Wonder Twins: AT&T and Wall Street team up to support Internet Overcharging. "Shape of usage caps, form of ripping broadband users off."

The Wall Street Journal has left its readers with the impression America is the last bastion of the unlimited, all you can use, broadband plan.

In a story for the Dow Jones Newswires, Roger Cheng reports AT&T’s imposition of data caps and other Internet Overcharging schemes “is the latest step taken to get people out of the mindset that online access is an all-you-can-eat buffet. It’s part of a broader shift by companies on both the wireless and fixed-line sides to get consumers comfortable with a usage-based pricing model, in line with how the service is delivered elsewhere around the world.”

But that statement is provably inaccurate.  In fact, usage limits and so-called “usage-based pricing” is a phenomenon growing mostly in under-competitive markets in North America.

As Stop the Cap! has reported over the past few years, while the rest of the world is moving away from these usage-limited plans, providers in the United States and Canada are seeking to impose them to boost profits and monetize broadband traffic.  Some are even exploring charging you based on individual web applications and websites visited.

At the same time Korea is moving towards delivering 1Gbps unlimited broadband to every resident by 2013, American providers are trying to limit the broadband party to protect their own business interests.  In Canada, AT&T’s counterpart Bell was caught distorting the record on why it wanted to cease unlimited access, eventually admitting it was about getting users to reduce usage, particularly of video services which compete against its own pay television product.  Shaw Cable was caught lowering usage allowances when the threat of Netflix arrived in Canada.  So did Rogers Cable.

Around the world, usage-limited broadband is either yesterday’s story, or will be soon:

• The Philippines fought off unjustified efforts to impose usage limits on broadband service to boost provider profits.  So did Malaysia.
• Australian providers forced to impose caps because of undersea fiber capacity issues are relaxing them as capacity increases.
• Australia’s government has made abolishing data caps a national priority with its National Broadband Network, because they harm innovation and entrepreneurship.
• In New Zealand, providers and government officials have made it clear, “we hate data caps,” and they are benefiting from new underseas fiber that will eliminate them once and for all;
• In South Africa, MWEB abolished usage limits and now waits for additional underseas cable projects to finish before boosting speeds.
• Just this week, BT in the United Kingdom joined a parade of other providers eliminating usage caps on its broadband service.

Make no mistake: every survey ever conducted on this issue shows consumers loathe Internet Overcharging schemes and prefer unlimited access usage plans, particularly for wired broadband:

• In Europe, where unlimited access plans are already available on the wired side, consumers there now want limits also lifted on mobile networks;
• In the United States, Americans despise usage capped broadband;
• Another survey shows usage caps alienate providers’ best customers;

South Africa adopts unlimited Internet.

It’s no wonder telecommunications companies rival big banks among the Wall Street Cheat Sheet’s 18 Most Hated Companies.  Among the despised: AT&T, Comcast, Time Warner Cable, Cox Cable and Charter Communications.

Why?  Pricing and usage caps are covered among the reasons.

Despite the overwhelming evidence to the contrary, Wall Street analysts joined AT&T’s chorus claiming such usage capped broadband was the wave of the future:

1. DISTORTED CLAIM: “All-you-can-eat is a uniquely American service,” said Dan Hays, who covers telecom for consultancy PRTM. Consumers, who have enjoyed years of flat-rate pricing for Internet, may have a hard time accepting limits on their landline service, analysts said.
2. BROKEN RECORD: “We expect the cable operators to follow AT&T’s move by introducing pricing plans that include caps for lower end packages,” said Craig Moffett, analyst at Sanford C. Bernstein & Co. Moffett said the logical reaction to more cord-cutting would be usage-based pricing.

Hays is provably wrong on his claim unlimited access is “uniquely American.”

Moffett said precisely the same thing in December (and earlier) when Net Neutrality was halfheartedly adopted at the FCC.  He had called for these pricing schemes in the past and will continue to do so.

Both of these analysts work for companies who favor the higher profits Internet Overcharging will bring providers (and their investing clients), so it’s no surprise both are willing to cheerlead price hikes.  But readers are left in the dark as both are quoted with the impression they are independent observers with no interest in the outcome.

As for the impact on consumers, nobody from the Wall Street Journal bothered to talk to any to find out.

