C. Public Policy Supports Classifying Broadband Internet Access Service As An
1. Title II Regulation Imposes Substantial Costs on the Internet Ecosystem
those inherent in Title II, can deter investment by regulated entities and, until the Title II Order, its regulatory framework for cable, wireline, and wireless broadband Internet access services reflected that reality.
330This concern is well-documented in the economics literature on regulatory theory, and the record also supports the theory that the regulation imposed by Title II will negatively impact investment.
The balance of the evidence in the record suggests that Title II classification has reduced ISP investment in the network, as well as hampered innovation, because of regulatory uncertainty. The record also demonstrates that small ISPs, many of which serve rural consumers, have been particularly harmed by Title II. And there is no convincing evidence of increased investment in the edge that would compensate for the reduction in network investment.
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324 USTelecom Comments at 5-6.
325 CTIA Comments at 3.
326 Verizon Comments, Exh. A at 24 (citing CTIA, “Wireless Snapshot 2017,” available at https://www.ctia.org/docs/default-source/default-documentlibrary/ctia-wireless-snapshot.pdf).
327 NCTA Comments at 29.
328 NCTA Comments at 30 (citing Comments of Comcast Corp., GN Docket No. 12-228, at 12 (filed Sep. 20, 2012)).
329 For a summary comparison of benefits and costs, see infra Part V.
330 See Cable Modem Order, 17 FCC Rcd at 4802, para. 5; Wireline Broadband Classification Order, 20 FCC Rcd at 14865, para. 19; BPL-Enabled Broadband Order, 21 FCC Rcd at 13285, paras. 7-8; Wireless Broadband Internet Access Order, 22 FCC Rcd at 5902, para. 2 (2007). Congress has similarly recognized the burdens associated with regulation. For example, the 1996 Act states its purpose is to “reduce regulation,” and directs the Commission to regularly review regulations and repeal those it deems unnecessary or harmful to investment, competition, and the public interest. Preamble to Telecommunications Act of 1996, Pub. L. No 104-104, 110 Stat. 56 (1996); 47 U.S.C.
§§ 161, 257.
89. Investment by ISPs. As the Commission has noted in the past, increased broadband deployment and subscribership require investment, and the regulatory climate affects investment.
331The mechanisms by which public utility regulation can depress investment by the regulated entity are well-known in the regulatory economics literature. The owners of network infrastructure make long-term, irreversible investments. In theory, public utility regulation is intended to curb monopoly pricing just enough that the firm earns a rate of return on its investments equivalent to what it would earn in a
competitive market. In practice, public utility regulation can depress profits below the competitive rate of return for a variety of reasons. This reduction in the expected return reduces the incentive to invest.
332Importantly, the risk that regulation might push returns below the competitive level also creates a disincentive for investment.
33390. We first look to broadband investment in the aggregate and find that it has decreased since the adoption of the Title II Order. ISP capital investment increased each year from the end of the recession in 2009 until 2014, when it peaked.
334In 2015, capital investment by broadband providers appears to have declined for the first time since the end of the recession in 2009.
335And investment levels fell again in 2016—down more than 3 percent from 2014 levels.
336Although declines in broadband capital investments have occurred in the past with changes in the business cycle, the most recent decline is particularly curious given that the economy has not experienced a recession in recent years but rather has been growing. While observing trends in the data by itself cannot establish the cause of directional movements, the stark trend reversal that has developed in recent years suggest that changes to the regulatory environment created by the Title II Order have stifled investment. Fortunately, the record contains a variety of other studies, using different methodologies which seek to determine how imposition of public-utility style regulation might affect ISPs’ investments.
91. Comparisons of ISP investment before and after the Title II Order suggest that reclassification has discouraged investment. Performing such a comparison, economist Hal Singer
331 See Inquiry Concerning High-Speed Access to the Internet Over Cable & Other Facilities; Internet Over Cable Declaratory Ruling; Appropriate Regulatory Treatment for Broadband Access to the Internet Over Cable Facilities, GN Docket No. 00-185, CS Docket No. 02-52, Declaratory Ruling and Notice of Proposed Rulemaking, 17 FCC Rcd 4798, 4802 para. 5 (2002) (Cable Modem Order) (“Second, we believe ‘broadband services should exist in a minimal regulatory environment that promotes investment and innovation in a competitive market.’ In this regard, we seek to remove regulatory uncertainty that in itself may discourage investment and innovation. And we consider how best to limit unnecessary and unduly burdensome regulatory costs.”), quoting Appropriate Framework for Broadband Access to the Internet Over Wireline Facilities, Universal Service Obligations of Broadband Providers, CC Docket No. 02-33, Notice of Proposed Rulemaking 17 FCC Rcd 3019, 3022 para. 5 (2002).
