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Stop the Cap’s Comments on the Proposed Settlement Between Charter Spectrum and NY PSC

July 8, 2019

Hon. Kathleen H. Burgess
Secretary to the Commission
New York State Public Service Commission
Three Empire State Plaza
Albany, NY 12223-1350

Re: 15-01446/15-M-0388 Joint Petition of Charter Communications and Time Warner Cable for Approval of a Transfer of Control of Subsidiaries and Franchises, Pro Forma Reorganization, and Certain Financing Arrangements – Settlement Proposal

Dear Secretary Burgess,

Stop the Cap!, a party in this proceeding that has regularly contributed to the record since the original application by Charter Communications to transfer control of cable systems formerly owned and operated by Time Warner Cable, is pleased to provide our comments regarding the April 19, 2019 proposed settlement between the Department of Public Service/Public Service Commission and Charter Communications, Inc.

Our organization and our members remain actively interested and engaged on this transaction and the impact it has had on consumers and businesses in New York State. We believe that all New Yorkers were harmed as a result of Charter’s lack of compliance with the 2016 Merger Order.

Stop the Cap! believes the existing settlement proposal lacks adequate compensation for the millions of New Yorkers that are now paying higher prices for internet service, receiving compromised service in the New York City area due to an ongoing, unsettled strike action, rural residents still waiting for Charter to meet its commitments to expand its network, and those low income New Yorkers that have been disadvantaged by the difficulty of obtaining affordable internet service. At the time of this submission, nearly half of Charter’s national footprint provides twice the internet speed New Yorkers now receive, making a mockery of the claim that Spectrum provides best-in-class service in this state.

Therefore, we believe the current settlement proposal as offered is insufficient and does not provide adequate compensation to New York consumers and businesses.

Cost Concerns and Charter’s Impact on New York’s Digital Divide

Stop the Cap! objected to the 2016 merger because of our fears it would result in higher prices for internet service for consumers in New York, exacerbating the digital divide. We believe there is now strong evidence to back our concerns.

Since the DPS/PSC issued the original 2016 Merger Order, New Yorkers now pay substantially more for internet service than was the case with Time Warner Cable. Although Charter has significantly raised broadband speeds in New York State, it has also reduced the number of budget-priced options ordinary customers have for broadband service.

In 2016, prior to the Merger Order, Time Warner Cable charged customers as follows (rates applicable to customers in Rochester, N.Y.)[1]:

  • Everyday Low Price Internet ($14.99)
  • Basic Internet ($49.99)
  • Standard Internet ($59.99)
  • Turbo ($69.99)
  • Extreme ($79.99)
  • Ultimate ($109.99)

In 2019, Spectrum offers faster speeds than Time Warner Cable, but at a higher cost[2]:

  • Spectrum Internet ($65.99)
  • Spectrum Ultra ($90.99)
  • Spectrum Gig ($125.99)

The broadband options for low-income New Yorkers have been drastically reduced by Spectrum. Faster speed is of little concern to low income residents that cannot afford the service. New Yorkers saw their cable bills rise as a direct result of this merger, as we predicted. The minimum cost for standalone broadband service from Spectrum for the majority of consumers is now $65.99 a month, and the company has become far more reticent about negotiating customer retention deals that discount the cost of service than its predecessor Time Warner Cable. In fact, Charter CEO Thomas Rutledge made a point of promising to end the “Turkish bazaar” of pricing promotions at Time Warner Cable after the merger[3]. Customers are now subjected to “take it or leave it” pricing[4].

Spectrum’s concern for low income customers in New York is dubious. Stop the Cap! recommended, and the PSC adopted a condition in the 2016 Merger Order temporarily extending the availability of Time Warner Cable’s $14.99 “Everyday Low Price Internet” (ELP) tier of service, available on a standalone basis to any consumer without pre-qualification. However, after Spectrum announced its own plans and pricing, the company never significantly marketed the option of ELP service to its New York customers. In fact, while the company heavily promoted its own conditional Spectrum Internet Assist (SIA) package, consumers informed us they could not subscribe to ELP in New York because Charter customer service representatives misinformed them the service was no longer available, or they confused it with SIA and told them they were not qualified for discounted internet service. It is our testimony that only the most persistent and well-informed customers were likely to successfully sign up for the ELP program, often requiring multiple attempts to do so[5].

The differences between ELP and SIA are stark. ELP required no pre-qualification and customers could keep the package as long as they liked. SIA is limited to customers that qualify for the National School Lunch Program (NSLP), the Community Eligibility Provision of the NSLP, or seniors 65 and over that qualify for Supplemental Security Income[6]. Customers must re-qualify at set intervals to continue eligibility, leaving out low income households without school-age children or seniors on limited incomes but lack SSI eligibility. More importantly, Charter protects its revenue stream by denying eligibility to all customers with pre-existing Spectrum internet service. To qualify, a customer would have to disconnect internet service for at least 30 days, have no outstanding debt with Charter within one year prior to applying for service, and once an SIA customer be sure not to have any outstanding debt with Charter subject to Charter’s “ordinary debt collection procedures.”[7] ELP service, in contrast, was available as an option at any time, to anyone.

Charter’s Speed Gap

New York residents do not uniformly benefit from the best in class service available from Charter Communications. Nearly half of Charter’s footprint outside of New York now offers customers entry-level download speeds of 200 Mbps at the same price most New Yorkers pay for 100 Mbps[8].

Failure to Comply With Rural Broadband Buildout Obligations

The PSC’s decision to rescind approval of the 2016 Merger Order between Time Warner Cable and Charter Communications was done after substantial evidence showed Charter had failed to meet the important obligations to rural New Yorkers required of it to make the merger meet the public interest test.

These failures were systemic and have compromised our rural economies by delaying much-needed internet access. It is for this reason that much of the settlement must be focused on correcting these deficiencies and, as a penalty for underperformance, broaden the number of required passings to deliver service to an even greater number of residents and businesses.

We welcome the settlement proposal to target penalties to help fund further broadband expansion. After years of talking to rural New York residents, it is clear New York’s rural broadband problem will continue after the conclusion of the state’s own broadband expansion program. We have heard from New Yorkers that are deeply concerned because the providers originally designated to serve their rural addresses have now refused to offer service or wrongly claim it will be made available by another provider. There is significant confusion and we fear many rural addresses are likely to “fall through the cracks” and end up serviced by no one.

Therefore, guaranteeing that rural New Yorkers have access to 21st century broadband service should be of the highest priority.

More than 78,000 New Yorkers have been assigned inferior internet access through HughesNet, a satellite internet provider[9]. HughesNet will allow those New Yorkers designated for satellite service through the Broadband Program Office (BPO) to use up to 100 GB of data per month before throttling service speeds to 1-3 Mbps for the balance of the billing period[10]. HughesNet also cannot guarantee to meet the FCC’s minimum speed definition of 25 Mbps and more importantly, provides an inadequate usage allowance[11].

