Outside of a handful of consumer groups, just about everyone — including one “anti-tax” Republican on the Federal Communications Commission — favors the imposition of a new broadband tax on your Internet connection.

It is all a part of the Federal Communications Commission’s effort to transform a badly-outdated Universal Service Fund (USF) into the Connect America Fund (CAF) — an ongoing project to help defray the costs of wiring rural America for broadband service.

Phone and cable companies are on board. So are several state regulators. Even search engine giant Google favors applying a surcharge to consumer bills to retire a funding formula currently dependent on declining landline phone revenue.

In April, the FCC began accepting comments on its proposal to expand the number of telecommunications services subject to the surcharge, currently found on telephone bills. The FCC has proposed a number of possible taxes including the new broadband fee, a tax on text messages, or moving to a flat fee for each phone line instead of a variable tax rate (currently around 18%).

Virtually every major telecommunications company provisionally supports the new tax, for at least three reasons:

1. Most can benefit from future CAF funding opportunities, dipping into the fund to help subsidize expanding broadband into areas where current “return on private investment”-standards make deployment unprofitable;
2. Consumers will pay the tax, not providers;
3. The companies are confident their fierce lobbying will get the FCC to drop a proposed requirement the fee be included in the advertised price of broadband service. They want the fee broken out separately on customer bills, in part because they fear higher-advertised-prices for broadband will discourage customers from buying.

Google also supports the new tax because they profit from a larger broadband audience accessing their web pages and services. If the FCC were to tax online services, as Google fears, it would be bad news.

“Saddling these offerings with new, direct USF contribution obligations is likely to restrict innovative options for all communications consumers and cause immediate and lasting harm to the users, pioneers, and innovators of Internet-based services,” Google argued.

The Fiber to the Home Council, another industry group, was disturbed by one FCC proposal that would levy an increasingly higher percentage of the new tax on customers with progressively faster high speed connections. Although the Council agreed with many consumer groups that any new broadband tax would discourage broadband adoption, it was alarmed with the proposition of taxing consumers the most for selecting the highest speed broadband tiers.

“The Commission should not impose a fee that increases with greater performance capabilities (capacity/speed) because that would discourage plant and service upgrades and hinder the expansion of critically important high-speed broadband services,” the Council wrote in its comments to the FCC.

The Fiber to the Home Council is concerned about one proposal that would levy increasingly higher taxes the higher your connection speed.

With 19 million Americans currently unable to obtain broadband service, adding a new tax on existing broadband customers’ bills would bring in millions that the CAF will ultimately award to rural landline providers and cable operators to encourage them to expand their broadband networks.

But consumer groups including Free Press worry the new tax would rob Peter to pay Paul, and further discourage poor Americans who can’t afford current broadband prices from ever signing up for service.

“In other words, as the Commission reforms the overall USF system in the name of greater broadband adoption, particularly among rural, poor and elderly consumers, assessing [a broadband tax] could lead to an overall lower level of broadband adoption, despite the availability of new broadband subsidies,” writes Free Press research director S. Derek Turner in an official filing with the FCC.

Free Press called the current comments from industry players largely as expected.

“Industry commenters simply offered self-serving proposals that will ensure that their (but not necessarily their customers’) contribution burdens are as low as possible,” Turner wrote. “We instead are strongly encouraging the Commission to conduct actual cost-benefit analysis prior to adopting rule changes that could have massive unintended consequences for consumers.”

Thinks a broadband tax will reduce broadband adoption.

Outside of a small handful of remarks from end users, the overwhelming majority of comments received by the FCC are from providers, industry groups, and telecommunications regulators. Almost none come from actual consumers, who will ultimately pay the proposed tax.