332 See Graeme Guthrie, Regulating Infrastructure: The Impact on Risk and Investment, 44 J. of Economic Literature 925, 950-51 (2006). This article provides a survey of the economic literature on the ways regulation can affect investment.
333 Id. at 954.
334 See Patrick Brogan, Broadband Investment Continues Trend Down in 2016, Research Brief (Oct. 31, 2017), https://www.ustelecom.org/sites/default/files/documents/Broadband%20Investment%20Trending%20Down%20in%
202016.pdf.
335 Id.
336 Id.; see also Anna-Maria Kovacs, The Effect of Title II Classification on Wireless Investment (July 2017),
http://cbpp.georgetown.edu/sites/cbpp.georgetown.edu/files/Kovacs%20-%20Title%20II%20and%20wireless%20investment.pdf (finding that “in the last three years wireless capital investment (capex) has slowed, with a precipitous decline in 2016” that “coincided with and was likely caused at least in part by investors’ and the industry’s reaction to” the Title II Order’s “common-carrier regulation [of] mobile broadband”).
concluded that ISP investment by major ISPs fell by 5.6 percent between 2014 and 2016.
337Singer attempted to account for a few significant factors unrelated to Title II that might affect investment, by subtracting some investments that are clearly not affected by the regulatory change (such as the accounting treatment of Sprint’s telephone handsets, AT&T’s investments in Mexico, and DirecTV investments following its acquisition by AT&T in the middle of this period).
338In contrast, Free Press presents statistics
339that it claims demonstrate that broadband deployment and ISP investment
“accelerated”
340to “historic levels”
341after the Commission approved the Title II Order. But Free Press fails to account for factors such as foreign investment and the appropriate treatment of handsets as capital expenditures, as Singer did.
92. A comparative assessment that adjusted the Free Press and Singer numbers so that they covered the same ISPs, spanned the same time period, and subtracted investments unaffected by the regulatory change, found that both sets of numbers demonstrate that ISP investment fell by about 3 percent in 2015 and by 2 percent in 2016.
342A Free State Foundation calculation using broadband capital expenditure data for 16 of the largest ISPs reached a result similar to Singer’s, but this analysis simply compared actual ISP investment to a trend extrapolated from pre-2015 data.
343These types of
comparisons can only be regarded as suggestive, since they fail to control for other factors that may affect investment (such as technological change, the overall state of the economy, and the fact that large capital investments often occur in discrete chunks rather than being spaced evenly over time,), and companies may take several years to adjust their investment plans. Nonetheless, these comparisons are consistent with other evidence in the record that indicates that Title II adversely affected broadband investment.
34493. The record also contains work attempting to assess the predicted causal effects of Title II regulation on ISP investment and/or output.
345Some of these studies are “natural experiments” that seek
337 See Hal J. Singer, 2016 Broadband Capex Survey: Tracking Investment in the Title II Era (Mar. 1, 2017), https://haljsinger.wordpress.com/2017/03/01/2016-broadband-capex-survey-tracking-investment-in-the-title-ii-era/.
338 However, Singer’s calculations do not control for some factors that influence investment, such as the “lumpiness”
of capital investment and technological change. See, e.g., AARP Comments at 51-54.
339 Free Press Comments at 86-144.
340 Free Press Comments at 86.
341 Free Press Comments at 86.
342 Doug Brake, Broadband Myth Series, Part 1: What Financial Data Shows About the Impact of Title II on Investment, ITIF (June 2, 2017), https://itif.org/publications/2017/06/02/broadband-myth-series-part-1-what-financial-data-shows-about-impact-title-.
343 See Broadband Investment Slowed by $5.6 Billion Since Open Internet Order, Free State Foundation (May 5, 2017), http://freestatefoundation.blogspot.com/2017/05/broadband-investment-slowed-by-56.html.
