The Cable Guys Need to Come up with a Better Argument

A couple weeks ago, at the annual industry hoedown known as The Cable Show, National Cable and Telecommunications Association CEO Michael Powell argued against those who think broadband internet access should be regulated as a public utility: The intuitive appeal of this argument is understandable, but the potholes visible through your windshield, the shiver you feel in a cold house after a snowstorm knocks out the power, and the water main breaks along your commute should restrain one from embracing the illusory virtues of public-utility regulation. Powell then went on to contrast these grim images with the shiny world of the internet: Because the internet is not regulated as a public utility it grows and thrives, watered by private capital and a light regulatory touch. It’s not too hard to find nits to pick here. Cable internet service goes out in snowstorms, too, and if the latest American Customer Satisfaction Index is to be believed, Americans are much happier with their energy providers (who score a respectable 76 on the index) than their internet providers (a dismal 63, absolute worst of the 43 industries tracked). Potholes are indeed a pain, although unless Powell is proposing to turn every last cul-de-sac in America into a toll road, I’m not clear what his private solution would be. As for the water-main breaks, a lot of them are caused by guys digging up roads to lay cable. Still, Powell is right that broadband networks are still growing and improving, while the U.S. electricity, transportation, and water networks mostly aren’t. The most obvious explanation for this is that broadband providers are serving a new and burgeoning market. The power, road, and water networks had their boom times, too — and while they are now older, with limited growth prospects, this would also be true if they were unregulated and entirely private. So the question is really whether the current, mostly hands-off regulatory regime for broadband has led to faster growth and more investment than if Powell, as chairman of the FCC, hadn’t decided in 2002 to classify cable broadband as a lightly regulated “information service” instead of a common-carrier ”telecommunications service.” The best answer to this I can come up with is that while I really don’t know the answer, Powell and the cable industry make an awfully weak case for yes. There is economic evidence that some kinds of regulation depress infrastructure investment. If the government is going to restrict how much money you can make, you’ll probably invest less. But since the mid-1990s, telecommunications regulation in the U.S. has been aimed mainly at encouraging competition, not telling providers how much they can charge. For several years starting in 1998, for example, the FCC made the then-dominant providers of broadband service, the phone companies, open their DSL lines to competing internet service providers. The reasoning was that, without regulatory pressure, monopoly owners of communications networks tend to charge too-high prices that depress use of their networks and end up crimping innovation and economic growth. Opening up parts of their infrastructure to upstart competitors was a way to counteract that tendency. Most other developed countries have continued to force broadband providers to open the “last mile” into consumers’ homes to competitors. Since Powell’s reign at the FCC, the U.S. has instead banked on head-to-head competition between the cable companies and the telcos, each with their own last-mile wires. But cable broadband is markedly superior to DSL, and Verizon’s and AT&T’s plans to wire the nation’s homes with even-faster fiber optic cable haven’t amounted to all that much, at least not yet. So the cable industry has become the dominant provider of wired broadband, and in most of the country competition is muted. Some argue, as Brendan Greeley did in Bloomberg BusinessWeek a few months ago, that the U.S. approach has been shown to be a mistake because the broadband rollout here has lagged that of countries that do have last-mile rules. I’m not entirely convinced by this evidence — international comparisons are difficult, and the race isn’t over yet. But it’s a lot more compelling than the cable industry’s case that we in the U.S. are living in the best of all possible broadband worlds. The evidence trotted out by the NCTA (the cable lobby) consists mainly of the impressively large quantities of dollars that cable companies have been spending on infrastructure. But as Matthew Yglesias showed last week, that spending appears to have been declining in recent years. In response, the NCTA trotted out a new chart going all the way back to 1990, but even that showed flat spending at best over the past few years. This piqued my interest, and I thought it might be instructive to adjust the numbers for inflation and annotate the resulting chart with a few regulatory and competitive landmarks, to see if any patterns jumped out. I asked the NCTA for the numbers underlying the chart, and was told I should get them from the source: media and communications research firm SNL Kagan. SNL Kagan told me they couldn’t give out “that many data points,” and seemed a little peeved that the NCTA had. So I settled for eyeballing the NCTA’s chart for the numbers, and adjusting them using the GDP deflator for nonresidential fixed investment. Here’s what I came up with: The main story this chart tells is of a big rise in cable infrastructure spending in the 1990s, then a massive binge during the Internet bubble, then a hangover, and for the past decade a slight upward trajectory with some swings that seem related to the ups and downs of the overall economy. This doesn’t reflect poorly on the cable guys at all. They’re spending a lot more money than they were in the 1990s, and seem to have gotten past the boom-bust ways of the early Internet to a steady investment plan. But neither does the chart back up any particular argument about the impact of regulation on capital spending. A 1992 cable law that the industry said would depress investment was followed by … a big increase in capital spending. That increase probably had a lot to do with the arrival on the scene in 1994 of satellite television purveyor DirectTV, the first direct competitor most cable companies had faced. The FCC’s 1998 ruling that broadband internet was a common-carrier “telecommunications service” did not visibly discourage spending by cable companies trying to get in on the broadband party. And then, when the FCC decided in 2002 that cable broadband wouldn’t be regulated like that, there was no discernible spending boom — at least not for quite a few years. When I looked at a single company, industry leader Comcast, the story was one of a long, steady decline in cable investments as a percentage of cable systems revenue over the past decade and a half (I calculated it that way to reduce distortions from the acquisition of NBC Universal in 2011): What is Comcast doing with its money instead? It’s been making big acquisitions and giving lots of cash back to shareholders. In 2002, Comcast didn’t spend a penny on share buybacks or dividends; in 2012, buybacks and dividends added up to $4.6 billion, only a little bit less than the $4.9 billion in cable capital expenditures. Last year the company dialed back a bit on buybacks, with just under $4 billion returned to shareholders, but the trend is clearly upward. This is not a bad thing — it’s what big, maturing companies do. But if Michael Powell wants to keep arguing that his broadband deregulation has unleashed a huge wave of investment and innovation in the U.S., he needs to come up with some better evidence than this.

The Cable Guys Need to Come up with a Better Argument

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