What AT&T has proven, yet again, is that American broadband is moving backwards to enhance their profits as the rest of the world advances.

The crowds in New York City waiting for iPad 2 to arrive. (Courtesy: Digital Trends)

You have to give Apple credit.  Nobody knows how to design a product for intuitiveness, sex appeal, and downright usability like Apple. Although I have never been devoted to the Macintosh or other Apple personal computers, nobody can deny Apple has had one success after another with their personal communications and entertainment devices:

• iPod – It changed music players the same way the Sony Walkman did a generation earlier;
• iPhone – Not since Ben & Jerry’s Chocolate Chip Cookie Dough ice cream have I seen people literally fight over something.
• iPad – The only tablet I have found tolerable.

Acquiring these products, particularly around launch time, is often an experience.  Apple is the ultimate control freak when it comes to managing its product releases, with pages of requirements about how, when, and where people will be able to acquire the latest Apple Anything. They also know how to stage events guaranteed to bring the media out.

And so last Friday, in the middle of a nasty wind-whipped snowy day, there I was standing outside of a Best Buy store in Victor, N.Y., with around 75 others waiting in line to acquire iPad 2 (it’s not “the iPad” I learned — it’s just “iPad” thank you very much.)

It could have been worse.  At the Apple Store inside Eastview Mall, adjacent to Best Buy, hundreds were camped out, with some arriving with the early morning mall walkers.  A much smaller group gathered at Target and Wal-Mart, two other retailers who were part of the opening day festivities.

An hour before the 5pm official start of sales, I was #15 in line — not bad, but not great either in the 5 degree wind chill.  Not since a CompUSA Thanksgiving night promotion a few years ago had I waited in a significant line for anything.  As I chatted up several new-found queue-friends, I began to notice a trend.  I was the only one there who did not already own iPad.  At one point, while checking the time on my Motorola Droid X phone, audible gasps were heard.

“You… you don’t have an iPhone?” my line neighbor asked, as I realized I was the skunk at Apple’s garden party.

“No, nothing is worth being stuck with AT&T for cell phone service,” I replied, trying to recover from my social faux pas.  Not good enough.

The whispering began — “he doesn’t have an iPhone… what is he doing here?”

Eventually, after some friendly interrogation, it was decided I was okay, because at least I owned an iPod Touch, an Apple TV, and a Mac Mini.  Besides, there was plenty of time to evangelize me with tales that AT&T wasn’t so bad in Rochester.  Hey, the iPhone is available from Verizon, I was told.

Yes, I replied.  I sort of knew that.

As members of the crowd texted their compatriots staked out at other retail locations sharing rumors and sightings, we learned the Apple Store crowd was now completely out of hand at the mall just a few hundred yards away.

“The line is down to Macy’s!” one hollered.  “I’m glad I came here, instead,” another replied.

Best Buy's store in Victor, N.Y.

Anxiety levels seemed to increase whenever someone entered or exited the store.  Were they line jumping?  If an employee emerged, what did they know?  Best Buy employees were strictly forbidden, by Apple it turned out, to reveal -anything- about the product people were waiting to buy.  How many are on hand?  Can’t say.  Why are we waiting outside?  Because Apple required it.  What models will you have?  Can’t say that either.  What happens if you run out?  We will begin taking names for the reservation list tomorrow.  Why tomorrow?  Apple rules, came the reply.

The frustration of Best Buy management was on full display, knowing full well that any unhappy or disappointed customers were likely to blame Best Buy, not Apple, for being unable to walk away with iPad 2 right then and there.

By 4:45pm, it became clear Target could care less about Apple’s rules, as the first winners in the Apple device lottery emerged from the store waving their conquest.  It turned out they had eight units to sell.  Wal-Mart had 10.  This was not going over well with the Best Buy line, who now wondered how many the Best Buy store in the most wealthy part of greater Rochester would actually have on hand.

At 4:50pm, Best Buy employees emerged with folders described as “tickets” customers could use to buy the units they had to sell.  But be careful, we were told.  Apple required ticket holders to complete their purchases at Best Buy no later than 6pm or their “ticket” would expire.

Then a fever swept the line as people tried to guess how many tickets Best Buy had to hand out.  Not since Charlie and the Chocolate Factory has there been this much excitement over tickets (at least with Willy Wonka you got a chocolate bar as a consolation prize.)

