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COMMON CARRIER REGULATION OF THE 

INTERNET: INVESTMENT IMPACTS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON COMMUNICATIONS AND 

TECHNOLOGY 

OF THE

COMMITTEE ON ENERGY AND 

COMMERCE 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED FOURTEENTH CONGRESS 

FIRST SESSION 

OCTOBER 27, 2015 

Serial No. 114–93 

( 

Printed for the use of the Committee on Energy and Commerce 

energycommerce.house.gov 

COMMITTEE ON ENERGY AND COMMERCE 

FRED UPTON, Michigan 

Chairman 

JOE BARTON, Texas 

Chairman Emeritus 

ED WHITFIELD, Kentucky 

JOHN SHIMKUS, Illinois 

JOSEPH R. PITTS, Pennsylvania 

GREG WALDEN, Oregon 

TIM MURPHY, Pennsylvania 

MICHAEL C. BURGESS, Texas 

MARSHA BLACKBURN, Tennessee 

Vice Chairman 

STEVE SCALISE, Louisiana 

ROBERT E. LATTA, Ohio 

CATHY MCMORRIS RODGERS, Washington 

GREGG HARPER, Mississippi 

LEONARD LANCE, New Jersey 

BRETT GUTHRIE, Kentucky 

PETE OLSON, Texas 

DAVID B. MCKINLEY, West Virginia 

MIKE POMPEO, Kansas 

ADAM KINZINGER, Illinois 

H. MORGAN GRIFFITH, Virginia 

GUS M. BILIRAKIS, Florida 

BILL JOHNSON, Ohio 

BILLY LONG, Missouri 

RENEE L. ELLMERS, North Carolina 

LARRY BUCSHON, Indiana 

BILL FLORES, Texas 

SUSAN W. BROOKS, Indiana 

MARKWAYNE MULLIN, Oklahoma 

RICHARD HUDSON, North Carolina 

CHRIS COLLINS, New York 

KEVIN CRAMER, North Dakota 

FRANK PALLONE, JR., New Jersey 

Ranking Member 

BOBBY L. RUSH, Illinois 

ANNA G. ESHOO, California 

ELIOT L. ENGEL, New York 

GENE GREEN, Texas 

DIANA DEGETTE, Colorado 

LOIS CAPPS, California 

MICHAEL F. DOYLE, Pennsylvania 

JANICE D. SCHAKOWSKY, Illinois 

G.K. BUTTERFIELD, North Carolina 

DORIS O. MATSUI, California 

KATHY CASTOR, Florida 

JOHN P. SARBANES, Maryland 

JERRY MCNERNEY, California 

PETER WELCH, Vermont 

BEN RAY LUJA ́ N, New Mexico 

PAUL TONKO, New York 

JOHN A. YARMUTH, Kentucky 

YVETTE D. CLARKE, New York 

DAVID LOEBSACK, Iowa 

KURT SCHRADER, Oregon 

JOSEPH P. KENNEDY, III, Massachusetts 

TONY CA ́ RDENAS, California7 

SUBCOMMITTEE ON COMMUNICATIONS AND TECHNOLOGY

GREG WALDEN, Oregon 

Chairman 

ROBERT E. LATTA, Ohio 

Vice Chairman 

JOHN SHIMKUS, Illinois 

MARSHA BLACKBURN, Tennessee 

STEVE SCALISE, Louisiana 

LEONARD LANCE, New Jersey 

BRETT GUTHRIE, Kentucky 

PETE OLSON, Texas 

MIKE POMPEO, Kansas 

ADAM KINZINGER, Illinois 

GUS M. BILIRAKIS, Florida 

BILL JOHNSON, Missouri 

BILLY LONG, Missouri 

RENEE L. ELLMERS, North Carolina 

CHRIS COLLINS, New York 

KEVIN CRAMER, North Dakota 

JOE BARTON, Texas 

FRED UPTON, Michigan (ex officio) 

ANNA G. ESHOO, California 

Ranking Member 

MICHAEL F. DOYLE, Pennsylvania 

PETER WELCH, Vermont 

JOHN A. YARMUTH, Kentucky 

YVETTE D. CLARKE, New York 

DAVID LOEBSACK, Iowa 

BOBBY L. RUSH, Illinois 

DIANA DEGETTE, Colorado 

G.K. BUTTERFIELD, North Carolina 

DORIS O. MATSUI, California 

JERRY MCNERNEY, California 

BEN RAY LUJA ́ N, New Mexico 

FRANK PALLONE, JR., New Jersey (ex 

officio) 

(II) 

(III) 

C O N T E N T S 

Page 

Hon. Greg Walden, a Representative in Congress from the State of Oregon, 

opening statement ................................................................................................ 1 

Prepared statement .......................................................................................... 3 

Hon. Anna G. Eshoo, a Representative in Congress from the State of California, opening statement .................................................................................... 4 

Prepared statement .......................................................................................... 5 

Hon. Fred Upton, a Representative in Congress from the State of Michigan, 

opening statement ................................................................................................ 6 

Prepared statement .......................................................................................... 6 

Hon. Frank Pallone, Jr., a Representative in Congress from the State of 

New Jersey, opening statement .......................................................................... 7 

Prepared statement .......................................................................................... 8 

Hon. G.K. Butterfield, a Representative in Congress from the State of North 

Carolina, prepared statement ............................................................................. 74 

WITNESSES

Michael Mandel, Ph.D., Chief Economic Strategist, Progressive Policy Institute ........................................................................................................................ 10

Prepared statement .......................................................................................... 12 

Nicholas Economides, Ph.D., Professor of Economics, Stern School of Business, New York University .................................................................................. 24 

Prepared statement .......................................................................................... 26 

Robert J. Shapiro, Ph.D., Co-Founder and Chairman, Sonecon, LLC ................. 33 

Prepared statement .......................................................................................... 36 

Additional information submitted for the record 1

Answers to submitted questions ...................................................................... 76 

Frank Louthan, Managing Director, Equity Research, Raymond James Financial ......................................................................................................................... 40 

Prepared statement .......................................................................................... 42 

Answers to submitted questions ...................................................................... 78 

SUBMITTED MATERIAL

Letter of October 26, 2015, from James Reid, Senior Vice President of Government Affairs, Telecommunications Industry Association, to Mr. Walden and 

Ms. Eshoo, submitted by Mrs. Ellmers .............................................................. 75 

1The information has been retained in committee files and also is available 

at http://docs.house.gov/meetings/IF/IF16/20151027/104110/HHRG-114- 

IF16-Wstate-ShapiroR-20151027-SD002.pdf. 

(1) 

COMMON CARRIER REGULATION OF THE 

INTERNET: INVESTMENT IMPACTS 

TUESDAY, OCTOBER 27, 2015 

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON COMMUNICATIONS AND TECHNOLOGY, COMMITTEE ON ENERGY AND COMMERCE, Washington, DC. 

The subcommittee met, pursuant to notice, at 10:13 a.m., in room 

2123, Rayburn House Office Building, Hon. Greg Walden (chairman of the subcommittee) presiding. 

Members present: Representatives Walden, Latta, Shimkus, 

Blackburn, Lance, Guthrie, Olson, Pompeo, Kinzinger, Bilirakis, 

Johnson, Long, Ellmers, Collins, Cramer, Upton (ex officio), Eshoo, 

Doyle, Welch, Yarmuth, Clarke, Loebsack, Rush, Butterfield, Matsui, McNerney, and Pallone. 

Staff present: Gary Andres, Staff Director; Rebecca Card, Assistant Press Secretary; Andy Duberstein, Deputy Press Secretary; 

Gene Fullano, Detailee, Communications and Technology; Kelsey 

Guyselman, Counsel, Communications and Technology; David Redl, 

Chief Counsel, Communications and Technology; Charlotte 

Savercool, Professional Staff, Communications and Technology; 

Greg Watson, Legislative Clerk; Jeff Carroll, Democratic Staff Director; David Goldman, Democratic Chief Counsel, Communications 

and Technology; Jerry Leverich, Democratic Counsel; and Ryan 

Skukowski, Democratic Policy Analyst. 

Mr. WALDEN. We will call to order the Subcommittee on Communications and Technology for our hearing on ‘‘Common Carrier Regulation of the Internet: Economic Impacts.’’ 

OPENING STATEMENT OF HON. GREG WALDEN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF OREGON 

Good morning, everyone. I want to thank our witnesses for being 

here. I want to apologize for a late start on the hearing. We had 

a mixup on my end on the schedule. 

Eight months ago, the FCC decided to grab control of the Internet and regulate it like a monopoly utility under Title II. Rather 

than work with Congress to adopt a statute that would have punished those who engaged in harmful actions, the FCC yielded to 

White House pressure and went all in for Title II. The predictable 

result is litigation in the courts and uncertainty in the marketplace. I understand there was great demand for strong and forceful 

rules to govern the relationship between the so-called edge providers, like Netflix, and Internet service providers. And I still believe that goal is achievable. But I also believe that Title II is the 

2 

wrong approach and is likely to dampen investment in the Internet. Clearly the private sector will continue to invest in broadband 

buildout and improvements. The question is will that investment 

plateau or even decline over time. After all, it is the money on the 

margins that helps extend broadband into unserved and underserved areas. 

One witness will testify today that, based on the availability evidence, the economic impacts of this type of regulation could increase costs and decrease investment of anywhere from about 5.5 

percent to 20.8 percent per year, and the ratio of investment to 

capital stock could decline by roughly those amounts as well. To 

put that into context, at the low end, a decrease of that magnitude 

in 2014 investment could range from about $4.29 billion to a high 

of $15.6 billion. These studies were based on observations of other 

industries that have experienced a significant shift toward more 

economic regulation and on the pattern of decreased investment in 

other countries when they subject their telecommunication sectors 

to much higher levels of regulatory oversight than our traditional 

light regulatory touch has had. 

There are many other ripple effects of the Commission’s actions. 

There is the uncertainty factor. Businesses don’t know what to expect as they look ahead, making them pause to do risk assessments 

of regulatory hurdles before expanding offerings or investing in infrastructure. What will happen in the courts? What will happen 

with the new chairman at the FCC? What if someone pushes the 

FCC to walk back some of the forbearance they agreed to as part 

of their open Internet order? All of these uncertainties serve to 

tamp down dollars spent on improving networks and services to 

consumers. There are also hidden costs of compliance in this new 

possibly litigious territory. What about fines for missteps? Given 

the runaway nature of the fines from the FCC’s Compliance Bureau, you know this has to be a concern. Trying to navigate murky 

legal and regulatory rules puts quite a burden on companies who 

want to avoid running afoul of those rules but are unsure how the 

FCC will ultimately interpret these new rules. 

We are not here today because we think investment will come to 

a screeching halt or that most of these providers will stop putting 

money into their valuable assets. But given the incredible levels of 

investment in the past, any decrease, any pause is a loss to our 

economy and to consumers. And in the end, the customers, the 

American people, are the ones who will ultimately bear the greatest loss from these rules, whether it is because the increased burden drives small providers out of the market or because there is 

less incentive for any company to invest in new and innovative 

service offerings or because additional infrastructure investment is 

no longer attractive to industry or investors. Title II regulations 

don’t inspire innovation or investment confidence. In the long term, 

it means uncertainty, reduced investment, and a future of what 

might have been for our vibrant and thriving Internet ecosystem. 

We can do better. I look forward to hearing from the witnesses. 

[The prepared statement of Mr. Walden follows:] 

3 

PREPARED STATEMENT OF HON. GREG WALDEN

Eight months ago the FCC decided to grab control of the Internet and regulate 

it like a monopoly utility under Title II. Rather than work with Congress to adopt 

a statute that would punish those who engaged in harmful actions, the FCC yielded 

to White House pressure and went all in for Title II. 

The predictable result is litigation in the courts and uncertainty in the marketplace. I understand that there was a great demand for strong, enforceable rules to 

govern the relationship between so-called edge providers like Netflix and Internet 

service providers. I still believe that goal is achievable, but I also still believe that 

Title II is the wrong approach and is likely to dampen investment in the Internet. 

Clearly, the private sector will continue to invest in broadband build out and improvements. The question is, will that investment plateau, or even decline, over 

time? After all, it’s the money on the margins that helps extend broadband into 

unserved and underserved areas. 

One witness will testify today that based on the available evidence the economic 

impacts of this type of regulation could increase costs and decrease investment of 

anywhere from about 5.5 percent to about 20.8 per year, and the ratio of investment 

to capital stock could decline by roughly those amounts as well. To put that into 

context, at the low end a decrease of that magnitude in 2014 investment would 

range from about $4.29 billion to a high of $15.6 billion. 

These studies were based on observations of other industries that have experienced a significant shift toward more economic regulation, and on the pattern of decreased investment in other countries when they subject their telecommunications 

sectors to much higher levels of regulatory oversight than our traditional light regulatory touch. 

There are many other ripple effects of the commission’s action. There’s the uncertainty factor-businesses don’t know what to expect as they look ahead, making them 

pause to do risk assessments of regulatory hurdles before expanding offerings or investing in infrastructure. What will happen in the courts? What will happen with 

a new chairman? What if someone pushes the FCC to walk back some of the forbearance they agreed to as part of their Open Internet order? All of these uncertainties serve to tamp down dollars spent on improving networks and services to consumers. There are also the hidden costs of compliance in this new, possibly litigious territory. What about fines for missteps? Given the runaway nature of the fines from 

FCC’s compliance bureau, you know this is a concern. Trying to navigate murky 

legal and regulatory rules puts quite a burden on companies who want to avoid running afoul of the rules, but are unsure how the FCC will ultimately interpret these 

new rules. 

We are not here today because we think investment will come to a screeching 

halt, or that most of these providers will stop putting money into their valuable assets. But given the incredible levels of investment in the past, any decrease, any 

pause, is a loss to our economy and to consumers. 

And in the end, the consumers, the American people, are the ones who will ultimately bear the greatest loss from these rules. Whether it’s because the increased 

burden drives small providers out of the market, or because there is less incentive 

for any company to invest in new and innovative service offerings, or because additional infrastructure investment is no longer as attractive to industry and investors, 

Title II regulations don’t inspire innovation or investment confidence. 

In the long term, it means uncertainty, reduced investment, and a future of ‘‘what 

might have been’’ for our vibrant and thriving Internet ecosystem. We can do better. 

I look forward to hearing from our witnesses. 

Mr. WALDEN. I yield the balance of my time to the vice chair of 

the committee, Mr. Latta. 

