Investing in America’s communications infrastructure

President-elect Trump has promised to lower taxes and strengthen America’s infrastructure.  To fulfill that dual commitment, private investment is essential.  It is particularly crucial for the communications industry on which most of the U.S. economy now relies.  Thus, one of the new administration’s most important economic tasks will be to ensure that the right incentives are in place to encourage investment in America’s broadband infrastructure.

Of course, a well-designed lower tax structure is itself critical to stimulating investment in all sectors of our economy.  It can free up cash flow that companies can invest.  Best of all, it can help the U.S. compete globally by making America the most attractive place to do business. 

{mosads}The communications industry already invests heavily in its infrastructure.  It has invested nearly one and a half trillion dollars over the last two decades, with more than half that capital coming through AT&T and Verizon and the rest through hundreds of other wired and wireless broadband providers.  The keys to attracting even more private capital to this industry are a new Communications Act and a new regulatory environment that recognize and encourage the vibrant competitive forces that drive the communications ecosystem today. 

The last time the Communications Act of 1934 was updated was in 1996.  That update opened markets that were monopolies by law to competition.  At that time, according to Federal Communications Commission (FCC) statistics, 94% of households bought plain-old-telephone service (POTS) from the incumbent provider and 24% combined it with wireless, 89% of those who bought multichannel video service did so from the cable incumbent and the rest from satellite, and Internet service was such a gleam-in-the-eye that the FCC didn’t even measure it. 

Thanks to the Telecommunications Act of 1996 and a lighter-touch regulatory environment that prevailed until very recently, those numbers have changed radically.  Today, according to the CDC, 90% of households use one or more wireless providers.  Less than a quarter of U.S. households use POTS and less than 5% do so exclusively.  For video, according to the FCC, 99% of households have a choice of three different multichannel video providers, and more and more households supplement or replace those choices with online video.  Leichtman Research Group shows that as of year-end 2015, 48% of adults streamed video monthly and 77% of 18 to 24 year-olds did so.  An increasing number of households, especially young households, are cutting the cord.  Any of these communication and entertainment services are very likely to be acquired—for pay or free—from a non-traditional supplier rather than the traditional incumbent provider of that service. 

Today’s consumers have made it clear that they are individuals who want options they can tailor to fit their various preferences.  They use wired and wireless voice, data, and video services in ways that are interchangeable according to their specific needs at any given moment.  The consumer who still wants to make a voice call can choose among POTS, voice-over-IP, and wireless.  It is more likely, however, that the communication will be a text or email to an individual or a social media posting of text or video to a larger audience.  In each case, there is a choice among numerous platforms, traditional or over-the-top.   There are myriad of means of self-expression, from just about any location in this country. 

The world of entertainment is similarly moving to a consumer-centric model that allows families and individuals to watch what they want, when they want, over any of several fixed or wireless platforms.  They can also become active participants in the entertainment ecosystem.  Interactive gaming connects individuals around the globe even as it amuses them.  Online videos posted by millions of people around the globe not only connect strangers, but in some cases create new entertainment stars.  

The Telecommunications Act of 1996 was designed to bring competition into a sector that gave consumers few or no choices in communication or entertainment.  Today, consumers have myriad choices and a new Communications Act needs to take that fact as its baseline.  Instead of focusing on the old, irrelevant classifications, the new Act should invite investment in the infrastructure that is the foundation of the entire communications ecosystem. The new Act must be flexible enough to foster innovation rather than calcification.

Similarly, any agency that regulates this industry needs to respect consumers’ own choices, rather than substituting its preferences for theirs.  It should empower rather than imperil the overwhelmingly popular marriage of mobile and video.  Instead of regulating prices, it should encourage innovations such as tiered prices, free data, skinny video bundles, and any other experiments that increase the options available to individual consumers.  Rather than forcing a one-size-fits-all mold that reflects regulators’ ideologies, it should embolden innovation in service design.  Above all, it should let consumers pick winners and losers.  The resulting high-growth environment will, in turn, entice even more investment in both broadband infrastructure and the services and applications that ride on it.

The best way to unleash investment in the communications sector is to allow the market to evolve freely in response to consumers’ will.  The new Administration and the new Congress have the opportunity to create communications law and regulation that look at the communications ecosystem as a whole, recognize that it is already highly competitive, and focus on providing the flexibility necessary for the innovations that will provide Americans with ever-more choices.

Anna-Maria Kovacs, Ph.D., CFA, is a Visiting Senior Policy Scholar at the Georgetown Center for Business and Public Policy. She has covered the communications industry for more than three decades as a financial analyst and consultant.