Moffett

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Phone Company Fiber Optic Upgrades = ‘Shareholder Value Destruction’

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

AT&T repair truck

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

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

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

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

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

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

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

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

Good News

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

Bad News

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

CenturyLink’s Prism TV

CenturyLink has stopped expanding its cable TV alternative Prism TV, and will no longer promote the service to its customers.

“Due to emerging market trends in video content and delivery, we do not plan to expand our Prism TV service offering,” CenturyLink spokesperson Francie Dudrey told Fierce Cable, in a statement delivered at the NAB Show yesterday. “We will continue to provide service and support to our current Prism TV subscribers and make the service available to qualified customers who request it in the markets where we currently offer Prism TV.”

As Stop the Cap! reported last month, CenturyLink is planning to pull back on residential broadband upgrades and services it was expecting to sell on its improved internet platform after the company announced senior management changes. One key sign CenturyLink was moving away from Prism TV was the sudden retirement of Duane Ring on March 30. Ring, a 34-year veteran at CenturyLink had been recently promoted to help oversee CenturyLink’s residential broadband upgrades and was instrumental to the launch of Prism TV in 2005.

Wall Street and activist shareholders had pushed CenturyLink hard to replace long time CEO Glen Post III, who had recently turned bullish on costly residential broadband upgrades. Post’s replacement, former Level 3 CEO Jeff Storey, wants to refocus CenturyLink on its more profitable commercial customers.

Ironically, Level 3 was acquired by CenturyLink in 2016. Now some of Level 3’s top executives will firmly control CenturyLink itself. Shareholder activists were pleased with CenturyLink’s new direction under Storey’s leadership, arguing CenturyLink shouldn’t be devoting significant resources or funding to its legacy phone and copper broadband businesses. CenturyLink will now move away from home broadband services and towards commercial and enterprise broadband, metro ethernet, and cloud/backup services. About two-thirds of CenturyLink customers are commercial enterprises.

CenturyLink will now promote DirecTV to its residential customers instead of Prism TV.

Longer term, a growing number of analysts suspect CenturyLink’s new management will want to sell off some or all of CenturyLink’s residential customers to refocus the business entirely on its commercial customers. The company refused to discuss that issue at this time. CenturyLink may find a difficult market for would-be buyers. Frontier Communications, a regular buyer of wireline assets, is itself mired in debt and financial difficulties.

Investors continue to be skeptical of the merits of costly network upgrades for the nation’s copper wire phone networks. In areas where fiber-enabled phone companies compete directly with cable, price wars can develop, reducing profits and the incentive to invest.

Phillip “Another year, another AT&T deregulation measure” Dampier

It’s back.

It seems that nearly every year, AT&T and its well-compensated fan base of state legislators trot out the same old deregulation proposals that would end oversight of basic telephone service and allow AT&T (and other phone companies in Kentucky) to pull the plug on landline service wherever they feel it is no longer profitable to deliver.

This year, it’s Senate Bill 99, introduced once again by Sen. Paul “AT&T Knows Best” Hornback (R-Shelbyville). Back in 2012, Hornback disclosed AT&T largely authors these deregulation measures and he introduces them on AT&T’s behalf. In fact, he’s proud to admit it, telling the press nobody knows better than AT&T what the company needs the legislature to do for it.

“You work with the authorities in any industry to figure out what they need to move that industry forward,” Hornback said. “It’s no conflict.”

While Hornback moves AT&T forward, “his” bill will move rural Kentucky’s best chances for broadband backwards.

AT&T always pulls out all the stops when lobbying for its deregulation bills. In Kentucky, AT&T has more than 30 legislative lobbyists, including a former PSC vice chairwoman and past chairs of the state Democratic and Republican parties working on their behalf. It has spent over $100,000 in state political donations since 2007.

The chief provisions of the bill would:

• End almost all oversight of telephone service by the Public Service Commission anywhere there are more than 15,000 people living within a telephone exchange’s service area;
• Give Kentucky phone companies the right to disconnect urban/suburban basic landline phone service and replace it with either wireless or Voice over IP service;
• Allow rural customers to keep landline service for now, but also permits AT&T and other companies to effectively stop investing in their rural wired networks.