I want iPad 2 NOW! I don't care how much it costs.

Within minutes it became obvious Best Buy had exactly 15 units to sell to a line of 75.  Uh oh.  Worries over making the “right choice” between the white or black, 16 or 32GB model were replaced with “you will take what we give you and like it.”

And there I was clutching the last folder for a 16GB white model, actually fearing someone might swoop in and grab it.  I shook my head — now I am caught up in this silly hysteria.

Instantly, like one of those well-choreographed flash mobs, the losers silently dissolved into the parking lot, heading for their cars, despite Best Buy employees’ best efforts to promise to “take names” tomorrow for future sales.  No deal.  But one desperate young lady who wandered up minutes later, encouraged seeing only 15 of us preparing to enter the store, flew into a panicked tantrum when she realized they were already sold out.

“I need iPad 2 today!  I don’t care what it costs or what model.  I need it now,” she wailed.

I realized I’ve just encountered the 2011 reincarnation of Veruca Salt.

“A hardcore Apple junkie,” one of the fellow 15 whispered to a friend.

“Yes, she should have got here hours ago if she was serious,” came the reply.  “Amateur.”

With that we were paraded into the store with one manager at the front and another employee at the rear to protect “line integrity.”  But it was not the beginning of a magical adventure with a golden ticket.  It was still just Best Buy.

My DOA iPad 2 serves me right. I don't own an iPhone.

Moments later, we were trapped in a “special line” facing upselling snipers trying to pick us off with extended warranty service plans, accessories, and Zagg’s invisibleSHIELD, the product that requires the patience of Job to apply.

“No problem, we can do it for you for $14.95,” an employee chimed in on queue.

Nearly an hour(!) later, I finally managed to get to the register and tell them “no” on the extras, swipe my card, and get the heck outta there.

Later that evening I unwrapped it, plugged it in, and discovered (and later confirmed), it was a dud — dead on arrival.  It went back on Saturday.

Lessons Learned:

1. It is never worth waiting in line for an hour or more for -anything- unless you enjoy the experience of waiting and chatting people up;
2. Being an early adopter means you are a beta tester, bound to end up with early manufacturing boo-boos;
3. Steve Jobs is a Bond Villain;
4. It’s my own fault.  After all, I didn’t have an iPhone.

Bennett

We received word this afternoon proponents of community-0wned broadband in North Carolina were under attack by the ironically-named Innovation Policy Blog from the Information Technology & Innovation Foundation (ITIF), a thinly-disguised, industry-funded think tank.

Charges and counter-charges are flying fast and furious. Well-travelled muni broadband consultant Craig Settles says the authors are in the pockets of Time-Warner Cable, and urges people around the country to lobby NC legislators to kill the bills:

The battle is now fully joined in NC. But it’s not just their fight, and it’s not a fight solely about broadband. This fight affects everyone who believes that communities deserve the freedom to choose their own best solutions to key problems involving economic development. Communities own the problems of this terrible economy.

Philip Dampier, the supporter of former New York Congressman Eric Massa who joined the broadband policy fight when Time Warner was experimenting with metered pricing, is even more shrill than Settles.

I suppose being called “shrill” is a little better than “mean and nasty,” even if perennial industry defender and comment troll Richard “I Don’t Work for a K Street Lobbyist, But I Do” Bennett doesn’t bother to spell my name correctly.

Bennett’s read of North Carolina’s H.129 is that it’s a minor little bill that does no harm.

I don’t see what our perpetual network operator-haters are so worked up about, although I can certainly see that the network equipment vendors want more outlets for their gear; more power to them. The bills actually don’t place any restrictions at all on unserved communities (where 90% or more can’t get broadband) who want to build themselves a first-class, triple-play enabled, broadband network or anything else better than dial-up. If there weren’t such an exemption, I’d be just as riled as the people I’ve quoted.

Supporting innovation from the right kind of companies.

I suspect Bennett may have trouble seeing the facts on the issue because they are obscured by the $20,000 stipend he picked up from Time Warner Cable.  That is in addition to his regular salary provided by players with a dog in the fight.

Unfortunately for those who accidentally stumble their way into the warped world of “innovation” some of our biggest telecommunications companies have in store for us, Bennett forgets to disclose who pays him.

