Big Telecom companies like Verizon and AT&T use phony numbers and perpetuate myths about broadband traffic and network investments that have conned investors out of at least $1 trillion in unnecessary investments and consolidation.

Alexander Goldman, former chief analyst for CTI’s American Recovery and Reinvestment Act grants, is warning Wall Street and investors they are at risk of losing millions more because some of the largest telecom companies in the country are engaged in disseminating bad math and conventional wisdom that relies more on repetition of their talking points than actual facts.

Goldman’s editorial, published by Broadband Breakfast, believes the campaign of misinformation is perpetuated by a media that accepts industry claims without examining the underlying facts and a pervasive echo chamber that delivers credibility only by the number of voices saying then same thing.

Goldman takes Verizon Communications CEO Lowell McAdam to task for an editorial published in 2013 in Verizon’s effort to beat back calls on regulators to oversee the broadband industry and correct some of its anti-competitive behavior.

McAdam claimed the U.S. built a global lead in broadband on investments of $1.2 trillion over 17 years to deploy “next generation broadband networks” because networks were deregulated.

Setting aside the fact the United States is not a broadband leader and continues to be outpaced by Europe and Asia, Goldman called McAdam’s impressive-sounding dollar figures meaningless, considering over the span of that 17 years, the United States progressed from dial-up to fiber broadband. Wired networks have been through a generational change that required infrastructure to be replaced and wireless networks have been through at least two significant generations of change over that time — mandatory investments that would have occurred with or without deregulation.

Over the past 17 years, the industry has gotten more of its numbers wrong than right. An explosion of fiber construction in the late 1990s based on predictions of data tsunamis turned out to be catastrophically wrong. University of Minnesota professor Andrew Odlyzko, the worst enemy of the telecom industry talking point, has been debunking claims of broadband traffic jams and the need to implement usage-based pricing and speed throttling for years. In 1998, when Wall Street was listening intently to forecasts produced by self-interested telecom companies like Worldcom that declared broadband traffic was going to double every 100 days, Odlyzko was telling his then-employer AT&T is was all a lot of nonsense. The broadband traffic emperor had no clothes, and statistics from rival telecom companies suggested Worldcom was telling tall tales. But AT&T executives didn’t listen.

“We just have to try harder to match those growth rates and catch up with WorldCom,” AT&T executives told Odlyzko and his colleagues, believing the problem was simply ineffective sales, not real broadband demand. When sales couldn’t generate those traffic numbers and Wall Street analysts began asking why, companies like Global Crossing and Qwest resorted to “hollow swaps” and other dubious tricks to fool analysts, prop up the stock price and executive bonuses, and invent sales.

Nobody bothered to ask for an independent analysis of the traffic boom that wasn’t. Wall Street and investors saw dollars waiting to be made, if only providers had the networks to handle the traffic. This began the fiber boom of the late 1990s, “an orgy of construction” as The Economist called it, all to prepare for a tidal wave of Internet traffic that never arrived.

After companies like Global Crossing and Worldcom failed in the biggest bankruptcies the country had ever seen at the time, Odlyzko believes important lessons were never learned. He blames Worldcom executives for inflating the Internet bubble more than anyone.

A bubble of another kind is forming today in America’s wireless industry, fueled by pernicious predictions of a growing spectrum crisis to anyone in DC willing to listen and hurry up spectrum auctions. Both AT&T and Verizon try to stun investors and politicians with enormous dollar numbers they claim are being spent to hurry upgraded wireless networks ready to handle an onslaught of high bandwidth wireless video. Both Verizon’s McAdam and AT&T’s Randall Stephenson intimidate Washington politicians with subtle threats that any enactment of industry reforms by the FCC or Congress will threaten the next $1.2 trillion in network investments, jobs, and America’s vital telecom infrastructure.

Odlyzko has seen this parade before, and he is not impressed. Streaming video on wireless networks is effectively constrained by miserly usage caps, not network capacity, and to Odlyzko, the more interesting story is Americans are abandoning voice calling for instant messages and texting.

That isn’t a problem for wireless carriers because texting is where the real money is made. Odlyzko notes that wireless carriers profit an average of $1,000 per megabyte for text messages, usually charged per-message or through subscription plan add ons or as part of a bundle. Cellular voice calling is much less profitable, earning about $1 per megabyte of digitized traffic.

