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The Great American Telecom Oligopoly Costs You $540/Yr for Their Excess Profits

Like the railroad robber barons of more than a century ago, a handful of phone and cable companies are getting filthy rich from a carefully engineered oligopoly that costs the average American $540 a year more than it should to deliver vital telecommunications services.

That is the conclusion of a new study from the Washington Center for Equitable Growth, authored by two men with decades of experience representing the interests of consumers. They recommend stopping reckless deregulation without strong and clear evidence of robust competition and ending rubber stamped merger approvals by regulators.

The trouble started with the passage of the 1996 Telecommunications Act, a bill heavily influenced by telecom industry lobbyists that, at its core, promoted deregulation without assuring adequate evidence of competition. It was that Act, signed into law by President Clinton, that authors Gene Kimmelman and Mark Cooper claim is partly responsible for today’s “highly concentrated oligopolistic markets that result […] in massive overcharges for consumer and business services.”

“Prices for cable, broadband, wired telecommunications, and wireless services have been inflated, on average, by about 25 percent above what competitive markets should deliver, costing the typical U.S. household more than $45 per month, or $540 per year, for these services,” the report states. “This stranglehold over these essential means of communication by a tight oligopoly on steroids—comprised of AT&T Inc., Verizon Communications Inc., Comcast Corp., and Charter Communications Inc. and built through mergers and acquisitions, not competition—costs consumers in aggregate almost $60 billion per year, or about 25 percent of the total average consumer’s monthly bill.”

The cost of delivering service is plummeting even as your bill keeps rising.

The authors also claim that these four companies earn astronomical profits — between 50 and 90% — on their services, compared with the national average of just under 15% for all industries.

The only check on these profits came from the 2011 rejection of the merger of AT&T and T-Mobile, which started a small price war in the wireless industry, saving customers an average of $5 a month, or $11 billion a year collectively.

But antitrust enforcement alone is inadequate to check the industry’s anti-competitive behavior. Competition was supposed to provide that check, but policymakers too often kowtowed to the interests of telecom industry lobbyists and prematurely removed regulatory oversight and protections that were supposed to remain in place until real competition made those regulations unnecessary.

Attempts to force open closed networks to competitors were allowed in some instances — particularly with local telephone companies, but only for certain legacy services. Newer products, particularly high-speed broadband, were usually not subject to these open network policies. The companies lobbied heavily against such requirements, claiming it would deter investment.

The framers of the ’96 Act also mandated an end to exclusive franchise agreements that barred phone and cable companies from entering each others’ markets. This was intended to allow phone and cable companies to compete head to head, setting up the prospect of consumers having multiple choices for these providers.

Current FCC Chairman Ajit Pai frequently cites the 1996 Communications Act as being “light touch” regulation that promulgated the broadband revolution. But in reality, the Act sparked a massive wave of corporate consolidation in broadcasting, cable, and phone companies at the behest of Wall Street.

“[Cable companies] refused to enter new markets to compete head to head with their sister companies [and] never entered the wireless market,” the authors note. “Telephone companies never overbuilt other telephone companies and were slow to enter the video market. Each chose to extend their geographic reach by buying out their sister companies rather than competing. This means that the potentially strongest competitors—those with expertise and assets that might be used to enter new markets—are few. This reinforces the market power strategy, since the best competitors have followed a noncompete strategy.”

Wall Street sold consolidation on the theory of increased shareholder value from eliminating duplicative costs and workforces, consolidating services, and growing larger to stay competitive with other companies also growing larger through mergers and acquisitions of their own:

  • The eight regional Baby Bells created after the breakup of AT&T’s national monopoly in the mid-1980s eventually merged into two huge wireline and wireless companies — AT&T and Verizon. The authors note these companies didn’t just acquire those that were part of the Ma Bell empire. They also bought out independent companies like GTE and long distance companies like MCI. Most of the few remaining independents provide service in rural areas of little interest to AT&T or Verizon.
  • The cable industry is still in a consolidation wave combining large players into a handful of giants, including Comcast and Charter Communications, which also have close relationships with content providers. Altice entered the U.S. cable business principally on the prospect of consolidating cable companies under the Altice brand, not overbuilding existing companies with a competing service of its own.

Such consolidation wiped out the very companies the ’96 Act was counting on to disrupt existing markets with new competition. Comcast, Charter, and Verizon even have agreements to cross-market each others’ products or use their infrastructure for emerging “competitive” services like mobile phones and wireless broadband.

“By the standard definitions of antitrust and traditional economic analysis, a tight oligopoly has developed in the digital communications sector,” the report states. “While some markets are slightly more competitive than others, the dominant firms are deeply entrenched and engage in anti-competitive and anti-consumer practices that defend and extend their market power, while allowing them to overcharge consumers and earn excess profits.”

