[flv width=”636″ height=”380″]http://www.phillipdampier.com/video/Susan Crawford on Captive Audience The Telecom Industry and Monopoly Power in the New Gilded Age 12-12.flv[/flv]

Invest an hour of your time and learn about how America ceded its broadband leadership to a handful of telecom companies that have carved out comfortable, barely competitive territories for themselves, leaving Americans overpaying for slow broadband service. Susan Crawford is author of the new book, “Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age,” which has just been published. (65 minutes)

Follow the money to the real root of this argument.

After conclusive evidence that cable broadband upgrades have eliminated any congestion problems, the cable industry has finally admitted usage caps are not about “congestion relief,” but are, in their view, “about fairness.”

Reports of the Internet data exaflood, tsunami, brownouts, or even blackouts are highly exaggerated and always have been. But we knew that from the first day Stop the Cap! got started.

In the summer of 2008, Frontier Communications attempted to define a top limit on their residential DSL accounts at a staggeringly small 5GB per month. Time Warner Cable initially thought 40-60GB a month was more than fair when it tried to ram its own Internet Overcharging scheme down the throats of customers in New York, North Carolina, and Texas in April 2009. Comcast said using more than 250GB a month could create congestion problems on their network and be unfair to other customers. To this day, AT&T, one of the nation’s largest telecommunications companies, claims that anything more than 150GB on their DSL service or 250GB on U-verse could bring their entire network to its knees.

The Holy Grail of Wall Street economics for broadband is to monetize its usage, creating an endless money party for what is today a utility service. Millions have been spent lobbying anyone who will listen that usage caps and consumption billing were essential to promote investment, upgrades, and to expand broadband service into rural America. Since those arguments have been made, broadband rates have increased, investment has decreased on a per customer and often real basis, and the government is now trying to chip in public taxpayer dollars to get providers to wire areas that will never pass demanding return on investment formulas.

The second prong of selling this meme is the creation of an Internet boogeyman — the “data hog,” a largely fictional creature that supposedly cares only about consuming every possible bit of bandwidth and slowing your web browsing to a crawl. Shouldn’t he pay more, you are asked, at the same time these same companies continue to raise your rates and now attempt to limit your use of a service that should cost less.

This week, Michael Powell, former FCC chairman turned head of the nation’s largest cable lobby — the National Cable & Telecommunications Association, capitulated on the “congestion” myth to an audience at the Minority Media and Telecommunications Association.

Asked by MMTC president David Honig to weigh in on data caps, Powell said that while a lot of people had tried to label the cable industry’s interest in the issue as about congestion management. “That’s wrong,” he said. “Our principal purpose is how to fairly monetize a high fixed cost.”

He said bandwidth management was part of it, though a more serious issue with wireless.

But he pointed out that the cable industry had to spend a bunch of money on its network before the first customer was signed. So, for a business that requires “enormously high” fixed costs — digging up the streets, put the wires in — and operational expense, “it is a completely rational and acceptable process to figure out how to fairly allocate those costs among your consumers who are choosing the service and will pay you to recover those costs.”

When will Washington regulators and lawmakers stop drinking the Kool-Aid handed them by high-paid lobbyists?

But our readers know Powell’s arguments are based on nothing more than the same empty rhetoric that declared the Internet exaflood was at hand.

Cable broadband was introduced as an ancillary service in the late 1990s utilizing cable television infrastructure that was constructed and paid off years earlier. Introducing broadband required only incremental investment and that remains true to this day. Cable operators more than cover their costs with sky high prices for service delivering some operators as high as 95% gross margin on broadband. Capital investments have broadly declined for years as have the costs to deliver the service on a per customer basis.

Suddenlink president and CEO Jerry Kent admitted the days of expensive system upgrades were over and it was now time to rake in profits.

“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.”

Powell’s arguments ironically may apply partly to Verizon’s FiOS fiber network, which requires the retirement of copper wire infrastructure around since Alexander Graham Bell, but even Verizon covered much of its costs winning permission to raise rates years earlier to cover fiber upgrades. Much of that money was diverted to their wireless business instead. Today, Verizon FiOS manages just fine with no usage limits at all.

In fact, the only argument about fairness that should be open for debate regards the current cost of broadband service in the United States when compared against operators’ enormous profit margins. The lack of competition has allowed providers to increase prices and introduce “creative pricing” that always guarantees protection for the incredibly high average revenue per customer already earned.

Too often, Washington regulators and lawmakers drink the Kool-Aid handed them by an industry with an incentive to distort the truth. That incentive is the billions at stake in this fight.

