Phillip “Artificial Scarcity for Fun and Profits” Dampier

It would be an understatement to say I’ve heard the argument once or twice that there is simply no economic room for additional players to enter what Big Telecom companies always claim is a robustly competitive marketplace for Internet access.

Virtually every company facing inquiries from regulators, politicians, and consumers always makes the point today’s deregulated broadband playing field is an excellent example of free market competition at its best.

While they advocate for even more deregulation, oppose the entry of community-owned broadband services, and demand more spectrum from Washington lawmakers, we endure a veritable monopoly/duopoly for Internet access. Their defense, after a dismissive rolling of the eyes, is that we just don’t understand business.

Enter Tim Lee, writing for the alternate reality reader of Forbes, who decided to prove his argument by comparing broadband with Supercuts:

Being the first to build a hair-cutting shack in a particular customer’s backyard can be pretty lucrative. It gives you a de facto monopoly on that household’s haircut business. Let’s assume that it takes 4 years worth of haircuts to recoup the costs of building a shack for a particular household. While barbers will need to raise some extra capital to build the shacks, in the long run the owner of the first shack may be able to earn big monopoly rents.

Now along comes a new barber who wants to enter the hair-cutting business, but every household already has at least one hair-cutting shack. So he needs to build hair-cutting shacks in backyards where another barber has already built one. And that’s an economically precarious situation. Remember, we assumed a monopolist needs to do 4 years worth of haircuts in order to break even. But if you build a shack in a backyard that already has another barber in it, you shouldn’t expect to get more than half of the customer’s business, on average, over the long run. Not only that, but competition will push down prices, so you’ll have to do more haircuts to recover the costs of construction. So you’ll be lucky to recover your initial investment within 8 years, and it could easily take more than a decade.

And things are even worse for the third or fourth barber who builds in a particular backyard. The fourth barber will be building in a yard that already has three barbers. He can only expect to attract 25 percent of the household’s business, and strong competition among barbers means his margins will be pretty thin. It’s hard to see how he could ever recover the costs of his investment.

Brushing away the hair-cutting analogy, Lee’s point is that it is wasteful and inefficient for competitors to overbuild new networks where others already exist. The phone and cable companies that dominate the marketplace today decry additional competition as a death blow to their business models, because with so many providers fighting for customers (by lowering prices and offering better service), not every provider can sustain a profit Wall Street investors expect quarter after quarter. This argument is particularly common when attacking those dastardly socialist community-owned broadband providers they say destroy private enterprise (while unconvincingly also warning they will always fail and cost taxpayers millions on the way down). It is also why Wall Street continues to beat the drum for additional consolidation in the wireless marketplace, where anything more than AT&T and Verizon Wireless represents too much revenue destruction.

Lee does make some valid points:

1. Infrastructure costs are the biggest expense in launching a new network, especially wiring the last mile to customers;
2. Verizon FiOS overestimated its potential market share and found it harder to turn a profit than first anticipated;
3. Other utilities have avoided building redundant networks (ie. you don’t have two companies providing their own electric, water, and gas lines).

When communities decide to offer their own broadband service, incumbent cable and phone companies spend big bucks to scare residents.

But Lee’s conclusion is entirely favorable to the industry he often defends — that is just the way things are and customers should not expect anything better.

Those arguments are usually also the basis for free market declarations that if a private company cannot find a way to deliver a service at a profit, then those left out will just have to do without.

Thankfully, despite Lee’s criticism of Google Fiber in Kansas City as “extremely wasteful,” the search engine company is perhaps best positioned of all to turn the industry’s common refrain against new competition on its head.

Every so often, a surprising third party shows up with the resources to ignore Wall Street’s conventional wisdom. Enter the deep pockets of Google Fiber or a bond-backed community provider threatening to deliver service far better than what a community currently enjoys. The predictable defense from incumbent providers:

• Nobody needs faster broadband speeds;
• Community networks are a government takeover of the Internet;
• Fiber optics are expensive and represent an unnecessary investment;
• Public broadband destroys private investment and jobs at incumbent commercial providers;
• This is just a political stunt, not a real effort at taking Internet speeds to the next level.