This year, AT&T apparently conceded it was just too tough to convince the legislature to let them disconnect hundreds of thousands of rural Kentucky phone customers at the company’s pleasure, so this time they have permitted rural wired service to continue, with some exceptions that make life easier for AT&T.

First, the end of oversight of telephone service means customers in larger communities in Kentucky will have no recourse if their phone service doesn’t work, is billed incorrectly, is disconnected during a billing dispute, or never installed at all. The PSC has traditionally served as a last resort for customers who do not get satisfaction dealing with the local phone company directly. PSC intervention is taken very seriously by most phone companies, but the state agency will be rendered almost toothless under this bill.

Second, although existing rural phone customers would be able to keep their basic landline service (for now) under this measure, nothing prevents AT&T from marketing alternative wireless phone service to customers experiencing problems with their existing service. Verizon has attempted that in portions of upstate New York, where telephone network deterioration has led to increased complaints. In some cases, Verizon has suggested customers switch to wireless service instead of waiting for phone line repairs which may or may not solve the problem. New rural customers face the possibility of only being offered wireless or alternative phone services.

Third, provisions in the bill give AT&T and other companies wide latitude to offer wireless or Voice over IP alternatives to landline service with little recourse for customers who only later discover these alternatives don’t support faxes, medical or security alarm monitoring, dial-up Internet, credit card processing, etc.

Fourth, the bill eliminates any requirement imposed upon broadband service in existence as of July 15, 2004. In fact, the measure specifically defines both phone and broadband service as “market-based and not subject to state administrative regulation.” That basically means service will be unregulated.

AT&T’s wireless home phone replacement

Here are some real world examples of where S.B. 99 could trip up consumers:

1. An elderly Louisville couple living the summer months in Louisville discover their phone service has been switched to the U-verse platform over the winter as AT&T seeks to decommission its deteriorating landline network in the neighborhood. S.B. 99 offers customers a 30-day opt out provision upon first notification, allowing a customer dissatisfied with the alternative service the right to switch back to their landline. But this couple was in Florida during the 30-day window, did not receive the notification to opt out in time to act, and are now stuck with U-verse. Unfortunately, the home medical monitoring equipment for his pacemaker does not work with Voice over IP phone service. This couple’s recourse: None.
2. A customer moves into a new home currently served by AT&T’s wireless home phone replacement service. The customer doesn’t like the sound quality of the service and wants a traditional landline instead. Her recourse: None.
3. A retired couple uninterested in broadband service or television from AT&T U-verse suddenly discovers AT&T wants to raise prices on landline phone service, but offers savings if the couple agrees to sign up for U-verse. Instead of paying a $25 monthly phone bill, the couple is now being asked, on a fixed income, to pay $100 a month for services they don’t want or need. Their recourse: They can appeal to keep their landline if they meet the aforementioned deadline, but they have no recourse if AT&T raises rates for basic phone service to make its discounted bundled service package seem more attractive.

Hood Harris, president of AT&T Kentucky, follows the same playback AT&T always uses when pushing these bills by framing its argument around landline telephone service regulation, which is an easy sell for cell phone-crazy customers who have not made a landline call in years:

Harris

Some of Kentucky’s laws that regulate our phones were written before cable television, cell phones, the Internet or email existed.

Because of these outdated laws, providers like AT&T must sink resources into outdated technology that could be invested in the modern broadband and wireless technology consumers want and need.

Every dollar invested in old technology is a dollar not being invested in speeding up the build out of new technology across the commonwealth.

It’s no longer the 19th century coming into your home over the old, voice-only phone network that was put in place under now-outdated laws. It’s the 21st century coming into your home over modern networks. While technology has changed dramatically for the better in just the past few years, our laws have not.

Despite what you may have heard, SB 99 will not remove landlines from rural homes or businesses.

