AT&T CEO Randall Stephenson is kicking himself over his decision to allow “unlimited use” plans on AT&T’s wireless network.

Speaking at the Milken Institute’s Global Conference last Wednesday, Stephenson took the audience on a journey through AT&T’s transformation from a landline provider into a company that today sees wireless as the source of the majority of its revenue and future growth.  But the company left a lot of revenue on the table when it offered “unlimited data” for smartphone customers, particularly those using Apple’s iPhone.  It’s a mistake Stephenson wishes he never made.

“My only regret was how we introduced pricing in the beginning… thirty dollars and you get all you can eat and it’s a variable cost model,” Stephenson complained. “Every additional megabyte you use in this network, I have to invest capital. So get the pricing right. Our average revenue [per customer] has been increasing every single quarter since we started down this path.”

Stephenson admitted AT&T’s problems were created by the company itself when it embraced its transformation into a wireless power player.

Years earlier, the current CEO green-lit a new “smartphone” after a visit from Apple proposing a new device that used a touch screen to make calls, launch applications, and surf the wireless web.  It was called the iPhone.

AT&T’s first iPhone, Stephenson said, was not a major problem for AT&T and did not even launch on the company’s growing 3G network. In 2007, the Apple iPhone came pre-loaded with a selection of apps and used AT&T 2G network to move data.  Stephenson said Apple’s launch of a new iPhone in 2008 that worked on AT&T’s 3G network, along with a new App Store that allowed customers to do more with their phones, changed everything.  By 2009, AT&T’s network was overloaded with data traffic in many areas.

“[There] were volumes [of traffic] that nobody had ever anticipated and we had anticipated big volumes of growth,” Stephenson said.

In Stephenson’s view, AT&T’s solution to the traffic problem early on should have been a change to the pricing model, eliminating flat rate service at the first sign of network congestion.

“I wish we had moved quicker to change the pricing model to make sure that people that were consuming the bandwidth were paying for the bandwidth and [instead] we had a model where the high end users were being subsidized by the low end users,” he said.

Stephenson acknowledged the company has service issues in large American cities like New York, San Francisco, and Los Angeles, and blames them on a combination of voracious wireless data usage and spectrum shortages.  However, industry observers also note that many of AT&T’s service woes may have come from an unwillingness to invest in sufficient network upgrades as aggressively as other carriers, which have not experienced the same level of network congestion and the resulting steep declines in customer satisfaction AT&T has endured for the last three years.

But the ongoing congestion problems have not hurt AT&T’s revenue and profits.  Stephenson admitted that in 2006, AT&T earned almost nothing from wireless data and made between 30-32% margin selling voice and texting service.

“Today, we’re a $20 billion data revenue company and we’re operating at 41-42% margins,” Stephenson said.

Despite that improved revenue, AT&T says if they don’t get spectrum relief soon, they are going to keep raising prices on consumers. Stephenson said the company has been increasing prices across the board on data plans, new smartphone ownership, those upgrading phones, as well as reducing certain benefits for long-term customers. Stephenson said these actions were taken because spectrum has become a precious resource and bandwidth scarcity requires the company to tamp down on demand.  But that’s not a message he delivers to Wall Street, telling investors AT&T’s key earnings and increased revenue come from price adjustments and metering data usage.

Stephenson also fretted there is too much competition in America’s wireless marketplace.  That competition is eating up all of the available wireless spectrum, threatening to create a spectrum crisis if the federal government does not rethink spectrum allocation policies, he argued.  Stephenson believes additional industry consolidation is inevitable because of the capital costs associated with network construction and upgrades. He said he was uncertain whether AT&T will be able to participate in that consolidation after failing to win approval of its buyout of T-Mobile USA.