Without the kind of competition on offer from Google, community providers, and private providers like Verizon taking a chance on FiOS fiber optics, there would be no room for innovation in the marketplace.

Provider tolerance for today’s marketplace duopoly and the lackluster service that results is reminiscent of a joke told by President George W. Bush’s in 2000: “If this were a dictatorship, it would be a heck of a lot easier…just so long as I’m the dictator.”

It is easy for today’s comfortable duopoly providers to take shots at would-be competitors while dragging their feet on network upgrades. They have little to fear with Wall Street on their side, joining opposition to new competition as harmful to profits. Even Verizon Communications, one of the two dominant providers, quickly heard from analysts irritated with the infrastructure expenses involved upgrading to a fiber optic network. At the heart of that criticism was a sense it was an unnecessary expense, with no reason to change the safe and reliable status quo. Innovation that costs money is the enemy of Wall Street, unless competition warrants the investment.

Therein lies the key. Effective, disruptive competition demands companies do something different. Lee may be right that three companies cannot easily bring home the big profits. Wall Street may have to make do with less. In a competitive market, the player offering the least will be the first to innovate to keep or attract customers, or eventually close their doors. Those remaining will compete in turn to deliver the best possible service at the lowest possible price. That itself is a departure from the comfort zone enjoyed by phone and cable operators today where neither feels much pressure. Cable companies won’t ever compete with other cable companies and the same is true for phone companies. But if a company like Google arrives, the decade-long coffee break is over.

Want proof? Just look at cable operators struggling to keep video customers who are now finding alternatives with Netflix and online viewing. They are increasingly looking for ways to enhance the value of cable television by offering online viewing themselves. Even rate increases have slowed. If Netflix and cord-cutting were not factors, would cable companies have changed the way they do business?

Google’s marketplace disruption delivers for consumers.

Lee is right saying it is not easy to break into the broadband business. Only some might realize the same investors and Wall Street barons that dislike profit-eroding competition also often happen to be in the business of loaning money to finance new businesses. More than a few will turn those loans down as too risky to contemplate.

But here comes the rhetorical trap Lee’s argument gets ensnared in: If running redundant networks is wasteful and we still need competition, the logical solution would be to construct or nationalize one advanced network on which all providers would market their services. Why waste time and money on duplicate copper and coaxial networks when a single fiber to the home network could deliver improved service well beyond what the local phone and cable company can offer.

Isn’t the answer to run a single telecommunications line into customer homes (one preferably not controlled by any provider), and let competition bloom on that advanced infrastructure? That is the solution Australia has chosen, scrapping the country’s ancient copper wire phone lines in favor of one national fiber network. Most community providers also operate open networks that other cable and phone companies can utilize (but often petulantly refuse).

Somehow, despite the enormous savings possible from sharing or offloading network infrastructure expenses, I doubt providers will consider that the kind of innovation they want or need.

Otero

When a former labor leader suddenly starts advocating for the interests of AT&T and other super-sized telecommunications companies, even as AT&T’s unionized work force prepared to strike, the smell of Big Telecom money and influence permeates the air.

Jack Otero, identified in the Des Moines Register as “a former member of the AFL-CIO Executive Council and past national president of the AFL-CIO’s Labor Council for Latin American Advancement,” penned a particularly suspicious love letter to deregulation that might as well have been written by AT&T’s director of government relations:

[…]Industries — like broadband Internet — are thriving and creating innovations. Tossing a regulatory grenade into these businesses could wreck markets that create value for consumers and jobs for workers.

The United States is one of the most wired nations in the world. More than 95 percent of households have access to at least one wireline broadband provider, and the vast majority can connect at speeds exceeding 100 Mbps. And monthly packages start as low as $15. That means more families can go online to improve their job skills, look for work or help the kids with their school assignments.

More choices and higher speeds — the signs of a vibrant market — are the product of private investment, not public dollars. Internet service providers have invested over $250 billion in the last four years alone. This has created roughly half a million jobs laying fiber-optic and coaxial cable.

