Network Investments Steady at Major Carriers Despite Reclassification Concerns

Verizon expects to spend about $17.5 billion this year, Chief Financial Officer Fran Shammo said at a UBS financial conference this month. Shammo described Verizon as a “flat” capex company. “The capital allocation is continuing to really be the majority around wireless; you'll see wireless continue to grow within our portfolio, wireline continue to slow in the portfolio,” he said. “Some of that is because the FiOS build is starting to taper off.”

Shammo said Verizon’s 10-year history building out its broadband network means wireline investment is slowing. Verizon already has installed optical network terminals in many locations, he said. “When a home reconnects, I don't have to deploy new capital to get the reconnection.” On the wireless side, Verizon’s emphasis is on “densifying” its network through small cells and other wireless facilities, he said. Capex is flat rather than down because the carrier is also upping its investment in its Go90 streaming video service and in hum, its connected car product line, plus making investments in the assets it bought with the AOL purchase, Shammo said.

AT&T has indicated its capex is likely to be $18 billion this year, down from $20 billion in 2014. But AT&T executives have stressed repeatedly that software defined networking (SDN) and other factors are behind the reductions. “We are leading the charge in the industry on this,” CEO Randall Stephenson said of SDN at the same UBS conference. “This is driving capital requirements down already and it’s having a marked impact on not just capex but op ex [operating expenditures]. … There’s going to be a continual downward pressure on our capital spending just by virtue of SDN virtualizing the core network.”

AT&T also largely wrapped up its LTE deployment and wired broadband deployment in 2014, Stephens said, calling 2014 “the monster of all years.” Since the end of 2014 AT&T has had a “downward bias on our capital spending,” he said. AT&T is also deploying 40 MHz of new, contiguous spectrum into 2017, which will help reduce costs, he said. “The guy with the best spectrum position has the best cost position in terms of deploying capital in the network,” Stephens said.

T-Mobile projected that its capex for 2015 will be steady, in the range of $4.4 billion to $4.7 billion as it continues to build out its LTE network. That compares with $4.3 billion in 2014 and $4.2 billion in 2013.

Sprint is projected to spend $5 billion on its network in 2015, which at 20 percent of sales is the highest capex to sales ratio among the four major wireless carriers, CFO Tarek Robbiati said at the December UBS conference. Robbiati said the carrier had to increase spending as it melds together its LTE, WiMax and iDEN platforms. Sprint’s new Network Vision platform will get the carrier “to a point where we have essentially re-centered our focus on one platform,” he said. Sprint’s capital expenditures were $1.7 billion in the most recently concluded quarter, compared to $1.1 billion the previous year.

CenturyLink spent $2.7 billion on capex in 2014 and expects to spend $2.8 billion this year, the carrier has indicated in financial releases.

Cable Spending Increases

Net neutrality proponents said the numbers are what they predicted. Matt Wood, policy director at Free Press, said the group also tabulated expenditures looking at larger ISPs. "Minor fluctuations in the total amount invested across the industry are not tied to net neutrality or Title II,” Wood said. “It is demand and competition that really drive investment decisions, not regulatory considerations. That’s true whether you look at the facts for the last 20 years or the last 20 months. AT&T Wireless and a few other companies decreased 2015 investment after finishing major upgrades in 2014." But spending has increased at Comcast, Sprint, T-Mobile and some of the smaller ILECs like Frontier and Windstream, he said.

The numbers are exactly what CEOs told Wall Street would happen -- investment would continue regardless of what the FCC did on reclassification, said Harold Feld, senior vice president at Public Knowledge. “Title II did not drive investment decisions,” he said. “It doesn't impose significant new costs. Companies this big have multi-year planning cycles for investment based on multiple factors, especially the question of aging equipment.”

A “handful of anti-net neutrality activists” have insisted for the past five years that, “all evidence to the contrary … net neutrality will depress investment,” Feld said. He borrowed language he said net neutrality opponent FCC Commissioner Ajit Pai likes to use in other contexts. “These Chicken Littles need to calm down and realize the sky is not falling,” he said. “To the contrary, the investment cycles are working pretty much the way people who have no particular interest in net neutrality expect them to work.”

More Remains To Be Seen

But Robert McDowell, former FCC commissioner now at Wiley Rein, said the fall-off in capital spending as a result of the order will likely take years to see. "If you look at the history of railroads, airlines and trucking, when they were given relief from common carrier regulations under [President] Jimmy Carter, capital expenditures soared, rates went down and transit time shrank,” McDowell said. “The past teaches us that common carrier regulation inhibits investment and constructive risk taking. But it could be years before consumers feel the negative effects of the gradual slowing down of investment and innovation."

Problems won’t be seen immediately, agreed Doug Brake, telecom policy analyst at the Information Technology and Innovation Foundation. “I worry Title II introduces uncertainty that will see capital shift away from long-term sunk investments and toward areas where return on investment is more certain or realized sooner,” he said. “Big spends by carriers can't stop on a dime and competition is doing wonderful things in urban markets. But uncertainty, especially around rate regulation and unbundling forbearance, will impact the way operators spend over the long term.”

“It is too early to know definitively the extent of any impact,” said Randolph May, president of the Free State Foundation. “Even if capex spending increases in the next few years, this does not mean there would not have been even greater increases absent adoption of the agency’s new regulations. The fact is there is a rich literature of academic studies showing that increased regulation represses investment.” That doesn't mean all regulation is bad, May said. “It just means that new regulations -- like the ones adopted by the FCC in the net neutrality proceeding -- shouldn’t be imposed without a convincing showing of market failure and consumer harm.”

“The net neutrality regulations are a part of the investment picture, but they’re overshadowed by the larger issue of cord-cutting and expectations about the longevity of Title II,” said Richard Bennett, network architect and founder of the High Tech Forum. “When the 5G rollout starts in 2017, investment will shift strongly to mobile and the carriers are betting that Title II will be lifted by then. It also remains to be seen how cable will react to their new position as a secondary pipe. I expect we’ll see further diversification into less-regulated markets.”