Some conservative anti-tax groups have been alarmed by the tax expansion and Republican FCC Commissioner Robert McDowell’s apparent support of it. McDowell issued a statement in April declaring his support for reform of the USF system to broaden the tax to additional telecommunications users:

[…] “To put the importance of contribution reform into perspective, the contribution factor, a type of tax paid by telephone consumers, has risen each year from approximately 5.5 percent in 1998 to almost 18 percent in the first quarter of this year. This trend is unacceptable because it is unsustainable. Furthermore, the cryptic language on consumers’ phone bills, combined with the skyrocketing “tax” rate, has produced a new form of “bill shock.” We must tame this wild automatic tax increase as soon as possible.

[…] “Controversy, however, should not deter us from lowering the tax rate while broadening the base according to the authority granted to us by Congress. The current pool of contributors is shrinking. It must be expanded, but we must do so only within our statutory authority while keeping in mind the international implications of our actions.”

Dish Network is planning to introduce 5Mbps nationwide satellite broadband service after its partner company EchoStar successfully launched the satellite that will host the new service.

Bloomberg News reports Dish will introduce the service in late September or October this year and intends to market it in areas where DSL or cable broadband has been spotty or unavailable.

Dish’s broadband service will use its new EchoStar 17 satellite launched in July. The satellite can technically support download speeds up to 15Mbps, but Dish wants to start with slower speeds to maximize the number of potential customers the satellite can accommodate, which the company estimates can be as high as two million.

With an estimated 8-10 million Americans currently bypassed by broadband, Dish may have little trouble establishing a substantial customer base, if the service works as advertised. Past satellite broadband ventures have traditionally offered slow speeds and draconian “fair usage policies” which strictly limit how much customers can use the service.  The services are not cheap either.

EchoStar’s vice president of investor relations Deepak Dutt said the newest generation of satellite broadband services offer much faster service and higher capacity by an order of magnitude. But average usage per subscriber has also risen, providing a challenge for satellite broadband providers that may lack the capacity to sustain high bandwidth content, especially streaming video.

Dish already offers up to 12Mbps satellite broadband through a marketing partnership with Carlsbad, Calif.-based ViaSat, Inc. But ViaSat’s service is limited to certain geographic regions in the United States. Dish insiders say their service with EchoStar will compliment, not replace their deal with ViaSat, and will expand coverage nationwide.

The combination of broadband and satellite television may make it possible for Dish to sell new bundled packages that can compete with phone and cable companies. Dish also claims to be waiting for Federal Communications Commission approval to use its wireless spectrum to offer mobile Internet and phone service, which could also be included in a future bundled offer.

Chickamauga Telephone Cooperative office (Courtesy: WRCB-Chattanooga)

AT&T and some of Georgia’s cable operators are under attack by telephone customers outraged to learn of a plan to force two independent phone companies to raise their rates because some think they charge too little.

Residents packed the Chickamauga Civic Center Monday night to loudly protest an effort by AT&T and the Georgia Cable TV Association to force both Chickmauga and Ringgold Telephone to raise their rates, in some cases by 100 percent.

“We’re here today because another company has complained about Chickamauga Telephone rates [claiming] that they are too low,” said Chickamauga city superintendent of schools Melody Day. “Maybe it’s just that their rates are too high.”

Retirees complained the rate increases demanded by AT&T and cable operators were unaffordable, with residential customers facing hikes of 42% for phone service. AT&T claims both phone companies are subsidizing their rates with money from the Universal Service Fund to an artificially low level. AT&T rates are considerably higher, and now AT&T wants the two independents to raise their rates accordingly.

If AT&T has their way with the Georgia Public Service Commission, Chickamauga residential customers currently paying $13.30 per month will be billed $18.83 per month for basic phone service with a limited local calling area. Business customer rates would double from $20.40 to $40.80 per month.

Local businesses and politicians are complaining loudly about the proposal, and want AT&T to mind its own business.

AT&T does not directly compete with landline service in the area, considered a suburb of nearby Chattanooga, Tenn. But cable operators do compete and AT&T sells cell phone service locally.

“It’s important for the Public Service Commission to be able to hear from our constituents around the state,” said PSC Chairman Tim Echols. “And we’re glad people packed the auditorium tonight.”

