In the financially difficult world of landline service, there has been one bright spot for Verizon — its state-of-the-art fiber optic service FiOS.  The cost of replacing obsolete copper phone with 21st century fiber optics has proved to be an expensive, but successful endeavor, at least in the eyes of customers.  Hated by Wall Street for its costs but loved by those who enjoy the service, FiOS has successfully proven traditional phone companies can earn money by providing the kinds of services consumers want, just so long as investors are willing to hang in there while the investment pays off over time.  But many investors aren’t.

Some of Verizon’s critics in the investment community complain the company is n0t earning enough from FiOS — in fact, for some critics who didn’t want Verizon spending money on a fiber-to-the-home network in the first place, financial returns provide the evidence used to claim they were right all along.

Despite the naysayers, revenue for Verizon FiOS is up by almost one-third each year, with average revenue per user now reaching $145 a month.  That’s well above the money Verizon earns on its legacy copper network phone customers keep leaving, especially outside of major cities where DSL service is spotty.  There is plenty of room for Verizon FiOS to grow in the limited communities it reaches.  Unfortunately, Verizon has stopped expanding its FiOS network to new communities, in part from pressure from investors who want to see cost cutting from the telecommunications giant.

Despite the positive reviews (subscription required) FiOS earns from consumer publications like Consumer Reports, Verizon slashed marketing and promotion expenses, resulting in second-quarter net additions for FiOS TV coming in at 174,000, compared with 300,000 a year earlier.

With Verizon now deploying service to communities on a reduced schedule, the results have been underwhelming according to the Wall Street Journal:

Verizon Communications may want to tweak the ad slogan for its TV and ultrafast Internet service to “This is FIOS. This is pretty small.”

Not catchy, but it would be more accurate than the current “This is Big” line.

[…]It eventually became clear that Verizon had slowed the time frame of the buildup, originally scheduled to be mostly done this year. Instead, it now expects to meet its target of passing 18 million homes with the network by 2012.

The slower timetable allows Verizon to trim capital spending this year. The problem is that FiOS’s expansion could stall with a less aggressive approach to growth. Already, Verizon has retreated from its target of adding one million subscribers a year, in favor of boosting penetration to 40% of homes passed. At June 30, its 3.2 million TV subscribers was about 20% of homes passed.

[…]And that can only reinforce questions about long-term returns on the $23 billion FIOS investment.

Evidence that Verizon is looking for more customers in its existing FiOS markets can be found in the news the company dropped its contract commitment for new customers.  The term contracts may have held some potential customers back out of fear of a lengthy term commitment with a $360 early cancellation fee.

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/Verizon FiOS goes contract free ad.flv[/flv]

Verizon started running this ad several weeks ago touting its new “no contract” FiOS service.  (15 seconds)

But a change in strategy isn’t enough for investors who demand immediate results through further cost cutting measures.

In Verizon’s second quarter earnings reports, company executives speak to this perception, proudly noting they have slashed costs through job-cutting and reduced spending on infrastructure and services.  Some of those services include DSL expansion for rural Verizon customers, many who are now left on hold waiting for broadband from Verizon indefinitely.

In many states, Verizon’s DSL expansion was incremental at best, with the company issuing press releases touting new service for literally hundreds of potential customers.

Verizon’s traditional landline business continues to lose customers year after year, and is abandoning millions of others through sell-off deals with companies like Frontier Communications.  Light Reading notes Verizon eliminated 11,000 jobs in its Mid-Atlantic and Eastern regions through early retirement incentive programs, an idea soon to spread to other regions, particularly California and Texas in the coming months.  This kind of cost cutting saves cash and allows companies to report positive financial results in quarterly reports.

According to John Killian, executive vice president and CFO of Verizon, the job cuts are just getting started.  As Verizon further alienates its non-FiOS landline customers who can find better service and lower prices elsewhere, the company expects “further force reductions” in the coming months.  Verizon is also slashing costs by selling off real estate, consolidating operations and vacating buildings.