Spectrum does not cap data usage or utilize speed throttles, while HughesNet severely throttles internet speeds of customers exceeding a data allowance we consider paltry. Recent research reports the average U.S. household now consumes 282.1 GB per month in areas where flat-rate internet service is offered. This leaves addresses designated for satellite service at a significant disadvantage[12].

The BPO has indicated that addresses assigned to the HughesNet program came as a result of a lack of suitable bids to service those addresses with traditional wireline service. There is clear evidence that providers are dissuaded from serving these high cost areas as a result of a lack of return on investment. Therefore, incentivizing Charter Communications to consider servicing as many of these addresses as practical is in the best interests of New Yorkers.

It is our view that cable broadband service is far superior to many current wireless, satellite, and copper-based DSL services, and we believe that technological capability should be a factor in considering whether to credit Charter for an overlapping new passing. We strongly recommend that Charter be encouraged in every way possible to extend service to as many customers currently designated for satellite internet service as possible. Although the proposed settlement does not punish Charter for extending service into these areas, it is reasonable to assume that the company would not otherwise extend service to these locations without receiving some direct or indirect financial benefit or subsidy. Therefore, we argue that Charter should be credited for any and all new passings in satellite-designated areas, without limit. However, we also believe the 30,000 minimum passing requirement is too low, as is the allowed designation of “substantial compliance” after passing 28,500 homes.

The exceptional amount of confidentiality surrounding Plans of Record among the different providers, including Charter, is not in the public interest and prevents impacted New Yorkers from fully participating in this important process. Since these areas have been historically underserved or unserved, there is little, if any, competitive risk by divulging the Plans of Record publicly. Charter’s rural buildout plans and progress reports should be publicly available. As it stands today, we remain unclear about how many already-passed or planned-to-be-passed homes are a part of the 30,000 the Commission proposes to count. Having that information is crucial to offering informed views about the proposed settlement.

With respect to wireline service overlap, we believe that consumers should benefit from the best possible service provider. We recognize that with limited funds available, duplicative service should be avoided. However, if Charter overlaps with another provider, and if the broadband speed Spectrum offers is superior to what is available from the incumbent wireline provider, it should receive credit for that passing even if in excess of 9,400 addresses, so long as that area is designated as rural and underserved.

Incremental Build Commitment

Stop the Cap! strongly approves of the settlement recommendation to establish a fund for supplementary broadband expansion beyond the original commitments defined in the 2016 Merger Order.

However, we offer some recommendations that we believe will make the fund’s purpose more practical to address the real-life experiences rural New Yorkers encounter when requesting that Charter extend service to a presently unserved address.

Charter Communications, like all cable companies, has a confidential formula to determine a reasonable return on investment when considering whether or not to expand service to a currently unserved address. Cable operators designate an amount the company is willing to pay out of pocket to cover construction/expansion costs. That number is often different for residential and commercial subscribers.

The proposed ceiling of $10,000 is very low in our opinion. Rural New York residents seeking Spectrum cable service are frequently quoted prices far in excess of this amount to extend service from a nearby served location. We believe this ceiling should be at least doubled to $20,000 and should be separate from the amount of money Charter routinely self-funds for qualified buildouts. For example, if Charter is traditionally willing to self-fund up to $2,500 of the cost of supplying service to a new residential or commercial customer, a project budget up to $22,500 would be acceptable to proceed, with $2,500 in funds coming from Charter and the remaining $20,000 coming from the Incremental Build Account.

We also recommend that any address rejected for consideration for service expansion for cost reasons be formally notified and offered an opportunity to participate in the process and permitted to optionally finance any cost in excess of the ceiling amount. The current proposal lacks any provision for the participation of residents and businesses in this process. At least some might choose to voluntarily participate in a cost-sharing opportunity to extend cable broadband service to their address.

Impact of Ongoing Strike in the New York City Area

For more than two years, at least 1,500 Spectrum employees affiliated with the International Brotherhood of Electrical Workers Local 3 have been on strike in the New York City area. As a result, Spectrum customers have been subjected to a declining level of service as highly-qualified technicians remain off the job[13]. Charter Communications’ merger with Time Warner Cable was only approved in New York if it met a public interest test, and there is significant evidence New York City customers are not getting the level of service they would otherwise receive if there was no strike action[14].

As a result, the PSC should carefully study the impact of the strike on New York City customers and find any means available to compel a fair settlement and end this historically long labor dispute. Customers are caught in the middle, and there is evidence Charter may not be employing an entirely local workforce to service its customers in the New York City area. This strike would likely have not occurred had Time Warner Cable still been the incumbent cable provider.

Stop the Cap!’s Recommendations for a Revised Settlement Between Charter Communications and the Department of Public Service/Public Service Commission

  1. In recognition of the fact Charter has exacerbated the digital divide by pricing internet service higher than its predecessor, Charter must agree to further extend the availability of its Everyday Low Price Internet ($14.99/month) service to new customers for an additional five year period, reset existing New York customer pricing for this package to $14.99 for the same period, and publish a regular notice in bill statements about the availability of this tier, including the fact it is available to all customers on a standalone basis.
  2. In recognition of the fact Charter places unreasonable restrictions on qualifying for its Spectrum Internet Assist program, the settlement agreement should require that for the next five years Charter remove the restriction preventing New York customers from enrolling in the SIA program if they already have Spectrum internet service.
  3. In recognition of the fact Charter is not supplying all New York residents with best-in-class service, Charter must immediately boost the download speed of its basic Spectrum Internet package from the current 100 Mbps to 200 Mbps in all service areas in New York State, which matches the speed offered in nearly half of its national footprint. For a period of not less than five years, Charter must agree to provide New York State customers with access to any other speed improvements or upgrades as soon as they become available in any other state serviced by Charter.
  4. In recognition of the fact Charter has failed to meet its obligations to expand service to rural New York locations, the Commission should move forward with the revised buildout plan that includes additional new passings beyond what was specified in the 2016 Merger Order, and establish the proposed Incremental Build requirement and associated Spectrum-funded Build Account of not less than $6 million.
  5. In recognition of the fact New York addresses designated to receive HughesNet satellite internet service will be at a substantial disadvantage because of slower internet speeds and a usage allowance of 100 GB, well below the national data consumption average, the DPS/PSC do everything possible to compel and/or encourage Charter Communications to extend its service to overlap satellite-designated areas and receive credit towards its buildout requirement for doing so.
  6. In recognition of the fact some wireline providers offer superior internet service over others, any formula counting the number of homes provided overlapping wireline internet coverage from Spectrum and an existing incumbent wireline provider should consider the capabilities of both providers. If Spectrum offers superior internet speeds, it should be counted as a new passing. If the incumbent matches or exceeds Spectrum’s available speeds, Spectrum’s new overlapped passing should not be counted.
  7. In recognition of the fact that rural consumers and businesses have been left in the dark about the status of their designated internet provider, Plans of Record from Charter Communications under this settlement, as well as other BPO-fund recipients should be made public, including the name and contact information of the designated provider and estimated date of service availability.
  8. In recognition of the fact cable companies designate a maximum amount they are willing to pay out of pocket to establish service at a new address/location, that amount should continue to be paid out of pocket by Charter, with additional expenses above that amount, up to $20,000, covered by the Incremental Build Account if designated as an incremental buildout project. Any address considered for a new passing must be notified in advance if the proposal would otherwise be rejected because the estimated cost to extend service is beyond the $20,000 ceiling and the amount Charter would typically pay out of pocket. That resident or business would then be offered the opportunity to optionally pay the specified excess amount within a reasonable period of time to allow the project to move forward.
  9. In recognition of the fact that Charter technicians and employees in the New York City area have been on strike for over two years, potentially impacting the quality of service Spectrum customers receive in the area, the DPS/PSC should study the impact of the strike on service quality and do all it can to encourage Charter to settle the strike at the earliest opportunity.