344 A separate comparison of the United States’ ISP investment with ISP investment in Europe also suggests that ISP investment might decline if the U.S., under the Title II Order, moves toward a regulatory system more like Europe’s.
A USTelecom research brief finds that European investment per capita is about 50 percent lower than broadband investment in the U.S. per capita. See Patrick Brogan, Utility Regulation and Broadband Network Investment: The EU and US Divide, Research Brief (Apr. 25, 2017). As some commenters point out, this study compares the U.S.
with the much more regulatory European system, which includes mandatory unbundling at regulated rates. Thus, it presents a picture of how investment could change if the U.S. moves toward the European system under Title II, not an assessment of the direct results of the Title II Order. See, e.g., AARP Comments at 60,; USTelecom at 1, The brief does not control for other factors that could explain investment. Utility Regulation and Broadband Network Investment at 4; AARP Comments at 59.
345 An additional type of evidence is the effect of the Title II Order on stock prices. Robert W. Crandall, The FCC’s Net Neutrality Decision and Stock Prices, 50 Rev. of Industrial Org. 555, 560-573 (Feb. 11, 2017). According to that study, in the short term, the decision appears to have had little direct effect on stock prices, except for a few cable ISPs. That may reflect the forward-looking, predictive capabilities of market players.
to compare outcomes occurring after policy changes to a relevant counterfactual that shows what outcomes would have occurred in the absence of the policy change. No single study is dispositive, but methodologies designed to estimate impacts relative to a counterfactual tend to provide more convincing evidence of causal impacts of Title II classification. Having reviewed the record of these studies, the balance of the evidence indicates that Title II discourages investment by ISPs—a finding consistent with economic theory.
34694. Prior FCC regulatory decisions provide a natural experiment allowing this question to be studied. Scholars employing the natural experiment
347approach found that prior to 2003, subscribership to cable modem service (not regulated under Title II) grew at a far faster rate than subscribership to DSL Internet access service (the underlying ‘last mile’ facilities and transmission for which were regulated under Title II).
348After 2003, when the Commission removed line-sharing rules on DSL, DSL Internet access service subscribership experienced a statistically significant upward shift relative to cable modem service.
349A second statistically significant upward shift in DSL Internet access service subscribership relative to cable modem service occurred after the Commission classified DSL Internet access service as an information service in 2005.
350This evidence suggests that Title II discourages not just ISP
investment, but also deployment and subscribership, which ultimately create benefits for consumers.
While some commenters contend that deployment and subscribership continued to increase after the Title II Order, such that nothing is amiss,
351this casual observation does not compare observed levels of subscribership and deployment to a relevant counterfactual that controls for other factors.
95. An assessment of how ISP investment reacted to news of impending Title II regulation suggests that the threat of Title II regulation discouraged ISP investment. Such statistical analysis allows one to compare the actual level of investment with a counterfactual estimate of what investment would have been in the absence of the change in risk. This study found that Chairman Genachowski’s 2010 announcement of a framework for reclassifying broadband under Title II—a credible increase in the risk of reclassification that surprised financial markets—was associated with a $30 billion-$40 billion annual decline in investment in the U.S. Bureau of Economic Analysis’ “broadcasting and telecommunications”
category between 2011 and 2015.
352The study attributes the decline to the threat of Title II regulation, rather than net neutrality per se, because no similar decline occurred when the FCC adopted the Four Principles to Promote an Open Internet in 2005.
353Because the study’s measure of investment data covers the entire broadcasting and telecom industries,
354the change in investment measured in his study
346 See Graeme Guthrie, Regulating Infrastructure: The Impact on Risk and Investment, 44 J. of Economic Literature 925 (2006). The record does not provide sufficient evidence to quantify the size of the effect of Title II on
investment.
347 A natural experiment research approach seeks to use a plausibly exogenous source of policy variation between groups (a treated and control) to estimate the effect of the policy. This seeks to identify a counterfactual situation where the policy was not in effect against which the treated group can be compared. See Bruce D. Meyer, Natural and Quasi-Experiments in Economics, 13 Journal of Business & Economic Statistics 151 (1995).
348 Thomas W. Hazlett & Joshua D. Wright, The Effect of Regulation on Broadband Markets: Evaluating the Empirical Evidence in the FCC’s 2015 ‘Open Internet’ Order, 50 Rev. of Industrial Org. 487, 499 (2017) (Hazlett and Wright).
