the end of 2014." Also, "[a]s of September 2012, [Sprint's] LTE service is offered in 19 cities and plans to deploy LTE to 100 additional cities within the next several months and to complete LTE build-out by the end of 2013." The FCC's order approving the T-Mobile/MetroPCS merger was based, in significant part, on the post-merger potential to further LTE deployment. And providers such as Clearwire, Leap, U.S. Cellular, and C-Spire already have 4G services available, with further expansions underway.  

• Wireless-only households are increasing even more. "As of the second half of 2011, just over one-third, or approximately 34 percent, of all U.S. households were wireless only, up from 29.7 percent in the second of 2010 and 24.5 percent in the second half of 2009." And that number should be expected to continue its upward trajectory since "[a]pproximately half of all adults aged 18-24 and aged 30-34 lived in wireless-only households, while nearly 60 percent of adults aged 25-29 did so."

• Smartphone consumers now a growing majority. "[A]mong those who acquired a new cell phone in the second quarter of 2012, 67 percent opted for a smartphone, up from 30 percent in the fourth quarter of 2009. As of the second quarter of 2012, 55 percent of U.S. mobile subscribers now own smartphones."

• Consumer mobile data consumption is sharply increasing. Average consumer data consumption rose to 500MB/month at the end of 2011, up from over 200MB/month in 2010 and 150MB/month in 2009. For that matter, "mobile data traffic more than doubled from 226.5 billion MB in the last six months of 2010 to 525.7 billion MB in the second half of 2011."

• Consumer prices have seen decreases. Voice revenue per minute "has declined over the past 18 years, from more than $0.40 to the current $0.05," according to one estimate. Moreover, "the effective price per megabyte of data declined from $0.47 per megabyte in the third quarter of 2008 to about $0.05 per megabyte in the fourth quarter of 2010, which is roughly an 89 percent decrease."

• Private investment is sizeable and also increased. 2010 capital investment by wireless providers totaled between $23 and $25 billion, marking double-digit increases in investment from the year before. Those numbers exclude investment in spectrum licenses.

• The number of wireless apps continues to surge. U.S. consumers had access to over 1 million wireless apps by mid-2012. In addition, the "[t]otal number of applications downloaded from Apple’s App Store grew from 100,000 in 2008 to 25 billion in March 2012. By October 2012, Google Play for the Android operating system offered over 675,000 applications and had more than 25 billion total downloads.

• M-commerce services are growing. Although "[m]aking payments by mobile phone is not yet a mainstream payment method due to lack of awareness," "[p]aying-by-phone is playing a growing role in transactions made by U.S. consumers." In particular, "[a]bout 13 percent of U.S. bank account holders regularly use mobile banking services. As of August 2012, 61 percent of these mobile banking customers used their mobile devices to check transaction histories, 45 percent to check balances, and 31 percent to transfer money between accounts." Also, "in June 2012, 45 million smartphone owners accessed applications in the shopping and commerce category, an average of 17 times."

• Wireless infrastructure is expanding. "[T]otal cell sites in use by CTIA’s members was 283,385 as of year-end 2011. This represents an increase in the number of cell sites of 12 percent since December 31, 2010, of 15 percent since December 31, 2009, of 54 percent since December 31, 2005, and of 61 percent since December 31, 2004." This build-out is critical to ensuring upgrades to next-generation wireless networks. And "as infrastructure improves, transaction costs for businesses fall, including the costs of ordering, gathering information, and searching for services."

• Wireless continues to benefit the overall economy. "U.S. wireless providers directly employed 238,071 workers at the end of 2011, up from 184,449 in 2000, yielding an average job creation rate of around three percent per year," and "the mobile app economy employs an additional 466,000 workers." Also, "in 2011, the wireless industry accounted for $33 billion in productivity gains for U.S. businesses." Plus, "the wireless industry was responsible for 3.8 million U.S. jobs in 2011, directly and indirectly, and accounted for 2.6 percent of all U.S. employment."

Like its two predecessors, the 16th Wireless Competition Report "makes no formal finding as to whether there is, or is not, effective competition in the industry." Supposedly, "the complexity of the various inter-related segments and services within the mobile wireless ecosystem" is the reason for the FCC's non-conclusion. But that explanation is unconvincing. The tremendous growth in the wireless market's sophistication and intricacy points to the market's dynamism and competitiveness. (I made this point more extensively in prior Perspectives papers on the FCC's 14th and 15th Wireless Competition Reports, respectively.)

Most important, the FCC must preserve the minimal regulatory environment in which wireless has thrived. That was the basic point of my chapter on wireless policy in Communications Law and Policy in the Digital Age.

Among other things, preserving a minimal regulatory environment means keeping common carrier-like regulations away from wireless voice and broadband services as well as devices, operating systems, and applications. It also means eliminating regulatory barriers to deploying infrastructure. And the FCC must work to foster a light-touch regulatory environment for wireline services and fixed mobile functionalities that will increasingly work in tandem with wireless to offer consumers greater reliability and cost-effective services. The Report, for example, referenced expected adoption and use of new technologies such as small cells and seamless Wi-Fi offloading.

For that matter, the Report's findings, hopefully, should end calls for regulation of handset exclusivity business agreements between wireless handset manufacturers and service providers. Notwithstanding the Report's observation that Apple's iPhone exclusivity deal with AT&T ended in 2011, "[d]uring June 2011, 20 handset manufacturers offered a total of 297 handset models to mobile wireless service providers in the United States." This prompted the FCC to conclude that "[i]nnovative smartphones are available at a variety of price points and with both post-paid and pre-paid service plans."

A simple comparison of the wireless consumer experience from a dozen years go with today's experience should be reason enough for recognizing the dynamism of the wireless market. In that time, the market has transitioned from analog, voice-centric service to a digital, broadband-centric multimedia service of increasing sophistication and variety. Still, assembling the positive data points into a single report drives home the progress that wireless continues to make.

All told, the 16th Wireless Competition Report reconfirms the commonsense conclusion that the market for wireless services is effectively competitive. The task for Congress and the FCC is to ensure that a free market devoid of impediments exists to best ensure that the maximum benefits of the wireless market are bestowed upon consumers in the years ahead.