Mr. LATTA. I appreciate the chairman for yielding. And thanks 

for holding today’s very important committee hearing. Before the 

Federal Communication Commission’s recent action to reclassify 

broadband as a telecommunication service under Title II of the 

Communications Act, the regulatory framework that governed 

broadband service fostered a pro-consumer, pro-business environment. However, the FCC chose to abandon the Internet as we know 

it today by applying outdated rules that were developed for an era 

of monopoly telephone providers to a cutting-edge broadband marVerDate Mar 15 2010 09:53 Mar 22, 2016 Jkt 037690 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 C:\USERS\WLAUFERT\DESKTOP\114X93COMCARRIERREGSPENDING WAYNE
4 

ketplace. Subjecting a thriving, dynamic industry to navigate the 

FCC’s bureaucracy and red tape and will adversely affect innovation, investment, and consumer choice. 

In addition, the FCC’s reclassification will place industry into a 

state of prolonged uncertainty for years as litigation proceeds 

through the courts. An Internet service provider in my district, 

Amplex, relayed this concern to me, stating that the ruling does 

such a poor job of defining what the FCC actually intends, that 

many years of expensive litigation will result before we know exactly what the FCC costs are going to be. This uncertainty poses 

a risk to investment that could provide a disincentive to product 

and service offerings which ultimately harms consumers. I look to 

forward to hearing from the panel of witnesses. 

And I thank the chairman, and I yield back. 

Mr. WALDEN. The gentleman yields back the balance of his time. 

The Chair recognizes the gentlelady from California, Ms. Eshoo, 

the ranking member of the subcommittee. 

OPENING STATEMENT OF HON. ANNA G. ESHOO, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA 

Ms. ESHOO. Thank you, Mr. Chairman, for holding this hearing, 

which I think is an important one. And thank you to the witnesses. 

Some have been here before, and others haven’t. Welcome to you. 

And we look forward to hearing from you. 

We have heard the doomsday scenario brought on by the FCC’s 

open Internet rule, that stock prices of major broadband providers 

would fall, that investment in new infrastructure would decline 

rapidly, and that consumers’ monthly bills would become saddled 

with new taxes. In fact, the sky is not falling. And we have 

broadband providers’ own data to prove it. 

According to an analysis by Free Press of 18 publicly traded 

broadband providers, more than half increased their capital spending during the being second quarter of 2015 compared to spending 

during the second quarter of 2014. Earlier this year, Sprint’s chief 

technology officer stated that he, quote, ‘‘does not believe that a 

light-touch application of Title II, including appropriate forbearance, would harm the continued investment in and deployment of 

mobile broadband services,’’ unquote. He was right. Sprint increased their investments by 88 percent between the second quarter of 2014 and 2015. During the same period, Comcast increased 

their capital expenditures by 12 percent; Verizon wireless, by 13 

percent; and T–Mobile, by 27 percent. Smaller providers also saw 

major increases, including Cincinnati Bell by 81 percent and Frontier by 31 percent. 

Following Chairman Wheeler’s announced plan in early February 

to pursue a light-touch Title II approach, the stock prices of major 

cable companies surged. Some suggested this was an anomaly. Yet, 

over the past 6 months, while the NASDAQ, S&P, and Dow have 

been in the negative, many of the Nation’s largest communications 

providers, including Comcast, Time Warner Cable, and T–Mobile 

have outperformed the market average. 

Finally, the story of investment should include not just 

broadband providers but the broader Internet ecosystem of mobile 

5 

aps, social media, streaming video services, and so much more. According to a recent study by PricewaterhouseCoopers, venture capitalists invested $5 billion in 290 Internet-specific companies during the second quarter of 2015. The study found that this investment represents an impressive 64-percent increase in dollars and 

a 25 percent rise in deals compared to the first quarter of 2015. 

Eight months ago, the FCC took the historic step of enacting robust 

enforceable net neutrality rules that ensure millions of American 

consumers and entrepreneurs can continue to rely on the Internet 

they know and love—underscore that last word, ‘‘love.’’ These rules 

provide certainty for the entire Internet ecosystem and can do so 

without curtailing investment. 

Again, welcome to the witnesses. I thank you each of you in advance. And I yield the remainder of my time to the gentlewoman 

from California, Ms. Matsui. 

[The prepared statement of Ms. Eshoo follows:] 

PREPARED STATEMENT OF HON. ANNA G. ESHOO

We’ve heard the doomsday scenario brought on by the FCC’s open Internet rules 

that stock prices of major broadband providers would fall; investment in new infrastructure would decline rapidly; and consumer’s monthly bills would become saddled 

with new taxes. The sky is not falling and we have broadband providers’ own data 

to prove it. 

According to an analysis by Free Press of 18 publicly traded broadband providers, 

more than half increased their capital spending during the second quarter of 2015, 

compared to spending during the second quarter of 2014. Earlier this year, Sprint’s 

Chief Technology Officer stated that he ‘‘does not believe that a light touch application of Title II, including appropriate forbearance, would harm the continued investment in, and deployment of, mobile broadband services.’’ He was right. Sprint increased their investments by 88 percent between the second quarter of 2014 and 

2015. During this same time period, Comcast increased their capital expenditures 

by 12 percent; Verizon Wireless by 13 percent; and T–Mobile by 27 percent. Smaller 

providers also saw major increases including Cincinnati Bell by 81 percent and 

Frontier by 31 percent. 

Following Chairman Wheeler’s announced plan in early February to pursue a 

‘light-touch’ Title II approach, the stock prices of major cable companies surged. 

Some suggested this was an anomaly. Yet over the past 6 months, while the 

NASDAQ, S&P and Dow have been in the negative, many of the Nation’s largest 

communications providers, including Comcast, Time Warner Cable and T–Mobile 

have outperformed the market average. 

Finally, the story of investment should include not just broadband providers but 

the broader Internet ecosystem of mobile apps, social media, streaming video services and so much more. According to a recent study by PricewaterhouseCoopers, 

venture capitalists invested $5 billion in 290 Internet-specific companies during the 

second quarter of 2015. The study found that this investment represents an impressive 64 percent increase in dollars and a 25 percent rise in deals compared to the 

first quarter of 2015. 

Eight months ago, the FCC took the historic step of enacting robust, enforceable 

net neutrality rules that ensure millions of American consumers and entrepreneurs 

can continue to rely on the Internet they know and love. These rules provide certainty for the entire Internet ecosystem and can do so without curtailing investment. I welcome our witnesses and thank each of you in advance for your important 

testimony. 

Ms. MATSUI. Thank you. And I thank the ranking member for 

yielding me time. I am a strong supporter of a free and open Internet because it is so central to the daily lives of my constituents and 

all Americans. Strong net neutrality rules are also critical for our 

economy, for the virtuous cycle of innovation and investment that 

has spurred broadband deployment and the development of Internet-based businesses in every corner of this country. That is why 

6 

I introduced legislation with Senator Leahy to ban paid 

prioritization or so-called Internet fast lanes. The FCC did the 

right thing earlier this year by including a ban on paid 

prioritization in the net neutrality rules. We know that allowing 

fast and slow lanes online would harm both investment in edge 

providers and deter broadband network investments. Net neutrality has allowed our Internet economy to become the envy of the 

world. I hope we can work together on bipartisan solutions that 

spur the kind of investment we all want to see. Thank you. 

And I thank the witnesses for being here today. 

Thank you. And I yield back. 

Mr. WALDEN. The gentlelady yields back the balance of her time. 

The chairman recognizes the chairman of the full committee, Mr. 

Upton, from Michigan. 

OPENING STATEMENT OF HON. FRED UPTON, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MICHIGAN 

Mr. UPTON. Thank you, Mr. Chairman. 

Few issues have consumed and divided this subcommittee quite 

like net neutrality over the last couple of years. From the early 

days of the dialogue, much of the thinking and the conversation 

have evolved. We are no longer debating whether there should be 

net neutrality rules but, instead, how to best put them into place. 

However, there is little debate around the fact that the FCC’s Title 

II reclassification is the wrong way to implement smart consumer 

protections for folks in Michigan as well as across the country. So 

we are here to talk again about these rules because they are not 

the solution that we need. We need certainty so that companies can 

continue to plan their business models for the years ahead. We 

need investment so consumers can continue to receive the high 

quality, innovative broadband services that we have come to rely 

on in our everyday lives. And we need to return to the light-touch 

regulatory world that has served the industry and consumers so 

well over the last number of years. Recognizing that many feel that 

strong net neutrality rules need to be put into place, Chairman 

Walden, ChairmanThune, and I put together a discussion draft earlier this year to protect consumers and encourage robust investment and innovation at the same time. Instead of waiting on another round of argument in the court right now, we could have sustainable, enforceable, and reliable rules to maintain the Internet 

that we know. That is not the case. And we are here to talk about 

what the alternative means. 

I yield the balance of my time to Marsha Blackburn. 

[The prepared statement of Mr. Upton follows:] 

PREPARED STATEMENT OF HON. FRED UPTON

Few issues have consumed and divided this subcommittee quite like net neutrality over the past few years. From the early days of the dialogue, much of the 

thinking and the conversations have evolved. We are no longer debating whether 

there should be net neutrality rules, but instead, how to best put them into place. 

However, there is little debate around the fact that the FCC’s Title II reclassification is the wrong way to implement smart consumer protections for folks in Michigan and across the country. 

We are here again to talk about these rules because they are not the solution that 

we need. We need certainty, so companies can continue to plan their business modVerDate Mar 15 2010 09:53 Mar 22, 2016 Jkt 037690 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 C:\USERS\WLAUFERT\DESKTOP\114X93COMCARRIERREGSPENDING WAYNE
7 

els for the years ahead. We need investment, so consumers can continue to receive 

the high-quality, innovative broadband services we have come to rely on in our everyday lives. We need a return to the light-touch regulatory world that has served 

the industry and consumers so well over the years. 

Recognizing that many feel that strong net neutrality rules need to be put into 

place, Chairman Walden, Chairman Thune, and I put forward our discussion draft 

earlier this year to protect consumers and encourage robust investment and innovation at the same time,. Instead of waiting on another round of arguments in court 

right now, we could have sustainable, enforceable, reliable rules to maintain the 

Internet we know. But that’s not the case, and we are here to talk about what the 

alternative means. 

This isn’t our attempt to undermine net neutrality, rather, it is to talk about what 

the realworld effects of an ill-fitting regulatory scheme are: depressed investment, 

fewer jobs, reduced innovation. Is this really the outcome that advocates had in 

mind when they pushed for stronger net neutrality rules? I don’t think so, and 

that’s why it is so important to not lose sight of the fact that we can have our cake 

and eat it to. We can have protections for Internet consumers and a vibrant investment environment—just not under Title II. While net neutrality was supposed to 

protect consumers, Title II may be having the opposite effect, and that means nobody wins. 

Mrs. BLACKBURN. Thank you, Mr. Chairman. 

I want to thank our witnesses for being here. As Chairman 

Upton just said, this is a discussion that we have had and that we 

are continuing to have and there is good reason for continuing this. 

We are looking at what are the expected costs to the system of putting in these net neutrality rules. Now, we all know that Progressive Policy Institute had done an estimate. And they said: Well, it 

will be an $11 billion cost to new fees and taxes that you are going 

to see. Free Press had estimated that it was going to be about $4 

billion in new costs. Well, no one knows exactly where that is going 

to shake out. 

But they do know this: More Government control and more reclassification under Title II is going to mean a couple of things. 

One is less innovation. Another is less investment by the companies that could be investing in expansion of broadband and Internet services. And what that brings to the marketplace is less certainty whether you are a company that is investing, whether you 

are a consumer that is trying to get broadband services into your 

community. The Title II power grab is something that certainly deserves our attention. It is counterproductive to a free market system. 

And, Mr. Chairman, I will yield the balance of my time to any 

member who is seeking it. 

Mr. WALDEN. Any members on the Republican side seeking comments and opening statements? Doesn’t appear to be. 

Mrs. BLACKBURN. I yield back. 

Mr. WALDEN. The gentlelady yields back. 

The Chair recognizes the ranking member of the full committee, 

the gentleman from New Jersey, Mr. Pallone. 

OPENING STATEMENT OF HON. FRANK PALLONE, JR., A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW JERSEY 

Mr. PALLONE. Thank you, Chairman Walden and Ranking Member Eshoo, for holding this hearing. 

As I have said many times, I remain a strong supporter of net 

neutrality, and I believe that the rules the FCC adopted have alVerDate Mar 15 2010 09:53 Mar 22, 2016 Jkt 037690 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 C:\USERS\WLAUFERT\DESKTOP\114X93COMCARRIERREGSPENDING WAYNE
8 

ready benefited consumers. And I also believe time will prove that 

they benefit the economy as well. We already know that many of 

the scariest predications about the devastation that the FCC’s rules 

would bring have proved to be false. For instance, days before the 

FCC’s vote. At least one analyst downgraded cable stocks due in 

part to concerns over the Title II rules. A few months later, the fire 

alarm was called off and the stocks were upgraded. This makes 

sense since the value of networks appears to be on the rise. The 

Charter/Time Warner Cable merger announced a few months after 

the FCC adopted its rules is valued at $55 billion. That is a nearly 

$10 billion increase from what Comcast was willing to pay a year 

earlier. And just a couple of months ago, Altice announced it is 

paying $17.7 billion for Cablevision. 

For all these transactions, high-speed Internet service is one of 

the most important parts of the deal. But perhaps one of the 

strongest indicators is the spectrum auction the FCC conducted 

earlier this year. AT&T spent $18 billion on spectrum. And Verizon 

added another $10 billion. Those amounts dwarf the amount that 

carriers spent in 2008 for the 700 megahertz auction. The auction 

is at least one indicator that carriers are not afraid to invest in 

their networks. 

But the truth is all these statistics miss the point. When the 

FCC adopted its net neutrality rules earlier this year, consumers 

won, innovation won, and the economy won. The value of the network goes up for everyone when people are able to use it the way 

that they want. 

So, Mr. Chairman, again, thank you for holding this hearing. 

[The prepared statement of Mr. Pallone follows:] 

PREPARED STATEMENT OF HON. FRANK PALLONE, JR. 

Thank you Chairman Walden and Ranking Member Eshoo for holding this hearing today. 

As I have said many times, I remain a strong supporter of network neutrality. 

I believe that the rules the FCC adopted have already benefited consumers, and I 

believe time will prove that they benefit the economy as well. 

