Why Must The FCC Insult Everyone's Intelligence By Misrepresenting Broadband Investment?

Economics

from the big-question dept

Last month, I wrote a post detailing Ajit Pai’s big lie, concerning his totally false claim that the order the FCC voted on today simply brings the internet back to where it was in 2015. As we explained that’s not even remotely close to accurate. That same post also mentioned a second, but still important, lie that Pai and Pai’s supporters have been telling repeatedly: that the 2015 rules harmed broadband investment.

There are two very important things to discuss regarding this claim. First, it is simply not true. Second, whether or not it is true, broadband investment is an incredibly meaningless proxy for whether or not the rules are good.

Let’s start with the first point. There is no credible evidence that Title II harmed investment. While the big broadband companies have made claims about this, and telco-funded thinktanks have pushed out studies claiming this, on financial reports (where the consequences can mean jail time if they’re lying), they all admit that classifying broadband under Title II has not harmed investment.

Here’s Neil Smit, Comcast Cable’s President and CEO telling Wall Street that nothing about Title II changes anything (on page 16):

On Title II, it really hasn’t affected the way we have been doing our business or will do our business. We believe on Open Internet and while we don’t necessarily agree with the Title II implementation, we conduct our business the same we always have…

He immediately follows that up by stating:

We have invested significantly in our capacity and will continue to do so and that includes both the — we launched a 2 gigabit speed, 2 gigabit symmetrical speed recently. We are rolling that out across 18 million homes by the end of the year…

That doesn’t sound like the disaster for broadband investment that Pai and his supporters are claiming.

How about AT&T? AT&T’s Randall Stephenson was asked by a UBS analyst “are these net neutrality or Title II rules an impediment…” and Stephenson responded:

No, we don?t think so.

How about Charter (formerly Time Warner Cable)? Well, just last year at a UBS conference, he said:

I mean, Title II, it didn’t really hurt us; it hasn’t hurt us.

And, that wasn’t the first time he said that. A year earlier he made it clear the company changed nothing about its investment plans:

“the commission?s decision to reclassify broadband Internet access under Title II has not altered Charter?s approach of investing significantly in its network to deliver cutting edge services.”

Verizon is basically the only big broadband provider that didn’t directly contradict its claims with a statement specifically about Title II… but, it did increase its investment spending quite a bit. Verizon’s only comments have basically been the company saying that it continues to invest exactly as planned prior to the 2015 rules change. None of this should be surprising. As we’ve explained there is nothing in the 2015 order that increases compliance costs — so long as you’re not screwing over customers. The only way that the 2015 Open Internet Order should be a burden is if the broadband providers were doing something that broke the rules.

And, of course, just yesterday we noted that contrary to Pai’s claims of five smaller ISPs decreasing investment, the actual data showed the opposite — that they had all expanded. And that says nothing of the over 40 small ISPs which spoke out in favor of keeping the 2015 rules, in part because it allows them to invest more, knowing that the giant incumbents mentioned above can’t use certain unfair, anti-competitive practices to keep them out of a market.

Without a legal foundation to address the anticompetitive practices of the largest players in the market, the FCC?s current course threatens the viability of competitive entry and competitive viability. As direct competitors to the biggest cable and telephone companies, we have reservations about any plan at the FCC that seeks to enhance their market power without any meaningful restraints on their ability to monopolize large swaths of the Internet.

It certainly looks like Pai’s rules may actually cause some of those ISPs to decrease their investment as they’ll have trouble competing with the large incumbents.

That’s why it’s so ridiculous not just to see Pai make these false claims about investment, but to also see Pai’s handpicked “chief economist” ridiculously claim that this FCC “is no longer an ‘economics free zone.’ This line was parroted a lot leading up to the 2015 rules (which, we must remind you, have been approved by the courts). People claimed that there was no economic basis for the changes in 2015, which ignores the fact that the 2015 rules pretty clearly lay out the economic rationale for reclassifying broadband under Title II. You can see it starting on Page 150 of the order.

