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Los Angeles Has Accumulated $35 Million in Cable Franchise Fees It Has No Idea How to Spend

35-LACityView

Channel 35 is Los Angeles’ Government Access station

Los Angeles cable subscribers are paying $30-50 a year in extra franchise fees the city government has no idea what to do with, allowing a bank account dedicated to housing the unspent funds to reach $35 million and counting.

A new audit by the Office of the City Controller found no misappropriation or ethical lapses by the city government, but it did criticize the lack of long-term planning regarding how franchise revenue should be used, as well as lax auditing of expenses that were paid from the fund. Los Angeles City Controller Ron Galperin added the city’s lack of consistent auditing of the five major cable operators servicing greater Los Angeles may be allowing cable operators to charge customers franchise fees the companies are keeping for themselves. A 2006 law passed at the behest of Verizon and AT&T allowing statewide video franchise agreements in California isn’t helping either.

For decades, communities have been able to demand up to a 5% franchise fee from cable and phone companies offering video services in their areas in return for access to public rights-of-way and other public property. Most cities, including Los Angeles, have requested the maximum allowed – 5% of the provider’s gross annual revenue earned within the city. Cable operators retaliated by recouping the franchise fee by billing cable customers for it on a separate line on monthly cable bills.

In Los Angeles, 60% of all franchise fees ($31 million) paid are transferred to the city’s all-purpose General Fund, used for all types of city expenses. The remaining 40 percent ($12.4 million) is supposed to be earmarked for a Telecommunications Fund, but the city often raids that account as well. Time Warner Cable subscribers account for 85% of Los Angeles’ cable franchise revenue, AT&T U-verse contributes another 10% with other operators paying considerably less. Last year, Charter Cable wrote a check for less than $5,000, primarily because only a tiny part of the city of Los Angeles is served by Charter today.

So where is the excess money still in the account coming from?

fund balance

The Unintended Consequences of Statewide Video Franchising

Eight years ago, Governor Arnold Schwarzenegger signed AB 2987:  the “Digital Infrastructure and Video Competition Act of 2006” (DIVCA). In reality, DIVCA was just another statewide video franchise bill heavily pushed by the state’s dominant phone companies — AT&T and Verizon — to let them begin offering video services without having to sign franchise agreements with thousands of local governments across the state.

verizon attAT&T and Verizon sold the legislation to the public as a red-tape cutter to bring Verizon FiOS and AT&T U-verse to millions of Californians without unnecessary bureaucratic delay.

But lobbyists from both phone companies, as well as several cable companies, were successful in inserting their own amendments into the law that undercut their arguments for passing the legislation:

  • As local franchise agreements expired, companies took their franchise renewal business direct to the state, cutting off local oversight. Communities could no longer require operators to expand into rural areas or impose fines for sub-standard service;
  • Cable companies won the right to toss Public, Educational, and Government Access (PEG) channels out of their buildings. Many communities assigned responsibility for housing and operating PEG channels as part of their franchise agreement. DIVCA rendered those agreements void and unenforceable;
  • Cable companies no longer had to offer institutional broadband networks for free or at a discount to local governments, schools and libraries, and many existing networks were closed down as soon as the local franchise agreement expired and communities balked at the new prices charged by telecom companies.

But perhaps the most controversial amendment was language that gets AT&T and Verizon out of meeting obligations to build out their fiber networks where they choose not to built them, while still compelling smaller independent telephone companies to offer service to every customer within their telephone service area within a reasonable amount of time.

So instead of promoting a rush towards video competition, both AT&T and Verizon won concessions that let them cherry pick — on their own schedule — customers for AT&T U-verse and Verizon FiOS:

  • Verizon is in compliance with DIVCA as long as 25% of the households where service is available are low-income and within 5 years, Verizon increases that to at least 40%;
  • AT&T stays out of trouble with DIVCA by providing video service to 35% of low-income households where service is available. Within five years, AT&T must reach at least 50%.

One of the biggest victims of DIVCA are PEG channels which lost the sponsorship of the cable companies that used to underwrite them as part of their franchise agreements. American Community Television reported in California, Illinois and Indiana, where statewide video franchising laws were passed, cable operators that operated PEG channels closed the doors, sometimes with only 30 days notice. Even in states where PEG funding remained, channels have been exiled to Channel Siberia (eg. Channel 1,512) or are under constant threat of losing their channel if they don’t meet an operator’s arbitrary quality of programming criteria.

Time Warner Cable has moved PEG channels to digital service in a majority of their service areas, requiring many customers to have an added-cost cable box to watch.

To help Californian PEG services cope, a state law permitted cities to collect an extra 1% of gross revenue from cable operators to keep funding these channels. But if a city already collects a full 5% franchise fee, any money collected from PEG channels must only be spent on their operations — no raiding of funds allowed. If the local government thinks there are bigger priorities than supporting public, educational, and government access, the future of PEG channels is questionable.