The impact can become a vicious circle of deteriorating service, customer defections, and additional cost cutting, which starts the circle all over again.  In West Virginia, deteriorating Verizon phone lines reached the point of serious service outages whenever major storms hit the state.  Then Verizon simply sold off its network in West Virginia.  Those customers are now served by Frontier Communications.

Verizon previously declared the era of the landline dead, and is now seeking to prove its point, even as it demonstrates it can make money by spending money on FiOS, if only investors would give them the chance.

[flv width=”576″ height=”344″]http://www.phillipdampier.com/video/CNN Behind the scenes at Verizon Fios 3-15-10.flv[/flv]

CNN took a behind the scenes tour of Verizon’s FiOS network in New York City, from the central offices to individual apartments.  (4 minutes)

A California attorney has filed a nationwide class action lawsuit against AT&T for fraud and misrepresentation over claims the company baited consumers to purchase Apple iPads with unlimited access and then subjected them to Internet Overcharging schemes after AT&T ended its unlimited data plan.

Lieff Cabraser Heimann & Bernstein, LLP claims AT&T knew it was going to break its promise to thousands of customers who were told they could switch between unlimited and limited data plans as their needs changed.  On June 7th, AT&T ended its unlimited data plan but grandfathered existing contract customers, permitting them to retain the plan indefinitely.  But if a customer changed to a limited usage plan or discontinued service, they lose the chance to get the unlimited plan back.

Apple and AT&T announced this policy change with less than one week’s notice to their customers and only about a month after Apple and AT&T began selling 3G-enabled iPads.  Apple and AT&T had promised consumers flexibility with their data plans, allowing them the ability switch back and forth between the limited data plan, the unlimited data plan, and no data plan.

No more.

“The availability of an unlimited data plan was a key reason why consumers paid the extra $130 charge to access the 3-G network, and their ability to switch in and out of the unlimited data plan was also an important consideration in the decision to purchase an iPad,” stated Lieff Cabraser attorney Michael W. Sobol. “The complaint alleges that Apple and AT&T should have known at the time they were promoting the availability of unlimited data plans, they were not going to keep that promise.”

“I originally purchased a standard iPad. Three weeks later, I returned it to the Apple store, paying an additional $130 plus sales tax to upgrade to an iPad with 3G capability. I thought the iPad 3G was worth the additional money because, with the unlimited data plan, I could work outside my office or home and access all the data I needed for a fixed, monthly price,” commented plaintiff Adam Weisblatt of Fulton, New York. “But I also knew that for several months each year, with my schedule, a lesser expensive, limited data plan was sufficient. I would have never purchased a 3G-capable iPad if I knew Apple and AT&T were planning on suddenly taking away from me the freedom to opt in and out of an unlimited data plan at my choice.”

The proposed class plaintiffs seek to represent a nationwide class consisting of all individuals and entities within the United States who purchased or ordered an Apple iPad 3G on or before June 6, 2010.

Consumers wishing to join the suit can contact the law firm for additional details.  There are no details on exactly what the attorneys will be seeking from AT&T.

Class action lawsuits have often delivered far more in benefits and compensation to the law firm that filed the lawsuit, with consumers usually left with discount coupons or less than $10 in compensation.  In this case, demanding AT&T deliver on its marketing promises or permitting customers to return their iPads for full refunds would seem appropriate.  Thanks to Stop the Cap! reader Marcus for the news tip.

America's most creative taxing authority, charged with collecting the innovative taxes the state government dreams up

No state can be more innovative in finding new ways to tax, fee, and surcharge residents than New York.  Once it becomes taxable in the Empire State, it’s only a matter of time before it becomes taxable in other states as well.  Now consumers face the prospect of paying new sales taxes on broadband and other services they purchase online, even in cases where federal laws would seem to exclude such possibilities.