349 Id.
350 Id.at 499-500
351 Free Press Comments at 91-125.
352 George S. Ford, Net Neutrality, Reclassification and Investment: A Counterfactual Analysis, Phoenix Center Perspectives at 2 (Apr. 25, 2017), http://www.phoenix-center.org/perspectives/Perspective17-02Final.pdf.
353 Id. at 7-8.
354 AARP Comments at 105-06.
might be larger than the change in broadband investment associated with the threat of Title II regulation.
Accordingly, the findings may be a more reliable indicator of the direction of the change in investment than the absolute size of the change. At the very least, the study suggests that news of impending Title II regulation is associated with a reduction in ISP investment over a multi-year period.
96. Some commenters have argued that this study does not identify the effect of Title II on ISP investment, because the ‘last mile’ facilities and transmission underlying DSL Internet access service (essentially incumbent LEC broadband supply) was under Title II before 2005, during the study’s pre-treatment period.
355However, to the extent that a fraction of the industry was subject to Title II (and at the time the bulk of broadband subscribers used cable modem services that were not regulated under Title II), this would imply Ford’s negative result for investment were understated.
35697. The study is also disputed by the Internet Association, which submitted an economic study arguing that the threat and eventual imposition of Title II status on broadband Internet service providers in 2010 and 2015 did not have a measurable impact on telecommunications investment in the US.
357While we appreciate the alternative method and data sources introduced by that study, several elements lead us to discount its findings. The estimation of the impact of events in both 2010 and 2015 relies partially on forecast rather than actual data, which likely lessens the possibility of finding an effect of Title II on investment.
358In addition, when examining cable and telecommunications infrastructure investment in the U.S., the study relies on a regression discontinuity over time model, thereby eliminating the use of a separate control group to identify the effect of policy changes. We believe use of such a model in these circumstances is unlikely to yield reliable results.
35998. In light of the foregoing record evidence, we conclude that reclassification of broadband Internet access service from Title II to Title I is likely to increase ISP investment and output. The studies in the record that control the most carefully for other factors that may affect investment (the Ford study and the Hazlett and Wright study) support this conclusion. Consequently, we disagree with commenters who assert that Title II has increased or had no effect on ISP investment, given the complexity of
355 AARP comments at 56-57; Joan Nix, Bruce McNevin, & David Gabel Comments at 7 (Nix et al. Comments) (“[Ford’s paper] does not address the fact that between the years of 1980 and 2005, wireline carriers provided Internet access as a Title II service.”). One commenter points out the pre-treatment period was one in which, for a period, DSL was subject to particularly heavy-handed Title II regulation. Nix et al. at 7. Again, this means Ford would have underestimated the impacts of a move from pure absence of Title II regulation and its threat. Finally, that same commenter asks, “why would ISP investment decline in 2010-2015, when Title II regulation was considered, but not implemented, relative to the non-treatment years [1980-2009] when Title II regulation was in-place for wireline carriers, and considered but not adopted for cable modem service?” Nix et al. at 7-8. However, they provide no basis for the question’s premise.
356 Between 1999 and 2002, there were roughly twice as many cable modem subscribers as DSL subscribers. DSL Internet access service started achieving a much larger market share after the FCC removed line-sharing regulations from DSL in 2003. Hazlett and Wright at 498-99.
357 Internet Association Comments at 12.
358 The Internet Association study claims that its test of the 2010 effect did not use forecast data. However, comparing the reported number of observations in Tables B1 and B2 of the study clearly indicates that the same datasets were used to estimate 2010 and 2015 effects. Furthermore, we note that the Phoenix Center attempted to replicate the results of Table B1 and obtained strikingly different results when excluding the forecast data.
Unfortunately, the Phoenix Center chose to only estimate Hooton’s baseline model, which did not control for obviously confounding factors such as the business cycle, and therefore we place limited weight on the Phoenix Center’s revisions. See George Ford, A Further Review of the Internet Association’s Empirical Study on Network Neutrality and Investment, Phoenix Center Perspectives 17-10 (Aug. 14, 2017).
359 See Catherine Hausman and David S. Rapson, Regression Discontinuity in Time: Considerations for Empirical Applications, NBER Working Paper No. 23602 (July 2017), http://www.nber.org/papers/w23602.