We appreciate the Commission and its staff’s hard work on this matter, and hope you will seriously consider our input and ideas, demonstrating once again that the New York Public Service Commission takes its obligations to the citizens of New York seriously.

Very truly yours,

Phillip M. Dampier

President and Founder

Stop the Cap!

 

[1] http://stopthecap.com/wp-content/uploads/2019/07/twc-2016-rate-card-rochester.jpg

[2] http://stopthecap.com/wp-content/uploads/2019/07/Charter-Spectrum-2019-Rate-Card-Information.pdf

[3] https://www.fiercevideo.com/cable/charter-s-rutledge-pre-merger-twc-offered-a-turkish-bazaar-promo-offers

[4] https://www.syracuse.com/news/2017/05/thousands_of_time_warner_cable_video_customers_flee_spectrums_higher_prices.html

[5] https://www.reddit.com/r/Spectrum/comments/ab02cu/spectrum_deceiving_customers_about_everyday_low/

[6] https://www.spectrum.com/browse/content/spectrum-internet-assist.html

[7] https://www.spectrum.com/browse/content/spectrum-internet-assist.html

[8] https://newsroom.charter.com/news-views/2018-twas-the-year-of-gig-50-million-locations-and-counting/

[9] https://nysbroadband.ny.gov/new-ny-broadband-program/phase-3-awards

[10] https://www.hughesnet.com/node/102201

[11] http://legal.hughesnet.com/SubAgree-03-16-17.cfm

[12] https://www.telecompetitor.com/report-u-s-household-broadband-data-consumption-hit-268-7-gigabytes-in-2018/

[13] http://amsterdamnews.com/news/2017/aug/10/spectrum-strike-affects-us-all/

[14] https://www.pressconnects.com/story/money/2018/08/08/charter-spectrum-cable-new-york-consumers/898780002/

How a Wall Street Analyst Complicates AT&T and Verizon’s Upgrade and Investment Plans

Moffett

The road to 5G wireless home broadband is paved with good intentions and a lot of hype, but at least one Wall Street analyst hints Verizon’s millimeter wave 5G project may be a bad idea, unable to achieve a proper return on investment and potentially a worse performer than originally thought.

Craig Moffett, a key analyst at MoffettNathanson, has analyzed and commented on the telecommunications industry at least as far back as the 1990s. He slammed cable operators for overpriced upgrades in the 1990s, talked down AT&T’s U-verse project, and spent years telling the media and investors that Verizon FiOS — a fiber to the home project, was an expensive failure.

Moffett’s latest research examines Verizon’s six-month old 5G millimeter wave wireless network in Sacramento, Calif., which relies on a large number of small cells to provide a $50 wireless home broadband replacement. But after taking a closer look at the technology, its performance, and costs, Moffett has warned investors Verizon has a “steep climb” to convince Wall Street it can attract enough revenue from paying customers to justify the tens of billions in new spending required to roll out small cell technology across the country.

How does Moffett know this and can his views derail or alter Verizon’s long-term plans for millimeter wave 5G? The answer is clearly “maybe.”

In this series, we will look at how Wall Street’s view of the telecom industry is often focused on short term profits at the expense of long term growth and customer satisfaction.

The telecom industry analyst presents detailed analyses tracking industry developments, mergers and acquisitions, technology shifts, competition, regulation, expenses, and shifting consumer behavior into reports for investment banks, institutional investors, or in some cases individual investors looking for both hard numbers and perspective on what is going on in the industry.

The metrics analysts use to describe success or failure are typically different from what customers use, and many analysts don’t spend much time focused on technical trivia, public policy goals, and ways of overcoming problems for which there are no obvious market solutions, such as rural community broadband. Some analysts are particularly friendly and non-confrontational with executives, who know and recognize them by their first name, while others are more willing to challenge company press releases and policies and can eventually develop an adversarial relationship with at least some of the companies they cover. The analyst’s reputation for getting the correct analyses to clients means everything. Good research and advice does not come cheap, and subscription fees can be breathtakingly high. Many Wall Street analysts also make frequent appearances in the media, often on business cable news channels and newspapers.

Moffett is one of the most frequently-quoted telecom analysts, known for his favorable coverage of the cable industry and skepticism towards telephone companies attempting to reinvent themselves. He has advocated for the adoption of usage caps and usage-based billing to further monetize broadband, but has not been as aggressive as others, such as Jonathan Chaplin, a Wall Street analyst with New Street Research, who has frequently called on the cable industry to aggressively raise broadband prices to $90 a month or more. Moffett, in contrast, worried last year that Cable One, an operator specializing in serving small and medium sized cities, was pricing its service far too high, driving off potential customers.

Cable’s Hybrid Fiber/Coax vs. Telco’s Copper: Dueling Legacy Technologies Confront a Fiber and Wireless Future

Most of the nation’s cable television systems were built in the 1970s and 1980s and were primarily dependent on copper-based coaxial cable. By the 1990s, many cable operators embarked on system wide “rebuilds” to prepare for the era of digital cable television. It was during this decade that most cable systems moved beyond 50-70 analog TV channels and also began offering new services, including home phone, broadband, home security, and large on-demand video libraries. To support these new services and to increase the reliability of cable systems, operators began replacing some of the coaxial cable in their networks with more reliable fiber optics. Investments in these upgrades were significant, but to the cable industry not extravagant. A loud chorus from Wall Street disagreed, complaining cable systems were overspending on upgrades. Moffett, an analyst for Sanford Bernstein at the time, complained the cable industry collectively wasted $100 billion on network upgrades.

But like many Wall Street analysts who complain about almost any significant investment or spending, once a company has gone ahead and spent the money, analysts start looking at how those companies are monetizing those upgrades to recover the investment, boost revenue, and maximize shareholder value. Moffett flipped on a dime from being a critic of cable’s spending to commenting on how well the cable industry was now positioned to lead the telecom industry.

“Cable built a plant that was more expensive than they ever should have built,” Moffett told the New York Times in 2008. “But now that the cable companies have spent that money, their network is in place to deliver phone service more cheaply than any other alternative.”

