A new report critical of broadband providers’ implementation of usage-based billing and data caps finds providers are not using them to handle traffic congestion, instead implementing them to monetize broadband usage and protect pay television from online video competition.

The New America Foundation and the Open Technology Institute today released its report, “Capping the Nation’s Broadband Future?,” which takes a hard look at the increasingly common practice of limiting subscribers’ broadband usage.

The paper finds that provider arguments for limiting broadband traffic don’t make sense, but do earn more dollars from customers forced to upgrade their service to win a larger monthly usage allowance.

“Although traffic on U.S. broadband networks is increasing at a steady rate, the costs to provide broadband service are also declining, including the cost of Internet connectivity or IP transit as well as equipment and other operational costs,” the reports argues. “The result is that broadband is an incredibly profitable business, particularly for cable ISPs. Tiered pricing and data caps have also become a cash cow for the two largest mobile providers, Verizon and AT&T, who already were making impressive margins on their mobile data service before abandoning unlimited plans.”

The study finds providers are attempting to invent a climate of broadband scarcity, particularly on the nation’s wired networks, to defend the introduction of various forms of Internet Overcharging, including data caps, usage-based billing, and overlimit fees.

The New America Foundation is calling on policymakers to take a more active role in defending online innovation and controlling provider zeal to cap the nation’s broadband future.

The False Argument of Network Congestion

Providers’ tall tales.

The most common defense for usage caps providers put forward is that they curb “excessive use” and impact almost none of their customers. The report points out many of the providers implementing usage caps have left them largely unchanged, despite ongoing usage growth patterns. In 2008, the report notes Comcast measured the average monthly usage of each broadband customer at around 2.5GB. Just four years later that number has quadrupled to 8-10GB. While many customers rely on Comcast’s broadband service for basic e-mail and web browsing, the cable operator has begun to entice customers into utilizing its online video platform, which in certain cases can dramatically eat into a customer’s monthly usage allowance, which remained unchanged until earlier this year.

Many broadband providers are less generous than Comcast, some imposing caps as low as 5GB of usage per month.

“Data caps encourage a climate of scarcity in an increasingly data-driven world,” the report concludes. “Broadband appears to be one of few industries that seek to discourage their customers from consuming more of their product. Thus, even as the economic and engineering rationale for data caps on wireline broadband does not hold up given the declining costs of providing service and rapid technological advancement, the proliferation of data caps is increasing. The trend is driven in large part by a woefully uncompetitive market that allows the nation’s largest providers to generate enormous profits as well as protect legacy business models from new services and innovators.”

The argument that increased usage puts an undeniable burden on providers is untenable when one examines the financial reports of providers.

The study found, for example, Time Warner Cable’s latest 10-K report shows that connectivity costs as a percentage of revenue have decreased by half, from an already modest 1.20% in 2008 to a little over 0.60% in 2011.

In 2012, the company is again exploring ways to introduce usage caps on at least some of its customers, in return for a modest discount.

Upgrade? Spend Less and Charge Customers More Instead!

The report notes cable companies like Time Warner Cable and Comcast, whose networks were originally built for television services and have now been repurposed for broadband as well, are enjoying lucrative profits on
networks that have long been paid off. In fact, Time Warner Cable recently disclosed it earns more than 95 percent in gross margins on its broadband service, with additional rate increases for consumers likely in the near future. The company recently began charging its customers a modem rental fee as well.

Shammo

At these margins, the report concludes selling broadband service to “data hogs” who consume hundreds of gigabytes of traffic per month are still profitable for providers.

As financial reports disclose capital spending on network upgrades continue to fall, operators are instead content imposing usage limits on customers to control traffic growth and further monetize an already enormously-profitable business.

The nation’s largest phone companies also come in for criticism. The report quotes from Stop the Cap!’s coverage of Verizon’s chief financial officer openly admitting it is investing most of its available capital in the highly profitable wireless sector.

“It is clear that in shifting a greater percent of their overall capital expenditures to their wireless segments, Verizon and AT&T are more interested in expanding their dominance in the wireless industry than they are in upgrading DSL or expanding fiber connectivity to provide aggressive competition for residential broadband service,” the report found.

Verizon’s chief financial officer recently made the following statement at an investor relations event:

“The fact of the matter is wireline capital — and I won’t give the number but it’s pretty substantial — is being spent on the wireline side of the house to support wireless growth,” [Verizon CFO Fran Shammo] said. “So the IP backbone, the data transmission, fiber to the cell, that is all on the wireline books but it‖s all being built for the wireless company.”

Wall Street Educates Providers on How to Lead the Way With Data Caps

Although the majority of subscribers loathe usage restrictions on their already-expensive broadband accounts, a vocal group on Wall Street strongly favors them, and routinely browbeats providers on the issue.