Instead, this legislation puts those customers in charge of deciding which communications services they want and need. If you are a rural customer, for example, you may choose to join the nearly 40 percent of Kentuckians who already have moved on from landline home phones and gone only with a wireless phone, or you may choose a landline phone that’s provided over the Internet (known as Voice over Internet Protocol, or VoIP), or you may choose both a VoIP and a wireless service.

But you do not have to — you can keep your existing landline phone if you like. Under SB 99, the choice is yours.

It’s seems like a logical argument, until you read between the lines. Harris implies that those old-fashioned laws governing landlines you don’t have anymore are slowing down AT&T from bringing about a Broadband Renaissance for Kentucky. If AT&T only was freed from the responsibility of patching up its copper wire phone network, it could spend all of its time, money, and attention on improving cell phone service and bring broadband to everyone. Harris promises every resident will have a choice to get the service they want — wireless or wired — as long as you remember he is only talking about basic phone service, not broadband.

If your community isn’t highlighted on this map, AT&T has a wireless-only future in store for you.

Harris avoids disclosing AT&T’s true agenda. The company has freely admitted to shareholders it wants to scrap its rural wired network, now considered too costly to maintain for a diminishing number of customers. Unlike independent phone companies like Frontier, AT&T has been in no hurry to upgrade these rural customers for broadband service. AT&T has not even bothered to apply for federal broadband funding assistance to defray some of the costs of extending DSL to its rural customer base. With no possibility of buying broadband from AT&T, customers have little incentive to keep wired service if a cell phone will do. But decommissioning landline service in rural Kentucky guarantees these customers will probably never receive adequate broadband.

The “long-term cost reduction” AT&T mentions above is for them, not for you.

AT&T claims it will invest the savings in a wireless broadband network for rural customers, but as any smartphone owner will attest, AT&T’s wireless service is much more expensive than traditional phone service and its data plans are stingy and very expensive. Customers who can buy DSL from AT&T pay as little as $14.99 a month for up to 150GB of usage. A wireless data plan with AT&T for a home computer or notebook starts at $50 a month and only provides 5GB of usage before customers face a $10 per gigabyte overlimit fee. Which would you prefer: paying $14.99 for 150GB of usage with AT&T DSL or $1,500 for the same amount of usage on AT&T’s wireless network?

AT&T’s claims it will expand broadband as a result of not having to spend money on its landline network are specious. In fact, regardless of whether Kentucky passes S.B. 99 or not, AT&T has already embarked on its last known U-verse expansion. Project Velocity IP (VIP) devotes $6 billion to expanding U-verse to 57 million homes, reaching 75% of customer locations by the end of 2015. For the remaining 25% of customers, mostly in rural areas, AT&T’s plan isn’t to spend more money on improved wired service. Instead, it will build out its wireless network to serve the remaining customers with its LTE wireless broadband service — the same one that costs you $1,500 a month if you use 150GB.

Wireless is a cash cow for AT&T, so even saddled with its landline network, the company still spends the bulk of its investments on the wireless side of the business. Project VIP could have devoted all its resources to bringing U-verse to a larger customer base, but it won’t. AT&T sees much fatter profits spending $14 billion now to expand its wireless 4G LTE network and collect a lot more money later from its rural Kentucky customers.

Kentucky residents who don’t have U-verse in their area by the end of 2015 are probably never going to get the service, with or without S.B. 99. So why support a measure that delivers all the benefits to AT&T and leaves you sorting through the fine print just to keep the service you have now at a reasonable price. In every other state where AT&T has won deregulation, it raises the rates with no corresponding improvement in service.

Just how bad can AT&T’s wireless home phone replacement be? Just look at their disclaimers:

AT&T Wireless Home Phone is not compatible with home security systems, fax machines, medical alert and monitoring services, credit card machines, IP/PBX Phone systems, or dial-up Internet service. AT&T’s fine print on its website.

“AT&T’s wireless services are not equivalent to wireline Internet.” Wireless Customer Agreement, Section 4.1.

