Sorry, Ajit Pai: Smaller Telcos Did Not Reduce Investment After NN Ruling

Pai justifies his NN choice with the claim, “The impact has been particularly serious for smaller Internet service providers.” #wrong (Actually, NN has minimal effects on investment, up or down, I’m convinced. Competition, new technology, customer demand and similar are far more important.)

The two largest suppliers to “smaller ISPs” saw sales go up. Adtran’s sales the most recent nine months were $540M, up from $473M the year before. 2016 was $636M, 2015 $600M. Calix the last nine months sold $372M, up from $327M. The full year 2016 was $459M, up from $407M in 2015. Clearfield, a supplier of fiber optic gear, was up 8% in sales in the smaller ISPs.

There is nothing in the data from others that suggests an alternate trend.

The results in larger companies are ambiguous. I can “prove” capex went up or went down by selecting the right data.

Anyone could have found this data in a few minutes from the company quarterly reports. Pai offered no numbers to back that up. He based that claim on what he heard from fewer than 5% of the smaller service providers. They provided no figures. Pai strongly opposed Net Neutrality. It’s reasonable to assume the handful of people he’s citing wanted to say something he would agree with.

It’s also reasonable to assume that his “confirmation bias” would make it hard for him to hear contrary evidence, such as the clear comments of the biggest suppliers in this space. I constantly have to fight a similar problem.

For example, I’ve spent over a decade reporting DSL and landline broadband. It was hard for me to see how important mobile broadband is becoming. Eventually, I’ve come to recognize the impact, probably two years later than I should have seen it. Landlines are still important – AT&T is extending 3M/year – but wireless is now good enough for many people.

Japan has fiber almost everywhere, but Softbank reports ~3M have chosen to use mobile broadband instead. The convenience of connecting 15 minutes after you bring a modem home was more important to them than the greater performance of wireless. Most were young people who could take the modem with them if they moved. (I was surprised by this, so I doublechecked.)

Actually, whether capex went up or down in 2016 tells us almost nothing about the choice on neutrality. Everyone knows a single datapoint could be random or due to other causes.

Even if he had enough data to have some hypothesis, any statistician would require he eliminate “confounding variables” – other reasons to explain the effects he sees. In this case, many are well-known. AT&T, the largest spender, had told Wall Street before Title II was considered likely that it intended to cut capital spending. They were finishing a large project of bringing LTE to 97% of the U.S. and would now reduce capex. This was well-known. Less discussed was that they also had finished a very large project of extending fiber to a million business locations.

In addition, 5G technology was not ready to deploy in 2015-2017. At the time, that was expected to be the next big telco investment. 5G will be modest in 2018 but likely will pick up in 2019 and 2020 at AT&T. In the last two months, Verizon has said the reach is better than expected so the spending bump won’t be necessary.

Other factors loom large in carrier investment. In over 15 years of listening to CFO’s and CTO’s explaining capex decisions, I’ve nearly never heard investment attributed to any government action  They are fat more likely to cite competition worries, better technology, and customer demand.

Competition often inspires investment. Verizon President Larry Babbio told me they built Fios, the largest fiber network in the western world, because “We have to get cable out of the house.” Cablevision was taking away too many customers. More recently, Verizon’s successful first in the world large LTE network was killing AT&T, which was upgrading more slowly. AT&T added several billion dollars to capex after 2011 to catch up.

Cecilia Kang at the Times and the other D.C. reporters knew the decision was coming. Pai made this claim in the past, so they should have found the data. “The usual sources” in D.C. are typically unreliable about the telecom world outside Washington. Both left and right suffer from Beltway Blindness. 

The results in larger companies are ambiguous. I can “prove” capex went up or down.

The results in the larger companies were more ambiguous. “

The four largest companies’ capex – two/thirds of the total – went up from $52.7B in 2015 to $55.7B in 2016, an increase in line with sales. The result remains positive after making sensible adjustments for mergers and acquisitions. That’s as close to “proving” that NN led to increased spending as the facts chosen to prove the opposite.

I could also find data that shows spending going down. To get meaningful results, you have to choose the right data set.

Pai cites a paper by Bob Hahn here. Hahn happens to be a strong opponent of Neutrality. The telcos are important clients to him. That doesn’t mean he’s wrong, but it’s irresponsible not to look at the assumptions in his work. In fact, a Neutrality proponent has done that. Making different assumptions, he came to the opposite conclusion. Both points of view are totally unproven because of inadequate data.

Probably, the effect of NN on investment is minimal in either direction, but even I don’t have enough data to be certain.


For the record: I have supported Net Neutrality since 1999. It’s my job to report accurately no matter what my personal opinion. I have written, “The claims from some people who agree with me are ridiculous.  According to former FCC commissioner Michael Copps, ending net neutrality will end the Internet as we know it. Michael knows I respect him, but this is ridiculous.

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