Helping educate cable companies how usage caps can protect against cord cutting and further monetize broadband.

The report’s authors discovered some Wall Street banks even invest time and money developing presentations advocating usage caps and consumption billing to protect video revenue. A 2011 Credit Suisse presentation outlined ways usage-based billing can protect cable operators’ video revenues:

“…over the longer term, consumption based billing could reduce the attractiveness of over the top video options (e.g., Netflix and Hulu), as the economic attractiveness of such over the top options could be partially offset by a [broadband] bill that is higher, due to [broadband] overage charges that would be driven by large amounts of data being streamed via a customer’s [broadband] connection.”

Yet most cable operators vehemently deny usage caps and consumption billing are designed to decrease usage or protect video revenue. Credit Suisse and other Wall Street banks and analysts say otherwise, and express little concern over network congestion.

The report finds compelling evidence that data caps have effectively stopped new competitors and online innovation already, noting a Sony executive stated that the company was putting the development of its own online video service on hold, citing Comcast’s monthly usage cap.

The Wireless Cap Shell Game: Caps Protect Scarce Airwaves While Companies Promote More Usage, For a Price

The report also found suggestions of a forthcoming wireless traffic tsunami are greatly exaggerated. AT&T and Verizon Wireless have issued repeated alarmist rhetoric claiming that wireless data’s exponential growth is threatening to overwhelm available network capacity.

But both carriers recently changed pricing models to encourage consumers to bring more devices to their networks, along with suggestions customers upgrade to higher allowance plans to handle the additional traffic generated by those devices. In fact, both AT&T and Verizon Wireless see profitable futures in forthcoming “machine to machine” wireless traffic that will allow cars, appliances and medical devices to communicate over their respective mobile networks. AT&T’s security and home automation system also relies on its own wireless network, offering customers remote access to their homes, chewing up wireless bandwidth as they go.

Despite suggestions from both providers their new wireless data plans would save customers money, it has brought overall increases in the average revenue earned from each subscriber instead.

New York City Mayor Michael Bloomberg has called Verizon’s notification that phone service in lower Manhattan will not be back to normal until late next spring “unacceptable.”

Hurricane Sandy’s storm surge ruined at least 95 percent of Verizon Communications’ landline network in the lower half of Manhattan leaving numerous businesses without phone service with little hope service will be restored this year.

“Their schedule right now says that lower Manhattan is not going to be back up until May,” Bloomberg said in a recent speech.

The mayor is upset with Verizon’s timetable because a number of major buildings in the area cannot be reoccupied by business tenants until telephone service is restored, and Verizon is facing questions about why it will take a half-year to get phone service back up and running to everyone that wants it.

When local cable news channel NY1 asked Verizon how many customers were still without service, a spokesman told the reporter it did not know, adding some customers have priorities more pressing than phone service.

Verizon has chosen not to replace much of the damaged copper infrastructure and plans to invest in more reliable fiber optics in its ongoing effort to meet its FiOS rollout obligations in New York City, but that does not satisfy many business owners who cannot process credit card transactions or, in some cases, run their businesses as long as phone lines remain out of service.

This week a coalition of interest groups petitioned New York’s Public Service Commission asking them to impose new requirements on the state’s utility companies to develop comprehensive emergency response plans that acknowledge climate change and the extreme weather events that accompany it.

The petition was filed by the Columbia Law School Center for Climate Change Law, Natural Resources Defense Council, New York League of Conservation Voters, Pace Energy and Climate Law Center of Pace Law School, Municipal Art Society of New York, Earthjustice, Environmental Advocates of New York, and Riverkeeper.

The petition notes in the past two years alone, New York City has been hit by two of the largest hurricanes in history (Irene and Sandy).

The group’s observations are shared by some of the state’s highest elected officials.

“In just 14 months, two hurricanes have forced [New York City] to evacuate neighborhoods — something our city government had never done before,” New York City Mayor Bloomberg wrote in an editorial for Bloomberg View. “If this is a trend, it is simply not sustainable.”

New York Governor Andrew Cuomo echoed Bloomberg’s concerns:

Extreme weather is a reality. It is a reality that we are vulnerable. And if we’re going to do our job as elected officials, we’re going to need to think about how to redesign, or as we go forward, make the modifications necessary so we don’t incur this type of damage…. For us to sit here today and say this is a once-in-a-generation and it’s not going to happen again, I think would be short-sighted…. I think we need to anticipate more of these extreme weather type situations in the future and we have to take that into consideration in reforming, modifying, our infrastructure.

The coalition claims current utility policies are designed for short-term disaster response procedures, which they call inadequate.

