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AT&T Deregulation Wallops Californians In Their Wallets; Rates Up 222%, Despite Competition Claims

special reportStop the Cap! reader Steve L. has heard enough of AT&T’s promises that deregulation would bring more competition and better deals to Californians.

The Carlsbad resident is staring at the fruits of AT&T’s labor — winning deregulation of phone rates in 2006: a  basic phone bill that has increased from $5.70 a month before deregulation to $21.25 effective Jan. 2, 2014. That represents a 272 percent increase for basic measured (pay-per-minute) local telephone service. As if that was not enough, AT&T is also raising the per-minute rate for semi-local calls for the second time in two years. Earlier this year, AT&T slashed customers’ calling allowances by 25 percent, reducing the 225 minutes a month of toll-free calling down to 168 minutes in January.

Customers living in large, spread out cities in California are accustomed to Zone Usage Measurement (ZUM) charges for calls placed to numbers more than 12 miles from the local telephone exchange. But they may get bill shock after noticing how much the per-minute rates have increased:

  • ZUM 1/2 (12-15 miles): Calls have doubled in price over the last 36 months. Prior to 2013, calls cost three cents per minute. AT&T raised prices to four cents in January and will raise them again to six cents per minute on Jan. 1;
  • ZUM 3 (15-16 miles): Calling prices have increased from five cents a minute in 2012 to six cents a minute in 2013 and will be seven cents per minute in 2014.

attcarlsbad“After surcharges, fees, and taxes, my bill will be nearly $30 per month for measured rate service, representing a near doubling of cost in just a 22-month period,” Steve writes. “I have no other choice than AT&T for a true powered landline, but I am rejecting this latest increase and plan to test and move to a VoIP system.”

The constant parade of rate increases from the state’s largest local telephone company began shortly after the California Public Utilities Commission (CPUC) unanimously approved sweeping deregulation of telephone rates in August 2006. Then Republican Commissioner Rachelle Chong was the driving force behind the effort, reports the San Francisco Chronicle.

Chong embraced AT&T’s attitude about telecommunications deregulation, promising consumers would not face abusive rate hikes or bad service. Under the old system, AT&T telephone rates were capped in California. AT&T had to approach the CPUC and justify any proposed increases. Without solid evidence, the company’s rate increase requests were rejected. Under deregulation, AT&T was permitted to set rates at-will.

“By the end of the 2010, these rate caps will no longer be necessary,” Chong promised as the new rules were being phased in. “The market will be so competitive it will discipline prices.”

Not quite.

att_logoAT&T’s rates have shot up as much as 222 percent for the average Californian’s measured rate phone service. Some customers, including our reader, found rates nearly three times higher than they were before deregulation. In the last few years, AT&T has increased prices on landline service and calling features even more dramatically across the state:

  • AT&T Flat-Rate landline service jumped 115 percent since 2006, from $10.69 to $23 a month;
  • Call Waiting, a popular phone feature, is up nearly 180 percent;
  • Anonymous Call Rejection fees have almost quadrupled;
  • Lifeline Service for California’s most disadvantaged is up 28 percent.

“My belief is that AT&T is essentially harvesting,” Dane Jasper, chief executive of Sonic.net, a competing broadband Internet service in Santa Rosa that tosses in domestic phone service for free, told the newspaper. “They jack up the rate by a pretty egregious amount … because if people leave, well, where are they going? AT&T mobile phone service in at least half the cases. So they’re happy to have them leave or happy to have them stay.”

rate hikesAT&T defends the increases by suggesting rates were artificially restrained by rate regulators under the old system, and the new higher prices reflect economic reality and the deregulated marketplace. But AT&T’s rate increases have blown past other service providers in the state. Verizon’s flat rate service only increased 18 percent since deregulation. Independent providers SureWest and Frontier Communications have only raised prices by about six percent.

With these kinds of rate increases, customers like Steve are making hard choices about whether to keep or ditch their landline service. Ironically, AT&T’s argument to decommission traditional landline service is based on the premise customers are abandoning landline service. AT&T advocates moving customers to its deregulated U-verse platform in urban areas and switch rural customers to wireless-only service.

Chong paid a personal price for her erroneous predictions of consumer savings. In December 2009, the Democratically controlled State Senate refused to hold hearings on Chong’s reappointment to the CPUC, ending her term. AT&T and Verizon strongly backed Chong and lobbied hard for her confirmation. AT&T even turned out its notorious “dollar-a-holler” sock puppet brigade of non-profit groups that showered the legislature with letters supporting her reappointment, without bothering to disclose AT&T had made substantial direct or indirect contributions to the groups in the past.

Murray Bass, head of a small nonprofit in Northern California, initially wrote lawmakers saying Chong was a strong voice for low-income seniors. But in an interview, he admitted he’d endorsed her at the suggestion of executives at AT&T, which had given his group money.

“There’s an essential conflict of interest when a regulated — or supposedly regulated — entity is intervening on behalf of a regulator that’s friendly to them,” said Mark Toney, executive director of the Utility Reform Network, a group that opposed Chong.

SUPPORTERS OF COMMISSIONER CHONG WITH TIES TO AT&T

Organization  Funding Received  Letter Signatory (-ies)
Asian Pacific Islander American Public Affairs (APAPA) The AT&T Foundation gave APAPA $25,000 in 2007. On the APAPA website, AT&T is listed as a top-tier event sponsor with a $50,000 donation in 2009. Joel Wong, Bay Area Chapter PresidentNorm De Young, VP Outreach and Chair of APAPA’s GovernmentRelations Committee (spoke on behalf of Filipino Progress)
CA Small Business Association (CBSA) AT&T is a corporate sponsor of the Small Business Roundtable (CBRT), the advocacy wing of CBSA, which has received $37,500 from AT&T since 2006.    The AT&T Foundation  underwrites  CBRT’s education fund, tech training and website.  Both CBSA and CBRT are active in CPUC proceedings, and CBSA endorses candidates and lobbies public officials.The California Small Business Education Foundation received a 3-year $1.125 million grant from the AT&T foundation.  Betty Jo Ticcoli, the letter’s signatory, is its Chair and CSBA is a member.CSBA is a member of the California Utilities Diversity Council (CUDC) along with AT&T and Verizon. Betty Jo Toccoli
California Hispanic Chambers of Commerce (CHCC) $30,000 from AT&T corporate since 2006, millions more from the Foundation.  Black, Hispanic & Asian Chambers are sharing a 1.25-year $287,000 CETF grant.   AT&T is a corporate member statewide and of several local Hispanic Chambers.  AT&T sponsors CHCC’s annual convention and underwrites local events such as FestivALL, sponsored by the Silicon Valley Hispanic Chamber.Member of  CUDC. Kenneth A. Macias, Chairman of the BoardJoel Ayala, President & CEO
City of Firebaugh $633,000 CETF grant. Jose Antonio Ramirez, City Manager
Cristo Rey High School Sacramento Received a $25,000 grant from AT&T Foundation in 2009. Joan Evans, VP for Advancement
Fresno-Madera Area Agency on Aging (FMAAA) $50,000 SBC Foundation Grant in 2002; $20,000 in 2003; AT&T has sponsored FMAAA’s Scamnot.org website since 2005. Jo Johnson, Executive Director
Latino Community Foundation $25,000 CETF grant. Aida Alvarez, Chairperson
Latino Institute for Corporate Inclusion (LICI) AT&T is a corporate partner of LICI; LICI’s IRS form 990 shows  income of $19,742 in 2008 and it has received $17,500 from AT&T corporate according to AT&T’s 77-M filing with the state, more from the AT&T foundation.Member of CUDC. Ruben Jauregui, President & CEO
Latino Journal $17,500 from AT&T since 2006; AT&T, Verizon and the CPUC are strategic partners in the Journal-sponsored California Education Summit, which AT&T underwrites.Member of CUDC. Jose L. Perez
Mexican American Opportunity Foundation (MAOF) $25,000 from AT&T Foundation. Magda Menendez, Administrator
Other Connections Between AT&T and Chong Supporters
OCA – Organization of Chinese Americans Sacramento AT&T is a corporate partner of national org and both AT&T and Verizon sponsor Asia Week and other heritage events Joyce Eng, President
Tools of Learning for Children Big AT&T logo on website. Told the Los Angeles Times, “he’d endorsed [Chong] at the suggestion of executives at AT&T, which has given his group money.” Murray T Bass, MA, CFP
United Way of Butte & Glenn Counties President Preston Dickinson is former Director of External Affairs for AT&T. W. Jay Coughlin, Executive Director

 Notes

  • 1.  CUDC - The California Utilities Diversity Council is a collaboration between the CPUC , the utility companies and other industry participants  to promote diversity in the utility industry.  AT&T is a gold sponsor of CUDC’s annual convention.
  •  2.  CETF - CETF is a private non-profit corporation created by the California Public Utilities Commission (CPUC) and funded entirely by AT&T and Verizon.  Commissioner Chong is Chair of the CETF Board of Expert Advisors and its Accessibility Committee.  CPUC President Michael Peevey is Chairman of the CETF Board of Directors. The CETF board is appointed by the CPUC, AT&T and Verizon.