New York residents have endured the so-called “Amazon tax” since June 1, 2008 when the state government demanded large, out of state Internet retailers collect and remit sales taxes for online purchases should they result from online advertising.  Although largely ignored by smaller online retailers, large high profile Internet retailers with so-called “affiliate programs” that pay independent websites for referring potential customers faced the choice of cutting ties with their “affiliates” in New York or imposing sales tax on New York customers.

Websites ranging from Overstock.com, Buy.com, Amazon.com, Newegg, and others were all targeted by the New York State Department of Taxation and Finance.  Overstock and Newegg eventually threw their New York affiliates under the bus to preserve an “unofficial” tax-free shopping experience for New Yorkers.  Buy.com and Amazon both complied with the state, although the latter filed suit challenging the constitutionality of out-of-state sales tax collection.

What made the New York sales tax law different from all the rest is that it delivered an end run around settled federal interstate commerce law.  A Supreme Court decision found it legal for states to demand sales tax payments from businesses that operate within their state, but no such provision was made for businesses who don’t locate an office or store in a particular state.  Buying a new hard drive from an online retailer inside your state?  You’ll be charged sales tax.  Order it from outside of the state, and the company typically won’t try to collect sales tax.

New York wants online businesses to get a new attitude.  It wants sales tax money for orders placed by New Yorkers no matter where your business is located.

As the Great Recession wreaks havoc on state budgets, state lawmakers who don’t want to cut popular spending programs are instead sniffing for new ways to raise revenues.  Some are declaring ‘I Love New York’ for blazing the trail to fatter sales tax coffers.

Colorado's legislature ignited a firestorm of controversy after passing an online sales tax bill into law

One recent example is Colorado, where state lawmakers borrowed liberally from New York’s tax law and passed their own — requiring large online retailers to start collecting sales taxes or provide a summary of residents’ web purchases in the state (so the Colorado taxing authority can pressure residents to declare those purchases and pay sales tax themselves.)  The penalty for not doing so is a fine of several dollars per non-compliant transaction.  Amazon.com, among others, yanked their affiliate program in the state, and some online retailers have declared they won’t comply.  A few proclaimed they would throw away any fine notifications, suggesting the state has no authority to impose such fines for interstate commerce, which is regulated on the federal level.

Rhode Island passed its own sales tax law, and collected almost nothing from it, in part because online retailers outside of Rhode Island almost universally ignored it.  Now the law faces repeal.

Other states like North Carolina and California have endured their own controversies over such legislation.  In North Carolina, Amazon.com threw their affiliates under the bus.  California Gov. Arnold Schwarzenegger vetoed a sales tax proposal last year.  There are bills to impose sales taxes on all online purchases in Iowa, New Mexico, Vermont and Virginia.

Meanwhile, New York’s taxing authority has some new ideas on how to expand the scope of sales taxation to include a whole new range of online activities.

The E-Commerce Times reports the New York State Department of Taxation and Finance has declared doing practically anything online that involves the transfer of money in return for a service could be subject to New York sales tax:

This new position results in the imposition of sales tax on purchases of services provided over the Internet that would not be subject to sales tax if provided in person by a human being. For example, the purchase of an educational course is not taxable if provided by a live speaker, but the same course may now be considered taxable by the Department if the course is given online.

The Department has painted with a broad brush to conclude in a number of advisory opinions that, among other things, the following services or forms of entertainment are really sales of software when provided over the Internet:

1. e-learning courses;
2. information technology courses;
3. mail-tracking services performed for airlines;
4. loan origination and processing services;
5. automobile insurance policy services;
6. payroll processing services; and
7. video games played on computers located at a business’ facility.

Rhode Island's efforts to collect sales tax on out of state purchases was a flop

The logic used to justify taxation of online services illustrates the time and talent state workers are willing to extend to help fill New York’s dire budget pothole:

The Department is asserting that a purchaser of an online service is controlling the software on the provider’s server by clicking various icons on his or her own computer screen, and thus the purchaser has control over the software; hence the software has effectively been “transferred” to the purchaser. Accordingly, the Department is taking the position that the purchase of an online service is really the purchase of a license to use software, even though the software is being used by the service provider on its own server.