“WE DO NOT GUARANTEE YOU UNINTERRUPTED SERVICE OR COVERAGE. WE CANNOT ASSURE YOU THAT IF YOU PLACE A 911 CALL YOU WILL BE FOUND.” (All caps in original). Section 4.1.

Verizon Communications is cutting investment in its landline and fiber optic networks, spending the money on improving the company’s more profitable wireless business, which now accounts for 67 percent of Verizon’s total revenue.

Verizon reported second-quarter results this morning, meeting most Wall Street analysts’ expectations. The company reported a minor increase in capital spending to bolster its wireless LTE 4G network which is seeing strong growth in data traffic.

Verizon Wireless added one million new wireless customers in the last quarter, many transferring from Sprint’s now-discontinued Nextel network shut down last month. Among the new customer additions, 941,000 signed two-year postpaid contracts.

A growing number of Verizon Wireless customers are also migrating to the company’s Share Everything plan. At least 36 percent of Verizon’s wireless customers are now on shared, usage-limited data plans. Verizon expects more customers to switch, especially when legacy plan customers discover they will not receive a subsidized phone upgrade unless they abandon the grandfathered, all-you-can-eat data plan. Verizon believes the Share Everything plan will keep the company in a strong place to accelerate earnings as customers find they must regularly upgrade to higher capacity data allowances to handle increasing data usage.

Verizon’s wired success story

The growing adoption of more expensive data plans means higher bills for Verizon Wireless’ 35 million contract customers. The average Verizon Wireless customer now pays $152.50 per month, an increase of 6.4 percent. In total, over 100 million Americans now use Verizon’s prepaid and postpaid wireless services.

In June, Verizon Wireless reported its nationwide upgrade to LTE 4G service was now essentially complete, with 99 percent of 3G service areas also covered by 4G. Verizon reports 59% of its total data traffic is carried on the 4G LTE network, which is five times more efficient than the 3G network.

Wireline: Success When Verizon Invests in Upgrades, Ongoing Customer Defections Where Verizon’s Copper Network Continues to Deteriorate

Verizon’s success story in wireless is not repeated on its wireline network. Verizon lost another 5.2 percent of its residential copper landline customers during the quarter, down from 6.6 percent at the same time last year. In contrast, where Verizon’s fiber optic network FiOS is in place, customer numbers are growing along with revenue.

In fact, 71 percent of the revenue Verizon now earns from its wired residential network now comes from FiOS. The fiber network helped Verizon boost revenues by another 4.7 percent in the second quarter. With an average Verizon FiOS bill now at over $150 a month, the company saw a 9.4 percent increase in the average revenue per wireline customer over last year.

Verizon added 161,000 new FiOS Internet customers and another 140,000 new video customers in the second quarter. FiOS Quantum, which offers a broadband speed upgrade to 50/25Mbps for $10 more a month, has continued to be a hit with customers. More than one-third of all FiOS Internet customers have upgraded to faster Quantum speeds.

Shammo

With continued growth possible in the wired network business, Verizon could increase investment in expanding FiOS fiber into more markets, but instead the company continues to divert its attention and money to Verizon Wireless.

Verizon’s legacy copper wire phone and FiOS businesses saw a further reduction of 5.9 percent in capital expenditures in the second quarter — just $1.5 billion spent in the quarter and $2.9 billion year to date. Verizon’s full-year capital spending outlook which includes wireless, in contrast, is on track to spend between $16.4-16.6 billion this year. The majority of Verizon’s capital investments are aimed at improving its wireless network. Verizon’s aging copper wire network will continue to see a declining percentage of investment, and the company continues to leave FiOS fiber expansion on hold.

Fran Shammo, Verizon’s chief financial officer, this morning told investors they should expect to see a continued decline in spending on Verizon’s wired networks and more cost savings wrung out from Verizon’s declining unionized workforce, which has been asked to make concessions in labor contracts and increase work rule flexibility.