Sources:

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History Repeats: Revisiting Dr. John Malone’s Big Cable “B-Movie” Treatment of Jefferson City, Mo.

tciAs Dr. John Malone positions his pieces on the cable industry’s chess board to win back the title of King of Big Cable, it is important to consider history.

Malone’s growing interest in a combined Charter-Time Warner Cable, under his effective control, is the first step towards re-envisioning Tele-Communications, Inc. (TCI) — America’s largest cable operator in the 1980s and early 1990s. Although most of the original TCI Cable systems are now owned by Comcast, Malone’s notorious way of doing business may soon affect millions of Charter and Time Warner Cable subscribers in the not-too-distant future.

http://www.phillipdampier.com/video/Senate Hearings Alan Garner Jeff City MO 3-90.flv

How bad was life with TCI as your local cable company? Listen to Alan Garner, then-City Attorney for Jefferson City, Mo., who testified before Congress in March, 1990 about the uniquely abusive, allegedly criminal behavior of out of control TCI executives. (5:04)

http://www.phillipdampier.com/video/Senate Hearings Danforth Alan Garner Jeff City MO 3-90.flv

Sen. Daniel Inouye (D-Hawaii) was so stunned by the events in Jefferson City, he first asked if TCI’s threats were documented and on learning they were the basis of $35 million in court-ordered damages, the chairman of the Senate Commerce Committee remarked, “you got thugs around there.” Under detailed questioning by Sen. John Danforth (R-Mo.) Garner talks about the “B-Movie” threats from TCI executives who warned city officials “we know where you live,” constant rate hikes, take-what-we-give-you service, and the fact TCI was willing to rip down cable lines and leave the city without cable service if they were denied a franchise renewal. (14:12)

http://www.phillipdampier.com/video/Senate Hearings Burns Alan Garner Jeff City MO 3-90.flv

A befuddled Sen. Conrad Burns (R-Mont.) asked Garner why the city would still want to stay involved in the cable franchise process after the city’s horror story. Garner explained cable operators use public property to wire service to customers. Without local oversight, Garner believed TCI would still be scattering cable lines across neighbors’ backyards, across sidewalks, and draped over fences. TCI had a unique way of managing local service complaints, according to Garner. It threw service orders into a random cardboard box and let cable repair crews fish them out one by one. The ones furthest back in the box were the oldest, and the least likely to ever be chosen. TCI only listened to city officials when they had some oversight and enforcement powers. (3:13)

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New FCC Chairman Denies He’s an Industry Shill: “My Client is the American People”

Phillip Dampier November 14, 2013 Competition, Consumer News, History, Public Policy & Gov't, Video 2 Comments
Tom Wheeler circa 1983, when he represented the cable industry.

Tom Wheeler circa 1983, when he represented the cable industry. (Image: The Cable Center)

Skepticism persists over whether new FCC chairman Tom Wheeler, a former cable and telco lobbyist and venture capitalist, will have the interests of an industry he was a part of for decades ahead of the people he is supposed to represent.

The doubts are so significant, The Wall Street Journal’s ‘All Things D’ devoted an entire piece on the subject, interviewing Wheeler about his plans for the federal agency.

“My client today is the American people, and I am going to be the most effective advocate they could hope for,” Wheeler told AllThingsD in a phone interview on Wednesday. “I was (involved in) the early days of cable television when everybody was trying to squash it; I was a was champion for a diversity of voices and the competition that represented. I’m very proud of that period, but it was 30 years ago that I was in in cable, and 10 years ago that I was in wireless.”

Both periods were extremely important for both industries. When Wheeler was president of the National Cable TV Association (now the NCTA), his leadership helped enact the 1984 nationwide deregulation of the cable television industry. Wheeler promised the single national “hands-off” policy for cable television would put control “back in the hands of customers” instead of the local, state, and federal government. The cable lobby pushed hard for extra provisions in the law that would prohibit local or state governments or franchising authorities from reimposing controls the federal government eliminated.

The 1984 Cable Act contained three major provisions to strip away regulatory/rate oversight:

  1. “Basic Cable” rate regulation was removed in any community where a cable company faced “effective competition” from at least three unduplicated over the air television stations. If your community received two fuzzy network affiliates and one local religious station, that was considered effective competition.
  2. Local franchise authorities and cable TV commissions, often citizen-run, had most of their oversight and enforcement powers stripped away, including the most important power to deny a franchise renewal to a bad-acting local cable company, except in the most extreme cases. Cable operators effectively used this provision to launch costly lawsuits burying local communities in litigation expenses when they tried to find a different provider.
  3. Granted local franchise authorities to right to demand cable systems set aside a few channels for Public, Educational, and Government (PEG) use.

The cable industry carefully lobbied for an effective definition of “competition” that made it into the final version of the bill. Estimates from congressional researchers predicted that 97 percent of the country’s cable systems would be deregulated when the law took effect Dec. 29, 1986.

In a 1984 C-SPAN call-in program, Wheeler noted that before deregulation, “the cities were in the driver’s seat” controlling the franchising process. Wheeler claimed cable operators competing for franchise agreements were forced to promise services and technology that ultimately proved too burdensome or expensive to actually deliver. Deregulation, Wheeler promised, would “keep cable rates low because you are not going to be paying for services that [the government says] have to be provided that nobody watches.”

In reality, after the passage of the 1984 Cable Act, cable systems were bought and sold in a frenzy that left control ultimately in the hands of a handful of operators. Soon after, cable rates skyrocketed and cable-industry-owned networks and channels were shoveled on to cable lineups. With every sale and every new channel addition, rates were raised even higher, whether customers wanted the extra programming or not.

Without oversight, cable service itself deteriorated in quality. In some cities, cable operators ignored rights-of-way and often refused to hang or bury cable lines left scattered on lawns. Customer complaints often went unresolved for days or weeks. Cable operators also rolled out new charges for monthly programming magazines and equipment, even as they continued to boost rates for basic cable itself. Prior to deregulation, customers usually paid less than $10 a month for basic cable. After, rates rapidly pushed towards the $20 a month mark. Today’s cable TV prices are much higher.

In the summer of 1984, Wheeler left the NCTA to pursue a new business – The NABU Network, a precursor to cable broadband that turned out to be a commercial failure. The NABU Network coupled a home computer system with a cable-based data service. The only significant North American trial of NABU was in Ottawa, Canada and required significant subsidies from the Canadian government. Wheeler said the NABU system would offer subscribers a mountain of software at a monthly subscription price. Canadians had to buy the NABU PC for around $950 and pay around $10 a month for software access.

The venture fell apart because cable systems in that era lacked two-way capability, making it cumbersome for users to interact with the NABU platform or manage applications. Ottawa Cablevision and Skyline Cablevision introduced NABU in 1983 and discontinued it in 1985.

