Sunday, September 13, 2015

What is Slamming U.S. ISP Capital Investment?

With the caveat that some will dispute the figures, the second quarter of 2015 showed major dips in capital investment by the largest U.S. Internet service providers.

AT&T’s capital expenditure was down 29 percent in the first half of 2015 compared to the first half of 2014, according to Hal Singer, Progressive Policy Institute senior fellow.

Charter Communications capex was down 29 percent as well. Cablevision capex shrank 10 percent while Verizon’s capex dipped four percent.

Skeptics might argue the capital contraction is deliberate: a signal to regulatory officials that taking the profit or growth potential out of the business does have predictable negative effects.

Some have argued the major ISPs were bluffing; that faced with rising threats from competitors, the major ISPs could not afford to take their foot off the accelerator.

There have been very few times when industry capex declined year over year. A dip happened In 2001, after the telecom and Internet bubble burst.

Spending also shrank in 2009, after the Great Recession.

In every other year save 2015, broadband investment has climbed. The 2001 and 2009 contractions, plus the 2015 slowdown, could have the same drivers: expectations of reduced future revenue and reduced growth.  

Singer argues the reclassification of Internet access as a common carrier service is the best explanation for the rare capital reductions.

Others might suggest virtualization and open source are reducing the amount carriers have to invest. Others might suggest mobile network investment is declining (though that obviously does not explain why cable TV capex also has dropped).

Honestly, I would not have been surprised if capex remained flat or dipped only slightly, as my assumption would have been that competitive pressures would not allow the big ISPs to reduce pace.

We will have to watch for what happens in the balance of the year and next year.
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