Wireless carriers in the United States, particularly Verizon and AT&T, are immensely profitable and the industry as a whole haven’t invested more than 27% of their yearly revenue on network upgrades in over a decade. In fact, in 2011 carriers invested just 14.9% of their revenue, rising slightly to 16.3 percent in 2012 when companies collectively invested $30 billion on network improvements, but earned $185 billion along the way.

While Verizon preached “spectrum crisis” to the FCC and Congress and claimed it was urgently prioritizing network upgrades, company executives won approval of a plan to pay Vodafone, then a part owner of Verizon Wireless, $130 billion to buy them out. That represents the collective investment of every wireless provider in the country in network upgrades from 2005-2012. Verizon Wireless cannot find the money to upgrade their wireless networks to deliver customers a more generous data allowance (or an unlimited plan), but it had no trouble approving $130 billion to buy out its partner so it could keep future profits to itself.

Odlyzko concludes the obvious: “modern telecom is less about high capital investments and far more a game of territorial control, strategic alliances, services, and marketing, than of building a fixed infrastructure.”

That is why there is no money for Verizon FiOS expansion but there was plenty to pay Vodafone, and its executives who walked away with executive bonuses totaling $89.6 million.

As long as American wireless service remains largely in the hands of AT&T and Verizon Wireless, competition isn’t likely to seriously dent prices or profits. At least investors who are buying Verizon’s debt hope so.

Goldman again called attention to Odlyzko’s latest warning that the industry has its numbers (and priorities) wrong, and the last time Odlyzko had the numbers right and the telecommunications industry got its numbers wrong, telecommunications investors lost $1 trillion in the telecommunications dot.com bust.

As the drumbeat continues for further wireless consolidation and spectrum acquisition, investors have been told high network costs necessitate combining operations to improve efficiency and control expenses. Except the biggest costs faced by wireless carriers like Verizon are to implement strategic consolidation opportunities like the Vodafone deal, not maintain and grow their wireless network. AT&T is putting much of its spending in a proposed acquisition of DirecTV this year as well — at a cost of $48.5 billion. That could buy a lot of new cell towers and a much more consumer-friendly data plan.

Voice to text substitution (US)

Cell phone network companies (if you can believe their SEC filings) are incredibly profitable, and are spending relatively little on infrastructure:

America’s least-connected live in much of upstate New York, including the cities of Buffalo, Rochester, and Syracuse and a large percentage of the state of Ohio, including the cities of Cleveland, Dayton, Akron, Cincinnati, and Toledo.

The data comes from the 2013 U.S. Census American Community Survey, which now gathers information on household Internet connections. Out of 176 major American cities with 50,000 or more residential households, the Redistributing the Future blog team was able to crunch the numbers and score which American cities are most likely to lack home Internet access of any kind, including dial-up and mobile Internet (smartphone) and those that lack wired broadband of any kind, including cable, DSL, fiber, or satellite Internet.

The most common reasons homes lack Internet access are: cost (ie. consumers cannot afford the price of the service), availability (one cannot subscribe because the service is not offered), or disinterest (typically older Americans are the most likely to claim they don’t need Internet access).

The worst-scoring include economically challenged communities like Detroit, Mich., and those with extremely large ethnic populations, including Laredo, Tex., and Hialeah, Fla.

Laredo has a 30 percent rate of poverty. Laredo households with children under the age of eighteen headed by women have a 51 percent poverty rate. More than 95% of the population self-identify as Latinos. Hialeah has the highest percentage of Cuban and Cuban-American residents of any city in the United States, at 74% of the population.

It is too early to tell why regions in upstate New York and much of Ohio score particularly badly. Time Warner Cable is by far the most dominant player in upstate New York, winning much higher market share than competitors Verizon and Frontier. In Ohio, rankings for the city of Cleveland are particularly dismal: 51% of Cleveland’s households still didn’t have “fixed” broadband accounts (i.e. cable modem, DSL, satellite, etc.) in 2013. Even counting mobile devices, 45% of the city’s households didn’t have broadband Internet accounts. The economy is likely to have something to do with that. At least 61% of Cleveland households had incomes below $35,000 in 2013.

