George Ford

Central to the debate over the Federal Communications Commission's reclassification of broadband as a "common carrier" telecommunications service under Title II of the Communications Act of 1934 is the effect on broadband network investment. In April 2017, the Phoenix Center released its first statistical analysis of the investment question and found that between 2011 and 2015, telecommunications investment differed from expectations by between 20 percent and 30 percent, or about $30 to $40 billion annually. That is, over the interval 2011 to 2015, another $150-$200 billion in additional investment would have been made "but for" Title II reclassification. In this paper I expand my statistical analysis, restricting the analysis to investments in property and equipment (thereby excluding investment in intellectual property), altering the control group, and evaluating other modifications to the statistical model. My prior results are confirmed in this updated analysis, again finding "that investment in total fixed assets would have been about $30 billion more annually" and "[i]nvestment in equipment and property would have been $20 billion more 'but for' reclassification."

Applying the difference-in-differences method to a broad measure of investment (thus accounting for the Federal Communications Commission's "virtuous circle" effects), the author estimates the investment effects in telecommunications following the introduction of Title II reclassification to the Net Neutrality debate. Using standard econometric methods, George finds sizable investment effects from reclassification.

Between 2011 and 2015 (the last year data are available), telecommunications investment differed from expectations by between 20% and 30%, or about $30 to $40 billion annually. Actual investment averaged $126 billion annually, a sizable expenditure, but the counterfactual analysis indicates the average investment over the five-year window would have been about $160 billion (or more) annually. That is, over the interval 2011 to 2015, another $150-$200 billion in additional investment would have been made "but for" Title II reclassification. Notably, Dr. Ford finds no decline in investment following the release of the FCC's "Four Principles" to promote an Open Internet in 2005, suggesting it is reclassification -- and not Net Neutrality principles -- that is reducing investment.

In this bulletin, we attempt to shed some light on the optimal design of Federal Communications Commission rules and practices for addressing interference disputes. Since spectrum licenses produce no benefits without large and mostly sunk investments in communications networks, our focus is on investment incentives. We argue that the Federal Communications Commission’s optimal interference policy would necessarily deal with different license holders differently when their sunk network investments vary.

We focus on sunk investments because if interference-causing repurposings are permitted and the significant sunk assets to provide services using spectrum are given short shrift, then the rational response of private parties is to curb investment. Put bluntly, regulatory policy towards interference concerns should favor those licensees with more “skin in the game,” with attention focused on actual capital investments in networks and not spectrum licenses alone. To provide context, we use the continuing saga of LightSquared Networks—a spectrum speculator now branded as Ligado—as a case study, though the analysis is in no way limited to the specifics of this ongoing proceeding.

In these frugal times, many Americans are forced to do more with less. Given the pernicious effect of the growth of the regulatory state, it is time for the government to do less with less. As such, our recommendation remains the same now as in 2011: As Congress and the Trump Administration struggle with the difficult policy decisions of how to shrink federal spending and get the economy moving again, perhaps an excellent place to start would be to investigate responsible cuts in the size of the federal regulatory bureaucracy.

Building and maintaining broadband networks is a tremendously expensive endeavor and even where networks are built they provide less benefit if vast swaths of the earth’s population does not see any value in using them. Research indicates that awareness, digital literacy, and affordability are the key barriers to adoption. A successful program, whether implemented by the public or private sectors, must expose nonusers to the benefits of being on-line and do so at low prices (or even free). While some governments have attempted to spur deployment and adoption, the public sector operates with limited resources.

Using subscriptions from the Lifeline program in the United States, we find that the use of the subsidy program rises with increases in unemployment and poverty. We suspect that private programs such as Facebook’s Free Basics may even be more effective than public programs, since the private programs are not influenced by political concerns and are available through participating operators to everyone for free without eligibility criteria.

The Federal Communications Commission recently outlined a “new path forward” for imposing price regulation on high-capacity telecommunications circuits sold to businesses and other telecommunications providers. The FCC outlines a two-step procedure for determining if it will apply rate regulation these Business Data Services: As a first step, the FCC proposes to determine “whether market power exist[s]” and where. If the FCC determines that market power exists, then the FCC proposes to apply a price-cap “style” regime to control prices.