We already know that many of the scariest predictions about the devastation that 

the FCC’s rules would bring have proved to be false. For instance, days before the 

FCC’s vote, at least one analyst downgraded cable stocks due in part to concerns 

over the Title II rules. A few months later the fire alarm was called off and the 

stocks were upgraded. 

This makes sense since the value of networks appear to be on the rise. The Charter-Time Warner Cable merger—announced a few months after the FCC adopted its 

rules—is valued at $55 billion. That’s a nearly $10 billion increase from what 

Comcast was willing to pay a year earlier. And just a couple of months ago, Altice 

announced it is paying $17.7 billion for Cablevision. For all of these transactions, 

high-speed Internet service is one of the most important parts of the deal. 

But perhaps one of the strongest indicators is the spectrum auction the FCC conducted earlier this year. AT&T spent $18 billion on spectrum and Verizon added another $10 billion. Those amounts dwarf the amounts the carriers spent in 2008 for 

the 700 MHz auction. The auction is at least one indicator that carriers are not 

afraid to invest in their networks. 

But the truth is, all these statistics miss the point. When the FCC adopted its 

net neutrality rules earlier this year, consumers won. Innovation won. And the economy won. The value of the network goes up for everyone when people are able to 

use it the way they want. 

Mr. Chairman, again thank you for holding the hearing. I yield the balance of my 

time to Mr. Doyle and Mr. McNerney. 

9 

Mr. PALLONE. I have a little over 3 minutes. I would like to split 

it between Mr. Doyle and Mr. McNerney. So I yield to Mr. Doyle. 

Mr. DOYLE. Thank you, Frank. 

Thank you, Mr. Chairman, for holding this hearing. 

And thank you to the witnesses for appearing before us today. 

The FCC took historic action this year after nearly 4 million 

Americans called for strong network neutrality rules. The order 

recognized that the Internet constitutes a virtuous cycle of investment and innovation. We are here today only talking about ISP investment, when we really need to be talking about the whole cycle. 

Mr. Chairman, I would have appreciated seeing witnesses representing edge providers, venture capitalists to see how they see 

the order and their investment plans. Since the order was released, 

Uber has made major investments in Pittsburgh with a new R&D 

facility and is planning to raise another billion dollars of capital. 

To my mind, the order is driving innovation, not stifling it. 

And I will yield back to the Chair. 

Mr. PALLONE. I yield the balance of my time to Mr. McNerney. 

Mr. MCNERNEY. I thank the ranking member for yielding. And 

I thank the chairman for holding the hearing here this morning. 

This year, the FCC took an historic step to protect the Internet as 

we know it. Reliable broadband access has been and will remain 

essential for the future of commerce, education, and innovation in 

this country. As an engineer and as someone who worked in the 

private sector for 2 decades, I recognize the need for investors and 

companies to make sound investments. But we also have seen how 

the market pushes individuals and companies to innovate, leading 

to new technologies and benefits the customers and consumers. 

And that makes the investments worthwhile. 

The Internet has been a hotbed of economic growth and forwardthinking ideas. And we have seen great progress to date. The 

FCC’s net neutrality rule will keep us moving forward, empowering 

consumers and businesses as technologies change and advance, 

benefiting the economy as a whole. 

I look forward to hearing the witnesses today on the economic 

impacts of an open Internet. 

And I yield back. 

Mr. PALLONE. I don’t think any other Member wants the time. 

So I yield back, Mr. Chairman. 

Mr. WALDEN. The gentleman yields back the balance of his time. 

All opening statements are concluded. We will now go to our panel 

of expert witnesses. And we will start with Dr. Michael Mandel, 

the chief economic strategist for the Progressive Policy Institute. 

Dr. Mandel, thank you for being here. We look forward to your 

testimony here, sir. 

10 

STATEMENTS OF MICHAEL MANDEL, PH.D., CHIEF ECONOMIC 

STRATEGIST, PROGRESSIVE POLICY INSTITUTE; NICHOLAS 

ECONOMIDES, PH.D., PROFESSOR OF ECONOMICS, STERN 

SCHOOL OF BUSINESS, NEW YORK UNIVERSITY; ROBERT J. 

SHAPIRO, PH.D., CO–FOUNDER AND CHAIRMAN, SONECON, 

LLC; AND FRANK LOUTHAN, MANAGING DIRECTOR, EQUITY 

RESEARCH, RAYMOND JAMES FINANCIAL 

STATEMENT OF MICHAEL MANDEL 

Dr. MANDEL. Thank you very much. 

Chairman Walden, Ranking Member Eshoo, and distinguished 

members of the subcommittee, my name is Michael Mandel. And 

I am chief economic strategist at the Progressive Policy Institute. 

I am honored to testify on the investment impact of common carrier regulation of the Internet. I want to note that I have been 

writing about the tech-driven new economy since the mid 1990s. 

More recently, I have written a series of papers on the job impact 

of the app economy globally, which is enormous. I am going to 

briefly make three points here. 

First, each year PPI systematically analyzes the financial statements of large U.S.-based companies. Our goal is to estimate how 

much each company actually invests in equipment, billings, and 

software in the United States. As part of this project, we publish 

an annual list of the top 25 investment heros, companies that are 

the leaders in capital spending in this country. Our most recent list 

came out in September 2015 based on 2014 financial data. From 

our perspective, domestic business investment is an essential part 

of any progressive policy for generating higher wages and good 

middle class jobs. Unfortunately, domestic investment is still well 

below its long-term trend more than 6 years after the official end 

of the Great Recession. This investment drought is a key reason for 

weak productivity growth and weak real wage gains. Jason 

Furman, head of the White House Council of Economic Advisers, 

who recently spoke at a PPI event, has called the decline in productivity growth an investment-driven slow down. However, our analysis has shown that the telecomm, cable, broadband sector has 

been one of the bright spots for domestic investment. The two top 

companies investing in the U.S. in 2014 were AT&T and Verizon, 

as they have been in all 4 years that we have done this project. 

Comcast and Time Warner are on our list as well. All told, the 

telecom cable sector was the largest single sector on our investment 

heroes list, accounting for almost $50 billion in capital spending in 

2014. Needless to say, these figures pre-date the FCC’s imposition 

of Title II. 

Second, this bountiful investment added enough wired and wireless capacity to hold down consumer bills despite the soaring demand for data. In a forthcoming paper, I find that communication 

services, all wired, wireless, cable, and satellite, absorb roughly 2.9 

percent of consumer spending in 2014. That is up just slightly from 

2.7 percent in 2000. In other words, telecom, cable, broadband investment, under the previous light-touch regulatory regime, appears to have created enough capacity to absorb the astounding increase in data use by consumers without a significant increase in 

share of spending going for communication services. 

11 

Finally, what about the future of telecom, cable, broadband investment under common carrier regulation? You know, studies 

such as Hassett and Shapiro, 2015, conclude that Title II will likely 

have significant adverse effects on future investment in the Internet. To additionally support this conclusion, I would like to raise 

the controversial example of health care. I strongly favor the extension of healthcare coverage stemming from the Affordable Care Act. 

In fact, I regularly cite healthcare reform as one of the great 

achievements of the Obama administration. 

However, let’s acknowledge that health care has been the most 

regulated industry in the economy for decades, both to protect consumers and to hold down costs. For example, a Federal law enacted 

in 1974 required that all major healthcare capital investments had 

to get approved at the State level. The goal then was to eliminate 

duplication. That law is no longer on the books. But about 35 

States still require certificates of need for some kinds of healthcare 

investments. Because of regulations such as these, health care has 

consistently suffered from an investment gap relative to the rest of 

the economy. From 1990 to 2014, real investment per worker in 

health care rose by 39 percent, compared to 103 percent gain in 

real nonresidential investment per worker in the entire private sector. Economic theory tells us that industries with less investment 

will have slower productivity growth and typically rising costs. And 

that is exactly what we see in health care. Now, broadband providers are not hospitals. However, the application of common carrier regulation to broadband is one large step towards the all-encompassing regulatory environment that has historically described 

health care. The degree to which common carrier regulation reduces investment and involves the FCC in micromanaging the industry, broadband consumers may find themselves with the same 

rising costs that has beleaguered healthcare consumers for decades. 

Thank you. 

[The prepared statement of Dr. Mandel follows:] 

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Mr. WALDEN. Thank you, Dr. Mandel. 

We will go to Dr. Nicholas Economides, professor of economics, 

Stern School of Business, New York University. We welcome you. 

Thanks for being here. Please go ahead. 

STATEMENT OF NICHOLAS ECONOMIDES 

Dr. ECONOMIDES. Chairman Walden, Ranking Member Eshoo, esteemed Congressmen and Congresswomen, and ladies and gentlemen, I am a professor of economics at the Stern School of Business 

at NYU. And my name is Nicholas Economides. Thank you very 

much for inviting me to discuss the issue of network neutrality. In 

assessing the impact of network neutrality, we should look at the 

total benefit to three groups: Consumers; applications and content 

companies, such as Google; and Internet service providers, ISPs, 

such as, for example, AT&T. Looking at only one group would lead 

us to the wrong conclusions. Similarly, examining only investment 

is incorrect and misleading. 

Instead, we should look at the total benefit for all three groups. 

Network neutrality has created tremendous benefits for companies 

at the edge of the network. It has facilitated innovation resulting 

in big successes, such as Google and Skype, as well as a myriad 

of smaller innovative companies that are the engine of growth for 

the United States economy. Network neutrality has contributed 

significantly to the fast and vigorous growth of the high-technology 

sector in the United States. Departures from network neutrality 

would not be in the public interest and would create significant social welfare losses. Consider the possibility of paid prioritization, 

where a company, for example, Yahoo, would pay an ISP, for example, Verizon, to get its content—here search results—delivered 

first. Then Yahoo results would arrive first. Google results would 

be delayed. This would give a huge boost to Yahoo for which Yahoo 

would pay a lot to the ISP. Using this method, the ISP can choose 

the winner in the search market and, similarly, the winner in 

many other markets. This is highly undesirable. It would kill innovation, as small, new, innovative companies would be unable to pay 

the ISP. What we want instead is a level playing field for competition. And network neutrality guarantees that. I want to focus now 

on the investment issue. 

It has been proposed that ISPs invested less in the first two 

quarters of 2015 because of the new regulatory rule. I believe this 

proposition is incorrect. Why? First, economic models are divided 

on whether an ISP will invest more or less under network neutrality. The models do not tell us that the ISP will invest less 

under network neutrality. 

Second, investment decisions follow a complex and long-term, 

multiyear path. Even with an upward trend, investment does not 

increase every quarter. If we observe the decrease in the quarter, 

it would not necessarily be from the impact of regulation. And 

there have been big fluctuations in investment in the past. In particular, in quarters 1 and 2 of 2015, almost all the change in investment came from the investment of a single company, AT&T. 

AT&T had advised as early as 2012, November 2012, long before 

the passage of the FCC regulation, that its investment will peak 

in 2014. In November 2014, it announced that its investment in 

25 

2015 would be at least 16 percent lower than in 2014. Then, in August of 2015, Barron’s reported that AT&T said that it now expected that its 2015 investment would be the same as 2014, and 

it will just make the difference—for the shortfall of the first two 

quarters, it would make the difference in the remaining two quarters of 2015. So there is no reason for concern. 

Third, the appeals process in the courts has not ended. And, 

therefore, the final word on the regulation has not been written. It 

does not make sense to change the long-run investment plans of a 

company already. 

Fourth, even if one believes that the ISPs would decrease their 

investment as a result of the regulation, the period of observation 

between the time of the passage of the regulation at the end of 

February and the end of quarters 1 and 2 is too short to be able 

to make any meaningful inferences. It is incorrect to draw the conclusion that the FCC regulation has either an adverse or a positive 

impact on investment based on just observing two quarters of investment. 

Fifth, a theory has been proposed that investment is lower because this regulation increased uncertainty. However, I believe 

that the network neutrality regulation, in fact, decreased uncertainty by clarifying the rules of competition. In conclusion, I believe 

that network neutrality results in very significant benefits to the 

Internet ecosystem. Network neutrality’s impacts should be assessed at the whole ecosystem, not just on ISPs and not just on 

ISPs’ investment. And I have outlined a number of reasons why we 

should not be concerned about short-term investment patterns. It 

seems very unlikely that these investment patterns are the effects 

of the network neutrality rule. Thank you. 

[The prepared statement of Dr. Economides follows:] 

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Mr. WALDEN. Thank you, Doctor, we appreciate your testimony 

and your learned comments. 

We will now go to Dr. Robert Shapiro, the co-founder and chairman of Sonecon, LLC. 

Dr. Shapiro, thank you for being here. We look forward to your 

comments. 

STATEMENT OF ROBERT SHAPIRO 

Dr. SHAPIRO. Thank you, Chairman, and members of the subcommittee. I appreciate the opportunity to discuss how the FCC’s 

recent decision to apply Title II regulation to Internet service providers will affect their investments in Internet infrastructure. I am 

Dr. Robert Shapiro. I am on the faculty of the McDonough School 

of Business at Georgetown; chairman of the advisory firm Sonecon; 

and former Under Secretary of Commerce for Economic Affairs 

under Bill Clinton. You have my complete CV. 

On this matter, I conducted my analysis with a co-author, Dr. 

Kevin Hassett, director of economic studies at the American Enterprise Institute. And our study was published by the McDonough 

School of Business at Georgetown. I append a copy of the study to 

the testimony. The views I express are solely my own. 

The question we asked about how Title II regulation could affect 

investments by ISPs and Internet infrastructure is a subset of a 

more general issue which economists have pursued for decades: 

namely, how regulation affects investment and fixed capital. Economists have long recognized that, under some conditions, regulation 

can increase investment in social welfare. For example, when regulation forces firms that produce negative externalities, such as pollution, to invest in ways to reduce it. In these cases, the goal is to 

promote more optimal levels of investment in the presence of a 

market failure. Without such market failures, economists have 

found that regulation usually reduces investment. 

In assessing whether that will happen here, we cannot proceed 

directly because it hasn’t happened yet. However, my recent study 

explored how to approach new regulatory issues using analogous 

issues and conditions to assess the direction and the scale of their 

effects. In this case, the FCC’s decision reversed its longstanding 

view of ISPs as information providers not subject to Title II, an approach that had let the marketplace drive the development of a 

range of technologies to deploy broadband. The result was rapidly 

rising levels of investment across cable, telephone, and other types 

of broadband service providers. Without Title II regulation, 

broadband uptake had proceeded faster than any other technology 

on record, faster than telephone, faster than television, faster than 

computers, faster than cell phones. Further, the National Economic 

Councilhas reported that 94 percent of U.S. households have access 

to terrestrial broadband service and the other 6 percent have access to satellite-based broadband. 