Stephenson believes the days of heavy investment in wired networks are over. Stephenson has systematically sought to transition AT&T away from prioritizing wired services in favor of wireless, a position he has maintained since his earliest days as AT&T’s CEO. The company’s decision to end expansion of U-verse — AT&T’s fiber-to-the-neighborhood service, and concentrate investment on wireless is part of Stephenson’s grand vision of a wireless America.  Stephenson noted the real fiber revolution isn’t provisioning fiber to the home, it’s wiring fiber to cell towers to support higher data traffic.

But that traffic doesn’t come to users free. Instead, Stephenson believes leaving the meter on guarantees lower rates of congestion because it makes customers think about what they are doing with their phones. It also brings higher profits for AT&T by charging customers for network traffic.  Stephenson believes that assures the returns Wall Street investors demand, attracting capital to front network investments.

With that in mind, Stephenson still believes AT&T can help solve the data digital divide, where poor families cannot afford to participate in the online revolution. Stephenson said it can be managed by handing the disadvantaged sub-$100 smartphones and $20 data plans, assuming they can afford those prices.

What keeps Stephenson up nights?  Worrying about business model busters that manage end-runs around AT&T’s profitable wireless services.

“Apple iMessage is a classic example,” Stephenson noted. “If you’re using iMessage, you’re not using one of our messaging services, right? That’s disruptive to our messaging revenue stream.”

Stephenson remains fearful its network upgrades will improve wireless data service enough to allow customers to switch to Skype for voice and video calling, depriving AT&T of voice revenue.

But the CEO seems less concerned than some of his predecessors that content producers are enjoying “free rides” on AT&T’s network.

“We in this industry have spent more time bemoaning the thought that Google or Facebook may use our network for free, and it just hasn’t played out that way,” Stephenson said. “I mean they do use it for free, they’re getting a bargain, and that is fine.”

“I believe what will play itself out over time, is that the demand model will change this behavior,” he said. “We’re already at a place where some companies that deliver content are coming to us and saying ‘we would like to do a deal with you where you would give us a class of service to deliver our content to your customers.'”

“The content guys that have been so loud about these issues [Net Neutrality] are now the ones coming to us saying we want these models,” Stephenson argued. “I’ve always believed that is what would play out.”

[flv width=”640″ height=”500″]http://www.phillipdampier.com/video/Global Conference 2012 A Conversation With ATT’s Randall Stephenson 5-1-12.flv[/flv]

Stop the Cap! edited down Randall Stephenson’s appearance at last Wednesday’s conference.  Stephenson faces few challenges as he presents his world-view about AT&T pricing, spectrum allocation policies, network investments vs. data traffic growth, his vision for AT&T’s future, and how much customers will be forced to pay for today’s “spectrum crisis.”  (28 minutes)

Cities left out of Verizon Communications’ fiber to the home upgrade FiOS are telling the Federal Communications Commission to reject any wireless spectrum swap between the phone company and the nation’s largest cable operators unless Verizon commits to getting the fiber upgrade done in their cities.

Coordinated by the Communications Workers of America, which represents many Verizon workers, elected officials and community groups in Boston, Baltimore, and the upstate New York cities of Albany, Syracuse, and Buffalo collectively blasted the proposed swap as bad news for consumers.  On a city-by-city basis, they each filed comments with the FCC opposing the deal unless the Commission mandates Verizon complete fiber upgrades as a condition for the approval of the spectrum swap.

Buffalo’s argument:

For the past few years, we have watched as Verizon Communications has built its all fiber FiOS network in 10 suburban communities that ring our city. In those communities, we have seen what happens when Time Warner Cable, our local cable monopoly, competes head-on with Verizon’s FiOS to provide video and broadband services. Consumers benefit from competitive choice; small businesses benefit from truly high-speed connections to suppliers and customers; schools and hospitals benefit from education and health-related applications; communications workers benefit from the jobs building, maintaining, and servicing networks; and families and communities benefit from the 21st century jobs and expanded tax base.

