What is the last technology product you purchased that never declined in price after you bought it?  If you answered your broadband service, a new study proves you right.

Since there are no public data on what has happened to broadband prices over the last decade, Shane Greenstein, a professor of management and strategy at the Kellogg School of Management, and his co-author Ryan McDevitt, an assistant professor of economics and management at the University of Rochester and a graduate of Northwestern University, analyzed the contracts of 1,500 DSL and cable service providers from 2004 to 2009.

The results every broadband user already knows.

At best, prices have declined only slightly — typically between 3-10 percent, partly from a “quality adjustment” the authors included to account for gradually increased broadband speeds when measuring prices.

Greenstein blames a broadband duopoly for the stagnation in broadband pricing.

“So if you were in such a market as a supplier, why would you initiate a price war?” Greenstein asks. With no new entries on the market, suppliers can compete by slowly increasing quality but keeping prices the same. According to Greenstein, quality is where providers channel their competitive urges.

Meanwhile, once companies have installed the lines, their costs are far below prices. “At that point, it becomes pure profit,” Greenstein says. A company might spend around $100 per year to “maintain and service” the connection, but people are paying nearly that amount every other month. Greenstein says that it is not surprising that prices were high during the buildout phase in the early and mid-2000s, since the firms were trying to recover their costs. “However, we are approaching the end of the first buildout, so competitive pressures should have led to price drops by now, if there are any. Like many observers, I expected to see prices drop by now, and I am surprised they have not.”

The authors also confirm Stop the Cap!‘s long-standing contention that providers are enjoying dramatically reduced costs to deliver broadband to customers, yet are not spending some of those profits on important network upgrades.  That could lead to a broadband bottleneck, Greenstein contends, especially with the growth of online video.  We argue it is a recipe for Internet Overcharging — triggering increased pricing to “pay for upgrades” while limiting usage of broadband service, despite the mountain of profits available today to cope with usage growth.

Greenstein and McDevitt pored over 1,500 broadband contracts over several years, tracking pricing, service bundling, and speed improvements.  Pricing, adjusted for speed improvements, was generally flat.  Because the cable industry has delivered most of the speed growth Americans enjoy, the “quality adjustment” the authors used credited most of the modest price declines to the cable industry, especially for customers moving to bundled packages of services.  The authors found DSL and its providers almost completely stagnant — both in pricing and speed.

The most surprising discovery, Greenstein says, is that national decisions are being made without the type of data that he created in the consumer price index. “As an observer of communications policy in the U.S., I find it shocking sometimes how often government makes decisions by the seat of their pants,” he says. Without real data and statistics, decisions are based solely on who has better arguments—in essence, a debate. A better consumer price index will help produce better decisions for the future of the Internet and its users.

It may also serve as an effective challenge to telecommunications industry lobbyists who engineer their own statistics and claims about the performance of the nation’s phone and cable companies.

Thanks to Stop the Cap! readers Bones and Michael for sending along the story.

Australia’s planned National Broadband Network (NBN) delivering the country access to broadband speeds up to 1Gbps face many of the same criticisms American municipal providers hear when incumbent commercial providers face imminent competition from fiber broadband.

But nobody can top the venomous spray of Exetel’s CEO John Linton, who called the entire concept of public broadband for the public good “a load of crap” and those behind it a mix of ‘thugs,’ ‘pretenders,’ and generally incompetent and stupid.

Linton’s Internet Service Provider delivers broadband to most of its customers over Telstra landlines, using DSL.  But the company has grudgingly agreed to participate in the NBN project, even while still despising it to the core.

Exetel’s pricing on NBN’s fiber network charges for speed and usage.  Much like cable broadband, Exetel delivers much faster downstream speeds (up t0 100Mbps), with upload speeds maxing out at 8Mbps. The higher the speed, the higher the monthly access fee.  Users receive no usage allowance, paying fees per gigabyte for all of their usage.  Exetel still reserves the right to throttle customer speeds for certain online applications, and “traffic shape” users based on their usage.

In Tasmania, Exetel has introduced a 25/2Mbps broadband plan with no usage allowance — but no monthly access fee either — charging a flat $2 per gigabyte of usage.

