Telco-Funded Phoenix Center Flip Flops on Net Neutrality

Free Press attempted to insert a little sanity into the debate by offering a paper that used real market data to clear up the rhetoric around Net Neutrality and investment. Finding the Bottom Line: The Truth About Network Neutrality and Investment showed, contrary to industry claims, that open-internet rules are unlikely to have a negative impact on investment in network markets, and likely to positively impact investment in the applications market.

Now that report has come under fire from the Phoenix Center — an industry-funded “think tank” that operates as a mercenary research arm for AT&T and other phone companies. It claims our report is based on “flimsy analysis.” But the only thing flimsy here is Phoenix’s credibility.

Phoenix is notorious in D.C. for its stunning reversal of opinion on telecom policy, a flip-flop that just happened to coincide with the change in views of its major industry benefactors following the 2005 mergers of AT&T with SBC and of Verizon with MCI. In 2004, Phoenix authored an Op-Ed titled “Net Neutrality: Now More than Ever.”

Now it’s sliming those who have actually and consistently pursued the goal of enacting strong Net Neutrality rules.

What we actually said

The Phoenix Center’s entire argument is that the Free Press report attributed “all change in [AT&T’s] investment to the single voluntary merger commitment on network neutrality.” The problem is, the report never made any such claim.

Finding the Bottom Line did make three major points:

1. The claims by phone and cable companies and their lobbyists that the FCC’s proposed Network Neutrality rules would be “catastrophic” for investment represent a wildly over-simplistic characterization of what factors actually influence capital expenditure decisions.

As the paper stated: “Investment decisions are driven primarily by six factors: expectations about demand; supply costs; competition; interest rates; corporate taxes; and general economic confidence — making the overall decision to invest a complex process that is highly dependent on the specific facts of a given market. It is simply wrong to suggest that network neutrality, or any other regulation, will automatically deter investment.”

2. AT&T did not lower its amount of investment while operating a non-discriminatory network under conditions imposed to complete its 2006 merger with BellSouth. In fact, during this period when the FCC obligated it to respect Net Neutrality, AT&T actually increased its capital expenditures, both in gross dollar terms and as a percentage of revenues.

The paper did not in any way, shape or form suggest that this increase was due — in whole or in part — to the Net Neutrality obligations. The paper merely pointed out that the “review of AT&T’s investments over those two years shows quite clearly that a strict network neutrality rule did not in any way deter investment.”

3. The claims that Net Neutrality will harm investment are just an offshoot of the general dogma that any and all regulations are bad for investment. But the relative investment levels of the incumbent phone companies rose substantially during the time when these companies were subjected to very strong regulations stemming from the 1996 Telecom Act.

Prior to 2006, those regulations were strongly supported by … the Phoenix Center!

Anyone who reads the Free Press report can see that the Phoenix Center is simply punching at ghosts.

Follow the money

Anything the Phoenix Center says should be viewed with a hefty dose of skepticism given its track record that lacks integrity and intellectual honesty.

Prior to the 2005 mergers of AT&T-SBC and Verizon-MCI, Phoenix was essentially a research division of the old AT&T, which was then a competitor to the local monopoly phone companies.

The theme of Phoenix’s work at the time largely reflected the typical CLEC (competitive local exchange carrier) policy priorities: strong support for unbundling and open-access regulations; opposition to telco mergers; strong support for more regulation in the Bell-dominated special-access market; strong support for more intra-modal platform competition; the belief that the 1996 Act’s regulations would lead to a large increase in investment; and the belief that unbundling increases broadband deployment, among others.

But shortly after the 2005 mergers, Phoenix changed its tune.

All of a sudden, the very same regulations it had once championed were now all bad. Unbundling and open access were now no longer good for investment and broadband deployment. Special access regulations, which Phoenix used to say were needed, now were harmful. And while we used to need Net Neutrality “now, more than ever,” this policy was now the worst thing in the world.

When previously confronted with this shaky track record, Phoenix Center’s president had this to say: “Everyone has to make a living in this town… The point is, go and look at the work.”

Nice work if you can get it

So let’s just go look at some of the Phoenix Center’s work prior to the 2005 mergers. You’ll see titles such as:

Net Neutrality: Now More than Ever

The Positive Effects of Unbundling on Broadband Deployment

The $10 Billion Benefit of Unbundling: Consumer Surplus Gains from Competitive Pricing Innovations

Reconcentration of Telecommunications Markets After the 1996 Act: Implications for Long-Term Market Performance

Set It and Forget It? Market Power and the Consequences of Premature Deregulation in Telecommunications Markets

A Fox in the Hen House: An Evaluation of Bell Company Proposals to Eliminate their Monopoly Position in Local Telecommunications Markets

Getting Their Wires Crossed: The FCC’s Plan to Unshackle the Baby Bells is Bad Policy Based on Bad Economics

Will Anyone Stop Big Phone?

Higher Prices Expected from the Cingular/AT&T Wireless Merger

Spend a few hours reading the Phoenix Center’s pre-2006 work, and you’ll come away with the impression that it strongly supports open networks because these policies promote competition and investment. It also thought reconstructing the old Bell monopoly on local and long-distance service was a very bad idea.

But after its financial backers were swallowed up by the same monopolists, the organization switched sides.

For Net Neutrality before it was against it

It’s hard to square the Phoenix Center’s pre-2006 pro-Net Neutrality statements with their anti-Net Neutrality statements made after the mergers.

For example, it used to claim that “unless policies are put in place to constrain this inevitable discrimination, we will be back to the old AT&T vertically-integrated monopoly — on a regional, not national, basis — and without the tight government constraints that once prevented price gouging and service interruptions.”

Now it says: “Network neutrality regulation has, at best, ambiguous welfare effects and, at worst, is decidedly anti-consumer.”

This is just one example among many on issues where the Phoenix Center’s not-so-scholarly work stood in direct conflict, depending on where the old and new AT&T stood.

Yes, this is DC, where the masses have become quite cynical of the role of astroturf and think-tanks. Yet among those who act as industry mercenaries, Phoenix is alone in its unabashed loyalty to whatever AT&T believes is good public policy.

While most coin-operated think tanks produce work that opposes any and all regulations, the Phoenix Center has carved out a special niche, serving the narrow interests of AT&T, even if that means jettisoning all appearances of intellectual integrity.