But the residents and small business owners in Buffalo have not been able to reap these benefits. To date, Verizon has chosen not to deploy its all-fiber FiOS network to the more densely-populated city of Buffalo. The proposed Verizon Wireless/cable company partnership would cement this digital divide and foreclose the possibility of effective high-speed broadband and video competition in our city. Verizon Wireless is a subsidiary of Verizon Communications. We are deeply concerned that as a result of the new joint marketing agreement, Verizon will no longer have the incentive to invest in an all-fiber network that competes with Verizon Wireless’ new partner, the cable company. Therefore, to promote high-speed broadband investment and video competition, especially in heavily minority and lower-income areas like the city of Buffalo, the FCC should include as a condition for approval of this Transaction a requirement that Verizon continue to invest in and build-out its FiOS network to currently unserved areas that are inside its traditional telephone service area footprint, including the city of Buffalo and the surrounding areas.

Cole

In response, Verizon confirmed it never had any intention of wiring any of those cities for fiber service.  Multichannel News reports:

But a Verizon exec points out that those cities are all areas that were not scheduled to get FiOS, whether or not the cable spectrum deal goes through. As Verizon has pointed out, the company decided back in 2010 that it was going to build out the franchises it had already secured and target those 18 million customers in and around New York City, Washington, D.C., and Philadelphia, rather than spend any more of its shareholders money in a wider buildout. The above cities were not in those franchise areas.

Baltimore City Council member William H. Cole accused Verizon of leaving the city of Baltimore behind in a letter he addressed to the Commission this week:

High-speed, fiber-optic networks are vital for economic competitiveness. Currently, Verizon’s FiOS is the only all fiber-optic commercially-available network for businesses and households. Other advanced industrialized nations have already deployed fiber-optic networks on a large-scale; they recognize that high-speed fiber is the competitive infrastructure of the 21 st century. Much of the suburban areas outside of Baltimore already have FiOS. The City of Baltimore will never get a fiber-optic network if this deal is approved, which concerns me greatly. I am not willing to see Baltimore permanently relegated to the wrong side of the digital divide.

A Philadelphia community group is accusing Comcast of keeping its low-income budget Internet program a secret and denying needy families access for the flimsiest excuses.

Action United, which fights for low and moderate income Pennsylvanians, dropped off complaints with federal officials in Philadelphia from residents who are upset because they never heard of the discounted Internet access program or were disqualified from applying.

Comcast’s Internet Essentials offers families who qualify for the federal student lunch program access to 1.5Mbps broadband for around $9.95 a month.  But an informal survey by the group found scores of residents who never heard of the program and would have applied if they had known it existed.

The group, which says it has 44,000 members in Philadelphia, Pittsburgh, Harrisburg and Allentown, says it could find only two families among its members that actually qualified to sign up for the service.  Some were disqualified because they didn’t participate in the school lunch program, others because they already have Internet service or had a long-forgotten past due bill.

“I feel as though the Internet service will help my son to progress in math, reading, spelling,” Dawn from North Philadelphia told CBS Philadelphia. But she says Comcast refused to sign her up.

“They told me I had a back bill from 10 years ago, so I was not qualified,” Dawn said.

As Stop the Cap! reported in September, Comcast’s program is effectively designed to reap positive publicity for the cable company while discouraging customers from applying and actually obtaining the service.

Action United protests the digital divide in downtown Philadelphia. (Courtesy: Action United)

Action United says area schools, an obvious place to promote low cost Internet for students, knew nothing about the program.

Comcast counters it sent mailings about Internet Essentials to 4,000 school districts, which covers 30,000 schools.

The group originally planned to protest Wednesday in front of Comcast’s corporate headquarters in Philadelphia to draw attention to the problem.  Earlier today, Action United announced it had reached an agreement to meet with Comcast executives to discuss the program and help cut some of the red tape for families experiencing trouble applying.

Comcast’s decision to offer budget Internet service came as a result of negotiations with the federal government to approve its merger with NBC-Universal. Critics contend Internet Essentials is too restrictive and requires applicants to navigate through a cumbersome qualification process.  After approval, the program only provides discounted service for a period of three years and can be terminated if a family falls past due on their account.

