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Wall Street: Telecom Mergers Are Supercalifragilisticexpialidocious! Consumers: More Pocket-Picking

price-gouging-cake“Comcast Corp.’s bid to buy Time Warner Cable Inc. may be the opening act for a yearlong festival of telecommunications deals that would alter Internet, phone and TV service for tens of millions of Americans.” — Bloomberg News, May 14, 2014

Wall Street analysts remain certain Comcast and Time Warner Cable won’t be the only merger on the table this year as the $45 billion dollar deal is expected to spark a new wave of consolidation, further reducing competitive choice in telecom services for most Americans.

While the industry continues to insist that the current foundation of deregulation is key to investment and competition, the reality on the ground is less certain.

Let’s review history:

For several decades, the cable industry has avoided head-on competition with other cable operators. They argue the costs of “overbuilding” cable systems into territories already serviced by another company is financially impractical and reckless. But that did not stop telephone companies like AT&T and Verizon from overhauling portions of their networks to compete, and in at least some communities another provider has emerged to offer some competition. Some wonder if AT&T was willing to spend billions to upgrade their urban landline network to provide U-verse, why won’t cable companies spend some money and compete directly with one another?

The answer is simple: They can earn a lot more by limiting competition.

When only a few firms account for most of the sales of a product, those firms can sometimes exercise market power by either explicitly or implicitly coordinating their actions. Coordinated interaction is especially suspect where all firms seem to charge very similar prices and few, if any, are willing to challenge the status quo.

Since the 1980s, the telecommunications industry has been deregulated off and on to a degree not seen since the pioneer days of telephone service. That was the era when waves of mergers created near-monopolies in the oil, railroad, energy, tobacco, steel and sugar industries. By the late 1890s, evidence piled up that proved reducing the number of providers in a market leads to higher prices and poor service. The abuses eventually led to the passage of the Sherman Antitrust Act of 1890 and later the Clayton Antitrust Act of 1914.

Here is what happened when the cable industry was reined in during the early 1990s, only to be deregulated again.

Here is what happened when the cable industry was reined in during the early 1990s, only to be deregulated again.

The generation of political leaders that dominated Washington during the 1980s developed selective amnesia about economic history and dismantled many of the regulatory protections established to protect consumers, arguing competition would keep markets in check. In the broadband and cable business, that has not proved as successful as the industry represents.

At the heart of the problem is the 1996 Telecommunications Act, signed into law by President Bill Clinton. The sweeping law is littered with lobbyist landmines for consumers and their interests. Under the guise of increasing competition, the 1996 law actually helped reduce competition by removing regulatory oversight and, perhaps unintentionally, sparking an enormous rampage of industry consolidation followed by price increases. The Bush Administration kept the war on consumers going with the appointment of Michael Powell (now the CEO of the cable industry’s lobbying group) to chair the Federal Communications Commission. Under Powell, non-discriminatory access to networks by competitors was curtailed, and Powell’s FCC gave carte blanche to the cable industry’s plan to cluster its territories into large regional monopolies and a tight national oligopoly. The FCC’s own researchers quietly admitted in the early 2000s “clustering raised prices.”

Cable prices

By January 2001, cable operators had settled on rate increases that averaged three times the rate of inflation. While the national inflation rate hovered around 1%, cable companies routinely raised basic cable rates an average of 7% annually. Powell declared rising cable rates were not a consumer problem and adopted the industry’s classic talking point that rate increases reflect the “value of the programming” found on cable. In fact, even as cable customers grew increasingly angry about rate increases, Powell told three different reporters he wanted to further relax the FCC’s involvement in cable pricing. (McClintock, Pamela, “Powell: No Cable Coin Crisis” Variety, April 30, 2001; Hearn, Ted. “Powell: Value Matters in Cable Rates,” Multichannel News, March 13, 2002; Powell Press Conference, February 8, 2001; Dreazen, Yochi. “FCC Chairman Signals Change, Plans to Limit Intervention,” Wall Street Journal, February 7, 2001.)

cost_broadband_around_the_world_v2Economists reviewing data found in publicly available corporate balance sheets soon found evidence that the “increased programming costs”-excuse for rate increases did not hold water. The less competition or number of choices available to consumers in the market unambiguously lead to higher prices. It has remained true since Consumers’ Union revealed the financial trickery in 2003:

The cable industry will claim that programming costs are driving prices up. While programming costs have certainly risen, a close look at the numbers shows that rising program costs account for only a small part of the rising rates.

If costs were really the cause of rising prices, then the cable industries’ operating margins – the difference between its revenues and costs — would not be rising. The facts are just the opposite. Operating margins have been increasing dramatically since 1997. The operating margin for the industry as a whole will reach $18.8 billion per year in 2002, $7 billion more than it was in 1997. Operating revenues per subscriber have increased dramatically over that period, from $208 per year to $273. That is, after taking out all the operating costs, including programming costs, cable operators have increased their take per subscriber by over 30 percent.

[…] The ability of cable operators to raise rates and increase revenues, even with rising programming costs, stems from the market power they have at the point of sale. They would not be able to raise prices and pass program price increases through if they did not have monopoly power.

Consumers’ Union also foreshadows what will happen if another wave of industry consolidation takes hold the way it did over a decade earlier:

While the cable industry has certainly increased capital expenditures to upgrade its plants, it has actually sunk a lot more capital into another activity – mergers and acquisitions.

It is the outrageous prices that have been paid to buy each other out and consolidate the industry that is helping to drive the rate increases. Between 1998, when the first mega merger between cable operators was announced, and 2001, when the last big merger was announced, cable companies spent over a quarter of a trillion dollars buying each other out. In those four years, they spent almost six times as much on mergers and acquisitions as they did on capital expenditures to upgrade their systems. At the same time, the average price paid per subscriber more than doubled.

countries_with_high_speed_broadbandWhen a cable operator pays such an outrageous price, the previous owner is reaping the financial rewards of his monopoly power. The acquiring company can only pay such a high price by assuming that his monopoly power will allow him to continue to increase prices. Monopoly power is being bought and sold and borrowed against. The new cable operator, who has paid for market power, may insist that the debt he has incurred to obtain it is a real cost on his books. That may be correct in the literal sense (he owes someone that money) but that does not make it right, or the abuse of market power legal.

Fast-forwarding to 2014, economist and Temple professor Joel Maxcy said the same basic economic truths still exist today with Comcast’s merger with Time Warner Cable.

“My concern is the merger and the consolidation of the cable and internet delivery system for consumers and what will happen to internet and cable rates and choices,” Maxcy said, voicing his hesitancy about a deal that merges the nation’s two largest cable providers. “As that industry has gotten more consolidated over time, we have seen rates go up. The answer from them is that we’ve got more choices. Are we better off or not better off? I don’t know, but certainly rates have gone up at a much faster rate than the inflation rate. The result of more monopoly power is always higher prices and less choices and it seems that this merger moves in that direction.”

“The threat from non-network content providers is a concern for the cable industry,” Maxcy added.

“We’re moving to a situation where we don’t need cable, but we still need the internet and the cable companies are the ones that have control of that,” he said. “Consolidating them together makes them more competitive against the outside forces, but the other argument makes the whole thing less competitive so they’ll have more ability to control the access to Netflix, YouTube and the like. People that may develop other similar sorts of services will have a hard time getting the access they would like to purchase those.”