How to Spend the Untouchable Proceeds

The new home of Los Angeles' Government Access channel

The new home of Los Angeles’ Government Access channel

With Los Angeles-area cable companies collecting and sending on the proceeds of the 1% PEG surcharge to city coffers, the money has been more or less just piling up over the last seven years, unspent.

As of the end of June last year, the city had squirreled away about $22 million collected from cable TV customers stashed in a non interest-bearing account. PEG operations across the United States are not known for being profligate spenders, relying on budgets that would be insufficient to keep the lights on at a typical local public television station. So some question whether Los Angeles’ Public Access, Educational Access, and Government Access networks need $22 million to continue operations.

The city has decided the Government Access channel — the one that airs council meetings and other political functions — does need a new home.  So the city is spending $20 million to completely renovate one of the oldest buildings in Los Angeles, the long-vacant three-story Merced Theater near Olvera Street.

When complete, the state-of-the-art digital facilities of Cityview Channel 35 may rival those of some commercial television stations in Los Angeles. The building will house a small performance venue on the first floor, a studio with space for a 70-person live audience, and plenty of office space on the third floor. What it evidently won’t have room for is the Public Access and Educational Access channels that make up the rest of the PEG trio. The new facility is for the exclusive use of Channel 35.

Local residents are happy someone is finally doing something with the theater, which has been empty and unused for at least 30 years. The project could also make Los Angeles’ Government Access channel one of the most capable in the country, producing high quality programming well beyond the ubiquitous city council meetings.

“Space for a live audience of about 70 people will allow us to engage the public with debates, town halls and other events that we weren’t able to do,” Mark Wolf, executive officer at the city Information Technology Agency, which oversees Channel 35, told Downtown News. “The venue also gives us a full upgrade to digital technology, as we’ve been operating in an analog environment.”

Downtown News partly misled its readers when it suggested cable providers are footing the bill for the renovated home of Channel 35. Although money from the city’s general fund won’t be used for the project, the money did originate from cable subscribers who have paid higher cable bills since 2007 because the city elected to collect a 1% PEG franchise fee.

Galperin

Galperin

Even after spending $20 million on the Merced Theater, the money from Time Warner Cable, Cox, AT&T, Verizon, and Charter cable TV subscribers will keep rolling in. The audit found that by the time the new Merced Theater facility opens in 2016, the city will again have between $21-25 million in unspent PEG funds.

Galperin thinks throwing more money at traditional PEG operations would be a mistake, particularly when younger audiences are not even subscribing to cable television.

“We’re in a new era,” Galperin said. “The old rules that envisioned everybody getting their programming from cable are changing before our very eyes. We are in a totally different era in terms of how people get their information, so much of viewership is on the Internet now, not necessarily on cable.”

Because PEG funds can only be spent on PEG operations, as a starting point, funds could be spent to build up what is now an anemic, barely functioning website for Channel 35. Although the channel does stream online, it is intermittent in our experience. Channel 35 might also partner with local public broadcasting and minority-interest channels in co-production ventures. It should also develop a robust on-demand library of its content for site visitors because that is increasingly how Americans choose to watch television.

Galperin suggested other uses including a public Wi-Fi network and city Internet sites for programming and other information, but these may stray outside of the boundaries of what is permissible under current California and federal law.

Of course, there is one other alternative – rescind the PEG fee altogether until there is a legitimate need to collect the money from already overburdened cable subscribers.

franchise fees

http://www.phillipdampier.com/video/Surviving DIVCA.mp4

Silicon Valley Community Television aired this lengthy conference last fall for the benefit of local governments across California still trying to make sense of the 2006 Digital Infrastructure and Video Competition Act, a provider-influenced piece of legislation that has tied the hands of most communities to manage their local telecommunications infrastructure for the good of their citizens. (2 hours, 47 minutes)

 

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AT&T Piles On U-verse Junk Fees: Say Hello to the 24¢ ‘Regulatory Video Cost Recovery Charge’

We get to keep all the money!

We get to keep all the money!

AT&T has begun charging U-verse television customers a new monthly fee to cover the cost of an FCC charge now extended to IPTV providers like AT&T that used to be paid only by cable operators.

AT&T’s “Regulatory Video Cost Recovery Charge” is defined by AT&T as a new “monthly fee that is charged to each U-verse TV subscriber’s bill to recover the regulatory fee imposed on providers of Internet Protocol Television (IPTV) Service.”

The new fee is reportedly set at $0.24 a month. AT&T will collect $2.88 a year from 5.7 million television customers annually beginning June 1, 2014.