Exetel Fiber Pricing In Tasmania

Plan	Speed Down	Speed Up	Monthly Access	Download Charges	Upload Charges	Contract Length	Usage Allowance
A	25 mbps	2 mbps	$0.00	$2.00 per GB	Nil	12 Months	None
B	50 mbps	4 mbps	$25.00	$1.00 per GB	Nil	12 Months	None
C	100 mbps	8 mbps	$50.00	$0.75 per GB	Nil	12 Months	None

Linton spews most of his angry commentary on his personal blog, which he closed to non-Exetel customers unless they made a $20AUS contribution to the company’s endangered wildlife protection programs.  But he rarely pulls punches in public either.

A sampler:

With wireless broadband waiting in the wings, those excited by NBN’s 1Gbps speeds are “unthinking and just plain stupid, pretty much along the same lines as the stone age cargo cult dwellers in the jungles of New Guinea are excited about the next ‘goods drop’ from the strange colored bird.”

Australia’s aging population, “who don’t play computer games or get a surrogate sex life from pornography” have zero interest in getting terabyte broadband speeds, making the whole endeavor a giant waste of money.

“The number of people who want 100Mbps are almost none today and aren’t going to be very many in five years time.   Probably 40-50% of people today will never want to use a piece of fiber […] and they’re certainly not gamers playing, or those other things.  They’re the other half of Australia that has a life rather than a half life.”

On the results of the recent election and the decision to move forward with the NBN: “God help us all.”

On Communications Minister Stephen Conroy (Australia’s version of FCC Chairman Julius Genachowski): “He was his usual mixture of bewilderment, ignorance and barely concealed thuggery, but I was amused at his reference to Exetel (not by name).” Linton wrote on his blog. “While I’m grateful for the ‘free plug’ I thought it was an obvious example of “straw clutching” if it wasn’t based on appallingly bad briefing, which I would doubt, because for him to have been aware of any actual pricing would have required some sort of briefing,” added Linton.

On NBN co-chief Mike Quigley, who will help manage NBN service: “Is [Mike Quigley] god? Can he reverse 100 years of telecommunications going one way and say, ‘Oh, I’m Mike Quigley, and I haven’t worked here in 30 years, I know nothing about running major networks, but someone has paid me $2 million a year so I can pretend I can’.  The only one who can do it is Telstra. It would do it cheaper than a bloody government.”

Linton blames all of the talk about a publicly-owned broadband network for the decrepit state of Australia’s commercial broadband market, claiming it dried up private investment in new ADSL products: “The situation as I see it is that the suppliers — Telstra, Optus, AAPT — are not really investing in anything new, especially when you’re referring to ADSL type broadband products. The current suppliers are holding on to the margins they have at the moment, and if anything they will seek to increase them rather than reduce them,” says Linton.

Since nearly every broadband user in Australia knows Linton hates fiber broadband, what technology does he believe represents Australia’s future?

3G wireless.

“Most people that I know, including me, put a much higher priority on mobility than they do on speed,” he told ZDNet. “The average person needs a 100Mbps internet connection about as much as they need to have their arms amputated.”

While mobility is important, his critics charge, there is no way 3G wireless can deliver Australia its broadband future.  Service is not ubiquitous across the country, speeds are far below even what DSL offers, streaming multimedia is challenging at best, and the usage fees and limits that accompany wireless service plans in the south Pacific would create an even greater divide between those who can afford wireless broadband, and those who cannot.

A report released yesterday by the Bureau of Statistics shows Australians are downloading more data than ever before, increasing more than 50 percent in the second quarter compared to the same period last year. The amount of data downloaded every three months is now 11 times higher than March 2005 and 126 times higher than March 2002.

Australia’s National Broadband Network is open to all Internet Service providers that wish to participate, reselling their broadband plans using NBN’s infrastructure.

AT&T wireless broadband customers who thought they could survive a smartphone data plan with only a 200MB usage allowance are discovering $15 overlimit fees applied to their bill because of mystery data usage consumed while they were asleep.