Our argument (the one that comes without industry money-strings attached) is explored in great detail here.

For the benefit of those who don’t want to dirty themselves wading through the ITIF’s blog, here is our response in full:

Richard and I have discussed several issues impacting the broadband community over the past two years.  He always takes the side of the industry that pays him well to serve as their mouthpiece, and I represent actual consumers and do not take a penny of industry money.

The ironically named “Innovation” blog attacks the very innovation that community broadband brings to hard-pressed communities in North Carolina who want to reinvent themselves from their tobacco and cotton-past.  The reason these networks exist is because existing companies refused to provide the service needed to accomplish this task.  Richard has no idea what these communities and ordinary North Carolina consumers are going through because his article exists merely as a “drive-by” hit piece that mischaracterizes the bill, the people that oppose it, and leaves his readers thinking he doesn’t have direct ties to a company that helped write the bill.

Gone undisclosed: Bennett accepted a $20K stipend from Time Warner Cable and does work on behalf of a K Street lobbyist.  That’s “dollar a holler” reporting.

Folks, follow the money.  If a Big Telecom company is involved, Richard reflexively adopts their position, often to the detriment of consumers.  He is also factually wrong.

1) Wilson did not “buy” their fiber to the home network, they built it.
2) Davidson and Mooresville bought a bankrupt Adelphia system that needed major upgrades.  Time Warner would have done precisely the same thing the community did, only they would pay for it with rate hikes across the state (except in Wilson which has avoided rate increases from Time Warner precisely because GreenLight is running there).
3) Salisbury has had a waiting list for signups.  Not bad for a “failure.”  EPB just finished their award-winning network in Chattanooga ahead of schedule.

The public-private partnership idea has no opposition, except among providers who won’t hear of anything they don’t own, operate, and control outright.  It is telling ongoing negotiations over Ms. Avila’s Time Warner-written bill have broken down because she still objects to language that would keep those networks in business to create those kinds of success stories.

All of the pipe dreams in this piece come from the author.  I’m not an industry consultant.  I just know a much better deal when I see one.  GreenLight, EPB, and Fibrant all deliver better service than the cable company or phone company and the money paid to them remains in those communities.  They also deliver unlimited service, an issue that now becomes more important than ever with AT&T’s attempt to launch its Internet Overcharging scheme.

The key question Bennett never asks is exactly how H.129 will improve broadband in the state, whose broadband rankings are unworthy of its potential.  Answer: it won’t.  It simply delivers protection for incumbent providers who will continue to not deliver the kind of service people want and will continue to ignore rural areas they have always ignored.  When a “small government” conservative like Marilyn Avila writes micro-management requirements for these networks right down to banning them from promoting themselves and arguing over service area boundaries (conditions Time Warner is exempted from), it tells you how far certain legislators will go on behalf of large telecom companies.

As for voter approval, it already exists in the form of elections.  I haven’t seen any “throw the bums out” movement in Tennessee or North Carolina over this issue.  In fact, the only ones out of office are the last two legislators that proposed these anti-community broadband bills.  Ty Harrell resigned in disgrace and David Hoyle left office admitting, on camera, Time Warner Cable wrote the bill he introduced.

Nice try, Richard.  Maybe if Time Warner gave you $40k, you would have spent more time coming up with legitimate arguments instead of just attacking the “music men” who can name your tune after the first predictable note.

Phillip M. Dampier
Editor, Stop the Cap!

[Update 3:42pm — We just received a carbon copy of an e-mail Rep. Marilyn Avila (R-Time Warner Cable) sent out after Bennett’s piece was published (coordinated effort, anyone?).  Amusingly, she forgot to hide the carbon copy list.  Among the recipients — two lobbyists from Time Warner Cable, the state’s top cable association lobbyist, and CenturyLink.  The most hilarious part of all — her claims Bennett’s piece represented an “independent explanation” to correct the “false record” on her anti-consumer bill.  Every resident in North Carolina should be on the phones and e-mail today telling the Finance Committee to oppose H.129, and also let them know Ms. Avila’s office is sending out distorted articles written by a K Street lobbyist who accepted a $20k stipend from Time Warner Cable, the company that most strongly supports this bill.  How “independent” is that?]

AT&T's revenue is on the rise, especially from its broadband and wireless service divisions.