Critics of the taxing authority accuse it of exceeding its legislative mandate.  In fact, the New York State legislature previously considered — and rejected — legislation that would have imposed sales tax on digital downloads like music and movies.  The legislature has been resistant to taxing online activities in hopes of retaining high tech businesses in the state, who might consider locating out of state if it meant avoiding imposing sales tax on consumers.

Of course, online buyers are technically subject to paying sales taxes for every taxable purchase, made in or out of state.  But since most states ask taxpayers to voluntarily report such purchases, the compliance rate is notoriously low.

In New York, the taxing authority has a reputation best summed up as “we don’t play — padlock and seize first, ask questions later.”  Aggressive enforcement against non-compliant retailers is likely, and E-Commerce Times suggests online retailers need to pay attention:

The sales tax is a transfer tax, and sellers collect the tax from purchasers and remit the tax to the Department. However, when a seller fails to collect and remit any tax due, the seller itself becomes liable for the tax, interest and possibly penalties. The Department has not been content simply to apply its new position going forward, but rather has been seeking to apply its position retroactively on audit as well.

There have been instances of the Department auditing online service providers and assessing sales tax as far back as 2005, even though the Department’s first clear administrative guidance with respect to its new position dates from November 2008 (and even though the Department issued administrative guidance in February 2006, that seems to conflict with its present position).

The Times predicts this will all come to a head when the taxing authority sues an online retailer or state resident for non-payment of taxes.  Then it’s up to the courts to decide… when they get around to it.  Remember the lawsuit Amazon.com filed against New York in 2008?  The New York Supreme Court threw out the suit in January 2009, but an appeal was filed with the next court up the chain — the appellate court — July 13th.  It’s still pending.

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/Online Sales Taxes 4-5-10.flv[/flv]

Here are three reports about the ongoing online sales tax controversy underway in three states (9 minutes):

1. KMGH-TV in Denver reports on a local family running a campaign to repeal the so-called “Amazon tax” in Colorado which resulted in the end of the company’s affiliate program for Colorado residents.
2. WCAX-TV in Burlington, Vermont discusses a proposed Vermont law that would extend sales tax to online purchases.  Local merchants support the proposed law as a way to restore pricing fairness between online and brick and mortar retailers.
3. WTVR-TV in Richmond, Virginia covers that state’s proposed online sales tax bill.  George Peyton from the Retail Merchant’s Association reminds viewers whether or not an online retailer charges them sales tax, they still owe the state the tax — declared on your income tax return.

William Randolph Hearst

The Progressive Movement of the 1900s-1920s

After the reform-driven progressive movement of the early 20th century was finished taking on the railroads, they turned their attention to so-called “utility services.”  These were telephone, energy, and water providers.

The progressive movement of the early 1900s split into at least two camps:

• Individualist Progressives — Most people in this camp belonged to Theodore Roosevelt’s Progressive Party, also known as the Bull Moose Party.  The Progressive party was made up mostly of disaffected centrists who left the Republican Party after Roosevelt failed to secure the 1912 Republican nomination for president.  A rift had developed between Roosevelt and then-president Taft over how much energy should be devoted to breaking up corrupt big business and corrupt politicians.  The Progressive Party believed the Republicans had developed an unholy alliance with big business, monopoly trusts, and corrupt politicians on the state and federal level.  These individualist progressives believed in a well-regulated capitalist system, and with respect to energy companies, they demanded honoring the services and pricing promised consumers.  Once those conditions were met, government should stay out of it.  These progressives opposed abusive trusts and monopolies and supported competition.  The Progressive Party had support in states like New York, Illinois, California, Michigan, and Pennsylvania — all states with a heavy manufacturing business base that suffered from monopoly abuses.
• Reformist Progressives — Reformist progressives believed essential services should be in the hands of public trusts or municipalities, operated as non-profit “utilities” answering to the communities they served.  They were major advocates for municipal utility projects, and believed it was immoral for important services to be left in the hands of for-profit businesses, much less trusts and monopolies.  Many reformist progressives rallied behind the newspaper magnate William Randolph Hearst, who loudly advocated radical reform in his newspapers.  Hearst even formed the Municipal Ownership League, a local party in New York City, whose primary goal was to force for-profit utilities out of the marketplace — turning services over to municipalities to run for “the public good.”  Reformist progressives often applied moral values to private enterprise, suggesting an improved capitalist model required companies to also consider the social good of operating in the public interest.