Most utility companies develop plans based on historic weather patterns the environmental groups argue cannot take into account the more extreme weather patterns afflicting the state. The PSC can mandate utilities do more.

New York’s utility infrastructure is also deemed outdated, with much of it exposed above-ground, vulnerable to storm damage. The state also lacks more advanced technology including smart electricity grids, telecommunications fiber rings that can reroute around cable cuts, and reinforcement of vulnerably placed generator plants, telephone switches, and utility substations.

Despite the criticism, Verizon CEO Lowell McAdam remained upbeat about Verizon’s performance, particularly noting strong growth in wireless.

In the third quarter when Sandy struck, Verizon picked up 1.54 million more contract customers, exceeding the 901,000 estimate predicted by analysts polled by Bloomberg News. The wireless profit margin at Verizon also reached a new milestone – 50 percent, up from 49 percent in the second quarter.

[flv width=”534″ height=”320″]http://www.phillipdampier.com/video/NY1 Bloomberg Criticizes Verizon For Slow Recovery Of Service 12-6-12.mp4[/flv]

NY1 reports business customers in lower Manhattan are not too pleased waiting for Verizon to repair their landlines.  (2 minutes)

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/Verizon Restoration of Verizon’s Lower Manhattan Cable Vault 11-12.flv[/flv]

Verizon produced this video showing off its own restoration efforts in a downtown Manhattan cable vault.  (3 minutes)

Efforts to develop new unlicensed uses for the public airwaves that include high-powered public Wi-Fi may be shelved if AT&T and House Republicans succeed in their joint effort to force those frequencies to be sold in a spectrum auction.

Majority House Republicans on the House Communications & Technology Subcommittee on Wednesday lectured all five FCC commissioners, insisting they have no authority to set aside spectrum specifically for unlicensed use when those airwaves could be sold to private companies.

Sub-Committee chairman Greg Walden (R-Ore.) criticized FCC Chairman Julius Genachowski for his plans to “give away” scarce airwaves eventually open to the public’s use when they could fetch as much as $19 billion in auction proceeds from large telecommunications companies seeking to own and control those frequencies.

Walden, the House’s second largest recipient of campaign contributions from the same companies likely to bid on that spectrum, insisted federal law only allows the Commission to designate unlicensed uses for so-called “technically necessary guard bands,” which act as a buffer between neighboring frequency users to protect against interference. Walden also criticized the FCC for setting aside too much spectrum for that protection.

Walden, the second largest recipient of telco cash in Congress.

The Oregon congressman has collected more than $84,000 in campaign contributions from telephone companies so far this year. Only House Speaker John Boehner won larger contributions from companies like AT&T.

Other Republican members of the subcommittee agreed with Walden’s sentiment and also received generous contributions from AT&T this year.

Rep. Lee Terry (R-Neb.), wanted to be sure the FCC does not impose “value-sapping restrictions” on the use of privately-owned airwaves owned by large telecommunications companies. Terry is the third largest recipient of campaign contributions in the House from those telecom companies, adding $69,400 so far this year to his campaign coffers.

Rep. Joe Barton (R-Tex.) expressed concerns that spectrum auctions could displace low-power television stations to make way for mobile communications. But Barton did not oppose the auctions generally. His largest contributor: AT&T, which sent him checks for more than $21,000 in 2012.

Representative Robert E. Latta (R-Ohio) suggested auctioning off airwaves intended for public use to large mobile broadband companies would help America’s competitiveness, alluding to his belief unlicensed, free use of the airwaves for new wireless applications would not. Latta cashed $10,500 in AT&T checks so far this year — his fourth largest contributor. Latta added he wanted there to be transparency and openness in the entire spectrum process. He did not disclose his significant contributions from AT&T at the hearing, despite being a chief stakeholder in the debate.

Rep. Marsha Blackburn (R-Tenn.) agreed with large telecommunications companies that the maximum amount of available spectrum should be sold off to private companies to sell mobile broadband services to the public. Blackburn’s third largest campaign contributor this year is Verizon Communications, who sent her $15,400. AT&T, her ninth largest contributor, handed her $13,250, together adding up to $28,650.

The Democrats on the panel roundly criticized Republican plans to sell off spectrum intended for unlicensed, public use applications to large wireless companies, which already own and control frequencies they still have not put into service.

Terry, worried about “value-sapping” regulations.

Rep. Henry Waxman (D-Calif.) called unlicensed spectrum an incredible economic success story.

“Innovative services like Wi-Fi and Bluetooth are now ubiquitous parts of our communications system,” he said in his opening remarks. “They came about because of the use of unlicensed spectrum.”