Chris Stigall spoke with economist and Temple professor Joel Maxcy on Talk Radio 1210 WPHT in Philadelphia about Comcast’s attempt to purchase Time Warner Cable and what that means for consumers. Feb. 18, 2014 (12:10)
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Big Telecom Threatens Investment Apocalypse if FCC Enacts Strong Net Neutrality

bfaMost of the same telecom companies that want to create Internet paid fast lanes, drag their feet on delivering 21st century broadband speeds, refuse t0 wire rural areas for broadband without government compensation, and have cut investment in broadband expansion are warning that any attempt by the FCC to enact strong Net Neutrality policies will “threaten new investment in broadband infrastructure and jeopardize the spread of broadband technology across America, holding back Internet speeds and ultimately deepening the digital divide.”

Twenty-eight CEOs of some of the same cable and phone companies that have fueled the fight for Net Neutrality protections by their actions signed a letter published on the website of the industry-funded astroturf group Broadband for America.

“An open Internet is central to how America’s broadband providers operate their networks, and the undersigned broadband providers remain fully committed to openness going forward,” says the letter. “We are equally committed to working with the Commission to find a sustainable path to a lawful regulatory framework for protecting the open Internet during the course of the rulemaking you are launching this week.”

Ironically, some of the same companies signing the letter earlier successfully sued the Federal Communications Commission to overturn Net Neutrality policies the agency attempted to enact under a lighter regulatory framework.

The industry now fears the FCC will reclassify broadband as a “telecommunications service,” which makes the service subject to oversight far less likely to successfully be overturned in the courts.

That has caused a panic in the boardrooms of some of America’s largest phone and cable companies.

“In recent days, we have witnessed a concerted publicity campaign by some advocacy groups seeking sweeping government regulation that conflates the need for an open Internet with the purported need to reclassify broadband Internet access services as Title II telecommunications services subject to common carrier regulation,” the letter says.

signers1

Part of the Problem?: The CEOs that signed the letter.

 

The companies warn that any attempt to rein in the largely unregulated broadband industry would be a major disaster for the U.S. economy and further broadband expansion:

Broadband investment is falling even without Net Neutrality.

Broadband investment is falling even without Net Neutrality.

Not only is it questionable that the Commission could defensibly reclassify broadband service under Title II, but also such an action would greatly distort the future development of, and investment in, tomorrow’s broadband networks and services. America’s economic future, as envisioned by President Obama and congressional leaders on both sides of the aisle, critically depends on continued investment and innovation in our broadband infrastructure and app economy to drive improvements in health care, education and energy. Under Title II, new service offerings, options, and features would be delayed or altogether foregone. Consumers would face less choice, and a less adaptive and responsive Internet. An era of differentiation, innovation, and experimentation would be replaced with a series of ―Government may I? requests from American entrepreneurs. That cannot be, and must not become, the U.S. Internet of tomorrow.

Net Neutrality advocates point out that even without Net Neutrality, broadband investment has fallen in the United States for several years, a point conceded by some cable operators.

In 2010, Suddenlink CEO Jerry Kent explained cable companies are now taking profits now that they don’t have to spend as much on upgrades.

“I think one of the things people don’t realize [relates to] the question of capital intensity and having to keep spending to keep up with capacity,” Kent said. “Those days are basically over, and you are seeing significant free cash flow generated from the cable operators as our capital expenditures continue to come down.”

“We should seek out a path forward together,” suggests the CEOs. “All affected stakeholders need and want certainty and an end to a decade of legal and political wrangling.”

It may prove difficult for observers to take the CEOs seriously considering the litigation record on broadband oversight and regulation. The largest cable and phone companies have repeatedly sued to overturn policies that do not meet with their full approval, something likely to happen again if these giant providers don’t get exactly what they want.

FCC Chairman Promises “New and Improved” Net Neutrality Proposal That Is More of the Same

Phillip "Section 706 is a road to nowhere" Dampier

Phillip “Section 706 is a road to nowhere” Dampier

After thousands of consumers joined more than 100 Internet companies and two of five commissioners at the Federal Communications Commission to complain about Chairman Tom Wheeler’s vision of Net Neutrality, the head of the FCC claims he has revised his proposal to better enforce Internet traffic equality.

Last week, huge online companies like Amazon, eBay, and Facebook jointly called Wheeler’s ideas of Net Neutrality “a grave threat to the Internet.”

In response over the weekend, an official close to the chairman leaked word to the Wall Street Journal that Wheeler was changing his proposal. Despite that, a closer examination of Wheeler’s ideas continues to show his unwavering faith in providers voluntarily behaving themselves. Wheeler’s evolving definition of Net Neutrality is fine… if you live in OppositeLand. His proposal would allow Internet Service Providers and content companies to negotiate paid traffic prioritization agreements — the exact opposite of Net Neutrality — allowing certain Internet traffic to race to the front of the traffic line.

Such an idea is a non-starter among Net Neutrality advocates, precisely because it undermines a core principle of the Open Internet — discriminating for or against certain web traffic because of a paid arrangement creates an unfair playing field likely to harm Internet start-ups and other independent entities that can’t afford the “pay to play” prices ISPs may seek.

Paid traffic prioritization agreements only make business sense when a provider creates the network conditions that require their consideration. If a provider operated a robust network with plenty of capacity, there would be no incentive for such agreements because Internet traffic would have no trouble reaching customers with or without the agreement.

But as Netflix customers saw earlier this year, Comcast and several other cable operators are now in the bandwidth shortage business — unwilling to keep up investments in network upgrades required to allow paying customers to access the Internet content they want.

While there is some argument that the peering agreement between Comcast and Netflix is not a classic case of smashing Net Neutrality, the effect on customers is the same. If a provider refuses to upgrade connections to the Internet without financial compensation from content companies, the Internet slow lane for that content emerges. Message: Sign a paid contract for a better connection and your clogged content will suddenly arrive with ease.

net-neutrality-protestWheeler has ineffectively argued that his proposal to allow these kinds of paid arrangements do not inherently commercially segregate the Internet into fast and slow lanes.

But in fact it will, not by artificially throttling the speeds of deprioritized, non-paying content companies, but by consigning them to increasingly congested broadband pipes that only work in top form for prioritized, first class traffic.

With Wheeler’s philosophy “unchanged” according to the Journal, his defense of his revised Net Neutrality proposal continues to rely on non germane arguments.

For example, Wheeler claims he will make sure the FCC “scrutinizes deals to make sure that the broadband providers don’t unfairly put nonpaying companies’ content at a disadvantage.” But in Wheeler’s World of Net Neutrality, providers would have to blatantly and intentionally throttle traffic to cross the line.

“I won’t allow some companies to force Internet users into a slow lane so that others with special privileges can have superior service,” Mr. Wheeler wrote (emphasis ours) to Google and other companies.

But if your access to YouTube is slow because Google won’t pay Comcast for a direct connection with the cable company, it is doubtful Wheeler’s proposal would ever consider that a clear-cut case of Comcast “forcing” customers into a “slow lane.” After all, Comcast itself isn’t interfering with Netflix traffic, it just isn’t provisioning enough room on its network to accommodate customer demand.

Another side issue nobody has mentioned is usage cap discrimination. Comcast exempts certain traffic from the usage cap it is gradually reintroducing around the country. Its preferred partners can avoid usage-deterring caps while those not aligned with Comcast are left on the meter.

Wheeler

Wheeler

Some equipment manufacturers are producing even more sophisticated traffic management technology that could make it very difficult to identify fast and slow lanes, yet still opens the door to further monetization of Internet usage and performance in favor of a provider’s partners or against their competitors.

With Internet speeds and capacity gradually rising, the need for paid priority traffic agreements should decline, unless providers choose to cut back on upgrades to push another agenda. Already massively profitable, there is no excuse for providers not to incrementally upgrade their networks to meet customer demand. Prices for service have risen, even as the costs of providing the service have dropped overall.