Data and charts courtesy: Bill Callahan

Time Warner Cable broadband customers in Los Angeles still using older cable modems are being offered replacement modems from the cable company for free, avoiding Time Warner Cable’s $6 monthly modem rental fee.

The Los Angeles Times notes some customers are receiving letters offering a free modem upgrade, but the company won’t say exactly how many subscribers have been offered a way out of the company’s modem rental fee.

A survey of Los Angeles residents suggests Time Warner is primarily targeting customers still using older DOCSIS 2 or basic DOCSIS 3 modems that are not capable of getting the full benefit of Time Warner Cable’s Maxx speed upgrades, which provides up to 300Mbps service for the same price the rest of the country pays for 50Mbps.

Customers taking advantage of the offer are expected to swap out their existing modem themselves, using an “Easy Install Kit” mailed by Time Warner. They will need to contact the cable company to activate their replacement modem.

The replacement is a basic, yet fully capable DOCSIS 3 modem without built-in Wi-Fi. Customers who don’t use a router with built-in Wi-Fi can upgrade to Time Warner’s Wi-Fi capable modem, but it will cost around $11 a month for the service. Stop the Cap! recommends customers buy their own router with built-in Wi-Fi, which is almost always a better deal than renting equipment from Time Warner.

There is no word if a similar offer will be made to customers in other Maxx cities, New York and Austin.

Russian Internet Service Providers have been strongly encouraged to upgrade their service and speeds as a matter of national pride as the Kremlin encourages broadband improvements across the vast expanse of the country.

Responding to the call, regional ISP Onlime, operated by Russian telecom giant Rostelecom, has introduced new broadband packages to subscribers at prices that would make most North Americans drool:

• “100 for 500” is Onlime’s most aggressive promotion, offering unlimited 100Mbps service for 500 Russian rubles, equal to $11.47US a month on promotion. The regular rate after the promotion expires should run around $20 a month;
• 15Mbps budget Internet is regularly priced at $6.88 a month;
• 30Mbps standard service costs $9.18 a month;
• 60Mbps turbo service runs $11.47 a month;
• 80Mbps deluxe service was tariffed before the “100 for 500” promotion, and its everyday price is $16.06 a month.

Meanwhile, Russian wireless mobile operator Vimpelcom also runs wired broadband service in parts of Russia and is boosting speeds without raising prices. Customers signed up with “Beeline” in the Moscow Oblast, including the communities of Moscow, Domodedovo, Zelenograd, Sergyev-Posad, Serpukhov, Chekhov, and Lyubertsy will now receive up to 30Mbps service. You can’t beat the price. At just 350 Russian rubles, that is just over $8 a month in U.S. dollars.

The speed increases start Nov. 10.

Malone

Cable magnate John Malone has rarely had it this good at the expense of the U.S. Treasury. Using his vast wealth to hire some of the smartest tax advisers in the country, he has personally avoided hundreds of millions in U.S. taxes and shared the benefits of his tax tips with shareholders, who collectively stiffed the tax man out of more than a billion dollars in 2013.

As the Obama Administration fights with Republicans in Congress to close the loopholes, corporate executives and fellow billionaires routinely engage in tax avoidance schemes that shift their tax burden to ordinary Americans that cover the difference in the form of service cuts or higher taxes and fees to offset the lost revenue.

In 2013, Malone jumped on the “inversion” bandwagon, shifting the corporate address of Liberty Global, Inc. from Colorado to London, largely out of reach of the Internal Revenue Service.

Bloomberg News detailed Malone’s exploits over decades of “rich get richer” deals and the consequences of loopholes unavailable to most Americans that stay in the tax code at the behest of those who directly benefit from them.

Malone is fiercely protective of his $7.5 billion net worth, structuring investments, tax shelters, and end runs around tax laws in ways that often leave him with no tax liability at all.

Not everyone can afford to move their assets overseas or set up complicated charitable trusts to shelter income, but the enormously wealthy Malone can. He recently passed Ted Turner as America’s biggest private landowner, owning 2.2 million acres of property in the United States, including more than 5% of the state of Maine.