AT&T’s announcement that it is will impose usage limits on its DSL and U-verse (wireline) customers this May is just another case of overcharging consumers for Internet access.

Stop the Cap! has been reviewing AT&T’s financial reports looking for justification for imposing usage controls on the company’s customers.  Most providers who enact these kinds of pricing schemes claim they are about controlling heavy users, reducing congestion, and covering the costs to provide the service.

But after reviewing some of AT&T’s financial reports, the only explanation apparent for these limits is a quest for additional revenue and profits from subscribers.

AT&T continues to earn billions every quarter — $7 billion in the last three months alone — from its data products division, the vast majority of which comes from selling IP — Internet access — services to customers.  At the same time, the company continues to cut operations and support expenses, reducing its operating costs, and increasingly relies on its wireless and wireline divisions for the majority of the company’s revenue.

There is no evidence AT&T broadband usage costs are significantly impacting the company’s revenue in any way.  In fact, its U-verse platform, which can deliver higher speed, premium broadband service (at a correspondingly higher price) is actually delivering higher revenue from the “heavy users” the company is now complaining about.

In short, AT&T wants to reap the financial rewards of selling more costly, higher speed broadband service, but wants to limit customers’ use of those services.

We reviewed both the quarterly and annual results for AT&T’s wireline division and discovered what we routinely find true among every provider that wants to implement an Internet Overcharging scheme: the company wants to raise prices on broadband customers even as it enjoys ongoing cost reductions to manage broadband traffic and reduces the amount of investment made to manage it.

AT&T's own facts and figures tell the story of a company that has no need to slap usage limits on its broadband customers.

Some interesting facts from AT&T:

• AT&T earns $5 billion (annualized revenue stream) from its U-verse platform;
• AT&T saw 30 percent revenue growth from residential broadband alone;
• 45 percent of AT&T’s revenue in wireline services comes from broadband/IP services;
• In 2011, AT&T says it has a “focus on growth” — of revenue and profit, that is.  The company seeks increases in its “operating margins,” plans capital expenditures that will be focused on a “slight increase in wireless spending,” and ongoing cost-cutting where possible.

AT&T plans to continue to invest in U-verse expansion, critical for a company that is rapidly losing revenue from departing landline customers. In the 2010 Annual Report, AT&T noted the vast majority of cash used in investing activities went towards construction costs related to improved wireless network capacity, which is dramatically different than wired broadband service, and U-verse.  This does not cover ongoing expenses from providing the service.

It’s an important strategy for AT&T, which needs to replace revenue from lost landline customers:

We continue to lose access lines due to competitors (e.g., wireless, cable and VoIP providers) who can provide comparable services at lower prices because they are not subject to traditional telephone industry regulation (or the extent of regulation is in dispute), utilize different technologies, or promote a different business model (such as advertising based) and consequently have lower cost structures.

In response to these competitive pressures, for several years we have utilized a bundling strategy that rewards customers who consolidate their services (e.g., local and long-distance telephone, high-speed Internet, wireless and video) with us. We continue to focus on bundling wireline and wireless services, including combined packages of minutes and video service through our U-verse service and our relationships with satellite television providers. We will continue to develop innovative products that capitalize on our expanding fiber network.

Unfortunately, the benefits U-verse provides broadband users will be tempered by usage limits on it.

Considering AT&T’s U-verse pipeline is one giant broadband connection, the disturbing fact the company will not implement these overcharging schemes on its voice or video services cannot be ignored.  Only the broadband service, on which customers could entirely bypass AT&T’s TV and phone products for a competitor, is impacted.  The risk of that happening with the company’s usage cap is now diminished.

As Stop the Cap! has warned for nearly three years — this is the ultimate end run around Net Neutrality. Instead of actively blocking or throttling competing services, AT&T simply uses a usage limit to discourage customers from using the competitor, relying on unlimited AT&T TV and phone services instead.

AT&T's annual report illustrates the ongoing wireline losses attributable to departing landline customers.

But things are much brighter in the broadband division. Notice the increasing revenue.

U-verse represents a successful example of benefits earned when companies invest in their networks to provide improved service to customers.

But what happens when companies gradually reduce their expenses and investments in those networks? They try and make up the difference with an Internet Overcharging scheme that places limits on service to keep costs down and profits up.

