Crocodile Tears, Net Neutrality and Broadband Competition

Human beings are “rationalizing” animals. That is, when we don’t want to do something, we’re pretty good at finding reasons not to. It turns out broadband gatekeepers are not much different.

These companies have a long history of claiming the FCC’s rules are so onerous they’d stifle investment. They cling to studies from self-proclaimed “consumer advocate organizations” to bolster their case that FCC regulations threaten investment and competition and then release year-end financial figures that tell their investors a far different story.

So you’ll forgive me if I don’t clutch my pearls at this notion because, you see, I’ve heard this line before. It’s specious at best, an old monopoly trick of telling regulators one thing and Wall Street another.

That is, whenever the big telcos see a regulatory change they don’t like, they insist they will take their ball and go home. From broadband access reform, to Net Neutrality rules, to Universal Service Fund reform, or a failed mega-merger or two, the incumbent Chicken Little cry has always been “this will stop us from investing.”

The data, on the other hand, tells an entirely different story. Incumbent providers follow a perfectly rational harvesting strategy in terms of their wireline networks; that is, they allocate capital to optimize a return on past investments rather than investing to deploy or upgrade new networks. These companies enjoy disproportionate profits in the industry obtained through price gouging competitors on interconnection fees, special access, switched access, and roaming charges; they posses massive scale and scope advantages; and operate at the top of a market that is not effectively competitive.

Rather than invest the billions of excess profits into new infrastructure, incumbents pay the biggest stock dividends in the industry. Analyst website Seeking Alpha explains: “Lower competition is not good for consumers, but great for the few dominant businesses. AT&T and Verizon in particular are large enough to reap the lion’s share of profits in the telecommunications industry.” Not surprisingly, after conducting the largest and most comprehensive data collection in FCC history, the data demonstrates that these incumbents control the majority of the high-capacity broadband access market — twenty years after their monopoly services were purportedly opened to competition. In fact, the lack of competition is so bad that an astoundingly high number of census blocks surpass the Department of Justice’s ‘Highly Concentrated’ market concentration marker.

What the rest of us have been reminded of over the last couple of years is that it is competition that sparks investment, just as it always has. Just look at what has happened when gigabit fiber providers begin to provide better, faster broadband to communities around the country – incumbent providers are quick to respond. Mere hours after Google announced its fiber product in Austin, AT&T announced a planned GigaPower investment. CenturyLink responded in kind in Omaha. Verizon suddenly started hinting that perhaps FiOS deployment might start up again. And for consumers, competitive market forces don’t just spur deployment but also lower prices as providers like AT&T charge more for the same product in locations where there is no competition.

Without effective competition across the board, these huge Internet gatekeepers will continue to dictate when, where, and how much consumers and businesses pay for the broadband access on which we all increasingly depend. They will continue to drive up prices for consumers, stifle innovation and investment, and drag down economic growth and job creation. And because would-be competitive broadband providers are paying outrageous sums to access these lines, they’re foreclosed from investing in technologies that would boost broadband speeds or deploying alternative mobile or fixed broadband services.

That’s not the story the incumbents would like to tell us (or regulators), but there is hope. American consumers and businesses are now well aware of the risks these few huge companies pose to the future of the Internet, and they’re watching. They’re watching the FCC very closely because Chairman Tom Wheeler has shown he’s committed to improving the competitive landscape of the broadband market and risk that these huge providers could use their control over the Internet to distort the economy.

The rules for “Net Neutrality” are an important step in protecting American consumers and businesses from anti-competitive activity resulting from the dominance of two companies over the Internet’s infrastructure—but without real competition we will have just treated a symptom rather than the underlying disease. The FCC must act to preserve all the good work they have done to promote broadband competition. The FCC has the power to stop these gatekeepers from using their market power to extract unjust and unreasonable rates for access to the information superhighway. It’s time for the FCC to finish the job.

Gately is an economic and policy expert specializing in the telecom arena with more than thirty years of consulting experience in the areas of telecom industry and market structure.