Malone spreads his vast wealth around — owning stakes in Liberty Media, Liberty Global, and Liberty Interactive, as well as pieces of News Corp., Viacom, Time Warner, Inc., QVC, Discovery Communications, the old Court TV, DirecTV, SiriusXM satellite radio, Barnes & Noble, and Expedia.com.

Malone’s influence over the U.S. tax code comes in part from his advocacy work as an unpaid director at the Cato Institute, a Libertarian think tank that lobbies Washington hard for lower taxes and deregulation.

Malone’s personal tax code is to avoid taxes at all costs and, where possible, let someone else pick up the tab.

Malone’s baseball team, the Atlanta Braves, was instrumental as part of Liberty Media’s deal to cash out its stake in Time Warner without paying a dime in capital gains tax. Malone walked away with $1.4 billion in tax-free cash and ownership of the baseball team. Atlanta taxpayers will be responsible for more than $300 million in costs to build the Braves a brand new stadium in the Atlanta suburbs.

SiriusXM satellite radio subscribers were notified this week of the latest rate increase, due by the end of this year.

What they may not know is Malone’s Liberty Media now owns and controls the satellite radio venture. In 2009, Malone invested $530 million in the struggling operation. But he also gained the benefits of SiriusXM’s $6 billion in tax losses that Malone used to offset taxes on Liberty’s future profits. As a fringe benefit, Malone has also boosted revenue by imposing regular rate hikes on SiriusXM customers.

Like many U.S. corporations, Malone’s various Liberty ventures store massive amounts of cash in offshore bank accounts, avoiding U.S. taxes. When Liberty contemplated tapping that offshore cash, it faced a U.S. corporate tax rate of 35 percent. So Liberty joined more than a dozen other U.S. corporations relocating overseas, avoid corporate taxes back home.

Although the corporation escapes a tax bill, shareholders usually do not, subject to tax for shares converted from the old U.S.-based company to the new overseas entity. Faced with owing capital gains taxes at a rate of 23.8 percent, the day before the inversion was announced, Malone transferred almost $600 million of his shares to the Malone-controlled, tax exempt LG 2013 Charitable Remainder Unitrust, avoiding much of the tax. Not satisfied with the fact he still would owe tax on the remaining $260 million of his personal stake in Liberty, the company hired Shearman & Sterling LLP to devise a strategy to get Malone (and shareholders) off the hook for any tax liability.

They found one, turning the government’s own efforts to plug tax loopholes against itself, manufacturing income that would not only satisfy the IRS’ recently hardened rules, but also let Malone & Co. escape any British tax liabilities in their new home.

“Malone threw a multi-billion dollar left hook at the Treasury Department,” said Samuel C. Thompson, a law professor at Pennsylvania State University. “They didn’t see it coming.”

As has been so often the case, the IRS eventually closed the loophole, but only after Malone exploited it.

Malone’s defenders point out all of his creative tax strategies are perfectly legal, and he is only taking advantage of existing U.S. tax laws. Detractors note America’s wealthy and powerful have exercised disproportionate influence over how those laws are written, usually through well-funded think tanks, lobbying firms, and anti-tax astroturf efforts. Most Americans lack the resources to take advantage of loopholes and benefits that require sophisticated advisers prepared to withstand any scrutiny from the IRS.

An emboldened Liberty Global is even willing to publicly signal its next tax avoidance measure.

In a filing last April, Liberty disclosed that a U.S. subsidiary will pay at least $7 billion in tax-deductible interest to its new UK parent over the next decade. Such payments are known to tax lawyers as “earnings stripping,” because the big interest deductions strip profits out of the U.S., thus cutting any U.S. tax obligation.

The practice has become so common among inverted companies headquartered overseas, Democratic Sens. Charles Schumer and Richard Durbin authored a bill to ban the practice. It has gone nowhere in the legislature because of objections raised primarily by Republicans, who characterize loophole closing measures as disguised “tax increases” on business.

What is Malone doing with all the money he has successfully kept out of the hands of the U.S. Treasury? He bought an Irish castle and three major Irish hotel properties. He did it using a capital gains tax holiday offered by Ireland’s government to wealthy investors willing to buy Irish real estate and retain ownership for a minimum of seven years.