Wheeler seems content to bend over backwards trying to shove a round Net Neutrality framework into a square regulatory black hole. Former chairman Julius Genachowski did the same, pretending that the FCC has oversight authority under Section 706 of the Telecommunications Act. But in fact that section is dedicated to expanding broadband access with restricted regulatory powers:

The Commission and each State commission with regulatory jurisdiction over telecommunications services shall encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans (including, in particular, elementary and secondary schools and classrooms) by utilizing, in a manner consistent with the public interest, convenience, and necessity, price cap regulation, regulatory forbearance, measures that promote competition in the local telecommunications market, or other regulating methods that remove barriers to infrastructure investment.

The spirit of the 1996 Telecom Act was  deregulation — that language pertaining to “regulatory forbearance” encourages regulators to restrain themselves from reflexively solving every problem with a new regulation. The words about “removing barriers to infrastructure investment” might as well be industry code language for the inevitable talking point: “deregulation removes barriers to investment.”

1nnWith a shaky foundation like that, any effort by the FCC to depend on Section 706 as its enabling authority to oversee the introduction of any significant broadband regulation is a house of cards.

The D.C. Circuit Court of Appeals agreed. In the Verizon network management case, the court found that the FCC was not allowed to use Section 706 to issue broad regulations that contradicted another part of the Communications Act.

U.S.C. 153(51) was and remains the FCC’s Section 706-Achilles Heel and the judge kicked it. This section of the Act says “a telecommunications carrier shall be treated as a common carrier under this [Act] only to the extent that it is engaged in providing telecommunications services.”

The current president of the National Cable & Telecommunications Association (NCTA) Michael Powell — coincidentally also former chairman of the FCC under President George W. Bush — helped see to it that broadband was not defined as a “telecommunications service.” Instead, it is considered an “information service” for regulatory purposes. This decision shielded emerging Internet providers (especially big phone and cable companies) from the kinds of traditional telecom utility regulations landline telephone companies lived with for decades. Of course, millions were also spent to lobby the telecom deregulation-friendly Clinton and Bush administrations with the idea to adopt “light touch” broadband regulatory policy. A Republican-dominated FCC had no trouble voluntarily limiting its own authority to oversee broadband by declaring both wired and wireless broadband providers “information services.”

Tom Wheeler is the former president of the National Cable & Telecommunications Association

Tom Wheeler is the former president of the National Cable & Telecommunications Association

So it was the FCC itself that caused this regulatory mess. But the Supreme Court provided a way out, by declaring it was within the FCC’s own discretion to decide how to regulate broadband, either under Title I as an information service or Title II as a telecommunications service. If the FCC declares broadband as a telecommunications service, the regulatory headaches largely disappear. The FCC has well-tested authority to impose common carrier regulations on providers, including Net Neutrality protections, under Title II.

In fact, the very definition of “common carrier” is tailor-made for Net Neutrality because it generally requires that all customers be offered service on a standardized and non-discriminatory basis, and may include a requirement that those services be priced reasonably.

Inexplicably, Chairman Wheeler last week announced his intention to keep ignoring the straight-line GPS-like directions from the court that would snatch the FCC’s attorneys from the jaws of defeat to victory and has recalculated another proposed trip over Section 706’s mysterious bumpy side streets and dirt roads. Assuming the FCC ever arrives at its destination, it is a sure bet it will be met by attorneys from AT&T, Comcast, or Verizon with yet more lawsuits claiming the FCC has violated their rights by exceeding their authority.

Wheeler also doesn’t mollify anyone with his commitment to set up yet another layer of FCC bureaucracy to protect Internet start-ups:

Mr. Wheeler’s updated draft would also propose a new ombudsman position with ‘significant enforcement authority’ to advocate on behalf of startups, according to one of the officials. The goal would be to ensure all parties have access to the FCC’s process for resolving disputes.

Anyone who has taken a dispute to the FCC knows how fun and exciting a process that is. But even worse than the legal expense and long delays, Wheeler’s excessively ambiguous definitions of what constitutes fair paid prioritization and slow and fast lanes is money in the bank for regulatory litigators that will sue when a company doesn’t get the resolution it wants.

Wheeler promises the revised proceeding will invite more comments from the public regarding whether paid prioritization is a good idea and whether Title II reclassification is the better option. While we appreciate the fact Wheeler is asking the questions, we’ve been too often disappointed by FCC chairmen that apply prioritization of a different sort — to those that routinely have business before the FCC, including phone and cable company executives. Chairman Genachowski’s Net Neutrality policy was largely drafted behind closed doors by FCC lawyers and telecom industry lobbyists. Consumers were not invited and we’re not certain the FCC is actually listening to us.

The Wall Street Journal indicates the road remains bumpy and pitted with potholes:

Mr. Wheeler’s insistence that his strategy would preserve an open Internet, without previously offering much insight into how, has been a source of disquiet within his agency. Of the five-member commission, both Republicans are against any form of net neutrality rules, which they view as unnecessary. Commission observers will be watching the reaction of the two Democrats, Ms. Rosenworcel and Mignon Clyburn, to Mr. Wheeler’s new language.

“There is a wide feeling on the eighth floor that this is a debacle and I think people would like to see a change of course,” said another FCC official. “We may not agree on the course, but we agree the road we’re on is to disaster.”

There is still time to recalculate, but we wonder if Mr. Wheeler, a longtime former lobbyist for the wireless and cable industries, is capable of sufficiently bending towards the public interest.

FCC Chairman Thomas Wheeler Explains His Net Neutrality Policies… at the Cable Industry Convention

Wheeler

Wheeler

Federal Communications Commission chairman Thomas Wheeler this morning defended his forthcoming Net Neutrality policies in front of an audience of cable executives attending the Cable Show in Los Angeles.

“If you read some of the press accounts about what we propose to do, those of you who oppose Net Neutrality might feel like a celebration was in order,” Wheeler told the cable industry audience. “Reports that we are gutting the Open Internet rules are incorrect. I am here to say wait a minute. Put away the party hats. The Open Internet rules will be tough, enforceable and, with the concurrence of my colleagues, in place with dispatch.”

“Let me be clear,” Wheeler continued. “If someone acts to divide the Internet between ‘haves’ and ‘have-nots,’ we will use every power at our disposal to stop it. I consider that to include Title II. Just because it is my strong belief that following the court’s roadmap will produce similar protections more quickly, does not mean I will hesitate to use Title II if warranted. And, in our Notice, we are asking for input as to whether this approach should be used.”

Wheeler also used the forum to acknowledge that cable companies are now the “principal provider of broadband” in the United States, a slap at telephone company DSL service that continues to lose market share.

Wheeler’s comments primarily addressed intentional interference with Internet traffic and remained silent about whether the FCC would allow providers to delay network upgrades that gradually allow service to degrade while selling improved “Quality of Service” contracts to content providers like Netflix.

“Prioritizing some traffic by forcing the rest of the traffic into a congested lane won’t be permitted under any proposed Open Internet rule,” Wheeler insisted. “We will not allow some companies to force Internet users into a slow lane so that others with special privileges can have superior service.”

http://www.phillipdampier.com/video/FCC Chairman Tom Wheeler's Speech and Chat with Michael Powell 4-30-14.mp4

FCC chairman Thomas Wheeler spoke before the 2014 NCTA Cable Show this morning to speak about Net Neutrality and chat with NCTA president Michael Powell. (39:15)

Wheeler’s remarks in full can be found below the jump:

… Continue Reading

FCC’s Net Neutrality Trial Balloon Floats Like the Hindenburg; Wheeler Blames ‘Misinformation’

the-strip-slide-5GWG-jumbo

Oh the humanity!