Title II regulation in order to ensure universal access to 

broadband is a solution in search of a problem. The FCC also has 

long barred ISPs from discriminating against any legal content, 

guaranteeing consumers access to any lawful content, as well as 

the rights to run any lawful applications, and connect to any lawful 

device. In this regard, Title II regulation to ensure that all content 

34 

providers have access to high-speed, large-capacity technologies at 

market prices is also a solution in search of a problem. 

It also is clear that Title II regulation of ISPs falls in the class 

of policies that increase costs and regulatory hurdles. For example, 

if Title II here entails a universal service program analogous to 

that applied to telephony under Title II, it would mean significant 

new fees. And the fees needed to finance it would likely increase 

costs I believe enough to depress the uptake of broadband by more 

households than would benefit. But we don’t know if that will occur 

because this is still subject to a very long and extended regulatory 

and judicial process. 

Even larger costs, however, involve the diversion of resources 

and strategic attention by Internet companies from their basic 

business challenges and the investments required to meet those 

challenges, rather shifting to how best to accommodate and comply 

with Title II. These costs could affect any Internet company with 

transmission capacity, not just the Internet service providers, including online video services, Web search advertising services, and 

cloud computing services. 

This reasoning leads us to conclude that Title II would negativity 

affect ISP investment. The question is, by how much? One analogy 

involves Title II regulation and telephony investments. Economists 

who examined the period of 1996 to 2008, when telecom companies—but not cable companies—were subject to Title II, found that 

cable capital expenditures grew 7.5 percent per year over those 

years versus 3.2 percent by the telecom companies. We also can 

compare Internet capital spending rates here and in leading European nations subject to title-2-like regulation. OEC data show that 

in 2012, those capital spending rates in the United States were 

about double those in Europe. 

Again, we cannot estimate the long-term effects yet until this regime is in place. This is designed to give us a sense of the dimensions of those effects. And it suggests the dimensions are very substantial and that the direction is negative. Some of these effects 

may be felt already because the character of the proposed Title II 

regulation remains uncertain. The notion that, the announcement 

that Title II creates certainty ignores the entire—the nature of the 

regulatory process, and the nature of the litigation process in response to that. 

We certainly know, economists certainly know that uncertainty 

adversely affects investment. One analyst reports that compared to 

the first half of 2014, capital expenditures by all wireline ISPs fell 

12 percent in the first half of 2015, and capital expenditures by 

wireline and wireless ISPs fell 8 percent. ISP capital expenditures, 

relative to the prior year, had fallen only twice before, following the 

dot-com meltdown and recession in 2001; and in 2009, during and 

after the Great Recession. No such conditions held in the first half 

of 2014. The only change was the FCC’s order to regulate ISPs 

under Title II. 

The extent to which that order and the uncertainty effects affected, drove these declines is still unknown. And anyone who 

claims that they know it is talking through their hat, frankly. But 

what we do know, we have established there is a substantial effect 

that we are already seeing. And the direction of that effect is negaVerDate Mar 15 2010 09:53 Mar 22, 2016 Jkt 037690 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 C:\USERS\WLAUFERT\DESKTOP\114X93COMCARRIERREGSPENDING WAYNE
35 

tive. It is consistent with a long economic literature on the impact 

of uncertainty on fixed investments. That is particularly true in the 

case of what are called irreversible investments, which are fixed investments which cannot be resold. And that happens to characterize much of the investment by ISPs. I conclude, therefore, that 

Title II regulation of ISPs is very likely to increase costs and reduce investment in Internet infrastructure and likely by very substantial amounts. Thank you. 

[The prepared statement of Dr. Shapiro follows:] 

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[Additional information submitted by Mr. Shapiro is available at 

http://docs.house.gov/meetings/IF/IF16/20151027/104110/ 

HHRG-114-IF16-Wstate-ShapiroR-20151027-SD002.pdf.] 

40 

Mr. WALDEN. Thank you, Dr. Shapiro. 

Our final witness, Mr. Frank Louthan—thank you for being 

here—managing director, Equity Research, Raymond James Financial. 

Mr. Louthan, thank you. And we look forward to your comments. 

STATEMENT OF FRANK LOUTHAN 

Mr. LOUTHAN. Thank you, Chairman Walden, Ranking Member 

Eshoo, and members of the subcommittee. I appreciate you asking 

me to be here today. My name is Frank Louthan. I am a managing 

director at Raymond James covering the telecom, cable, and data 

center industries. I analyze companies that provide voice, data, 

Internet, and pay TV services for the vast majority of American 

consumers, businesses, and Government institutions, both on a 

wireline and wireless platforms, as well as companies that transport, store, and enable the majority of the world’s Internet traffic. 

In general, we believe that the move by the FCC to impose Title 

II regulation on the Internet is a mistake that ultimately harms 

consumers, restricts investment, and adds unnecessary costs to the 

industry. When you hear me discuss investment, you should really 

think of it as the means by which the industry offers service to consumers, not selfish moneymaking schemes for wealthy people. The 

industry is about providing essential services to individuals, businesses, and Government, which takes capital to make it a reality. 

The overhang from Title II will be a drag on this investment, lower 

investment returns, all of which will result in less telecom deployment, consumer choice over time, in spite of well-meaning intentions to the contrary. Thus, regulation, in an effort to prevent problems that could occur instead of addressing actual consumer harms 

that have occurred, will restrict the industry’s ability to expand by 

diminishing returns in attractiveness to capital. 

As I look at the industry from an investment perspective or a 

capital required to enable essential services perspective, I focus on 

the amount of capital invested, the rate of return on that capital. 

The main objectives of my clients, who represent large mutual 

funds, pension funds, investment firms, and other investment institutions, is to get an adequate risk-adjusted rate of return on their 

capital. Many of these investors are individuals with modest 401(k) 

and pension assets looking for better growth in their savings. The 

investment is not about someone’s bank account clipping better interest income, but rather it provides the ability for companies I follow to provide essential services that produce the valuable public 

policy goals, the near ubiquitous voice service in the last century, 

and almost universal broadband availability now. All citizens in 

this country benefit from the money invested and reinvested in the 

industry, probably more so than the investors that risked their capital. The telecom industry currently spends $60 billion to $65 billion in annual and capital expenditures. While this is often referred 

to as investment, the vast majority of this is simply what it table 

stakes to keep the business going but with only small amounts of 

this for expansion and new investment. This limited new investment is not surprising since the industry as a whole has earned a 

modest 4.9 percent return on capital over the last 3 years and the 

long-term returns are not much better. Regulation has played a 

41 

significant role in this low investment return. And less regulation 

would improve the returns to your constituents’ 401(k)s and the 

telecom choices in your district. More regulation under Title II will 

have the opposite effect and threaten the availability of affordable 

capital needed to reinvest to keep the business going, let alone expand broadband and data services. I cannot argue that the state 

of Title II with the heavy forbearance is not, for the moment, impacting industry any worse than the opportunity costs that have 

faced the industry under the prior FCC net neutrality orders. But 

the rate of change in the telecom industry is very, very slow. Network privacy, pole attachments, and interconnection obligations are 

all real concerns that are just starting to come into the marketplace after the Title II regulation, and they are beginning to add 

cost. 

The deceiving part is that everyone is really waiting on the court 

case to see what the real rules are. But don’t mistake this as an 

endorsement for the current status quo. Similar levels of capital 

spending each year do not mean that all is well. I am also concerned that today’s heavy forbearance will change in the future. 

This is where the just and reasonable standard under the future 

Commissions could mean something different and costly for the industry. Price regulation and required resale of facilities are good 

examples of future risks. With approximately 10 major wireline 

ISPs and 6 national and regional wireless providers, consumers 

have a diversity of Internet access to judge discriminatory behavior 

for themselves, the prevention of which was the original intent of 

the open Internet order to begin with. 

And I would ask, where have we seen increased access to capital 

and higher levels of investment follow once regulation has been put 

into place? I would argue we see the opposite. I cannot imagine 

growing industries lobbying Congress to impose regulation on them 

so they can better raise capital and invest. Ultimately, I believe the 

FCC is attempting to use a large, blunt instrument to address unfounded fears when a swift surgical procedure in the form of targeted legislation would be a better choice. I would argue members 

of this committee should look to a legislative solution that will not 

limit investment choice and/or product development for consumers. 

So, from my perspective, Title II is restricting overall investment 

and returns; it is beginning to slow down and overcomplicate an industry in unnecessary ways; and has yet to see the full effect while 

the court case is pending. We do not believe the imposition of Title 

II regulation will make the industry as attractive for capital as it 

has been in the past. Less investment will eventually result in degrading consumer experience and fewer choices in the market. I 

would encourage members of this committee to seek out a simple 

legislative solution to ensure the main goals of Title II proceeding 

rather than allow the current blunt force approach to have unattended consequences that degrade one of the best tech stories in 

the U.S. ever—the Internet. 

Lastly, I don’t have any shares of any of the companies that we 

would cover. And we have provided disclosures of any business relationships my firm may have. I look forward to your questions. 

[The prepared statement of Mr. Louthan follows:] 

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Mr. WALDEN. Thank you, Mr. Louthan. We appreciate your testimony, as well as that of your colleagues on the panel. 

I will start off with questions. And I wanted to go to Dr. Shapiro 

first because in your testimony, in additional data, you indicate 

that Title II regulation of ISPs will increase cost, reduce investments. You say reviewing the available evidence, we estimate the 

scale of this effect could range from 5.5 percent to 20.8 percent per 

year. Can you translate that for me into how many dollars we 

might not see invested in the Internet that we would otherwise 

see? 

Dr. SHAPIRO. Well, as Mr. Louthan just informed us, the investment rates have averaged about $60 billion a year. And so 5 percent of that would be $3 billion. And 20 percent would be $12 billion. So these are—— 

Mr. WALDEN. Per year? 

Dr. SHAPIRO. Yes, per year. Let me say, that is what our both 

models and analogies tell us are the range of the dimensions. It 

could be substantially greater. It could be somewhat less. What we 

know, again, from decades of economic analysis of the impact of 

regulation on this particular kind of fixed capital investment is 

that unless it is correcting a market failure, unless there is something that is suppressing investment, some distortion in the market that is suppressing investment, the direction of the effect is 

negative—costs go up, attention is diverted, and companies invest 

less—and that the scale, particularly based on international comparisons and the comparisons of telephony before and after Title II 

is substantial. 

Mr. WALDEN. Do you think that is part of why the Clinton administration chose to go with a light-touch regulation as opposed 

to Title II through the FCC? 

Dr. SHAPIRO. I know that is why. And the fact of the matter is 

that the Clinton administration was absolutely committed to allowing the Internet to develop in its own way. This is a sector driven 

by technological and organizational innovation. And regulation constricts that. 

Mr. WALDEN. And I just want to point out $3 billion would be 

on the low end, you estimate, that we could lose per year in the 

U.S. 

Dr. SHAPIRO. Yes. 

Mr. WALDEN. And $12 billion on the upper end. I think the stimulus spending for Internet was something like $7 billion that Congress passed. I did not support that. But these are substantial 

numbers. 

Dr. SHAPIRO. Right. Let me say that the Obama administration 

also supported the view of ISPs as information providers not subject to Title II regulation for several years before reversing itself. 

Mr. WALDEN. Yes, it did. 

Dr. SHAPIRO. So this has been a consensus view across both parties. 

Mr. WALDEN. Up to a certain point. And then Obama, Mr. President, decided to go a different direction. I want to differentiate too 

between the open order and net neutrality discussion and Title II 

as common carrier regulation. 

52 

And Dr. Shapiro, Mr. Louthan, anybody else on the panel, there 

is a pretty distinct difference between net neutrality, which we 

proffered a legislative product on, and Title II, right? And isn’t 

there uncertainty in the marketplace when it comes to the issue of 

how much the FCC can forbear against existing statute and get 

away with it in courts and just the uncertainty and the rule structure and litigation? I have heard from Dr. Economides that there 

is, this actually gave certainty. I am hearing from you it didn’t give 

certainty. Dr. Shapiro? Mr. Louthan? 

Mr. LOUTHAN. My argument is that it brought a lot of clarity to 

the industry. It absolutely clarified that it is a less attractive place 

to investment. I mean, that was what everyone was sort of waiting 

for. And right now, that is current the status quo. Everyone assumed that, if you look at the way Title II is now with the heavy 

forbearance, it is not that different than under net neutrality. 

What you can see, what I would argue, the $60 billion, $65 billion 

they are spending already reflects a depression in potential investment in the sector. That is how much the investors and my clients 

are willing to put up with these guys investing. 

Mr. WALDEN. And you know that from discussions you are having with your own clients, the investors? 

Mr. LOUTHAN. Yes. The discussions I would have with investors 

going into Title II basically would say, well, the sector is 

uninvestable, which means they are not willing to risk capital in 

the investment if the Title II regulations are—— 

Mr. WALDEN. Because they don’t see enough return or there is 

more uncertainty? 

Mr. LOUTHAN. Because the lack of clarity on exactly how the forbearance was going to play out. And then going forward, even if 

today we say they are going to implement these few things, these 

other 200 rules they are going to forbear from, what is to say that 

doesn’t change in the future? That potential risk in the future, 

which could be very detrimental—price regulation and resale of facilities—limits the amount they are going to risk. 

Mr. WALDEN. So do you think we would be better off, then, to go 

with a statutory framework on net neutrality, as some of us have 

proposed, as opposed to letting this play itself out under Title II? 

Mr. LOUTHAN. Absolutely. That would bring a lot of clarity, and 

that would open up a lot more investment back into the sector. 

Mr. WALDEN. Dr. Shapiro? 

Dr. SHAPIRO. Title II regulation was created in 1934 for a monopoly telephone system. It then developed over many decades of regulatory responses as conditions changed. That is why the regulatory 

process, no matter what is said today about the particular dimensions of forbearance, is not dependable with respect to certainty. 

Mr. WALDEN. Thank you. My time has expired. I am going to 

turn now to the ranking member from California, Ms. Eshoo. 

Ms. ESHOO. For a different point of view. I am having trouble 

discerning from at least some of the witnesses between investments 

that have been made since the FCC came out with its net neutrality rules and what your opinion is. So there is a lot of fog in 

between because there are facts in terms of earnings of the major 

companies. And they are quite robust. 