Cable operators have paid similar fees all along but have generally considered them part of the cost of doing business. AT&T wants to pass the cost directly on to its customers.

But a review of the FCC’s 2013 Fiscal Year fee schedule shows a major discrepancy between the amount AT&T intends to collect from customers and the actual cost of the fee AT&T will have to pay the FCC.

While AT&T will bank $2.88 annually from each television customer, it only has to pay the FCC $1.02 a year per subscriber — a difference of $1.86. That doesn’t sound like much until you factor in the number of AT&T U-verse TV customers. AT&T will pocket $10,602,000 a year in “regulatory cost recovery” charges it will apparently keep for itself.

That suggests AT&T has imposed another hidden rate increase on customers who already pay a range of surcharges and fees. AT&T has created so many fees, surcharges, and other ancillary charges, it has published a Billing Glossary explaining them for the benefit of confused customers. AT&T usually keeps all the money associated with these fees — most are not taxes, although some fund state initiatives.

Here are some customers may already be acquainted with:

Activation Fee
A one-time fee charged when you activate new service. It is billed in full on your first bill.

Bill Statement Fee
The Bill Statement Fee is to cover the expenses associated with providing your AT&T Long Distance charges as part of your local phone company bill.

Broadcast TV Surcharge
This surcharge is to recover a portion of the amount local broadcasters charge AT&T to carry their channels.

CA Advanced Services Fund (CASF) (California Only)
The fund is used to spur deployment of broadband facilities in un-served and underserved areas of California. Funding for the CASF program will not increase total surcharges, since the CASF surcharge will be offset by an equal reduction of the High Cost Fund-B surcharge. For billing purposes, the CASF surcharge may appear as a separate item on a bill or may be combined with the CHCF-B surcharge if the item is renamed to reflect both the “CHCF-B and the CASF.”

CA CHCF A and CA CHCF B [High Cost Fund (CHCF) Surcharges A and B] (California Only)
These surcharges subsidize basic rates for local telephone companies servicing rural areas and compensate carriers for providing basic residential service in areas where the cost exceeds the CPUC determined statewide average.

CA Relay Service and Communications Devices Fund (California Only)
A surcharge utilized by the state to provide telecommunications devices to deaf or hard of hearing consumers.

CA Teleconnect Fund (California Only)
This surcharge provides discounts on telecommunications services to qualifying schools, libraries, community-based organizations, county-owned hospital and health clinics.

All these fees and surcharges...

All these fees and surcharges…

Carrier Cost Recovery Fee
This fee helps recover costs associated with providing state-to-state and international long distance service, including expenses for national regulatory fees and programs, as well as connection and account servicing charges.

Change Fee
A charge applied if a TV service or package is downgraded or cancelled within the first 30 days of ordering.

Chicago Amusement Tax (City of Chicago Only)
A tax imposed by the City of Chicago on amusement services (i.e. paid television programming, recreational activities, etc.) provided within the city limits.

Convenience Fee
A fee applied when a customer payment is processed by a customer service representative. This fee does not apply for payments made online or through our automated phone system.

CT Community Access Support Fee (Connecticut Only)
Fee required to be imposed by AT&T upon its customers by Connecticut General Statutes in order to support community access operations.

CT Public Programming Gross Earnings Tax Recovery (Connecticut Only)
Connecticut fee imposed to support Public, Educational and Governmental (PEG) programming.

CT Video Provider Gross Earnings Tax Recovery (Connecticut Only)
Connecticut fee imposed on U-verse video service.

...and their advertised price was so low.

…and their advertised price was so low.

DEAF Surcharge
This surcharge shall be identified on the telephone bill as the “CA Relay Service and Communications Devices Fund.”

Early Termination Fee
A fee associated with early termination of one or more of your services before the end of the associated service plan term.

Federal Subscriber Line Charge
This charge was instituted in 1984 to cover the costs of a portion of the local phone network.

HD Technology Fee
A monthly fee for access to high-definition (HD) U-verse television service.

High Speed Internet Equipment Fee
A monthly fee for customers who have U-verse TV and Internet equipment.

Infrastructure Maintenance Fee (IMF)
All telecommunications carriers on a customer’s bill must collect this fee. The funds for the state IMF help to support the costs of providing and maintaining utility rights of way. Revenue from the IMF is dedicated for Personal Property Replacement Tax (PPRT) and is disbursed to all taxing districts.

In-State Connection Fee
The In-State Connection Fee helps to cover the costs AT&T is charged by your local phone company to provide you access to local phone lines.

Local Connectivity Charge
This fee helps recover increased connectivity costs associated with providing local service in your state.

Local Number Portability (LNP) Charge
A charge permitted by the FCC to recover costs of upgrading the network to provide customers the ability to keep their phone numbers when changing local service providers.

moneyLocal Video Facilities Fee
A state or local government fee to support Public Educational and Governmental (PEG) programming.