Where individualist progressives had control, rate regulation and oversight was the usual model when dealing with electric companies.  California and Wisconsin, fed up with the railroad abuses, saw many similarities in  electric monopolies.  In the end, they applied the same rate regulation philosophy used with the railways for all utility services.  Both states regulated rates charged based on their perception of fair pricing.  Beyond that, they tended to leave private providers alone.  New York’s governor Charles Evans Hughes was an individualist progressive who advocated regulatory crackdowns on monopolies who abused the terms and conditions under which they offered service.  Once they met that obligation, Hughes believed the free market would manage to sort out the rest.

That was all fine and well for communities already served by electric companies, but what about vast numbers of smaller communities bypassed for electric service?

Defenders of the free market, and the companies themselves argued that only through deregulation would providers get sufficient investment to expand their service areas into previously unserved communities.  Apply rate regulation and other government interference and investors will look elsewhere.

Reformist progressives disputed this assertion, believing hunger for quick profit was responsible for the disinterest in serving rural communities, where construction costs were higher and rapid return on investment was unlikely.  Besides, they argued, since most of these companies provided monopoly service, it wasn’t as if they faced imminent price-cutting competition.

Reformers advocated bypassed communities should form their own municipally-run electric companies or cooperatives, managed by local government and answerable to local ratepayers.  This solution was attractive to many communities, especially the growing number of planned new communities that came during the boom years of the 1920s.

As municipal power attracted attention, some in the private power sector balked.  Not only were these companies delivering good service to customers, they were often doing it at far lower prices.  Many large utility companies and their allies made municipal power a political issue, attacking the concept as anti-American.  Their argument: Public money should never be spent to construct services traditionally provided by private companies, even when those companies had yet to wire those communities for service.

Charles Evans Hughes

As political lobbying for bans on municipal power projects grew more intense, newspaper magnate William Randolph Hearst declared all-out war on the electric monopolies.  Hearst advocated that electricity be a delivered only through not-for-profit municipally-run utility companies.

Hearst even went as far to seek the governor of New York’s office several times in the early 1900s, to implement his progressive reforms.  Hearst’s platform included advocacy of public power delivered for the social good. That meant companies would extend service to outlying areas as soon as practical instead of when it was grossly profitable.  Power companies would charge a fair price for good service.  Companies would also advocate for customer safety and work with government to define safety regulations instead of reflexively opposing them at every turn.

In one of several runs for office, his opponent was the aforementioned then-current governor Charles Evans Hughes, who promptly went on the attack.

Hughes had one word for Hearst’s reform views: Socialism

Governor Hughes told the Republican Club of New York in 1908, “Our government is based upon the principles of individualism and not upon those of socialism…. It was founded to attain the aims of liberty, of liberty under law, but wherein each individual for the development and the exercise of his individual powers might have the freest [sic ] opportunity consistent with the equal rights of others.”

Hearst lost the governor’s race each time he ran, and was outmaneuvered by the private industries he sought to reform.  In fact, the industry managed to outwit regulatory advocates at every turn.

For example, since states were permitted only to regulate commerce within its borders, giant national electricity holding companies, also known as “trusts,” typically escaped such regulation by opening headquarters out of state, which allowed them to ignore local and state regulations.  In Riverside, California, Southern Sierras Power Company was able to ignore California state regulations because its head offices were in Denver, Colorado.  That kept pesky state officials out of Sierras’ books to verify whether the rates it charged were fair.