53 

And going first to Mr. Louthan, I think that, you know, the 

whole issue—or maybe Dr. Shapiro, in your testimony, you cite the 

data from Hal Singer that suggests capital expenditures for 

wireline and wireless ISPs fell between the first half of 2014 and 

the first half of 2015. And, yet, Professor Economides has told us 

that this decline in capital expenditures is due almost entire to one 

company, a decline which this company predicted as far back as 

2012. 

And also I think you all need to take into consideration that mobile voice has operated under Title II for almost 20 years. So how 

do you reconcile these? 

Mr. Louthan, I know that you are an analyst, a Wall Street analyst. And your analysis to me sounded extraordinarily dim. And, 

yet, that analysis doesn’t seem to have had an effect relative to 

shareholders or the companies and what they have produced in the 

last, in the last quarter since the FCC took its step. And to suggest 

that legislation brings about great stability, I would question that, 

as a Member of Congress. So why don’t we go with Dr. Shapiro 

first and then Dr. Economides, and then Mr. Louthan. 

Dr. SHAPIRO. Sure. Look, there are many ways to interpret these 

data. 

Ms. ESHOO. Uh-huh. 

Dr. SHAPIRO. Yes, for example, AT&T did announce that when a 

certain investment project was over, they would recur to historic 

levels of investment. 

Ms. ESHOO. Give me an 18-carat example, if you will, of where 

investment since the FCC came out with what they came out with, 

where essentially the sky is falling in or a dark pattern has 

emerged since then that this is so off the charts that America and 

shareholders beware across the whole ecosystem. Where is it? 

Dr. SHAPIRO. What I have said is that economists cannot say at 

this point—— 

Ms. ESHOO. OK. That is a good answer. 

Dr. SHAPIRO [continuing]. With using direct data because the 

data aren’t in yet. What we can say—— 

Ms. ESHOO. What is in, though? What is in? 

Dr. SHAPIRO. What is in, according to the way I read those data, 

show a decline which I attribute to uncertainty. Now, the argument 

about this, for example, on AT&T—— 

Ms. ESHOO. I only have 1 1⁄2 minutes left. So, Mr. Louthan? 

Mr. LOUTHAN. I think I can summarize this. Net neutrality provisions were in place. Title II comes in, which looks very much like 

the current net neutrality today. It has the potential to be a lot 

worse in my opinion. But today it looks the same. So, as a result, 

the world the way it was and the world the way it is now, and the 

carriers are not necessarily changing in spending. I can give you 

a long, what happened with AT&T was very specific circumstances 

for them for some—we can talk about that later. But, in general, 

the industry is staying the same. And then they are all assuming 

until the court case is over, we really don’t know how this is going 

to play out. And we are assuming everything is going to stay the 

same for the next 18 months until the court case is over. At that 

point, then we are going to find out which way it goes in the courts. 

And at that point, we will probably see a slow—— 

54 

Ms. ESHOO. Well, you are making projections about what you 

think is going to happen. But the case so far, from February to 

now, does not—that is what I am looking for. I am looking for 

something different. 

Dr. Economides? 

Dr. ECONOMIDES. It is really true, we don’t see evidence. We 

don’t see right now evidence of very significant reductions or even 

significant reductions in investment. And AT&T itself says that 

whatever lower investment they did in the first two quarters, they 

will make it up in the next two quarters. So I don’t see an issue 

with that. Now, I think that the general issue that Dr. Shapiro 

brings up, which is, well, regulation necessarily reduces the returns 

on investment, that has to be looked at more generally in the ecosystem of the Internet because if we just reward telephone companies much more but it kills innovation in the whole other sector, 

then we are doomed. We are doing the wrong thing. 

Mr. WALDEN. The gentlelady’s time has expired. 

Ms. ESHOO. Thank you very much. 

Mr. WALDEN. The Chair recognizes the gentlelady from Tennessee, Mrs. Blackburn. 

Mrs. BLACKBURN. Thank you, Mr. Chairman. 

Mr. Louthan, I want to come to you and go back to your testimony on page 3 of your testimony, where you said we are seeing 

the beginnings of Title II adding cost to the industry as negotiations between carriers are taking longer, and it remains unclear 

what will and will not be applied or be allowed and which parts 

of Title II regulations do and do not apply. 

OK, network privacy, pole attachments, and interconnection obligations are all examples of real concerns in the marketplace now. 

And I can tell you they are. And I agree with you on that. May 15, 

the FCC issued an enforcement advisory that broadband providers 

should take, and I am quoting, ‘‘reasonable and good faith steps to 

protect consumer privacy.’’ I was recently joined by 14 other members of the subcommittee in sending a letter to Chairman Wheeler 

questioning the FCC’s potential entry as a privacy regulator in the 

online space. The FTC has traditionally been our Government’s 

sole online privacy regulator. So now what we have is confusion 

and uncertainty. So I would like for you to elaborate, if you will 

please, on how the FCC becoming a privacy regulator and trying 

to preempt the FTC may lead to marketplace uncertainty and impact the investments of the ISPs. 

Mr. LOUTHAN. Well, in general, what, this complicates negotiations. So if two carriers have interconnection agreements and they 

are looking at what—they knew what the rules were before. They 

knew what they were allowed to do. But now under Title II, if you 

suddenly have additional regulatory burdens or like the network 

privacy issue, are you allowed to collect data? Are you not allowed 

to collect data? Who is going to make those decisions? Well, before, 

we knew. And well, wait a minute, if we are interconnecting with 

you, do you have all the right approvals to do this? It has become 

very unclear. So I have spoken with most of the companies that I 

follow. And they all say that they are having negotiations, which 

normally they would have expected to, for interconnection agreements and other things that the carriers all have to rely on each 

55 

other for, these negotiations are taking longer than they were in 

the past. And they are potentially adding cost. And in some cases, 

they are signing agreements that they are not really sure if they 

are not going to come out later and find out that they are not legal. 

And, of course, this could all change. And that is the biggest fear 

is that you have a tremendous amount of other regulation under 

Title II that right now everyone is saying we don’t need to forbear. 

But what if someone comes later and says, ‘‘you know what, you 

can’t forbear from that, you have to enforce this new regulation, 

you must put this sort of price regulation’’? That is a big concern. 

And that completely changes the dynamic of the Internet, the way 

we have seen it for many, many years, particularly the privacy 

issues and being able to gather network data. That is basically 

Google’s entire business model. I don’t think that is what the intention is. But that is the potential result of some of this Title II regulation. 

Mrs. BLACKBURN. Thank you. I appreciate that. 

Mr. Shapiro, I want to come to you for a minute. I have a lot of 

rural area in my district. I have 19 counties in Tennessee. So 

broadband expansion and the investment for that broadband expansion is something that is a topic of discussion. You can’t get the 

education system you want or access that you want or the economic 

development that you want unless you are going to have that highspeed Internet. 

And so we look at this, and I was interested in your comments 

about Title II regulation of the ISPs would increase their cost and 

is going to reduce their investment and the impact that such regulation and the corresponding higher costs there are going to be 

there are going to have on the quality of broadband service and especially in these less populated areas. And so speaking to someone 

that represents rural America and saying these are the warning 

signs, what would you highlight? Because in my district, this is 

what people are looking for. They need this high-speed Internet. 

And they are incredibly frustrated right now with some of the carriers that are not living up to promises made. 

Dr. SHAPIRO. Right. Well, I think everybody has complaints 

about the providers of services which have become so vital to us. 

We expect the service to be 100 percent all the time. We depend 

on it so vitally. Having said that, the fact is that as the National 

Economic Council has reported, without this kind of regulation, 

broadband access is available for 94 percent of all the households 

in this country. The buildout of broadband capacity and the uptake 

of broadband service has proceeded faster than any other technology we have ever seen: faster than telephone service, faster than 

television, faster than computers, faster than dial-up. So the model 

of innovation and competition has been very successful. 

Having said that, there are 6 percent of remote households who 

don’t have access. And we need to address that. But, again, that 

is a very specific problem. And if we address it in a way which increases the costs for everyone else, for example, through a universal service fee—and we have experience of this with telephone. 

It is not to say universal service isn’t important. It is to say that 

this particular mechanism if applied to the Internet would likely 

increase costs sufficiently so that the reduction in uptake by people 

56 

who cannot afford the increased costs would more than counterbalance the increase in access by those who formerly didn’t have 

it. In this case, it is the wrong solution. The problem exists, but 

it is the wrong solution. 

Mrs. BLACKBURN. Thank you, I yield back. 

Mr. WALDEN. The gentlelady yields back. 

The Chair recognizes the gentleman from New Jersey, Mr. 

Pallone. 

Mr. PALLONE. Thank you, Mr. Chairman. I support strong net 

neutrality rules because they will protect consumers, and consumers now have guaranteed access to the content that they want 

without intervention from the provider. 

My questions are for Dr. Economides. Can you please elaborate 

on the other benefits that these rules will provide the consumer? 

Dr. ECONOMIDES. Yes. The network neutrality rules have allowed 

the Internet to grow. It allowed companies to innovate at the edge 

of the network with great examples such as Google and Skype. 

They created a vigorous growth in the high-technology sector in the 

United States, which helps everybody and, of course, helps the consumers. It gives them choice. And network neutrality has created 

an equal playing field. It allows innovative companies that are 

competent and have good products to make it, to be there. 

I am afraid that if we start violating network neutrality, then 

the innovation will dwindle. It won’t be easy for small companies. 

It wouldn’t be a matter of Google, but it will be the matter of the 

new Google, a new company, a small company will not be able to 

pay the fees to the ISPs that are going to be levied. And we are 

going to see a slowdown of innovation. And, really, innovation the 

one of the few things we have going well in this country. It is very 

important to preserve it, to expand it, to make it very, very, very 

important—to grow it. 

Mr. PALLONE. Well, thank you. You mentioned small businesses, 

and one of the reasons I support net—strong net neutrality is because I want to ensure that small businesses have an equal playing 

field. So, Doctor, could you tell us again, how will the net neutrality rules benefit small businesses in particular? 

Dr. ECONOMIDES. Well, if I have a small business and innovative 

company and I want to access the Web, right now I can do it without having a special contract with the network operator or the ISP. 

I can just go and post my news or my whatever it is, trying to get 

customers through the Internet. And I don’t have to have any special relationship with the ISP. If we abolish network neutrality, we 

allow the ISP to have special relationships with the clients, to have 

special relationships with anybody who has content out there. And 

the big companies that have the money and the ability to pay the 

ISPs are going to squeeze out the smaller companies, and that is 

going to be a serious problem in the area of innovation, where it 

creates a lot of growth, but it will be a problem also in small companies across the board who do not have the ability to pay. 

Mr. PALLONE. All right, thanks. You know, with all of these great 

benefits, I am troubled by the assertions from critics of the rules 

that allege that the FCC net neutrality or even healthcare regulations will harm investment, given that there is very little data that 

proves that point. 

57 

So, Doctor, you have provide at least five different reasons why 

it is incorrect to assume there is a systematic decrease in investment based merely on a comparison of two data points. Can you 

elaborate why you believe this is to be the case? 

Dr. ECONOMIDES. Well, sure. First of all, it seems like some people believe automatically, without really proof, that the economic 

models would say that, under net neutrality, they would be less investment. And that is not really true. I have written models myself, 

but I also quote in my written submission models of others that say 

that investment might go up in net neutrality or might go down. 

So there is no clear-cut conclusion there. 

Second, there is a multiyear path in investment for any company. 

It won’t change overnight just because the regulation has changed. 

And that is why this discussion of looking at the two quarters of 

2015 and trying to draw conclusions from that doesn’t really make 

sense, besides the problem of AT&T really having revised its story 

and now saying something different than they were saying before 

and now saying they are going to invest in 2015 as much in 2014. 

I think that it is too early to say whether the rule is going to create 

more investment or less investment. And the economic theory supports that. And I believe that if you are looking at the whole Internet ecosystem, there is no doubt that there is a huge benefit from 

network neutrality, even if, even if it is true that there is going to 

be less investment in one particular sector in the ISP sector. Still, 

the huge amount of extra benefits and growth and investment in 

the other sector in the rest of the ecosystem would more than balance that. 

Mr. PALLONE. Thank you very much. 

Mr. WALDEN. The gentleman’s time is expired. 

The Chair recognizes the vice chair of the subcommittee, Mr. 

Latta, for 5 minutes. 

Mr. LATTA. I appreciate the chairman for recognizing me at this 

time. 

And, Mr. Shapiro, if I could start my questions with you, and following up with what the gentlelady from Tennessee was speaking 

about her district and being rural and the question about the 

broadband service in her area, and what it could affect. I am one 

of the co-chairs of the Rural Telecommunications Working Group, 

and I am also concerned about the negative implications of Title II 

regulations on our rural regions of our country. And to follow up 

with her line of questions, do you think the reclassification will redirect industry resources away from network upgrades and 

broadband development, particularly in these rural communities, 

due to the already high-cost nature of the regions? 

Dr. SHAPIRO. Well, we know that, or we have every reason to believe that the regulation will reduce investment. It will reduce investment in particular in areas which produce relatively lower returns. And that, yes, is likely to include a lot of rural buildout. If 

I could make one other point. Dr. Economides has described the 

great benefits of the development of the Internet infrastructure and 

the Internet ecosystem. All of that occurred without Title II regulation. It occurred under the existing nondiscriminatory rules, which 

all of us support. That is not the issue here. The issue here is a 

new regulatory structure and what impact it would have. And I 

58 

certainly agree that all of those benefits are extensive and very important, and as I said, all developed in the absence of Title II regulation. 

Mr. LATTA. Well, thank you. 

And, Mr. Louthan, if I could go on to you. Again, as I mentioned 

in my opening statement, I have got an Internet service provider 

in my district that serves about 5,500 customers. And they are concerned about the reclassification. The company is worried about 

losing temporary exemption to enhance transparency rules for 

smaller providers because if the exemption expires, they will incur 

additional legal costs and network monitoring costs they cannot afford. This is one example of how Title II regulations are creating 

unnecessary burdens on these small businesses and, in turn, will 

have the potential to negatively impact the economy and harm the 

customers out there. 

And I guess my first question to you is, Will stories like this soon 

be all too common across the country? 