Local Video Service Franchise Fee
Fee imposed by state or local government on U-verse video service.

Minimum Monthly Usage Charge
A charge to an account that does not meet a specified minimum total amount for a particular service.

Municipal Charge
A charge to cover costs of installing telephone poles and lines, manholes, and other telephone items on public property such as city streets.

NV Universal Service Fund Surcharge (Nevada Only)
A fee imposed by the Public Utilities Commission of Nevada that supports telecommunication needs of low-income households, consumers living in high cost areas, schools, libraries, and rural hospitals. This surcharge will be based on a percentage of intrastate long distance charges associated with your U-verse Voice service and will be modified as needed to stay consistent with any required changes in fund contributions.

Number Portability Service Charge
A charge permitted by the FCC to recover costs of upgrading the network to provide customers the ability to keep their phone numbers when changing local service providers.

Receiver Fee
A monthly charge for additional U-verse receivers (set top boxes).

Regulatory Video Cost Recovery Charge
The Regulatory Video Cost Recovery Charge is the monthly fee that is charged to each U-verse TV subscriber’s bill to recover the regulatory fee imposed on providers of Internet Protocol Television (IPTV) Service.

Restoral Fee
A charge to restore service that was suspended or disconnected.

State Cost-Recovery Fee (Texas Only)
Fee/Surcharge imposed by AT&T to recover franchise costs imposed on the company by Texas law.

State Infrastructure Maintenance Fee
All telecommunications carriers on a customer’s bill must collect this fee. The funds for the State IMF help to support the costs of providing and maintaining utility rights of way. Revenue from the IMF is dedicated for Personal Property Replacement Tax (PPRT) purposes and is disbursed to all taxing districts.

Universal Connectivity Charge
The Universal Connectivity Charge is the monthly fee that is charged to each residential customer’s phone bill to recover the expenses associated with AT&T’s payments into the Universal Service Fund.

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Independent Cable Companies Unify Against Cable TV Programmer Rate Increases

big 7Subscribers of more than 900 independent cable companies may face an unwelcome surprise this summer in the form of a mid-year rate increase.

For years, members of the National Cable Television Cooperative (NCTC) have joined forces to negotiate for the kinds of volume discounts only the largest cable and satellite companies like Comcast, Time Warner Cable, DirecTV, Dish Networks, Charter, and Cablevision have traditionally received. NCTC members range from family owned cable operators, rural co-ops, community-owned providers, independent telephone companies, and small multi-system operators servicing multiple communities. With group-buying power, NCTC-member cable companies used to be able to negotiate volume discounts that could keep their rates competitive with larger providers.

But as consolidation among major network media, cable, satellite, and phone companies marches on, only the largest operators — some directly affiliated with the cable programming networks — are getting the best deals at contract renewal time. All NCTC members combined serve just five million cable TV subscribers. Comcast has 21 million, DirecTV: 20 million, Dish Networks: 14 million, and Time Warner Cable: 11 million.

When NCTC’s contract with Viacom was up for renewal, the owner of networks like MTV and Comedy Central raised the renewal price more than 40 times the rate of inflation. In fact, Viacom’s asking price was so high, operators like Cable ONE pulled the plug on 15 Viacom networks for good and replaced them with other programming. NCTC members eventually compromised on a deal to renew Viacom-owned networks, but customers of companies like Massillon, Ohio-based MCTV are paying the price in the form of a mid-year rate hike Bob Gessner, MCTV’s president, did not want to have to pass on to customers.

MCTV“I don’t like to do this because it puts me in a difficult position of raising prices, which no one likes, or reducing the product, which no one likes, or cutting back on the quality of our customer service, which no one likes,” said Gessner. “Large media companies control all the TV programming and they are raising the price.  The cost of TV programming is rising very rapidly and it is causing this rise in retail prices.”

Some facts about cable TV programming:

  • Nine media companies control 95% of the paid video content consumed in the U.S.;
  • The average household watches only 16 channels, yet networks package their channels to force you to buy those you don’t want to get those that you do want;
  • tvonmysideProgramming network fees account for the bulk of your monthly cable bill;
  • The cost of basic cable has risen 3½ times the rate of inflation over the last 15 years because of demands from networks for higher programming fees;
  • One media company honcho recently stated that, “…content is such a fundamental part of daily life that people will give up food and a roof over their heads before they give up TV.” This shows that they have lost their perspective and the demands for huge increases will continue.
Gessner

Gessner

Gessner has broken ranks with many cable operators that say little more at rate hike time than “increased programming costs.”