Powell has even shelved the notion of the Cheetos-eating data hog burning up the Internet in his parent’s basement and has elected to try class warfare instead, claiming the most capacity is used “by a high end elite subsidized by the rest.” The real high-end elite are the telecom company executives cleaning up overcharging customers for a service that has become a necessity. Arguing for usage caps as a way to offer “lower prices” for those who cannot afford the ridiculously high prices the industry charges today only creates a new digital divide – the have’s and the have only so much.

Either way, providers laugh all the way to the bank.

All new homes must be equipped with fiber broadband connections if they are located in a county or city where fiber service is provided, according to a new mandate from China’s Ministry of Industry and Information Technology.

The Chinese government has learned turning over national broadband policy to self-regulating providers reluctant to invest in super-fast broadband service is a mistake other countries will pay for dearly as they fall behind in broadband rankings and digital opportunities only available to the broadband “well-connected.”

Now the government has taken measures to level the playing field for ordinary consumers and businesses who will share the right to equal service from various telecommunications companies over the country’s state-of-the-art fiber to the premises network.

The mandate takes effect April 1, and is anticipated to bring explosive growth in domestic fiber broadband, according to the China Daily.

With an open fiber network, expensive network redundancy and cherry-picking lucrative customers are reduced or eliminated, allowing the country to deploy fiber more rapidly in areas providers would typically deem “unprofitable.”

The new fiber policy will mean at least 40 million Chinese homes will have fiber broadband by 2015. China Unicom (Hong Kong) Ltd., the nation’s second largest telecom company, is among the most aggressive providers, adding 10 million Chinese families to its fiber network in the last year alone.

The bare minimum fiber speeds for Chinese families will be 4Mbps in rural areas, 20Mbps in urban zones, with 95 percent of the country blanketed with broadband within a few years.

The Chinese government’s broadband plan is laser-focused on fiber optics, with satellite and wireless service filling in rural coverage gaps. The country sees 21st century broadband as a national priority and is well on its way even as North American broadband companies are pulling back on fiber deployments. Instead, American and Canadian companies are incrementally upgrading inferior copper wire and cable HFC broadband networks. The Chinese government does not believe these older technologies will suffice.

Optical fiber manufacturers who assumed telecom companies in North America would continue aggressive fiber deployments and ramped up optical fiber production as a result have taken a financial beating, slashing prices to reduce inventory. The price for fiber cable has dropped at least 90 percent in the past decade. The Chinese government has even resorted to tariffs to stop American and European manufacturers from dumping fiber cables and equipment at rock bottom prices to the detriment of its domestic manufacturers.

China remains the largest driver in global fiber demand. In 2011, China accounted for about 50% of the global demand, reaching nearly 60 percent by the end of 2012.

A CenturyLink official made a remarkable concession in the state of Minnesota last week when he admitted the state’s community-owned broadband networks are better equipped to deliver 21st century broadband speeds that CenturyLink simply cannot provide.

Duane Ring, midwest region president for CenturyLink publicly told an audience at a Minnesota High Tech Association-sponsored discussion in Minneapolis that community-owned networks don’t have to meet shareholder demands for return on investment and other corporate metrics that have left CenturyLink broadband customers with far lower speeds than municipal broadband customers. Minnesota Public Radio was on hand:

Noting that CenturyLink wants every customer it can find, Ring pointed out that the company nonetheless needs a return on investment that satisfies shareholders and meets the demands of larger commitments and fiduciary responsibilities.

The small phone companies that have laid high-speed fiber networks, some of whom are cooperatives whose customers are the owners “can make decisions that maybe the economic return is 25 years,” Ring said. “They can do that.”

CenturyLink concedes Paul Bunyan offers better speeds over a superior network.

Only 62 percent of Minnesotans can today purchase what qualifies as broadband service. Those lucky enough to be served by public providers like Paul Bunyan in the Bemidji area and Farmers Mutual Telephone in western Minnesota benefit from some of the fastest broadband speeds in the state. That is because those cooperatives and public ventures laid fiber optic cables connected to individual homes. Those in rural Minnesota served by CenturyLink or Frontier get much less from slow speed, copper-based DSL, if they can get broadband at all.

CenturyLink has proven itself an obstacle for community broadband, opposing the construction of improved networks in areas they already service, condemning rural customers to substandard broadband speeds indefinitely. While the company says it is not opposed to public-private partnerships, any attempt to bypass them will result in a hornet’s nest of legal protests and blocking actions.

While community-owned networks struggle for financing and approval in a hostile atmosphere created by incumbent providers, the government is handing out money to companies like CenturyLink to get them to extend their slow speed DSL network. CenturyLink is spending $11 million in Connect America funds in Minnesota alone.

In other areas, residents have no interest in waiting around for single digit DSL speeds. In Lac qui Parle County in western Minnesota, local officials have joined Farmers Mutual Telephone to build a fiber network.

CenturyLink’s admission proves it answers first to shareholders, much later to customers.