Last week, advocates for an Open Internet were up in arms over a report in the Wall Street Journal indicating FCC chairman Thomas Wheeler was about to solve his Net Neutrality problem by redefining it to mean the exact opposite of its intended goal to keep Internet traffic out of provider-established toll lanes.

Former FCC chairman Michael Powell created the current definition of the Internet as "an information service" that has been repeatedly invalidated by the courts. Today he is the president of the national cable lobbying firm NCTA.

Former FCC chairman Michael Powell created the current definition of the Internet as “an information service” that has been repeatedly invalidated by the courts. Today he is the president of the nation’s largest cable industry lobbying group, the NCTA. (Image: Mark Fiore)

“Regulators are proposing new rules on Internet traffic that would allow broadband providers to charge companies a premium for access to their fastest lanes,” said the report, quoting an unnamed source.

Wheeler’s proposal follows the agency’s latest defeat in the courts in its latest effort to define net policy. The D.C. Court of Appeals objects to the FCC’s rule-making powers under the current “light touch” regulatory framework introduced by former FCC chairman Michael Powell. Since the first term of the Bush Administration, the FCC has avoided reclassifying broadband as a “telecommunication service,” which would place it firmly under its regulatory authority. Instead, it has continued to define the Internet as “an information service,” under which there is little precedent to support Net Neutrality rules.

The Wall Street Journal reported Wheeler was planning to introduce a new Net Neutrality policy that would ban blatant attempts to censor or block access to Internet websites, but would allow providers to monetize access to its broadband pipes by giving preferential treatment to traffic from certain content providers. Wheeler’s proposal would allow any company to pay for faster access to customers, so long as providers charged an undefined fair price to all-comers.

Wheeler said the FCC would have the authority to deal with providers unwilling to maintain a level playing field for content companies willing to pay extra, but was much more vague about how the regulator would protect websites unwilling to pay extra for traffic guarantees.

Net Neutrality proponents contend Wheeler’s proposal is exactly what Net Neutrality was supposed to prevent – an Internet toll lane only affordable to deep-pocketed giant corporations. For everyone else, including startups and smaller companies, customers could experience the type of slowdowns Netflix users experienced earlier this year — congestion-related buffering that disappeared almost instantly once Netflix signed a paid contract with Comcast for a more direct connection.

“With this proposal, the FCC is aiding and abetting the largest ISPs in their efforts to destroy the open Internet,” said Free Press CEO Craig Aaron. “Giving ISPs the green light to implement pay-for-priority schemes will be a disaster for startups, nonprofits and everyday Internet users who cannot afford these unnecessary tolls. These users will all be pushed onto the Internet dirt road, while deep-pocketed Internet companies enjoy the benefits of the newly created fast lanes.”

“For technologists and entrepreneurs alike this is a worst-case scenario,” Eric Klinker, chief executive of BitTorrent Inc., a popular Internet technology for people to swap digital movies or other content, told the Wall Street Journal. “Creating a fast lane for those that can afford it is by its very definition discrimination.”

It’s even worse than that for consumer groups like Free Press.

Charging another fee to get content on your broadband connection represents a massive business opportunity for broadband companies. But Free Press’ Craig Aaron says it would be a bad deal for Web companies, especially those that can’t afford to pay more for premium service. National Public Radio’s Morning Edition reports. Apr. 24, 2014 (1:58)
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Providers love the idea of monetizing the use of their Internet pipes. (Image: Mark Fiore)

Providers love the idea of monetizing the use of their Internet pipes. (Image: Mark Fiore)

“This is not Net Neutrality. It’s an insult to those who care about preserving the open Internet to pretend otherwise,” said Aaron. “The FCC had an opportunity to reverse its failures and pursue real Net Neutrality by reclassifying broadband under the law. Instead, in a moment of political cowardice and extreme shortsightedness, it has chosen this convoluted path that won’t protect Internet users.”

Wheeler, a former industry insider that presided over both the wireless and cable industry’s largest lobbying groups had a friendlier reception from his former colleagues.

One top cable executive admitted, “I have to say, I’m pleased.”

The cable industry claims they need to attract more investment to manage upgrades of their broadband networks now coming under strain from the online video revolution.

“Somebody has to pay for this, and if they weren’t going to let companies pay for enhanced transport and delivery…it just seemed like this was going to come back to the consumer,” said the cable executive.

So far neither Wheeler or the FCC has released the draft proposal for Net Neutrality 2.0 and won’t until just before it votes on it next month.

A day after the story leaked, Wheeler wrote a damage control blog post to correct what he called “misinformation” about the proposed rules:

Wheeler is keeping the exact language of his Net Neutrality proposal to himself until just before holding a vote on it.

Wheeler is keeping the exact language of his Net Neutrality proposal to himself until just before holding a vote on it.

To be very direct, the proposal would establish that behavior harmful to consumers or competition by limiting the openness of the Internet will not be permitted.

Incorrect accounts have reported that the earlier policies of the Commission have been abandoned. Two points are relevant here:

  1. The Court of Appeals made it clear that the FCC could stop harmful conduct if it were found to not be “commercially reasonable.” Acting within the constraints of the Court’s decision, the Notice will propose rules that establish a high bar for what is “commercially reasonable.” In addition, the Notice will seek ideas on other approaches to achieve this important goal consistent with the Court’s decision. The Notice will also observe that the Commission believes it has the authority under Supreme Court precedent to identify behavior that is flatly illegal.
  2. It should be noted that even Title II regulation (which many have sought and which remains a clear alternative) only bans “unjust and unreasonable discrimination.”

The allegation that it will result in anti-competitive price increases for consumers is also unfounded. That is exactly what the “commercially unreasonable” test will protect against: harm to competition and consumers stemming from abusive market activity.

But Wheeler ignored one glaring change his proposal would make – permitting providers to monetize the performance of select Internet traffic. Currently, customers choose from a menu of available Internet speeds. Under Wheeler’s definition of Net Neutrality, a provider selling “up to” a certain amount of speed is under no obligation to actually deliver that speed. But that same provider could sell “insurance” to content producers promising certain network packets will have a better chance of reaching the customer on a timely basis, while non-paying content might not. That could make all the difference between a watchable streaming movie and one constantly pausing to “buffer.”

As long as everyone is free to pay Comcast, Time Warner Cable, Verizon and AT&T the same (more or less) for preferred treatment, all is well in Wheeler’s world.

Tim Wu, a law professor at Columbia University, coined the phrase “Net Neutrality.” He discusses how the Federal Communications Commission’s proposed changes could affect the average consumer and it’s not good news. From NPR’s All Things Considered. Apr. 24, 2014 (3:51)
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The New York Times editorial page wasn’t fooled:

Dividing traffic on the Internet into fast and slow lanes is exactly what the Federal Communications Commission would do with its proposed regulations, unveiled this week. And no amount of reassurances about keeping competition alive will change that fact.

[…] In this new world, smaller content providers and start-ups that could not pay for preferential treatment might not be able to compete because their delivery speeds would be much slower. And consumers would have to pay more because any company that agrees to strike deals with phone and cable companies would undoubtedly pass on those costs to their users.

The F.C.C. proposal claims to protect competition by requiring that any deal between a broadband company and a content provider be “commercially reasonable.” But figuring out what is reasonable will be very difficult, and the commission will struggle to enforce that standard. The rules would also prohibit broadband companies from blocking content by, for example, making it impossible for users to access a service like Skype that competes with their own products.