From the byzantine terms and conditions for enrollment in the Comcast Internet Essentials program:

The program is only available to households that (i) are located where Comcast offers Internet service; (ii) have at least one child who receives free school lunches through the National School Lunch Program (the “NSLP”) and as confirmed annually while enrolled in the program; (iii) do not have an overdue Comcast bill or unreturned equipment; and (iv) have not subscribed to any Comcast Internet service within the last ninety (90) days (sections 1(i)-(iv) collectively are defined as “Eligibility Criteria”). This program is not available to households that have children who receive reduced price lunches under the NSLP. The program will accept new customers for three (3) full school years, unless extended at the sole election of Comcast. Comcast reserves the right to establish enrollment periods at the beginning of each academic year in which it accepts new customers that may limit the period of time each year in which you have to enroll in the program.

2. In order to confirm your eligibility for the program, Comcast will need to verify that your children receive free school lunches through the NSLP in the initial enrollment year and each subsequent year you are enrolled in the program. In order to confirm eligibility, participants in the program will be required to provide copies of official documents establishing that a child in the household is currently receive free school lunches through the NSLP. Each year you will be required to reconfirm your household’s current eligibility by providing Comcast or its authorized agent with up-to-date documentation. If you fail to provide documentation proving your eligibility in the program, you will be deemed no longer eligible to participate in the program.

3. You will no longer be eligible to participate in the program if (i) you no longer have at least one child living in your household who receives free school lunches under the NSLP; (ii) you fail to maintain your Comcast account in good standing; (iii) Comcast ceases to provide the Covered Service to your location; or (iv) your account opened under the program is closed. A change in address may result in your account being closed, even if you continue to receive Comcast services at a different address. Program participation also may be terminated if the Covered Service is upgraded, altered or changed by you for any reason. If you are no longer eligible for the program, but continue to receive the Covered Service from Comcast, regular rates, and any other applicable terms and conditions will apply to the Covered Service.

Genachowski

The cable industry is expanding so-called “lifeline Internet service” to more households in an effort to combat what a government agency calls “a persistent digital divide.”

Next spring, Time Warner Cable, Cox, and Charter Communications will launch low-speed Internet service for $9.95 a month for two years.  The offers will echo Comcast’s Internet Essentials, which launched earlier this year as part of a deal with the government to win approval of the cable company’s merger with NBC-Universal.

The Federal Communications Commission calls the effort “Connect to Compete,” and suggests the public-private initiative will help rural Americans and low-income minorities get affordable Internet access. A study by the National Telecommunications and Information Administration found just 55% of black households and 57% of Hispanics currently subscribe to broadband.  More than 72% of Caucasian households and more than 81% of Asian homes use broadband by comparison.  The rural southern states of Mississippi (52%), Arkansas (52%) and Alabama (56%) have the lowest broadband penetration rates in the country.  In contrast, more than 80% of Utah residents have broadband in their homes.

“In this difficult economy, we need everyone to be working together on solutions,” FCC Chairman Julius Genachowski said. “Broadband is a key to economic and educational opportunity and these kinds of commitments to close the digital divide are powerful.”

But not every poverty-stricken American will qualify for the discount programs.

Cable operators are following Comcast’s lead, restricting access to families with at least one school age child enrolled in the free school lunch program.  Customers must not have existing broadband service during the last 90 days and customers with past due balances cannot sign up.  Don’t have children or fell behind on your cable bill?  No discount Internet for you.

Pilot programs will be launched by each operator in around a dozen cities total starting next spring, with plans to roll programs out nationally by the start of the 2012 school year.  Broadband speeds, usage limits, and other fees were not disclosed.  Comcast’s Internet Essentials operates at 1.5Mbps with upload speeds up to 384kbps.

Comcast’s program sells a netbook computer loaded with Windows 7 Starter Edition for around $150.  The $250 computers expected to be provided by Microsoft will include Windows 7 Home Premium operating system and Microsoft Office.  An additional vendor will sell refurbished computers to interested program participants for around $150.