“The impact of this abuse of market power on consumers is clear. According to the most recent Consumer Expenditure Survey by the U.S. Bureau of Labor Statistics, the ‘typical’ middle-income household spends about $2,700 per year on a landline telephone service, two cell phone subscriptions, a broadband connection, and a subscription to a multichannel video service,” the report indicates. “Adjusting for the ‘average’ take rate of services in this middle-income group, consumers spend almost twice as much on these services as they spend on electricity. They spend more on these services than they spend on gasoline. Consumer expenditures on communications services equal about four-fifths of their total spending on groceries.”

The authors point out the Obama Administration, unlike the Bush Administration that preceded it, was the first since the 1996 Act’s passage to begin implementing policies to enhance and protect competition, and also check unfettered market power among the largest incumbent providers:

  • It blocked the AT&T/T-Mobile merger, which would have removed an important competitor and affect wireless rates in just about every U.S. city. The Obama Administration’s opposition not only preserved T-Mobile as a competitor, it also made that company review its business plan and rebrand itself as a market disruptor, forcing wireless prices down substantially for the first time and collectively saving all wireless customers in the U.S. billions from rate increases AT&T and Verizon could not carry out.
  • It blocked the Comcast/Time Warner Cable merger, which would have given Comcast unprecedented and unequaled control over internet access and content providers in the U.S. It would have immediately made other cable and phone companies potentially untenable because of their lack of market power and ability to achieve similar volume discounts and economy of scale, and would have blocked emerging competitors that could not create credible business plans competing with Comcast.
  • It blocked informal Sprint/T-Mobile merger talks that would have combined the third and fourth largest wireless carriers. Antitrust regulators were concerned this would dramatically reduce the disruptive marketing that we still see today from both of these companies.
  • It placed restrictions on Comcast’s merger with NBC Universal and Charter’s acquisition of Time Warner Cable. Comcast was required to effectively become a silent partner in Hulu, a vital emerging video competitor. Charter cannot impose data caps on its customers for up to seven years, helping to create a clear record that data caps are both unnecessary and unwarranted and have no impact on the cost of delivering internet services or the profits earned from it.
  • Strong support for Net Neutrality, backed with Title II enforcement, has given the content marketplace a sense of certainty and stability, allowing online cable TV competitors to emerge and succeed, giving consumers a chance to save money by cutting the cord on bloated TV packages. If providers were given the authority to discriminate against internet traffic, it would place an unfair burden on competitors and discourage new entrants.

The authors worry the Trump Administration and a FCC led by Chairman Ajit Pai may not be willing to preserve the first gains in broadband and communications competitiveness since mergermania removed a lot of those competitors.

“The key lesson in the communications sector is that vigorous regulation and antitrust enforcement can create the conditions for market success. But balance is the key,” the reports warns. “Technological innovation and convergence are no guarantee against the abuse of market power, but the effort to control the abuse of market power should not stifle innovation. If the Trump administration jettisons the enforcement practices of the past eight years, then the telecommunications sector is likely to see a wave of new consolidation and a dampening of the price cutting and innovative wireless and broadband services that have been slowly emerging.”

A Deal With Charter, Comcast Could Further Burden Sprint’s Poor-Performing Network

With Sprint and T-Mobile reportedly far apart in prospective merger talks, Sprint has given a two-month exclusive window to Charter Communications and Comcast Corp. to see if a wireless deal can be made between the wireless carrier and America’s largest cable operators. But any deal could initially burden Sprint’s fourth place network with more traffic, potentially worsening performance for Sprint customers until additional upgrades can be undertaken.

The two cable companies are reportedly seeking a favorable reseller arrangement for their forthcoming wireless offerings, which would include control over handsets, SIM cards, and the products and services that emerge after the deal. Both Charter and Comcast also have agreements with Verizon Wireless to resell that network, but only within the service areas of the two cable operators. Verizon’s deal is far more restrictive and costly than any deal Charter and Comcast would sign with Sprint.

Such a deal could begin adding tens of thousands of new wireless customers to Sprint’s 4G LTE network, already criticized for being overburdened and slow. In fact, Sprint’s network has been in last place for speed and performance compared with AT&T, T-Mobile, and Verizon for several years. A multi-year upgrade effort by Sprint has not delivered the experience many wireless customers expect and demand, and Sprint has seen many of its long-term customers churn away to other companies — especially T-Mobile, after they lost patience with Sprint’s repeated promises to improve service.

PC Magazine’s June 2017 results of fastest mobile carriers in United States shows Sprint in distant fourth place.

At least initially, cable customers switching to their company’s “quad-play” wireless plan powered by Sprint may find the experience cheaper, but underwhelming.