In 1992, Wheeler went on to become president of CTIA – The Wireless Association, the nation’s biggest cell phone industry trade group. Wheeler beefed up the association’s lobbying forces after joining, turning CTIA into “one of the most influential lobbying forces on Capitol Hill,” according to Connected Planet.

Once there, Wheeler presided over efforts to get government spectrum policies relaxed and keep cancer questions about RF energy leaking from cellphones under wraps:

In a 1994 memo, Wheeler raised objections to a draft of a mobile-phone manual that, among other things, advised consumers how to limit radio-frequency radiation from mobile phones. The book says Wheeler succeeded in getting the industry consumer safety document watered down.

In a September 1994 memo, Wheeler mapped out “a pre-emptive strike” on Rep. Edward Markey (D-Mass.) by highlighting to Markey the involvement of Harvard University. Wheeler, according to the book, even had a backup plan to curry favor with Markey that, if necessary, would “send all cash through Harvard.”

By 2000, Wheeler was being questioned about conflict of interest charges about his lucrative investments in businesses represented under the CTIA’s public policy umbrella, according to RTR Wireless:

But conflict-of-interest issues-real, perceived and otherwise-that flow from Wheeler’s lucrative ties to Aether, OmniSky and now, Metrocall, could have long-term consequences that CTIA and the wireless industry would rather not consider in these halcyon days of soaring stocks, consolidation and deregulation.

The unorthodox arrangement Wheeler has with outside wireless firms begs closer scrutiny by CTIA’s board. Do Wheeler’s money and management ties to firms he advocates set a bad precedent? Could it diminish CTIA’s credibility as an organization?

Wheeler claims to be committed to three principles that will govern how he looks at issues before the FCC:

  1. Is it good for competition? “You can’t have economic growth if you don’t have competition. You can put me down as rabidly pro-competition,” Wheeler said.
  2. Trust between those who run networks and those who use them must be maintained.
  3. Opening up high-speed networks must include guarantees that content will be open and accessible to all. “I am pro-the ability of individuals to access an open network,” he said.

Wheeler asked for a review of all proposals before the FCC and expects that in two months.

Tom Wheeler, then retiring president of the National Cable TV Association (NCTA), appeared on this fascinating 1984 C-SPAN call-in program at the NCTA Convention with future president Tom Mooney. The NCTA promised deregulation would deliver many benefits to cable subscribers. They got higher bills and declining service instead. (June 5, 1984 – 39:00)

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Charter Communications Weighs Time Warner Cable Takeover by End of 2013; Usage Caps Might Follow

The new name of Time Warner Cable?

The next name of Time Warner Cable?

Charter Communications is laying the foundation for a leveraged buyout of Time Warner Cable before the end of the year in a deal that could leave Time Warner Cable’s broadband customers with Charter’s usage caps.

Reuters reported discussions between the two companies grew more serious after last week’s revelation a poor third quarter left TWC with 308,000 fewer subscribers.

Charter is relying on guidance from Goldman Sachs to structure a financing deal likely to leave Charter in considerable debt. Charter Communications emerged from bankruptcy in 2009 and is the country’s tenth largest cable operator, estimated to be worth about $13 billion. Time Warner Cable is the second largest cable operator and is worth more than $34 billion.

The disparity between the two companies has kept Time Warner Cable resistant to a deal with Charter, stating it would not be beneficial to shareholders. Charter executives hope to eventually win shareholder support for a buyout stressing the significant cost savings possible from a combined operation, particularly for cable programming.

The deal would likely end Time Warner Cable as a brand and leave Charter Communications CEO Thomas Rutledge in charge of a much larger cable company. Pricing and packaging decisions are usually made by the buyer, which could bring faster broadband speeds to Time Warner customers, but also usage caps already in place at Charter.

John Malone’s War on Customers

Malone

Malone

Cable billionaire John Malone, former CEO of Tele-Communications, Inc. (TCI) — America’s largest cable operator in the 1980s — believes consolidation is critical to the future of a cable business facing competition from phone companies and cord cutting. Malone’s Liberty Media, which now holds a 25% stake in Charter, is currently buying and consolidating cable operators in Europe. Malone’s post-consolidation vision calls for only two or three cable operators in the United States.

Malone’s quest for consolidation is nothing new.

Under his leadership, TCI eventually became the country’s biggest cable operator, but one often accused of poor service and high prices. More than a decade of complaints from customers eventually attracted the attention of the U.S. Congress, which sought to rein in the industry with the 1992 Cable Act — legislation that lightly regulated rental fees for equipment and the price of the company’s most-basic television tier.

Despite the fact consumer advocates didn’t win stronger consumer protection regulations, TCI was still incensed it faced a new regulatory environment that left its hands tied. One executive at a TCI subsidiary advocated retaliation with broad rate increases for unregulated services to make up any losses from mandated rate cuts.

A 1993 internal TCI memo obtained by the Washington Post instructed TCI system managers and division vice presidents to increase prices charged for customer service calls and add new fees for common installation services the company used to offer for free. TCI’s Barry Marshall recommended charging for as many “transaction” services as possible — like hooking up VCR’s, running cable wire, and programming remote controls for confused customers.

“We have to have discipline,” Marshall wrote. “We cannot be dissuaded from the [new] charges simply because customers object. It will take awhile, but they’ll get used to it. The best news of all is we can blame it on re-regulation and the government now. Let’s take advantage of it!”

Tele-Communications, Inc. (TCI) was the nation's largest cable operator.  Later known as AT&T Cable, the company was eventually sold to Comcast.

Tele-Communications, Inc. (TCI) was the nation’s largest cable operator. Later known as AT&T Cable, the company was eventually sold to Comcast.

The FCC’s interim chairman at the time — James Quello, charged with monitoring the cable industry, was not amused.

“It typifies the attitude of cable companies engaging in creative pricing and rate increases to evade the intent of Congress and the FCC,” Quello said. “There is little doubt that the cable industry has an economic stake in discrediting the congressional act they vehemently and unsuccessfully opposed.”

Marshall defended his internal memo, although admitted it was inartfully written and was not intended for the public. Revelation of a damaging memo like this would normally lead to a quiet resignation by the offending author, but not at John Malone’s TCI, a company with a reputation for being difficult.

Mark Robichaux’s 2005 book, Cable Cowboy: John Malone and the Rise of the Modern Cable Business, was even less charitable.

Robichaux describes Malone as a “complicated hero,” at least for investors for whom he was willing to ignore banking rules and creatively interpret tax law. Robichaux wrote Malone’s idea of customer service was to ‘charge as much as you can, but spend as little as you can get away with.’

TCI’s top priority was to keep up the cable business as an “insular cartel.” The predictable result included accusations of “shoddy service” customers were forced to take or leave. In the handful of markets where TCI faced another cable competitor, TCI ruthlessly slashed prices to levels some would describe as “predatory,” only to rescind them the moment the competitor was gone. TCI’s intolerance for competition usually meant mounting pressure on competitors to sell their system to TCI (sometimes at an astronomical price) or face a certain slow death from unsustainable price cuts.

Among Malone’s most-trusted friends: junk bond financier Michael Milken and Leo Hindery, former CEO of Global Crossing.

Congressman Albert Gore, Jr., later vice-president during the Clinton Administration, was probably Malone’s fiercest critic in Washington. Gore’s office was swamped with complaints from his Tennessee constituents upset over TCI’s constant rate increases and anti-competitive behavior.

The cable industry's biggest competitor in the 1980s-1990s was a TVRO 6-12 foot diameter home satellite system.

The cable industry’s biggest competitor in the 1980s-1990s was a TVRO 6-12 foot diameter home satellite system.

Gore was especially unhappy that TCI’s grip extended even to its biggest competitor — satellite television.

In the 1980s and early 1990s, cable operators made life increasingly difficult for home satellite dish owners, many in rural areas unserved by cable television. But things were worse for home dish owners that walked away from TCI and began watching satellite television instead. To protect against cord-cutting, the cable industry demanded encryption of all basic and premium cable channels delivered via satellite. It was not hard to convince programmers to scramble — most cable networks in the 1980s were part-owned by the cable industry itself.

