[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]




 
     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
                           
                           
                           
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]                           
                           
                           



      Printed for the use of the Committee on Energy and Commerce

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                    COMMITTEE ON ENERGY AND COMMERCE

                          FRED UPTON, Michigan
                                 Chairman

JOE BARTON, Texas                    FRANK PALLONE, Jr., New Jersey
  Chairman Emeritus                    Ranking Member
ED WHITFIELD, Kentucky               BOBBY L. RUSH, Illinois
JOHN SHIMKUS, Illinois               ANNA G. ESHOO, California
JOSEPH R. PITTS, Pennsylvania        ELIOT L. ENGEL, New York
GREG WALDEN, Oregon                  GENE GREEN, Texas
TIM MURPHY, Pennsylvania             DIANA DeGETTE, Colorado
MICHAEL C. BURGESS, Texas            LOIS CAPPS, California
MARSHA BLACKBURN, Tennessee          MICHAEL F. DOYLE, Pennsylvania
  Vice Chairman                      JANICE D. SCHAKOWSKY, Illinois
STEVE SCALISE, Louisiana             G.K. BUTTERFIELD, North Carolina
ROBERT E. LATTA, Ohio                DORIS O. MATSUI, California
CATHY McMORRIS RODGERS, Washington   KATHY CASTOR, Florida
GREGG HARPER, Mississippi            JOHN P. SARBANES, Maryland
LEONARD LANCE, New Jersey            JERRY McNERNEY, California
BRETT GUTHRIE, Kentucky              PETER WELCH, Vermont
PETE OLSON, Texas                    BEN RAY LUJAN, New Mexico
DAVID B. McKINLEY, West Virginia     PAUL TONKO, New York
MIKE POMPEO, Kansas                  JOHN A. YARMUTH, Kentucky
ADAM KINZINGER, Illinois             YVETTE D. CLARKE, New York
H. MORGAN GRIFFITH, Virginia         DAVID LOEBSACK, Iowa
GUS M. BILIRAKIS, Florida            KURT SCHRADER, Oregon
BILL JOHNSON, Ohio                   JOSEPH P. KENNEDY, III, 
BILLY LONG, Missouri                 Massachusetts
RENEE L. ELLMERS, North Carolina     TONY CARDENAS, California7
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

             Subcommittee on Communications and Technology

                          GREG WALDEN, Oregon
                                 Chairman
ROBERT E. LATTA, Ohio                ANNA G. ESHOO, California
  Vice Chairman                        Ranking Member
JOHN SHIMKUS, Illinois               MICHAEL F. DOYLE, Pennsylvania
MARSHA BLACKBURN, Tennessee          PETER WELCH, Vermont
STEVE SCALISE, Louisiana             JOHN A. YARMUTH, Kentucky
LEONARD LANCE, New Jersey            YVETTE D. CLARKE, New York
BRETT GUTHRIE, Kentucky              DAVID LOEBSACK, Iowa
PETE OLSON, Texas                    BOBBY L. RUSH, Illinois
MIKE POMPEO, Kansas                  DIANA DeGETTE, Colorado
ADAM KINZINGER, Illinois             G.K. BUTTERFIELD, North Carolina
GUS M. BILIRAKIS, Florida            DORIS O. MATSUI, California
BILL JOHNSON, Missouri               JERRY McNERNEY, California
BILLY LONG, Missouri                 BEN RAY LUJAN, New Mexico
RENEE L. ELLMERS, North Carolina     FRANK PALLONE, Jr., New Jersey (ex 
CHRIS COLLINS, New York                  officio)
KEVIN CRAMER, North Dakota
JOE BARTON, Texas
FRED UPTON, Michigan (ex officio)

                                  (ii)
                                  
                                  
                                  
                                  
                                  
                             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

----------
\1\ The 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.


     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 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:]

                 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 marketplace. 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 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 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 models 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 already 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.

    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 
forward-thinking 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.

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.
    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 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:]
    
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]   
    
    
    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 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 negative. 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:]
    
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]   
    

    [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.]
    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 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:]
   
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]   
   
    
    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.
    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.
    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----
    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 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 high-speed 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 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.
    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 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 
clarity. 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 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.
    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?
    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.
    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.
    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 bottom-line 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.
    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 you elaborate on some of what you observed in the 
relationship between 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 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 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 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 
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 nowhere to go if they are not satisfied with their 
broadband service. 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.
    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 Internet are all ultimately based on robust, fast-
rising levels of investment 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 tele-education 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.
    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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