Stop the Cap! reader Pat dropped us a note to say she accumulated a whopping $45 in overlimit fees on her August bill for her family’s three iPhones because they exceeded their 200MB usage allowances while the family was unconscious:

At around 2AM most mornings, our phones regularly show usage of around 5-10MB each even though they are being charged and are not used by anyone in the family.  At first my husband thought an application on the phone was automatically exchanging data so we tried switching off 3G access and relied exclusively on Wi-Fi access, to no avail.  Sure enough, for the next seven days in a row, the phones all used between 5-10MB of usage.  We tried disabling and removing various applications and told others only to communicate manually.  That didn’t work either.  The mystery usage remained.

We contacted AT&T multiple times about this issue, because this usage easily put us over the limit, at which point AT&T bills a $15 penalty to buy you another 200MB of usage.  We got a lot of excuses, one month’s credit, but no answers.  One representative used the opportunity to try and upsell us on the 2GB plan to “avoid this from happening.”  It sounds like a nice scam.

Pat, it turns out this has been a significant issue for many AT&T customers dating back to the June introduction of the usage-limited smartphone data plans from AT&T.  We found threads on both AT&T and Apple’s websites running well into the dozens of pages, with nobody getting a definitive, consistent answer as to why this keeps happening.

In late July, the folks at Gizmodo got a statement from AT&T about the problem:

This is a routine update of your daily data activity on your device to ensure the accuracy of your data billing. Customers are not charged for data usage, given that no data session is generated. It’s not uncommon for devices that are ‘always on’, like iPhone, to process data event records for billing purposes after a certain amount of inactivity or after long periods of time. It’s also separate from how our system lets you monitor your data consumption.

Unfortunately, it’s also apparently inaccurate because subsequent comments indicate customers were, in fact, billed for that usage.

Customers have been told a variety of things to justify AT&T’s usage billing:

1. It’s an application on your phone polling for data and/or updates;
2. Your phone is sending and receiving e-mail;
3. If your phone goes “to sleep” it switches away from Wi-Fi and back to AT&T’s 3G usage, incurring data usage fees;
4. In the early morning, AT&T communicates with phones to exchange updates and data;
5. The usage reports represent cumulative usage made during the day but only later reported to AT&T;
6. It’s iTunes diagnostic information you agreed to share with Apple being sent to them every night;
7. It’s Apple’s fault.

The biggest problem? AT&T’s stingy usage allowances.  Many customers do not understand what a megabyte represents, but 200 of them sounds like a lot… until you browse to a page with multimedia content or utilize an application that exchanges a lot of data during the day.  AT&T has really not addressed the problem, other than to throw $10 credits to customers who complain the loudest.  Many just upgrade to the higher priced 2GB plan and hope the problem goes away.

AT&T’s Internet Overcharging scheme for wireless has trained customers to use less of a service they pay good money to receive:

• Customers think twice before installing and using data applications that could consume too much of their allowance;
• Customers train themselves to jump off of AT&T’s 3G network and switch to Wi-Fi wherever possible, despite paying for AT&T’s wireless data network;
• Customers quickly learn paying more for a more “generous allowance” is a “better value,” saving them the time and hassle of worrying about overlimit fees;
• Customers can complain all they like, but in the end they’ll grumble and pay the bill, facing exorbitant early termination fees if they want out of AT&T’s fee maze.

Unfortunately, without a team of lawyers or regulatory agencies breathing down AT&T’s neck to deliver a credible response to these overcharges, they are very likely to continue.  Although AT&T claims the 200MB usage plan was designed to save customers money and attract new users to smartphones, it’s no mistake the cheapest plan delivers a minuscule allowance.

The company knows very well that smartphone data usage increases as the phones and the software that runs on them become more sophisticated.  Customers delivered a tasty sample of 3G usage are likely to enjoy it and find themselves upgrading to a more profitable data plan with a comparatively larger allowance.  If they don’t, AT&T wins again because customers face paying at least $30 for 400MB of usage, even though a 2GB plan would have only set them back $25.

For now, the best we can recommend is completely powering off the phone overnight and seeing if it still incurs any phantom charges.  You should also complain, regularly and loudly, to AT&T each time it happens.  Contact your state Attorney General and file a complaint if AT&T’s answers are unsatisfactory and urge their office to begin an investigation.