The cable industry’s hybrid fiber-coax (HFC) systems upgraded in the 1990s are still partly in wide use today. Cable operators are using incremental technology upgrades to squeeze more performance out of these systems, notably by retiring space-hogging analog cable television in favor of digital. That analog to digital video conversion, along with regular updates to the cable broadband technical standard, known as DOCSIS, has allowed most cable operators to claim they do not need to upgrade to an all fiber network to support the services offered today, which includes hundreds of TV channels and gigabit speed downloads. Altice USA, which operates Cablevision in suburban New York City, is among a few operators claiming it was time to discard HFC technology in favor of fiber to the home (FTTH) service. Altice argues fiber further increases available bandwidth and is much more reliable, reducing costs. So far, other major operators like Comcast, Charter, and Cox are still taking a more incremental approach towards fiber, in part to keep costs down.

The upgrade spending that Wall Street complained about in the 1990s ultimately paid off handsomely for the cable industry. Moffett himself only occasionally criticizes cable operators these days, preferring to target most of his negative coverage on phone companies. In fact, in an interview in 2008, Moffett called effectively called phone companies obsolete.

“In 1996, as soon as you saw that the technology existed for a cable network with vastly higher capacity and vastly lower margin cost to be able to do voice calls over the same network, you would have said the end game is obvious: Cable will win and the telcos will go into bankruptcy. The only question is how long it will take,” Moffett said.

Moffett praised Qwest for doing and spending nothing to confront copper wire obsolescence.

The phone companies, having no interest in voluntarily sacrificing themselves in bankruptcy court, have moved to meet the cable industry’s challenge by upgrading their own networks to compete, something Moffett is not a big fan of either. Back in 2008, he gave top marks to Qwest, the orphaned Baby Bell serving the sparsely populated Pacific Northwest that would later be bought by CenturyLink. Lacking its own mobile business, or a large amount of capital for upgrades, Moffett praised Qwest for making the right decision (according to him) in the cable vs. phone wars of the early 2000s: “do nothing.”

That advice was simply not acceptable to the top executives at two of the biggest phone companies in the country. Both rejected Moffett’s philosophy of living with the technology they had instead of putting investors through the agony of spending money to completely overhaul the existing copper wire phone network. For Moffett, that was throwing good money after bad, and it was too late to try.

“It is an obsolete technology,” Moffett said. “It’s not like horses lost share of the transportation market until they stabilized at 40 percent market share.”

Phone Company Fiber Optic Upgrades = ‘Shareholder Value Destruction’

Large phone companies saw the same writing on the wall about landline telephone service Moffett did back in the 1990s. Their emerging wireless mobile businesses were cannibalizing in-home landlines and the introduction of the cable industry’s “digital phone” Voice over IP product, often bundled with a range of calling features and a nationwide long distance plan, quickly began eroding the revenue phone companies earned from per-call charges, calling features like Caller ID, and long distance revenue.

AT&T repair truck

AT&T and Verizon had a problem. Telephone networks were designed and built to handle voice-grade phone calls, not broadband or television. Repurposing the traditional landline to support a popular package of phone, internet, and television service was complex and costly. DSL had already emerged as the phone company’s best effort to compete with cable broadband over the traditional copper phone wire network. Phone companies experimented with competing television service, sending one channel at a time down a customer’s phone line. When a customer changed channels, one streaming channel stopped and another began. It did not always prove to be very reliable or dependable, because performance degraded significantly the farther the customer lived from the phone company’s switching office. Something better was needed, and it was going to cost billions.

The 1992 Cable Act, which guaranteed competing video providers could offer popular cable networks on fair and competitive terms, was crucial to laying the groundwork for a reimagined local phone company. Telephone company executives began approaching state and local officials with proposals to replace existing phone networks with newer fiber technology that could support voice and video, giving local cable monopolies long-awaited competition. The sticking point was money. Some large phone companies sought regulator approval to raise telephone rates to create a fiber fund that would be used to cover some of the costs of scrapping copper wire networks and replace them with fiber optics. The cable industry understood the threat and immediately launched a fierce lobbying campaign to block attempts to bill captive phone ratepayers for the cost of fiber upgrades. The phone companies were largely unsuccessful winning approval to cross-subsidize their fiber future, but some companies did make deals with state regulators to approve rate increases with the promise the extra revenue would fund future fiber upgrades.

Critics contend AT&T and Verizon’s wireless mobile networks ended up the biggest beneficiaries of the revenue raked in from rate increases, with some accusing companies like Verizon of shifting money away from landline service to help pay for the construction of their growing wireless businesses. With billions spent on cell tower construction and network buildout costs, there was not much money left for fiber to the home upgrades. The cost to wire each home for fiber was also a concern, as were regulatory requirements surrounding universal service, which meant phone companies might have to serve any customer seeking service, while cable companies were allowed to skip serving rural America altogether.

It would take until 2004 for phone companies to begin major upgrades. At the same time, deregulation was once again stirring up the marketplace, triggering a gradual re-consolidation of the old Bell System, coalescing primarily around AT&T (SBC, Ameritech, BellSouth, and Pacific Telesis) and Verizon (Bell Atlantic, NYNEX, independent telephone company GTE, and former long distance carrier MCI). Both AT&T and Verizon were exploring fiber upgrades.

AT&T U-verse vs. Verizon FiOS – Wall Street Not Impressed Either Way

Project Lightspeed was developed by SBC in 2004 and later renamed AT&T U-verse in time for its commercial launch in 2006. AT&T chose a fiber to the neighborhood approach, leaving intact existing copper phone wiring already in place in neighborhoods and homes. U-verse was capable (at the time) of delivering just over 20 Mbps internet service while customers also watched TV,  and/or made a phone call. The advantage of U-verse was that it was cheaper to deploy across AT&T’s more sprawling local telephone territories than fiber all the way to each customer’s home.

Verizon, which serves a number of densely populated cities in the northeast and mid-Atlantic region, believed a fiber to the home upgrade would future proof their network and deliver better, more reliable service than U-verse. Verizon FiOS launched in September 2005 and completely did away with existing copper phone wiring in favor of optical cable. Verizon argued that although it was more expensive, a complete fiber upgrade would cost the company less over time, and was essentially infinitely upgradable as customer needs changed. Verizon also argued that with scale, the cost of wiring each home or business would fall, making the technology more cost-effective. Verizon launched its FiOS business with great fanfare among customers, some who bought homes specifically because they were located in a FiOS service area.

As with the cable industry’s rebuilding (and spending) wave of the 1990s, many on Wall Street were unhappy with both AT&T and Verizon. Moffett’s calculations were based on the premise that projects like this have 15 years not only to pay back investors in full, but also generate shareholder value from increased revenue. If the costs are not covered in full and then some, it is deemed a failure and value destructive. What customers want is only a tiny part of the means test Wall Street analysts use to determine if a project is good news or bad news:

Good News

  • The provider successfully raises prices and accelerates payoff of outstanding debt.
  • A project attracts new customers and prompts current customers to upgrade, generating more revenue.
  • An upgrade can be expensed in a way that results in extra tax savings.
  • Customer churn drops, as a more satisfied customer remains a customer.
  • An upgrade offers new revenue opportunities not available before.