But some squeaky wheels are demanding heavy-handed regulations that would move our broadband Internet to the European model, where taxpayers have to subsidize outdated networks with slow speeds. Some want broadband providers to be required to lease their networks to competitors at discounted prices — as they do in Europe. But lawmakers in both parties agree that this policy, tried in the 1996 Telecommunications Act, failed miserably.

Others argue that broadband Internet providers should not be able to impose a small surcharge on the tiny percentage (less than 1 percent) of consumers who download hundreds of movies and tens of thousands of songs every month — effectively the data usage of a business. They say these fees discriminate against online video companies like Netflix. But that’s silly. More than 99 percent of users can watch plenty of Apple TV or Netflix without approaching the lowest data allotment. Without tiered pricing plans, the rest of us would have to underwrite these super-users.

Okay then.

Otero’s Fantasy World of Broadband sounds great, only it does not exist for the vast majority of Americans. Are most of us able to connect at speeds exceeding 100Mbps?

If you happen to live in a community served by a publicly-owned broadband provider Otero effectively dismisses, you can almost take this fact for granted.

Some of America’s most advanced telecommunications providers are actually owned by the public they serve in dozens of communities small and large. EPB Fiber, Greenlight, Fibrant, Lafayette’s LUS Fiber, among others, deliver super-fast upload and download speeds at very reasonable prices while the giant phone and cable companies offer less service for more money.

The only major telecommunications company with a wide deployment of fiber-to-the-home service is Verizon Communications.

You cannot easily buy residential 100Mbps service from Time Warner Cable, AT&T, CenturyLink, Frontier, FairPoint, or a myriad of other telecom companies at any price, unless you purchase an obscenely expensive business account. From the rest, 100Mbps service typically sets you back $100 a month.

Otero’s quote of affordable $15 broadband is not easy to come by either. It usually requires the customer to qualify for food stamps or certain welfare programs, have a family with school-age children, a perfect payment history, and no recent record of subscribing to broadband service at the regular price.

The only people who believe America is the home of a vibrant market for broadband service are paid employees of telecom companies, paid-off politicians, or their sock-puppet friends and organizations who more often than not receive substantial contributions from phone or cable companies. The fact is, the United States endures a home broadband duopoly in most communities — one cable and one phone company. They charge roughly the same rates for a level of service that Europe and Asia left behind years ago. Broadband prices keep going up here, going down there.

Simply put, Mr. Otero and actual reality have yet to meet. Consider his nonsensical diatribe about the impact of the “heavy-handed” 1996 Telecommunications Act, actually a festival of mindless deregulation that resulted in sweeping consolidation in the telecommunications and broadcasting business and higher prices for consumers.

Otero is upset that big companies like AT&T and Verizon originally had to open up their networks in the early 1990s to independent Internet Service Providers who purchased wholesale access at fair (yet profitable) prices. Those fledgling ISPs developed and marketed third-party Internet service based on those open network rates. Remember the days when you could choose your ISP from a whole host of providers? In some markets, this tradition carried forward with DSL service, but for most it would not last.

The telecommunications industry managed to successfully lobby the government and federal regulators to change the rules. Phone companies did not appreciate the fact they had to open their networks for fair access while cable operators did not. So in 2005, the FCC allowed both to control their broadband networks like third world despots. Competitors were effectively not allowed. Wholesale access, where available, was priced at rates that usually guaranteed few ISPs would ever undercut the cable or phone company’s own broadband product.

The lawmakers who believed open networks represented awful policy were almost entirely corporate-friendly or recipients of enormous campaign contributions from the telecom companies themselves.

So which market is actually on the road to failure?

The LCLAA couldn’t do enough to help AT&T swallow up competitor T-Mobile USA.

The American broadband business model is a firmly established duopoly that charges some of the world’s highest prices and has rapidly fallen behind those “failures” in Europe.

In the United Kingdom, BT — the national phone company, is required to sell access at the wholesale rates Otero dismisses as bad policy. As a result, UK consumers have a greater choice of service providers, and at speeds that are increasingly outpacing the United States. Nationally backed fiber to the home networks in eastern Europe and the Baltic states have already blown past the average speeds Americans can affordably buy from the cable company.

