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The Effect of Regulation on Broadband: Evaluating the Empirical Evidence in the FCC’s 2015 “Open Internet Order.” Net Neutrality Special Issue Blog #5

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When the FCC classified broadband Internet service providers as Title II common carriers in the 2015 Open Internet Order (2015 OIO), it argued that emerging industries had thrived under “light touch” variations of Title II regulations and that broadband would be no different.

This argument does not hold up to scrutiny, write Thomas Hazlett, H.H. Macaulay Endowed Chair in Economics at Clemson University and former Chief Economist of the FCC, and Joshua Wright, Executive Director, Global Antitrust Institute at George Mason University and former FTC Commissioner, in their article “The Effect of Regulation on Broadband Markets: Evaluating the Empirical Evidence in the FCC’s 2015 ‘Open Internet’ Order.”

This blog post is the fifth in a series featuring the contents of a recent special issue of the Review of Industrial Organization, organized by the Technology Policy Institute and the University of Pennsylvania’s Center for Technology, Innovation, and Competition.

Until the late 1990s, the FCC imposed common carrier regulations (also known as Title II regulations) only on “basic and telecommunications services,” such as telephone services, leaving emerging services such as mobile and broadband largely unregulated. In its 2010 Open Internet Order (2010 OIO), the FCC began to change course. Where it previously took a “hands off” approach to encourage investment, the FCC suddenly felt the need to regulate. The 2015 OIO reclassified broadband Internet as a Title II common carrier, and issued three bright-line rules prohibiting paid prioritization, and blocking or throttling of end-user access, which together are generally considered to be the net neutrality rules.

To help justify the new rules, the FCC argued that Title II-like regulations increased investment. In particular, the Commission argued that capital expenditures by ISPs increased following the 2010 OIO, the high prices paid for spectrum in the 2015 AWS auction were inconsistent with net neutrality rules depressing investment, mobile service expanded in the 1980s under a regime the FCC contends is similar to Title II, and applying Title II to DSL and fiber-to-the-home increased broadband deployment.

Hazlett and Wright dig into these examples and find that adjusting for general economic trends and special circumstances eliminates any benefit cited by the FCC. To the contrary, the authors argue that growth in the mobile and broadband industries might actually be related to deregulation – the opposite of the Title II rules.

“Capital investments made by broadband ISPs went up following the imposition of the 2010 network neutrality rules.”

The FCC insists that a positive trend in ISP capital expenditures (capex) immediately following 2010 OIO is evidence of its efficacy. Hazlett and Wright contest this relationship, noting that 2010 OIO rules were challenged and placed on hold almost immediately, calling into question any impact they might have had on investment. Furthermore, the authors note that real investment did not increase following 2010 OIO when adjusting for inflation and measuring capex as proportions of both U.S. GDP and the S&P500 Index.

“Since the 1980s, mobile markets have developed under ‘light touch common carrier’ regulation.”

The FCC argued that the $271 billion invested in the mobile industry between 1993 and 2009 is due to the same Title II regulations it imposed on broadband markets in 2015 OIO. The first problem with this argument is that the rules in place between 1993 and 2009 are not identical to Title II. Indeed, proponents of increased regulation insisted during that time that the rules were insufficiently strict. Second, the 2010 rules imposed fewer regulations on mobile than on fixed line broadband providers. Third, when the Commission auctioned spectrum in the 1990s it emphasized the importance of offering the spectrum “with no rules attached and preempting all state regulations….” Hazlett and Wright argue that this lack of regulation, not Title II regulations, contributed to growth in mobile investment and use.

“The application of Title II rules to DSL and Fiber-to-the-Premises [(FTTP)] networks encouraged broadband deployment”

The authors test this claim by juxtaposing cable modem and DSL subscribership. Until 2015, the FCC had never regulated cable broadband service. In contrast, DSL service was regulated to varying degrees until 2005. Cable broadband grew more quickly than DSL during that time period. Hazlett and Wright find that as DSL was slowly deregulated in 2003 and again in 2005, subscribership growth increased.

Analysis of FTTP growth tells a similar story. The FCC asserts that Title II regulations were responsible for expanding FTTP networks across the country. In reality, FTTP subscriptions only began to increase significantly in 2005, after a 2004 FCC vote to remove Title II requirements for FTTP configurations. Though deregulation alone was not responsible for this increase, it played a role.

“FCC Wireless auction No. 97, which registered relatively high bids for AWS-3 licenses in January 2015, demonstrated that there was no depressing effect on network investment due to FCC network neutrality rules.”

The FCC cites higher-than-expected bids for wireless spectrum in January 2015 as evidence of strong demand for spectrum, a proxy for investment, under Title II regulations. However, the authors note, 2015 OIO and net neutrality rules were not announced until February of 2015, a few weeks after this auction concluded. They also argue that the FCC released only a fraction of the spectrum that they knew to be necessary to support broadband growth and adoption between 2010 and 2015. Limiting supply, intentionally or not, could have driven prices up.

In each of these episodes, the FCC attempted to link rules and Title II regulations under 2010 OIO and 2015 OIO to increased investment, deployment, and use of broadband-adjacent technologies. Hazlett’s and Wright’s analysis finds the connections between regulation and growth are at best tenuous and at worst nonexistent.

Given the far-reaching implications of net neutrality rules, the potential benefits and costs require careful consideration. The analysis presented by Hazlett and Wright highlights the potential for misinformation in this debate and underscores the importance of scrutinizing arguments on both sides of the issue.

Note: Our intent is to summarize Hazlett’s and Wright’s paper, but mistakes are ours alone, not theirs.