And yet, in Pai’s new order he insists that it’s conclusively proven that the 2015 order hurt investment. He does name multiple studies — though every single one comes from a group or organization connected to the big broadband players. It’s hard to see how that’s a neutral, careful analysis. And, of course, some commenters on the proposal pointed to the studies that debunked all those studies — and rather than actually address those points, Pai’s rules hand-wave all of them away as just not credible.

But, of course, if you start to dig into the studies that Pai does rely on… they’re terrible. Basically all of them make questionable assumptions — assumptions that if you start to question them, the entire “economics” claims fall apart. Take, for example, the “study” by the Free State Foundation, which the FCC points to as saying its results are “consistent with other evidence in the record that indicates that Title II adversely affected broadband investment.” But read the analysis. It is hardly a rigorous economic look at broadband investment. It’s an extrapolation, with a bunch of assumptions.

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.

Count the assumptions. The date range is an assumption (at least that one’s explained). The “trend line” is a total extrapolation, without any research into whether or not there’s a reason for such a trend line or even if the timeline is a large enough sample size for a reasonable trend line. As for the capex data — why on “sixteen of the largest ISPs.” Sixteen is a fairly strange number. What happens if you just look at the top 3? Or the top 10? Or all of them? This is not a rigorous analysis.

And, of course, if it’s really true that all of these think tanks funded by the telcos magically have more insight into what’s happening with broadband investment, then… does that mean all those quotes we mentioned above are examples of these CEOs lying on investor calls? Because, if so, that seems like a pretty big deal. But, I’m generally going to assume that the execs are telling the truth to Wall St. and relying on others to put forth the misleading arguments — which Pai then parrots, and his “Chief Economists” gets to play make believe and say that the FCC cares about economics again.

But, really, none of this matters. Because my second point is more important: Broadband investment is not a good proxy for whether or not Title II is a good or bad idea. It’s a giant broken windows fallacy. I’ll use a few extreme examples to prove the point: if “broadband investment” is the sole proxy that we use as economic proof of a good or bad policy, well, then the best policy for the FCC right now is to physically destroy the internet. With all internet infrastructure broken, it will surely boost investment and economic activity around rebuilding the internet, right? Of course, no one would consider that a good policy, but if our metric is purely investment, then that’s the kind of crazy result you get. Or, let’s say that new technologies are developed that allow people to implement better broadband more cheaply. Indeed, that’s what some broadband access providers have been claiming. In that case, investment is likely to drop, even though the speeds/access/value that everyone gets increases.

Especially when you’re discussing a technology field, any halfway competent economist knows that you have different forces at play than in static markets. With technology, thanks to innovation, stuff gets cheaper as it gets better. Yet, under the new FCC’s sole focus on broadband investment as an economic measure, a more efficient, cheaper roll-out to more people would be “bad” because it would decrease investment. That’s not to say either of things have actually happened, but just to demonstrate the pure uselessness of aggregate investment data. It’s not “economics,” its junk science. It’s pretending that the numbers are meaningful because they’re numbers.

But the real “economic” test should be about the value to the end user. And broadband access and speeds is one part of that. But only one part. Indeed, a huge part of this discussion is how the real value on the internet comes from the edge providers, the apps and services that people use on the internet. That’s why the network is valuable. And the problem with killing net neutrality is it puts that in danger. It can make it more expensive, or limit competition, or make some of those services go away altogether. And that decreases the value of the internet to every user. And that’s because the internet works off of network effects for the services on them. That is, with many services, the more people use them, the more valuable they get. Killing net neutrality will interfere with those network effects in many cases, again decreasing value.

So, in short, even ignoring that the FCC’s numbers are bogus, so is its entire framing of the net neutrality debate. Perhaps it’s not surprising that the framing used here — broadband investment — only measures what the giant telco/cable companies do related to the internet. Because, after all, Chairman Pai has made it pretty damn clear that that’s all he cares about. But it’s economics malpractice to ignore where the actual value is on the network, and what these rules will do to all those service providers and the end users.

Filed Under: ajit pai, broadband, competition, fcc, investment, net neutrality, open internet, value