Betting on the future

The dog days of summer appear to be with us still...  And,finding so little UK news of interest, I’ve yet again been forced to look to the US for inspiration.  The problem there is that so much of the useful editorial comes laden with large dollops of political lobbying – probably more so than on this side of the Atlantic.  But sometimes the propaganda can itself be enlightening, and what soon caught my eye was the report recently compiled by the Progressive Policy Institute (PPI) on its ‘US Investment Heroes of 2014’. 

In its third year of publication, this report focuses on identifying the U.S.-based corporations with the highest levels of domestic capital expenditure.  The authors, Diana Carew and Dr Michael Mandel, hope that their listing “can help inform good policy for encouraging continued and renewed investment domestically.”  Well, Amen to all that but first, here’s the Top-10 from the latest spending list (excluding energy companies):

 

RANK	COMPANY	EST. 2013 US CAPEX ($m)
1	AT&T	20,944
2	Verizon	15,444
3	Walmart	8,652
4	Intel	8,442
5	Comcast	6,596
6	Google	4,697
7	General Motors	4,591
8	Apple	3,807
9	Union Pacific	3,496
10	Ford Motor	3,392

 

The top Investment Heroes of 2014 actually look very similar to those of last year.  The continued strength of domestic investment by telecommunications and cable companies remains very clear: together, telecom and cable companies recorded $46bn of domestic CAPEX, just over 30% of the US total.  Within the sector, AT&T, which has invested significantly in expanding its U-verse fibre optic network, has remained top spender in all three annual reports.  Similarly, Verizon has focused its investment on building out its 4G LTE wireless network, and remains in the runner-up spot.  Comcast moves up from being in the 10th spot last year to ranking 7th this year, on the strength of investment in its X1 cable platform equipment, wireless gateways, and network capacity.

 

It’s hard to scope UK comparisons against these figures – given huge differences in addressable markets, the technology used, accounting conventions and so on.  Nonetheless, according to a learned colleague, writing earlier this year, BT's infrastructure spend has been running at about $1.86 billion (£1.15bn) a year, out of total CAPEX (including non-UK) of $4bn.  Using a very broad brush, and similar methodology to the PPI Report, we might end up with relevant domestic CAPEX of $2.5-3bn annually.  For the dominant UK player, that seems rather lightweight against AT&T’s $21bn.  On the other hand, the BT figure excludes a sizeable chunk of government (BDUK) subsidy  Indeed, some UK commentators - and I include myself in this group - have seen the existence of these government funds as a basis for criticising BT for not investing more from its own resources.  At any rate, we tend to see such private sector spending as being a predictable response to a rational business case.  That attitude contrasts sharply with that of the authors of the PPI Report, who firmly believe that the maintenance of discretionary investment merits some species of ‘compensation’ through government or regulatory concessions of some kind.  The Report dwells on these incentive measures at some length but they can essentially be summed up in biblical terms, i.e. 

 

 

The Eight US Commandments*: (* Per PPI Report)
1	First, investment heroes should be commended publicly for their willingness to ‘bet on the nation’s future’
2	Policymakers must be aware that all regulations impact on investment appetite – so take care!
3	The unintentional accumulation of past regulations can also impede investment flow so keep these constantly under review
	(For the FCC)
4	Ensure the next spectrum auction proceeds as scheduled in mid-2015.
5	IP-transition trials must form part of a gradual, complete transition to new network technology
6	Local governments should be deterred from deploying their own broadband networks.
7	Utility-style, ‘Title II’ regulation of the internet must be avoided
8	New data privacy measures could also adversely affect the investment climate.

 

It’s easy enough to scoff at such a daunting ‘shopping list’ but it might actually provide some clues for UK policy.  As we continue to seek private sector investment in sustainable (fibre-based) broadband networks, perhaps the UK will have to accept that commitment to such investment may well require some form of regulatory incentive – probably not the generic concessions suggested in the above ‘Commandments’  but possibly some form of franchising or geographic exclusivity.  After all, we desperately need more ‘heroes’.