The problem, however, is that nowhere does the FCC define a meaningful concept of “market power.” To fill this gap, in this paper I construct a policy-relevant definition of market power. I then consider whether the FCC’s analysis is capable of identifying the presence of or quantifying the magnitude of market power for Business Data Services. As I demonstrate, it is not. The FCC’s analysis is unsupported by basic economics and good statistics, and is thus incapable of providing any meaningful evidence regarding the presence or absence of market power.

[Commentary] On June 14 Chattanooga Mayor Andy Berke touted the economic impact of the municipal broadband system in his city. Chattanooga’s fiber system required a $330 million investment, with $105 million coming from federal taxpayers. A sizeable share has also been shouldered by the city’s captive electricity ratepayers. Demonstrating the economic benefits of such massive investments — about $4,400 per customer — is a necessary political task, albeit a tricky one, especially since most Chattanoogans purchase service from private providers in that city.

Upon inspection, the mayor’s claims just don’t add up. Mayor Berke’s lead claim is that the “city’s unemployment rate has dropped to 4.1 percent from 7.8 percent,” over the past three years. Yet, over the same period, the nationwide unemployment rate fell from 7.5 percent to 4.7 percent. In terms of unemployment, Chattanooga isn’t much different than the nation as a whole. Unless the Chattanooga system is having nationwide economic impacts, it’s pretty clear that attributing the unemployment decline to a city broadband network is bogus.

[Dr. George S. Ford is the Chief Economist of the Phoenix Center for Advanced Legal & Economic Public Policy Studies]

As the Federal Communications Commission begins to formalize rules for the upcoming voluntary incentive auctions for broadcast spectrum, questions regarding participation limits on the largest domestic wireless carriers remain open.

Proponents of bidder restrictions on AT&T and Verizon appeal to a “revenue- enhancement hypothesis,” under which the participation by the more successful carriers will allegedly discourage bidding by smaller firms and thus reduce total auction revenues.

In this bulletin, we analyze data from a recent large-scale spectrum auction to shed light on the validity of the revenue-enhancement hypothesis, and our findings are significant. Among other things, we find no evidence that AT&T and Verizon reduced the number of bidders for licenses. Moreover, we find no evidence to support the claim that lower auction revenues resulted from large firm participation.

As participants, the two increased overall auction revenues, both by winning licenses and by helping to reveal the valuations of other bidders. AT&T’s efforts (win or not) added a 21% premium to final auction prices above and beyond the revenue effects of the typical bidder.

AT&T alone accounted for nearly half of all auction proceeds, even though its winning bids were only about 10% of the total. Verizon’s impact was consistent with that of the average bidder. Accordingly, our findings contradict almost every key aspect of the revenue- enhancement hypothesis -- not only did AT&T’s and Verizon’s participation not deter smaller firms from entering the auction, but their participation substantially raised total auction proceeds. Empirical evidence supporting bidder exclusions or restrictions in the forthcoming voluntary incentive spectrum auctions therefore remains weak.

[Commentary] Congress tasked the Federal Communications Commission with the difficult job of having to figure out both the big picture and small details of the auction process, including how many licenses to auction in any given market.

This number would, in part, determine the number of firms offering mobile wireless services (in addition to the two already in operation). On this question, former FCC Chairman Reed Hundt indicated he relied heavily on the advice of Professor Michael Porter at the Harvard Business School. The government, the Professor rightly reasoned, could not pick the equilibrium number of firms in advance.

To sum up, the advice from Professor Porter was to sell too many licenses and let consolidation move the industry to its equilibrium. In light of Chairman Hundt’s “overshoot the equilibrium plan,” I find the Obama Administration’s hard line and much of the current debate over the price-increasing effects of further consolidation misplaced.

In this strategy devised by Professor Porter and Chairman Hundt, even if we limit the argument solely to a price effect, permitting consolidation from a point known to be “too many” can still be good policy. Significantly, under the Hundt-Porter strategy, even if we know a merger will lead to higher prices, this knowledge is not a sufficient reason to block a merger. Higher prices was, in large part, the plan.