To make matters worse, unlike cable systems that only leased set-top boxes to customers, home dish owners had to buy combination receiver-descrambler equipment outright, starting at $500. Just a few years later, the industry pressured programmers to switch to a slightly different encryption system — one that required home dish owners replace their expensive set-top box with a different decoder module available only for sale.

Gore was further incensed to learn TCI often insisted home dish owners living within a TCI service area buy their satellite-delivered programming direct from the cable company. Customers hoping to leave cable for good found themselves still being billed by TCI.

Sometimes the rhetoric against TCI and Malone got personal.

”He called me Darth Vader and the leader of the cable Cosa Nostra,” Malone said of Gore. “You can’t win a pissing contest with a skunk, so there’s no point in getting involved in that kind of rhetoric.”

“There’s a joke going around Washington,” John Tinker, a New York-based Morgan Stanley & Company investment banker who specializes in cable television said of Malone back in 1990. “If you have a gun with two bullets, and you have Abu Nidal, Saddam Hussein and John Malone in a room, who would you shoot? The answer is John Malone — twice, to make sure he’s dead.”

TCI itself was a four letter word in the many small communities that endured the cable company’s insufferable service, outdated equipment, and constant rate “adjustments.”

The New York Times reported John Malone’s TCI had a reputation for treating customers with “utter disdain,” and provided examples:

  • In 1973, rate negotiations stalled with local regulators in Vail, Colo., the local TCI system shut off all programming for a weekend and ran nothing but the names and home phone numbers of the mayor and city manager. The harried local government gave in.
  • In 1981, TCI withheld fees and vowed to go completely dark in Jefferson City, Mo., if the city failed to renew its franchise, while a TCI employee — “who turned out to have a psychological problem,” said Malone — threatened harm to the city’s media consultant. Again, a beleaguered local government renewed the franchise — although in a subsequent lawsuit, TCI was fined $10.8 million in actual damages and $25 million in punitive damages.
  • In 1983, the small city of Kearney, Neb., also dissatisfied with poor service and rising rates, tried to give Malone some competition in the form of a rival system built by the regional telephone company. TCI slashed fees and added channels until the enemy was driven from the field.

“That’s the dark side, if you will, of TCI,” said Richard J. MacDonald, a media analyst with New York-based MacDonald Grippo Riely.

By mid-1989, Malone’s frenzied effort to consolidate the cable industry resulted in him presiding over 482 merger/buyout deals, on average one every two weeks. Among the legacy cable companies that no longer existed after TCI’s takeover crew arrived: Heritage Communications, United Artists Communications and Storer Communications.

To cover the debt-laden deals, Malone simply raised cable rates and shopped for easy credit. Bidding with others’ money, the per-subscriber price of cable systems shot up from $998 in 1983 to an astronomical $2,328 in 1989.

The General Accounting Office, the investigative arm of Congress, found deregulating the cable industry cost customers through rate hikes averaging 43 percent. In Denver, TCI raised rates more than 70% between 1986 and 1989.

Malone’s attempt to finance a leveraged, debt-heavy buyout of Time Warner Cable seems to show his business philosophy has not changed much.

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Wireless is Verizon’s Cash Cow: $12.9 Billion in Operating Profits vs. Landlines/FiOS: $87 Million

moneyIf “follow the money” is a maxim in business, then it should come as no surprise Verizon favors the making the bulk of its investments and expansion in its enormously profitable wireless business.

Verizon Wireless earned the company $12.9 billion in operating profits during the first six months of 2013 while landlines and Verizon’s fiber optic network only delivered $87 million. That inconsistency may help explain why Verizon FiOS expansion is stalled while Verizon throws enormous sums into its 4G LTE wireless upgrade project.

The average Verizon Wireless bill is now over $150 a month. FiOS customers pay an average of over $150 a month as well, but Verizon’s costs to reach its smaller customer footprint are higher. Revenues for basic landline service are considerably lower than either wireless or fiber service.

With wireless providing a virtual ATM for Verizon Communications, the New York Times notes it is unsurprising that Verizon wants to buy out its European partner Vodafone, which owns 45% of Verizon Wireless. Once the $130 billion transaction is complete, Verizon will keep wireless profits all to itself as it continues lobbying for permission to decommission rural landlines and encourage those customers to use its vastly more profitable and almost entirely unregulated wireless network instead.

Exactly 100 years after Verizon predecessor AT&T/The Bell System voluntarily agreed to be a regulated monopoly provider of telephone service, Verizon Wireless and AT&T have successfully established unregulated wireless networks that serve most Americans with cell service and wireless data at prices that would be shocking to people 20 years ago.

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Time Warner Cable Introduces New 30GB Usage-Capped Billing Plan in Rochester, N.Y.

twc logoIn addition to an August broadband rate increase for western New York’s Time Warner Cable customers, those in Rochester will also be among the first to experience a new 30GB usage-capped billing option for broadband service.

The subject of usage-based billing is a major sore spot for customers in the Flower City, who joined forces with customers in Greensboro, N.C., and San Antonio and Austin, Tex. to force the cable company to shelve a mandatory usage billing scheme announced in 2009. Stop the Cap! was in the middle of that fight, although this group was founded after Frontier Communications proposed a 5GB usage cap the summer before.

Time Warner Cable CEO Glenn Britt personally promised Sen. Charles Schumer (D-N.Y) that the cable company would yank its planned experiment with usage caps and consumption-based billing after it became clear Rochester and other cities were being singled out where Verizon FiOS would never offer competition, making it seem Time Warner was taking advantage of a lack of broadband competition to charge dramatically higher prices.

In 2009, Time Warner Cable planned to implement mandatory usage pricing starting in Rochester, N.Y., Greensboro, N.C., and San Antonio and Austin, Tex.

In 2009, Time Warner Cable planned mandatory broadband usage pricing starting in Rochester, N.Y., Greensboro, N.C., and San Antonio and Austin, Tex.

But Britt has never stopped believing in usage pricing, and Time Warner has since switched to a more gradual introduction of the pricing scheme, this time offering discounts to customers that agree to limit their Internet usage.

Time Warner’s current usage billing plan offers a meager $5 discount to those who limit consumption to less than 5GB per month. That plan was originally introduced in Texas and Time Warner Cable employees confidentially tell Stop the Cap! it has attracted almost no interest from customers.

Now Time Warner Cable plans to introduce a second usage limited plan, with a yet to be disclosed discount for subscribers who keep Internet usage under 30GB a month.

“Those who use the Internet for e-mail or to surf the web need not pay the same rates as those who download games and the like,” said company spokesperson Joli Plucknette-Farmen.

As far as we can tell, the 30GB capped plan is new for Time Warner Cable and Rochester will be among the first communities to experience it. Unless the company chooses to more aggressively discount both the 5GB and 30GB plans, we expect few customers will take Time Warner Cable up on their offer.

For now, Time Warner says the usage capped plans are optional and that flat rate Internet service will continue. But company executives have not said for how long or what the company might choose to eventually charge for unlimited broadband usage.

Britt has stressed repeatedly he wants customers to get re-educated to accept “a usage component as part of broadband pricing.” But customers may not accept that, particularly considering the cable company already enjoys a 95% gross margin on flat rate broadband service.

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History Lesson: Qwest v. The City of Boulder – Helpful to Municipal Broadband Cause?

Phillip "It worked for Qwest so why not community broadband" Dampier

Phillip “It worked for Qwest so why not community broadband” Dampier

While doing research on another story, I recently uncovered a fascinating legal case that set an important precedent on whether it is right for a community to hold a referendum before authorizing a new telecommunications provider to offer service in a community.

Opponents of community-owned broadband networks routinely claim such services are “undemocratic” because they can exist without the majority support of the community they propose to serve. In 2001, Qwest (now CenturyLink) ran into just such a “majority-rules” provision in Boulder, Colo. that companies like AT&T and Time Warner Cable advocate should be a law everywhere.

