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Democracy & Technology Blog Warnings to lawmakers who are contemplating new regulation of telecom and cable firms

A group of Wall Street analysts provided key advice to the Senate Commerce Committee at a hearing Mar. 14th. The following excerpts are drawn from both oral and written testimony (emphasis added throughout).
In a nutshell, the consensus is that the investment outlook for broadband is somewhere between uncertain and bleak. Net neutrality or a la carte regulatory mandates would make the outlook worse.

“As media consumption over the Internet develops at a rapid pace, I believe that it is too early to introduce regulation on key issues such as a la carte packaging and pricing and on net neutrality as the market is still in its early stages. In fact, the broader media and communications sector is perhaps at its most dynamic stage of its evolution as media content is available across multiple platforms under various pricing structures. Changes are occurring at such a frenetic pace that any possible regulation today carries a risk of stunting this innovation if it does not build in enough flexibility for the complexion of the sector in the coming years, if not months….

Mr. Aryeh B. Bourkoff
Managing Director, Media – Cable & Satellite, Entertainment Equity & Fixed Income
UBS Investment Research

“Relative to telecommunications, we believe that Wall Street’s biggest desire is to minimize the need to constantly re-evaluate the role of regulation in its investment decisions. We have enough to worry about in considering the rapidly changing competitive and technological environment. In other words, we want regulatory stability and certainty….
“I think it is important that we agree now that we can’t imagine what will happen over the next ten years. It is then critical that any new regulatory framework takes this uncertainty into account and is sufficiently flexible.”

Mr. Kevin M. Moore, CFA
Managing Director, Telecommunications Services Equity Research
Wachovia Securities

The capital markets see a bleak future for network operators. Cable stocks have suffered five years of valuation declines relative to the broader market. Telecommunications firms like Verizon and AT&T have been given similar treatment. Comcast’s stock is punished every time the company’s management even mentions the words “capital investment….
“Wall Street harbors grave doubts about the ability to earn a return on network investments. Excessive competition and an uncertain regulatory environment are dampening capital formation and slowing the pace of investment. That investment is critical though because despite a great deal of arm waving from visionaries, our telecommunications infrastructure today is woefully unprepared for the widespread delivery of advanced services, especially video, over the Internet….
“Downloading a single half hour television show on the web consumes more bandwidth than does receiving 200 e-mails a day for a year. Downloading a single high definition movie consumes more bandwidth than does the downloading of 35,000 web pages and it’s the equivalent of downloading 2300 songs off of Apple’s iTunes website. Today’s networks simply aren’t scaled for that kind of usage….
“Mandated net neutrality would further sour Wall Street’s taste for broadband infrastructure investments, making it increasingly difficult to sustain the necessary capital returns. It would likely mean that consumers alone would be required to foot the entire bill for whatever network investments do get made. Conversely, from a Wall Street perspective, allowing a multiplicity of payers , that is , advertisers, or web services providers, to support network investments would greatly bolster the business case and would offer the prospect of better returns and more consumer choice in the end.”

Mr. Craig E. Moffett
Vice President and Senior Analyst
Sanford C. Bernstein and Co., LLP

“…there is a high degree of skepticism that the substantial investment
underway at the ILECs to build broadband networks to the home will deliver a satisfactory return
on the incremental investment.
It is true that sometimes investors can be too skeptical, and it
seems that telecom investors have become extremely risk-adverse. However in the case of
broadband access network investments, the skepticism seems entirely rational given that there
has yet to be a proven business model
. Memories of the telecom meltdown that started in 2000
and resulted from the big spending programs of the late 1990s which proved to be based on
entirely misplaced hopes and business models contribute to the skepticism. The big question is
whether carriers’ plans are more realistic and achievable this time around. It a question for
which one could make either a positive or negative argument, and the answer will come only
with time, and thus the caution.”

Mr. Luke T. Szymczak
Vice President
JPMorgan Asset Management

Hance Haney

Director and Senior Fellow of the Technology & Democracy Project
Hance Haney served as Director and Senior Fellow of the Technology & Democracy Project at the Discovery Institute, in Washington, D.C. Haney spent ten years as an aide to former Senator Bob Packwood (OR), and advised him in his capacity as chairman of the Senate Communications Subcommittee during the deliberations leading to the Telecommunications Act of 1996. He subsequently held various positions with the United States Telecom Association and Qwest Communications. He earned a B.A. in history from Willamette University and a J.D. from Lewis and Clark Law School in Portland, Oregon.