The program will primarily reach urban residents who cannot afford current Internet service plans that are sold for $40-45 a month.  Rural residents are unlikely to benefit much because most cable operators do not deliver service in rural areas.

CenturyLink announced its own version of discounted DSL Internet in October to sell for $9.95 a month, but with numerous “gotcha” fees and surcharges.

One group unlikely to take advantage of the program: older householders, particularly those ages 65 and older, where just 45% have broadband at home.  The biggest reason the rest don’t?  They don’t believe they need the Internet at any cost.

Phillip Dampier on USF Reform: It might have been great, it could have been a lot worse, but ultimately it turned out to be not very good.

Last week, the Federal Communications Commission unveiled their grand plan to reform the Universal Service Fund, a program originally designed to subsidize voice telephone service in rural areas deemed to be unprofitable or ridiculously expensive to serve.  Every American with a phone line pays into the fund through a surcharge found on phone bills. Urban Americans effectively subsidize their rural cousins, but the resulting access to telecommunications services have helped rural economies, important industries, and the jobs they bring in agriculture, cattle, resource extraction, and manufacturing.

The era of the voice landline is increasingly over, however, and the original goals of the USF have “evolved” to fund some not-so-rural projects including cell phone service for schools, wireless broadband in Hollywood, and a whole mess of projects critics call waste, fraud, and abuse.  For the last several years, USF critics have accused the program of straying far from its core mission, especially considering the costs passed on to ratepayers.  What originally began as a 5% USF surcharge is today higher than 15%, funding new projects even as Americans increasingly disconnect their landline service.

For at least a decade, proposals to reform the USF program to bridge the next urban-rural divide, namely broadband, have been available for consideration.  Most have been lobbied right off the table by independent rural phone companies who are at risk of failure without the security of the existing subsidy system.  Proposals that survived that challenge next faced larger phone company lobbyists seeking to protect their share of USF money, or by would-be competitors like the wireless industry or cable operators who have generally been barred from the USF Money Party.

This year, FCC Chairman Julius Genachowski finally achieved a unanimous vote to shift USF funding towards the construction and operation of rural broadband networks.  The need for broadband funding in rural areas is acute.  Most commercial providers will candidly admit they have already wired the areas deemed sufficiently profitable to earn a return on the initial investment required to provide the service.  The areas remaining without service are unlikely to get it anytime soon because they are especially rural, have expensive and difficult climate or terrain challenges to overcome, or endure a high rate of poverty among would-be customers, unable to afford the monthly cost for the service.  Some smaller independent phone companies are attempting to provide the service anyway, but too often the result is exceptionally slow speed service at a very high cost.

The new Connect America Fund will shift $4.5 billion annually towards rural broadband construction projects.  Nearly a billion dollars of that will be reserved in a “mobility fund” designated for mobile broadband networks.

The goal is to bring broadband to seven million additional households out the 18 million currently ignored by phone and cable operators.

The FCC believes AT&T will take a new interest in upgrading its rural landline networks, even as the company continues to lobby for the right to abandon them.

Unfortunately, the FCC has set the bar pretty low in its requirements for USF funding.  The FCC defines the minimum level of “broadband” they expect to result from the program — 4/1Mbps.  That’s DSL speed territory and that is no accident.  The phone companies have advocated a “less is more” strategy in broadband speed for years, arguing they can reach more rural customers if speed requirements are kept as low as possible.  DSL networks are distance sensitive.  The faster the minimum speed, the more investment phone companies need to make to reduce the length of copper wiring between their office and the customer.  Arguing 4Mbps is better than nothing has gotten them a long way in Washington, but it also foreshadows the next digital divide — urban/rural broadband speed disparity.  While large cities enjoy speeds of 50Mbps or more, rural towns will still be coping with speeds “up to” 4Mbps.

