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Perspectives from FSF Scholars
April 17, 2017
Too Much Unnecessary Regulation Is Impeding Telecom Investment
Theodore R. Bolema*
[Below is the Introduction and Summary to this latest FSF Perspectives. A PDF version of the complete Perspectives, with footnotes, is here.]
Introduction and Summary
The telecommunications sector of the U.S. economy is far different today than it was when its principal regulatory structure was created. With respect to telecommunications services, the Communications Act of 1934 was enacted to impose control over perceived monopolies that provided analog services. Its main regulatory structure still largely exists even though today's broadband, digital, and wireless technologies and services do not raise the same regulatory concerns as the technologies and services of the last century.
Without doubt, regulatory controls that have outlived their intended purposes are holding back new investment that otherwise would lead to greater innovation, new competition, and significant benefits for American customers. So it is significant that FCC Chairman Ajit Pai has declared April 2017 to be "Infrastructure Month" as the agency considers several proposals aimed at reducing the cost of broadband deployment and eliminating unnecessary rules that impede its deployment. This focus by Chairman Pai on enhancing infrastructure deployment by curtailing unnecessary regulation is a welcome development. Building out new infrastructure and upgrading existing infrastructure requires encouraging capital investment, yet recently regulatory policies too frequently have done the opposite.
Chairman Pai earlier this year summarized his vision for encouraging broadband investment:
In short, America's approach to broadband policy will be practical, not ideological. We will embrace what works and dispense with what doesn't. T hat means removing barriers to innovation and investment instead of creating new ones. That means taking targeted action to address real problems in the marketplace instead of imposing broad, preemptive regulations. And that means respecting principles of economics, physics, and law and acting with humility as we regulate one of the most dynamic marketplaces history has ever known. This vision will unleash the massive investments that will help the United States realize its 5G future.
Applying the principles from my previous Perspectives that explained, as a general proposition, why more regulation means less investment, this new Perspectives reviews recent analysis showing how the accumulating regulatory burdens has led to less investment generally in the telecommunication sector. It then applies these principles to three current regulatory issues that have significant implications for telecommunications investment: The Open Internet order, small cell wireless network buildout,  and the possible re-introduction of price regulation over business data services.
Telecommunications, a sector that should be leading the way in innovation, continues to be too heavily regulated. While some eras are characterized by great regulatory accumulation and others by little or no accumulation, the direction, especially in the last several years of the Wheeler Commission, has been continuously toward imposing more regulatory burdens. Many of these regulations are now outdated due to changes in markets and technologies. Other regulations are overly broad and prescriptive, or not designed to address market failures. Often these regulations were designed to try to anticipate possible harms, even when these harms were unlikely to materialize.
The slow post-recovery growth of the U.S. economy has been accompanied by weak capital investment, which has grown more slowly than in any post-recession period since the Great Depression. As weak as recent economic growth has been in the U.S. economy as a whole, the economy outside the telecommunications sector has outperformed the telecommunications sector, which has fallen from 2.6% of GDP at the end of the last recession to 2.3% in 2016.
Weak growth in the telecommunications sector is a problem not only for telecommunication firms, but for firms and entrepreneurs throughout the economy that depend on telecommunications in their businesses and for their own innovation. As Chairman Pai explained:
Today, with a powerful plan and a broadband connection, you can raise capital, start a business, immediately reach customers worldwide, and disrupt entire industries. Never before in history has there been such opportunity for entrepreneurs with drive and determination to transcend their individual circumstances and transform their world.
And achieving this success does not require you to move to Silicon Valley or Stockholm or Seoul or any other tech hub around the world. There are opportunities in every city in every corner of the world, if - and this is a big if - you have high-speed access to the Internet.
Several current proceedings before the FCC directly implicate the fundamental question: How to best promote capital investment through regulatory policy? This Perspectives will briefly describe the investment issues raised in three of the current policy debates that have significant implications for telecommunications investment: The Open Internet Order of 2015, the barriers to small cell deployment needed for the 5G network, and the current rules for business data services (BDS).
The Open Internet Order was justified in part by claims that imposing common-carrier rules would not deter capital investment and that innovation among edge providers would flourish. Instead, the opposite has happened. As Chairman Pai explained: "After the FCC embraced utility-style regulation, the United States experienced the first-ever decline in broadband investment outside of a recession. In fact, broadband investment remains lower today than it was when the FCC changed course in 2015." This decline in domestic broadband capital expenditures was $3.6 billion in 2016, or 5.6%, relative to 2014 levels.
The small cell deployment needed for the 5G network wireless technology is well underway, as wireless access points placed on existing utility poles are replacing tall cell towers. Millions of small cells are needed for the multi-gigabit connectivity for future 5G networks. Small cell technology does not raise the same concerns as large towers, but is covered by the same regulations, and thus is facing regulatory impediments at both the federal and local level. Chairman Pai points out that "the more difficult government makes the business case for deployment, the less likely it is that broadband providers big and small will invest the billions of dollars needed to connect consumers with digital opportunity."The FCC is considering ways to expedite state and local approvals, as well as changes to the FCC's own rules that would facilitate network deployment.
BDS involves network connections over dedicated broadband network facilities to securely move large amounts of data, such as credit card transactions. BDS services were largely deregulated in the late 1990s, after the FCC determined they were largely competitive. Today, nearly all of the country is served by multiple BDS providers, with only a small part of the population living in rural areas that lack service providers. For several years, the FCC has been considering imposing new rate controls on this market, even on new entrants, and requiring BDS providers to lease access to their facilities to competitors at regulated rates. This forced sharing will discourage capital investment and eventually will lead to artificial scarcities in the network infrastructure, because providers that own the existing infrastructure will be discouraged from improving the network when they know they will have to lease the improved facilities to their competitors at regulated rates. And investment by new entrants will be discouraged as well so long as they perceive themselves to be the beneficiaries of regulated rates.
The slowing of capital investment in telecommunications markets was notable in the final years of the Wheeler Commission, as the growth of the telecommunications regulatory burden has accelerated. So far, under Chairman Ajit Pai's leadership, the FCC has demonstrated a welcome interest in encouraging new capital investment by eliminating or curtailing those regulations that no longer are necessary. Reducing the regulatory burden on the telecommunications sector promises to unleash capital investment in broadband deployment and the evolving business data services markets, among others, which would give the overall economy a greatly needed boost.
* Theodore R. Bolema i s a Senior Fellow of the Free State Foundation , an independent, nonpartisan free market-oriented think tank located in Rockville, Maryland.
Read the complete Perspectives, with footnotes, here.

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