As Stop the Cap! has said from day one, Internet Overcharging schemes force customers to spend time and energy doublechecking usage gauges that may or may not be accurate and make you think twice about everything you do online, wondering what it will ultimately do to your bill at the end of the month.  It’s all a win for service providers, who get the benefit of conservative usage from the “think-twice” mindset and revenue enhancing overlimit fees from those who never worry.  You lose either way.

EPB’s new 1Gbps municipal broadband service is causing some serious embarrassment to the telecom industry.  Since last week’s unveiling, several “dollar-a-holler” telecom-funded front groups and trade publications friendly to the industry have come forward to dismiss the service as “too expensive,” delivering speeds nobody wants, and out of touch with the market.

The “Information Technology and Innovation Federation,” which has historically supported the agenda of big telecom companies, has been particularly noisy in its condescending dismissal of the mega-speed service delivered in Chattanooga, Tenn.

Robert Atkinson, president of ITIF, undermines the very “innovation” their group is supposed to celebrate.  Because it doesn’t come from AT&T or Verizon, it’s not their kind of “innovation” at all.

“I can’t imagine a for-profit company doing what they are doing in Chattanooga, because it’s so far ahead of where the market is,” Atkinson told the New York Times.

“Chattanooga definitely is ahead of the curve,” Atkinson told the Times Free Press. “It’s like they are building a 16-lane highway when there is a demand for only four at this point. The private companies probably can’t afford to get that far ahead of the market.”

Bernie Arnason, formerly with Verizon and a cable industry trade association also dismissed EPB’s new service in his current role as managing editor for Telecompetitor, a telecom industry trade website:

Does anyone need that speed today? Will they in the next few years? The short answer is no. It’s kind of akin to people in the U.S. that buy a Ferrari or Lamborghini – all that power and speed, and nowhere to really use it. A more apropos question, is how many people can afford it – especially in a city the size of Chattanooga?

[…]Will there be a time when 1 Gb/s is an offer that is truly in demand? More than likely, although I still find it hard to imagine it being really necessary in a residential setting – I mean how many 3D movies can you watch at one time? Maybe a service that bursts to 1 Gb/s in times of need, but an always on symmetrical 1 Gb/s connection? Truth be told, no one really knows what the future holds, especially from a bandwidth demand perspective.

Arnason admits he doesn’t know what the future holds, but he and his industry friends have already made up their minds about what level of service and pricing is good enough for “a city the size of Chattanooga.”

Comcast’s Business Class broadband alternative is priced at around $370 a month and only provides 100/15Mbps service in some areas.  Atkinson and Arnason have no problems with that kind of innovation… the one that charges more and delivers less.

For groups like the ITIF, it’s hardly a surprise to see them mount a “nobody wants it or needs it”-dismissive posture towards fiber, because they represent the commercial providers who don’t have it.

Fiber Embargo

The Fiber-to-the-Home Council, perhaps the biggest promoter of fiber broadband delivered straight to customer homes, currently has 277 service provider members. With the exception of TDS Telecom, which owns and operates small phone companies serving a total of 1.1 million customers in 30 states, the FTTH Council’s American provider members are almost entirely family-run, independent, co-op, or municipally-owned.

Companies like American Samoa Telecommunications Authority, Hiawatha Broadband Communications, KanOkla Telephone Association Inc., and the Palmetto Rural Telephone Cooperative all belong.  AT&T, CenturyLink, Frontier, Verizon, and Windstream do not.  Neither do any large cable operators.

While not every member of the Council has deployed fiber to the home to its customers, many appreciate their future, and that of their communities, relies on a high-fiber diet.

EPB’s announcement of 1Gbps service was made possible because it operates its service over an entirely fiber optic network.  Company officials, when asked why they were introducing such a fast service in Chattanooga, answered simply, “because we can.”

The same question should have been directed to the city’s other providers, Comcast and AT&T.  Their answer would be “because we can’t… and won’t.”

Among large providers, only Verizon has the potential to deliver that level of service to its residential customers because it invested in fiber.  It was also punished by Wall Street for those investments, repeatedly criticized for spending too much money chasing longer term revenue.  Wall Street may have ultimately won that argument, because Verizon indefinitely suspended its FiOS expansion plans earlier this year, despite overwhelmingly positive reviews of the service.

So among these players, who are the real innovators?