Gessner has produced a 20-minute video that carefully explains to his customers what is going on in the cable programming industry and why providers like MCTV are forced to shovel networks onto cable lineups few customers want or watch and how the biggest cable and satellite companies are now negotiating volume-discounted renewal pricing at the expense of smaller providers.

While the largest cable companies in the country secure lower rates through those volume discounts, programmers have found a way to make up the difference: demanding even higher rates for smaller cable companies to cover what they lose from Comcast and other big players.

Gessner, as well as other NCTC member companies, confront huge programmers like Comcast-NBCUniversal, Viacom, Time Warner (Entertainment), Discovery and Disney that first demand 3-7 year renewal contracts with built-in, automatic annual rate increases averaging 5-10 percent, regardless of the ratings of their networks. Most also demand that all of their cable networks be carried on their systems, whether customers are interested in them or not. If these companies dream up new cable networks, like ESPN’s SEC Network and the Longhorn Network, MCTV is committed to carry those channels as well, even though they are of little interest to residents of northeastern Ohio where MCTV operates.

These dream contracts (for cable programmers) are the single biggest reason cable-TV rates are skyrocketing. But Gessner says it gets even worse when those contracts expire. When renewal negotiations begin, programmers these days inevitably demand a “rate reset” which starts rate negotiations at a price 10, 30, even 60 percent higher than under the expiring contract.

local cleveland tv

Those dollar amounts cover local station retransmission consent agreements nationwide.

Gessner says he doesn’t know how much longer MCTV can afford to carry expensive networks like sports channels. If he drops them, angry subscribers could cancel cable service and switch to a provider willing to pay the asking price. Unless all of his competitors stand together, programmers will maintain the upper hand.

Some cable companies, like Cable ONE, are starting to risk the wrath of their customers by refusing to negotiate for terms they consider unreasonable. When subscribers learned the reasons why Cable ONE dropped more than dozen Viacom channels, many were supportive because the company replaced the networks with other channels and promised to keep rate increases down because they won’t have to pass on Viacom’s higher prices. Viacom retaliated by locking out Cable ONE’s Internet customers from accessing any of Viacom’s free-to-view online programming.

“Viacom lets web surfers from Albania watch Spongebob but Viacom blocks people who live in Alabama, and if you are an advocate of this thing called Net Neutrality, you should be very concerned,” Gessner said. “Viacom is blatantly violating the spirit of Net Neutrality by discriminating against certain Internet users in order to extract higher fees from TV viewers. That’s the sort of vicious bullying behavior many of the content companies use to maintain their stranglehold on the U.S. television industry.”

Gessner and other independent cable operators hope cable operators’ willingness to drop cable networks over their price is the start of something big — a pushback that could eventually force programmers to charge rational rates.

“Hopefully this will serve as a wakeup call to the rest of the industry to stop paying these ridiculous prices for TV rights,” said Gessner. “I have no illusion that sanity will come to the industry overnight — it will take time — but this is a step in the right direction.”

http://www.phillipdampier.com/video/MCTV Rate Increase 2014.flv

MCTV president Bob Gessner hosted this thoughtful presentation to carefully explain why his customers are facing a $1-3 mid-year rate increase for cable television. Gessner breaks with tradition by explaining the cable television business model is effectively broken and needs serious reform, including more choices for customers seeking fewer channels and a lower bill. It’s well worth 20 minutes of your time. (20:11)

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The Invisible Rate Hike: Verizon Introduces New $0.99 “Because We Can” FiOS Voice Surcharge

Unsimplify

Unsimplify

When is a rate increase not a rate increase? When it is an “administrative surcharge” of course!

Verizon FiOS phone customers will soon find the company’s latest innovation in the form of a new line on their June bill, along with a $0.99 surcharge.

Notice of Price Increase
Effective May 17, 2014, Verizon will apply an FDV Administrative Charge of $0.99 per FiOS Digital Voice line. This monthly surcharge helps defray account servicing costs associated with providing voice services. This is a Verizon surcharge, not a tax or governmental fee. Visit verizon.com for more information.

Instead of simply raising the advertised price of the service, Verizon added a new opaque charge which they admit is nothing more than an effort to increase revenue. Prospective customers will still see Verizon’s attractive promotional pricing, but only later discover the final bill is higher once taxes, fees, and other surcharges are tacked on.

In fact, Verizon’s new FiOS Digital Voice fee is subject to taxes as well, so for some the true cost of the rate increase is $1.21.

Some angry Verizon customers are switching to Ooma, a service that asks customers to pay upfront for the hardware but offers basic telephone service for free (customers pay well under $10 a month to cover taxes that Ooma does not pocket itself.) A more deluxe option including more phone features runs around $10 a month.

One annoyed customer considers the fee an end run around consumer contract law:

My concern [is] with a regulated utility’s ability to get around a contract price by labeling an increase as an “administrative charge.”