Isiogu

A current member of the Michigan Public Service Commission is penning guest editorials featuring AT&T’s favorite talking points: promoting the company’s deregulatory agenda and providing false memes about Internet Overcharging schemes like usage caps and consumption billing.

Orjiakor N. Isiogu, co-vice chairman of the National Association of Regulatory Utility Commissioners Committee on Telecommunications and member and immediate past chairman of the Michigan Public Service Commission wrote nearly identical pieces appearing in The Hill, the Detroit Free-Press and the Battle Creek Enquirer that included misleading claims that could have come straight from an AT&T lobbyist’s “fact sheet.”

A sample:

The federal government has used the telecom industry as a model of how competition could be a better elixir than the guiding hand of government regulation. And the results are impressive. The high-speed Information Superhighway touches 95 percent of the U.S., and most consumers can choose from among six or more wireless or wireline providers (90 percent can choose from at least two). And the price of Internet access — measured by megabits per second — has fallen 87 percent since 1999, even as the speed has increased tenfold;

80 percent of U.S. homes now have access to download speeds of 100 megabits per second, and 4G wireless service will soon be available nationwide, with speeds of up to 20 megabits per second;

Despite the evidence, however, there are those who wonder whether there is sufficient competition for Internet access, whether speeds are too slow and prices too high. Others object to new pricing plans that allow a consumer to purchase the amount of bandwidth that best suits his needs.  In fact, some have asked the government to stop these new tailored pricing plans, even though these plans save nearly all consumers from having to underwrite the “outliers” whose monthly usage is gigantic — over 300 GBs a month or the equivalent of over 500 standard definition movies;

And if Teddy Roosevelt were with us today, he would likely argue that we can walk and chew gum at the same time, pointing to the banking industry as an example of industry excesses in need of a public check and the telecom industry as an example of how private competition, with occasional nudges, could better make the markets work.

In reality, if Teddy Roosevelt were alive today, he’d ask why a state commissioner working for the public is instead carrying water for the large telecommunications companies he oversees.

Did Roosevelt advocate the government keep their hands off AT&T and other consolidating telecom companies?

Isiogu doesn’t know his history either.

Roosevelt made no distinctions between the excesses of one industry over another. He strongly believed all major interstate corporations (and that would cover Isiogu’s friends at AT&T, Comcast, and other big telecom companies) should be subject to federal regulation and, in some cases, have their rates set by the government to ensure the public was charged fairly for the services they received. Roosevelt learned his lesson well from the oil, railway, and tobacco trusts his government sued to break up after years of consolidation and rapacious greed at the public’s expense. Those companies all claimed to be competitive as well.

Few industries have consolidated faster than the telecom sector, which is gradually rebuilding the Bell System in AT&T and Verizon’s image and a cable cartel that agrees never to compete directly with other cartel members.

Isiogu’s “facts” are disturbingly incomplete and misleading for a telecom regulator ostensibly serving the public interest.

For example, his claim that Americans can choose among six or more different providers ignores the fact AT&T and Verizon are counted twice (wired and wireless), no competition exists among multiple cable operators or phone companies, and many of the other options Isiogu counts (almost always wireless) do not provide coverage in suburban and rural Michigan. The average consumer in the U.S. has two practical choices for broadband — the cable or phone company.

While Isiogu sings the praises of American broadband, the rest of us have watched the price of Internet service continue to increase, whether customers want faster speeds or not. The industry itself admits it can raise prices because the competitive landscape and consumer love of broadband gives companies “pricing power.”

He also doesn’t mention the price of 100Mbps service or the fact it is not offered by either AT&T or (outside of one city) Time Warner Cable — both industry leaders. Wireless is no panacea either. 4G service may offer faster speeds, but usage plans that start with just a 1GB allowance make it hard (and expensive) to take advantage of the technology improvements. Just a few years ago those plans offered unlimited access.

Isiogu also tapdances around the fact no broadband provider in the country wants to sell a “pay for what you use” plan. Instead, companies create usage allowances that come with steep overlimit fees and, as AT&T executives have told shareholders, deliver limitless potential revenue growth as subscribers are forced to upgrade as their usage grows.

Most consumers favor and appreciate unlimited-use plans for predictable pricing and ease of mind. But flat rate plans ruin providers’ goals to monetize broadband usage and are usually eliminated when consumption pricing arrives, another fact Isiogu does not bother to disclose.

Isiogu has gotten remarkably cozy with the industry he oversees, even resorting to mind-bending pretzel logic that calls regulation for the banking sector a good idea and oversight of his industry friends a disaster.

What is disturbing is while Isiogu pens these industry friendly guest editorials in his spare time, he is also in a position of power to oversee and regulate these same companies in the public’s interest.

That represents a clear conflict of interest Teddy Roosevelt could see and feel from his grave.