Other highlights:

• 51 percent of new phone activations were Apple iPhones during the second quarter;
• Over 64 percent of all activated phones on Verizon Wireless’ network are now smartphones;
• Verizon’s 3G network will increasingly be used by prepaid and reseller (MVNO) customers not allowed on Verizon’s LTE network;
• Verizon’s proposed entry into the Canadian wireless market is primarily focused on serving southeastern Canada from roughly Montreal to Toronto;
• 60 percent of Verizon’s revenue declines in its enterprise division were due to the federal government’s sequestration — automatic spending cuts, and declining spending by state and local governments;
• Verizon has no interest in competing with AT&T to acquire Leap Wireless (Cricket);
• The impact of Verizon’s agreement with cable operators to sell each other’s products has underwhelmed, at least so far;
• Voice Over LTE service, which will dramatically improve sound quality on voice calls, will arrive in Verizon handsets later this year with an aim to introduce the service sometime in 2014. But Verizon Wireless wants to be certain 4G LTE coverage is robust, because if reception deteriorates, VoLTE calls are not backwards-compatible with its current CDMA network and the call will get dropped. Getting it right is more important for Verizon than getting the service out quickly.

Phillip “Artificial Scarcity for Fun and Profits” Dampier

It would be an understatement to say I’ve heard the argument once or twice that there is simply no economic room for additional players to enter what Big Telecom companies always claim is a robustly competitive marketplace for Internet access.

Virtually every company facing inquiries from regulators, politicians, and consumers always makes the point today’s deregulated broadband playing field is an excellent example of free market competition at its best.

While they advocate for even more deregulation, oppose the entry of community-owned broadband services, and demand more spectrum from Washington lawmakers, we endure a veritable monopoly/duopoly for Internet access. Their defense, after a dismissive rolling of the eyes, is that we just don’t understand business.

Enter Tim Lee, writing for the alternate reality reader of Forbes, who decided to prove his argument by comparing broadband with Supercuts:

Being the first to build a hair-cutting shack in a particular customer’s backyard can be pretty lucrative. It gives you a de facto monopoly on that household’s haircut business. Let’s assume that it takes 4 years worth of haircuts to recoup the costs of building a shack for a particular household. While barbers will need to raise some extra capital to build the shacks, in the long run the owner of the first shack may be able to earn big monopoly rents.

Now along comes a new barber who wants to enter the hair-cutting business, but every household already has at least one hair-cutting shack. So he needs to build hair-cutting shacks in backyards where another barber has already built one. And that’s an economically precarious situation. Remember, we assumed a monopolist needs to do 4 years worth of haircuts in order to break even. But if you build a shack in a backyard that already has another barber in it, you shouldn’t expect to get more than half of the customer’s business, on average, over the long run. Not only that, but competition will push down prices, so you’ll have to do more haircuts to recover the costs of construction. So you’ll be lucky to recover your initial investment within 8 years, and it could easily take more than a decade.

And things are even worse for the third or fourth barber who builds in a particular backyard. The fourth barber will be building in a yard that already has three barbers. He can only expect to attract 25 percent of the household’s business, and strong competition among barbers means his margins will be pretty thin. It’s hard to see how he could ever recover the costs of his investment.

Brushing away the hair-cutting analogy, Lee’s point is that it is wasteful and inefficient for competitors to overbuild new networks where others already exist. The phone and cable companies that dominate the marketplace today decry additional competition as a death blow to their business models, because with so many providers fighting for customers (by lowering prices and offering better service), not every provider can sustain a profit Wall Street investors expect quarter after quarter. This argument is particularly common when attacking those dastardly socialist community-owned broadband providers they say destroy private enterprise (while unconvincingly also warning they will always fail and cost taxpayers millions on the way down). It is also why Wall Street continues to beat the drum for additional consolidation in the wireless marketplace, where anything more than AT&T and Verizon Wireless represents too much revenue destruction.

Lee does make some valid points:

1. Infrastructure costs are the biggest expense in launching a new network, especially wiring the last mile to customers;
2. Verizon FiOS overestimated its potential market share and found it harder to turn a profit than first anticipated;
3. Other utilities have avoided building redundant networks (ie. you don’t have two companies providing their own electric, water, and gas lines).

