We Told You So: Title II Regulation Harms Investment

by

Randolph J. May

On August 25, 2015, Hal Singer, an economist at the Progressive Policy Institute, published a piece in Forbes that appears to confirm what Free State Foundation scholars have said over and over again for years - that rigid regulation of broadband Internet services providers (ISPs) almost certainly will discourage investment. From a sample of some of the largest ISPs in the United States, Mr. Singer finds that broadband (wireline and wireless) infrastructure investment fell by 8% in the first half of 2015 compared to the first half of 2014. Investment by wireline providers alone fell by 12%.

According to Mr. Singer, this is only the third time that capital expenditures by major Internet providers have gone down from the previous year. The first two times followed the "dot.com" bubble burst in 2001 and the Great Recession in 2009. Of course, now there are no such exogenous events to explain the investment drop-off. Because GDP increased over the same period and ISP revenues do not appear to be falling, Mr. Singer concludes the FCC's adoption of public utility-like regulation of Internet providers in the 2015 Open Internet Order is the most plausible explanation for the reduction in capital expenditures.

Mr. Singer included the chart below in a tweet.

Mr. Singer, Free State Foundation scholars, and many others who opposed the imposition of public utility-like common carrier regulation on Internet providers warned that broadband investment would be adversely affected if the agency ignored the warnings. It looks like we may have been correct and, if so, the decrease in capital expenditures below what they otherwise would have been harms the nation's overall economy, reduces the number of jobs available, and adversely impacts the quality of consumers' Internet services.

Over the last decade, we at the Free State Foundation have said countless (yes, I really do mean countless!) times that common carrier-like regulation of ISPs would stifle investment. Therefore, I can't say we are surprised that broadband investment already appears to have declined substantially. It was apparent for several months in advance of the Commission's meeting that, come what may, FCC Chairman Tom Wheeler and his two Democrat colleagues were determined to apply the public utility model to Internet providers.

Here is just a sampling of the comments Free State Foundation scholars submitted to the Commission over the years in which we too specifically warned that rigid regulation of ISPs likely would discourage broadband investment.

In July 2014, Seth Cooper and I submitted comments in the matter of "Protecting and Promoting the Open Internet." We said the following in response to the Commission's May 2014 Notice of Proposed Rulemaking (NPRM):

Today, there is no evidence of marketplace failure or demonstrable consumer harm in the Internet ecosystem, including the Internet service provider market segment. Instead, there is competition among Internet service providers employing various technological platforms. And investment in network facilities is strong, and innovative business models are thriving. If new net neutrality mandates are adopted, there is a substantial risk that this new regulatory action will disrupt, or at least inhibit, the innovation and investment that has characterized the Internet ecosystem for the past decade or so. This, in turn, and most significantly, will harm consumer welfare.

In September 2014, Seth Cooper and I submitted reply comments in the matter of "Protecting and Promoting the Open Internet." We said: "A Commission-imposed regulatory regime, which in the name of preventing 'discrimination' would enforce the effectual subsidization of heavier users by lighter users and thereby deter investment in facilities, would by no means necessarily be consumer-friendly." In response to commenters asking the Commission to impose Title II regulation, Seth Cooper and I warned: "There is a long history demonstrating that Title II regulation represses investment and innovation and limits consumer choice."

In January 2010, Seth Cooper and I submitted comments in the matter of "Preserving the Open Internet and Broadband Industry Practices." We criticized the Commission's efforts to apply century-old regulations to Internet providers: "If adopted as proposed, this new Internet regulation - which, in effect, would be much like the public utility regulation that applied to last century's voice-only telephone companies and the nineteenth century's railroads - almost certainly would discourage investment and job creation, stymie innovation, and harm overall consumer welfare."

In July 2010, Seth Cooper and I filed comments in response to the Commission's Notice of Inquiry in the matter of "Framework for Broadband Internet Service," suggesting that reclassifying broadband as a telecommunication service "would be harmful to broadband innovation and investment."

