In the darkness of night, Congress on Tuesday handed some of America’s largest telecom companies a huge tax windfall allowing many to continue taking a special 50% depreciation bonus that slashes their tax bills on new equipment purchases, winning substantial reductions in their federal tax bills.

CenturyLink had been heavily lobbying House Speaker Paul Ryan (R-Wis.) and other House leaders to extend a “temporary tax provision” that was designed to stimulate corporate spending on capital investments during the height of the Great Recession. Stimulus programs like these have allowed corporations like AT&T and Verizon to pay virtually no federal taxes at all for multiple years in a row. AT&T was the second biggest tax provision/corporate welfare recipient in the country, Verizon was fifth according to Citizens for Tax Justice. Between 2008-2012 taxpayers effectively covered the $19.2 billion in federal tax not paid by AT&T and $11.1 billion not paid by Verizon.

The two words that make it possible are: Accelerated Depreciation

Telecom companies, particularly those with wireless assets, are benefiting from the “temporary” stimulus program introduced by President George W. Bush in the last year of his second term because most are capital-intensive, spending regularly to expand, maintain, and upgrade their networks. CenturyLink has taken advantage of accelerated depreciation to invest billions in fiber network expansions to reach cell towers and businesses and on residential broadband speed upgrades the company claims would not have come so quickly without the tax savings.

Mobile companies like AT&T and Verizon Wireless are some of the largest beneficiaries of the stimulus program, using accelerated depreciation to write off expenses for cell tower expansion, network densificiation, and deployment of services like 4G LTE. In most cases, “accelerated depreciation” is technically a tax deferral, but because these companies maintain constant investment in network development and upkeep, the tax man never actually arrives at the door to collect.

Heavy lobbying from beneficiaries not only succeeded in getting the program’s expiration date extended, the Obama Administration agreed to expand it at the end of 2013. Companies slashed tens of billions off their tax bills as a result. A report from the Congressional Research Service, reviewing efforts to quantify the impact of depreciation breaks, found that “the studies concluded that accelerated depreciation in general is a relatively ineffective tool for stimulating the economy.”

Citizens for Tax Justice added:

Combined with rules allowing corporations to deduct interest expenses, accelerated depreciation can result in very low, or even negative, tax rates on profits from particular investments. A corporation can borrow money to purchase equipment or a building, deduct the interest expenses on the debt and quickly deduct the cost of the equipment or building thanks to accelerated depreciation. The total deductions can then make the investments more profitable after-tax than before-tax.

The latest budget bill, passed Dec 15-16, extends the tax breaks until 2018 when the bonus drops to 40%, 30% in 2019, and zero in 2020.

Motorola NVG589 gateway

AT&T customers offered free broadband service upgrades are discovering “free” means at least $7 a month in new equipment charges for some, even when the customer owns the equipment.

Jim Grant has been an AT&T ADSL 2+ customer for almost a decade, happy to get 12Mbps broadband service from the phone company while maintaining an account with DISH Network for satellite television. As part of AT&T’s expansion effort, Grant’s neighborhood recently became U-verse capable, which led to an onslaught of new customer promotions offering upgrades for broadband-only customers and packages of television, telephone, and broadband service for everyone else.

“An AT&T salesman offered me 18Mbps VDSL service for the exact same price I’ve been paying for 12Mbps, claiming the newer single-pair circuit would work more reliably than the bonded pair service I receive today,” Grant tells Stop the Cap! “What he and the installation guy failed to mention is that this ‘free upgrade’ would cost me $7 a month in equipment fees, even though I bought and own the RG (residential gateway) they now want to charge me for using.”

Grant’s Motorola-manufactured router/modem did not need to be replaced. It was always capable of supporting ADSL2+ and VDSL broadband service. Only his bill has changed.

It turns out AT&T changed its policies that used to allow certain customers to avoid modem fees by buying their own equipment. Starting Jan. 11, 2015, AT&T’s modem rental fee for customers using the company’s equipment remained $7 a month. But customers who own their own equipment in a U-verse upgraded area are also charged the same $7, only AT&T doesn’t consider it a modem rental fee. Instead, it is a combination equipment charge and extended warranty.

AT&T claims this change actually saves customers money once their purchased modems go out of warranty. AT&T used to charge $99 for a service call to a home with customer-owned equipment and a $100 replacement charge if the modem turned out to be defective. AT&T says the $7 monthly equipment and warranty fee protects customers from both charges if something goes wrong.