Bad News

  • A project causes a surprise increase in capital expenses, especially if those costs are higher than anticipated.
  • An upgrade results in increased competition, or worse, a price war that forces providers to cut prices.
  • The project cannot be paid off within ~15 years. Short term results matter. Long term results only matter to future investors.
  • An upgrade forces competitors to also undertake upgrades.
  • A provider is forced to choose between share buybacks and dividend payouts and spending money on upgrades and chooses the latter. Shareholders matter more.

Moffett’s 2008 calculations argued that Verizon would lose $769 on each FiOS customer signing up for service. AT&T U-verse would come close to breaking even, but not generate much in the way of profit for AT&T. After determining that, he was a frequent and vocal critic of upgrade efforts, particularly in the case of FiOS. Verizon argued his calculations were wrong and that the company was pleased with the progress of its fiber buildout. But Moffett claimed vindication when Verizon shelved future FiOS expansion in 2010, leaving many cities with only a smattering of fiber service — often in a handful of wealthy suburbs and nowhere else.

Verizon clearly changed direction in 2010, but probably not because of Moffett and other critics. Verizon’s CEO at the time came from Verizon Wireless, and his executive team was focused predominantly on the phone company’s wireless unit, which was earning Verizon plenty of revenue. Verizon so valued its wireless business, in 2014 it bought out its partner Vodafone’s 45% interest in Verizon Wireless in a transaction valued at approximately $130 billion. That kind of money would have wired a considerable amount of the United States with fiber to the home service.

Paradox: 2008 – Don’t you dare spend that kind of money / 2013 – That was money well spent

Wall Street analysts, like many investors, like to focus on the short-term picture of the companies they cover. What appears to be really bad news today may not be so bad tomorrow, and as a result their advice often changes with time.

For example, Mr. Moffett spit nails over the cable industry’s “waste” of $100 billion on system rebuilds in the 1990s, but by the late 2000s he was a veritable cable stock promoter. Moffett told the New York Times it was clear cable was emerging on top in the telecom space and its competitors, including satellite and telephone companies, were dead companies walking. Cable’s success would likely not have come without the investments Moffett and other Wall Street analysts howled about.

Among the phone companies, AT&T initially won more respect from investors for not overspending on its U-verse project, which was less costly than FiOS, but also less capable. U-verse avoided the cost of ripping out copper cable from backyards and the sides of homes, but also had limits on broadband speed and the number of concurrent TV channels a customer could watch. As HDTV took hold, those limits became more clear, especially to customers. As a result, U-verse customer satisfaction was not that high. In contrast, Verizon FiOS consistently achieved top position in customer ratings year after year because it delivered more than customers expected and was ready-made for easy expansion and upgrades.

“There was a raging debate a couple of years ago about who got it right, AT&T or Verizon,” Blair Levin, then an analyst with Stifel, Nicolaus & Company, told the Times in 2008. “Initially the investment community thought it was AT&T, but increasingly Verizon got their begrudging respect.”

Even Moffett’s views on FiOS ‘evolved’ over time. In 2013, he sent a research note to his clients admitting his views were more positive about FiOS than before.

“FiOS will sustain subscriber growth longer than either we or Verizon had projected, and that FiOS will ultimately achieve higher penetration rates than either we or Verizon had originally targeted,” Moffett’s team wrote. “Verizon’s FiOS is overwhelmingly the largest and most important FTTH network in the U.S. For comparison, Verizon’s FiOS covers 14% of American homes; Google’s fledgling fiber network, at least based on the three markets that have been disclosed up to now . . . will cover less than ½% to 1% when it is eventually completed.”

Moffett himself predicted in 2008 his views would evolve over time, as would his clients. Those invested in Verizon during FiOS’ buildout years would suffer somewhat from the costs to deploy the fiber optic network. But those who bought shares around 2010 or after consider those expenses “sunk costs” at this point — already spent and dealt with on the balance sheet. The economics change from ‘who is going to pay for all this’ to ‘how is the company going to use this new asset to best monetize its business.’

To be sure, Moffett still frequently recoils when a company reports it is planning on significant and costly upgrades, like Verizon’s millimeter wave 5G network. He is more tolerant of gradual upgrades, like those undertaken by Charter Spectrum to retire analog cable television and upgrade its systems to DOCSIS 3.1 technology, allowing it to sell faster internet speeds.

Moffett and other analysts can present a problem for for-profit, investor-owned companies that are about to launch a disruptive product or service. Verizon’s 5G project is now facing new scrutiny, perhaps as a backlash against the excessive hype these wireless networks are enjoying in the media. The costs to deploy small cell wireless technology across the country will be staggering, and it is not a stretch to suggest some on Wall Street will champion efforts to consolidate costs by building a shared network, recommending a tough return on investment formula to determine where small cell technology will be deployed, or calling for higher prices on services. Companies like Verizon will have to be prepared to defend their business case for 5G, perhaps stronger than they did defending FiOS more than a decade ago.

We’ll explore Moffett’s latest findings about the performance of Verizon’s millimeter wave 5G wireless home broadband replacement in part two.

Craig Moffett was a featured guest on C-SPAN’s ‘The Communicators’ at the 2013 Cable Show, discussing cable’s inherent advantages over telephone companies and the emergence of video cord-cutting as a result of too many rate hikes on customers. (24:39)

North Carolina’s Goal to be the First Giga State is Improbable With Current State Legislature

Solving America’s rural broadband crisis will take a lot more than demonstration projects, token grants, and press releases.

Since 2008, Stop the Cap! has witnessed media coverage that breathlessly promises rural broadband is right around the corner, evidenced by a new state or federal grant to build what later turns out to be a middle mile or institutional fiber optic network that is strictly off-limits to homes and businesses. Politicians who participate in these press events tend to favor publicity over performance, often misleading reporters and constituents about just how significant a particular project will be towards resolving a community’s broadband challenges. Much of the time, these projects turn out to serve a very limited number of people or only fund part of a broadband initiative.

Officials last week said they are hoping to make North Carolina “the first ‘giga-state,’ with broadband access for all its residents.” But to realistically achieve that goal, nothing short of an expenditure of hundreds of millions of dollars will be required to realistically achieve that goal statewide.

A decade ago, rural broadband progressed in North Carolina, as communities transitioned away from traditional tobacco and textile businesses to the information and technology economy. To assure a foundation for that economic shift, several communities identified their local substandard (or lacking) broadband as a major problem. The state’s phone and cable companies at the time — notably Time Warner Cable, AT&T, and CenturyLink, often proved to be obstacles by refusing to upgrade networks in the state’s smaller communities. Some cities decided to stop relying on what the broadband companies were willing to offer and chose to construct their own modern, publicly owned broadband network alternatives, open to residents and businesses. A handful of cities in North Carolina went a different direction and acquired a dilapidated and bankrupt cable system and invested in upgrades, hoping cable broadband improvements would help protect their communities’ competitiveness to attract digital economy jobs.

