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The FCC should pay attention to the overall economy

Posted January 21st, 2016 in AT&T, Broadband, capital, economy, Verizon, Wall Street and tagged , , , , by Alton Drew

Yesterday at the World Economic Forum in Davos, Switzerland, AT&T chief executive officer Randall Stephenson shared with The Wall Street Journal his opinion on economic growth. Mr. Stephenson shared that he is not optimistic about growth in the economy. Expected growth of two percent is unacceptable, according to Mr. Stephenson. Tax policy changes are needed but there is no expectation that there will be any fiscal action this year.  Without fiscal action there is the potential of more downside than upside.

Mr. Stephenson added that lower oil prices were expected to lead to increased consumer spending but that has not panned out because consumers have been price conscious about mobile services. Discounts as  little as ten dollars could prompt a consumer to change mobile carriers.

There has been little if any evidence that the Federal Communications Commission is taking into account the state of the economy and its impact on consumer demand for broadband services. In comments before the Brookings Institution, FCC chairman Tom Wheeler argued that the success of broadband services leads to increases in demand for broadband which increases the incentive for competitive broadband.

Mr. Wheeler might not buy AT&T’s argument that lack of national economic growth is constraining carriers like AT&T. Mr. Wheeler believes that 75% of AT&T’s network will be controlled software by 2020. The replacement of hard physical switching systems by software is expected to reduce Verizon’s real estate costs by 80%, according to Mr. Wheeler. Powering a few computers can save up to 60% of energy costs versus endless hard switches, according to Mr. Wheeler. As the cost of delivering broadband goes down, says Mr. Wheeler, the opportunities for innovation increase. “This means we’re not going to let imaginary concerns about investment incentives and utility regulation cause us to let up on policies to encourage fast, fair, and open broadband.”

If the concerns are imaginary then maybe equity analysts are sleep deprived. We shared in a 28 December 2015 post that analysts believed that the wireless industry participated in a competitive market. The large wireless service companies are subject to pricing squeezes brought on by smaller entrants, analysts found, and extremely high prices for spectrum were further compounding pricing squeezes.

The reality of market concerns are further highlighted when one considers how much the information sector impacts gross domestic product. According to the U.S. Bureau of Economic Analysis, the information services portion of the economy has been playing an increasing role over the last three years. Information represented 9.3% of gross domestic product in 2013. By 2014 this percentage increased to 9.5%. At the end of the third quarter in 2015 the percentage has climbed to 9.6%.

Given Wall Street’s assessment of wireless markets and the impact information services plays on the overall economy, the FCC should look beyond the switch to software-based communications infrastructure when ascertaining the competitiveness.

 

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