Modem fees apparently don’t apply if you are lucky enough to qualify for a promotion like this one offered in Austin in 2013 for AT&T’s GigaPower service.

AT&T’s explanation didn’t go over well with Grant, who only found out about the charge once the bill arrived.

“I was promised repeatedly my bill would be exactly the same and since I owned my own equipment, there was no way I should be charged a fee like this,” Grant explained. “AT&T is charging me the same $7 it would any customer using AT&T-supplied equipment.”

Most customers affected by this charge discover it after upgrading their service or when technicians replace older equipment, often accompanied by a promise there would be no extra charges or fees, something customers learn isn’t always true after their next bill arrives.

Abhijit accepted an AT&T offer to boost his U-verse Internet speed to 24Mbps. Along for the ride was a brand new U-verse gateway.

“I was told specifically that there would be no additional charge,” Abhijit complained on AT&T’s customer support forum. “After first month’s bill, I am seeing an additional $7.00 Internet equipment fee.”

Another customer in Texas was also misinformed by AT&T’s salespeople about the modem fees.

“I was informed that this $7 fee was for leasing a modem/wireless Router/Residential Gateway (RG),” wrote the customer. “However, if I have my own compatible modem, there will be no additional charge. I have purchased my own compatible modem and now AT&T service says [it will charge a] ‘$7 service fee’ instead of [the $7] equipment rental.”

Modem fees are a lucrative source of revenue from AT&T, earning the company potentially more than $84 million a month.

Some customers report success receiving service credits or other fee waivers after complaining about the undisclosed fees in complaints to the FCC.

On Monday, AT&T announced 38 additional cities that will eventually have access to its gigabit broadband offering – AT&T U-verse with GigaPower, but the company remains coy about the number of customers that can actually order the service today across the 56 metro areas that will eventually be served by AT&T’s fiber to the home network.

“Nearly two years ago, we successfully launched the first AT&T GigaPower metro in Austin, Tex.,” AT&T wrote in its press release. “This launch led to a major expansion in multiple metros beginning in 2014. Recently we marked a major milestone deploying the AT&T GigaPower network to more than 1 million locations, and we expect to more than double availability by the end of 2016.”

Stop the Cap! asked AT&T for information about its claim of offering service to more than “one million locations” and received a response that this number may not reflect strict availability of the gigabit service, but rather the likely number of potential customers served by a central office/exchange where GigaPower was enabled. In reality, not every customer within a central office immediately qualifies for U-verse service, as many customers have complained.

At the current rollout rate of about one million customers per year, it will take AT&T at least 12 years to achieve its goal of more than 14 million residential and commercial locations, probably in the year 2027.

The 38 metro areas that AT&T will be entering, starting with the launch of service in parts of the Los Angeles and West Palm Beach metros today, are:

• Alabama: Birmingham, Huntsville, Mobile and Montgomery
• Arkansas: Fort Smith/Northwest Arkansas and Little Rock
• California: Bakersfield, Fresno, Los Angeles, Oakland, Sacramento, San Diego, San Francisco and San Jose
• Florida: Pensacola and West Palm Beach
• Georgia: Augusta
• Indiana: Indianapolis
• Kansas: Wichita
• Kentucky: Louisville
• Louisiana: Baton Rouge, Shreveport–Bossier, Jefferson Parish region and the Northshore
• Mississippi: Jackson
• Missouri: St. Louis
• Michigan: Detroit
• Nevada: Reno
• North Carolina: Asheville
• Ohio: Cleveland and Columbus
• Oklahoma: Oklahoma City and Tulsa
• South Carolina: Charleston, Columbia and Greenville
• Tennessee: Memphis
• Texas: El Paso and Lubbock
• Wisconsin: Milwaukee

For more information on where the AT&T GigaPower network is and will become available, visit att.com/gigapowermap.

Next year’s upgrade to DOCSIS 3.1 will support cable broadband speeds up to one gigabit shortly after introduction.

Telephone companies relying on traditional ADSL service to power their broadband offering will likely face a renewed competitive assault in 2016 that will further reduce their already-challenged market share in areas where cable companies compete.

Cable operators are hungry for profitable broadband customers and the best place to find new prospects is at the phone company, where DSL is still a common technology to deliver Internet access. But while cable Internet speeds have risen, significant DSL speed hikes have proven more modest in the residential market.

In 2016, the cable industry intends to poach some of the remaining price-sensitive holdouts still clinging to DSL with revised broadband offers promising more speed for the dollar.