Mr. LOUTHAN. Absolutely. There are hundreds of small phone 

companies and cable companies out there that don’t have a tremendous amount of access to capital. They work very hard to provide 

services in districts such as yours, and they do a very good job— 

generally, small family-run businesses. But the additional regulatory burdens that are placed on them, where they built a business model based on one set of rules, and now when that changes 

and adds additional costs, that is going to be very difficult for 

them. It is probably going to force many of them to consider mergers and to be selling to larger companies and to consolidate in 

order to remove costs because they won’t be—they will have a very 

difficult time operating. 

Mr. LATTA. Let me ask you, it is kind of interesting you just 

mentioned because in a lot of our areas in our more rural communities, it is tough to get folks out there that want to make those 

investments. When you say that they might be forced to either 

merge or have somebody else buy them out, you know, how typical 

would that be, though, for somebody else to want to come into an 

area that is being served by a very small community that, you 

know, that they have to run things out for long distances before 

they can get to certain folks in some cases—if that is going to really happen all the time, or do you think that some companies, larger 

companies are just going to say, it is not worth even looking at or 

even buying them out or merging with them? 

Mr. LOUTHAN. They definitely would say that. I would argue that 

they would change their tune if they were different business models. One of the things, such as additional sources of revenue and 

one of the things that keeps being brought up is paid prioritization. 

And, unfortunately, there is always an assumption that if someone 

is paying for better access, someone else—you must be taking that 

away from someone else. It doesn’t have to be a zero sum gain. But 

if there are additional revenue opportunities and additional ways 

that companies could make money, then they might be interested 

in investing. But, unfortunately, a small 5,500-customer company 

may have a difficult time finding a buyer. But I do think that people do want to serve a lot of those small communities. There are 

companies that would like to invest. But they need some more clarVerDate Mar 15 2010 09:53 Mar 22, 2016 Jkt 037690 PO 00000 Frm 00062 Fmt 6633 Sfmt 6633 C:\USERS\WLAUFERT\DESKTOP\114X93COMCARRIERREGSPENDING WAYNE
59 

ity. And with the clarity the way it is now, I think that is really 

going to restrict those kind of investments. 

Mr. LATTA. Thank you very much, Mr. Chairman. I see my time 

is expired, and I yield back. 

Mr. WALDEN. Thank you. 

The Chair recognizes the gentleman from Pennsylvania, Mr. 

Doyle. 

Mr. DOYLE. Thank you, Mr. Chairman. 

I know this has been covered somewhat by some of my colleagues, but I think it is important that this is clear on the record. 

You know, a study by Hal Singer, a senior fellow at the Progressive 

Policy Institute, was published recently in Forbes this August 

which claimed that the major ISPs, that their expenditures were 

down this year as a result of the FCC’s open Internet order. He 

cites AT&T specifically, saying that their capex is down 29 percent 

for the first half of 2015 and that there is an industry-wide average 

decline of 12 percent as a result of the FCC’s open Internet order. 

Professor Economides, first, are these numbers accurate, and second, are the changes in capex cited by Mr Singer related to the 

FCC’s order? 

Dr. ECONOMIDES. Well, depending on what numbers exactly we 

look, I mean, it might be—they might not be exactly the same. But 

the fact that the—that AT&T did have lower investment in the 

first quarter of 2015, is, in fact, correct. 

But I should say, and I have a diagram in my written submission, where you can look clearly to see that these investment numbers, both for AT&T and for the whole industry, vary a lot quarter 

by quarter. So you cannot necessarily say, oh, this is because of 

this particular rule or this particular action. There is no such 

thing. They vary a lot. 

The second thing is that we know now that AT&T had advised 

early that its investment program is going to end in 2014. And, 

therefore, necessarily, 2015 would be a bad year. But then later on 

in August from an article in Barron’s, from August 15, we know 

that AT&T has reversed itself, and now it says, after the passage 

of the act, that we are going to invest in 2015 as much as we invested in 2014. And, in fact, we are going to expand investment 

tremendously during the last two quarters of 2015 to be able to 

make up that shortfall of the first two quarters. 

Now, the more general question you are asking, could it be because of the passage of the act, it really doesn’t make sense. These 

are long-term decisions of the companies. They wouldn’t really stop 

investing immediately, even if they wanted to stop investing. They 

wouldn’t do it immediately. It doesn’t really make any sense. It is 

not reasonable. 

Mr. DOYLE. Thank you. I want to talk a little bit about interconnection, too, Professor Economides. In the past, you yourself 

have argued that outside the traditional realm of blocking, throttling, and prioritizing data traffic, that interconnection agreements 

between networks play a critical role in facilitating a competitive 

environment for digital services. Certainly this past year, we saw 

that Netflix, a direct competitor with many MPVD saw its service 

degraded in a way that hurt consumers and competition as a result 

of interconnection. Do you believe that the FCC acted rightly in the 

60 

order by including interconnection agreements as part of the open 

Internet order? 

Dr. ECONOMIDES. Yes, I do. I believe that interconnection is a 

crucial issue in telecommunications. It is a long-term issue. It goes 

all the way back to the interconnection between MCI and AT&T in 

the 1970s. It is a big long-term issue. It is important that the regulatory rule sets up a level playing field so that there will be no 

abuse of the power of any Internet service provider because once 

you are a subscriber to Comcast, let’s say, you are not so easily 

flexible to change to AT&T or Verizon or somebody else. So you 

are, to some extent, captured by Comcast. So it is important that 

you don’t become a pawn at being sold to this company or the 

other. It is important to have a playing field where companies can 

interconnect in that way. 

Mr. DOYLE. Thank you. 

And, just finally, Mr. Louthan, I appreciate in your testimony 

that you have said that you have no business relationships with 

any of the carriers that we are discussing today. I appreciate that 

transparency. 

Mr. LOUTHAN. I didn’t say that I didn’t have them. I said we disclosed if my firm does have any, there are in the disclosure. 

Mr. DOYLE. Thank you, and I appreciate it because transparency 

has been a big topic of conversation in our subcommittee this year, 

whether it is ensuring transparency from the FCC or political ad 

disclosures. 

Dr. Mandel, I was wondering, does your organization, the Progressive Policy Institute, receive any money from any of the carriers or the organizations linked to them? 

Dr. MANDEL. Yes, so PPI gets funding from a wide variety of 

foundations, individuals, and companies, including telecoms and 

edge providers. 

Mr. DOYLE. Can you, for example, what carriers are you getting 

funding from? 

Dr. MANDEL. Without sort of naming names, I am not privy to 

the individual details, but when I say ‘‘wide variety.’’ I mean wide 

variety. 

Mr. DOYLE. Dr. Shapiro, you cofounded PPI. Can you provide any 

additional information on the funding sources for the organization? 

Dr. SHAPIRO. Oh, I was a cofounder, but I have not been involved 

with PPI since I became Under Secretary of Commerce under 

President Clinton. So I can’t give you any insight into PPI. But I 

am happy to say that the research that I conducted was supported 

by NDN, not by an Internet service provider, an organization that 

I know that Mrs. Eshoo is very familiar with. 

Mr. DOYLE. Right, but I was referring to PPI. 

Dr. SHAPIRO. Oh, I have no information. 

Mr. DOYLE. So you say carriers fund you; you just don’t want to 

name who they are? 

Dr. MANDEL. Carriers fund us. Edge providers fund us. Foundations fund us. Individuals fund us. 

Mr. DOYLE. Thank you, Mr. Chairman. 

Mr. WALDEN. Well, we had one other witness we didn’t hear from 

on this topic. 

Mr. DOYLE. Yes, Dr. Economides. 

61 

Mr. WALDEN. So isn’t it true Google also helps fund some of your 

research—— 

Dr. ECONOMIDES. No. 

Mr. WALDEN [continuing]. As disclosed in the documents I have 

here, really? 

Dr. ECONOMIDES. Disclosed that the only—the only research that 

is relevant in the disclosure is my grant from the National Science 

Foundation to study fifth-generation networks. 

Mr. WALDEN. Well, we have got to show you some of these documents that would indicate something different at some point. This 

is on your, ‘‘Why Imposing New Tolls on Third-Party Content and 

Applications Threatens Innovation and Will Not Improve 

Broadband Providers Investment.’’ Down at the bottom it says: The 

research reported herein was supported by Google Inc.; the views 

expressed in this paper are, of course, those of the author. 

Dr. ECONOMIDES. Yes, this research was many, many years ago. 

Mr. WALDEN. In 2010. 

Mr. DOYLE. Well, Mr. Chairman, why don’t you read the disclosures of all of these panelists? 

Mr. WALDEN. I am happy to do it. I don’t know that we have 

them all here. But they should be in the records of the committee. 

Mr. DOYLE. Well, I mean—— 

Dr. ECONOMIDES. I fully disclosed it. There is no doubt about it, 

but this was 2010. It is not—the disclosure that I just filed with 

the committee said to disclose everything from 2013. And I was 

perfectly OK with that. I mean, let’s make sure. 

Mr. WALDEN. Perfect. Got it. All right, we will go now to Mr. 

Lance for 5 minutes. 

Mr. LANCE. Thank you, and good morning to the distinguished 

panel. As I understand it, the case is currently pending before the 

United States Court of Appeals for the District of Columbia Circuit 

regarding Title II, and I would like the views of every member of 

the panel as to how this will have an impact moving forward, beginning with you, sir, Dr. Mandel. 

Dr. MANDEL. I am an economist and not a lawyer. 

Mr. LANCE. I won’t hold that against you. 

Dr. MANDEL. I appreciate that. So I have a hard time predicting 

what the courts will do. I do think that, you know, what I worry 

about, and what other people have mentioned, is whether or not 

the Title II regulations will end up being extended and not just 

simply touch the ISPs but actually get applied indirectly to the 

edge providers. 

Mr. LANCE. I realize you are an economist. I would presume that 

this would eventually reach the Supreme Court. It is likely to take 

certiorari, and then we will have a final decision from the Supreme 

Court. 

Dr. MANDEL. Well, and so, like I said, I am not in the business 

of predicting that. So what that means right now there is a lot of 

uncertainty in the market about what is going to happen in terms 

of decisions, and so forth. 

Mr. LANCE. Dr. Economides, do you have an opinion on that, on 

the legal aspect of all of this? 

Dr. ECONOMIDES. On the what? 

62 

Mr. LANCE. The legal aspect, the fact that it is now before the 

DC Circuit and may ultimately reach the Supreme Court? 

Dr. ECONOMIDES. I am not a lawyer. I think that these regulations tend to be very much challenged. I wouldn’t be surprised if 

it reached the Supreme Court. But this is a layman’s point of view. 

I mean, it is not my expertise. 

Mr. LANCE. Thank you, sir. 

Dr. SHAPIRO. Dr. SHAPIRO. Certainly with so much at stake, I would be surprised if it did not proceed to the Supreme Court. 

Mr. LANCE. We will have a decision from the United States Court 

of Appeals for the District of Columbia Circuit, I presume, within 

the next year or so. And whichever side loses will petition the Supreme Court for a grant of certiorari, and it is your best judgment 

that the Supreme Court of this country is likely, eventually, to take 

the case? 

Dr. SHAPIRO. Yes, but I, again, I have no insight into what the 

court, either the court of appeals or the Supreme Court will say. 

I have—I have been on the other side of these cases as a Government official and have been assured by the Office of the Solicitor 

General what the result was going to be, and it turned out to be 

something quite different. 

Mr. LANCE. Would it be fair to say that there is uncertainty as 

a result of the fact that this is now under major litigation, as some 

of us predicted several months ago or perhaps even a year ago as 

this matter was bubbling up? 

Dr. SHAPIRO. I think it is absolutely accurate that this process, 

this judicial process increases uncertainty and, again, if I could 

mention the uncertainty is particularly acute for the kind of fixed 

capital investment which ISPs undertake because most of them are 

what is called irreversible capital, which is to say capital which 

cannot be resold. And, consequently, the incentives to wait until 

you are certain about what the conditions are going to be for your 

rate of return on that capital investment are very large. 

Mr. LANCE. And to follow up on that, irreversible capital, this is 

the fact that this and this alone is where the investment is being 

made, and it would be very difficult to get your investments back 

easily. Do I understand that accurately? 

Dr. SHAPIRO. Yes, correct. That is, you know, if you are investing 

in a kind of standard machine tool and for a particular project, and 

the project doesn’t go forward, you can resell that machine tool. 

Mr. LANCE. Yes. 

Dr. SHAPIRO. That is reversible capital. Irreversible capital is 

capital in which it is very difficult to resell, and that characterizes 

much of the fixed capital—— 

Mr. LANCE. This is the type of investment that is occurring in 

this field. 

Dr. SHAPIRO. Yes. 

Mr. LANCE. Mr. Louthan, your opinion. 

Mr. LOUTHAN. Well, I am also not a lawyer. I am a much better 

stock picker than a predictor of what the courts would do. But the 

Wall Street assumption is that it is going to go all the way to the 

Supreme Court. 

Mr. LANCE. Yes, that is my understanding. 

63 

Mr. LOUTHAN. I believe that it is possible that the District Court 

could affirm in part and either—— 

Mr. LANCE. It would be the court of appeals. 

Mr. LOUTHAN. The court of appeals, yes, I apologize. But I definitely think somewhere all of this ends up in the Supreme Court, 

and the simple thing would be for a swift legislative solution for 

the basic tenets of net neutrality, very simple, and all of this could 

go away. 

Mr. LANCE. And from your perspective as a stock picker, would 

that be better for the economy of this country and for moving forward in the investment area regarding this field? 

Mr. LOUTHAN. There absolutely will be more spending and more 

investment by the—my industry. They would provide more services, more jobs, and so forth if you had more clarity under these 

rules rather than the large risk of the what if from what is left now 

with Title II. 

Mr. LANCE. Thank you. And I tend to share that opinion. 

Mr. Chairman, I yield back 30 seconds. 

Mr. WALDEN. The gentleman yields back the balance of his time. 

I turn now to Mr. Loebsack for 5 minutes. 

Mr. LOEBSACK. Thank you, Mr. Chair. I do thank the subcommittee for holding this hearing today as always. My first hearing on this subcommittee earlier this year was about net neutrality. It is an important topic. As I said then, I absolutely support 

an open Internet. And I am glad that we are talking today about 

ways to encourage investment of broadband. I, too, am from a rural 

area as so many folks on this subcommittee are and on the larger 

committee. I have 24 counties in my district, in southeast Iowa. I 

have heard I don’t know how many times from my constituents 

their concerns about the need to invest in rural broadband. I did 

a 24-county tour earlier this year around my entire district talking 

to folks about the concerns they had about the provision of rural 

broadband. We know how important it is for the local economy, for 

the schools, for hospitals, for agriculture, and so, for me, you know, 

to think about this—and Dr. Shapiro, I have a question for you in 

a second—but to hear folks, you know, I used to teach at a small 

college. I am a former academic. And, you know, people would say: 

Why don’t you get down into the real world, talk about what is 

really happening with folks and all the rest? Being on this committee and being in Congress, I am sort of out in the real world 

all the time in these different counties. And it is a little distressing 

for me to hear, for example, that, you know, there is 94 percent of 

America covered by broadband. But that says nothing about the 

quality of the broadband, says nothing about the speed of the 

broadband. It says nothing at all, really, about the real access that 

folks in these rural areas have to broadband. 