[…] Mr. Wheeler is seeking public comment on this option, but he is not in favor of it. Even though the appeals court has said the F.C.C. has authority to reclassify broadband, the agency has not done so because phone and cable companies, along with their mostly Republican supporters in Congress, strongly oppose it.

Michael J. Copps, a former FCC commissioner confirmed big telecommunications companies are spending millions to lobby for rules that would allow them to tilt the scales in their favor.

Wheeler’s “is a lot closer to what they wanted than what we wanted,” Copps told the New York Times. “It reflects a lot more input from them. The courts did not tell Wheeler to take the road that he is reportedly taking.”

That Wheeler would take an approach that coincidentally follows a model heavily favored by the telecommunications companies he used to represent should come as no surprise. Stop the Cap! repeatedly warned Wheeler’s appointment as FCC chairman would likely lead to disaster for consumers. A lifelong industry lobbyist (and investor) is unlikely to develop a world view that strays too far beyond the industry’s groupthink on telecom policy.

Wheeler may actually believe his policies represent the best way forward for the telecommunications industry he now oversees. A lot of supporters of Zeppelin Luftschiffbau used to believe blimps were the future of aviation, until May 6, 1937 when the Hindenburg burst into flames and crashed in Lakehurst, N.J.

http://www.phillipdampier.com/video/Fiore Goodbye Net Neutrality Hello Gilded Age Internet 2-14.flv

Mark Fiore uses animation in his editorial cartoon explaining the demise of Net Neutrality and the beginning of the Internet’s Gilded Age. (1:53)

Cable Industry Lobbies to Get Rid of CableCARDs: The Return of the Mandatory Set-Top Box?

Phillip Dampier April 22, 2014 Competition, Consumer News, Public Policy & Gov't No Comments

The House Energy and Commerce Subcommittee on Communications and Technology has approved a draft bill that could effectively render current CableCARD technology obsolete  by allowing cable operators to encrypt channels and introduce new security measures that only work with the cable company’s set-top box.

Cablecard_SciAtl_3-4_view

If you look closely inside your cable set-top box, chances are good a CableCARD similar to this is installed inside. But perhaps not for long.

With strong support from the cable industry, the House Subcommittee approved the reauthorization of the Satellite Television Extension and Localism Act (STELA) with language that would end the Federal Communications Commission’s ban on built-in descrambler set-top box equipment unavailable to competitors.

Section 629 of the 1996 Telecommunications Act requires that consumers have adequate access to alternative equipment to view multichannel video programming. In 2003, the FCC adopted the cable industry-developed CableCARD standard that would let customers view encrypted channels without leasing a traditional set-top cable box.

In fact, if you own a cable set-top box manufactured after 2007, chances are you already have a CableCARD without realizing it. It is built-in to your set-top box and decrypts and authorizes your cable television lineup. The cable industry never saw any need to incorporate CableCARDs into set-top equipment because it was designed to handle those functions without needing the extra card. But the FCC’s “integration ban” has insisted cable companies use the CableCARD with hopes it would stimulate universal support of the technology and help facilitate a breakup of the leased set-top box monopoly.

The cable industry has itself largely to blame for the FCC’s actions. Prior to 1992, some cable operators were notorious for saddling customers with expensive set-top boxes that were large and unwieldy. Cable companies regularly raised the rental price of the mandatory equipment in rate increase maneuvers and charged huge penalties when boxes were lost, stolen, or damaged.

Many cable customers never wanted the boxes, preferring “cable-ready” service, which let the television sort out the television lineup without any extra equipment.

But “Cable-ready” televisions were an impediment to the revenue-enhancing possibilities offered by digital cable television that became common in the 1990s. Existing television sets could not receive the digital channels without a set-top box and many customers avoided upgrading service because of the extra costs and equipment requirements. In other areas, signal theft pushed the industry towards encrypting more than just a few premium movie channels. In high theft areas like New York City, cable operators won permission to scramble most, if not all the cable television lineup. Customers needed boxes to receive those encrypted channels.

As early as January 2005, the National Cable & Telecommunications Association told the FCC that independent alternatives like the CableCARD were in direct “conflict with cable’s own market imperatives,” adding there was no economic incentive to support third-party equipment and adopting it would result in increased cable bills.

Powell

Powell

Now that CableCARD technology is with us, most cable companies rarely mention it unless customers directly ask. Even CableLabs, the industry engineering group that develops and markets a variety of cable industry technology, has also avoided the subject.

Without any significant backing from the cable industry, most customers never realized they had another option when the cable technician arrived with a leased set-top box in hand. Television manufacturers dropped support for the little-known technology as well.

Cable industry advancements like on-demand viewing don’t work with the standalone CableCARD, creating a disadvantage that further hurt the technology’s chances.

The cable industry argues times have changed and consumers don’t generally want CableCARDs.

NCTA president Michael Powell told Congress that more than 45 million CableCARD-enabled set-top devices are now sitting in customer homes, but only 600,000 of them were requested by cable customers for use in third-party devices. Powell argues supporting CableCARD technology means customers with a leased box are paying for redundant technology. One large cable operator claimed the average set-top box now costs an extra $40-50 to support CableCARD technology.

“Additionally, based on EPA figures, cable subscribers collectively foot the bill for roughly 500 million kilowatt hours consumed by CableCARDs each year,” said Powell. “By all measures, the costs of this misguided rule clearly outweigh its benefits.”

In the end the subcommittee agreed to a compromise by eliminating the “integration ban” that effectively keeps cable companies from switching on new security technology that might not work with CableCARDs but also gives the FCC the authority to create or authorize new independent set-top box technology ‘when needed.’

This means either the cable industry could develop a next generation of CableCARDs that work with advanced security measures or more likely the ongoing advancement of IP-delivery of television programming could make the matter moot. As the cable industry moves towards online streaming of cable channels, various third-party devices like Roku could be used to access much of the cable lineup without worrying about a CableCARD. Recording such programming for later viewing will likely require agreements with copyright-obsessed programmers, the cable industry, and manufacturers, however.

Comcast’s Festival of Nonsense Performed for Senate Judiciary Committee

Phillip "The circus is in town" Dampier

Phillip “The circus is in town” Dampier

Yesterday afternoon I got to experience both the pain of having a tooth pulled and watch Comcast and Time Warner Cable defend its merger for more than three hours before the Senate Judiciary Committee. The Festival of Nonsense from Comcast’s top lobbyist David Cohen and Time Warner Cable’s chief financial officer Arthur Minson hurt more.

Despite the $45 billion dollar deal, the real powers that be couldn’t be bothered to turn up at the hearing. Comcast’s chief executive was nowhere to be found — perhaps he was playing golf with President Obama again. Comcast’s top lobbyist David Cohen showed up instead, wearing an outfit that looked like it was stuffed with cash waiting to fall from his pockets into the hands of his “friends” on Capitol Hill. Cohen is a well-known Democratic money bundler who raised $1.44 million for the president’s reelection campaign in 2011 and 2012, and $2.22 million since 2007. (Obama spent time in Cohen’s Philadelphia home as well, part of a DNC fundraising party.)

Perhaps Time Warner Cable CEO Robert Marcus was unavailable because he was too busy counting the $8.52 million he was paid before agreeing to sell the company. Don’t expect him at the next hearing either, because he is shopping for a bigger safe to hold the $80 million he will receive for agreeing to change Time Warner Cable’s name to Comcast.