I called their customer service line to discuss/complain.  When I asked what would prevent Verizon from using this as a vehicle to increase prices by $10 or $15, assuming Time Warner/AT&T/DirectTV raised their prices as well, he admitted that he was not aware of any restrictions.  Neither am I.

I can’t find anything in my contract with Verizon that lets them increase my price by instituting back-end increases.  I’m pursuing with government regulators and encourage you all to do so as well.  If this gets through, there will be more.

In fact, one of the reasons why Verizon loves their digital voice product so much is because it is unregulated and not subject to government oversight. They can set rates at will and their current contract allows for the addition of administrative fees without violating any “price lock” agreements. So far, most companies implementing these fees have kept them low enough to avoid provoking government scrutiny, but the number of them and their respective amounts have increased over time.

Customer recourse? Complain and ask for a credit for the administrative fee or cancel service.

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Verizon’s Idea of a “Modest Rate Increase” in New Jersey: 440%; $15 Billion Collected for Phantom Fiber

Verizon-logoWhile the New Jersey Board of Public Utilities was able to quickly settle its differences with Verizon by granting the phone company’s wish to walk away from its commitment to offer 45Mbps broadband across the state, New Jersey ratepayers are out $15 billion in excess phone charges levied since 1993 for promised upgrades many will never get.

The Opportunity New Jersey plan the state government signed with Verizon was supposed to expand advanced broadband across the state in return for “a modest amount of pricing flexibility” in the fees Verizon charged customers in New Jersey. But Verizon is not a modest company and a new report shows the phone company used the agreement to boost rates as much as 440% — primarily through ancillary surcharges including inside wire maintenance, wire investment, an investment recovery fee, a local number portability surcharge, merged local calling area charge, and various other charges for phone features including Caller ID, Call Waiting, etc.

Tom Allibone, the president of LTC Consulting joined forces with New Networks’ Bruce Kushnick to analyze more than 30 years of Verizon New Jersey phone bills and discovered when it comes to tallying up rate increases, Verizon’s addition skills are akin to taking out a bag of M&M’s and only counting the yellow ones.

“This Verizon New Jersey bill from April 2002 [...] has an “FCC Subscriber Line Charge”, which was $6.21 cents per line. Verizon’s quote doesn’t include this charge in their analysis of no increases between 1985 to 2008,” Kushnick writes. “The FCC Line Charge (it has many names), is on every local phone bill and the charge started in 1985. You can’t get service without paying this charge and the money does NOT go to fund the FCC but is direct revenue to Verizon New Jersey.”

verizonnjrateincreaseAfter adding up various other surcharges, Kushnick’s bill increased a lot.

“Add up the ‘Total Monthly Charges’ for 2 phone lines— It’s ugly,” Kushnick said. “While the cost of the ‘monthly charges’ was $25.62, there’s an extra $17.70 cents — 70%. I thought that Verizon said there were no ‘increases.’”

“Anyone who has ever bought a bundled package of services from Verizon (or the other phone or cable companies) knows that they all play this shell game; the price of service you have to pay is always 10-40% more than the advertised price. That’s because the companies leave out the cost of these ancillary charges and taxes in their sale pitch,” he added.

Verizon raised local residential service rates 79% in 2008, according to Kushnick. Business customers paid 70 percent more. Caller ID rates increased 38% — remarkable for a service that has a profit margin of 5,695%. But Verizon did even better boosting the charge for a non-published number by 38% — a service that has a 36,900% profit margin as of 1999 — the services are even cheaper to offer now.

Telephone service is one of those products that should have declined in price, especially after phone companies fully depreciated their copper wire networks — long ago paid off. Companies like Verizon have cut the budgets for outdoor wire maintenance and the number of employees tasked with keeping service up and running has been reduced by over 70 percent since 1985, dramatically reducing Verizon’s costs. But Verizon customers paid more for phone service, not less.

The cost of service might not have been as much of an issue had Verizon taken the excess funds and invested them in promised upgrades, but that has not happened for a significant percentage of the state and likely never will. Instead, they just increased company profits. More recently, Verizon has directed much of its investments into its more profitable wireless division.

Even though Verizon achieved total victory with the Christie Administration-dominated BPU, the company is still making threats about any future plans for investment.

“It’s important that regulators and legislators support public policies that encourage broadband growth in New Jersey rather than ones that could jeopardize the state’s highly competitive communications industry, or risk future investments by providers like Verizon,” wrote Sam Delgado, vice president of external affairs.

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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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Philadelphia Customers Launch Revolt Against Comcast’s 15-Year Franchise Renewal

cap comcastComcast customers in Philadelphia are organizing to stop the cable company from winning a 15-year franchise renewal to continue providing service in the city unless the cable operator changes its ways after years of rate increases and poor customer service.