Broadband Reports has obtained a leaked memo stating AT&T plans on eliminating its flat rate broadband plans for DSL and U-verse customers effective May 2nd.

On that date, AT&T will limit its DSL customers to 150GB per month and its U-verse customers to 250GB per month in what will be the largest Internet Overcharging operation in the nation.  Customers who violate the usage limits will face a three-strikes-you’re-overcharged penalty system.  After three violations of the usage limit, customers will pay an additional $10 for each block of 50GB they consume.  Although that represents just $0.20 per gigabyte, less than some others have imposed, it is not pro-rated.  Whether a customer uses one or fifty “extra” gigabytes, they will face the same $10 fee on their bill.

Customers will begin receiving notification of the change in the company’s terms of service March 18.

AT&T claims only 2 percent of their DSL customers will be exposed to the Internet Overcharging scheme.

“Using a notification structure similar to our new wireless data plans, we’ll proactively notify customers when they exceed 65%, 90% and 100% of the monthly usage allowance,” AT&T’s Seth Bloom told Broadband Reports. The company also says they’ll provide users with a number of different usage tools, including a usage monitor that tracks historical usage over time, and a number of different usage tools aimed at identifying and managing high bandwidth consumption services.

“Using a notification structure similar to our new wireless data plans, we’ll proactively notify customers when they exceed 65%, 90% and 100% of the monthly usage allowance,” AT&T tells us. The company also says they’ll provide users with a number of different usage tools, including a usage monitor that tracks historical usage over time, and a number of different usage tools aimed at identifying and managing high bandwidth consumption services.

However, AT&T’s accuracy in measuring broadband usage is open for debate.  The company is facing a class action lawsuit over its wireless usage billing.  According to the suit, AT&T consistently inflates usage measured on customer bills.  No third party verification or oversight of usage meters is mandated — customers simply have to trust AT&T.

AT&T ran trials in Beaumont, Tex., and Reno, Nev., from 2008 with a range of usage limits.  Customer reaction to the trials was hostile, and the test ended in early 2010.  In December, FCC Chairman Julius Genachowski told providers the agency was not opposed to usage limits and consumption billing schemes, leading some to predict the green light was given to companies willing to test whether customers will tolerate Internet Overcharging.

AT&T claimed this weekend its new pricing was going to benefit customers.  So long as customers keep paying their bills, AT&T will not “reduce the speeds, terminate service or limit available data like some others in the industry,” Bloom said.

But the usage limits come at the same time Americans are increasing their consumption of online video and other high bandwidth services.  Usage limits which may appear to be reasonable at first glance become punishing when they do not change over time and customers increasingly risk exceeding them.  Once established, several companies have repeatedly lowered them to further monetize broadband service usage.  AT&T has delivered some of the lowest usage limits in the wireless industry, so it has faced customer criticism in the past.

Customers tied to existing term contracts may likely avoid the usage caps temporarily.  Others will not stick around long enough to find out.

“I will be canceling my U-verse service on Monday and go back to Time Warner Cable,” writes Stop the Cap! reader Jeffrey.  “I will never do business with a provider that imposes overlimit fees on usage that literally costs them next to nothing to provide.  It’s like charging extra for every deep breath.”

Some of our other readers are headed back to Comcast, which has a 250GB usage cap, or exploring DSL provided over AT&T lines by third party companies, which likely will not impose usage limits, at least for now.

“Charging 20 cents per gigabyte isn’t too bad, but you just know AT&T will lower the caps or jack those rates up,” our reader Ian writes. “It is very important to send AT&T a message right now we are prepared to quit doing business with them over this issue, or else we will be nickle and dimed to death by them tomorrow.”

Our reader Jared asks whether new legislation has been introduced to curb unjustified Internet Overcharging.  In 2009, then Rep. Eric Massa (D-N.Y.) introduced a bill to ban Internet Overcharging unless companies could prove it was justified.  At the moment, there is no new legislation, but when providers attempt to overreach and impose pricing the vast majority of broadband customers oppose, that could change.

At the moment, Stop the Cap! recommends AT&T customers begin to explore alternative providers and prepare to terminate their service with AT&T unless they scrap their Internet Overcharging scheme.  AT&T earns billions in profits from their broadband division and spends millions on lobbying.  With this amount of largesse, AT&T does not need this pricing scheme to remain profitable.