The other usual suspects were also missing in action. Not a peep from the major networks or cable programmers at the hearing. Instead, the Senate endured a guy with a golf channel nobody ever heard of using the hearing to try to get his calls returned by Time Warner and a wireless provider who believes his technology is faster than fiber. Sure it is.

Brought to you in part by America's cable industry.

Brought to you in part by America’s cable industry.

I suppose it’s also worth mentioning Christopher Yoo – Comcast’s intellectual sock puppet straight out of the cable company’s home town of Philadelphia. He serves at the pleasure of the “Center for Technology, Innovation & Competition” (cough) at the University of Pennsylvania. The “center” is financially supported by the cable industry. David Cohen just happens (by sheer coincidence) to chair the university’s Board of Trustees. Yoo’s testimony could be boiled down to a nod in Cohen’s direction with an affirming, “whatever he said.”

The Cohen and Minson Comedy Hour began with opening statements extolling the virtues of supersizing Comzilla, with dubious claims about its benefits for consumers.

Without laughing, read the following out loud:

“We welcome this opportunity to discuss the proposed transaction between Comcast Corporation (“Comcast”) and Time Warner Cable Inc. (“TWC”), and the substantial and multiple pro-consumer, pro-competitive, and public interest benefits that it will generate, including through competitive entry in segments neither company today can meaningfully serve on its own,” the two companies wrote in their joint opening statement.

Cohen

Cohen

“Comcast and TWC do not compete for customers in any market – either for broadband, video, or voice services. The transaction will not reduce competition or consumer choice at all. Comcast and TWC serve separate and distinct geographic areas. This simple but critically important fact has been lost on many who would criticize our transaction, but it cannot be ignored – competition simply will not be reduced. Rather, the transaction will enhance competition in key market segments, including advanced business services and advertising.”

To emphasize just how little this merger will impact the current state of non-competition in the broadband marketplace, Comcast repeatedly emphasized you can’t subscribe to a competing cable company today and still won’t tomorrow:

“Consumers in Comcast’s territories cannot subscribe to TWC for broadband, video, or phone services. And TWC customers cannot switch to Comcast. For that reason, this is not a horizontal transaction under merger review standards, and there will be no reduction in competition or consumer choice,” said the written statement.

In other words, since there was no competition between cable companies before, making sure consumers still don’t have a choice is not anti-competitive.

Watch the entire hearing on the Senate Judiciary Committee website.

(The hearing begins at the 24 minute mark.)

Here are some other “benefits” promised by Cohen and Minson:

Post-transaction, Comcast intends to make substantial incremental upgrades to TWC’s systems to migrate them to all-digital, freeing up bandwidth to deliver greater speeds. For example, Comcast typically bonds 8 QAM channels together in its systems, and Comcast’s most popular broadband service tier offers speeds of 25/5Mbps upstream across its footprint. In comparison, TWC bonds 4 QAM channels in nearly half of its systems, and its most commonly purchased service tier offers speeds of 15/1Mbps. Comcast’s fastest residential broadband tier offers speeds of 505/100Mbps; TWC’s current top speeds are 100/5Mbps. Comcast’s investments in the TWC systems will also improve network reliability, network security, and convenience to TWC customers.

Minson

Minson

Of course, nothing prevented either company from boosting speeds without a $45 billion merger deal. In fact, Comcast is doing exactly that this week. Marcus’ own revival plan for TWC, dubbed TWC Maxx, promised Time Warner Cable customers would get even faster speeds than Comcast offers most of its customers.

Time Warner Cable now advertises it does not have usage caps on broadband. Comcast cannot say the same, although it tries very hard to tapdance around the matter by calling the 300GB monthly cap spreading into more and more Comcast territories a “data threshold.”

Comcast’s speed upgrades for TWC customers are likely to come with a big catch — an arbitrary usage allowance that limits their usefulness. By the way, that 505Mbps service is available only from Comcast’s extremely limited fiber network that the overwhelming majority of customers cannot get.

The transaction will similarly speed the availability of advanced Wi-Fi equipment in consumers’ homes. The quality of broadband service depends not only on the “last-mile” infrastructure but also the delivery of the signal over the last few yards. Comcast has led the entire broadband industry in rolling out advanced gateway Wi-Fi routers to approximately 8 million households and small businesses, giving these customers faster speeds (up to 270 Mbps downstream as compared to 85 Mbps downstream from the prior generation devices) and better performance over their home and business wireless networks. In contrast, TWC only recently began deploying advanced in-home Wi-Fi routers. With the greater purchasing power and economies of scale resulting from the transaction, Comcast can not only offer TWC customers access to today’s best routers, but also invest in and deploy next-generation router technologies for all of the combined company’s customers.

comcast twcComcast doesn’t like to mention that “advanced Wi-Fi” equipment costs customers $8 a month… forever. Comcast is also using it to boost its own Wi-Fi service by sharing it with the neighbors. This merger “benefit” will cost customers almost $100 a year. Customers can do better buying their own equipment and don’t need a merger to make that decision.

The transaction will give Comcast the geographic reach, economies of scale, customer density, and return on investment needed to massively expand Wi-Fi hotspots across the combined company’s footprint, including in the Midwest, South, and West, particularly in areas like Cleveland/Pittsburgh, the Carolinas, Texas, and California, where there will be greater density and clustering of systems. Our goal is to provide greater Wi-Fi availability that allows the combined company’s customers to access the Internet in more places, more conveniently, and at no additional charge.

Your usage allowance will likely apply to this “free Wi-Fi” that most customers cannot access because they live in an area where neither company offers it now and likely won’t anytime soon.

The transaction will also enable Comcast to invest in network expansions and last-mile improvements that provide an even stronger foundation for innovative applications, including education, healthcare, the delivery of government services, and home security and energy management. And with greater coverage and density of systems, Comcast will also have the ability and incentive to build out and make available interconnection points in more geographic regions. This will be especially beneficial to companies like Google, Netflix, and Amazon, which aggregate massive data traffic when they deliver their own and others’ services to consumers.

internet essentialsFor the right price. Nothing precluded Comcast or Time Warner Cable from investing some of their lush profits into improvements for customers. But why bother when your only serious competitor is usually DSL. Investment in broadband networks has declined for years in favor of profit-taking. Making Comcast bigger introduces no new market forces that would provoke it to improve service. In fact, Comcast’s massive size and reach would likely deter would-be competitors from entering a market where Comcast can use predatory pricing and retention offers to keep customers from switching.

Helping people successfully cross the digital divide requires ongoing outreach. To increase awareness of the Internet Essentials program, Comcast has made significant and sustained efforts within local communities. To date, those outreach efforts have included:

  • Distributing over 33 million free brochures to school districts and community partners for (available in 14 different languages).
  • Broadcasting more than 3.6 million public service announcements with a combined value of nearly $48 million.
  • Forging more than 8,000 partnerships with community-based organizations, government agencies, and elected officials at all levels of government.

Cohen does not mention the company planned to offer Internet Essentials earlier than it did, but held it back for political reasons.

“I held back because I knew it may be the type of voluntary commitment that would be attractive to the chairman” of the Federal Communications Commission, Cohen said in a 2012 interview. Comcast’s generosity was limited. It specifically designed its discount Internet program to make it difficult to qualify and protect its regular-priced broadband offerings. The goodwill from handing out Comcast sales brochures and getting free exposure in the media offers little to customers. Comcast also has a way of getting the community-based organizations it “partners” with to advocate for Comcast’s business interests.