A provision in Boulder’s Charter required that voters in a municipal election approve any cable franchise before it was granted by the city. Wishing to avoid the cost of such an election, Qwest sued the City of Boulder and asked for summary judgment to declare the policy unlawful. Chief Judge Lewis Babcock found Qwest’s argument compelling enough to invalidate the city’s mandatory referendum provision.

Qwest argues that the language in [U.S. Federal Law] 47 U.S.C. § 541 regulating franchising authorities is in direct conflict with [Boulder's] § 108′s mandatory election provision. I agree.

First, the Act provides guidance to, and restrictions on, “franchising authorities.” Section 541′s requirements are directed toward franchising authorities. See 47 U.S.C. § 541(a)(1), (3), (4). Under the statute, a “franchise” is “an initial authorization, or renewal thereof,” issued by a franchising authority to construct or operate a cable system. 47 U.S.C. § 522(9). A “`franchising authority’ means any governmental entity empowered by Federal, State, or local law to grant a franchise.” 47 U.S.C. § 522(10) (emphasis added).

Here, Qwest approached City officials to seek franchise approval. The City granted a revocable permit to Qwest, and agreed to “grant a cable television franchise authorizing [Qwest] to provide cable television service within the City for a term of years” once an affirmative vote by the qualified taxpaying voters occurred. There is no evidence that the City negotiated the franchise in any manner, or put any additional restrictions or caveats on the franchise beyond voter approval. City officials follow the will of the voters with no additional scrutiny or decision-making. Thus, the City has abdicated franchising authority to the City’s voting citizens. These voters cannot, by the plain terms of the statute, be a “governmental entity empowered by Federal, State, or local law to grant a franchise.” 47 U.S.C. § 522(10). Therefore, direct conflict between the federal and local laws exist, as it is impossible for the franchise to be granted by a governmental entity as required by the Act, and simultaneously granted by the voters as required in § 108.

Second, § 541 imposes numerous and specific requirements on franchising authorities. The statute forbids exclusive franchises, see § 541(a)(1); unreasonable refusals to award additional competitive franchises, see id. at (a)(1); requirements that have the purpose or effect of prohibiting, limiting, restricting, or conditioning the provision of a telecommunications service by a cable operator, see id. at (b)(3)(B); ordering a cable operator or affiliate thereof to discontinue the provision of a telecommunications service, discontinuing the operation of a cable system by reason of the failure of a cable operator to obtain a franchise or franchise renewal, see id. at (b)(3)(C)(i)-(ii); or requiring a cable operator to provide any telecommunications service or facilities as a condition of the initial grant of a franchise. See Id. at (b)(3)(D).

A franchising authority has affirmative requirements as well. It must assure that access to cable service is not denied to any group of potential residential cable subscribers because of the income of the residents of the local area in which such group resides, see id. at (a)(3); and allow the applicant’s cable system a reasonable period of time to become capable of providing cable service to all households in the franchise area, see id. at (a)(4)(A).

However, by allowing voters unfettered and unreviewed discretion to grant or reject a franchise, § 108 is in conflict with virtually every provision in § 541. Because only WOWC has received a franchise, voters could effectively grant WOWC an exclusive franchise simply by refusing to vote affirmatively for a second operator. See id. at (a)(1). Voters could unreasonably refuse to award an additional competitive franchise, as they could deny a franchise for any reason or for no reason. See id. Qwest correctly argues that § 108 “provides voters with the unfettered and unreviewable discretion either to grant or deny a cable television franchise for any reason, or for no reason at all.”

Qwest (now CenturyLink), is Idaho's largest Internet Service Provider.In brief, the judge found cable franchises are granted or denied at the municipal level by local government, not through referendums. The City of Boulder was effectively abdicating its responsibility under federal law to manage the franchising process itself. There is no provision in federal law that allows citizens to directly vote a cable franchise agreement up or down, although voters can use the ballot box to remove local officials who do not represent the will of the majority.

More importantly, the judge recognized that turning the process over to local citizenry could unintentionally hand an incumbent provider a monopoly just by voting down any would-be competitor. Why would local citizens oppose competition? As we’ve seen in the fight for community broadband, incumbent providers will spend millions to keep would-be competitors out with a variety of scare tactics and propaganda. Providers have suggested community networks are guaranteed financial failures, will result in yards being torn up to install service, might result in local job losses, and will raise taxes whether residents want the service or not.

Judge Babcock also found that laws that could limit effective competition to incumbent cable companies are in direct conflict with the 1992 federal Cable Act:

The legislative history clearly supports the proposition that Congress was focused on fostering competition when passing the 1992 Act. The Senate Report regarding the Act states, “[I]t is clear that there are benefits from competition between two cable systems. Thus, the Committee believes that local franchising authorities should be encouraged to award second franchises.”

[...] Given the clear intent of Congress to employ § 541 as a vehicle for promoting vigorous competition, I conclude that § 108 is in conflict. Section 108 serves only to provide a significant hindrance to the competition that Congress clearly intended to foster. It forces the potential franchiser to spend money, time, advertising, and logistical support on an election. Thus, § 108 “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.”

Perhaps the time has come to raise similar challenges in states where legislatures have passed community broadband bans or placed various impediments on providing service. If Qwest can successfully argue that such rules are designed to limit competition, local communities can certainly argue the panoply of anti-competition laws that were written by and for incumbent cable and phone companies deserve the same scrutiny.

Referendums are an inappropriate way to approve the entry of new competitors.

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Wireless Spectrum: Highest Bidder Wins in U.S., Competition Wins in Europe… for Now

analysisIn the race to acquire spectrum and market share, AT&T and Verizon Wireless have already won most of the awards worth taking and have little to fear from smaller competitors. The U.S. government has seen to that.

The two wireless giants have benefited enormously from government spectrum auctions that award the most favorable wireless spectrum to the highest bidder, a policy that retards competition and guarantees deep-pocketed companies will continue to dominate in the coverage wars.

Winner-take-all spectrum auctions have already proven that AT&T and Verizon are best equipped to bid and win coveted 700MHz spectrum which provides the best indoor and fringe-area reception. This is why AT&T and Verizon customers often find “more bars in more places” than customers relying on Sprint or T-Mobile. Smaller carriers typically have to offer service over much-higher frequencies that don’t penetrate buildings very well. With a reduced level of service, these competitors are at an immediate competitive disadvantage. They also must spend more for a larger number of cell towers to provide uniform service.

Verizon's own presentation materials tout the benefits of controlling 700MHz spectrum which is less costly to deploy and offers more robust coverage.

Verizon’s own presentation materials tout the benefits of controlling 700MHz spectrum, which is less costly to deploy and offers more robust coverage.

Sprint and T-Mobile have two strikes against them at the outset — less favorable spectrum and much smaller coverage areas. Customers who want the best reception under all circumstances usually get it from the biggest two players. Those focused primarily on price are willing to sacrifice that reception for a lower bill.

The same story is developing in the wireless data marketplace. AT&T and Verizon Wireless have the strongest networks as Sprint and T-Mobile fight to catch up.

Where America Went Wrong: The Repeal of Spectrum Caps

Tom Wheeler: America's #1 Advocate for Repeal of Spectrum Caps is now the chairman of the FCC.

Tom Wheeler: America’s #1 advocate for repeal of Spectrum Caps is now the chairman of the FCC.

Originally, the United States prevented excessive market domination with a “Spectrum Cap,” — a maximum amount of wireless spectrum providers could hold in any local market. The rule was part of the sweeping changes in telecommunications law introduced in the mid-1990s. Wireless spectrum auctions replaced lotteries or strict frequency assignments based on merit. The U.S. government promoted the auction system as a win for the U.S. Treasury, which has been promised $60 billion in proceeds from the wireless industry (not the amount actually collected) since auctions began in 1994.

The cost to U.S. consumers from increasing cell phone bills in barely competitive markets is still adding up.

After the auction system was introduced, the largest carriers acquired some of the most favorable, lower-frequency spectrum, easily outbidding smaller rivals. Most of the smaller regional carriers that ultimately won coveted 700MHz spectrum emerged victorious only when AT&T and Verizon felt the smaller markets were not worth the investment. In larger markets, spectrum caps were a gatekeeper against acquiring excess spectrum and, more importantly, rampant industry consolidation.

