Let's encourage capital investment by rolling back net neutrality
© Greg Nash

Perhaps no topic has dominated the telecoms debate move over the past decade than the politically charged issue of net neutrality. While everyone agrees that it is important to have a free and open internet, the crux of the problem has always been legal—that is, does the Federal Communications Commission have sufficient authority to protect consumers under its previous bi-partisan “light touch” approach under Title I of the Communications Act, or must it invoke the nuclear option and subject the internet to a law intended to govern the old Ma Bell monopoly by reclassifying broadband internet access as common carrier telecommunications service?

According to the D.C. Circuit in 2010, the FCC had ample legal authority to protect consumers under Title I, provided it followed a detailed “roadmap” set forth by the court. Unable to resist the siren call of price regulation, however, in 2015 the Obama administration opted for reclassification, raising significant due process concerns in the process. Seeking to reverse this massive regulatory overreach, the current FCC under the leadership of Chairman Ajit Pai recently initiated a Notice of Proposed Rulemaking in which it is proposing to roll back the excesses of his predecessor.

Under long-standing administrative law, the FCC is well within its rights to reverse course, so long as it provides a reasonable reason for its change in policy direction. As part of this process—particularly given the short time frame for its policy reversal—the commission will likely have to demonstrate some combination that it either underestimated the costs imposed by the 2015 Open Internet Order or overestimated the expected benefits of the regulation.

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Which brings us to the question of network investment.

 

The FCC’s primary economic justification for reclassification was its “virtuous circle” of investment. Under this theory, (1) “edge” providers such as Google and Netflix invent cool stuff for consumers to use; (2) as consumers use this cool stuff, the demand for better broadband networks correspondingly rises; (3) this increase in demand for broadband drives network operators (the “core”) such as AT&T and Comcast to invest in their networks; (4) which, in turn, leads edge providers to innovate further, leading to more demand and network investment, and so forth.

Proof of network investment is key to the commission’s case, because Section 706 of the Telecommunications Act (a central legal backstop to the commission’s reclassification decision) expressly commands the commission to “encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans” and to “remove barriers to infrastructure investment.” Significantly, as a predicate for using Section 706 as legal authority, the statute clearly points to promoting broadband infrastructure investment across the nation—not to promoting investment in edge services.

Unfortunately for the FCC, rather than promote infrastructure investment, reclassification retarded it. From 2011—the year after reclassification was first introduced as a possibility by then-FCC Chairman Julius Genachowski—to 2015, another $80 billion in additional infrastructure investment would have been made “but for” the regulatory revival at the FCC under the Obama administration. Recent analysis suggest that reductions in capital spending for 2016 are large relative to historical changes in spending. Data from USTelecom indicate that capital spending in broadband networks is $5 billion below expectations. Similarly, data from CTIA reveals a $6 billion drop in capital spending, a decline of 20 percent.

Having lost on the empirics, proponents of continued aggressive internet regulation (and their allies on Capitol Hill) are now resorting to a cute, but ultimately flawed, argument: Noting that it is illegal for publicly-held companies to lie to investors and on official Securities and Exchange Commission documents, they claim that Broadband Service Providers (“BSPs”) have never told Wall Street that Title II would reduce investment. In making such outlandish statements, however, it becomes readily apparent who the real fabulists are in the net neutrality debate.

For example, in its 2014 Annual Report, AT&T bluntly told investors that the FCC was “attempting to regulate the entire internet under an arcane law called Title II that was written in 1934 to regulate the rotary dial telephone. We feel this antiquated approach will damage investment and damage the internet itself.” Verizon, also in its 2014 Annual Report, said that Title II regulation “could depress long-term capital investment in infrastructure, discourage innovation in broadband internet and related services, and cost the economy thousands of middle-class jobs.”

What is true, however, is that major BSPs never told their investors that reclassification would increase investment.

The FCC’s 2015 Open Internet Order was a poster child of bad law and even worse economics (so much so that the order was referred to as an “economics-free zone” by the FCC’s own chief economist.) The data bears this out, and Chairman Pai deserves credit for attempting to restore due process and serious analysis to the net neutrality issue.

But for those proponents of aggressive regulation of the internet for whom net neutrality has become a form of religion, none of this matters. Instead, they ask the public to suspend disbelief for their version of the greater good. In their view, the approach to the facts is simple: “Who are you going to believe? Me or your lying eyes?”

Given the stakes, that is hardly a compelling argument.

Lawrence Spiwak is the president of the Phoenix Center, a non-profit 501(c)(3) research organization focused on public policy issues related to governance and social and economic conditions, with a particular emphasis on the law and economics of the digital age.


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