 

Broadband aspiration: our missing link..?

In the dog days of July and August, my holiday reading was largely dominated by stories from the US about initiatives to facilitate municipal broadband projects, and the corresponding attempts by incumbents (and state laws) to suppress these - see here, for example.  The debate has become so heated that even content providers have felt obliged to muscle in.  Netflix, for instance, has lobbied the FCC in these resonant terms: 

“[a] single fiber-optic strand the diameter of a human hair can carry 101.7 terabits of data per second, enough to support nearly every Netflix subscriber watching content in HD at the same time.” When municipalities harness that technology to extend new opportunities to new communities, federal and state laws should encourage that initiative, or at the very least, get out of the way. The Commission can and should take a hard look at state laws that facilitate the efforts of incumbents to artificially constrain broadband availability and capacity.  “[B]roadband is not a finite resource. No statute—state or federal—should make it one". 

The American system of local government is clearly very different to ours but I wonder whether we couldn’t learn some lessons from their predicament.  Recall, for instance, the fiasco in Birmingham when BT and Virgin successfully thwarted the plans by the City Council to provide ‘ultrafast’ broadband connectivity to businesses in some previously unserved areas of the city. That situation seems to me very similar to the battles now being fought across a number of metropolitan areas in the US. Indeed, this summer’s report by the City Growth Commission had some harsh words to say about the UK environment for state-aided broadband investment in urban areas, e.g. 

“Government should commission a comprehensive review on how our current and future needs for digital infrastructure can be met, especially in the face of strict EU State Aid rules and a highly concentrated high-speed broadband market in which major players such as BT and Virgin can constrain supply and market competition.” 

Susan Crawford, Visiting Professor at the Harvard Law School, and an arch critic of the US cable incumbents, believes the answer is enhanced regulation - not at the federal level but state regulation in the hands of local mayors.  These mayors would act as digital champions, as some have done already, thus fostering competition between metropolitan areas for their levels of broadband access - interview here. 

Hard to say whether a comparable model might work in this country but there has to be some risk that our cities’ broadband infrastructure – now and for future upgrades- could be caught between competition/overbuild policies at the macro level and bottom-up, infill projects at the very local, micro kevel.

A guilty admission

I readily admit that I’ve long been a cynic about BT’s reliance on ADSL technology for its roll-out of superfast broadband access.  And I’m certainly not alone in grumbling about the limited shelf-life of ADSL as a network solution.  But then there comes the real world matter of expediency…

I live in a small rural village in which BT has been the only viable ISP on offer – providing typical – and surprisingly respectable -download speeds of 6-8Mbps.  I watched with wry amusement the promises by my County Council that superfast availability would be “here soon” (under the aegis of a BDUK scheme), doubting whether the village’s older-age profile would make it a BT priority.  But, in the fullness of time, Openreach vans started to become prominent and the old BT cabinets were gradually replaced with their newer, much chunkier versions.  Still, the fact that my house sits outside the village centre and is served by overhead wires made me sceptical about its superfast prospects.  I was therefore hugely surprised to see that BT’s online checker suggested I might qualify for its Infinity service at speeds of up to 76 Mbps. Bah!!

A couple of weeks later, an unsuspecting BT engineer arrived on a sunny morning to install the service in my 15^th century home.  He faced not only the property’s “bizarre” telephone wiring but also an electrical system that bears all the scars left by the ‘enthusiastic amateur’ who sold me the house.  The poor man visibly wilted but settled in for what was clearly going to be a long day… He finally left at 6.30pm.

And the outcome?  Well, I’ve run several online speed checks and the results are pretty consistent: I’m getting download speeds at 73-75 Mbps, uploads at around 12 Mbps.  Interim technology it may be, but not half bad for a country bumpkin!  Hats off to BT.

God bless Canada

I recently mentioned the, possibly suspect broadband statistics which Prof. Christopher Yoo derived to demonstrate the superiority of US regulatory policies over those of Europe.  Well, the Professor has been at it again, using the same US/EU data to make some even more sweeping claims. For instance: 

“…the U.S. focus on private investment and competition has placed it far ahead of Europe in terms of Internet speed and access…. 