Under the pre-2001 rules, wireless companies couldn’t own more than 45MHz of spectrum in a single urban area or more than 55MHz in a rural area. That was when Verizon and AT&T competed with carriers that no longer exist — old familiar names like Nextel, Cingular, VoiceStream, Alltel, Centennial Communications, Qwest, and many others considered safe from poaching because the most likely buyers would find themselves over their spectrum limits.

As the largest carriers realized the caps were an effective merger/buyout firewall, the wireless industry began a fierce lobbying campaign against them. Leading the charge was Tom Wheeler, then-president of the CTIA Wireless Association, the nation’s top cellular industry lobbying group. Today he is chairman of the Federal Communications Commission.

“Today, America faces a severe spectrum shortage for wireless services,” Wheeler said in 2001. “The spectrum cap is a legacy of spectrum abundance, not shortages; the inefficiencies it perpetuates cannot be allowed to continue. While the U.S. government is looking for ways to catch up to the rest of the world on spectrum allocations, removal of the cap can at least increase the efficiency of existing spectrum.”

Copps

Former FCC Commissioner Michael Copps opposed retiring Spectrum Caps: “Let’s not kid ourselves: This is, for some, more about corporate mergers than it is about anything else.”

Wheeler was backed by an intensive lobbying effort funded by the largest wireless companies itching to merge and acquire.

By the end of 2001, the new Bush Administration’s FCC was ready to deal, gradually repealing the spectrum caps and fueling major wireless industry consolidation in the process. Providers everywhere could now own or control 55MHz of spectrum in any market, with the promise the caps would be repealed altogether by March 2003.

The result was already foreseen by former FCC Commissioner Michael Copps in November 2001, when he strongly dissented to the Republican majority gung ho for dissolving spectrum caps.

“Let’s not kid ourselves: This is, for some, more about corporate mergers than it is about anything else,” Copps wrote in his strong dissent. “Just look at what the analysts are talking about as the specter of spectrum cap renewal approaches – their almost exclusive focus is on evaluating the candidates for corporate takeovers and handicapping the winners and losers in the spectrum bazaar we are about to open.”

Just in case Copps might be making headway in his campaign to protect competition, Wheeler began complaining even louder about spectrum caps during the spring of 2003, just before their dissolution.

“The wireless industry fought long and hard to secure this spectrum for America’s wireless consumers,” said Wheeler. “Now we must tread carefully — in this era of rapid technological change, writing rules that are too restrictive would be irresponsible. In order to use this spectrum both efficiently and effectively, those who purchase this spectrum at auction must be allowed the freedom to grow and evolve with the demands of the market.”

Europe: Protecting Consumers from Giant Multinational Competition Consolidators (Some of the same ones AT&T reportedly wants to buy)

There is a reason Europeans are shocked by the costs of wireless service in the United States and Canada. North Americans pay higher prices for less service than our European counterparts. Most of the New World also has fewer choices in near-equivalent service providers.

Much of this difference can be attributed to European regulators maintaining focus on driving competition forward and disallowing rampant industry consolidation. But as Wall Street turns its attentions increasingly towards Europe to push for the next big wave of wireless mergers, the European system of “competition first” could be undermined if providers follow the North American model of high profits and reduced competition through consolidation.

Across much of Europe, at least four national carriers serve each EU member state, almost all controlling a share of the most valued, low-frequency wireless spectrum. European regulators do not allow a small handful of providers to maintain a stranglehold on the most valuable radio spectrum. Competitors have traditionally been offered a spectrum foundation to build networks that can stand up to their larger counterparts — the large multinationals or ex-state monopoly providers who had a head start providing service.

A report released by Finland market research firm Rewheel in May found clear evidence that the European model was benefiting consumers at the expense of rampant provider profits. Europeans in “progressive” markets that welcomed new competitive entrants pay lower prices for far more service. In some cases, the price differences between the five giant multinational providers that dominate Europe — Vodafone, KPN, France Telecom, Telefonica and Deutsche Telekom — were staggering. Competitors like Tele2, TeliaSonera, and “3″ charge up to ten times less than the larger companies for equal levels of service.

http://www.phillipdampier.com/video/Bloomberg ATT Takeover List of European Wireless Carriers 7-15-13.flv

“Europe is ripe for competition,” reports Bloomberg News. Providers like AT&T may be preparing to embark on a European wireless acquisition frenzy, but Wall Street warns profits are much lower because of robust price competition in Europe that benefits consumers. (4 minutes)

The study also found a number of the largest European providers were following in the footsteps of Verizon Wireless, AT&T, Rogers, Bell, and Telus here in North America:

  • Prices were enormously higher in markets that lack effective competition from an upstart competitor able to deliver a comparable level of service. Smaller cell companies with very limited infrastructure or with non-favored spectrum could not provoke dominant players to cut prices because reception quality was starkly lower and consumers would have to cope with a reduced level of service. In Europe, when new competitors were able to fully build-out their networks using favorable spectrum, incumbents in these progressive markets slashed prices and boosted services to compete. In North America, upstart competitors cannot access favorable spectrum for financial reasons and the investor community has dismissed many of these players as afterthoughts, starving them of much-needed investment.
  • Large dominant European providers are now heavily lobbying for deregulation of merger and acquisition rules and want the right to acquire the competition entering their markets.
  • In almost half of the EU27 member state markets spectrum is utilized very inefficiently by the largest incumbent telco groups who are keen to protect their legacy fixed assets and cement their European dominance with more consolidation at the price of competition. In the United States and Canada, many of the largest providers crying the loudest for more wireless spectrum have still not used the spectrum already acquired.

competition slide

From the Finnish report:

The obvious question that needs to be asked is how is it technologically possible and economically viable for Tele2, 3 and TeliaSonera to offer four times more gigabytes of data usage at a fraction of the price charged by larger companies.

  • Do independent challengers have privileged access to more efficient technologies (i.e. LTE) than the E4 group members?
  • Do they hold relatively more spectrum capacity than the E4 group members?
  • Do independent challengers have access to more radio sites and their spectrum reuse factor is higher than the E4 group members?
  • Or are independent challengers (i.e. Tele2, DNA) unprofitable?

None of the above are true.

The answer is actually very simple. Independent challengers and incumbents such as TeliaSonera present mainly in progressive markets are utilizing the spectrum resources assigned to them. In contrast, incumbent telco groups [...] rather than utilizing their spectrum resources instead appear to be more concerned about keeping the unit price of mobile data very high [...] by restricting supply, the same way the lawful “cartel” of OPEC controls the price of oil by turning the tap off.

In progressive markets (where at least one independent challenger is present, triggering spectrum utilization competition) such as Finland, Sweden, Austria and the UK, mobile data consumption per capita is up to ten times higher than in protected markets.

In some European countries dominated by the biggest players, consumers are being gouged for service. Where robust competition exists, prices are dramatically lower.

The European nation where market conditions are most similar to the United States is Germany. Two large carriers dominate the market: Deutsche Telekom, the former state-owned telephone company and Vodafone, part owner of Verizon Wireless.

In Germany, consumers spending €20 ($26) end up with a data plan offering as little as 200MB of usage per month. In progressive markets in adjacent countries, spending the same amount will buy an unlimited use data plan or at least one offering tens of gigabytes of usage. In short, German smartphone service is up to 100 times more restrictive than that found in nearby Scandinavia or in the United Kingdom. These same two companies charge Germans double what English customers pay and a Berliner will end up with 22 times less data service after the bill is settled.

competition slide 2

So what is going on in Germany that allows the marketplace to stay so price-distorted? The fact all four significant competitors have close ties to or are owned by the large multinational telecom operators mentioned above. Deutsche Telekom, Vodafone, Telefonica and E-Plus, the latter one belonging to the Dutch KPN Group are all members of a lobbying organization attempting to persuade the EU to invest public funds into improving Europe’s wired broadband networks. Playing against that proposition is a growing number of Europeans moving to wireless. By charging dramatically higher wireless prices in Germany, all four companies have successfully argued that wireless adoption is not a significant reason to stall public financing of private broadband projects. In fact, Germany’s wireless growth is well below other EU nations.