State regulators told the Times Free Press the Commission was unlikely to approve the kind of rate increase being demanded by AT&T. But they may approve a cut in state subsidies received by Chickamauga and Ringgold telephone companies, which would likely force both to raise rates anyway.

Chickamauga city manager John Culpepper said the city alone is looking at paying $200 more per month — money that will ultimately fall on the taxpayer. Culpepper says independent small businesses are already having a hard time competing with corporate America.

“When you double their rates, it is another financial impact.”

[flv width=”480″ height=”380″]http://www.phillipdampier.com/video/WRCB Chattanooga Walker County phone customers fighting rate increase 8-13-12.mp4[/flv]

WRCB in Chattanooga reports on the unrest among phone customers in Chickamauga, Ga. over a plan by AT&T and Georgia cable companies to get regulators to force their local telephone cooperative to increase rates by as much as double. (4 minutes)

Greenwich Village business owner Louis Wintermeyer has spent the last three months without phone or broadband service from Verizon Communications.

“It is hard to believe it has gone on this long,” Wintermeyer told the New York Post. “You feel like you’re in Bangladesh here. I mean we’re in the West Village!”

Across Manhattan, and well into upstate New York, Verizon customers who start experiencing landline problems often keep experiencing them for weeks or months on end.

Wintermeyer couldn’t wait that long — he relocated his car-export company to his Rockland County home. Another Verizon customer in the same building — the Darling advertising agency, experienced intermittent outages adding up to 10 weeks of no service since February.

“We really sounded like amateurs,” Jeroen Bours, president of the Darling advertising agency told the Post. “We would be in a conference call, and all of a sudden the call would go. It just doesn’t really make a good impression.”

In the Adirondack hamlet of Wanakena, when the rain arrives, Verizon service leaves a lot to be desired.

One person’s phone may be working but the one next door will be completely out of service or crackly at best, according to local residents.

“It’s almost comical,” Ranger school director Christopher L. Westbrook told the Watertown Daily Times. “It’s so bizarre because some phones will be working while others are not.”

[flv]http://www.phillipdampier.com/video/WWNY Watertown Phone Situation Improving Officials Say 8-3-12.mp4[/flv]

A fiber optic line cut near Cicero, N.Y. in early August disrupted phone and cellular service from Verizon across the North Country. WWNY in Watertown covers the event.  (1 minute)

One Adirondack Park Agency commissioner who lives in the area says he has been without a phone 15 times in the last two months. Unfortunately for North Country residents, cell phone service is often not an option, because carriers don’t provide reliable wireless service in the region.

Local businesses cannot process credit card transactions, broadband service goes down, and a handful of privately-owned pay phones out of service for months have been abandoned by their independent owner because of the ongoing service problems.

Verizon repair crews come and go, but affected customers report a real reluctance by Verizon technicians to complete repairs once and for all.

“The permanent fix is not happening,” says Angie K. Oliver, owner of the Wanakena General Store.

Bours said one Verizon technician told him the company no longer cares about its older copper wire landline business. Rural residents upstate sense the company has little interest spending money on deteriorating infrastructure.

Some Wanakena residents suspect Verizon has thrown in the towel in St. Lawrence and Franklin counties, where independent Nicholville Telephone subsidiary Slic Network Solutions is constructing over 800 miles of fiber optic cable and operates a fiber to the home broadband and phone service.

[flv]http://www.phillipdampier.com/video/WWNY Watertown Lewis County Phone Service Restored 8-20-11.mp4[/flv]

Last summer, Lewis County suffered a similar widespread phone service outage that left businesses and homes without service for days.  WWNY says Barnes Corners was hardest hit.  (1 minute) 

Verizon spokesman John J. Bonomo blamed lightning strikes for the problems in Wanakena, but said the cable serving the area was intact and should not be responsible for service outages.

Gray

Near Syracuse University, some businesses and residents were without phone service for nearly two weeks in June.

The largest outage began when more than 150 customers around SU lost service after a storm. More than a week later, nearly two dozen customers were still without service, including the 4,000 member U.S. Institute for Theater Technology.