Even Canada requires Bell, the dominant phone company, to open its network to independent ISPs selling DSL service. Without this, Canadians would rarely have a chance to find a service provider offering unlimited, flat rate service.

Otero’s final, and most-tired argument is that data caps force “average” users to subsidize “heavy” users. In fact, as Stop the Cap! reported this week, that fallacy can be safely flushed away when you consider the largest ISPs pay, on average, just $1 per month per subscriber for usage, and that price is dropping fast. The only thing being subsidized here is the telecom “dollar-a-holler” fund, paid to various mouthpiece organizations who deliver the industry’s talking points without looking too obvious.

The Des Moines Register omitted the rest of Mr. Otero’s industry connections. We’re always here to help at Stop the Cap!, so here is what the newspaper forgot:

• Mr. Otero is a board member of Directors of the U.S. Hispanic Leadership Institute (USHLI), a group funded in part by AT&T and Verizon;
• He is the past president of the Labor Council for Latin American Advancement, a group that enthusiastically supported the anti-competitive merger of AT&T and T-Mobile USA;

Mr. Otero has a side hobby of penning nearly identical editorials with largely these same broadband talking points. One wonders what might motivate him into writing letters to the Des Moines Register, the Lexington Herald-Leader, the Gainesville Sun, the Star-Banner, and the Ledger-Inquirer.

Otero may have a case for plagiarism, if he chooses to pursue it, against Mr. Roger Campos, president of the Minority Business RoundTable (the top cable lobbyist, the National Cable & Telecommunications Association is labeled an MBRT “strategic partner” on their website). Campos uses some of the exact same talking points in his own “roundtable” of letters to the editor sent to newspapers all over the place, including the Ventura County Star, the Leaf Chronicle, and the Daily Herald.

The views of the Adam Smith Institute, despite the near-global financial meltdown engineered by the Masters of the Universe.

Forbes columnist Tim Worstall is unimpressed with Google’s foray into fiber optics.

Worstall, a Fellow at the Adam Smith Institute in London, has repeatedly penned columns tsk-tsking the global broadband speed race.

In his world view, nobody except certain specialists needs any connection faster than 2Mbps:

The most obvious being that outside certain very specific uses (video editing for example, where people can pay up for their own T1 line) there’s not really much evidence that speeds above 2 Mbps or so actually improve productivity or economic performance/growth. Sure, they’re great for consumers who want to download movies but that’s not really a justification for a large scale infrastructure program.

Worstall’s Luddite-like knowledge of broadband technology makes it difficult to take him seriously. Notwithstanding the fact a T1 line delivers just 1.5Mbps (at a cost several times a typical cable or DSL broadband connection), Worstall’s declaration that faster speeds are only good for “downloading” movies (the concept of streaming also escapes him) is simple nonsense.

Worstall’s tantrum is really part of a bigger discussion about how to do broadband better in both the United Kingdom and the United States. Incumbent providers are dragging their feet while reaping profits for overpriced, too-slow service. Consumers and businesses are fed up, and some are now increasingly turning to the government to do-something to shake up the status quo.

Government? For those slavishly devoted to free market ideals at the Adam Smith Institute, such a notion guarantees an intemperate outburst with phrases like “government takeover,” “government interference in private business,” or “government monopoly” — all ideas Worstall complains are “blindingly awful.”

“The idea that the solution to anything is a government run engineering monopoly just boggles the mind,” Worstall declares.

In his piece, “Why High Speed Broadband Just Doesn’t Matter,” Worstall has just a single litmus test to define broadband worthiness: how much economic value can be extracted from the Internet — Ferengi economics at their finest.

Worstall (Image: Forbes)

Worstall:

So more people can watch TV. Apologies, but this doesn’t really convince. Higher definition TV just isn’t the sort of technology that boosts the economy of a country. It might be nice to have but it most certainly does not justify taxing some to provide the service to others.

[…] The truth is that as long as you’re getting broadband of a kind (2 Mbps say) then it’s possible to extract that economic value. Faster speeds might be nice but they’re just not necessary for economic development.

Even if you accept Worstall’s inaccurate contention fast Internet is only good for watching online entertainment, he evidently forgets PricewaterhouseCoopers estimated the value of that industry at $2 trillion, and that was by 2011. Why even have a cable television business, if the only thing it is good for is watching reality shows and Law & Order reruns? Because it makes money — lots of it.

