.@FCC and hypothetical competition

Last week, Federal Communications Commission general counsel Jon Sallet delivered remarks to the Telecommunications Policy Research Conference where he described the circumstances behind three recently attempted broadband mergers.  The term, “competition”, raised its head during Mr. Sallet’s speech as he argued that in the case of two of the mergers, signaling disapproval of or outright disapproving the mergers the Commission believed negatively impacted consumer welfare.

Reading Mr. Sallet’s remarks it was clear that the Commission still prefers turn a blind eye to the changes everyone else is seeing in the industry; that broadband companies are becoming content delivery, media companies, data analytic companies, or a combination of the three.  Verizon’s purchase of online legacy media company AOL and AT&T’s purchase of DirecTV are two examples of convergence 2.0.

In addition, not only are AT&T and Verizon ready and able to use their wireless networks to deliver content for consumers and eyeballs for advertisers, they are collecting and selling to third-parties the data they collect on their access networks.  The data they sell to third-parties may be used to better define a subscriber’s user experience or to determine buying habits such that better, more targeted advertising can be created.  The openness of internet infrastructure architecture is such that other data analytics and data broker firms are competing with broadband providers to gather, collate, and sell this very same consumer information. This along with content, in my opinion, is the closest thing to competition involving internet players.

But what about a competitive market for consumer access services via broadband?  While the number of choices for networks that get you online may differ based on whether you are a rural, suburban, or urban dweller, it still remains that you have a choice involving more than one carrier.  Progressives often cite how much better European and Asian countries are doing in terms of subscribers per capita when analyzing the “dearth” of choice in the U.S.  Some will argue that a European style mandate that opens up the last mile to competitors may do the trick. What progressives consistently overlook is that the Commission’s authority to open up the last mile with a European-style mandate is dead on arrival because permission to deploy in the last mile depends on local or state authority.  Franchise agreements and certificates of public convenience and necessity are the biggest bottlenecks to the very competition progressives and the Commission continuously choose to ignore.

So, if consumers aren’t happy with the quality or quantity of broadband access choices, they may have to include in their residential decision matrix, along with good schools and tax schedules, the amount of broadband choice available in a locality.

The irony is that progressives may have further shot their broadband access competition argument in the foot by advocating for onerous net neutrality rules.  Even if state and local governments further loosened franchise restrictions for entering local markets, there are for now network management, transparency, no blocking, and no throttling rules that new entrants will have to comply with.  Net neutrality has raised another barrier to entry that may serve to dissuade the very competition its proponents allegedly want.

What Mr. Sallet left out of his remarks was any discussion on capital flow.  This is one of the downsides of too many lawyers and not enough economists at the Commission.  While broadband networks have benefited from many billions of dollars in investment, that investment is tapering off.

According to U.S. Telecom: The Broadband Association, broadband capital expenditures totaled $78 billion in 2014.  Since 1996, total broadband capex was $1.4 trillion. But, according to one member of the Commission, broadband capex is falling.  In remarks to the American Enterprise Institute, Commission member Ajit Pai noted that major wireless companies saw a decline in capex of 12% during the first half of 2015.

Compounding Commissioner Pai’s observation is another observation by former Commission member Harold Furchtgott-Roth.  Mr. Roth shared in a recent piece that annual growth rates in capital expenditures in the information sector, the sector most impacted by broadband spending, has been running below the national rate for capital expenditure. While capex in the information sector has been running at an annual rate of 8.2% between 2010 and 2013, the average for overall capex is 10.7%

Broadly speaking, the only competition that matters is competition for resources and capital. Onerous regulations with a negative impact on capital expenditure growth rates will make investors go the other way.

About Alton Drew

Alton Drew brings a straight forward and insightful brand of political market intelligence. Alton Drew graduated from the Florida State University with a Bachelor of Science in economics and political science (1984); a Master of Public Administration (1993); and a Juris Doctor (1999). You can also follow Alton Drew on Twitter @altondrew.
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