Net neutrality’s effect on investment: It’s complicated
This week, the Federal Communications Commission (FCC) will vote to remove 2015 rules that regulated broadband service under Title II of the 1934 Communications Act. Throughout the debate over this move there have been several attempts to portray the plan as mistaken or outright lying about the effect of Title II on investment. However, these claims continually make the mistake of looking at absolute numbers rather than what’s known as a counterfactual.
Consider an example: You’re in the apple business. Last year, you bought five apple trees from your supplier. Business was going well, so this year, we’d expect you to invest in 10 apple trees. But then someone imposes costly regulations on the apple industry, and you only buy eight trees. Did the regulation increase or decrease the number of trees you bought? Or did it have no effect? Can we even tell?
Clearly you increased your investment in apple trees compared to last year–eight is larger than five–but that’s not the right question. To determine the regulation’s effect, we have to ask: What would your investment in apples trees have been this year if the regulation had not gone into effect?
This is a much more difficult question to answer. The world is a complex place where numerous factors may impact investment decisions. Maybe the price of apple-tree-growing supplies has increased. Maybe the economy went into a recession. If all we know is that last year you bought five trees, the regulation went into effect, and then you bought eight trees the following year, neither opponents nor proponents of the regulation should wave around this correlation as absolute proof for their side.
Yet this is what we’ve seen time and again in the net neutrality debate. Article after article has claimed that Internet Service Providers (ISPs) “increased … capital expenditures” and “continued to invest” despite reclassification of broadband as a Title II service, so any suggestion that Title II hurt investment has been “proven indisputably false” and, in fact, the rules “haven’t affected overall industry investment.”
It’s also troubling that many of these stories rely so heavily on a Free Press report that makes such elementary blunders as failing to adjust for inflation. Doing so reverses the study’s purported findings, showing a decline, rather than an increase, in investment.
Simply looking at what happened after the reclassification does not, in itself, tell us anything about what would have happened over the same time period without Title II regulation. Maybe these companies would have invested more in broadband infrastructure. Maybe their investment levels would have declined, but Title II regulation protected the “virtuous cycle” and actually increased investment. We can’t know just by looking at bottom-line expenditures.
Luckily, more sophisticated econometric methods can help us zero-in on how the regulation affected broadband investment. Economist Dr. George Ford of the Phoenix Center conducted an insightful, methodologically-sound study that accounts for an additional complicating factor: the fact that the FCC has had the Title II option on the table since 2010. That date is a better place to start looking for effects, since companies account for what might happen when making investment decisions rather than waiting for final rules to take effect. And, in fact, Ford found that the threat and later imposition of Title II regulation did decrease investment ISPs’ investment–by $160 to 210 billion from 2011 to 2015.
You need not agree with Ford’s conclusion here, but refuting him requires engaging in counterfactual analysis–trying to figure out not just what happened after we enacted the 2015 Title II rules, but what would have happened without the real possibility of Title II regulation. These aren’t questions that can be answered by looking at bottom-line numbers for particular years and seeing if they rose or fell; answers to these questions require econometric analysis of the sort Ford conducted.
The other common feature of reporting on broadband investment is that many of these articles tout statements by ISPs to their investors as proof that broadband investments were not harmed by Title II. As we at R Street Institute document in our reply comments to the FCC, however, the statements themselves don’t actually support that portrayal.
Some ISPs did say that their current business practices wouldn’t be affected by the new rules; that is, they wouldn’t have to stop blocking, throttling, or engaging in paid prioritization because they weren’t doing that in the first place. Of course, rules banning something that you don’t do won’t affect your day-to-day activities very much. ISPs’ statements to investors and the Securities and Exchange Commission about the effect of reclassification on long term investment prospects, however, did clearly list Title II regulation as a significant threat.
Broadband investment is the best way to close the digital divide and create competition that will produce better quality services at lower prices. Regulations that create uncertainty and increase the cost of investment result in fewer people getting access to broadband and fewer options for those who have access.
Regardless of your position on net neutrality, we should all take care to ask the right questions and embrace their complexity rather than cutting corners to score points for our side.