And when I go to schools throughout my district, as I did recently, I went to 18 different schools in 18 different counties during 

the district work period to talk to them about issues having to do 

with education, and inevitably broadband comes up because it is 

great if students can be on the Iowa Communications Network at 

school, but then if they are in a rural area and they go home and 

they don’t have sufficient bandwidth to complete their homework, 

it is a problem. It is a real problem. 

64 

So, Dr. Shapiro, I do want to ask you, you said that in your testimony you called efforts to ensure universal access to broadband, 

quote, ‘‘A solution in search of a problem,’’ unquote. However, according to the Council of Economic Advisors, what we consider really to be sufficient broadband speeds are available to only 47 percent of rural households. So how can you explain, if you can, your 

assertion that there is not a problem, if you will, with regard to 

universal access to broadband? 

Dr. SHAPIRO. I didn’t say there isn’t a problem. I said the Title 

II regulation is not the solution to this problem. The fact is that, 

I mean, some form of broadband access is now available, according 

to the White House, to the Office of Science and Technology as well 

as the National Economic Council, to 94 percent of American 

households. That is not sufficient. But the fact is that has risen at 

a really extraordinarily rapid rate through competition, innovation, 

and falling prices. And if, in fact, we believe—if, in fact, Congress 

believes that this process is not proceeding at the rate that it 

should, then Congress has many ways of addressing that specifically as opposed to imposing this very large, antiquated regulatory 

regime on a market-driven innovative sector. 

Mr. LOEBSACK. Yes. I just want folks to keep in mind and I think 

there is probably agreement across the aisle here that when we 

talk about rural broadband, that 94 percent figure sounds really 

good, but in reality, when we talk about the bandwidth that is 

available, that doesn’t cover at all, you know, the reality. That 

doesn’t tell us about the reality. 

Dr. SHAPIRO. Yes. 

Mr. LOEBSACK. You wanted to say something Mr. Louthan? 

Mr. LOUTHAN. Well, I was going to point out, I have spent a fair 

amount of time covering rural broadband, particularly the 100 and 

something companies in your State. 

Mr. LOEBSACK. Right. 

Mr. LOUTHAN. The issue, I don’t disagree that while you could 

see more broadband, you have to be able to see a return on the 

money spent. There is a tremendous amount of money it takes to 

provide that broadband. 

Mr. LOEBSACK. And I am sorry, I am running out of time. I really 

do apologize for interrupting, but one of the players that has not 

been mentioned here at all is those local Internet service providers 

who started out years ago as telephone companies, and they have 

really stepped up to the plate, and they understand it is a bottomline issue. But they have been willing to take on that capital expenditure. They have been willing to invest because they really do 

think that they owe it to their folks in the rural areas to provide 

them with that service. And I think that is an important factor in 

all of this that gets overlooked by the traditional economic studies. 

So thank you so much. 

Mr. LOUTHAN. I completely agree with that. The issue is, if you 

put price regulation and things like that from Title II, their ability 

to continue to invest in those networks will not be there. They will 

not be able to raise the money. 

Mr. LOEBSACK. And I haven’t heard from them about that yet, 

just so you know. Thank you. 

Mr. WALDEN. The gentleman’s time is expired. 

65 

The Chair recognizes the gentleman from Kentucky, Mr. Guthrie, 

5 minutes. 

Mr. GUTHRIE. Thank you, Mr. Chairman, and I thank all the 

panelists, the witnesses, for being here today. My first question is 

for Dr. Mandel. Mandel, or Mandel? 

Dr. MANDEL. Mandel. 

Mr. GUTHRIE. OK, do you think communications companies are 

going to continue to be among PPI’s investment, quote, ‘‘heroes’’ if 

the courts do not overturn the imposition of common carrier regulations of broadband? 

Dr. MANDEL. That is an excellent question. I have to say that 

when we first started doing this list, it was a surprise to everyone 

that they were on the top of the list because no one would have 

thought, everyone would have thought that maybe an industrial 

company or maybe somebody else would have been the top investor 

in the U.S., and this turned out that consistently that the telecom 

companies and the ISPs in general have been up at the top. This 

is under the previous light-touch regulatory regime. 

Mr. GUTHRIE. Right. 

Dr. MANDEL. And so we don’t know what is going to happen as 

things change, evolve over the next several years, because I tend 

to agree with the other panelists that this is not a short-term 

thing. These are long-term issues that evolve over time. 

Mr. GUTHRIE. But we know under the current regulatory regime, 

they are the top investors in the country. 

Dr. MANDEL. They are the top investors, have continued to be so. 

And when we first came out with this list, we actually asked people 

who they thought were the top investors in this country and basically nobody got it right. 

Mr. GUTHRIE. And so now we are moving into an unknown? 

Dr. MANDEL. Yes. 

Mr. GUTHRIE. At best, people say we don’t know the effect. 

Dr. MANDEL. We don’t know. 

Mr. GUTHRIE. Yes, so would you assert Title II regulation might 

have perverse effects on reducing investment and increasing consumer cost? Given that you have listed telecom companies among 

the largest contributors to investment in our country, won’t that 

that have a significant negative impact? 

Dr. MANDEL. Here is the thing. Why mess with something that 

is working? Under the light-touch regulatory regime, these folks 

were big investors and innovation has proceeded forward very rapidly. What I don’t understand, what I have trouble is, why if your 

car is working, why replace the engine? In this case, we have a system which has produced lots of investment. We have a system that 

has produced lots of innovation, both in the networks and on the 

edge, and there has been a decision to change a regulatory system 

that has been working for everyone and producing innovation and 

investment in this industry. So I see this as creating uncertainty 

and problems where they did not exist before. 

Mr. GUTHRIE. OK, thank you. Thank you for your testimony. 

Dr. Shapiro, one of the elements that you consider in your analysis of regulatory impact is the investment climate in Europe. Can 

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tween heavy regulation and in decrease investment deployment in 

Europe? 

Dr. SHAPIRO. Yes. There are very useful OEC data on investment 

rates in—by Internet service providers in the major economies of 

Europe, and as well as the United States. And the regulatory regime in Germany and France, for example, the leading markets in 

Europe, it is not identical to Title II, but it is a much more—a 

much heavier form of regulation than the United States has had. 

And in certain respects, it does mirror Title II. And so, again, it 

looked to us to be something which could tell us, suggest what are 

the dimensions of the effect of heavy regulation of Internet service 

providers? And the fact is that the capital investment rates in Europe have run about half what they run in the United States. And 

there are other differences between Europe and the United States. 

We do not attribute all of that to the regulatory change. What we 

say is this, again, suggests that the dimensions of the effect are 

likely to be large rather than small. 

Mr. GUTHRIE. OK. Dr. Mandel, so you said we have had the light 

touch—robust investment growth; we lead the world—versus we 

don’t know where we are going. So this is obviously a hypothetical, 

but what do you think if we had started the Internet revolution 

under Title II? Where do you think we would be now? 

Dr. MANDEL. Oh, it would have proceeded much more slowly. It 

would have proceeded much more slowly. And, you know, I am a 

real fan of the app economy. I think I did the first study ever that 

measured the number of jobs generated by the app economy. I 

think we would have had a much slower introduction of the 

smartphone if we had Title II. We would have had a much slower 

ramp-up of investment in fast broadband. It just would have unfolded a lot more slowly. If you sort of look at the way it happened, 

you can sort of imagine that Title II, which has more permissioned 

innovation, would have required hearings for a lot of things that 

happened that have turned out to be very positive. So I think that 

Title II would have definitely have slowed down the Internet revolution. It would have slowed down the app revolution. 

Mr. GUTHRIE. Thank you very much. I appreciate that. I yield 

back. 

Mr. WALDEN. The gentleman’s time is expired. 

We now go to the gentleman from California, Mr. McNerney. 

Mr. DOYLE. I am from California. 

Mr. WALDEN. No, next on the list. I was making sure I didn’t—— 

Mr. MCNERNEY. Dr. Mandel, I was intrigued by your comments 

on the Affordable Care Act if you don’t mind. You said that is an 

example of the success of the Obama administration. Would you 

characterize that for us a little bit? 

Dr. MANDEL. Oh, absolutely. If, you know, I have been doing policy for years, and it used to be that when people sort of talk about 

the ineffectuality of Washington, they would talk about the inability to do healthcare reform. Now, whether or not you agree with 

particular details of the ACA or not, it is clear that it is healthcare 

reform that has substantially changed the system and broadened 

coverage, which I consider to be the single most important thing 

that can be done in terms of health care. So PPI, speaking for PPI 

67 

and speaking for myself, we strongly support the ACA and believe 

that it has been a real positive for the country. 

Mr. MCNERNEY. Well, and part of the reason for the success, I 

think you said, is the overregulation of the healthcare system before the ACA? 

Dr. MANDEL. So I, you know, I am not sure whether you had 

overregulation before the ACA. I think that we have had regulation 

of the healthcare system for many, many years under both Republican and Democratic administrations. And one of the things that 

has been a surprise for me as I have done this analysis is understanding that measures that were put in in health care that had 

really good intentions in terms of controlling costs, have ended up 

having perverse effects on productivity and costs going forward. 

And I am drawing the analogy in my testimony that you can almost think about our previous broadband regulation system and 

healthcare regulation as two poles. One, we had permissionless innovation, and the other one we have very permissioned innovation 

for many good reasons. And the investment growth has been far 

faster on the broadband side than on the healthcare side. And I 

just find it interesting and disturbing that we seem to be moving 

toward more regulation in broadband for good intentions without 

understanding that there is consequences for that. And the reason 

why I tried to draw the analogy with health care—— 

Mr. MCNERNEY. Thank you. I need to move on to some other 

questions. Thank you. 

Mr. Economides, you commented that investment decisions require long-term planning, and we are talking about investment decisions like the ones in the Internet service providers and so on. 

What kind of timeframes are we talking about here? 

Dr. ECONOMIDES. Well, most companies look a number of years 

ahead, 3 to 5 years, I would say. 

Mr. MCNERNEY. Three to 5 years? 

Dr. ECONOMIDES. Yes. 

Mr. MCNERNEY. How do changes in the regulation or otherwise 

changes in the market impact this planning, investment planning 

process? 

Dr. ECONOMIDES. Well, the demands for Internet services is 

growing. It is growing fast. So I expect that the telecom and cable 

companies will keep investing at a fast rate over time. Yes. 

Mr. MCNERNEY. Thank you. One other thing. Does the investment in other sectors, you mentioned that investment in other sectors of the Internet makes could make up for the lack or low investment in the ISPs. Could you expand on that a little bit? 

Dr. ECONOMIDES. Yes, sure. I think that what is going on under 

network neutrality is that we facilitate investment by applications 

and content companies, and we facilitate their operation. Their operation might not have a tremendous amount of investment, but it 

still has a lot of income generated and a lot of growth. 

For example, if you take Facebook, the investment of Facebook 

is nothing to do, very small compared to AT&T’s. But on the other 

hand, the amount of money it generates and the amount of people, 

the number of people it employees, and the impact on the economy, 

is huge. And it is crucial that we preserve the new Facebooks, the 

new Googles, to make sure that they get founded, they manage to 

68 

operate, they manage to grow, and they manage to be successful. 

That is very, very important. 

Mr. MCNERNEY. Thank you. 

Dr. Shapiro, you mentioned that without market failures, regulations can dampen growth. Is that right? 

Dr. SHAPIRO. In the absence of market failures, regulation tends 

to increase costs, and consequently reduce investment, yes. 

Mr. MCNERNEY. But with 4 million individuals commenting on 

the net neutrality ruling, doesn’t that indicate either a market failure or a fear of a market failure, which is almost the same thing 

as a market failure? I mean, that is one of the largest public inputs 

of any rulemaking process. 

Dr. SHAPIRO. Well, there are lots of issues that people feel very 

strongly about, Congressman, and enough to write in about and to 

comment about. And the Internet is integrated into all of our lives. 

I also think there is probably—well, this issue as on most issues, 

a lot of misinformation out. So, no, I can’t say that I think the public response is evidence of a market failure. A market failure has 

a particular meaning in economics, which is a set of conditions 

which induces companies to underinvest relative to a kind of optimal level of investment. 

Mr. MCNERNEY. But if 4 million people chime in on this and 

businesses mostly in favor of Title II regulation, that is a fear. That 

shows a lot of fear in my mind, which is a precursor to sort of a 

market failure. 

So at any rate, Mr. Chairman, I yield back. 

Mr. LATTA [presiding]. The gentleman yields back, and the Chair 

now recognizes the gentleman from Missouri for 5 minutes. 

Mr. LONG. Thank you, Mr. Chairman. 

Mr. Louthan, in your testimony, you assert: ‘‘We believe the 

move by the FCC to impose Title II regulation on the Internet is 

a mistake that ultimately harms consumers, restricts investment, 

and adds unnecessary cost and burdens to the industry.’’ 

So I say welcome to Washington. And to paraphrase Ronald 

Reagan: ‘‘We are from the Government. We are here to help.’’ 

Could you elaborate on how the imposition of Title II regulation 

harms consumers? 

Mr. LOUTHAN. It basically gets down to an opportunity cost. We 

have been living under this opportunity cost for a while with the 

net neutrality provisions in general. But when companies look at 

the potential say, OK, if I make an investment, what kind of revenue am I going to be able to generate from that and what kind 

of return am I going to get for that capital that I have gone out 

and asked small and large investors both to give to me to go out 

and invest? If you don’t see a revenue opportunity, you are not 

going to make that investment. 

One of the things that has had a tremendously positive impact 

on the industry is Google Fiber. Google Fiber came in, and that 

spurred additional competition. It showed where you could reduce 

regulation. The cities of Kansas City and Austin both reduced regulations substantially in order to incent that network build to be 

made, and then you saw the competitors step up and everybody has 

benefitted. I would argue that—and you specifically saw within 

that Google take specific steps for the products they sold to avoid 

69 

Title II regulation, particularly with their voice product that they 

had. 