Back to Google, which is creating a bit of a pickle for the cable and phone companies — an increasingly fat and happy bunch earning easy profits selling broadband at duopoly market prices. Proponents for better broadband advocating for new, publicly-owned broadband networks have had to confront astroturf and conservative groups using popular memes that “big government” cannot do anything right and if there was a market for gigabit broadband, private companies would already be selling it.

Starting this summer, Google is.

That spells t-r-o-u-b-l-e for the corporate love muffins at the Adam Smith Institute and their industry friends who are quite happy with the way things are today, thank you very much. Google just happens to be an example of a free market success story — a ‘responsible’ company willing to invest money in the game-changing broadband Worstall and friends spent years arguing we don’t actually want or need.

As Kansas City residents line up around the virtual block, eagerly plunking down $10 to “pre-register” for Google service, it becomes difficult to continue the standard line that super-fast Internet is just a tech-geek curiosity.

So what does a free-market-knows-best-devotee do in light of all this? Change the story.

Worstall picks up a premise first offered by The Guardian and runs with it. Namely, Google is actually riding the wave of past phone company failures to cheaply benefit from assets those companies deployed first:

There’s a very large difference between being able to do something usefully experimental with an orphaned asset and having to pay for the construction of that asset in the first place. The telecoms companies lost fortunes on laying that fibre (indeed, several, including such as Global Crossing, went resoundingly bust for billions in doing so). That something that was built for $100 can find a use when it is sold for $1 (just to make up some numbers) is not an argument in favour of spending the $100.

Yet that is exactly what the argument being proposed is. Look, Google’s got really cool fast broadband, now we should build it for everyone! What’s being missed is that, at least so far as we know as yet, that really fast broadband isn’t worth the cost of building it. It only makes sense even for Google because they’ve not had to pay full price for it.

Google got a discount, so that is why they are in the business.

Worstall’s declaration is news to Kansas City, which has been enduring Google’s construction crews for months as they lay fiber infrastructure across the metropolitan area. Evidently Google hired illusionist David Copperfield to perform the masterful trick of shading the truth:  re-purposing already-there fiber while pretending it was being buried and strung for the first time.

Adam Smith didn’t have super fast broadband when he posited his views on unfettered free markets in the 1700s. If his devoted followers are left in charge, you won’t either.

ALEC Rock exposes the truth about how many of today’s bills are actually written and passed into law with the help of a shadowy, corporate-backed group known as the “American Legislative Exchange Council” (ALEC). Counted among its members are: AT&T, CenturyLink, Charter Communications, Comcast, FairPoint Communications, Sprint, Time Warner Cable, and Verizon. ALEC works on elected members of state legislatures to deregulate phone and cable service, eliminate consumer protection/oversight laws, ban publicly-owned broadband networks, and let phone companies walk away from providing rural phone service at will.  (2 minutes)

Four of the nation’s largest phone companies — two former Baby Bells, two independents — have very different ideas about solving the rural broadband problem in the country. Which company serves your area could make all the difference between having basic DSL service or nothing at all.

Some blame Wall Street for the problem, others criticize the leadership at companies that only see dollars, not solutions. Some attack the federal government for interfering in the natural order of the private market, and some even hold rural residents at fault for expecting too much while choosing to live out in the country.

This four-part series will examine the attitudes of the four largest phone companies you may be doing business with in your small town.

AT&T’s real priorities are to satisfy Wall Street demands for regular revenue growth. Rural wired broadband just cannot compete with the margins the company earns on its enormously profitable wireless and ARPU-raising U-verse services. (Graphic adapted from original work of Mark Fiore)

Today: AT&T — More Rural Broadband? Don’t Call Us, We’ll Call You

AT&T CEO Randall Stephenson earlier this year declared expansion of its U-verse fiber to the neighborhood service “largely complete,” despite the fact almost half of AT&T’s customers only have access to much slower DSL service, or cannot receive any broadband service at all.

