Verizon won’t be using tax cut to boost spending on network upgrades
FCC Chairman Ajit Pai's claim that repealing net neutrality rules will boost network investment didn't get much support from Verizon's latest spending forecast. Verizon's network spending won't change much this year, and the company also won't be using its newfound tax savings to upgrade its broadband networks.
Verizon reported $17.2 billion of capital expenditures in calendar year 2017, with the net neutrality rules in place the entire year. In 2018, with the net neutrality rules about to come off the books, Verizon says its spending will come in slightly below or above that. Even at the high end of Verizon's forecast, the spending would not exceed its total of $17.8 billion in 2015, another year in which net neutrality rules were in place.
"Capital spending for 2018 will be in the range of $17.0 billion to $17.8 billion, including the commercial launch of 5G," Verizon said today in an announcement of its year-end financial results.
Additionally, the corporate tax cut that was supposed to create new jobs will go toward boosting Verizon's profit margin.
"Tax-reform legislation will have a positive impact to cash flow from operations in 2018 of approximately $3.5 billion to $4 billion," Verizon said.
Verizon promised that employees will "share in the company's success." But the tax savings "will be used primarily to strengthen Verizon's balance sheet."
The FCC's net neutrality rules prohibit home and mobile broadband providers from blocking or throttling traffic and ban paid prioritization deals that would let some online services pay ISPs for better access to Internet users.
Pai has repeatedly claimed that net neutrality rules crippled network investment in the US and that last month's vote to repeal them will trigger a big increase in investment and bring broadband to more people.
But capital investments often fluctuate from year to year based on technology upgrade cycles and customer demand, so a small decrease shouldn't automatically be attributed to a specific government policy. Advances in technology can also lower the cost of building and upgrading networks. But Pai dismissed data that contradicted his claim and was undeterred by the fact that ISPs told investors that the rules didn't harm their investment plans.
Verizon spending goes up and down
Verizon's investments over the past few years have gone up and down, with some of the increases happening while net neutrality rules were in force. The first version of net neutrality rules was in place from 2011 to 2013, and Verizon's annual capital expenditures rose from $16.2 billion in 2011 to $16.6 billion in 2013.
Those rules were thrown out by a court decision in January 2014 that was spurred by a lawsuit filed by Verizon against the FCC.
Verizon's network spending rose again to $17.2 billion in 2014, reflecting "capital to fund advanced networks and services, including 4G LTE and FiOS." Verizon's annual reports didn't cite the net neutrality court decision as a reason for the spending boost. In fact, Verizon said its capital expenditures in 2014 would decline as a percentage of revenue.
Verizon's year-end 2014 annual report claimed that the FCC's then-pending plan to reinstate net neutrality rules "could depress long-term capital investment in infrastructure, discourage innovation in broadband Internet and related services, and cost the economy thousands of middle-class jobs."
But the FCC voted to re-implement a stronger version of the net neutrality rules in February 2015, and Verizon boosted its spending to $17.8 billion on capital expenditures in 2015.
Verizon capital spending dropped to $17.1 billion in 2016, but the annual report didn't attribute that to the net neutrality rules. Verizon said it was continuing to upgrade its wireless and fiber networks but that "the level and the timing of the Company's capital expenditures within these broad categories can vary significantly as a result of a variety of factors outside of our control, such as material weather events." The company has "significant discretion over the amount and timing of our capital expenditures," it added.
As mentioned earlier, Verizon's capital spending remained steady in 2017 at $17.2 billion, despite the presence of net neutrality rules.
Now we come to 2018—a year in which Verizon should increase its capital spending significantly if Pai is correct. As we already noted, Verizon would spend less than it did last year if it comes in at the low end of its forecast of $17.0 billion to $17.8 billion. In the middle range of Verizon's forecast, the network spending would hit $17.4 billion, less than the total in 2015 when net neutrality rules were in place.
If Verizon spends at the high end of $17.8 billion, it would merely match its highest annual capital spending total from when net neutrality rules were in place.
"We're not seeing that sort of capital intensity that some were assuming," Verizon CEO Lowell McAdam told investors today, according to a Seeking Alpha transcript. It turns out that "the number of incremental sites that you need over a densified 4G network is much smaller than we had expected," McAdam said. For the year ahead, Verizon does not "see any upward pressure" on capital spending, he said.
Comcast investment remains steady, too
The steady investment levels match what we see from Comcast, the nation's largest home Internet provider. Comcast recently said that it will invest more than $50 billion in infrastructure over the next five years because of the repeal of net neutrality rules and the new tax overhaul.
But as we detailed, Comcast was on pace to hit $50 billion over the next five years even before the repeal and tax cut.
The FCC is preparing to release its latest analysis of US broadband deployment. Pai claimed that the report will show "that the pace of both fixed and mobile broadband deployment declined dramatically in the two years following the prior Commission's Title II [net neutrality] Order."
But so far, the FCC has released only a fact sheet describing the report, and the fact sheet provides no data to back up that claim. The fact sheet also provided no data to back up Pai's claim that deployment is now "headed in the right direction" because of the net neutrality repeal. (Technically, the repeal is still in process because the rules are on the books until 60 days after publication in the Federal Register.)
Net neutrality proponents have been frustrated that Pai focused his repeal argument almost entirely on investment trends despite ambiguous data and the fact that network expenditures aren't the only measure of whether net neutrality rules benefit society.
"You only seem to talk about it in relation to ISP investment," US Rep. Michael Doyle (D-Penn.) told Pai before the repeal vote. "I'm concerned that maybe you just don't get it: the Internet isn't just an ISP's connection to the consumer, it's a vast array of networks, services, and applications. Ignoring the rest of the ecosystem is to ignore the part of the Internet that is the most vibrant and innovative."
Repealing rules because of minor fluctuations in capital expenditures "will hurt small businesses, regular people, and some of the most innovative sectors of our economy," Doyle said.
Besides that, the argument that investment dropped because of net neutrality rules is not supported by evidence, FCC Commissioner Mignon Clyburn said.
"Even a Statistics 101 student knows that correlation does not equal causation," Clyburn said in her dissent last month. "Simply identifying an effect lends no insight into what caused it. So, too, with capital expenditures. To suggest that net neutrality rules shifted billions of dollars in capital beggars the imagination, and the record offers no proof that investment trends match the regulatory landscape."