That progress largely stalled after Republicans took control of the state legislature in 2011 and passed a draconian municipal broadband law that effectively banned public broadband expansion. Most of those backing the measure took lucrative campaign contributions from the state’s dominant phone and cable companies. One, Sen. Marilyn Avila, worked so closely with Time Warner Cable’s lobbyists, the resulting bill was effectively drafted by the state’s largest cable company. For that effort, she was later wined and dined by cable lobbyists at a celebration dinner in Asheville.

To be fair, some North Carolina cities are experiencing a broadband renaissance. Charlotte, Raleigh, Greensboro, Cary, Durham, Winston-Salem, and Chapel Hill will have a choice of providers for gigabit service. Google has installed fiber in some of these cities while AT&T and Charter lay down more fiber optics and introduce upgrades to support gigabit speeds.

Things are considerably worse outside of large cities.

In North Carolina, 585,000 people live in areas where their wired connections cannot reach the FCC’s speed definition of broadband — 25 Mbps, and another 145,000 live without any notion of broadband at all.

Bringing all of North Carolina up to at least the nation’s minimum standard for broadband will not be cheap, and politicians and public policy groups must be realistic about the real cost to once and for all resolve North Carolina’s rural broadband challenges. Where the money comes from is a question that will be left to state and local officials and their constituents. Some advocate only tax credit-inspired private funding, others support a public-private partnership to share costs, while still others believe public money should be only spent on publicly owned, locally developed broadband networks. Regardless of which model is proposed, without a specific and realistic budget proposal to move forward, the public will likely be disappointed with the results.

The Facts of Broadband Life

There is a reason rural areas are underserved or unserved. America’s broadband providers are primarily for-profit, investor-owned companies. They are not public servants and they respond first to the interests of their shareholders. Customers might come in second. When a publicly owned utility or co-op is created, in most cases it is the result of years of frustration trying to get a commercial provider to serve a rural or high cost area. Public projects are usually designed to serve almost everyone, even though it will likely take years for construction costs to be recovered. Investor-owned companies are not nearly as patient, and usually demand a Return On Investment formula that offers a much shorter window to recover costs. For broadband, adequately populated areas that can be reached affordably and attract enough new customers to recover the initial investment will get service, while those areas that cannot are left behind. The two populations most likely to fail the ROI test are the urban poor that may not be able to afford to subscribe and rural residents a company claims it cannot afford to serve. Many early cable TV franchise agreements insisted on ROI formulas that allowed companies only to skip areas with inadequate population density, not inadequate income, which explains why cable service is available in even the poorest city neighborhoods, while a wealthy resident in a rural area goes unserved.

Today, most cable and phone companies install fiber optic infrastructure most commonly in new housing developments or previously unwired business parks, while allowing existing copper wire infrastructure already in place elsewhere to remain in service. Some companies, including AT&T and Verizon, have made an effort in some areas to replace copper infrastructure with fiber optics, but in most cases, their rural service areas remain served by copper wiring installed decades ago. As a result, most rural residents end up with DSL internet from the phone company, often at speeds of 5 Mbps or less, or no internet service at all. Neither of these phone companies, much less independent telcos like CenturyLink and Frontier, have shown much interest in scrapping copper wiring for fiber optics in rural service areas. There is simply no economic case that shareholders will accept for costly upgrades that will deliver little, if any, short-term benefits to a company’s bottom line. That reality has led some communities to try incentivizing commercial providers to make an investment anyway, usually with a package of tax breaks and cost sharing. But many communities have achieved better results even faster by launching their own fiber broadband services that the public can access.

Some states with large rural areas have recognized that solving the rural broadband problem will be costly — almost always more costly than first thought. Such projects often take longer than one hoped, and will require some form of taxpayer matching funds, municipal bonds, public buy-in, or a miraculous sudden investment from a generous cable or phone company. In states with municipal broadband bans, like North Carolina, politicians who support such restrictions believe the cable and phone companies will spontaneously solve the rural internet problem on their own. Such beliefs have stalled rural broadband improvements in many of the states ensnared by such laws, usually tailored to protect a duopoly of the same phone and cable companies that have historically refused to offer adequate broadband service to their rural customers.

Challenges for North Carolina

(Courtesy: North Carolina League of Municipalities – Click image for more information)

North Carolina is a growing state, so a small part of the rural broadband problem may work itself out as population densities increase to a level that crosses that critical ROI threshold. But most rural communities will be waiting years for that to happen. Intransigent phone and cable companies are unlikely to respond positively to local officials seeking better service if it requires a substantial investment. As industry lobbyists will tell you, it is not the job of government to dictate the services of privately owned companies. The Republican majority in North Carolina’s legislature underlines that principle regularly in the form of legislation that reduces regulation and oversight. Many, but not all of those Republicans have also taken a strong strand against the idea of municipalities stepping up to resolve their local broadband challenges by working around problematic cable and phone companies. The ideology that government should never be in the business of competing against private businesses usually takes precedence.

Almost a decade ago, the cable and phone companies of North Carolina made three failed attempts to enshrine this principle in a new statewide law that would limit municipal broadband encroachment to such an extent it made future projects unviable. They succeeded in passing a law on their fourth attempt in 2011, the same year Republicans took control in the state legislature.

Today, Republicans still control the legislature with a Democratic governor providing some checks and balances. Why is this important? Because for North Carolina to achieve its goal, it will realistically need a combination of bipartisan support for rural broadband funding and an end to the municipal broadband ban.

Where is the money?

Although North Carolina wants to be America’s first “gigabit” state, New York is the first to at least claim full broadband coverage across the entire state. That did not and could not happen without a multi-year spending program. Recently, North Carolina’s Department of Information Technology launched a $10 million GREAT Grant program to provide last-mile connectivity to the most economically distressed counties in the state. While a noble effort, and one no doubt limited by the availability of funds to spend on broadband expansion, it is a drop in a bucket of water thrown into a barely filled pool.

To put this problem in better context, New York’s goal of full broadband coverage (which in our view remains incomplete) required not only $500 million acquired from settlement proceeds won by the state after suing Wall Street banks for causing the Great Recession, but another $170 million in federal broadband expansion funds that were expected to be forfeited because Verizon — the state’s largest phone company — was not interested in the money or upgrading their DSL service upstate.

Big Money: New York’s rural broadband funding initiative spent hundreds of millions to attack the rural broadband problem. Gov. Andrew Cuomo outlines funding for just one of several rounds of broadband funding.

Last year, Gov. Andrew Cuomo detailed success for his Broadband for All program by pointing out the state spent $670 million to upgrade or introduce broadband service to 2.42 million locations in rural New York, giving the state 99.9% coverage. That amounts to an average grant of $277 per household or business. In turn, award recipients — largely incumbent phone and cable companies, had to commit to matching private investments. For that state money, the provider had to typically offer at least 100 Mbps service, except in the most rural parts of the state, where a lower speed was acceptable.

