September 8, 2014 1:59 PM

Free Press's Misleading Theories on Title II and CapEx (Pt. 2)

In its Net Neutrality Comments, Free Press combines a limited number of less-than-ideal data points with a faulty methodology and a misleading narrative to claim that has "proven" its' reckless accusation that ISPs are lying when they express concerns that Title II reclassification/regulation may distort their incentives to invest in network improvements.  

In the previous post, we discussed some of the problems with the methodology, reasoning, and data Free Press uses to reach its conclusion.  Today, we'll correct Free Press's misleading narrative "interpreting" the data with some relevant facts that you wouldn't know if you only read their comments.  

Ironically, Free Press concludes its misleading presentation of capex "facts" (Comments III.B and III.C) by stating, "[w]e hope that the Commission and other policymakers learn and understand this history, for this debate cannot be a legitimate one if basic historical facts are replaced by incorrect beliefs."  Comments at 111 (emphasis added).  This statement would be OK (but still too preachy), if it didn't just present the FCC with a version of history so tailored for advocacy that it exists only in Free Press's comments.  But, it's easy to forget . . .   

Excessive Investment=Excess Capacity=Loss of Investment + Jobs

Free Press speaks of the period before the Cable Modem Order (in 2002) with a level of nostalgia that would seem more appropriate to a former WorldCom executive than a group claiming "historical facts."  Free Press confidently asserts,

[common carriage], in conjunction with policies that opened up communications markets to greater competition, also was responsible for the largest period of telecommunications industry investment in U.S. history.
Comments at 90.   The only hint from Free Press that this period may not have been an unqualified success is when Free Press allows that, "[m]uch of this investment . . . was a bubble ...." Comments at 111. 

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Perceived Bandwidth Demand Drove CapEx.  Internet traffic grew at incredibly high rates in the second half of the 1990s, but the Internet was new to most people, and the subject of a lot of hype.  Thus, perceived Internet traffic growth not only outpaced actual Internet traffic growth, but it was also disproportionately affecting perceptions of total bandwidth demand.  But, where would people get these ideas?

Well, in a March 2000 report to Congress, then-FCC Chairman William Kennard stated,

Internet traffic is doubling every 100 days. The FCC's 'hands-off' policy towards the Internet has helped fuel this tremendous growth. 
(emphasis added).  Kennard's predecessor, Reed Hundt, would have none of this foolishness, and wanted people to know that "[i]n 1999 data traffic was doubling every 90 days." (emphasis added) ( Quote is from Hundt's self-congratulatory book, "You Say You Want a Revolution"at 224.)

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The Reality.  Not everyone at the FCC was buying (or selling?) the hype.  A senior economist at the Commission, Douglas Galbi, published a paper the same year (2000), warning that total bandwidth demand was not as high as everyone seemed to think.

Growth of bandwidth in use for Internet traffic has been dramatic since 1995, but Internet bandwidth is only a small part of total bandwidth in use. . . .
(emphasis added).  Meanwhile, massive fiber deployments and innovations in optical transmission equipment meant that capacity was about to explode.  

The Reckoning. Only a year after Kennard's report to Congress, CNET reported that the U.S. was in the midst of a bandwidth glut, and that prices would likely decline much further.  
By summer 2001, the equipment companies issued clear warnings that the unraveling was well underway.  A few months later, the Enron scandal would break.  

Over the next year, what followed was the largest dislocation, in terms of job loss (500,000) and wealth destruction ($2 trillion) the telecom industry has ever seen.  See, e.g., this BusinessWeek article.  Law professor Dale Oesterle writes that the telecommunications industry in 2002 may have been the largest, most scandal-ridden, industrial meltdown in U.S. history.  Here at 1.

The Aftermath. After the telecom bubble burst, depressed Internet transport prices would continue well into the middle of the decade.  If you're wondering how low  

In 2006, Level 3 needed additional transatlantic capacity, so it purchased 600Gbps of lit capacity on another carrier's transatlantic fiber.  At the time of this purchase, though, Level 3 was carrying 480Gbps of traffic on its own transatlantic subsea cable system; a system that was scalable to 1.28Tbps.  In other words, Level 3 already owned unlit transatlantic capacity, but using its own fiber didn't make sense because wholesale prices had dropped below operational and replacement costs!

The Biggest Lie About Capital Investment

The central deception of Free Press's entire misleading capex narrative is, of course, the notion that the 2002 Cable Modem Order was the defining event for broadband Internet capital investment.  As explained above, the telecom bubble had little to do with Title II, and neither did the bust.  Moreover, broadband Internet services, in particular, benefited more from the bust (post Title I classification), than they did from the boom.

The cheap [below-cost] Internet bandwidth of the early/mid-2000s led to a lot of web application experimentation and new Internet companies.  Consumers responded quickly, and favorably, to the new, high bandwidth Internet applications, like Myspace. Xbox, and Youtube.    

This led to strong consumer broadband Internet adoption, which could not have been possible if the broadband ISPs had under-invested in their networks.  The FCC data show broadband Internet services increased by a factor of about 4.5 between 2002 and 2008; from 17 million customers in 2002 (see Table 3) vs. around 75 million telco and cable broadband customers in 2008 (see Table 1). 

Indeed, this 400-500% increase in demand for broadband Internet service compares favorably with total bandwidth demand growth of around 300% during last half of the 1990s. See Galbi at Table 2.  In fact, the success of the broadband Internet economy (Internet companies, backbones, metro fiber providers, and broadband ISPs) from 2002-2008 would finally end the bandwidth glut, and bring back demand for new "Title II" Internet transport capacity, including transatlantic capacity.

Free Press tries to prove that broadband ISPs are lying about their concerns with potential new, and undefined, rules under a Title II reclassification.  But, if the FCC is tempted to change its regime based on erroneous cause-effect propositions that ignore historical facts, then it would seem the broadband ISPs have every reason to fear the unintended effects that will accompany a new regulatory classification.













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