A damaged underground phone cable was deemed responsible, but repairs were slow.

Earlier this month, Massena town supervisor Joseph Gray fired off a letter to the deputy Secretary of State after a major Verizon line north of Syracuse was damaged, cutting off landline and cell phone service throughout Jefferson and St. Lawrence counties.

“I would have called your office to speak with you directly, but I couldn’t because our telephone service was unavailable,” Gray wrote. “Since I became supervisor of the town of Massena just over two and a half years ago, on at least three different occasions telecommunications in the entire North Country has been thrown into chaos because a Verizon fiber optic cable was cut 150 miles from here. Many of us found our emergency services, business, residential, and cellular telephone service interrupted, not to mention disabled credit card machines, facsimile machines and Internet service in some cases.”

Gray criticized the Public Service Commission for allowing Verizon to operate without service redundancy in the state, providing backup facilities if a fiber cut occurs.

“As a result, the Public Service Commission (which perhaps should be given a different name if my experiences with them is typical), has done nothing to address this dangerous situation and, more incredibly, appears unwilling to acknowledge that the problem exists,” Gray said.

Attorney General Eric Schneiderman blasted Verizon’s poor landline service in a petition sent to the New York State Public Service Commission. Schneiderman called Verizon’s service unacceptable in New York, with customers forced to wait inordinate periods to get service restored.

“Verizon’s management has demonstrated that it is unwilling to compete to retain its wireline customer base, and instead is entirely focused on expanding its wireless business affiliate,” said Schneiderman’s office.

Schneiderman’s office filed evidence in July that Verizon was undercutting its landline business in New York and diverting money for other purposes:

• Verizon’s claim it had spent more than $1 billion in investments to its landline network was misleading: Roughly three-quarters of the money was actually spent on transport facilities to serve wireless cell sites and ongoing spending on FiOS in areas already committed to get the fiber-to-the-home service;
• Verizon investment in landlines has declined even faster than its line losses. The dollars per access line budgeted for 2012 is one-third less than the investment for the 2007-2009 period;
• In just a five month period, 19.5% of the company’s 4.3 million customer lines in New York required repair. This means every Verizon customer will need an average of one repair every five years;
• Verizon’s complaint rate with the PSC has exceeded the PSC’s own limit for good service every month since June 2010. Most recently, Verizon exceeded the limit by more than double the threshold;
• Verizon’s agreement with the Commission establishes two classes of customers: “core” customers (8%) that qualify for enhanced repair service because they are elderly and/or have medical problems and non-core customers (virtually everyone else). The Commission only enforces service standards and repair lapses with “core” customers, which are required to have out of service lines restored within 24 hours 80% of the time. Verizon is free to delay other repairs indefinitely without consequence.
• The PSC has already fined Verizon $400,000 earlier this year for poor service from October-December 2011.

[flv]http://www.phillipdampier.com/video/WWNY Watertown Gray Phone Disruptions Perilous Flaw 8-7-12.mp4[/flv]

WWNY talks with Massena town supervisor Joseph Gray, who has launched a campaign to force Verizon to develop a plan to better handle outages in northern New York. (2 minutes)

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

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

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

Today: Frontier — “Rightsizing” Our Broadband Revenue in Barely-Competitive Markets, Even When It Costs Us Customers

“We have been very disciplined with our [data] pricing and really trying to make sure that we are moving the prices up in a right direction and looking at customers who are paying way below where they should be,” Donald R. Shassian, chief financial officer and executive vice president of Frontier Communications told investors on a conference call earlier this month. “They are not a valued customer. If we can’t get them up, we are sort of letting them disconnect off, if you would, and it’s enabling us to be more disciplined.”

That “direction” has meant higher bills for some long-standing customers that suddenly lost discounts or service credits. One common example is Frontier’s mandatory broadband modem rental fee, increasingly turning up on customer bills even though they own their own equipment or had previously arranged a fee waiver. Ex-Verizon customers were particularly hard hit when Frontier switched to its own billing platform. Just about every customer has also been impacted by Frontier’s “junk fees,” including company surcharges that effectively raise the price of the service.

