Broadband Capex Down, PPI Fellow Says; Parties Dispute Facts, Title II Link
FCC broadband reclassification appears to be discouraging capital expenditures, said Hal Singer, a Progressive Policy Institute senior fellow. The capex of seven major telco and cable broadband providers declined by 12 percent in the first half of 2015 compared with the first half of 2014, said Singer, who gave a presentation Wednesday at an American Enterprise Institute event. "We saw $3.3 billion walk out the door,” he said. Singer suggested the rare capex drop was at least partially due to telco/cable ISP concerns about possible regulation under the commission’s March net neutrality order, which reclassified broadband Internet access as a Communications Act Title II telecom service. Commissioner Ajit Pai agreed “the FCC’s decision to capitulate to the president’s demands and impose Title II public utility regulation upon the Internet is playing a large role” in the investment decline.
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Comptel CEO Chip Pickering said Singer was citing “pretty selective figures” that ignored tens of billions of dollars in spectrum purchases, merger expenditures, and capex by Internet companies and backbone providers. “There are lies, damn lies and statistics,” said Pickering, who didn't attend the event but spoke with us afterward. Bernstein analyst Paul de Sa told us no broadband ISP cited Title II as a factor in its capex reductions, and he expected at least some of them to increase their expenditures in the second half of 2015.
The capex of AT&T, Cablevision, CenturyLink, Charter Communications, Comcast, Time Warner Cable and Verizon dropped from almost $28.4 billion in the first half of 2014 to about $25 billion in the first half of 2015, said Singer, whose findings were based on a review of the company’s financial filings. AT&T’s capex decline from $11.6 billion to $8.3 billion (29 percent) accounted for almost the entire aggregate drop as the others were close to a wash: the capex decline for Charter (29 percent) Cablevision (10 percent), CenturyLink (9 percent) and Verizon (4 percent) were basically offset by the capex increases of Time Warner Cable (16 percent) and Comcast (14 percent).
Singer didn’t blame Title II for the entire capex drop but suggested it played a significant role. He said the biggest risks to the ISPs were that the FCC would eventually expose them to wholesale “unbundling” duties (to share their networks with rivals at discounted rates) and state assessment of telecom fees. Noting FCC decisions to forbear from applying most telecom regulation to broadband and preempt state assessments, Singer said it was reasonable for ISPs to factor into their capex decisions the possibility their investments at some point would effectively be appropriated by the agency, which could change its decisions in response to political pressures. He said the 2015 capex decline was particularly notable because since 1996 broadband spending had dropped only after the dot.com bubble burst in 2000 and after the “Great Recession” started in 2008.
Pai said the recent “decrease represents billions of dollars in lost investment and thousands of lost jobs.” He noted some smaller ISPs had also reduced their capex. “When the FCC makes it less attractive for broadband providers to invest in networks serving the American people, they will find other places to put their money," said Pai, in his statement posted on the FCC website. AT&T made a $3 billion investment in Mexico and Verizon bought AOL for $4.4 billion, he noted.
Singer dismissed or played down most other explanations for the capex drop. He said industry revenue and overall GDP hadn't declined. He said video cord-cutting was “not a good theory” because presumably it drives greater consumer broadband demand. He said arguments that AT&T and Verizon capex slowed after finishing previous network upgrades ignored that ISPs must keep investing in faster broadband to satisfy consumers. "There is no end,” he said. “These guys are like little hamsters on the wheel.” But analyst de Sa noted AT&T statements that the winding down of its Project VIP broadband deployment would lead to lower capex in 2015. Singer said suggestions that software operational expenditures were replacing hardware capex had some appeal, but didn’t explain the whole $3.3 billion drop. While some argued the ISPs were holding capex hostage to score political points, he thought it was more likely they were taking a “pause” due in part to the uncertainties about legal challenges to the FCC’s order.
Blair Levin, a Brookings Institution fellow in attendance, said AT&T, Verizon, Comcast, CenturyLink, Google Fiber and others are continuing to engage in major broadband deployments in dozens of communities across the country: “Lots of streets are being dug up.” Singer said he’s not saying deployment activity has ground to a halt, but there has been a reversal in the capex growth trend. Levin said the problem is it’s virtually impossible to isolate a single causal factor.
Afterward, Levin said the more than $40 billion in wireless expenditures in the AWS-3 spectrum auction also had to be factored into the investment equation. Comptel’s Pickering noted AT&T spent $18 billion and Verizon $10 billion at the auction, most of which was due in the first half of 2015. But Verizon and AT&T indicated they don’t count spectrum purchases in capex. “Nobody does,” said de Sa.
Pickering also said Singer was ignoring "record-setting mergers" in which Comcast tried to buy TWC, AT&T bought DirecTV, and Charter is trying to buy TWC and Bright House Networks. The DirecTV buy cost AT&T over $60 billion, and the blocked and pending cable transactions also diverted major resources from capex, which tends to get reduced or frozen while deals are pending, Pickering said.
Singer acknowledged afterward that the spectrum purchases and transaction expenditures could put pressure on ISP capex budgets, but he doubted it accounted for the entire $3.3 billion capex decline. He also said AT&T and Verizon have been making spectrum purchases for years and they and other major ISPs have deep pockets and will make broadband investments when there are good opportunities for a reasonable return. Despite that, the long-term broadband capex growth trend was interrupted in the first half of 2015, he said.