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Friday, December 12, 2014

Net Neutrality does not lead to falling telecom capex

One of the main arguments given against Net Neutrality laws is that it might lead to a reduction to investment by telcos in their networks, as ISPs will be unable to generate sufficiently profitable revenues.

And indeed, as part of the recent US furore over neutrality AT&T has "paused" its investment in fibre deployment - although this is in advance of any ruling being made. 

But I suspect this is being done mostly for effect and as regulatory leverage, not because AT&T genuinely sees much difference in its chances of future revenue streams.

Earlier this year, I published a report examining the potential for "non-neutral" business models for mobile broadband. When I looked into the mechanics of 20 different approaches, from QoS-enabled "fast lanes" to sponsored data, to prioritised MVNOs, the outcomes were that (a) most concepts would likely fail for technical and commercial reasons anyway, and (b) the actual potential incremental revenues were minimal - quite possibly less than the extra costs of more-complex network infrastructure and software needed to enable such models.

Now I've done another bit of research, and had a look at what's happened in the two countries that have actually had "full" Net Neutrality laws for some time. In Chile, a law was passed in 2010.  The Netherlands voted for Neutrality in June 2011 and ratified it in May 2012. 

The interesting thing is that telco capex does not appear to have been reduced in these markets. Indeed, it appears to have risen.

The Chilean regulator, Subtel, publishes annual reports and presentations [eg see page 9 here] including aggregate capex for both fixed and mobile operators. Fixed-network capex has continued to grow since the law was introduced, reflecting expanding use of broadband. Mobile capex has been more volatile, reflecting 3G build-outs, and also in 2013 a change in accounting rules which reclassified handset subsidy from capex to marketing expenditure.

The Dutch regulator, ACM, does not appear to publish aggregate data on capex, so I've collated data from the published financials of the top telcos in that market - KPN, Vodafone, T-Mobile, UPC, Ziggo (since acquired by UPC) and Tele2. The results show continued growth in investment, since a [presumably recession-driven] low in 2010.

(Notes: I've excluded the LTE spectrum auction fees paid in 2013. Vodafone has its financial year ending in March, so I count capex against the previous year ie. FY2012/13 = 2012. I also converted £GBP to Euros at the prevailing average annual rate. Also, I didn't include Reggefiber for which I had incomplete data - 2010/11/12 capex was also rising - €186/291/381m respectively)

While it's quite possible that future Dutch network investment might fall as a result of telecoms market contraction and consolidation, I don't think it's possible to ascribe that to the Neutrality laws - rather, it reflects the general issues globally with a lack of new and compelling service offerings from telcos. Also, KPN's integration of Reggefiber is expected to result in a net fall in expenditure from the combined entity in coming years.

I'd also note that when I was at The Hague conference on Smart Cities recently, KPN highlighted how good its LTE network coverage was, including indoors. This doesn't imply a scaling-back of investment, or a decision that 4G is somehow made unprofitable by mandated neutral business models.

Taking all this together, it appears that there is currently no evidence that enacting Net Neutrality laws results in falling capex and investment. It is also wrong to attribute rising capex to the same laws - correlation is not the same as causation. Indeed, when one digs into the details of each market, other considerations such as network-sharing, changes in competitive structure, new generations of technology and myriad other changes seem to be behind the movements.

None of this should be surprising - there are no proven "non-neutral" business models, and even the ones that have been suggested are unlikely to "move the needle" in terms of revenues. While it is possible that the life of legacy telephony and SMS might be extended if operators are allowed to block VoIP or IM, most advanced markets have ruled out that type of extreme violation of neutrality.

Overall, the "net" outcome is that capex is "neutral" to Net Neutrality, based on the evidence visible so far. Where lobbyists suggest that regulatory changes in the US or Europe might lead to lower investment, this seems likely to be scaremongering and politicking, rather than a rational analysis of existing experience of Net Neutrality, or factors influencing future cashflows.


Anonymous said...

"And indeed, as part of the recent US furore over neutrality AT&T has "paused" its investment in fibre deployment - although this is in advance of any ruling being made.

But I suspect this is being done mostly for effect and as regulatory leverage, not because AT&T genuinely sees much difference in its chances of future revenue streams."

This is a bit far-fetched, isn't it? In your opinion, AT&T is reducing CAPEX investments just to prove a point to the regulator, even though a revenue opportunity may be present. ARPU has been declining for some years, operators do not see additional revenue streams given the huge traffic increase, therefore they cut on investments as the ROI is too small. It would be expensive to stop investing in the network and risk losing future revenue opportunities just to show the regulator. If they are cutting investments it means they do not see those opportunities.

Dean Bubley said...

AT&T has "paused" some capex, in what I think is a fairly cynical and heavy-handed way. I imagine it could easily model the financial impact of a 6/12-month haitus vs. its expectation value of the impact of possible regulatory change.

Of course, that assumes its input data in its model is reasonable - my experience is that the telecoms industry is still clinging to unworkable notions like two-sided charging. Don't forget, it's AT&T that's the MNO which deluded itself into creating the Sponsored Data programme, so it's got some history here of wishful-thinking.

Or of course, it might have been a pre-planned cutback in capex anyway, which is now being "spun".