Cable broadband has already proven itself a runaway success when matched against telephone company DSL service. Over the last year, Strategy Analytics found Comcast and Time Warner Cable alone signed up a combined 71 percent of the three million new broadband customers in the U.S.

“Cable operators continue to increase market share in U.S. broadband,” said Jason Blackwell, a director at Strategy Analytics. “Over the past twelve months, Comcast has accounted for 42 percent of new subscribers among the operators that we track.  Fiber growth is still strong, but the telco operators haven’t been able to shake off the losses of DSL subscribers.  In 2016, we expect to see a real battle in broadband, as cable operators begin to roll out DOCSIS 3.1 for even higher speed offers, placing additional pressure on telcos.”

That battle will come in the form of upgraded economy broadband plans, many arriving shortly after providers upgrade to the DOCSIS 3.1 cable broadband platform. Currently those plans offer speeds ranging from 2-6Mbps. Starting next year, customers can expect economy plan prices to stay generally comparable to DSL, with promises of faster and more consistent speeds. A source tells Stop the Cap! at least two significant cable operators are considering 10Mbps to be an appropriate entry-level broadband speed for 2016, in keeping with FCC chairman Thomas Wheeler’s dislike of Internet speeds below 10Mbps.

Just a few years earlier, most providers wouldn’t think of offering discounted 10Mbps service, fearing it would cannibalize revenue as customers downgraded to get lower priced service. Increasing demands on bandwidth from online video and multiple in-home users have gradually raised consumer expectations, and their need for speed.

Unfortunately for many phone companies that have neglected significant investment in their aging wireline networks, the costs to keep up with cable will become unmanageable unless investors are willing to tolerate significant growth in capital expenses to pay for network upgrades. Frontier Communications still claims most of their customers are satisfied with 6Mbps DSL, neglecting to mention many of those customers live in areas where cable competition (or faster service from Frontier) is not available.

Where competition does exist, it’s especially bad news for phone companies that still rely on DSL. Earlier this year, Frontier’s former CEO Maggie Wilderotter admitted Frontier’s share of the residential broadband market had dropped to less than 25% in 26 of the 27 states where it provides service. In Connecticut, the one state where Frontier was doing better, its acquired AT&T U-verse system has enabled the phone company to deliver broadband speeds up to 100Mbps. But even those speeds do not satisfy state officials who are seeking proposals from providers to build a gigabit fiber network in a public-private partnership.

DSL speed upgrades have been spotty and more modest.

Frontier’s recent experiments with fiber to the home service in a small part of Durham, N.C., and the unintentional revelation of a gigabit broadband inquiry page on Frontier’s website suggests the company may be exploring at least a limited rollout of gigabit fiber service in the state. But company officials have also repeatedly stressed in quarterly results conference calls there were no significant plans to embark on a major spending program to deliver major upgrades across their service areas.

Some phone companies may have little choice except to offer upgrades where cable operators are continuing to rob them of customers. In the northeast, where Frontier has a substantial presence, cable operators including Charter, Comcast and Time Warner Cable are committing to additional speed upgrades. Time Warner Cable’s current standard speed of 15Mbps will rise to 50-60Mbps in 2016, up to ten times faster than Frontier’s most popular “up to” 6Mbps DSL plan.

Most of the broadband customer gains won by Comcast and Time Warner Cable come as a result of DSL disconnects. AT&T said goodbye to 106,000 customers during the third quarter. Verizon managed to pick up 2,000 new subscribers overall, almost all signing up for FiOS fiber to the home service. No cable operator lost broadband market share, reported analyst firm Evercore. Leichtman Research offered additional insight, finding AT&T and Verizon were successful adding 305,000 U-verse and FiOS broadband customers, while losing 432,000 DSL customers during the same quarter.

The message to phone companies couldn’t be clearer: upgrade your networks or else.

The year 2013 marked a significant turning point for phone companies that have handled voice telephone calls for over 100 years. For the first time, the volume of domestic telephone calls and the revenue generated from them was nearly flat. For the last two years, both are now in decline on the wireless side of the business as North Americans increasingly stop talking on the phone and text and message instead.

The U.S. wireline business peaked in the year 2000 with 192 million residential and office landlines. Over the next ten years, close to 80 million of those — 40 percent, would be permanently disconnected, replaced either by cell phones, cable telephone service, or a Voice over IP line. Wireless companies picked up the largest percentage of landline refugees, most never looking back.