Sprint chairman Masayoshi Son was initially aggressive about upgrading Sprint’s network with funds advanced by parent company Softbank. But it seems no matter how much money was invested, Sprint has always lagged behind other wireless carriers. In recent years, those upgrades seem to have diminished. Instead, Son has been aggressively trying to find a way to overcome regulator and Justice Department objections to his plan to merge Sprint with third place carrier T-Mobile USA. Likely part of any deal with Charter and Comcast would be a substantial equity stake in Sprint, or some other investment commitment that would likely run into the billions. That money would likely be spent bolstering Sprint’s network.

A deal with the two cable companies could also give Sprint access to the cable operators’ large fiber networks, which could accelerate Sprint’s ability to buildout its 5G wireless network, which will rely on small cells connected to a fiber backhaul network.

Less likely, according to observers, would be a joint agreement between Charter and Comcast to buy Sprint, which is currently worth $32 billion but also has $32.6 billion in net debt. Sprint’s talks with Charter and Comcast do not preclude an eventual merger with T-Mobile USA. But any merger announcement would likely not come until late this summer or fall, if it happens at all.

Wall Street is downplaying a Sprint/T-Mobile combination as a result of the press reports indicating talks between the two companies appear to have gone nowhere.

“We didn’t give a Sprint/cable deal high odds,” wrote Jonathan Chaplin of New Street Research.  “While a single cable company entering into any transaction with Sprint has a strong likelihood of regulatory approval, a joint bid raises questions that add some uncertainty. However, the deal corroborates our view that Sprint isn’t as desperate as many thought and T-Mobile didn’t have the leverage that most seemed to assume.”

Malone

“An equity stake or outright acquisition is less likely in our view, but not out of the realm of possibility,” said Mike McCormack of Jefferies. “In our view, this likely suggests major hurdles in any Sprint/T-Mobile discussions and could renew speculation of T-Mobile and Dish should Sprint talks falter.”

Marci Ryvicker of Wells Fargo believes Comcast will be “the ultimate decision maker” as to which path will be taken. Amy Yong of Macquarie Research seems to agree. “We note Comcast has a strong history of successfully turning around assets and could contribute meaningfully to Sprint; NBCUniversal is the clearest example. But she notes Charter is likely to be distracted for the next year or two trying to integrate Time Warner Cable into its operations.

Behind the cable industry’s push into wireless is Dr. John Malone, Charter’s largest shareholder and longtime cable industry consigliere. Malone has spent better than a year pestering Comcast CEO Brian Roberts to join Charter Communications in a joint effort to acquire a wireless carrier instead of attempting to build their own wireless networks. But both Roberts and Charter CEO Thomas Rutledge have been reluctant to make a large financial commitment in the wireless industry at a time when the days of easy wireless profits are over and increasing competition has forced prices down.

For Malone, wireless is about empowering the cable industry “quad play” – bundling cable TV, internet, phone, and wireless into a single package on a single bill. The more services a consumer buys from a single provider, the more difficult and inconvenient it is to change providers.

Malone also believes in a united front by the cable industry to meet any competitive threat. Malone favored TV Everywhere and other online video collaborations with cable operators to combat Netflix and Hulu. He also advocates for additional cable industry consolidation, in particular the idea of a single giant company combining Charter, Cox, and Comcast. Under the Trump Administration, Malone thinks such a colossal deal is a real possibility.

Wall Street Hissyfit: Raise Broadband Prices to $90/Month Immediately! (Or Else)

If the average customer isn’t paying $90 a month for broadband service, they are paying too little and that needs to stop.

That is the view of persistent rate hike advocate Jonathan Chaplin, a Wall Street analyst with New Street Research, who has advocated for sweeping broadband rate increases for years.

“We have argued that broadband is underpriced, given that pricing has barely increased over the past decade while broadband utility has exploded,” Chaplin wrote in a note to investors. “Our analysis suggested a ‘utility-adjusted’ ARPU target of ~$90. Comcast recently increased standalone broadband to $90 with a modem, paving the way for faster ARPU growth as the mix shifts in favor of broadband-only households. Charter will likely follow, once they are through the integration of Time Warner Cable.”

Companies that fail to raise prices risk being downgraded by analysts with views like these, which can have a direct impact on a stock’s share price and the executive compensation and bonus packages that are often tied to the company’s performance.

But there is a dilemma and disagreement between some cable industry analysts about how much companies can charge their customers. Companies like Cable ONE have been aggressively raising broadband prices to unprecedented levels in some of the poorest communities in the country, which worries fellow Wall Street analyst Craig Moffett from MoffettNathanson LLC.

“Never mind that the per capita income in Cable ONE’s footprint is the lowest (by far) of the companies we [Moffett’s firm] cover, or that the percentage of customers living below the poverty line is the highest (also by far),” Moffett told his investor subscribers. “What matters is that there is very little competition in Cable ONE’s footprint. If you want high-speed broadband, where else are you going to go? The unspoken fear among their larger peers is that over-reliance on broadband pricing invites regulatory intervention, not just for Cable ONE, but for everyone.”