CAP Comcast! argues Comcast is not paying its fair share and is not a good corporate citizen in the city.

“Comcast has outsized power in a Philadelphia still suffering under economic crisis,” says the group. While the company charges some of the highest cable rates in the country, it has successfully earned $64 billion in revenue and an extremely low corporate tax bill.

“During the last franchise negotiation, Philadelphia elected officials and appointed leaders secured important resources for our city, including funds for public access television, and about $17 million a year for Philadelphia’s general fund,” said Bryan Mercer, co-executive director at Media Mobilizing Project. “But since that time, Philadelphia has shuttered over 20 schools and slashed services that our communities need.  Comcast pays less than 4% in corporate tax revenue, in a state where the average is almost 10%. And they’re getting $40 million in subsidies for their new planned building. If Comcast wants a chance to profit from our communities, Philadelphia should ensure Comcast pays their fair share, or invite other communications companies to serve our city.”

Among the group’s key arguments:

“Comcast accesses our streets – our public rights of way – to sell cable and other services in Philadelphia,” said Hannah Sassaman, policy director at Media Mobilizing Project. “At the same time, they are earning huge profits here and nationally, and planning to merge with Time-Warner Cable.  Comcast has lobbied to stop City Council from passing bills that would expand paid sick days to hundreds of thousands of workers who don’t have them, and their executives have raised hundreds of thousands of dollars for Governor Corbett, who has cut over a billion dollars from Pennsylvania education.

CAP Comcast! is asking for a five-year rate freeze for Comcast services while increasing broadband speeds and access to all Philadelphians. It also seeks fair treatment for Public, Educational, and Government access channels, expanded affordable Internet access without pre-conditions, involvement in solving local community problems, support of worker rights, and an end to passing along the cost of the franchise fee to customers.

The group has a petition on its website.

http://www.phillipdampier.com/video/Comcast Tell Comcast to Pay Its Fair Share 5-2014.mp4

CAP Comcast! produced this video introducing its campaign to prevent another 15 year franchise for Comcast in Philadelphia unless the company changes its ways. (2:51)

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Comcast’s Spring Cleaning: More Rate Hikes, X1 Boxes, Wireless Gateways and Usage Caps

speed increaseComcast will increase capital spending in the first half of 2014 to hasten the rollout of its advanced X1 set-top boxes and new wireless gateways that provide public Wi-Fi from customer homes.

Comcast told investors Tuesday its increased spending will likely be offset by increased earnings from more subscribers and room for further price hikes over the course of the year.

First quarter consolidated revenue increased 13.7% to $17.4 billion over the past three months. Almost $11 billion of that comes from Comcast’s cable business. The company boosted cable earnings by 5.3% in the first quarter. Most of that came from a 4.5% increase in the average customer’s cable bill. Comcast subscribers, on average, pay $134 per month. They will pay even more by the end of the year.

Although Comcast’s head of its cable division Neil Smit noted the company implemented lower rate increases during the first quarter, there is room to boost prices further.

“I wouldn’t read any trends into it,” Smit said. “We took rate increases across the smaller percentage of our footprint this quarter than last year as well, but we target different offers to different customers and I don’t think we’re seeing it topping out. In the competitive arena, the offers are in the same ballpark, the promo prices go up and down, but the destination pricing is fairly similar across these various competitors.”

Roberts

Roberts

Comcast continued to buck cord-cutting trends and added 24,000 new video customers in the quarter, a major improvement over the 25,000 it lost at the same time last year. Comcast believes its new X1 platform and aggressive customer retention efforts are responsible for winning and keeping cable television customers. Ongoing speed enhancements in Comcast’s broadband division won the company 383,000 new Internet customers in the last three months. Broadband is Comcast’s biggest money-maker, and revenues increased a further 9% during the quarter owing to customer growth, rate hikes, and customers choosing higher-speed tiers. By the end of the quarter, 38% of Comcast’s residential customers subscribed to at least 50Mbps service, showing growing demand for higher speed Internet.

Sources tell Stop the Cap! Comcast intends to further expand its trial of usage caps (Comcast prefers to call them “usage thresholds”) to more markets this year. Comcast has settled on 300GB usage allowances for most broadband products in current test markets, charging $10 for each additional allotment of 50GB as an overlimit fee. Comcast has avoided trials of usage caps in areas where Verizon FiOS delivers significant competition. Verizon has no usage caps on either their DSL or fiber broadband products.

Comcast also picked up 142,000 new phone customers in the quarter, mostly from those subscribing to aggressively priced triple play service bundle promotions. Around 155,000 new triple play customers signed up over the last three months.

At the end of the first quarter, 68% of Comcast customers took at least two products and 36% took three products, compared to 33% at the end of last year’s first quarter.