North Carolina has 585,000 underserved or unserved locations. Just by using New York’s average $277 grant, North Carolina will have to spend approximately $202 million with similar matching funds from private companies to reach those locations. In fact, it is assuredly more than that because North Carolina’s goal is gigabit speed, not 100 Mbps. Also, New York declared ‘mission accomplished’ while stranding tens of thousands of expensive or difficult to reach residents with subsidized satellite internet access. That offers nothing close to gigabit speed. A more realistic figure for North Carolina in 2019 could be as high as $250-300 million in taxpayer dollars — combined with similar private matching funds to convince AT&T, Charter, CenturyLink and others that the time is right to expand into more rural areas. But as New York discovered, there will be areas in the state no company will bid to serve because the money provided is inadequate.

If the thought of handing over tax dollars to big phone and cable companies bothers you, the alternative is helping communities start and run their own networks in the public interest. Except private providers routinely retaliate with well-funded campaigns of fear, uncertainty and doubt over those projects, and they become political footballs to everyone except their customers, who generally appreciate the service and local accountability.

If North Carolina’s state government relies on a series of $10 million appropriations for grants, it will likely take at least 20 years to wire the state. Stop the Cap! agrees with the goals North Carolina has set to deliver ubiquitous, gigabit-fast broadband. But those goals will be difficult to reach in the present political climate. Republicans in the state legislature approved reductions in the corporate income tax rate to 2.5 percent, down from 3 percent last year, and the personal income tax rate drops to 5.25 percent from 5.499 percent. North Carolina’s latest budget sets aside $13.8 billion for education, $3.8 billion for Medicaid, $3 billion in new debt for road maintenance, and $31 million in grants to attract the film industry to shoot their projects in the state.

It is likely any appropriation significant enough to actually deliver on the commitment to provide total broadband coverage will have to be spread out over several years, unless another funding mechanism can be identified. That assumes the Republicans in the state legislature will be receptive to the idea, which remains an open question.

Windstream Dumps Its EarthLink ISP Business

Windstream announced this week it was ditching EarthLink, the internet service provider it acquired in 2017 that has been around since the days of dial-up, in a $330 million cash deal.

Trive Capital of Dallas, Tex., is the new owner of the consumer-facing ISP, which today primarily serves customers over some cable broadband and DSL providers.

EarthLink launched in 1994, when almost everyone accessed online services over dial-up telephone modem connections using providers like AOL, CompuServe, Prodigy, and MSN. EarthLink rode the Dot.Com boom and secured funding to build its own multi-city, dial-in access network, allowing customers to reach the service over local, toll-free access numbers. This allowed EarthLink to be among the first ISPs in the country to offer unlimited, flat rate access for $19.95 a month at a time when some other providers charged in excess of $12 an hour during the business day to use their services.

EarthLink grew to become America’s second largest ISP, reaching 4.4 million subscribers in mid-2001 — still dwarfed by 25 million AOL customers, but well-respected for its wide-reaching availability over more than 1,700 local dial-in numbers around the country. But 2001 was as good as it would get at EarthLink.

The newly inaugurated administration of George W. Bush and its deregulatory-minded FCC Chairman Michael Powell quickly threatened to derail EarthLink’s success.

As EarthLink’s balance sheet increasingly exposed the high wholesale cost of the company’s growing number of DSL and cable internet customers, executives calmed Wall Street with predictions that EarthLink’s wholesale costs would drop as networks matured and the costs to deploy DSL and cable internet declined. The phone and cable industry had other ideas.

Under intense lobbying by the Baby Bell phone companies, the FCC voted in 2003 to eliminate a requirement that forced phone companies to allow competitors fair and reasonable access to dial-up infrastructure and networks. The cable industry had never lived under similar guaranteed access rules, a point frequently made by telephone company lobbyists seeking to repeal the guaranteed “unbundled” access requirements. Lobbyists (and industry funded researchers) also claimed that by allowing competitors open access to their networks, it created a hostile climate for investors, deterring phone companies from moving forward on plans to scrap existing copper wire networks and invest in nationwide fiber to the home service instead.

Both the FCC (and later the courts) found the industry’s argument compelling. EarthLink protested the move was anti-competitive and could give the phone and cable company an effective duopoly in the business of selling internet access. Others argued the industry’s commitments to build out fiber networks came with no guarantees. FCC Commissioner Michael Copps warned that Americans would pay the price for the FCC’s unbundling decision:

I am troubled that we are undermining competition, particularly in the broadband market, by limiting — on a nationwide basis in all markets for all customers – competitors’ access to broadband loop facilities whenever an incumbent deploys a mixed fiber/copper loop. That means that as incumbents deploy fiber anywhere in their loop plant — a step carriers have been taking in any event over the past years to reduce operating expenses — they are relieved of the unbundling obligations that Congress imposed to ensure adequate competition in the local market.

[…] I fear that this decision may well result in higher prices for consumers and put us on the road to re-monopolization of the local broadband market.

Blinky, EarthLink’s mascot, was featured in instructional videos introducing customers to “the World Wide Web” and how to buy books on Amazon.com

In the end, the industry got what it wanted during the Bush Administration, and was also able to effectively wiggle out of its prior commitments to scrap copper networks in favor of fiber optics. Phone companies were also able to raise wholesale prices on providers like EarthLink. In 2002, EarthLink paid about $35 per month to phone companies for each subscriber’s DSL connection, for which the ISP charged customers $49 a month. Financial reports quickly showed EarthLink started losing money on each DSL customer, because it could keep only about $14 a month for itself. The cable industry was slightly more forgiving, if companies voluntarily allowed EarthLink on their emerging cable broadband networks. In general, cable operators charged EarthLink $30 a month for each connection, which gave EarthLink about the same revenue it earned from its dial-up business.

An even bigger threat to EarthLink’s future came when phone and cable companies got into the business of selling internet access as well, usually undercutting the prices of competitors like EarthLink with promotional rates and bundled service discounts.

EarthLink’s subscriber numbers dropped quickly as DSL and cable internet became more prevalent, and customers defected to their providers’ own internet access plans. Attempts by EarthLink to diversify its business by offering security software, web hosting, email, and other services had limited success in the residential marketplace.

By the mid-2010s, EarthLink primarily existed as a little-known alternative for some cable broadband customers and DSL users. But beyond initial promotional pricing, there was no compelling reason for a customer to sign up, given there was usually little or no difference between the prices charged by EarthLink and those charged by the phone or cable company for its own service. EarthLink’s competitors, including AOL and MSN, also saw subscriber numbers start to drop for similar reasons, especially when their customers dropped dial-up access in favor of broadband connections. This was strong evidence that companies that do not own their own networks were now at a strong competitive disadvantage, held captive by unregulated wholesale pricing and no incentive for phone or cable companies to treat them fairly.

In 2017, Windstream paid $1.1 billion for EarthLink, primarily to consolidate fiber-optic network assets and improve its business services segment. After more than a year, Windstream realized EarthLink’s residential ISP service had little relevance to them.

“People paid $5 to $10 a month for email,” Windstream spokesman Chris King told Bloomberg News. “It was not a strategic asset for us.”

With subscriber numbers still dropping to around 600,000 today, Windstream decided the time was right to sell.

“This transaction enables us to divest a non-core segment and focus exclusively on our two largest business units. In addition, it improves our credit profile and metrics in 2019 and beyond,” said Tony Thomas, president and CEO of Windstream.

