Does Net Neutrality Stifle Investment and Innovation?

On July 12, 2017, Internet companies took part in a protest that was meant to highlight how the Federal Communications Commission chief Ajit Pai's proposal to remove net neutrality regulations would hurt consumers. The organizers of the "Day of Action" called net neutrality the basic principle that protects free speech on the internet.

At the time, many thought that the FCC got the message, until Pai announced that the FCC would be holding a vote to roll back net neutrality rules on December 14, so here we go again. 

Since the word "free" often has a positive connotation, the other side hasn't wasted time calling for more freedom either. The FCC says its proposal is a step toward restoring internet freedom. A free and open internet is what internet service providers (ISPs) claim to want, too. For example, Comcast Corp. (CMCSA) filed comments with the FCC detailing its support for the agency's commitment to "restoring, protecting, and maintaining a free and open internet."

It looks like everyone wants the same thing. However, net neutrality opponents argue that the classification of ISPs as public utilities creates regulatory uncertainty, which stifles investment and innovation in the telecom industry. Pai says just the possibility of rate regulation prevents companies from investing in advanced networks because they are "unsure of whether the government will let them compete in the free market." 

Comcast calls the current rules an "outdated regulatory regime" that harms investment and innovation. Verizon Communications Inc. (VZ) worries about the scope of the government's authority and it wants policymakers to "catalyze innovation" and "encourage investment." AT&T Inc. (T) paints a bleak picture for an America under the current rules: "Less broadband investment in turn means fewer jobs, lower productivity and lost opportunity, particularly in rural America where broadband investment is needed the most." 

But has net neutrality really slowed down investment and innovation? As anyone who has dealt with statistics knows, it depends on whom you ask because the same data can be used to create different stories.

The Studies 

Ajit Pai cites studies by the USTelecom Association and economist Hal Singer when he says that broadband capital spending has been decreasing after net neutrality. "The key to realize our 5G future is to set rules that maximize investment in broadband," he said at the Mobile World Congress in February. Singer has previously prepared white papers and written testimony for AT&T and Verizon in the past, according to his bio on the Department of Justice website, and he is a principal at Economists Incorporated, which counts both those companies as clients.

But the Internet Association, which counts giants like Amazon and Google as members, cites studies that show spending by publicly traded telecom companies increased following net neutrality.

What gives?

For starters, in their respective calculations, USTelecom Association and Singer did not include Sprint’s leased-equipment capital investments – approximately $2 billion – and public interest group Free Press, whose study IA cited, said, "That’s nonsense. Sprint purchasing and leasing smartphones is no different from cable companies purchasing and leasing set-top boxes, which USTA does count as investment." The USTelecom Association and Singer also subtracted $2 billion from AT&T’s reported capital spending to account for the company’s acquisition of DirecTV and Mexican wireless operations. 

Free Press also notes that while AT&T and a few other publicly traded ISPs may have reduced spending after net neutrality, twice as many increased their investment levels. 

Pai also cited a study by Free State Foundation, a conservative think tank backed by the telecom industry, which said Title II net neutrality rules cost the U.S. $5.1 billion in broadband capital investment. A look at the methodology reveals it used USTelecom data, which includes the adjustments mentioned before, and established a trend line from 2003 to 2016 to calculate what broadband investment should have been.

This is similar to a paper from George Ford, an economist at a D.C. think tank with anonymous donors that was cited by Comcast on its website. Ford wrote, "the threat of reclassification reduced telecommunications investment by about 20% to 30%, or about $30 to $40 billion annually." Ford's analysis is counterfactual: the period he looks at is from 2010, when the threat of net neutrality rules first emerged and then estimates what would have been the annual investment had there been no such threat.

Think of the Children and the Automated Vehicles

Comcast in its filing with the FCC said that paid prioritization would have uses in telemedicine and self-driving vehicles that may need to communicate with each other. The Verge pointed out that automated cars don't use broadband at all. They rely on the exchange of data wirelessly over an unlicensed spectrum called the Dedicated Short Range Communications (DSRC) band. Moreover, paid prioritization in telemedicine would mean low-income groups would lose its benefits.

Since it is hard to quantify whether innovation has been depressed, the Internet Association has taken to using patent application statistics. The organization used government data from 2010 and 2012 to show a 58.4% increase in telecom patent applications at a time when federal regulators were looking to use the 2010 policy to protect net neutrality.

Patents granted under code H04W or "wireless communication networks" increased 10.66%, and patents granted under H04L or "transmission of digital information" increased 5.25% in 2016 from the year before, according to IFI CLAIMS Patent Services. AT&T was among the top 50 companies that received the most patents that year and also saw its patents increase from 2015.

The Bottom Line

It seems like the government is determined to roll back net neutrality rules, and there's very little internet companies or consumers can do about it now. Although the FCC chair argues that net neutrality has led to lower investment, he is relying on industry consultants, think tanks and trade associations to make this claim, which certainly weakens his position.

While it is possible ISPs may invest in more advanced networks if the rules are repealed, it is difficult to find evidence for this, and the companies have reportedly been telling investors they haven't affected investment. The greater question is at what and whose cost will net neutrality be rolled back? Investment in companies dependent on high speed internet is likely to drop if internet providers are free to discriminate between users, and MIT Technology Review has reported this has already begun. Netflix CEO Reed Hastings told Recode in May that net neutrality is not the company's primary battle anymore, because it's big enough to get the deals it wants, but it's crucial for startups.