Brian Roberts, CEO of Comcast, said there were several factors that fueled Comcast’s growth during the quarter, starting with its advanced X1 set-top box platform, which offers a better television experience and makes finding things to watch easier. If customers have an X1, Roberts told investors, they are less likely to drop cable television service.

X1

X1

“These positive early results reinforce our decision to accelerate our X1 deployment this year, and we are now adding 15,000 to 20,000 X1 boxes per day, which is double our rate of deployment from just six months ago,” Roberts told analysts. “Additionally, we are now rolling out a new XFINITY TV app, which enables our customers to live stream virtually their entire television lineup on any IP device in the home and watch DVR recordings in the home or on the go.”

Although usage caps remain controversial, Comcast has been aggressive about increasing broadband speeds at least once a year.

“In broadband, we recently increased speeds again for the 13th time in 12 years,” Roberts offered. “Doubling speeds in our Blast products to 105Mbps, while our Extreme tier moved up to 150Mbps for customers in the northeast. And we’re not stopping there. Our focus on wireless gateway deployment is adding utility to our customers while at the same time helping us create the largest Wi-Fi footprint in the U.S. with over one million public Wi-Fi hotspots currently available to our customers.”

xfinitylogoAlthough Comcast’s first quarter capital expenditures increased $51 million (or 4.6%) to $1.1 billion (10.6% of cable revenue versus 10.7% in the first quarter of 2013), the cable company returned even more money to shareholders. In the first quarter, the company boosted return of capital by 35% to $1.3 billion. Comcast repurchased its own shares of stock totaling $750 million and paid $508 million in dividends for the quarter.

In 2014, Comcast will invest 14% of cable revenue (compared to 12.9% in 2013) to accelerate the deployment of X1 and wireless gateways, increase network capacity and continue to invest in expansion of business services and XFINITY Home. But it will spend far more than that placating shareholders. If Comcast wins support to buy Time Warner Cable, Comcast intends to increase its stock repurchase plan by $2.5 billion. The company earlier committed it would spend $3 billion on repurchasing its own shares, for an expected total of $5.5 billion during 2014.

When a company repurchases its own shares, it reduces the number of shares held by the public. That in turn means that if profits remain the same, the earnings per share increase. It also boosts the value of the massive portfolios of Comcast stock held by executives as part of their compensation packages.

http://www.phillipdampier.com/video/Comcast Introducing the X1 Platform from XFINITY 4-14.mp4

Comcast produced this video showing off its X1 platform and new set-top boxes. (1:47)

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Cogeco Won’t Lower Your Bill; Warns Customers Not to Be “Victims” of Landline Cutting

Phillip Dampier April 14, 2014 Canada, Cogeco, Competition, Consumer News No Comments

cogecoDespite growing competition from Bell’s fiber-to-the-neighborhood service Fibe, now expanding into many of Cogeco’s outer suburban service areas, Cogeco will not negotiate a better deal for customers, preferring to emphasize its customer service and “right-sizing” bundles of services to best meet customer needs.

As a result of higher prices, Cogeco’s earnings and profits are up for the second quarter of 2014. In the quarter profits rose to $58.5 million — up from $48.9 million during the same quarter a year ago. Revenue rose to $518.4 million from $458.5 million.

“We don’t like competing on price,” said Cogeco CEO Louis Audet said. “I’m not saying it’s zero, but we really don’t like competing on price.”

Audet

Audet

Customers have been offered sign up discounts from Cogeco’s most aggressive competitor on pricing – Bell. But when customers in parts of Ontario and Quebec call Cogeco to negotiate for a lower price, they are largely being turned down.

Audet said Cogeco instead emphasizes that customers will receive better customer service from the cable company, and customer retention specialists are trained to adjust packages to emphasize the services customers want without cutting their cost.

“It’s a right-sizing exercise,” Audet said. “Maybe the person wants a little less video, but they want higher Internet speeds.”

Cogeco isn’t winning the battle to keep its price-sensitive customers, however. The company lost 10,305 subscribers in the second quarter, nearly double the amount lost in the same quarter a year ago. Cogeco now serves 1.96 million Canadian cable television customers.

Customers are also dropping their Cogeco phone service, a decision Audet said makes them “victims” of cell phones. Cogeco permanently disconnected 6,000 landlines in the quarter, up from 5,550 a year ago. It still serves 473,000 phone customers.

The company lost almost 6,000 telephone customers in the quarter compared with additions of 5,550 in the same quarter last year. It had more than 473,000 residential phone customers left.

Despite the customer losses, rate increases more than made up for lost revenue, giving the company a nearly $10 million boost in profits during the second quarter alone.

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

Phillip Dampier April 7, 2014 Competition, Consumer News 10 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.

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