The Finnish researchers point out the evidence of informal provider collusion is pretty stark in Germany:

“One would expect these ‘European Champions,’ especially the ones with lower market shares (Telefonica and E-Plus), to look at the smartphone centric market transformation as an opportunity to secure or improve their market share, especially in light of the fact they should have plenty of unused radio spectrum capacities to make their offers more consumer-appealing,” the report finds. But in fact these new entrants have priced their services very closely in alignment with the larger two.

“Undoubtedly, multinational incumbent telco groups and their investors have good reasons to lobby EU decision makers to enact friendly policies that will protect their inherited oligopolistic high profit margins,” the report states. “But will the German model serve the best interest of consumers and business in other EU member states? In Rewheel’s opinion, clearly not. Enforcing an overly ‘convergent player friendly’ German model would severely limit competition in the mobile markets, leading to high prices for consumers and the Internet of mobile things and sever under-utilization of the member states’ scarce national radio spectrum resources.”

http://www.phillipdampier.com/video/Bloomberg ATT Entry in Europe Not Seen as Competitive Threat 7-15-13.flv

Competition is brutal in Europe’s wireless marketplace — a factor Bloomberg News says could temper AT&T’s planned “European Wireless Takeover.” What makes the difference between enormous profits in North America and heavy price discounting in Europe? Spectrum policy, which gives European competitors a more level playing field. Bloomberg analysts speculate AT&T will bankroll its rumored European buyouts and mergers with the enormous profits it earns from U.S. subscribers.  (4 minutes)

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John Malone’s New Plans for Your Broadband: ISP Surcharges for Netflix, Online Video Use

Again with the domination thing.

Again with the domination and control thing.

Dr. John Malone is wasting no time reacquainting the cable industry with the kinds of classic power plays he used while running Tele-Communications, Inc. (TCI), then America’s largest and most powerful cable operator. Malone’s latest salvo: proposing new broadband pricing schemes that run afoul of Net Neutrality by charging consumers higher broadband prices if they watch online video services like Netflix.

Malone, increasing his influence over Charter Communications before launching the next wave of cable company consolidation, implied the industry is hurting from the lack of power and dominance it used to enjoy when it had an unfettered, territorial monopoly back in the 1980s. Malone told an audience at the annual shareholder meeting of Liberty Global he advocates getting the industry’s mojo back by returning to “value creation” pricing models — code language for new ways to charge customers higher prices or add-on fees.

Malone sees raising prices for Internet service key to bringing the industry back to the golden profits it used to enjoy selling television subscriptions, even as customers faced massive rate increases that doubled, tripled, or even quintupled rates for certain services.

Malone’s assessment of the eight current largest cable operators wiring the country: Snow White (Comcast) and the Seven Dwarfs (Everyone Else). The disorganized agendas of various cable operators are troublesome to Malone, who wants the industry to act in lock step with a unified, cooperating voice. Consumer groups call this kind of friendly cooperation “collusion.”

netflixpaywallMalone also thinks it is time to discard reliance on cable television to bring home the revenue and profits Wall Street expects. The industry should instead turn its earning attention to broadband, a product few Americans can live without. Malone believes the cable industry is not only positioned to control content distributed on its TV Everywhere online video platform for authenticated cable subscribers, but also have a say in competing content from Netflix, among others, which are totally reliant on the broadband pipes provided by ISPs.

With Netflix consuming a growing percentage of cable broadband resources, and possibly contributing to cable TV cord cutting, Malone does not advocate crushing its competition. Instead, he wants a piece of the action. How? By demanding online video providers pay for using cable broadband infrastructure. Consumers also face surcharges on their broadband accounts if they watch online video services like Netflix, Amazon, YouTube and other over-the-top-video. Malone also advocates the implementation of Internet Overcharging schemes like consumption billing and usage caps.

Malone’s “world of the future,” is, in reality, not much different from AT&T’s 2005 proclamation that use of AT&T’s broadband pipes should come at a cost to content producers.

Then-CEO Ed Whitacre’s public statements fueled support for Net Neutrality, which forbids broadband providers from traffic discrimination techniques like charging extra for certain content or artificially degrading service for producers who refuse to pay.

Malone’s incendiary ideas may be letting too much of the cat out of the bag, say some observers worried Malone’s rhetoric will remind people he was once labeled “the Darth Vader of Cable.” His statements could attract unnecessary attention that could be used to organize opposition.

Last week, the Wall Street Journal reported that broadband providers and content producers were already secretly cutting deals to exchange bandwidth for money without the public scrutiny Malone’s comments will generate.

The newspaper reports some of the biggest Net Neutrality proponents around, particularly Google, are quietly paying millions to large cable companies to guarantee their content reaches customers as quickly and smoothly as possible.

internettollAmong the top recipients: Comcast, which collects $25-30 million a year and Time Warner Cable, which nets “tens of millions of dollars” from Google, Microsoft, and Facebook.

The payments are buried in the murky world of “interconnection agreements” governing the backbone pipes carrying huge amounts of web traffic from popular websites and those owned by large telecom providers. Originally, content and broadband providers agreed to peering arrangements that would trade traffic without payment to each other. But as bandwidth-heavy online video began to turn those shared connections into lopsided floods of movies and TV shows headed into subscriber homes against a trickle of content coming back from broadband customers, the cable and phone companies began crying foul.

Netflix has so far navigated around paying Internet Service Providers directly to support their video content. Instead, it is building its own specialized content distribution network intended for ISPs to more effectively and efficiently deliver high bandwidth video. Connections to the Netflix network are free of charge to participating providers, but many ISPs are demanding to be paid.

Some content providers are fearful if they don’t pay, the free “peering” links will become hopelessly overcongested and slow web pages and services to a crawl.

For Verizon customers, that may have already happened as Netflix streams began stuttering and buffering earlier this month.

Cogent, which supplies Verizon with a considerable amount of Netflix traffic, immediately pointed the finger at the phone company for artificially degrading the Netflix viewing experience. Verizon promptly shot back:

Cogent is not compliant with one of the basic and long-standing requirements for most settlement-free peering arrangements: that traffic between the providers be roughly in balance. When the traffic loads are not symmetric, the provider with the heavier load typically pays the other for transit. This isn’t a story about Netflix, or about Verizon “letting” anybody’s traffic deteriorate. This is a fairly boring story about a bandwidth provider that is unhappy that they are out of balance and will have to make alternative arrangements for capacity enhancements, just like any other interconnecting ISP.

Cable giants like Malone see the battle as one the cable industry will have a hard time losing, because it is the only technology present in most communities that can handle the traffic and the growing demand for faster speeds.

Cable operators think content companies have a license to print money, especially since their success is built partly on broadband networks they don’t own or pay for delivering content to customers. At the same time, content companies fear they could be forced out of business if the cable industry decides to give itself preferential treatment.

http://www.phillipdampier.com/video/WSJ Paying ISPs to Move Content 6-20-13.flv

Reporters from The Wall Street Journal discuss the secret payment arrangements between content producers and some of America’s largest ISPs. (4 minutes)

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John Malone’s Vision of Cable’s Future: Mergers/Acquisitions/Bring Back the ‘Cable Mafia’

Time Warner Cable and Cablevision customers may one day end up as Charter Cable customers if John Malone has his way.

Time Warner Cable and Cablevision customers: Is Charter Cable in your future?

The best way the cable industry can grow revenue in the lucrative broadband business is to bring back the same type of collusion and control cable companies maintained over video programming 20 years ago.

Dr. John Malone did not want to sound nefarious in his recent interview with CNBC’s David Faber, but the new part-owner of Charter Communications has built a reputation as cable’s Darth Vader over the last 30 years. His detractors consider his way of doing business akin to a nationwide cable mafia, complete with exclusive, non-competitive territories that assure operators can charge sky-is-the-limit prices.