The Phone Company: Holding On to Alexander Graham Bell for Dear Life

Last week, Frontier Communications told customers in western New York they don’t need FiOS-like broadband speeds delivered over fiber connections, so they’re not going to get them.  For Frontier, yesterday’s ADSL technology providing 1-3Mbps service in rural areas and somewhat faster speeds in urban ones is ‘more than enough.’

That “good enough for you” attitude is pervasive among many providers, especially large independent phone companies that are riding out their legacy copper wire networks as long as they’ll last.

What makes them different from locally-owned phone companies and co-ops that believe in fiber-t0-the-home?  Simply put, their business plans.

Companies like Frontier, FairPoint, Windstream, and CenturyLink all share one thing in common — their dependence on propping up their stock values with high dividend payouts and limited investments in network upgrades (capital expenditures):

Perhaps the most important metric for judging dividend sustainability, the payout compares how much money a company pays out in dividends to how much money it generates. A ratio that’s too high, say, above 80% of earnings, indicates the company may be stretching to make payouts it can’t afford.

Frontier’s payout ratio is 233%, which means the company pays out more than $2 in dividends for every $1 of earnings! But this ignores Frontier’s huge deferred tax benefit and the fact that depreciation and amortization exceed capital expenditures — the company’s actual free cash flow payout ratio is a much more manageable 73%. Dividend investors should ensure that benefit and Frontier’s cash-generating ability are sustainable.

In other words, Frontier’s balance sheet benefits from the ability to write off the declining value of much of its aging copper-wire network and from creative tax benefits that might be eliminated through legislative reform.

The nightmare scenario at Frontier is heavily investing in widespread network upgrades and improvements beyond DSL.  The company recently was forced to cut its $1 dividend payout to $0.75 to fund the recent acquisition of some Verizon landlines and for limited investment in DSL broadband expansion.

Frontier won’t seek to deploy fiber in a big way because it would be forced to take on more debt and potentially cut that dividend payout even further.  That’s something the company won’t risk, even if it means earning back customers who fled to cable competitors.  Long term investments in future proof fiber are not on the menu.  “That would be then and this is now,” demand shareholders insistent on short term results.

The broadband expansion Frontier has designed increases the amount of revenue it earns per customer while spending as little as possible to achieve it.  Slow speed, expensive DSL fits the bill nicely.

The story is largely the same among the other players.  One, FairPoint Communications, ended up in bankruptcy when it tried to integrate Verizon’s operations in northern New England and found it didn’t have the resources to pull it off, and delivered high speed broken promises, not broadband.

Meanwhile, many municipal providers, including EPB, are constructing fiber networks that deliver for their customers instead of focusing on dividend checks for shareholders.

Which is more innovative — mailing checks to shareholders or delivering world class broadband that doesn’t cost taxpayers a cent?

Cable: “People Don’t Realize the Days of Cable Company Upgrades are Basically Over”

While municipal providers like EPB appear in major national newspapers and on cable news breaking speed records and delivering service not seen elsewhere in the United States, the cable industry has a different story to share.

Suddenlink president and CEO Jerry Kent let the cat out of the bag when he told investors on CNBC that the days of cable companies spending capital on system upgrades are basically over.

“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.”

Both cable and phone companies have called a technology truce in the broadband speed war.  Where phone companies rely on traditional DSL service to provide broadband, most cable companies raise their speeds one level higher and then vilify the competition with ads promoting cable’s speed advantages.  Phone companies blast cable for high priced broadband service they’re willing to sell for less, if you don’t need the fastest possible speeds.  But with the pervasiveness of service bundling, where consumers pay one price for phone, Internet, and television service, many customers don’t shop for individual services any longer.

With the advent of DOCSIS 3, the latest standard for cable broadband networks, many in the cable industry believe the days of investing in new infrastructure are over.  They believe their hybrid fiber-coaxial cable systems deliver everything broadband consumers will want and don’t see a need for fiber to the home service.

Their balance sheets prove it, as many of the nation’s largest cable companies reduce capital expenses and investments in system expansion.  Coming at the same time Internet usage is growing, the disparity between investment and demand on broadband network capacity sets the perfect stage for rate increases and other revenue enhancers like Internet Overcharging schemes.