Waxman suggested eliminating or limiting unlicensed spectrum would destroy innovation and further concentrate wireless communications in the hands of a handful of companies. Waxman said Congress’ original intent in passing laws that permitted the FCC to move forward with spectrum auctions also authorize the agency to protect competition and prevent unnecessary concentration of spectrum ownership to the detriment of smaller providers.

“I am troubled by attempts by some to relitigate issues that were resolved earlier this year, when the bill passed Congress with widespread support,” Waxman added. “After-the-fact-spin that unfairly twists the language of the law deserves little weight by the Commission or the courts.”

Rep. Anna Eshoo (D-Calif.) noted the FCC by statute is prohibited from considering the amount of revenue possible from spectrum auctions when drafting auction rules. She found Republican efforts to recast those rules to raise as much money as possible by selling off as much spectrum as possible “interesting.”

Many Republicans also complained the FCC must not set rules that either limit the maximum amount of spectrum owned by one company or set aside certain frequencies exclusively for smaller competitors. The Republicans want auctions to maintain a more straightforward “highest bidder takes all” format. Critics say that gives the advantage to larger, deep-pocketed existing providers and dissuades the entry of new competitors.

Some Republicans were also upset with FCC meddling over when and how private companies begin providing service on the airwaves they won at auction. Current FCC rules prohibit warehousing unused spectrum. The rules were designed to ensure large companies don’t invest in airwaves just to keep them off the market and unavailable to competitors.

Rep. Gerry Connolly (D-Va.) is fed up with Verizon Communications. The company handles most of the region’s 911 calls and has performed that task poorly in the last few years, argues Connolly.

“The whole purpose of 911 is that when you need it, it works,” Connolly told WUSA-News.

After several high profile 911 failures during significant storm events, Connolly and a few other congressmen are demanding Verizon resolve its 911 problems or face an intervention from the Federal Communications Commission.

The elected officials want Verizon to voluntarily comply, but if they won’t, all suggest it is time for the FCC to strengthen regulations and oversight to assure residents they will be met with a 911 operator when they call instead of a busy signal or nothing at all.

Verizon countered it takes its role in handling calls to 911 seriously, and when an issue arises, the company is quick to investigate, correct and apply any lessons learned across their system.

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/WUSA Washington Gerry Connolly Va- Democratic Congressman critical of Verizon for its 911 performance 12-6-12.flv[/flv]

WUSA reports Connolly has grown tired of repeated failures with Washington, D.C.’s 911 system, handled by Verizon Communications. He wants the company to make changes to increase the service’s reliability, especially during storms when demand on the 911 system is greatest. (2 minutes)

Although Americans are paying higher cell phone bills than ever before, some of America’s largest wireless providers have been saving a fortune, enjoying near-tax-free status thanks to an economic stimulus package that allowed companies to write off expenses associated with expanding their businesses.

Under accelerated depreciation, both AT&T and Verizon have been able to slash tax obligations by claiming deductions for capital investments most analysts believe they would have made with or without the income tax windfall. Despite this, both companies have raised prices and have cut jobs and employee benefits.

Washington lawmakers are now debating tax policies that could reduce or end corporate subsidies and raise their tax payments.

The stimulus incentives were designed to promote spending and investment by large corporations retrenching in the face of the Great Recession. Through a combination of special interest amendments guaranteed to favor certain businesses and creative accounting, the two largest wireless companies in the country wrote off investments originally planned before the stimulus package was enacted.

Without the corporate welfare package, telecom analyst Craig Moffett predicted AT&T would have paid a 35% tax rate over the past four years, amounting to $29.3 billion in taxes. Instead, it paid $13.3 billion total. Last year it paid 0% — nothing.

Verizon Wireless has skirted around its tax bill thanks to its offshore partner Vodafone. By shifting certain money overseas, and through other creative measures, Verizon ended up paying a 6% tax rate — $1.3 billion total taxes in four years. Not bad for America’s largest wireless operator. Two years ago, Verizon was estimated to have paid nothing at all.

Citizens for Tax Justice and the Institute on Taxation and Economic Policy claim corporate tax subsidies effectively cost taxpayers $14.5 billion for AT&T and $12.3 billion for Verizon Wireless over the past four years. Only one company benefited more than AT&T and Verizon: mortgage underwriter Wells Fargo.

If the ability to take accelerated depreciation were to be withdrawn in current tax negotiations, AT&T and Verizon would both find themselves paying taxes at rates comparable to many upper-middle class Americans.

AT&T would see its tax rate rise from 13.3% in 2013 to 29 percent by 2016. Verizon will pay 25% in 2013 and 27% by 2016. Both companies would still continue to aggressively pursue loopholes and other write-offs, including larger contributions to both companies’ pension plans which would reduce cash liabilities.