Malone is now back in the cable business in a big way, and analysts expect he will quickly amass influence in an industry he once led as CEO of the nation’s then-largest cable operator — Tele-Communications, Inc. (TCI).

http://www.phillipdampier.com/video/CNBC Malone is Back Into Cable 4-13-13.mp4

Why is John Malone back in the cable business and why buy a piece of Charter Cable? Malone tells CNBC’s David Faber Charter is a company with enormous growth potential through mergers and acquisitions. CNBC says Malone could be targeting Time Warner Cable and Cablevision for acquisition by Charter as early as next year. “There is consolidation yet to be done,” Malone hints.  (7 minutes)

Malone notes the cable industry is on the cusp of transformative consolidation through collaborative agreements, mergers, and outright acquisitions both here and abroad. CNBC speculated that could begin with efforts to further reduce the number of cable operators in the United States, perhaps beginning with a deal by Charter Communications to acquire both Time Warner Cable and Cablevision, which could combine under Malone’s stewardship and Charter’s executive leadership to “compete” with Comcast.

Dr. John Malone

Dr. John Malone

CNBC reporters note Malone has high praise for Thomas Rutledge, CEO of Charter Communications. Rutledge’s earlier experience working for both Time Warner Cable and Cablevision could be an asset in combining all three companies into one. Analysts speculate such a deal could be pitched as early as 2014 when Time Warner Cable will undergo a management makeover with the departure of CEO Glenn Britt. CNBC also noted Cablevision’s imminent sale has been rumored for years, and current leader and family patriarch Chuck Dolan is 87 years old. With cheap credit and Malone’s business savvy, both companies could find themselves part of a Malone-engineered takeover that would vastly expand Charter Communications into the second largest cable operator in the country.

Malone sees the days of traditional cable television coming to an end as consumers turn to “over the top” online video for an increasing share of their viewing time. As cable television rates continue to increase, customers are cutting the cord. Malone believes today’s bloated cable packages are ripe for an upheaval from a-la-carte pricing or theme-based programming bouquets that break expensive sports programming or movie channels out of the traditional basic cable lineup. Malone even suspects a challenge to the industry’s current price models could surprisingly come from the programmers themselves.

Sports networks will be among the first to notice their affiliate revenue collected from cable and satellite companies (and passed on to customers in the form of higher rates) will stagnate as customers drop cable television. Declining viewer ratings also mean lower ad revenues. Malone believes at some point sports teams and/or programming networks will decide that the biggest barrier to winning new viewers is the $70-80 asking price for basic cable. If sports programmers find they can reach new audiences selling their programming online, direct-to-consumer, for $5-10 a month, the basic cable all-for-one-price model will quickly collapse.

“As the cable guys and the satellite guys start to lose customers to the over-the-top guys, some of those economics will be reflected back on the sports guys,” Malone said. “They’ll start losing advertising revenue. They’ll lose affiliate revenue. And they have to face reality that maybe you need to segregate your market like everybody else.”

http://www.phillipdampier.com/video/CNBC Malone on Unbundling Cable 4-13-13.mp4

John Malone predicts the demise of the traditional bundle of cable television programming within five years. The future is streamed video online, declares Malone, so it is important the cable industry move to manage that competitive threat by acquiring streaming competitors or launching their own services to assure video programming revenue can be protected.  (5 minutes)

non competeMalone sees the future sustainability of the cable industry dependent on the high revenue broadband business.

“I think it is at a point in history when the most addictive thing in the communications world is high-speed connectivity,” Malone told CNBC. “Everywhere in the world that we operate, we’ve just seen the public want more and more data rate. Whether it’s wireless or wired. There’s a big appetite for it. Cable technology right now is the most cost-effective way to deliver that growth in speed.”

Malone believes there is also plenty of room for revenue growth and cost-cutting, which he said can best be accomplished by getting other cable operators together to “cooperate” and “coordinate” broad scale broadband projects that counter competitive threats from third parties.

Malone helped pioneer the cable industry business practice of “don’t compete in my backyard and I won’t compete in yours,” an informal agreement among operators to stay within their own specific territories, safe and secure from competition. In the 1980s and 1990s, Malone’s TCI was one among many cable operators buying and swapping cable systems to build large, regional system “clusters” where only a single cable company provides service, winning economy of scale and a formidable presence that discouraged other wired competitors from entering the business. In most cities, only the deep pockets of AT&T (U-verse) and Verizon (FiOS) have managed to shake things up.

http://www.phillipdampier.com/video/CNBC Bring Back the Cable Mafia 4-13-13.mp4

Bring back the cable mafia? CNBC’s David Faber gets John Malone to admit vertical and horizontal integration — controlling the content and the pipeline — are important factors to protect cable revenue and expand American dominance in cable internationally. Malone is also a big supporter of industry consolidation and believes mergers and acquisitions are necessary to shrink the number of cable operators in the United States. (5 minutes)

John Malone's "cable mafia."

The cable mafia?

Malone wants broadband to be carefully managed under the industry’s own control and direction.

Faber asked if Malone wanted to bring back the days of the “cable mafia.”

“Yes, I think we do want to bring back the days of @Home, the days of Ted Turner, the days when we all got together, because together we provided national scale,” Malone said. “Now I think we have the opportunity to create global scale,” he said. “The goal is not to be bigger. The goal is to be more cost-effective.”

One significant way cable can push broadband and protect video revenue is to acquire or directly compete with online video providers like Netflix and Hulu.

“People aren’t going to stop watching TV,” Malone said. “They’re just going to watch it coming over the top.”

With easy credit at cheap rates and enormous cash on hand, Malone recommends cable operators get out their mergers and acquisitions checkbook and remember the days when cable operators controlled both cable television systems and most of the programming carried on those systems. For broadband, that means making sure companies control the pipeline and the content that travels across it.

http://www.phillipdampier.com/video/CNBC When the Money is Cheap Use It 4-13-13.mp4

Washington tax policies originally designed to expand access to cheap capital for business investment, hiring and expansion are instead being used to leverage buyouts and mergers. John Malone says Charter Communications will use “cheap money” at interest rates well below 5% and favorable corporate tax policies to fuel the next wave of cable industry consolidation. (2 minutes)

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  • JoeinIllinois: At some point, won't the cable companies press ESPN , the Regional Sports Networks, NHL network, NBA network, MLB network, NBC Sports Net, regional NC...
  • Paul Houle: The big issue with Fiber is that it has high costs to set up, not so much because the hardware is expensive, but because you have to either dig up t...
  • Scott: Perfectly example of why I still don't subscribe to cable or satellite. The only channel I *might* watch out of that entire lineup is Comedy Central....
  • James Cieloha: CableOne, Service Electric, GCI, Buckeye and other NCTC members are being forced by Viacom to add the Epix movie channels in order to carry the cable ...
  • Dave Hancock: I don't know where AP lives, but in MOST areas of the country MOST people do not have any choice for High Speed Internet (15mbps or above) - it is the...
  • tacitus: That doesn't sound right. Are you in some sort of contract? Where in the country is this?...
  • AP: Good luck cutting cable if you live in an area that has one cable, internet, and phone company like I do. If you want internet or phone with the cable...
  • Dave Hancock: Soon the rest of the cable companies will follow Verizon's lead and start limiting the input bandwidth to their systems (ex: Netflix) to discourage su...
  • Milan in Austin: Cable TV is an obsolete product! I suggest everyone seriously consider dropping cable television. I cut the cord in August of 2013, and don't miss ca...
  • gsuburban: I have to agree that Verizon is not interested in providing its customers with a "clear pipe" due to the politics of peer-to-peer data sharing or what...
  • Scott: Not good, that takes away all your leverage in the situation. If you're holding the money you can work through the BBB or try and negotiate with the ...
  • Hudson Mohawk Press: We knew it couldn't last forever. Starting this month Time Warner Cable of NYC is charging Earthlink Internet customers a $5.99 modem lease fee. The w...

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