U.S. broadband was cheaper for all speed tiers below 12 megabits and is comparably priced at speeds between 12 and 30 megabits, which makes it easier for low-income families to become broadband users….

if the FCC were to impose European-style regulation, these studies indicate that the investments that have enabled such a healthy and vibrant U.S. broadband infrastructure may wane”.

As the above extract shows, Yoo’s argument rests heavily on his assessment of the (mostly) lower pricing of US broadband.  His own metrics concede that U.S. broadband costs are higher for services above 30 megabits but he argues that ‘that cost differential is justified by the fact that average U.S. households consume more than 50 percent more bandwidth than their European counterparts’.   

Does higher usage really justify a higher unit cost?  Anyway, I was interested to see that an entirely independent cost study came to a rather different conclusion on the pricing issue. The Canadian telecoms regulator, CRTC, recently published its own retail cost study, including a comparison againsth other G7 countries.  With apologies to CRTC, the extract below excludes Canada but includes the US, the UK and our nearest European neighbours.  All reported prices are expressed in purchasing power parity (PPP) adjusted Canadian dollars.  

Average monthly prices in PPP adjusted $CDN (2014)

Broadband – fixed access	US	UK	France	Germany
Level 1 (≤ 3 Mbps, 7.5 GB/month)	$62.5	n/a	n/a	n/a
Level 2 (4 – 15 Mbps, 30 GB/month)	$72.9	$30.2	n/a	$26.1
Level 3 (16 – 40 Mbps, 75 GB/month)	$79.8	$46.9	$51.2	$38.3
Level 4 (≥ 40 Mbps, 120 GB/month)	$103.2	$47.8	$56.0	$58.5
Broadband – mobile access t (≥ 3G)
Level 1 (2 GB/month)	$63.7	$21.9	$18.5	$34.4
Level 2 (5 GB/month)	$69.1	$45.9	$43.0	$49.7

 

While the UK prices might not be the best in Europe in every case, the comparison with the US looks pretty decisive in favour of Europe.  Slam-dunk…?

 

 

Ode to a louse

With apologies to Robert Burns for the English translation, his 1785(?) ode contains the following: 

“And would some Power the small gift give us
To see ourselves as others see us!
It would from many a blunder free us…” 

Anyone following this blog will know that I’ve never been a big fan of network unbundling.  Indeed, I’ve even shown some scepticism towards the argument that LLU might obviate some (most?) of the concerns regarding network neutrality.  This latter view was articulated as long ago as 2010, when Ed Richards  of Ofcom addressed that year’s Cable Congress: 

“In the US, limited competition, both at the network and at the ISP level, means that the potential for consumer detriment through traffic management is greater. In Europe, as recent research for the FCC indicates, the mixed model – investment in infrastructure complemented by unbundling of the local loop - has delivered a more competitive market structure from the exchange back into the network… Where competition thrives, the case for a highly interventionist net neutrality policy is harder to justify on the grounds of consumer protection.” 

It seems that this European view, which sounded rather complacent at the time, is gaining increasing acceptance in the US.  There, the debate over network neutrality has, if anything increased in intensity, several ‘experts’ arguing that the neutrality proponents have got it all wrong, while others contend that the ‘experts’ themselves have misunderstood the debate.  But the European argument, that regulatory intervention may be the answer, appears to be gaining ground. An op-ed in last week’s ars technica, admittedly by a British expat, explains the recent shenanigans between Netflix and Comcast/Verizon like this: 

“The reason that these ISP policies are so troublesome, and the concerns over network neutrality so grave, is that the ISP market in the US is remarkably uncompetitive… The solution is to attack the monopolies head on…” 

The article then goes on to rehearse the familiar arguments for service-based competition, even citing the UK as a good exemplar of its benefits: 

“This is a model for telecommunications regulation that works. It provides the safeguards against poor performance and ISPs trying to promote their own services (or punishing competing ones) that the net neutrality proponents want, and it uses market power to do so”.  

