Earlier this year, the Federal Communications Commission (FCC) released its open Internet order. The order imposes new Internet regulations, commonly referred to as “net neutrality regulations," and it reclassifies the Internet from a lightly regulated information service to a more heavily regulated “common carrier” telecommunications service. That reclassification puts broadband Internet services into the same regulatory category that has applied to public utilities and “plain old telephone services” for generations.
Many groups gasped and complained that the new rules would be costly for Internet service providers and consumers, because they would likely impose new broadband service taxes and discourage broadband network investment. Both assertions were strongly rejected by the FCC’s Chairman, Tom Wheeler, who announced that the order would not affect taxes and would protect both innovators and investors. As months passed, there are indeed plans underway to impose broadband taxes and there is now mounting evidence that investment is likely to decline as a result of common carrier regulations.
What the reclassification will allow the FCC to do
As to the issue of broadband taxes, the FCC Chairman released a document stating that reclassification would give it the authority to impose Internet service taxes. Specifically, the regulatory change – to use FCC’s own lingo – “bolsters universal service fund support.” The FCC is now collecting public comments on how it should best setup a new tax and subsidy program for broadband services. The fact is that the threat of widespread taxes is real, despite the FCC’s assurances to the contrary.
So what about the FCC’s claim that the more onerous common carrier regulations would have no effect on private broadband network investments? Well, that promise too now appears to be very much in question.
A new economics study released by Georgetown University’s Center for Business and Public Policy shows what every knowledgeable businessman and economist should know – investors are more likely to avoid putting their money into risky, higher taxed, more highly regulated and costlier ventures. Specifically, the study’s authors conclude that the FCC’s reclassification of Internet services will produce a chill on private investments. They reached this conclusion by reviewing decades of work published in the economic literature and numerous empirical studies. Their study finds that these Internet regulations will lead to a decline in wireline infrastructure investments in the range of 18% and 32%, and reduce total broadband investments (wireless and wireline) between 13% and 21%.
How the regulations would affect jobs
How significant would such a cut investment be? With annual broadband capital expenditures near $75 billion, a 20% decline would be equal to a $15 billion drop in total broadband investment. Since the multiplier effect of $1 billion of broadband investment is estimated to create 19,500 jobs, a 20% decrease in investment would, by my rough estimate, lead to a loss of nearly 300,000 jobs. Because many these are well-paying tech jobs, the ripple effect throughout the economy would be significant – crossing all industries and stunting innovation. The FCC’s conclusion that regulations will not affect investment is simply wrong, as this study shows. The fact is that these regulations will have a devastating effect on the burgeoning Internet economy.
Even if the new regulations are “softened,” as the FCC has stated, reclassification creates a framework that enables a whole host of common carrier regulations for years to come – including price controls, cross-subsidies, controls on product differentiation, new service approval, quality of service standards and so on. All of these regulations create uncertainty for the future. Because investors see capital infrastructure expenditures as a long term proposition, the threat of expanding regulations poses future costs with no upside. Large sunk costs cannot be undone without incurring large losses, which means that the mere threat of regulations and taxes will suppress future investments.
If every knowledgeable businessman and economist knows this, how did the FCC miss this obvious point? Some suggest that the FCC, an “independent” agency, was pressured by the White House to reverse its earlier conclusion that Internet services should remain less regulated as an information service. No one knows for sure.
The FCC has undergone mission creep - and expanded its purview
However, one possible explanation for the FCC’s action is that it represents mission creep. Over the years, the FCC’s budget has increased several times faster than the rate of inflation, despite the Telecommunications Act, which directed the FCC to “reduce regulatory burdens.” While the FCC is not deregulating, consumers are effectively do so by shunning heavily regulated telephone services and subscribing to largely unregulated Internet and wireless services. The order gives the FCC something big and growing to regulate – broadband services.
The fact is that the FCC’s reclassification of Internet services will mean higher taxes and, as a result, higher prices for consumers. Because higher prices will slow demand for broadband services, and because higher regulatory costs will do the same, the threat of future regulations will chill investment; and the recent Georgetown University study confirms that conclusion. None of this is in the public’s interest and none of it is beneficial to consumers. Now, maybe it is time for some serious FCC reform.
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Mr. Pociask is a member of the FCC’s Consumer Advisory Committee (CAC), but the comments here are solely his own and not those of the CAC.