"Sometimes we need a kick in the butt." -- Cohen

“Sometimes we need a kick in the butt.” — Cohen

If only the government got out of the way and approve the merger, Comcast will improve on its already amazing customer service:

Improving the customer experience is a top priority at Comcast. We are investing billions of dollars in our network infrastructure and are developing innovative products and features to make it easier and more convenient for our customers to interact with us. While our satisfaction results are beginning to rise, we know we still have work to do and are laser-focused on continuing to improve our customers’ experiences in a number of ways.  Comcast has improved its customer satisfaction ratings significantly. Since 2010, Comcast has increased its J.D. Power’s Overall Satisfaction score by nearly 100 points as a video provider, and close to 80 points in High Speed Data – more than any other provider in our industry during the same period.

Twice nothing is still nothing. Cohen even admitted at the hearing Comcast’s progress at improving customer service is not as rosy as his written testimony might suggest.

“It bothers us we have so much trouble delivering high quality of service to customers on a regular basis,” Cohen said. “Sometimes, we need a kick in the butt.”

That has never worked before. Comcast has kicked its customers around since at least 2007 when it also promised major customer service improvements that turned out to be figments of a press release. Comcast’s “laser-focused” efforts to improve instead won it the 2014 Consumerist Worst Company in America award this week and more than 100,000 consumers signing petitions vehemently opposing the merger.

Comcast has a long record of improving consumers’ online experiences and working cooperatively with other companies on interconnection, peering and transit.

bufferingJust ask any Comcast customer about their Netflix viewing experience lately and how it took a checkbook to improve matters. Ask any online video competitor whether Comcast is a good neighbor when it exempts its own video traffic from its “usage threshold” while making sure to count competitors’ traffic against it.

Comcast also likes to suggest Americans are awash in competitive options for broadband service. Why there is DSL, satellite broadband, fiber, wireless Internet, public libraries, and books.

In fact, Comcast’s filing points to various “competitors” that don’t even exist yet, if they ever will. Comcast suggests Google Fiber is popping up everywhere, despite the fact Google announced it was delaying its fiber rollout in Austin, and most of its latest expansion plans lack firm commitments to deploy and are framed only in the context of opening a dialogue with targeted communities.

Satellite Internet speeds are severely limited and usage-capped. The same is true for exorbitantly expensive mobile broadband. Comparing a $40 unlimited broadband offering from Time Warner Cable to Verizon Wireless’ 4GB for $50 mobile wireless Internet package is silly.

Comcast characterizes the competitive telecom marketplace as a veritable dogfight, but it looks a lot more like a well-executed dog and pony show. Just how rabid are these dogs?

  • Verizon’s pit bull zeal to compete has more bark than bite. Verizon Wireless customers can sign up for Comcast or Time Warner Cable service in Verizon stores (woof);
  • Comcast’s rottweiler isn’t supposed to get along well with others, but it manages pretty well pitching Verizon Wireless service (grrr).

An hour into the hearing, it was clear there was some bipartisan discomfort with the merger, with Sen. Al Franken (D-Minn.) leading the charge with pointed questions cutting through Comcast’s government relations fluff.

“I’m against this deal,” Franken concluded. “My concern is that as Comcast continues to get bigger, you’ll have even more power to exercise that leverage — to squeeze consumers.”

Like an orange.

JPMorgan Chase Advises Cable Companies to Raise Cable TV Rates; Where Can Customers Go?

Phillip Dampier April 7, 2014 Competition, Consumer News 9 Comments
Comcast Rates (Image: The Oregonian)

JPMorgan Chase reports average cable rates reached $88.67 in 2013. (Image: The Oregonian)

Cable TV rates are too low and need to be hiked to boost revenue and offset rising programming costs, even if rate increases further alienate cable subscribers, according to a new report from JPMorgan Chase.

The Wall Street bank concluded customers have few options, noting that after providers raised prices around 5% last year, they lost only 0.1% of subscribers.

“Cable operators are better off raising video prices than eating higher content costs,” said Philip Cusick, a JPMorgan analyst, in the report. “Our analysis indicates that cable companies are better off raising prices and catching customers with broadband if cord cutting becomes widespread, (rather) than eating the programming increase.”

The bank recommends imposing (or raising) broadcast TV and sports programming surcharges as well as general rate hikes on basic cable service.

JPMorgan notes that increased broadband pricing and cable modem rental fees paid off for the industry during the fourth quarter of 2013, when earnings topped estimates. By doing the same for cable television packages, providers can continue to boost revenue with little risk customers will find a suitable competitor that isn’t also increasing prices.

Even if customers get rid of cable television, a practice known as cord-cutting, cable operators can still keep customers by providing broadband service. Some of the lost revenue can be recovered from the services customers have not canceled.

Cusick says the industry is being challenged by a handful of content companies that increasingly dominate the cable package, among them Walt Disney, Time Warner (Entertainment), CBS, and FOX.

“With the majority of content controlled by only six or seven programmers, aggregate prices for content are rising around 10% annually and forecasts in many media models continue that rise for years,” Cusick said.

Math Problem: The Telecom Industry’s Bias Against Fiber-to-the-Home Service

Phillip "Spending $6k per cable customer is obviously a much better deal than paying half that to build a fiber to the home network" Dampier

Phillip “Spending $6k per cable customer is obviously a much better deal than paying half that to build a fiber to the home network” Dampier

Math was never my strong subject, but even I can calculate the groupthink of American cable and telephone companies and their friends on Wall Street just doesn’t add up.

This week, we learned that cable companies like Bright House Networks, Suddenlink, and Charter Communications are already lining up for a chance to acquire three million cable customers Comcast intends to sell if it wins approval of its merger with Time Warner Cable. Wall Street has already predicted Comcast will fetch as much as $18 billion for those customers and pegged the value of each at approximately $6,000.

But for less than half that price any company could build a brand new fiber to the home system capable of delivering 1,000Mbps broadband and state-of-the-art phone and television service and start banking profits long before paying off the debt from buying an inferior coaxial cable system. Yet we are told time and time again that the economics of fiber to the home service simply don’t make any sense and deploying the technology is a waste of money.

Let’s review:

Google Fiber was called a boondoggle by many of its competitors. The folks at Bernstein Research, routinely friendly to the cable business model, seemed appalled at the economics of Google’s fiber project in Kansas City. Bernstein’s Carlos Kirjner and Ram Parameswaran said Google would throw $84 million into the first phase of its fiber network, connecting 149,000 homes at a cost between $500-674 per home. The Wall Street analyst firm warned investors of the costs Google would incur reaching 20 million customers nationwide — $11 billion.

“We remain skeptical that Google will find a scalable and economically feasible model to extend its build out to a large portion of the U.S., as costs would be substantial, regulatory and competitive barriers material, and in the end the effort would have limited impact on the global trajectory of the business,” Bernstein wrote to its investor clients.

dealSo Google spending $11 billion to reach 20 million new homes is business malpractice while spending $18 billion for three million Time Warner Cable customers is confirmation of the cable industry’s robust health and valuation?

Bernstein’s firm never thought highly of Verizon FiOS either.

“If I were an auto dealer and I wanted to give people a Maserati for the price of a Volkswagen, I’d have some seriously happy customers,” Craig Moffett from Bernstein said back in 2008. “My problem would be whether I could earn a decent return doing it.”

Back then, Moffett estimated the average cost to Verizon per FiOS home passed was $3,897, a figure based on wiring up every neighborhood, but not getting every homeowner to buy the service. Costs for fiber have dropped dramatically since 2008. Dave Burstein from DSL Prime reported by the summer of 2012 Verizon told shareholders costs fell below $700/home passed and headed to $600. The total cost of running fiber, installing it in a customer’s home and providing equipment meant Verizon had to spend about $1,500 per customer when all was said and done.

