Reclassification Said to Pose Broad Risk to U.S. Economy

The broadband reclassification plan tops the list of questions from investors, said analyst Paul Gallant of Concept Capital. The FCC has not yet developed a full record on the Title I vs. Title II debate, he said. Nobody seems happy with the options at this point, he said. More options will be on the table after the FCC seeks comments, he said. Cable investors, among others, are “extremely nervous about what’s coming” out of the Title II broadband reclassification proposal, said Mike McCormack of J.P. Morgan.

The biggest disconnect between Washington and Wall Street is on how the competitiveness of the industry is viewed, said Jonathan Chaplin of Credit Suisse. Competition is doing its job and regulations would make it very difficult for companies to get reasonable return on investment, he said. “That’s unsustainable.” The threat of regulation could discourage investment and cost jobs, he warned. Right now, carriers are investing on a business-as-usual basis, hoping all the negative signals in Washington don’t end up being legislation or don’t survive legal challenges, Chaplin said. Carriers are investing in the future now but they won’t if the regulatory environment goes against the economics, he said. Broadband is a very competitive place so there’s no point of fixing it, McCormack said.

The National Broadband Plan was as much as anything a “wish list,” McCormack said. Realistically, the opportunity of getting things done is “fairly low” in the near term, he said. Anna-Maria Kovacs of Regulatory Source Associates disagreed, saying this is the first time in about 20 years that an FCC chairman can “count to three [votes] without any debate at all.” Previously, there were always negotiations after an order was proposed, she said. “This is an unusually unified FCC majority,” she said. Genachowski is in a position to have the reclassification. The effect of investment of the proposed reclassification was also the topic of the BFA call.

"There are concerns that many on Wall Street … have with regard to what we're proposing to do in Washington and what the FCC is proposing to do and the impact that will have on the certainty many are looking for as they make these kinds of investments,” said Harold Ford, BFA co-chairman and a former Democratic member of the House from Tennessee. Ford said he doesn’t think the commission intends to inhibit investment, but uncertainty in the marketplace leads to lower investment. “This is Economics 101,” he said. “This is not new.”

"If you impose neutrality and, second, if you bring back Title II and the blanket authorities that it contains, you're going to put a pall over investment,” said economist Everett Ehrlich of ESC Co., who joined Ford on the call. “You will obviously slow it.” Ehrlich said some at the FCC appear “enthralled with the idea of neutrality” regardless of warnings from some economists and others in industry.

"They can’t imagine a way for the FCC to move forward now that the courts have eliminated its Title I authority, without finding some new authority and only one available to them is Title II,” Ehrlich said. “It’s shortsighted because in essence the FCC has decided to bet the ranch that the courts will say that the Internet is just like the phone system of several generations ago and merits the same regulatory responses.” If the commission loses, he said, “the FCC could find itself even less relevant."

Ehrlich said net neutrality rules ultimately would lead to ridiculous mandates. One promising technology involves remote medical devices that connect to a server in the home with the data transmitted to the hospital, he said. Under net neutrality, “a remote cardiac device must travel under the same terms and conditions as a video of a cat playing a xylophone,” Everett said. “That is fundamentally the idea and I think that the potential for … lost innovation, for lost consumer welfare under that kind of a policy is really very substantial."

"In a largely deregulated climate, broadband penetration has skyrocketed in the U.S.,” said Hal Singer, principal at Navigant Economics. “Absolute and quality-adjusted prices fell and first generation technologies, and that includes cable modem, DSL and 3G wireless, individually covered approximately 90 percent of all U.S. households.” While overall private investment in the U.S. shrunk 20 percent between Q3 2008 and Q3 2009, broadband investment only declined by 3 percent, he said.

Also at the summit, Philip Verveer, U.S. coordinator for international communications and information policy, said the World Conference on International Telecom in November 2012 could turn out to be one of the most important events affecting the use of broadband since the privatization of the Internet in 1995. The importance arises from the opportunity that it presents to countries that would like to increase intergovernmental controls over international broadband services and transport, he said. The U.S. consistently has opposed the extension of intergovernmental controls over the Internet, he said, saying it would diminish the dynamism of the Internet and open the way for the introduction of “extraneous considerations, the most noxious of which would be content controls.”