While I retain my scepticism, I have to admit that two recent findings have rather dented my confidence in the argument that deregulation encourages network investment.  First, Vox magazine has been looking at what appear to be declining levels of recent infrastructure spend by the US Cable operators.  Its findings are quite likely to be challenged by the industry trade body (NCTA) but Vox makes the following assertion: 

 “Now needless to say the fact that investment is falling doesn't prove that NCTA is wrong about net neutrality regulations. But if you think the light regulatory touch is working because it's leading to an investment boom, you are mistaken. The industry is acting like a low-competition industry, scaling back investment and plowing its profits into dividends and share buybacks and merger efforts”. 

The second piece of evidence concerns the level of congestion in the access network (the source of the original Netflix dispute), specifically whether this is related to the nature of the local ISP market.  Might not similar congestion problems arise in the UK, for example?  Some very enlightening data from Level3 suggest otherwise: 

“We have [only] six peers with congestion on almost all of the interconnect ports between us…where our peer refuses to augment capacity. They are deliberately harming the service they deliver to their paying customers… Five of those congested peers are in the United States and one is in Europe…All six are large broadband consumer networks with a dominant or exclusive market share in their local market. In countries or markets where consumers have multiple Broadband choices (like the UK) there are no congested peers”.  (Emphasis added) 

As the man said:

“O…to see oursels as ithers see us!”

Uncle Sam knows... or maybe not.

For reasons I don’t fully understand the US has often seemed unreasonably obsessed with its international broadband ‘performance’, the debate swinging between ‘the sky is falling’ rhetoric of the likes of Susan Crawford  and other, more Chauvinist voices.  I was therefore rather relieved when I saw that yet another academic - Christopher Yoo, a Professor at the University of Pennsylvania, had waded into the debate, promising to provide a definitive judgement.  His is a substantial report but, for what it’s worth, Professor Yoo believes that his data are incontrovertible and his analysis comes down firmly on the optimistic side regarding US performance, e.g. 

“The answer is clear and definitive: as of 2012, the U.S. was far ahead of Europe in terms of the availability of NGA. The U.S. advantage was even starker in terms of rural NGA coverage and with respect to key technologies such as FTTP and LTE”. 

A bit more controversial is Yoo’s analysis regarding transatlantic differences in regulatory policy.  He uses mapping data to correlate the degree of unbundling (measured by the DSL market share of non-incumbents) against NGA coverage in the USA and Europe.  The methodology (especially causality) looks suspect to me on a number of grounds and it appears as though the results have been driven largely by the historical dominance of the US cable industry.  But Yoo is nothing if not bullish: he concludes: 

“The evidence… is fairly definitive (sic), confirming that facilities-based competition is more effective in terms of driving broadband investment than service-based competition”. 

For a coup de grace, Yoo sums up with this linguistic triumph: 

“These data stand as a major landmark with which anyone asserting otherwise must come to grip”. 

Well, they may not be ‘asserting otherwise’ but a couple of independent voices have this month bemoaned the state of so-called infrastructure competition in the US, in particular the hegemony of the cable operators.  First, FIBEREVOLUTION  picked up on research by consulting group cg42, showing that ‘US Cable is reviled by its customers’.  Apparently, 73% of those questioned in a customer survey agree with the proposition that ‘I feel cable companies are predatory in their practices and take advantage of consumers’ lack of choice’.  Moreover, within the same survey, 53% said ‘I would leave my current cable company if I actually had a choice’. 

Putting a more satirical slant on the dissatisfaction story, ‘the Onion’ ran an article this week announcing that: 

“Offering no justification for the action aside from their own desire to do so, executives from the nation’s leading cable companies announced plans Wednesday to take $100 from every one of their subscribers”.

 

The European model of service competition may well have proved less effective in terms of promoting investment in broadband networks but there are times when it’s reassuring to know there is at least a regulator keeping an eye on quality-of-service issues.