As a result of higher pricing and dissatisfaction with the quality of service, some customers have disconnected, and the company recently reported second quarter profits were down 44%, offset by slightly higher earnings from higher bills.

The New Frontier

Frontier Communications has enormously expanded its reach over the past few years. Frontier’s original “legacy” service areas were dwarfed in 2010 by the company’s acquisition of 4.8 million landlines from Verizon Communications.

Frontier’s Combined Service Map — Areas in red are “legacy” Frontier service areas. Those in blue were acquired in 2010 from Verizon. (click to enlarge)

Frontier roughly tripled in size as a result, and the huge spike in customers delivered four straight quarters of triple-digit revenue growth. But the transition for ex-Verizon customers has not been easy. Customers endured billing errors, service plan confusion, and service quality issues as Frontier got up to speed managing Verizon’s landline network. A significant number of those customers have had enough and are switching to other providers.

West Virginia is the best place to study the contrast between Frontier’s failures and successes. A large number of service problems and lengthy outages plagued the state after Frontier took charge of a landline network Verizon treated as an afterthought. Over at least a decade, Verizon allowed its landline network to deteriorate to abysmal condition in several areas of the state. Little was invested to upgrade service, and Verizon ultimately left West Virginia with one of the lowest national broadband service penetration rates — about 60 percent.

Verizon’s priorities were elsewhere: spend millions on FiOS fiber upgrades in larger, urban markets while letting rural landline networks stagnate. Eventually, Verizon’s management team decided it was no longer worth hanging on to these low priority service areas and began selling them off. FairPoint Communications acquired Verizon customers in northern New England and Frontier bought mostly rural midwestern and western territories long struck from Verizon’s priority list.

Wilderotter

Frontier’s key argument for acquiring Verizon landlines was that the company could bank on deploying broadband to a much larger percentage of customers than Verizon ever bothered to serve.

Frontier places a very high priority on broadband, because the company can significantly boost the average revenue it earns from each customer by providing the service. With Frontier often the only home broadband choice around in its most rural markets, the company can charge whatever it wants for DSL service, tempered only by how much customers can afford to pay. Broadband is also a proven customer-keeper, an important consideration for any company facing ongoing losses from customers dumping landlines for cell phones.

Since its acquisition, Frontier has been aggressively deploying rural broadband in the former Verizon territories — typically the cheapest form it can deliver — 1-3Mbps ADSL service. Frontier considers its legacy service areas already well-covered, claiming around 93 percent of customers can already subscribe to Frontier DSL.

In states like West Virginia, the fact anyone is supplying anything resembling broadband has been well-received by those who have never had the service before. But where competition exists, Frontier has been losing ground (and customers) as cable competitors provide more consistent, higher speeds and quality of service.

The frustration is especially acute in the Mountain State. Steve Andrews, a Beckley resident complained, “This company’s idea of broadband access is up to 3Mbps DSL while nearby states like Virginia and Pennsylvania are getting fiber or cable broadband speeds ten times faster.” Andrews added that on most days his Frontier-provided broadband provides only around 800kbps, not the advertised 3Mbps.

Frontier Admits It Uses Government (Your) Money to Expand Broadband Where It Would Have Expanded Service on Its Own… Eventually

Frontier Communications was by far the most enthusiastic participant in the Federal Communications Commission’s Connect America Fund (CAF). This subsidy program currently covers $775 of the cost to extend broadband service to a currently unserved customer. Frontier agreed to accept nearly $72 million from the program, which commits the company to offering at least 4Mbps broadband service to an additional 92,877 homes and businesses around the country.