An EarthLink television ad from 2004. (1:00)

Sinclair’s Lawyer Says Ajit Pai Froze Sinclair Out in All-But-Dead Sinclair-Tribune Merger

After the inspector general of the Federal Communications Commission opened an investigation into FCC Chairman Ajit Pai’s close relationship with executives at Sinclair Broadcasting, Pai stopped returning Sinclair’s phone calls and refused any further meetings with America’s largest local TV station owner, at least until last Tuesday when Pai called Sinclair’s general counsel to say its multi-billion dollar merger with Tribune Media was in trouble.

The revelation Pai effectively froze out Sinclair while under investigation came in an ex parte communication disclosed by FCC Commissioner Jessica Rosenworcel’s office late last week.

“I realize that you appear to have been unwilling to discuss this matter for the past several months (and for that reason our counsel and Tribune’s have been reaching out everyone at the FCC but you),” Sinclair general counsel Barry Faber wrote in an email to Ajit Pai the morning after the phone call.

Based on the email, it is clear Mr. Pai personally called Mr. Faber on Tuesday evening to report the FCC planned to refer Sinclair’s buyout of multiple Tribune Media TV stations, including WGN in Chicago, to an independent administrative law judge who would pursue a hearing — a procedure that usually signals the death of a proposed merger or acquisition. The courtesy call was one last consideration to Sinclair by Mr. Pai, giving executives an early warning that would allow them to quietly withdraw the deal as a face-saving measure before the FCC publicly pulled the rug out the next day. The call came as an apparent shock to executives at Sinclair and Tribune, who had repeatedly expressed confidence the transaction would meet approval from the Republican majority at the FCC — one led by Pai, who personally proposed several rule changes that made the Sinclair transaction possible.

Faber told Pai in response the two companies could not agree to withdraw the deal “in the brief period of time provided to us.” Instead, Faber begged Pai to give the companies more time to reassure the FCC and then offered to withdraw the controversial sweetheart sales of TV stations in Chicago, Dallas, and Houston a short time later. The buyers all had long-standing, close ties to the family that founded Sinclair and were suspected of buying the stations to become Sinclair’s silent partners. Pai refused Faber’s request and went public the next morning with the proposal to refer the matter to an administrative hearing. As of today, the deal is still headed for a hearing, but few expect it will survive long enough to begin the process. But the repercussions are likely to last far longer than that.

Faber

While talking to Faber, it is clear Pai also raised the issue of Sinclair’s possible deception in its merger application and its lack of candor about its plan to divest stations in those three cities.

“I understand that if Sinclair has not been completely truthful and forthcoming with regard to these proposed sales, abandoning them would not eliminate such unacceptable behavior. I point out, however, that as we discussed yesterday no evidence exists that Sinclair has mislead the FCC or been anything other than completely candid with respect to our relationships with the proposed buyers and the terms of the transaction,” Faber wrote. “To designate our transaction for hearing based on the possibility that there may be more to the deals than meets the eyes based on the pricing and other terms that have been disclosed, would be extraordinary and unprecedented.”

Deal critics claim Sinclair’s bold effort to barely disguise the sweetheart deals with well-known business associates of Sinclair’s chairman David Smith was extraordinary and unprecedented as well. Several Wall Street and K Street analysts have expressed concern Sinclair was being exceptionally brazen with the FCC, proposing to spin-off stations to known Sinclair associates at fire sale prices, with contract clauses allowing Sinclair to program the stations ‘for the owner’ and also have the right to buy the stations back at their original fire sale price, assuming deregulation of station ownership caps continued moving forward. Sinclair is no stranger to political controversy, generating a full-scale advertiser boycott and Wall Street blowback over mandatory political programming aired on its stations during the 2004 U.S. presidential election. Recently Sinclair’s mandatory editorials and news stories have received even more scrutiny in the media, and have generated a lot of negative press for the Baltimore-based TV station owner.

Pai

Some on Wall Street are reportedly growing tired of Sinclair management’s political agendas getting in the way of potential profits, and this latest high-profile incident is likely to further strengthen that perception. Pai’s announcement that the merger deal smacked of a “lack of candor” and “misrepresentation,” raise questions about the Sinclair’s honesty and character, something that could threaten its ability to keep or renew its stations’ licenses. Long standing FCC rules state a license can be revoked if an owner lies to the Commission or engages in unethical or criminal behavior.

The FCC rarely forgets about egregious bad conduct. In the 1960s, RKO General, a division of General Tire and Rubber Company, falsely testified to the FCC that its television stations, including KHJ Los Angeles, WNAC Boston, and WOR New York did not engage in “reciprocal trade practices” — forcing General Tire’s vendors to buy advertising time on RKO stations if they wanted their contracts with the tire company renewed. In 1969, the FCC had enough evidence to prove RKO officials had lied to the Commission and were brazenly violating FCC rules. In 1975, RKO was once again hauled before the FCC and questioned about allegations General Tire was bribing foreign officials, had a secret slush fund to finance campaign contributions, and misappropriated revenue from overseas operations to cook its books.

Five years later in 1980, the FCC stunned the broadcasting industry by canceling the license of RKO’s Boston station — WNAC, declaring RKO “lacked the requisite character” to hold a FCC license because it openly deceived the FCC by withholding evidence, covered up improper dealings, and maintained a “persistent lack of candor” about its business practices and behavior. The FCC also moved to cancel licenses for KHJ in Los Angeles and WOR in New York. RKO held on for a few more years by appealing the FCC’s decision in various courts. It eventually sold most of its TV stations by the mid-1980s. But by then, FCC administrative law judge Ed Kuhlmann documented even more corruption by RKO, calling the company’s conduct the worst case of dishonesty in FCC history. RKO systematically misled advertisers about station ratings, fraudulently billed clients, destroyed audit reports demanded by the FCC, and filed several false financial statements with the FCC. Kuhlmann wanted RKO out of the broadcasting business for good, ordering RKO to surrender licenses for the two remaining TV stations it still owned in 1987, as well as 12 radio stations.

Sinclair’s critics are likely to invoke RKO General in challenging Sinclair license renewals in the future, noting a similar lack of candor and misrepresentation.

With the Sinclair-Tribune merger deal now swirling in the bowl, shareholders may be the ultimate judge, jury, and executioner, at least at Tribune Media. Sports Fan Coalition and Public Knowledge took the opportunity to remind Tribune’s board of directors it just blew a $3.9 billion deal by allowing Sinclair to manage the transaction with apparent dishonesty and chutzpah:

The FCC has unanimously determined that Sinclair may have “engaged in misrepresentation and/or lack of candor in its applications with the Commission,” in possible violation of the Communications Act and FCC rules. Thus, because Sinclair failed to satisfy its commitments under the merger agreement, Tribune can and should invoke its termination right under the merger agreement. Such termination would not trigger the liquidated damages provisions of the merger agreement.

[…] “Either take immediate action to terminate your agreements for the sale of your company to Sinclair Broadcast Group, or resign as directors of Tribune Media.”

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