Moffett concluded Verizon was throwing money away spending that much on improving service. He wasn’t impressed by AT&T U-verse either, which only ran fiber into the neighborhood, not to each home. Moffett predicted AT&T was spending $2,200 per home on U-verse back in 2008, although those costs have dropped dramatically as well.

Moffett

Moffett

Moffett’s solution for both Verizon and AT&T? Do nothing to upgrade, because the price wasn’t worth the amount of revenue returns either company could expect in the short-term.

It was a much different story if Comcast wanted to spend $45 billion to acquire Time Warner Cable however, a deal Moffett called “transformational.”

“What we’re talking about is an industry that is becoming more capital intensive,” Todd Mitchell, an analyst at Brean Capital LLC in New York told Bloomberg News. “What happens to mature, capital-intensive companies — they consolidate. So, yes, I think the cable industry is ripe for consolidation.”

Other investors agreed.

“This is definitely a bet on a positive future for high-speed access, cable and other services in an economic recovery,” said Bill Smead, chief investment officer at Smead Capital Management, whose fund owns Comcast shares.

ftth councilBut Forbes’ Peter Cohan called Google’s much less investment into fiber broadband a colossal waste of money.

“Larry Page should nip this bad idea in the bud,” Cohan wrote.

Cohan warned investors should throw water on the enthusiasm for fiber before serious money got spent.

“FTTH authority, Neal Lachman, wrote in SeekingAlpha, that it would cost as much as $500 billion and could take a decade to connect all the houses and commercial buildings in the U.S. to fiber,” Cohan added.

Cohan was concerned Google’s initial investment would take much too long to be recovered, which apparently is not an issue for buyers willing to spend $18 billion for three million disaffected Time Warner Cable customers desperately seeking alternatives.

An investment for the future, not for short term profits.

An investment for the future, not short term profits.

Municipal broadband providers have often chosen to deploy fiber to the home service because the technology offers plenty of capacity, ongoing maintenance costs are low and the networks can be upgraded at little cost indefinitely. But such broadband efforts, especially when they are owned by local government, represent a threat for cable and phone companies relying on a business model that sells less for more.

The American Legislative Exchange Council (ALEC), funded by Comcast, Time Warner, AT&T, Verizon, and other large telecom companies is at the forefront of helping friendly state legislators ban community fiber networks. Their excuse is that the fiber networks cost too much and, inexplicably, can reduce competition.

“A growing number of municipalities are […] building their own networks and offering broadband services to their citizens,” ALEC writes on its website. “ALEC disagrees with their answer due to the negative impacts it has on free markets and limited government.  In addition, such projects could erode consumer choice by making markets less attractive to competition because of the government’s expanded role as a service provider.”

The Fiber-to-the-Home Council obviously disagrees.

“Believe it or not, there are already more than a thousand telecom network operators and service providers across North America that have upgraded to fiber to the home,” says the Council. “The vast majority of these are local incumbent telephone companies that are looking to transform themselves from voice and DSL providers into 21st century broadband companies that can deliver ultra high-speed Internet and robust video services, as well as be able to deliver other high-bandwidth digital applications and services to homes and businesses in the years ahead.”

Stephenson

Stephenson

In fact, a good many of those efforts are undertaken by member-owned co-ops and municipally owned providers that answer to local residents, not to shareholders looking for quick returns.

The only time large companies like AT&T move towards fiber to the home service is when a competitor threatens to do it themselves. That is precisely what happened in Austin. The day Google announced it was launching fiber service in Austin, AT&T suddenly announced its intention to do the same.

“In Austin we’re deploying fiber very aggressively,” said AT&T CEO Randall Stephenson. “The cost dynamics of deploying fiber have dramatically changed. The interfaces at the homes, the wiring requirements, how you get a wiring drop to a pole, and the way you splice it has totally changed the cost dynamics of deploying fiber.”

Prior to that announcement, AT&T justified its decision not to deploy fiber all the way to the home by saying it was unnecessary and too costly. With Google headed to town, that talking point is no longer operative.

Time Warner Cable, Comcast Crash, Burn in Consumer Reports’ 2014 Ratings

consumer reportsDespite claims of improved customer service and better broadband, Comcast and Time Warner Cable’s customer satisfaction scores are in near-free fall in the latest Consumer Reports National Research Center’s survey of consumers about their experiences with television and Internet services.

Although never popular with customers, both cable operators plummeted in the 2014 Consumer Reports ratings — Time Warner Cable is now only marginally above the perennial consumer disaster that is Mediacom. Comcast performs only slightly better.

In the view of Consumers Union, this provides ample evidence that two wrongs never make a right.

“Both Comcast and Time Warner Cable rank very poorly with consumers when it comes to value for the money and have earned low ratings for customer support,” said Delara Derakhshani.  “A merger combining these two huge companies would give Comcast even greater control over the cable and broadband Internet markets, leading to higher prices, fewer choices, and worse customer service for consumers.”

These ratings reflect Internet service only.

These ratings reflect Internet service only.

Comcast ranked 15th among 17 television service providers included in the ratings and earned particularly low marks from consumers for value for the money and customer support.  Time Warner ranked 16th overall for television service with particularly low ratings for value, reliability, and phone/online customer support.

Another ratings collapse for Comcast and Time Warner Cable

Another ratings collapse for Comcast and Time Warner Cable

Comcast and Time Warner Cable were mediocre on overall satisfaction with Internet service.  Both companies received especially poor marks for value and low ratings for phone/online customer support.

“In an industry with a terrible track record with consumers, these two companies are among the worst when it comes to providing good value for the money,” said Derakhshani.  “The FCC and Department of Justice should stand with consumers and oppose this merger.”

For as long as Stop the Cap! has published, Mediacom has always achieved bottom of the barrel ratings, with satellite fraudband provider HughesNet — the choice of the truly desperate — scoring dead last for Internet service. We’re accustomed to seeing the usual bottom-raters like Frontier (DSL), Windstream (DSL), and FairPoint (DSL) on the south end of the list. But now both Comcast and Time Warner Cable have moved into the same seedy neighborhood of expensive and lousy service. Comcast couldn’t even beat the ratings for Verizon’s DSL service, which is now barely marketed at all. Time Warner Cable scored lower than CenturyLink’s DSL.

Breathing an ever-so-slight sigh of relief this year is Charter Communications, which used to compete with Mediacom for customer raspberries. It ‘rocketed up’ to 18th place.

If you want top-notch broadband service, you need to remember only one word: fiber. It’s the magical optical cable phone and cable companies keep claiming they have but largely don’t (except for Verizon and Cincinnati Bell, among a select few). If you have fiber to the home broadband, you are very happy again this year. If you are served by an independent cable company that threw away the book on customer abuse, you are relieved. Topping the ratings again this year among all cable operators is WOW!, which has a legendary reputation for customer service. Wave/Astound is in second place. Verizon and Frontier FiOS customers stay pleased, and even those signed up with Bright House Networks and Suddenlink report improved service.

Ratings are based on responses from 81,848 Consumer Reports readers. Once again they plainly expose Americans are not happy with their telecom options. The average cost of home communications measured by the Mintel Group is now $154 a month — $1,848 a year. That’s more expensive than the average homeowner’s clothing, furniture or electricity budget. The same issues driving the bad ratings last year are still there in 2014: shoveling TV channels at customers they don’t want or need, imposing sneaky new fees along with broad-based rate increases every year, low value for money, and customer service departments staffed by the Don’t Care Bears.

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