New Study Projects Investment Declines under Title II

11.20.2014

A new economic model examining the impact of shifting to Title II regulation finds that Internet service providers are likely to invest “significantly less” — up to 31.7 percent lower — putting at risk much of the large capital investment needed to meet expected increases in demand for data services, according to economists Kevin Hassett and Robert Shapiro. The percentage decline translates to a negative impact on the order of tens of billions of dollars for companies modeled in the study, with potentially greater impacts if applied to the broader industry.

USTelecom data was included in the study, which puts hard numbers behind industry concerns that public utility regulation would depress investment. In a press briefing where the economists explained their procedure and findings, USTelecom President Walter McCormick said reclassification “would be contrary to the national interest in broadband investment and deployment.”

Based on the model, the study found that under the current regulatory structure where data services are not under Title II regulation, providers are expected to spend approximately $218.8 billion in new capital investments over the next five years from 2015 to 2019. In contrast, under Title II regulation of wireline data services, the providers’ wireline and wireless capital investments over the next five years would drop to as low as $173.4 billion, a reduction in investment of up to $45.4 billion.

Hassett and Shapiro said they projected a baseline of capital investment growth assuming the Federal Communications Commission (FCC) maintains current light-touch regulation, and used a quantitative model to estimate the portion of capital investment from 2009 to 2014 subject to Title II regulation and the portion unencumbered by Title II. The model is based on data from five companies — Alaska Communications, AT&T, Cincinnati Bell, TDS and Verizon — with Title II regulated wireline networks as well as lightly regulation wireline and wireless data networks.

The study concludes that the impact on investment would be even greater if wireless data were also reclassified as a Title II service, both because of the direct negative effect on wireless infrastructure buildout, and because wireline investment is directly related to wireless investment. Title II reclassification could adversely affect innovation, as regulation changes market conditions, which affects decisions about whether to develop new technologies. Wireless Internet could be particularly harmed, as it currently exhibits extensive and rapid innovation.

USTelecom asked the FCC to review the study in an ex parte filing.

Points to emphasize right away:

  • Under Title II regulation, ISPs are likely to invest significantly less than they would absent Title II regulation, putting at risk much of the very large capital investments that will be needed to meet the expected increases in demand for data services.
  • The study finds that Title II regulation of Internet Service Providers would reduce their future wireline investments by up to 31.7 percent per year. In contrast, capital investment unencumbered by Title II regulation would grow at an annual rate of 42.9 percent per year. This implies that Title II regulation of wireline would reduce future total wireline and wireless investments by up to 20.8 percent per year.
  • Under the current regulatory structure, where data services are unencumbered by Title II regulation, the ISPs that form the basis of the analysis are expected to spend approximately $218.8 billion in new capital investments over the next five years (2015-2019) in total wireline and wireless investments. In contrast, under Title II regulation of wireline data services, these ISPs’ wireline and wireless capital investments over the next five years would drop to as low as $173.4 billion. Title II regulation of ISPs thus reduces these companies’ total investments by up to $45.4 billion over the next five years.
  • The paper’s models account for five incumbent US-based broadband providers. In practice this accounts for about 50 percent of the market. Thus the predictions here for lost investment are on the very conservative side. In reality, the reduction in investment would be much greater.
  • The impact on investment would be even greater if wireless data were also reclassified as a Title II service, both because of the direct negative effect on wireless infrastructure buildout, and because wireline investment is directly related to wireless investment.
  • Title II regulation may also have an adverse effect on innovation, as regulation changes market conditions, which affects decisions about whether to develop new technologies. Wireless Internet could be particularly harmed, as it currently exhibits extensive and rapid innovation.

Questions from press call:

  • Is lowered investment caused by uncertainty as carriers wait to see what regulations the FCC adopts, or would it be caused by Title II rules themselves? (Both. The negative effects identified are a mixture of both of those effects, but the data wasn’t rich enough to allow the authors to deconstruct it precisely.)
  • What effect would forbearance have on the findings? (You can’t build that into the model because no one knows what form forbearance would take; it’s one of the conditions that leads to uncertainty for investment. Level of investment would respond depending on whether the ultimate regulation is stricter than expected, etc.)
  • If Title II were adopted, would the reduction in investment be temporary, as companies wait to see what happens on forbearance; or permanent going forward? (Both: Reduction because of uncertainty until the regime is in place, and then reduction based on public utility investment affecting rate of return.)
  • How would ISPs benefit from reduced investment going forward under Title II? (They do a rate-of-return calculation.)
  • Might Title II investments be declining for other reasons? Is investment driven by the regulatory scheme, or by demand for the particular service? (Model took that into account…)
  • What might companies be spending on if Title II weren’t causing a drop in investment? (Infrastructure upgrades, etc… people need more explanation on what exactly capex is.)
  • Would the FCC factor reduced investment into its decisions if the big ISPs want regulatory relief, or approval for mergers? (The FCC understands how markets work; authors don’t expect reduced investment to cause regulatory backlash.)

 

 

 

Comments

Post new comment

The content of this field is kept private and will not be shown publicly.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Allowed HTML tags: <a> <p> <span> <div> <h1> <h2> <h3> <h4> <h5> <h6> <img> <map> <area> <hr> <br> <br /> <ul> <ol> <li> <dl> <dt> <dd> <table> <tr> <td> <em> <b> <u> <i> <strong> <font> <del> <ins> <sub> <sup> <quote> <blockquote> <pre> <address> <code> <cite> <embed> <object> <strike> <caption> <iframe><area><map>
  • Lines and paragraphs break automatically.

More information about formatting options

To prevent automated spam submissions leave this field empty.
CAPTCHA
This question is for testing whether you are a human visitor and to prevent automated spam submissions.
Image CAPTCHA
Enter the characters shown in the image.

Comments are moderated, and will not appear on this website until a moderator has approved them. This means there will be a delay between the time a comment is submitted and it appears on the post. Profanity, or topics that are not germane to the post will not be approved for posting. The name you enter here will appear next to your comment.