The FCC does not seem too worried, relying heavily on a mild incentive program to prod providers to upgrade their DSL service to speeds of 6/1.5Mbps.

The irony of asking AT&T to invest in an aging landline network they are lobbying to win the right to abandon is lost on Washington, and future speed upgrades for rural America from companies like Verizon are in serious doubt when they sell off their rural areas to companies like FairPoint and Frontier and leave town.

Critics of USF reform suggest the program is still stacked in favor of the phone companies, and considering the state of their copper wire networks, would-be competitors are scratching their heads.

The cable industry, in particular, is still peeved by reforms they feel leave them at a disadvantage.  Of course, Washington may simply be recognizing the fact cable companies are the least likely to wire rural America, but when they do, the service that results is often faster than what the phone company offers.  The nation’s biggest cable lobbyist — ironically also the former chairman of the FCC, Michael Powell — still feels a little abused after reading the final proposal.

“While we are disappointed in the Commission’s apparent decision to ignore its longstanding principle of competitive neutrality and provide incumbent telephone companies an unwarranted advantage for broadband support,” said National Cable & Telecommunications Association President Michael Powell, “we remain hopeful that the order otherwise reflects the pro-consumer principles of fiscal discipline and technological neutrality that will bring needed accountability and greater efficiency to the existing subsidy system.  We are particularly heartened by the Commission’s efforts to ensure that carriers are fairly compensated for completing VoIP calls.”

Wireless operators are not happy either, because the arcane requirements that come with the USF bureaucracy were written with the phone companies in mind, not them.  Small, family-owned providers find it particularly difficult to do business with the USF, if only because they don’t have the staff or time to navigate through endless documents and forms.  Phone companies do.

Your phone bill is going up.

Many consumer groups are relieved because it could have been much worse.   The FCC could have simply capitulated and adopted the phone companies’ wish-list — the ABC Plan.  Thankfully, they didn’t, but the FCC has naively left the door open to substantial rate increases for consumers by not capping the maximum annual outlay of the fund.  That follows the same recipe that invited higher phone bills and questionable subsidies awarded in an effort to justify the original USF program even after it accomplished most of its goals. Consumers may face initial rate increases of $0.50 almost immediately, and up to $2.50 a month five years from now.

The FCC, unjustifiably optimistic, suspects phone companies and other telecommunications interests won’t gouge customers with higher prices.  They predict rate increases of no more than 10-15 cents a month.  I wouldn’t take that bet and neither will consumer groups.

“We’re going to press the FCC to ensure that these are temporary increases, because history has shown that these types of costs tend to stick around and go on and on and on,” said Parul Desai, policy counsel for Consumers Union.

An even bigger question left unanswered is just how far the FCC will get into the broadband arena when it refuses to take the steps necessary to ensure it has an admission ticket.  The agency has avoided classifying broadband as a telecommunications service, an important distinction that would bolster its authority to oversee the industry.  Without it, some members of Congress, and more importantly the courts, have questioned whether the FCC has any business in the broadband business.  Just one of the many high-powered players in the discussion could test that theory in the courts, and should a judge throw the FCC’s plan out, we’ll be back at square one.

[flv]http://www.phillipdampier.com/video/C-SPAN Tom Tauke from Verizon on Changes to the Universal Service Fund 10-29-11.flv[/flv]

Verizon’s chief lobbyist Tom Tauke spent a half hour last weekend on C-SPAN taking questions about USF reform and the side issues of IP Interconnection and Net Neutrality policies. Tauke supports consolidation of small phone companies into fewer, larger companies.  He also expands on his company’s lawsuit against Net Neutrality, which fortuitously (for Verizon) will he heard by the same D.C. Court of Appeals that threw out the FCC’s fines against Comcast for throttling broadband connections.  Politico’s Kim Hart participates in the questioning, which also covered wireless spectrum issues impacting Verizon Wireless, AT&T’s stumbling merger deal with T-Mobile, and Verizon’s latest lawsuit against the FCC for data roaming notification rules.  (28 minutes)