For those living in AT&T’s service areas, which include a large portion of the midwest, southern states east of the Mississippi, Connecticut, and parts of California and Texas, Stephenson has not inspired confidence the company is rethinking what is possible in rural broadband.

“We have been apprehensive on moving, doing anything on rural access lines because the issue here is, do you have a broadband product for rural America?,” Stephenson told investors earlier this year. “And we’ve all been trying to find a broadband solution that was economically viable to get out to rural America and we’re not finding one to be quite candid.”

AT&T’s lack of confidence this year is in contrast with their bombastic rural broadband lobbying campaign of 2011, launched as part of an effort to win approval for its aborted merger with T-Mobile USA. The company sent slick talking points promoting the deal to community groups it supported with contributions, politicians it bought with contributions, and astroturf efforts it bankrolled with contributions.

The result was declarations like this from former Rep. Rick Boucher (D-Va.), who swept through Washington’s revolving door and came out on the other side working for AT&T-backed lobbyist-law firm Sidley Austin and serving as an “honorary chairman” of the industry-backed Internet Innovation Alliance:

Thousands of the smallest communities outside of urban areas either lack broadband service or have just one option that can be pricey for a relatively low connection speed, inadequate for modern business demands. The joining of AT&T’s and T-Mobile’s wireless spectrum will largely fill the gap and bring robust Internet connectivity to rural localities where wired infrastructure is cost prohibitive.

With the merger now nothing more than a bad memory, Stephenson’s interest in the innovation of Internet access quickly faded.

Last week, AT&T customers learned the company isn’t even interested in taking free money from the federal government and ratepayers to do better. Offered access to $115 million in broadband subsidies from the reform of the Universal Service Fund (USF), AT&T officials shrugged their shoulders and indicated they were not interested because they are not yet “ready” to participate.

Quinn

“AT&T is in the midst of evaluating its options for further rural broadband deployment,” said Robert Quinn, AT&T’s senior vice president of regulatory affairs wrote in a letter to the commission. “As our chairman stated last month, we are optimistic about AT&T’s ability to get more broadband into rural areas, particularly as the technology continues to advance. However, until AT&T finalizes that strategy, it cannot commit to participating in the incremental support program. ”

For communities like Orangeburg, S.C., that answer is not good enough. The community received an $18.65 million federal grant of broadband stimulus funds to develop high-speed broadband in an area where only 20-40 percent of residents have Internet service today. AT&T is the dominant phone company and offered the same non-committal response to Orangeburg’s pleas for better service that the  company gives to customers elsewhere.

While AT&T reports it is not yet ready to do better in rural South Carolina, it is very motivated to make sure nobody else does either, funding a massive lobbying effort in coordination with its friends at the American Legislative Exchange Council (ALEC) to pass a virtual ban on community broadband development across South Carolina.

Christopher Mitchell at Community Broadband Networks calls it “monetizing scarcity.” Orangeburg officials call it a big headache and are working around AT&T, frustrated with the phone company’s disinterest while it also helps build barriers to impede the community’s efforts to build its own network.

“If some of these other providers had a desire to serve these rural areas, they would have already been doing it,” said county administrator Bill Clark. “We are entering the broadband business because third-party providers are reluctant to provide the service.”

AT&T’s reluctance to accept USF money may have a lot to do with the company’s focus on its wireless network which is seen as a much more lucrative investment. Profit margins for barely-competitive wireless service remain sky high, and are growing higher as AT&T raises prices and the industry works to cut costs.

Even the company’s urban-focused U-verse network delivers opportunities for greater revenues from AT&T customers likely to buy additional services. Investing in DSL just does not pull in the same level of profits, and companies like AT&T will remain reluctant to expand rural broadband unless the government delivers a much larger government subsidy, according to Benjamin Lennett, a policy director at the New America Foundation.

“It underscores how flawed it is to rely on private companies to serve these rural areas where their margins are not going to be that high,” Lennett said.

Unfortunately for communities trying to work around AT&T’s roadblock, the company has made sure towns and villages building their own networks soon discover that road remains closed in more than dozen states thanks to  AT&T with the help from corporate groups like ALEC, who feed willing legislators bills often drafted by the corporations they are designed to protect.