When regulators sought to construct a formula for fair regulated pricing, creative bookkeeping and debt structuring made even confiscatory rates permissible.  Companies learned to use business regulations against the regulators.  For instance, when a regulator believed rates could be lowered, power companies increased their debt obligations, at least on paper.  They paid outrageous administrative fees to the holding companies they themselves often quietly controlled.  Or they used creative accounting tricks to make it appear free cash was obligated to satisfy investors who held company debt and had to be repaid under government rules within a limited time frame.  Companies were able to “prove” to regulators their current rates were fair, and there was no leeway to reduce them.

Only after municipal power companies began providing service at dramatically lower, and sustainable prices did suspicion reach a fever pitch that regulators were being played.

Tomorrow: A “New Deal” for Americans

Suddenlink broadband customers in Lubbock and Midland, Texas will soon have a new option to boost their broadband speed to 36Mbps.  Dubbed MAX36, the new tier leaps over the cable company’s former top broadband speed of 20Mbps.  Upload speeds get a boost as well — to 2Mbps.

Multichannel News reports pricing for the new tier depends on how many other Suddenlink services you have.  Standalone pricing is $75 per month.  Bundle it with television or telephone service and the price drops to $65.  Take all three services and MAX36 costs $60 a month.

Suddenlink serves portions of these Texas communities

If that is too rich for your blood, Suddenlink next week will be providing existing broadband customers in Lubbock and Midland free speed upgrades:

• 1Mbps service increases to 1.5Mbps
• 8Mbps upgrades to 10Mbps service
• 10Mbps service becomes 15Mbps

The new speeds are possible because of DOCSIS 3 upgrades underway at the nation’s ninth largest cable operator.  Suddenlink has focused on DOCSIS 3 upgrades for many of its Texas systems, including Abilene, Bryan/College Station, Georgetown, Lubbock, Midland, San Angelo and Terrell.  The operator also deployed the technology in Beckley, Charleston and Parkersburg, West Virginia, as well as Jonesboro, Arkansas, Humboldt County, California, and Nixa, Missouri.  The company hopes to upgrade 90 percent of its cable systems within the next two years.  Nationwide, Suddenlink reaches 1.3 million subscribers.

Last summer Suddenlink introduced a usage meter for subscribers in Clovis, New Mexico and included a chart of what constituted average usage for its customers.

Suddenlink's national service area

The company openly admits it limits customer use of its broadband service is several communities where bandwidth upgrades have yet to occur, but at least drops communities from the usage limit list after expansion is complete.  As of February 4th, communities impacted by usage limits include:

• Arkansas: Charleston, Hazen, Mt. Ida, Nashville
• Kansas: Anthony, Fort Scott
• Louisiana: Ville Platte
• Missouri: Jefferson City, Maryville
• Oklahoma: Fort Sill, Healdton, Heavener, Hughes, Idabel
• Texas: Albany, Anson, Brenham, Burkburnett, Caldwell, Canadian, Center, Claredon, Crane, Dimmitt, Eastland, Electra, Hamlin, Henrietta, Junction, Kermit, Monahans, Nocona, Olney, Paducah, Rotan, San Saba, Seymour, Sonora, Trinity, Vernon, Wellington

Suddenlink also admits it engages in “network management” techniques which may spark controversy with the ongoing Net Neutrality debate, despite its declaration it “allows customers to access and use any legal Web content they prefer, thus honoring the principles of network neutrality.”

In addition to “mitigating network congestion, which can interfere with customers’ preferred online activities,” Suddenlink also discloses it “prioritizes certain latency-sensitive traffic such as voice traffic.”

Still, performing system upgrades to put a stop to usage limits and allowances is a move in the right direction, one that other providers seeking to monetize broadband traffic with Internet Overcharging schemes are loathe to take.

[flv width=”640″ height=”500″]http://www.phillipdampier.com/video/Suddenlink Ads.flv[/flv]

Watch some of Suddenlink’s more creative and amusing advertising. (2 minutes)