The Dystopia Of A Common Carrier World: Obama Picks A Fight With Broadband Providers

If the net neutrality debate wasn't sufficiently hot last week, President Obama poured fuel on the fire Monday by offering a full-throated defense of a retrograde prescription called "Title II." This archaic regulatory scheme was designed for the 1930's telephone monopoly, not the fiercely competitive broadband market of the 21st century.

Mr. Obama's endorsement of a heavier hand for broadband goes well beyond the FCC Chairman's hybrid proposal, which would have quarantined portions of the Internet from common-carrier regulation. In the President's mind, the companies that supply most of America's fixed and mobile broadband must be regulated like sewage, electricity, and other public-utility companies.

Apparently, the President thinks the best way to resuscitate the Democratic Party after the mid-term shellacking is to pick a fight with companies that are investing mightily in the U.S. economy. One of his aids told the Washington Post: "I see him almost salivating over a congressional fight, or a fight with the carriers, over this issue. This is a populist issue he thinks he can win on." It is Mr. Obama's war of choice—not on a foreign enemy, but on the broadband providers he hopes to demonize.

So what's wrong with a little populism? Perhaps not post-apocalyptic landscapes, with walkie-talkies for phones and roving bands of unemployed app developers. But if populism means slowing broadband investment and innovation to prevent theoretical harms, then gloom is in the forecast.

The Title II dystopia would mean stagnating networks with more congestion, rising broadband prices for consumers, and the U.S. falling behind the rest of the world in access speeds. And as pointed out by regulatory analyst Anna-Maria Kovacs, by exposing mobile broadband carriers to the same archaic rules, Mr. Obama's plan would scare investors and undermine the forthcoming broadcasters' spectrum auction.

The last time the weaponry of Title II was trotted out against broadband providers, investment stalled. The primary ammunition deployed against telcos from the 1996 Telecom Act was called "mandatory unbundling." Network owners were compelled to share or "unbundle" their network at regulated rates with resellers that were far below realistic constructs of cost. Unsurprisingly, investment came to a halt. Proponents of Title II, including the President, promise that the current and future FCC would "forbear" from deploying these and other investment-destroying Title II obligations. Would you invest on the basis of such a promise?

Two regulatory experiments permit us to estimate what Mr. Obama's Title II dystopia might look like.

First, the D.C. Circuit effectively ended the unbundling experiment for DSL in 1999. Until that time, cable companies were reluctant to make investments in their own broadband infrastructure so long as regulators were providing a less expensive entry path to a favored constituency (the resellers). When the unbundling regime was unwound, cable investment predictably exploded. According to NCTA, the average annual capital expenditure for cable operators from 1996-98 was $6 billion. In comparison, the average annual capital expenditure for cable operators from 2000-02—after unbundling was dismantled—was $15.1 billion (the average of $14.6, $16.1, and $14.5 billion), an increase of 149 percent. Even if half of that increase was attributable to the removal of Title II, that's still a huge effect.

Second, although DSL unbundling was gutted in 1999, the FCC still had the power to require telcos to share their new fiber lines. In its Triennial Review Order, which became effective in October 2003, the FCC determined that there would be no unbundling requirement for fiber-to-the-home loops. Once the telcos understood that they were free of the obligation to lease their fiber-based networks to resellers at below-market rates, they entered into a race with their cable counterparts to begin building the broadband networks that are now transforming the broadband landscape. In the span of just five years, from the FCC's adoption of a policy of regulatory forbearance for fiber and IP networks in 2003, the miles of optical fiber installed per year doubled from five to ten million by 2010. Again, half of the observed doubling in fiber would still imply a very large investment effect associated with the removal of Title II.

If you are not a fan of history or you suspect that these before-after methods fail to control for other factors (besides the removal of Title II obligations) that might influence broadband investment, consider this: On Wednesday, AT&T Chairman Randall Stephenson warned that its plans to deploy fiber to 100 cities are in hold mode as the company figures out how broadband is going to be regulated. This raises the prior estimate of Title II's deleterious effect on investment based on similar regulatory experiments.

So how much investment is at stake if Mr. Obama induces the nation's ISPs to go on an investment strike? A 2014 study by Progressive Policy Institute ranks each U.S. company by U.S. capital expenditures from 2011-13, and ISPs occupy the first (AT&T), second (Verizon), and ninth (Comcast) slots in the rankings. Collectively, these three companies invested nearly $43 billion in the United States in 2013.

For every dollar in core investment that Mr. Obama's Title II gamble puts at risk, there are adverse economic consequences. Not only would economic activity contract from Title II, but broadband users would also suffer as the core network atrophies. Continuous investment is needed to keep with the flood of data that broadband users upload and download; starve the network of investment, and users will experience congestion. To rationalize usage under a capacity constraint, ISPs would be forced to raise access prices or impose usage-based prices.

It doesn't have to be this way. This is Mr. Obama's war of choice. He should think through the ramifications. The President is gambling that investment created at the edges of the network will more than offset the decline at the core. But there is zero evidence for this effect, and no past history; he is throwing the long ball and hoping it works.

The President's Title II endorsement doesn't appear to be about economics at all: It's about politics pure and simple. That's a major reason Congress created an independent commission to make these determinations. If the FCC caves in to political pressure, it becomes increasingly difficult for moderates to defend the agency's usefulness.

twitter: @halsinger