The Federal Communications Commission’s quest to prove that killing net neutrality is somehow raising broadband investment recently focused on Charter Communications.
Charter, the second largest US cable company after Comcast, “is investing more in its broadband network and workforce because of the FCC’s Restoring Internet Freedom Order [that repealed net neutrality rules] and last year’s tax reform legislation,” FCC Chief of Staff Matthew Berry claimed in a tweet Friday.
But as we noted earlier this week, Charter raised its capital investment in 2017 while the net neutrality rules were in place. And with the repeal soon to take effect, Charter says it is preparing for a “meaningful decline” in spending on building and upgrading broadband networks.
This doesn’t mean that Charter boosted investment because of the presence of net neutrality rules or that it is now lowering investment because of the repeal. That would be an overly simplistic conclusion, when the reality is that ISPs make investment decisions based on a variety of factors such as changes in customer demand and the peaks and valleys of technology upgrade cycles.
But the opposite, equally simplistic conclusion—that broadband investment falls because of net neutrality rules and rises when net neutrality rules are repealed—is exactly what FCC Chairman Ajit Pai and his staff have repeatedly claimed despite what the evidence shows. This argument is what drove the FCC’s public defense of its decision to eliminate popular rules that prevent ISPs from blocking, throttling, or speeding up Internet traffic in exchange for payment.
Charter spending rises and falls
The FCC’s specific claim on Friday that Charter is boosting investment because of the repeal and recent tax cut was disproved by Charter’s own statements on the same day.
Charter’s earnings announcement said its capital spending rose from $7.5 billion in 2016 to $8.7 billion in 2017, with the net neutrality rules in place both years. Capital spending rose as a percentage of revenue, from 18.7 percent of $40.02 billion in 2016 to 20.9 percent of $41.58 billion in 2017. The increases helped pave the way for gigabit broadband services and an increase in minimum speeds to 200Mbps in some markets.
Going forward, Charter anticipates declines in capital spending both as a percentage of revenue and in dollar amounts. Charter expects its 2018 capital expenditures “as a percentage of revenue to be a bit lower than 2017,” Charter CFO Christopher Winfrey told investors on Friday. “Next year, 2019 that is, should deliver a meaningful decline in capital intensity in dollars.”
Separately, Charter announced Friday that it is raising the minimum wage for all its employees to at least $15 an hour, and the company attributed the decision to tax cuts and the net neutrality repeal.
Oddly, the announcement indicates that Charter might have stopped upgrading its networks if not for tax reform and the net neutrality repeal.
“Today, with tax reform and the removal of the Title II statutory framework [over net neutrality] both a reality, Charter will continue the capital investment program we started last year and will complete it by 2020,” the company said.
But if tax cuts and the net neutrality repeal were needed to “continue” a spending program, how was Charter able to begin the investment program in 2017 before the tax cuts and repeal? And if tax cuts and the repeal are fueling network spending, why is the spending going down over the next two years instead of up?
Upgrade plans were made years in advance
In March 2017, Charter promised President Trump that it would spend $25 billion on broadband infrastructure and technology over four years. But this was also simply a continuation of previous investment and did not include plans to serve new customers beyond the amount Charter had already committed to serve.
In reality, Charter’s broadband plans were in the works for years. Charter promised major broadband expansions to the FCC when it was allowed to purchase Time Warner Cable in 2016. As a result of the Obama administration’s approval of the merger, Charter is required to bring broadband with speeds of at least 60Mbps to at least two million new residential and small business locations.
Charter made its merger-related broadband expansion promises to the Obama administration even as it was promising to follow the net neutrality bans on blocking, throttling, and paid prioritization “regardless of the outcome of the litigation over the Open Internet Order.”
If a net neutrality repeal was needed to continue broadband investment, how was Charter able to promise both a broadband expansion and compliance with net neutrality?
Charter has since dropped its paid prioritization promise but still says it won’t “block, throttle or interfere with the lawful activities of our customers.”
Forecasting a “meaningful decline”
We asked Charter for more information on what its capital spending will look like this year and beyond. A Charter spokesperson said the company doesn’t provide guidance on future revenue or capital expenditures, and it referred us back to Winfrey’s remarks.
Winfrey did discuss some of the factors shaping Charter’s network investments. A big spending increase in Q4 2017 was “primarily driven by higher spending on CPE [customer-premises equipment], scalable infrastructure, and support,” he said. The spending included “purchases for 2018 activity, including significant CPE inventory purchases.”
Having upgraded customer equipment in stock will help Charter shift customers to “all-digital” video packages and version 3.1 of DOCSIS (Data Over Cable Service Interface Specification), which allows faster Internet speeds, he said.
“As we look to 2018, our cable capital expenditures should be driven by many of the same factors as last year, including customer growth, Spectrum migration, all-digital and in-sourcing and integration,” Winfrey said.
2019 will bring the “meaningful decline” in capital spending because the shift to all-digital video, DOCSIS 3.1, and other upgrades will have been mostly completed, he said.
Winfrey’s description of Charter’s capital spending—a big increase in 2017, a leveling-off in 2018, and a significant decrease in 2019—matches what we’ve noted in previous stories. As AT&T told the FCC in 2010, capital investments are based on technology upgrade cycles and should not be expected to rise year after year. Capital investments are naturally “lumpy,” rising and falling from one year to the next based on specific needs at specific times, AT&T said at the time.
Technology improvements that drive greater efficiency can also lower capital investment. The cost of Internet bandwidth has been falling for years, for example. Bandwidth “costs tend to trend down over time, driven by competition and decreases in the costs of underlying hardware,” Cloudflare noted in 2016.
Tax savings boost the bottom line
Charter’s expected spending decline isn’t the only example of ISP spending remaining stagnant or decreasing despite the net neutrality repeal and tax cuts. Comcast said it will invest more than $50 billion in infrastructure over the next five years because of the repeal of net neutrality rules and the new tax overhaul. But Comcast would exceed that milestone anyway if it continues increasing spending at the same rate as it did with net neutrality rules in place.
AT&T cited “higher efficiencies” driven by technology improvements last month when it explained a new round of layoffs.
Verizon, meanwhile, said that its capital spending in 2018 will be just slightly above or below its 2017 spending. Verizon won’t use its tax savings to upgrade broadband networks. Some of the benefits will flow to employees in the form of new stock shares, but the tax savings “will be used primarily to strengthen Verizon’s balance sheet.”
Last week, Pai’s FCC claimed that broadband deployments by AT&T, Verizon, Frontier, and Alaska Communications were caused by the net neutrality repeal. In fact, as we wrote, three of these four deployments were planned during the Obama administration, two were funded directly by the FCC before Pai was chair, and all four came from ISPs that had announced broadband expansions before Pai took over—with the net neutrality rules in place.
We don’t know what actual capital spending across the industry will look like in the next few years, but one thing is a certainty: Pai’s FCC will tout any progress it finds as proof that the net neutrality repeal is creating more broadband.
Disclosure: The Advance/Newhouse Partnership, which owns 13 percent of Charter, is part of Advance Publications. Advance Publications owns Condé Nast, which owns Ars Technica.
https://arstechnica.com/?p=1256909