In October 2010, Seth Cooper and I again filed comments in response to the Commission's Further Inquiry in the matter of "Preserving the Open Internet and Broadband Industry Practices." We advocated for a minimalist regulatory approach to "ensure that investment and innovation in new broadband platforms and Internet services continues to grow, subject not to regulatory dictates, but rather to the dictates of the marketplace."

In February 2008, I submitted comments in the matter of "Broadband Industry Practices," responding to petitions from Free Press and a number of other organizations asking the Commission to initiate a rulemaking to clarify what constitutes "reasonable network management" for broadband network operators. I 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." I added that "the FCC must not impose common carrier-like regulations that eliminate or reduce private sector investment incentives."

In other words, during this decade-long debate, FSF scholars have been consistent regarding the potential adverse impact of imposing common carrier-like regulation on Internet providers. (See the Further Readings below, dating back to 2006.) This is why we are not surprised that it appears that broadband ISPs already have reduced their investment. Assuming for the sake of argument that the FCC's 2015 Internet regulation order remains in place, it is not likely that there necessarily will be continuing straight-line year-over-year declines in capital spending. But it is likely - and this is the important point, even though it is difficult to measure - that there will be less investment than there otherwise would have been.

In conclusion, as Seth Cooper and I stated in our July 2014 FCC comments:

If new net neutrality mandates are adopted, there is a substantial risk that this new regulatory action will disrupt, or at least inhibit, the innovation and investment that has characterized the Internet ecosystem for the past decade or so. This, in turn, and most significantly, will harm consumer welfare.

We don't really relish saying "we told you so." But we did.

Further Readings

Randolph J. May, "The Net Neutrality Controversy: A Historical Perspective," FSF Blog (January 27, 2015).

Michael J. Horney, "Increased Fees Caused by Title II Regulations Will Depress Investment," FSF Blog (January 6, 2015).

Michael J. Horney, "Title II Would Not Just Harm Consumers, It Would Harm Workers Too," Perspectives from FSF Scholars, Vol. 9, No. 43 (December 17, 2014).

Randolph J. May, "Thinking the Unthinkable: Imposing the 'Utility Model' on Internet Providers," Perspectives from FSF Scholars, Vol. 9, No. 32 (September 29, 2014).

Randolph J. May, "FSF Scholars React to DC Circuit's Net Neutrality Decision," FSF Blog (January 15, 2014).

Gus Hurwitz, "Two Sides of the Internet's Two-Sidedness: A Consumer Welfare Perspective," Perspectives from FSF Scholars, Vol. 8, No. 25 (September 30, 2013).

Seth L. Cooper, "FCC's Pro-Regulatory Broadband Policy Risks Investment and Jobs," FSF Blog (September 11, 2012).

Randolph J May and Seth L. Cooper, "New FCC Regulations Reduce Investment and Hinder Job Creation," Perspectives from FSF Scholars, Vol. 6, No. 22 (September 13, 2011).

Randolph J. May, "Overregulating the Internet "Net Neutrality" Would Discourage Investment and Innovation," Perspectives from FSF Scholars, Vol.5, No. 2 (January 14, 2010).

Randolph J. May, "Riding the Back of the Internet Public Utility Tiger," FSF Blog (August 10, 2009).

Randolph J. May, "Don't Let Net Neutrality Go Airborne," Perspectives from FSF Scholars, Vol. 2, No. 17 (June 14, 2007).

Randolph J. May, "Net Neutrality: Of Chickens and Eggs," FSF Blog (May 11, 2007).

Randolph J. May, "Illogical Net Neutrality Idea," Perspectives from FSF Scholars, Vol. 2, No. 10 (February 26, 2007).

Randolph J. May, "Sidestepping the Net Neutrality Boondoggle," Perspectives from FSF Scholars, Vol. 2, No. 2 (January 9, 2007).

Randolph J. May, "Net Neutrality Unreality," FSF Blog (August 17, 2006).

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