Opinion

Look who’s profiting

Steve Pociask President, American Consumer Institute
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Various special interest groups have charged, albeit without evidence, that Internet Service Providers (ISPs) are exercising market power by setting prices substantially above costs and earning high profits.

Google made this case when it responded to the Federal Communications Commission’s Net Neutrality Notice of Inquiry in 2010.

However, by focusing on market power of ISPs, Google has only called attention to itself.

Years ago, former FCC Chief Economist and Wireline Bureau Chief Larry Darby provided empirical evidence concluding that there is nothing of consequence with ISPs that would require regulations to remedy and, in fact, his evidence showed that Google was significantly more profitable than the ISPs.

Another study I coauthored with Dr. Darby and Professor Fuhr, found that network companies reinvested 64% of their cash flow back into the network, while taking 14% as profits. In contrast, non-network companies (including Google) investing only 28% of cash flow back into the economy, while retaining 49% of the cash as profits, according to the study.

We have updated 2012 results and found that Google invested only 20% of their operating cash flow, while taking 64% in profits. While Internet Service Providers have continued to plow most of its cash back into their network, it took 16% of profits as a percent of operating cash flow. In terms of profits as a percent of revenue, Google earned 21% in 2012, compared 4% for the network companies.

Well, call the kettle black.

So where do network companies’ put their cash? The chart below shows capital expenditures for 2012 for the major network companies. Last year, these companies plowed nearly $60 billion in investment into their networks and infrastructure. That investment required approximately 860,000 jobs directly or indirectly in deployment, plant and equipment.

American ISPs invested $1.2 trillion from 1996 to 2011 building and maintaining advanced broadband networks. That’s more than six times the amount spent on the U.S. space shuttle program. In comparison, Google’s market capitalization, around $290 billion, is far greater than any network company, yet its 2012 capital expenditures were only $3.3 billion.

  

2012 Cap Ex (in Millions)

 
AT&T

$19,680

Verizon

$16,175

Comcast

$5,714

Sprint/Nextel

$4,261

Time Warner Cable

$3,095

DirectTV

$2,960

CenturyLink

$2,919

Cablevision

$1,075

DISH

$958

US Cellular

$826

MetroPCS

$817

Total

$58,480

 
Jobs (Direct&Indirect)

860,000

What does this say about market power? Economists most commonly quantify market power by measuring the extent to which prices are above costs (profits). Based on this measure and the data from financial reports, as well as the work done by Dr. Darby and other economists, there is no evidence of market power among the ISPs.

This means that these unsupported calls for regulatory remedies by Google and special interest groups are unnecessary and potentially costly to consumers.

Over the last decade and a half, a new “Internet ecosystem” has developed in which all of the companies involved in making the Internet what it is – network services providers, application makers, device manufacturers, online content, search and services companies like Google, and operating system makers – both compete and collaborate in offering an array of services and products to consumers.

Industry competition is quite dynamic and it cuts across these many industries. That is a good thing; competition fuels innovation and ultimately leads to lower costs and better services for consumers. New regulations, like those proposed by Google, would only upset the balance of the “ecosystem” by favoring certain players.

Just consider this, while people are increasingly using mobile services for everything Internet-related, more than 80 percent of consumers have a choice of more than five wireless Internet providers, a figure that doesn’t even include virtual and prepaid services.

Communications services are also being offered by cable, telephone and satellite providers, as well as Vonage, Microsoft’s very popular Skype service and Google’s services. This inter-industry competition is great for consumers.

Given the growing allegations against Google, we can’t understand why they would want to wish regulatory misfortune on their potential competitors. In fact, if Google is looking for evidence of market power, they may want to begin its search with some self-inspection.

Steve Pociask is president of the American Consumer Institute Center for Citizen Research, a nonprofit educational and research institute. He is a member of the FCC’s Consumer Advisory Committee. For more information, visit www.theamericanconsumer.org.