Guest Blog: Net Neutrality Is a Good Investment

Craig Aaron is the senior program director at Free Press.  S. Derek Turner is the organization’s research director.  They argue that net neutrality is a good investment and say phone and cable lobbyists are hawking unsubstantiated claims about the consequences of FCC action.  There guest blog follows:

With the Federal Communications Commission poised to propose new rules on Network Neutrality on Thursday, phone and cable lobbyists and their proxies have been hammering lawmakers, regulators and the press with unsubstantiated claims about the “unintended consequences” of FCC action.

One of the most pervasive myths being peddled by Net Neutrality opponents is the idea that protecting the free and open Internet will somehow hinder investment in the telecommunications sector.

Just today in a speech in Chicago, Verizon CEO Ivan Seidenberg lamented, “If we can’t earn a return on the investments we make in broadband capacity, our progress toward a connected world will be delayed, if not halted altogether.”

Yesterday, Joe Barton, the ranking Republican on the House Energy and Commerce Committee, said that Net Neutrality rules could have “potentially catastrophic effects on investment and deployment of broadband services throughout the country.”

AT&T chief lobbyist James Cicconi “asked” his employees to use their personal e-mail accounts to warn the FCC that Net Neutrality would “halt private investment in broadband infrastructure.”

And right here in Broadcasting & Cable, telco hired guns Mike McCurry and Mark McKinnon ominously warned investment and the jobs “could be snuffed out by new regulation that chills the revenue streams to fund it.”

Pretty scary stuff, to be sure. But like most good ghost stories, this one’s completely fictitious.

Those predicting that Net Neutrality will destroy network investment have never offered a shred of data to support this claim. At Free Press, we decided to actually look at the numbers.

This much is clear: If Net Neutrality has any impact on network investment, it will almost certainly be positive. And there is no doubt that without Net Neutrality, investment in the broader Internet applications and content markets will be substantially harmed.

It is simply wrong to suggest that Network Neutrality, or any other regulation, will automatically deter investment. Investment decisions are driven by a variety of factors — including expectations about demand, supply costs, competition and interest rates — but in the telecom sector, regulation plays only a minor role.

In fact, the actions of the very companies attacking Net Neutrality dispute the companies’ claims about its impact. Back in 2006, AT&T was required to respect Net Neutrality as a condition of its merger with BellSouth. In the next two years under Net Neutrality, the company’s overall gross investment increased by $1.8 billion — more than any other ISP’s in America.

We’re not saying that the Net Neutrality conditions were solely responsible for AT&T’s increased investment, but we are saying that this data provides compelling evidence to disprove the frenzied claims that Net Neutrality will be catastrophic for investment.

The historical numbers suggest that regulations that promote competition have been good for investment across the industry. Incumbent phone company investment rose dramatically during the years following regulations created by the 1996 Telecommunications Act, but declined after the FCC eliminated most of these rules.

In fact, with less regulation, U.S. ISPs are depleting more in asset value than they spend on new capital equipment — meaning they are actually disinvesting in their networks. During the 2005-2008 period, the top publicly traded incumbent phone and cable companies depleted nearly $5 billion more in assets than they made in new capital expenditures. In other words, these incumbents collectively made only 97 cents in new capital expenditure investments for every dollar in assets depleted during this period. AT&T, however, was a rare exception: While operating under Net Neutrality rules, the company invested more than it depleted.

Net Neutrality may actually encourage modestly higher levels of investment in network infrastructure, because it promotes competition and removes the incentives for companies to defer investment in new capacity in order to profit from artificial scarcity. Indeed, the competitive wireless company Clearwire – which has endorsed Net Neutrality – had investment levels for the first half of 2009 that were nearly 300 percent of revenues. That’s about 15 times as high as the anti-Net Neutrality ISPs’ investments.

But Net Neutrality will unquestionably encourage higher levels of investment in the applications and content sector, which is the key driver of growth in the Internet access market itself. Net Neutrality acts as a light regulatory firewall to prevent abuses of market power — abuses that if left unchecked would stifle the overall level of investment in the wider information and communications technology sector.

The shortsighted interests and outright misrepresentations of a few big companies shouldn’t be allowed to dictate our national broadband policy. Policymakers should look at the data for themselves and not be deterred in their efforts to finally secure this basic and beneficial consumer protection. The scare tactics should be ignored.

Those interested in the full story should check out the new Free Press report, Finding the Bottom Line: The Truth About Network Neutrality & Investment.

John Eggerton

Contributing editor John Eggerton has been an editor and/or writer on media regulation, legislation and policy for over four decades, including covering the FCC, FTC, Congress, the major media trade associations, and the federal courts. In addition to Multichannel News and Broadcasting + Cable, his work has appeared in Radio World, TV Technology, TV Fax, This Week in Consumer Electronics, Variety and the Encyclopedia Britannica.