But Maggie Wilderotter, CEO of Frontier Communications, admitted Frontier would have eventually spent its own money to extend service to those rural customers without a subsidy:

“Get broadband out faster to a bunch of customers that we would have built anyway, at some point in time. And it also accomplishes the objectives of using the funds that are available from the FCC. We actually could have taken more money…. So we felt good about it. We totally understand why the other carriers made the decisions they made because we didn’t — we’re not building anything on our legacy markets. So it’s the money. It’s all in the acquired properties where we still had pretty low penetration with enough density to support the parameters that the FCC put in place.”

The fund, paid for by telephone customers nationwide through a surcharge on customer bills, will also subsidize a lucrative business opportunity for Frontier, according to Wilderotter.

“These are unserved locations that really are not competitive at all,” Wilderotter told investors. “So there’s no competition in those areas. So we’re pretty excited about it. We think that this is going to be good for Frontier and good overall.”

More than $38 million of the total broadband subsidy Frontier received will be spent in 30 counties in just one state: Wisconsin. Among other locations where Frontier will spend the money:

• 1 Arizona county
• 2 California counties
• 1 Florida county
• 5 Idaho counties
• 25 Illinois counties
• 2 Indiana counties
• 26 Michigan counties
• 2 Nevada counties
• 8 New York counties
• 1 North Carolina county
• 8 Ohio counties
• 5 Oregon counties
• 2 Tennessee counties
• 7 Washington counties
• 25 West Virginia counties

Trying to Hang Onto Customers Frontier Already Has… With Serious Speed Boosts

Frontier’s speed plans through 2013.

One of the loudest and most consistent complaints Frontier broadband customers mention is the slow speeds they receive from Frontier’s DSL. Frontier traditionally offers 1-3Mbps in rural areas, up to 10Mbps in urban areas. But in fact many customers report their speeds are much lower than advertised. Data from the FCC’s national broadband speed measurement program bears this out. Frontier was the only measured provider in the United States that has been losing ground in promised broadband speed and performance.

Frontier officials announced earlier this month the company was shifting some of its capital investments away from broadband expansion towards improving the performance of its broadband service for current customers.

In highly competitive, urban markets Frontier will deploy VDSL2 technology which can support significantly faster and more reliable Internet speeds. In more rural markets, bonded ADSL 2+ will deliver speeds of 10Mbps or better to customers currently stuck with around 1-2Mbps speed.

Daniel J. McCarthy, president and chief operating officer:

• We expect our 20Mbps service to move from 28% of residential households today to 42% by year-end and then 52% by the end of 2013;
• The 12Mbps services planned to increase from 33% of homes today to 51% by year-end and 60% by 2013;
• And the 6Mbps service is planned to increase from 57% of homes today to 74% by year-end and 80% by 2013.

The new speeds will not come free of charge. Customers will be marketed speed upgrades for additional monthly fees.

Customers will also discover Frontier has been simplifying its packages and moving away from high-value promotional offers that bundled a free laptop, television, or satellite dish in return for a lengthy contract. Today, the company is emphasizing increasing discounts for customers subscribing to two or more services that include telephone/long distance, broadband, and satellite television.

Speeds Going Up, Employees (and their salaries) Going Down

Finally, Frontier executives told investors they are scouring the company looking for cost savings. They appear to have identified around $100 million worth, a good portion of which will come from employees facing job cuts or salary reductions.

Wilderotter said she is focusing on call center workers, retiree positions, and “tech op” savings.

“We still have some bubble workforce in the call centers that will continue to go away,” Wilderotter told Wall Street. “We have a number of employees, too, that are going to be retiring over these next several months. And our goal is not to replace any of those retirees either.”

One of the best examples of this cost savings, according to unions representing Frontier employees, is the forthcoming closure of an Idaho-based call center in Coeur d’Alene. More than 100 workers, average age 55, will lose their $15-21/hour jobs Sept. 18 while Frontier prepares to leverage cheaper labor in South Carolina.

Frontier’s new call center employees in Myrtle Beach will receive $11 an hour while training, $12/hour after training — with a five year wage freeze. Benefits will be considerably leaner for South Carolina employees as well, according to union officials.