Chaplin thinks the risk from gouging broadband customers is next to zero. With cable TV becoming less profitable every day, all the big profits that can be made will be made from broadband, where cable operators often enjoy a monopoly on high-speed service.

According to Chaplin, if customers value internet access, they will pay the higher prices cable companies charge. So what are companies waiting for? Raise those prices!

WOW Goes Public; At High Risk of Acquisition as Cable Industry Consolidates

Phillip Dampier May 16, 2017 Broadband Speed, Competition, Consumer News, WOW! 1 Comment

WideOpenWest, better known to subscribers as WOW!, has filed with the Securities and Exchange Commission to become a publicly traded company as it seeks to raise funding and make itself an attractive proposition for investors and potential buyers.

The company will initially remain under the control of Avista Capital Partners (44%), which has been an investor in WOW! from the beginning, joined by Crestview Partners (29%), which invested $125 million in the cable company in 2015.

WOW! is currently the sixth largest cable operator in the United States and an attractive takeover target for cable operators like Altice USA, Charter Communications or Comcast. In fact, WOW! provides direct cable competition for Charter and Comcast in the midwest and southeastern United States. Should either of those operators acquire WOW!, that competition will cease. The most likely buyer, however, is Altice USA, which is expected to offer its own IPO to raise funds specifically to acquire American cable companies. Altice currently owns Cablevision and Suddenlink.

WOW! has 772,300 subscribers, but is available to up to three million homes.

The cable company has also ditched its traditional logo and adopted a new one:

Old Logo

Old Logo

New Logo

WOW! is known for high quality customer service and aggressive service plans. Here is their current broadband offer:

America’s Best Three Internet Providers: EPB, Sonic, and Google Fiber

Phillip Dampier March 27, 2017 Broadband Speed, Competition, Consumer News No Comments

Consumer Reports is having a hard time handing out high scores to America’s cable and phone companies after its recent editorial overhaul that replaces simple numeric-only scores with a simpler color code that ranks good companies in green, fair companies in yellow, and downright lousy ones in red.

In its most recent rankings (subscription required), only three internet providers managed to win green ratings: a publicly owned municipal utility in Chattanooga, Tenn., a private ISP serving northern California communities in and around San Francisco, and Google Fiber, which shows every sign of stopping further expansion of its fiber to the home network.

EPB Fiber is the runaway winner of Consumer Reports’ ongoing ratings of America’s top telecom providers, scoring 92 and getting excellent ratings for value, reliability and speed. Sonic, which still primarily offers DSL service, achieved second place despite being limited in selling higher speeds available over AT&T’s wireline telephone network. Google Fiber made third place and is a regular favorite for offering affordable gigabit speeds for around $70 a month, not much more expensive than what some ISPs charge for 60Mbps for less.

The fact a public utility like EPB offers America’s best broadband service must give fits to the telecom giants like Comcast, Charter, and AT&T that only dream of achieving similar scores and have a history of opposing public broadband and in some cases have financed lobbying efforts seeking to ban it.

Providers achieving “yellow” ratings were almost exclusively small, regional independent cable operators and overbuilders like WOW and RCN. Verizon and Frontier’s versions of FiOS also made the cut, although it seems both suffered ratings drops attributable to decreased scores for value and customer service. Both companies have eliminated some of their most aggressive promotions that used to lure customers with a very low price for service.

The list of lousy-scoring companies is larger than ever, and encompass all the familiar large operators most Americans have to do business with. Since Stop the Cap! started in 2008, Mediacom is still rated the lousiest of the lousy cable companies, achieving a score of just 51. Only HughesNet, a satellite internet provider, scored worse, and not by much — achieving a 47 score.

DSL providers other than Sonic performed dismally as well: FairPoint (52), Windstream (53), Frontier (53), Verizon DSL (54), TDS (55), AT&T DSL (55), CenturyLink (57), and Cincinnati Bell DSL (57).

Cable companies also live in the ratings basement – Comcast/XFINITY (54), Charter/Time Warner Cable (55), GCI (60), Comporium (60), and Atlantic Broadband (60). Charter Communications just barely made it out of the red section with a score of (61), also shared by Cox and Cable ONE. Altice’s Cablevision, AT&T U-verse, Blue Ridge Communications, and Consolidated Cable managed scores of just 63. Charter/Bright House and Service Electric got a 64, and Altice’s Suddenlink managed a surprising 66.

The consumer magazine’s conclusion – most Americans still loathe their cable and phone companies, their prices, their bundles, and are greatly dissatisfied with the state of competition. That is unlikely to change considering the industry’s current trend of consolidation, which further reduces customer choice.

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  • Josh: Not the dumbest use of our money possible, but why the frak don't we just own the service we're paying for?...
  • Joe V: and the fleecing of the U.S. continues....
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