Over one-third of more than $500 billion in annual revenue generated by telecom companies in 2013 came from voice services. Although that sounds like a lot, it’s a pittance of a percentage when compared to 2005 when AT&T, Sprint, T-Mobile, and Verizon Wireless earned most of their revenue from voice calls. Ten years ago, wireless companies principally sold plans based on the number of calling minutes included, and many customers often guessed wrong, paying per minute for calls exceeding their allowance.

At first, this represented a revenue bonanza for the wireless industry, which earned billions selling customers minute-based calling plans that came with built-in cost-controlling deterrents for long-winded talkers — the concern of using up their calling allowance.

Starting in 2008, wireless industry executives noticed something peculiar. While revenue from texting add-on plans was surging, the growth in calling began to level off. Wireless voice usage per subscriber peaked at an average of 769 minutes in 2007 and began falling after that year. By 2011, the average customer was making 615 minutes of calls a month. As customers began downgrading calling plans, wireless carriers shifted their quest for revenue towards text messaging.

For awhile, texting earned wireless companies astounding profits that required little extra investment in their networks. SMS service at most carriers was effectively priced at $1,250 per megabyte, broken up into 160 byte single messages. In 2011, over 2.3 trillion text messages were exchanged. A message that cost a wireless carrier an infinitesimal fraction of a penny to send and receive cost consumers up to 20 cents or more apiece if they lacked an optional texting plan. To further boost revenue, some carriers like Verizon Wireless began to pull back offering customers a variety of tiered texting plans with different messaging allowances, switching instead to a single, more expensive unlimited texting plan. Many customers balked at the $19.95 a month price and began exploring other forms of messaging each other.

The industry’s demand for profit eventually threatened to kill the goose that laid the golden egg. At the same time wireless carriers were raising prices on text messages and forcing customers into expensive texting add-on plans, free third-party messaging apps began eating into texting volume. By 2012, the use of SMS declined for the first time, with 2.19 trillion text messages sent and received, down 4.9 percent from a year earlier.

It took little time for the wireless industry to realize the days of offering plans based on calling minutes and texting were quickly coming to an end. Younger users began the cultural trend of talking less, texting more — but using a growing number of free alternative apps to do so. As a result, both AT&T and Verizon shifted their plans away from focusing on revenue from calling and texting and instead moved to monetize data usage. Today, both carriers offer base plans featuring unlimited voice calling and texting almost as an afterthought. The real money is now made from selling packages of wireless data.

Wi-Fi calling allows customers to make and receive voice calls over a Wi-Fi connection, not a nearby cell tower. The prospect of bundling that option into a cell phone just a few years ago would have been unlikely at some providers, unthinkable at others. It was never considered a high priority at any traditional carrier, although T-Mobile began offering the service all the way back in 2007.

Since most calling plans now bundle unlimited calling, letting calls ride off the traditional cellular network is no longer much of an economic concern.

Some even expect carriers to eventually embrace Wi-Fi calling, declaring it superior to alternatives like Hangouts and Skype, which require an app to handle the call. A Wi-Fi call can be received by anyone with a phone.

This month, the last holdout, Verizon Wireless, capitulated and announced it had won approval from the FCC to introduce Wi-Fi calling to customers, joining Sprint, T-Mobile, and AT&T. But Verizon plans to initially limit that service, offering an app that must be installed to make and receive Wi-Fi calls. The other three carriers integrate Wi-Fi calling directly into the primary phone call app already on the phone.

The introduction of the service is unlikely to have a significant economic impact on any wireless carrier. Most have ample room on their networks to handle cell call volumes. Whether a call is placed over Wi-Fi or traditional cellular service, it will ultimately end up on the same or a similar IP-based phone switch as it makes its way to the called party.

With little revenue-generating opportunities for voice calling or SMS messaging, companies have nearly stopped the practice of monetizing individual telephone calls, preferring to offer unlimited, all-you-want calling and texting plans that used to cost consumers considerable amounts of money.

Now wireless carriers see fortunes to be made slicing up and packaging gigabytes of wireless data, sold at prices that have little relation to actual cost, just as carriers managed with text messaging for the last 20 years. A Verizon Wireless customer using 12GB of data in October that kept a now-grandfathered unlimited data plan paid just under $30 for that usage. (This month Verizon raised the price of that coveted unlimited plan by $20 a month.) Verizon charges $80 for that same amount of data on its new “XL” data plan. Verizon’s cost to deliver that data to customers is lower than it was five years ago, but customers wouldn’t know it based on their bill. As always with the wireless industry, costs often have no relationship to the price ultimately charged consumers.