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What's Certain About the Regulatory Uncertainty Debate

Rob Frieden

Incumbent carriers, such as AT&T, Comcast and Verizon, have made countless "curtains for the Free World" assertions in the Network Neutrality debate. They claim that if the FCC reclassifies as common carriage aspects of Internet access, it will create "regulatory uncertainty" and "disincentive investment."

Not one of the countless sponsored researchers funded by incumbents has provided a shred of empirical evidence to support these assertions. In fact, senior management officials at these carriers readily acknowledge that capital expenditures are based on marketplace conditions.

These managers act like children in the back seat of a car driven by a parent. Assuming the parent cannot hear them, kids say very candid things. So do senior telecommunications managers when discussing capital expenditure with buy-side Wall Street analysts. AT&T CEO Randall Stephenson has "warned that he could hold off on many of his company's capital investment plans — including fast new fiber lines — if uncertainty persists over how the US government will regulate the Internet." (source)

Mr. Stephenson and other senior managers would not dare understate future capex in statements to the financial community, or to the Securities and Exchange Commission.

In my mission to find and tell the truth, here are some inconvenient facts:

Congress Created Regulatory Uncertainty

Regulatory uncertainty results when Congress fails to legislate despite changed circumstances, or when its laws lack clarity. Congress last created telecommunications in 1996, before the Internet changed everything. In that kinder and less partisan time, the legislature achieved consensus, albeit one rife with compromises that translated — over time — into statutory ambiguity.

The FCC has acted in light of the vacuum generated by congressional inaction. On two separate occasions, the FCC has failed to convince a reviewing court that its statutory interpretation is reasonable and that the judiciary should defer to its expertise in making sense out of an outdated and ambiguous statutory mandate.

Incumbents Use Regulatory Uncertainty as a Lobbying Tool

Incumbents sustain regulatory uncertainty based on an assumption that the FCC will raise their cost of doing business and somehow limit their ability to maximize profit. Yes these carriers will need plenty of staff and expensive lawyers to litigate and perpetuate uncertainty, but where are the constraints on profits? Broadband access generates triple-digit returns. Comcast can generate over $1 billion a year in cable modem and set top box rentals, largely because the FCC can't seem to apply the longstanding Carterfone policy that obligates even private carriers to permit consumers to attach their own devices.

Regulatory uncertainty is a red herring, because incumbents surely know that if the FCC oversteps, a reviewing court will overturn the rules. The FCC may fail to convince a reviewing court that circumstances support reclassification of Internet access as common carriage, but the predicate for regulatory uncertainty lies with Congress that created it by not doing its job and by incumbents exploiting it for an uncertain monetary gain.

Competitive Necessity Drives Capex

AT&T and other incumbent cannot carry out their threat to reduce or stop investing in infrastructure. The decision to raise, lower or maintain capex results from a strategic assessment of competition. Competitive necessity forces wireless carrier incumbents to acquire more spectrum, whether to use it, or to warehouse it to prevent market entry. The lack of competitive necessity makes it possible for wire carriers, like Verizon, to cherry pick and red line the geographical areas where it chooses to offer fiber optic broadband service.

This Debate Increasingly Looks Like a "Tempest in a Teapot"

The network neutrality debate has triggered the worse sort of exaggeration and hype. Incumbents have not and cannot prove any measurable short and long run harm to their bottom line, but their vigorous and effective claims trigger false positives, i.e., the assumption of harms such as capex disincentives.

Recent market entrants deem common carriage rules, subject to forbearance of most regulations, as minimally necessary to safeguard competition and innovation. Maybe, but the real possibility exists that they have identified false negatives, i.e., harms to competition and consumers.

Today, tomorrow and for the foreseeable future the remedy to network neutrality concerns likes in having a far more robustly competitive broadband ecosystem, something incumbents strive everyday to thwart.

By Rob Frieden, Pioneers Chair and Professor of Telecommunications and Law. More blog posts from Rob Frieden can also be read here.

Related topics: Net Neutrality, Policy & Regulation

 
   

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Comments

Comcast can generate over $1 billion a Frank Bulk  –  Feb 05, 2015 9:57 PM PDT

Comcast can generate over $1 billion a year in cable modem and set top box rentals, largely because the FCC can't seem to apply the longstanding Carterfone policy that obligates even private carriers to permit consumers to attach their own devices.

Are you suggesting that Comcast does not allow it's subscribers to attach their own cable modems or that their subscribers can't get/make their own STB (as long as it supports an M-Card)?

Cable Modems and Set Top Boxes Rob Frieden  –  Feb 06, 2015 4:38 AM PDT

Hello Frank:
Thanks for your question.  Comcast makes it quite difficult for consumers to attach, certify, activate and use their own modem.  However, it is doable and I have made a point of making it happen.  Regarding Set Top Boxes, most consumers default to Comcast rentals, because of similar hassles and the reduced functionality of Cable Cards. A Comcast technician must "install" the card.  Note that Cable Card option results from the lack of a market for STB alternatives.  One available option Tivo regularly has to push on compatibility issues.
Carterfone should have made modem and STB installation as simple as activating a fax machine, or analog modem, i.e., far closer to plug and play.

Rob,One of the differences between phone, as Frank Bulk  –  Feb 06, 2015 10:10 AM PDT

Rob,
One of the differences between phone, as it relates to Carterfone, is that it doesn't require any provisioning, while the cable modem and card, do.
It's my understanding that Comcast doesn't give customers any trouble if they want to use their own cable modem, though a self-provisioning system would make it more user friendly (i.e. every new modem get's no internet access, but just access to a customer portal that directs them to enter some credentials).
In regards to cable cards, we ($DAYJOB) have found that customers can't do a self-install on the TV.  Every model of TV is slightly different that it got expensive (and frustrating!) to help customers over the phone, so we just rolled a truck and did the M-Card install and set up the TV. We still have to treat cable cards differently for provisioning.  The conditional access ecosystem is complex with some brittle interfaces between some layers, which is one of the reasons there are compatibility challenges.  We can wish it were easy, but it's not, and most customers "just want it to work", which is why they take the service provider's CPE.

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