Unfortunately for the cable industry, without a mass-conversion of cable-TV lineups to digital, which greatly increases available bandwidth for other services, their existing network infrastructure does not excuse required network upgrades.

EPB’s fiber optic system delivers significantly more capacity than any cable system, and with advances in laser technology, the expansion possibilities are almost endless.  EPB is also not constrained with the asynchronous broadband cable delivers — reasonably fast downstream speeds coupled with paltry upstream rates.  EPB delivers the same speed coming and going.  In fact, the biggest bottlenecks EPB customers are likely to face are those on the websites they visit.

EPB also delivered significant free speed upgrades to its customers earlier this year… and no broadband rate hike or usage limits.  In fact, EPB cut its price for 100Mbps service from $175 to $140.  Many cable companies are increasing broadband pricing, while major speed upgrades come to those who agree to pay plenty more to get them.

Which company has the kind of innovation you want — the one that delivers faster speeds for free or the one that experiments with usage limits and higher prices for what you already have?

No wonder Big Telecom is embarrassed.  They should be.

[flv width=”640″ height=”500″]http://www.phillipdampier.com/video/EPB Interviews 9-20-10.flv[/flv]

EPB and Chattanooga city officials appeared in interviews on Bloomberg News and the Fox Business Channel.  CNET News also covered EPB’s 1Gbps service, introduced last week.  (12 minutes)

Color of Change needs everyone to take a moment and let members of the Congressional Black Caucus know we need them to stand up for Net Neutrality and broadband reform to help Black communities harness the political, economic, educational, and cultural power of the Internet.

While several members are already on board, there are many who either haven’t gotten the message or are on the wrong side of consumers.  Color of Change writes:

Most on the wrong side have simply been taken in by the lies of telecommunications industry lobbyists. But others have taken large financial contributions from telecoms and appear to be willingly carrying water for their biggest donors.

It’s unacceptable, whatever the reason. The CBC needs to understand that Internet freedom is in the vital interest of Black communities. Please join us in calling on the Congressional Black Caucus to support a free and open Internet, and then ask your friends and family to do the same.

First, please thank these members who are strong advocates of Net Neutrality and broadband reform that favors consumers:

• Rep. Barbara Lee (D-California)
  
• Rep. Maxine Waters (D-California)
  
• Rep. John Conyers (D-Michigan)
• Rep. Donna Edwards (D-Maryland)
• Rep. Keith Ellison (DFL-Minnesota)
• Rep. Donald Payne (D-New Jersey)

Second, take note of these two Big Telecom bad actors effectively on AT&T and Verizon’s payroll:

• Rep. Greg Meeks (D-New York) – For years, AT&T and Verizon have been among Meeks’ biggest donors. In October 2009, he collected 70 signatures from his colleagues on an industry-backed letter — written after consulting AT&T — designed to weaken support for Internet freedom.  Meeks may claim that his major motivation is protecting jobs. But there’s no credible evidence that protecting Internet freedom will lead to job losses or decreased investment — in fact, evidence suggests the contrary. But in the face of massive support from telecoms, it appears that Meeks has only truly considered one side of the argument — the one that earns him fat checks.
• 

  Rush

  Rep. Bobby Rush (D-Illinois) – AT&T has long been one of Rush’s largest donors. Then, from 2001 – 2004, they donated $1 million to a community center Rush founded in Chicago. Since then, Rush has been a leader in the effort to eliminate Internet freedom. In 2006, Rush helped convince many members of the CBC to kill a measure that would have enshrined Internet freedom into law. And since that time, he has supported other efforts to weaken Internet freedom protections.  It’s wonderful AT&T donated the money to a community center Rush started, but that doesn’t mean AT&T is his only constituent.  Or does Congressman Rush need at least a million dollars from you to represent -your- interests before he’ll vote your way.

By signing the online petition and contacting members of the Congressional Black Caucus on these issues, you are delivering a wake-up call that lets Congress know these issues are critically important to you and they need to pay attention.  More importantly, it will expose those who feel safe taking big checks from phone and cable companies as a reward for voting against your interests.  If they know you are watching and their votes can make a difference in how you will vote in the next election, many will have the courage to leave Big Telecom’s money on the table and walk away.