When communities decide to offer their own broadband service, incumbent cable and phone companies spend big bucks to scare residents.

But Lee’s conclusion is entirely favorable to the industry he often defends — that is just the way things are and customers should not expect anything better.

Those arguments are usually also the basis for free market declarations that if a private company cannot find a way to deliver a service at a profit, then those left out will just have to do without.

Thankfully, despite Lee’s criticism of Google Fiber in Kansas City as “extremely wasteful,” the search engine company is perhaps best positioned of all to turn the industry’s common refrain against new competition on its head.

Every so often, a surprising third party shows up with the resources to ignore Wall Street’s conventional wisdom. Enter the deep pockets of Google Fiber or a bond-backed community provider threatening to deliver service far better than what a community currently enjoys. The predictable defense from incumbent providers:

• Nobody needs faster broadband speeds;
• Community networks are a government takeover of the Internet;
• Fiber optics are expensive and represent an unnecessary investment;
• Public broadband destroys private investment and jobs at incumbent commercial providers;
• This is just a political stunt, not a real effort at taking Internet speeds to the next level.

Without the kind of competition on offer from Google, community providers, and private providers like Verizon taking a chance on FiOS fiber optics, there would be no room for innovation in the marketplace.

Provider tolerance for today’s marketplace duopoly and the lackluster service that results is reminiscent of a joke told by President George W. Bush’s in 2000: “If this were a dictatorship, it would be a heck of a lot easier…just so long as I’m the dictator.”

It is easy for today’s comfortable duopoly providers to take shots at would-be competitors while dragging their feet on network upgrades. They have little to fear with Wall Street on their side, joining opposition to new competition as harmful to profits. Even Verizon Communications, one of the two dominant providers, quickly heard from analysts irritated with the infrastructure expenses involved upgrading to a fiber optic network. At the heart of that criticism was a sense it was an unnecessary expense, with no reason to change the safe and reliable status quo. Innovation that costs money is the enemy of Wall Street, unless competition warrants the investment.

Therein lies the key. Effective, disruptive competition demands companies do something different. Lee may be right that three companies cannot easily bring home the big profits. Wall Street may have to make do with less. In a competitive market, the player offering the least will be the first to innovate to keep or attract customers, or eventually close their doors. Those remaining will compete in turn to deliver the best possible service at the lowest possible price. That itself is a departure from the comfort zone enjoyed by phone and cable operators today where neither feels much pressure. Cable companies won’t ever compete with other cable companies and the same is true for phone companies. But if a company like Google arrives, the decade-long coffee break is over.

Want proof? Just look at cable operators struggling to keep video customers who are now finding alternatives with Netflix and online viewing. They are increasingly looking for ways to enhance the value of cable television by offering online viewing themselves. Even rate increases have slowed. If Netflix and cord-cutting were not factors, would cable companies have changed the way they do business?

Google’s marketplace disruption delivers for consumers.

Lee is right saying it is not easy to break into the broadband business. Only some might realize the same investors and Wall Street barons that dislike profit-eroding competition also often happen to be in the business of loaning money to finance new businesses. More than a few will turn those loans down as too risky to contemplate.

But here comes the rhetorical trap Lee’s argument gets ensnared in: If running redundant networks is wasteful and we still need competition, the logical solution would be to construct or nationalize one advanced network on which all providers would market their services. Why waste time and money on duplicate copper and coaxial networks when a single fiber to the home network could deliver improved service well beyond what the local phone and cable company can offer.

Isn’t the answer to run a single telecommunications line into customer homes (one preferably not controlled by any provider), and let competition bloom on that advanced infrastructure? That is the solution Australia has chosen, scrapping the country’s ancient copper wire phone lines in favor of one national fiber network. Most community providers also operate open networks that other cable and phone companies can utilize (but often petulantly refuse).

Somehow, despite the enormous savings possible from sharing or offloading network infrastructure expenses, I doubt providers will consider that the kind of innovation they want or need.