I would argue that with Title II, you would not have seen that. 

Look at the success from the wireless auctions last year which were 

done, by the way, before Title II came out, and most industry assumed that they would not impose Title II. All of these things are 

benefiting consumers in the absence of this regulation. You put 

more regulation on, more restrictions, and then the potential for a 

tremendous number of regulations that complicate things, reduce 

the costs and returns on investment, that is a recipe for the phone 

companies and the cable companies just to do less. 

And just because you see them doing the same amount they did 

last year, doesn’t mean they could have been doing more in the 

first place and could have gotten even better, all of which would 

be new products and new services for consumers. 

Mr. LONG. OK, and staying with you, Mr. Louthan, in your testimony, you indicate the overhang from Title II regulations as well 

as the lighter net neutrality rules that preceded it have already 

been a drag on investment. 

Does less investment being mean that broadband networks are 

being build out more slowly or that consumers in less populated 

areas are experiencing slower broadband speeds as a result of these 

regulations? 

Mr. LOUTHAN. The current, I would say the impact from the current Title II regulations are really yet to be felt. The rate of change 

is very slow. However, over time, if you put more regulation and 

more burdens on companies, it is definitely more difficult for them 

to justify building out services. What can they provide? Can they 

provide video? Can they provide more data services? Could they 

provide different tiers of data services in order to attract different 

levels of consumers? All of these things would really play a difference. But I would argue that in general, the $60 billion to $65 

billion that the industry spends today is already restricted because 

of the net neutrality provisions and the fear of the future provisions from Title II. It could have been a lot higher. With the difference, we won’t really know unless we have I would say either 

a legislative solution to get rid of the up certainty. 

Mr. LONG. A lot of us represent a lot of rural areas in our districts. I represent 751,000 people. Can you elaborate on how you 

think consumer choice is being impacted by Title II regulation of 

the broadband services? 

Mr. LOUTHAN. To the extent that there are—those services are 

difficult and costly to provide. That is why we have services like 

Universal Service Fund and the new Connect America Fund, that 

should be very beneficial providing services to constituents such as 

yours, I would assume. If you take those, if you take additional 

costs from regulatory burdens, whether it is just a legal cost and 

the accounting cost—some of the large providers have 40- or 50- 

person staffs just to maintain the additional accounting costs for 

Title II—or you bring in price regulation or you limit how much 

that they can charge or resale of facilities—so a rural provider 

spends a lot of money to run facilities to a customer, and someone 

else can come in and undercut them and resell it—none of those 

are recipes for investment. And all of that would imply, you would 

70 

see investors would be less likely to commit capital to provide those 

services. 

Mr. LONG. I was going to ask you about a legislative solution, but 

you have already said that you think that would be a better approach to Title II regulation. If ‘‘the broadband industry is not as 

attractive to capital as it had been in the past,’’ quote-unquote, will 

the industry be able to generate the money it needs to increase 

broadband network speeds and reach? 

Mr. LOUTHAN. It will eventually. Technology itself will eventually 

increase the speeds because the cost of the equipment will come 

down over time. But I would argue it would not go up at the rate 

that we have seen in the past as some of the other witnesses have 

discussed. The rate of innovation and the rate of that is going to 

slow dramatically and that doesn’t help consumers or businesses or 

governments. 

Mr. LONG. Thank you. My clock has run out, and I yield back. 

Mr. LATTA. The gentleman yields back. 

And the Chair now recognizes the gentlelady from New York for 

5 minutes. 

Ms. CLARKE. Thank you, Mr. Chairman. 

I thank our ranking member. 

Mr. Louthan, I want to pick up on the line of questioning that 

my colleague just presented to you, but it takes a little bit of a different turn here. 

You have emphasized uncertainty as one of the overriding concerns as we examine the investment impacts of net neutrality and 

Title II regs. Given the climate of uncertainty that you have highlighted, are you advising your clients that common carriers in this 

current climate are an unwise investment? 

Mr. LOUTHAN. No, I am not because my mandate is generally 

about a 12- to 18-month view in the future. So in the next 12 to 

18 months, I don’t see a whole lot changing. I do believe it eventually goes to the Supreme Court. I am hopeful that some of the decisions to be made at the district court level the Supreme Court level 

that would clarify these rules and possibly throw out the Title II 

ruling either on procedural grounds or other reasons—for that 

manner, for the investment time horizon that I am mandated with, 

I don’t really see a whole lot that changes. 

And then, even if you leave, then if you go back to, well, what 

if it doesn’t get thrown out and they leave Title II with heavy forbearance? OK, well, then we sort of know what the rules are. But 

what I can tell you is a discount will be put on the returns that 

investors will expect on this industry. The amount of risk that they 

will assign to it will go higher because of the potential for let’s say 

down the road some of the things that the FCC is at least forbearing from now—— 

Ms. CLARKE. And at that point, you think it would be an unwise 

investment? 

Mr. LOUTHAN. I can’t say that at this point. 

Ms. CLARKE. OK. Some of the testimony we have heard today 

mentions the harms that can come from regulation, but the fact remains that three out of four Americans do not have a choice in 

high-speed broadband provider. That means these consumers have 

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ice. Ultimately, this is a consumer issue, not just an investment 

issue. 

So, Dr. Economides, do you agree that the FCC has a role to play 

to ensure robust broadband competition? 

Dr. ECONOMIDES. Yes, of course. The FCC is there to represent 

every part of the U.S. economy, including the consumers, and including the rest of the ecosystem, not just the telecom and cable 

companies. And it is important to create a level playing field in 

that respect. 

Ms. CLARKE. We have heard a lot today about the system working fine. Would you drill down a little bit more on the ecosystem 

because I think that that is a point that is missing in the conversation. 

Dr. ECONOMIDES. Sure. Well, I mean, the—let’s think of this 

problem, as I said in the very beginning, of paid prioritization. The 

whole problem which created in the end these rules started when 

AT&T said that we want to kill network neutrality. And they said 

we want to introduce paid prioritization. So this didn’t come out of 

nothing. It came from a move by AT&T. And paid prioritization 

means that if you pay, your information comes in first, and if you 

don’t pay, it comes last. And if this gap between first and last is 

long, then the company that is first has a big advantage and is 

willing to pay a lot of money to AT&T or Verizon or a cable company to make this happen. 

So, in a way, this is a way for the cable companies and the telephone companies to squeeze the sector which is the most innovative sector of the economy, which is the companies that live on the 

edge of the network, companies like the new Google, the new 

Facebook, the new whatever, that are right now given the advantage of relatively low prices, an equal playing field, and not having 

to deal specifically with a cable company or a telephone company 

before they actually provide the product. 

Ms. CLARKE. Very well. Some critics of net neutrality have equated the FCC’s new rules with repressive government attempts to 

censor information online. Dr. Economides, what is your response 

to these claims? 

Dr. ECONOMIDES. I find it hard to believe that the FCC will start 

censoring our information online. I think, in fact, the lack of net 

neutrality rules could have that effect because if the Wall Street 

Journal, for example, pays for prioritization but the New York 

Times doesn’t, then there is a skewing of the way the information 

comes through. So this is one of the concerns that has been expressed very extensively, a concern about the information not 

reaching everybody at the same time, a level playing field in political views, in newspaper distribution, and so on. 

Ms. CLARKE. Very well. Thank you very much for your responses. 

I yield back. 

Mr. LATTA. The gentlelady yields back. 

The Chair now recognizes the gentlelady from North Carolina for 

5 minutes. 

Mrs. ELLMERS. Thank you, Mr. Chairman. 

And thank you to our panel today. This has been a very, very interesting discussion. 

72 

Dr. Mandel, I would like to ask you a question. I know we were 

just talking about the economic ecosystem, and I have one for you 

as well. While much of the discussion is focused on investment of 

ISPs, it seems to me that there is also a logical connection to the 

investment decisions of the industries that touch providers. For example, I have a letter here from TIA, the trade association for 

equipment manufacturers, that was submitted to the committee 

that outlines their serious concerns with Title II approach. Can you 

walk us through how investment and business decisions by ISPs 

ripple through the economic ecosystem? 

Dr. MANDEL. Absolutely. We have a situation where the edge 

providers need investment in the networks in order to make their 

applications work right. And, actually, what has been happening 

over the last few years, applications have been needing more and 

more access to data. So you can think of these things as synergistic. And this is why I am very worried about the Title II because 

the degree to which it sort of slows investments as regulation to 

the networks, that ripples out in a negative effect to the app economy, which, you know, I am as big a supporter as anybody else is. 

So I see this all as one big ecosystem where if you sort of impose 

regulations on one part or you suppress innovation there, it actually has negative effects on the rest of the ecosystem rather than 

positive. 

Mrs. ELLMERS. So, basically, if I am understanding what you are 

saying, you know, we love innovation, and we love the fact that our 

technology universe is just expanding greatly, but at the same 

time, it can be its own enemy when it comes to the ability of investment and looking into the future. And we don’t want to hold any 

of those things back, correct? 

Dr. MANDEL. That is right. I also think what is important here 

when we talk about consumers is that consumers have done very 

well under the current system, which is the share of their spending 

going to communication services has barely risen over the last 15 

years, barely risen, despite all of the increase in data that they 

have been using. So, you know, it has worked for consumers. It has 

worked for the edge providers. It has worked for the ISPs. And it 

is a surprise to me that we are engaging in this prospective regulation to deal with a problem that doesn’t exist. 

Mrs. ELLMERS. I see. Thank you, sir. 

And, Mr. Shapiro, I believe you have already addressed this 

issue, but one more time, if you could please describe for us with 

the actions that the FCC has taken with the open Internet orders 

release, what you believe the effect is going to be on broadband and 

the effect of regulation on broadband investment. 

Dr. SHAPIRO. Right. All of our analysis leads us to conclude that, 

first of all, the effect will be negative. We know the direction of the 

effect. There will be less rather than more investment by ISPs. 

And, second, that the dimensions of that are very likely to be substantial, whether it is a reduction of 5 percent, or 10 percent, or 

15, or 20, we don’t know. We will have to see. And that will be an 

unfolding process. 

I think it is very important to recognize, however, that the innovations which we all value so greatly that have come out of the 

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vestment in Internet infrastructure. These investments, these innovations more and more are a result of the ability to tap into very 

large bandwidth and, you know, leading to telemedicine and teleeducation as well as all of the video applications, et cetera. All of 

that depends on the infrastructure investment. That is, it all comes 

after the infrastructure investment because it is not possible without it. And so, in taking steps, which all of the evidence should lead 

us to conclude will have a substantial adverse effect. We have to 

recognize that this is not—this is harming, in effect, the engine of 

innovation, which is the expansion of the infrastructure. 

Mrs. ELLMERS. So, I am just going to assume then that the comments that Dr. Mandel have made, that you agree with his assessment? 

Dr. SHAPIRO. Yes, I do. 

Mrs. ELLMERS. OK, great. Thank you, sir. 

And, Mr. Louthan, to you, just touching again on this same subject of how it affects the ecosystem, I believe from your testimony 

already, that you also believe that it will have a negative effect on 

investment and also the broadband network and speed of research 

and innovation. Is this correct? 

Mr. LOUTHAN. Yes, investment is already suppressed because of 

these things. And without the ability for companies to have new 

products and generate new revenue from the investment, they are 

just not going to spend more money to either—whether it is increasing speeds, extending the reach of the network, accelerating 

the pace of new technology invested in the network—none of these 

things will happen at quite the same pace that we have seen in the 

past when we had none of these rules and regulations and we saw 

no real harms. 

Mrs. ELLMERS. Thank you, sir, and I yield back the remainder 

of my time. 

Mr. LATTA. The gentlelady yields back her time. 

And the Chair recognizes for 30 seconds the gentlelady from 

California. 

Ms. ESHOO. I appreciate that, Mr. Chairman. 

There’s been much said about certainty, uncertainty today, and 

where we would find certainty would be in legislation; we have uncertainty because of what the FCC did about net neutrality. 

But I would ask you to consider the following and that is: it is 

the ISPs that went to court that created the uncertainty. So for 

those of you that have restated all of this uncertainty because of 

net neutrality, I would ask you to consider the facts that I just 

placed on the table. 

So thank you, Mr. Chairman. 

And thank you to all the witnesses. I think it has been an excellent hearing. 

Mr. LATTA. Thank you very much. The gentlelady yields back. 

And the Chair would ask unanimous consent to enter the letter 

that the gentlelady from North Carolina referenced. 

Without objection, we will enter that into the record, 

[The information appears at the conclusion of the hearing.] 

Mr. LATTA. And also I would also like to thank our panelists for 

being with us today. We really appreciate your testimony. 

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And on behalf of the gentleman from Oregon, the chairman of 

the subcommittee, and also the gentlelady from California, the 

ranking member of the subcommittee, and myself, I would like to 

thank you for being here today. 

And, without any further questions, the committee stands adjourned. 

[Whereupon, at 12:14 p.m., the subcommittee was adjourned.] 

[Material submitted for inclusion in the record follows:] 

PREPARED STATEMENT OF HON. G.K. BUTTERFIELD

Thank you, Chairman Walden for convening today’s hearing on common carrier 

regulation of the Internet. I understand and respect the FCC’s decision to regulate 

wired and wireless broadband Internet services under Title II. Unfortunately, in 

doing so, the FCC is now having to defend that decision in court. 

I knew that any move to regulate the Internet under Title II would be met with 

swift opposition. And that has proven to be true. 

So that’s why I have long advocated for a legislative solution that codifies the 

principles that Republicans and Democrats support without moving to more onerous 

Title II regulation. The two aren’t mutually exclusive. There is a path forward here. 

My position on Net Neutrality remains the same as it always has—I strongly support an open Internet where blocking, throttling, and paid prioritization are banned. 

I do believe that a legislative solution is the most prudent and practical way forward. Absent Congressional action, I worry about the perpetual uncertainty for investors and consumers alike. 

So, Mr. Chairman, I hope to work with you and our colleagues on both sides of 

the aisle to shape a bill that I, Ranking Member Eshoo, and others can support. 

When then-Chairman Henry Waxman put forward a legislative proposal dealing 

with an open Internet 5 years ago, he said that we must ‘‘break the deadlock on 

net neutrality so that we can focus on building the most open and robust Internet 

possible.’’ That statement remains very much true today. 

Thank you very much, Mr. Chairman. I will submit my questions for the record. 

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