Picking Winners and Losers by Regulation

News about Google’s toe-in-the-water experiment with actually running a broadband network has generated some headlines recently, and for good reason.  In 2010, a study that I co-authored with Professors Larry Darby and Joseph Fuhr showed that network companies created twice as many jobs and invested twice as much, dollar for dollar, compared to non-network (edge) IT companies like Google.  While networks created more jobs and investment relative to cash flows, edge companies historically made significantly more profits.  The study’s conclusion was clear – stimulating network investment is a better way to create jobs, and shifting value from the core to the edge produces fewer jobs.  The study also showed that net neutrality regulations would be the wrong medicine for the ailing job market.

If you want to stimulate job growth, policymakers should encourage network investment.  To this end, some have proposed giving network operators tax breaks, reducing operating fees and allowing for the expensing of investments.  The idea is to build a faster and cheaper network which will fuel application providers and benefit consumers. 

Kansas City has decided to create incentives for network investment, but the irony is that Google would be the sole beneficiary.  When the deal was announced, Google, a strong proponent of net neutrality, promised to open its networks to competitors and build a high-speed broadband network.  In its agreement with Kansas City, Google had certain fees waived and other city-paid benefits, unlike its competitors.  As for “open networks,” Google has since changed its mind, probably seeing for the first time how rules like “net neutrality” that pick edge providers as “winners” over network providers actually impede investment. 

What were in Kansas City’s policymakers thinking?  If the idea was to provide competition, the city’s plan fails miserably, since it doles out favorable terms to one competitor and not the others.  If the idea was to create jobs, the city’s policymakers picked an interesting candidate in Google, as the following analysis will show.

Updating the data in the 2010 study, there are interesting differences between Google and the largest telephone, cable and wireless companies.[1]   Network infrastructure companies produce about 60% more jobs per billion dollars of revenue compared to Google.  Because of high infrastructure costs, network companies have lower cash flow and profits, but they invest much more.  In fact, Google takes 67% of its cash flow as profits, compared to 11% for network companies; and, in terms of capital expenditures, it invests much less into the economy.  The table below summarizes these results for 2011. 

These data provided here agree with the earlier findings of the 2010 study – Internet regulations and other barriers to network deployment threaten job creation by shifting opportunities, incentives and earnings prospects away from the core providers who generate the largest number of jobs and the most investment.  On balance — taking into account their net impact – Internet regulations are likely to destroy more investment and jobs in the core than they will create at the edge.

While Google wishes regulation on its competitors, its decision to not open its networks is more proof that net neutrality rules and other regulations that disfavor investment would do more harm than good.  Policymakers that use regulations and tax incentives to pick winners and losers are not helping competition or consumers, and they are certainly not creating more jobs.  

Steve Pociask is president of the American Consumer Institute Center for Citizen Research, an educational and research nonprofit organization.