The FCC Says Net Neutrality Cripples Investment. That’s Not True

Federal Communications Commission Chair Ajit Pai says the agency's net-neutrality rules are discouraging investment, leaving consumers with fewer, and less robust, choices for internet service, and potentially widening the digital divide. Broadband providers' own financial reports tell a different story.

In its proposal to repeal the rules, which were enacted in 2015, the FCC cites industry-funded studies concluding that investment in internet infrastructure declined 3 percent in 2015 and another 2 percent in 2016. The proposal also claims that internet providers delayed new offerings, such as home-wireless plans or streaming video services.

But the nation's largest internet provider actually increased its spending during this period, as did several other companies. Others cut spending, but said the drops stemmed from completion of longer-term plans. The shifts highlight the challenge of determining the cause and effect of spending changes, which reflect corporate need, technological change, cost-saving innovation, and shareholder pressures, as well as regulations.

There’s another consideration as well. The FCC says repealing the net-neutrality rules will remove “regulatory uncertainty” for broadband providers, and encourage them to boost spending. But the proposal will increase uncertainty for other internet companies, most notably small content providers, who may face stiff fees to distribute their work—and in some cases may not even try.

Comcast Boosts Spending

Comcast, the nation’s largest internet provider, increased its capital expenditures— spending on buildings, equipment, transmission lines and the like—for cable communications by about 13 percent in 2015, and by another 8.6 percent in 2016, to a total of $7.6 billion. Those numbers include Comcast’s investments to deliver TV programming, making it hard to tell how much was spent on internet infrastructure. However, in Security Exchange Commission filings, and calls with investors, company executives cited network upgrades to deliver faster internet service, as well as the rollout of a new TV service.

The increased investment was in line with what Comcast told investors after the FCC passed its new rules, which classified internet service providers as common carriers under Title II of the Communications Act. "It really hasn't affected the way we have been doing our business or will do our business," Comcast Cable’s then-CEO Neil Smit told investors in May 2015. "And while we don't necessarily agree with the Title II implementation, we conduct our business the same we always have."

Comcast says simply looking at its total capital expenditures doesn't tell the whole story. In a blog post, Comcast executive David L. Cohen argues that Comcast’s spending on infrastructure is flat, as a percentage of revenue. And in an FCC filing earlier this year, Comcast claimed that the company delayed the widespread launch of its Xfinity Instant TV service (formerly known as Stream TV) by 18 months due to an FCC investigation related to the net-neutrality rules.

Identifying the Cause

In other cases, it’s even harder to discern investment trends. At AT&T, for example, capital expenditures overall declined, excluding its acquisition of DirecTV. But the company doesn't disclose spending on its consumer internet business, as opposed to the rest of its empire, so it’s hard to know whether spending declined in that unit, and if so, by how much.

AT&T is clear on why it spent less overall. In 2012, the company announced plans to spend $14 billion over three years to upgrade both its wireless and DSL networks as part of "Project Velocity IP." That year, AT&T CFO John Stephens told analysts that AT&T’s spending would drop after the three-year project concluded.

And that's exactly how Stephens explained the company's reduced spending during an earnings call in 2015. "The additional spend isn't necessary, because the project's been completed, not for lack of anything but for success," he said during the call.

AT&T also has been making a strong effort to curb infrastructure costs by relying more on software than expensive telecom equipment. In recent years, the company has tapped open-source technology and is now exploring artificial intelligence as a potential cost-saving move. In other words, it's not clear whether, in some cases, reduced spending may be the result of smarter spending, not a fear of regulations.

Other carriers present a similarly mixed picture. Verizon’s investment in its wireless business was slightly higher in 2016 than 2014, before the FCC adopted the net-neutrality rules. Its spending on its aging wireline network declined, extending a long-term trend. Charter started rolling out faster internet offerings in 2014, so its spending has been increasing, even excluding its acquisition of Time Warner Cable. Sprint has been cutting spending, but then-CTO Stephen Bye told the FCC before it passed the net-neutrality rules in 2015 that the rules wouldn’t affect the company’s investments in its network.

Smaller Providers Split

Earlier this year, around 70 smaller companies, most of whom provide fixed wireless in rural areas, asked the FCC to overturn the net-neutrality rules because they created additional legal burdens and scared away potential investors.

Elizabeth Bowles, who heads a small internet-service provider in central Arkansas called Aristotle, was among the signers. She says that allow the company always complied with the FCC’s hard and fast rules against blocking and discrimination, the company delayed a planned expansion while making sure the company complied with some of the more esoteric requirements of Title II. The plan expansion eventually moved forward, but Bowles worries about the ongoing legal costs required to make sure the company doesn’t accidentally break any rules.

Meanwhile, a second group of about 30 small providers signed an open letter to the FCC saying that they'd not faced barriers to investment and arguing that the net neutrality rules actually help smaller companies by discouraging larger providers from acting anti-competitively.

Bowles wants the FCC to rescind the rules, and wants Congress to approve a replacement that does not rely on Title II. But she says that simply exempting small providers like Aristotle from the Title II rules would have been an acceptable compromise. In fact, she argued for that solution before Congress.

Internet providers large and small say they worry that the 2015 rules are too vague and could allow the FCC to someday regulate internet pricing. But those concerns could be addressed without scrapping the rules entirely. That would leave intact the protections internet content creators have grown accused to expect. By throwing out these rules without waiting for Congress to step in with a replacement, Pai’s FCC will do what he has accused his predecessor of doing: create an environment of uncertainty.

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