The future of investment in business data services is at stake in the Federal Communications Commission’s investigation into the role of rate regulation in the business broadband market. These services are vitally important to the well-being of small and large businesses, particularly in rural areas where high-speed connections to the rest of the world are necessary for everything from agribusiness and e-commerce to mobile phone service. And the stakes are high: Getting the regulation wrong could cost the economy billions of dollars in investment.
Companies on both sides of the debate have weighed in with their views on how the proposed regulation should be drafted. Verizon has joined a lobbying group for competitive providers (Incompas) to hand the FCC a ready-made “solution.” The heart of the Verizon-Incompas proposal is to tighten and expand price caps on business data services offered by incumbent local exchange carriers (ILECs) and others. For the first time, next-generation business broadband services such as Ethernet would also be regulated. The mandated price discounts are arbitrary and large, amounting to about 21 percent after two years.
Simply put, this proposed solution is bad for the market and the economy, and the FCC should not adopt it.
The regulations could destroy a huge amount of the ILECs’ return on their investments in network infrastructure, particularly in rural areas. I find that an estimated $3.8 billion of ILEC revenue would be destroyed by the new price regulation. These losses do not even include potential revenue lost by competitive providers, even though all providers are potentially subject to the regulations, so the losses could be even greater.
The problem with arbitrarily forcing providers to slash prices is that unnecessary price regulation doesn’t merely redistribute gains from the market, it destroys economic value. While it is tempting to slip into a zero-sum mindset (what the providers lose, their business customers must gain through lower prices, right?), below-market prices destroy investment by providers.
ILECs will have less incentive to maintain existing levels of service (did you know that up to 20 percent of ILEC revenue is plowed back into maintaining existing facilities and capabilities?), much less to expand business broadband offerings.
How big a deal is this? I estimate that lower cash flow will prevent about $1.4 billion to $2.1 billion of ILEC investment in the first two years after the new regulation is fully in effect. And that’s not the only reason investment could drop. The regulation would also reduce the investment incentives of competitive providers, since incumbents would be offering below-market, regulated prices.
Some proponents of regulation claim that imposing price regulation would promote 5G mobile wireless networks, which use business broadband for backhaul. However, it helps no one to lower the price of a service that doesn’t exist where you want it in rural areas because regulators killed its profitability. Instead, everything possible should be done to encourage investment in business broadband capacity to support the growth of next-generation mobile wireless networks.
Forgone investment isn’t just an issue for analysts following telecom stocks—it matters to all of us. Investment discouraged by regulation costs the economy up to three times as much lost output and many lost jobs. Rural areas, with their greater need for stable, diversified economic activity, would likely bear the brunt of these economic costs.
Mobile networks and other data-intensive uses require business broadband, which requires investment, which requires an adequate market-driven return—this isn’t rocket science. The FCC should not sabotage the transition to next-generation networks—mobile or wired—before lift-off.
James E. Prieger is a professor of economics and public policy at Pepperdine University School of Public Policy.
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