A corporate-funded business advocacy group backed by the telecom industry and the Koch Brothers is pursuing a lawsuit asking the D.C. Court of Appeals to toss pro-consumer deal conditions imposed by the Federal Communications Commission in return for granting its 2016 approval of the acquisition of Time Warner Cable and Bright House Networks by Charter Communications.

The Competitive Enterprise Institute filed an initial petition with the FCC asking the agency to rescind its own deal conditions shortly after the merger was completed. CEI argued the agency imposed “harmful merger conditions on Charter that had nothing to do with the merger itself,” and that the FCC did not have the authority to put corporate merger deal conditions in place.

CEI specifically targeted its objections to the FCC’s seven-year ban on Charter Spectrum data caps and consumption billing, arguing the ban raised broadband pricing for all Spectrum customers and prevented the cable company from offering discounts to low usage customers. It also claimed that Charter had to increase pricing for all customers because the FCC required Spectrum to raise broadband speeds, introduce a discounted internet program for low-income customers, and expand service to at least two million new households not presently served by Spectrum.

The FCC ultimately rejected CEI’s petition in 2018, claiming the group had no standing to challenge the merger transaction or deal conditions. The group called the FCC’s decision wrong, claiming consumers will “have to foot the bill for an overreaching federal agency” and that “the FCC has no authority to micromanage the internet at the public’s expense.”

This week, it filed an opening brief appealing the FCC’s decision to the D.C. Court of Appeals, which oversees the legality of the FCC’s regulatory decisions.

The 101-page filing maintains the FCC overreached by imposing any deal conditions on the 2016 multi-billion dollar merger deal, especially those that might require the merged company to spend money to improve service to customers. CEI argued such conditions were “arbitrary and capricious” and had no place as part of approving a business merger transaction.

The group submitted evidence from four individuals who attested to their belief that the deal conditions “probably contributed” to price increases after customers abandoned their legacy Bright House and Time Warner Cable plans in favor of Spectrum plans and pricing. The customers reported rate hikes ranging from $4 a month to $20 a month “for the same services,” but did not attach copies of their bills allowing a court to ascertain whether those rate increases involved cable television or broadband service or both.

No evidence was provided to prove CEI’s assertion that rate increases were directly tied to merger conditions other than a declaration from Robert W. Crandall, an economist and nonresident senior fellow at the Technology Policy Institute in Washington, D.C. Crandall argued any deal conditions requiring a cable company to spend money to expand, improve, or discount services would likely impact subscriber rates.

No disclosure was made regarding any fees paid to Crandall to conduct research on behalf of CEI. The Technology Policy Institute is financially backed almost entirely by the Koch Brothers and corporate interests including AT&T, Charter Communications, Comcast, and Verizon.

CEI’s legal brief depends on assertions made by then-minority Republican members of the FCC, notably then-Commissioners Ajit Pai and Michael O’Rielly, who objected to the FCC’s merger conditions. CEI ignored the views of the then-Democratic majority on the Commission, who voted to approve the merger with deal conditions. Then Chairman Thomas Wheeler and Commissioners Mignon Clyburn and Jessica Rosenworcel were not mentioned anywhere in CEI’s brief. Today the Commission has a Republican majority, with Pai now serving as chairman.

The FCC in 2016 (from left to right): Commissioners Ajit Pai, Mignon Clyburn, Chairman Tom Wheeler, and Commissioners Jessica Rosenworcel and Michael O’Rielly

CEI’s argument follows a similar pattern to arguments made against net neutrality — namely, the FCC has no authority to regulate broadband services or the pricing and policies of the companies providing it, as companies offer different services including health therapy, if you want to offer this you could check this hypnotherapist certification online just for this. Charter Communications has occasionally argued the same point with the New York State Public Service Commission, which imposed deal conditions of its own in return for approval of the merger.

Charter has consistently reserved the right to object to deal conditions requiring it to build out service to rural areas, as well as any deal conditions that go beyond the authority of state regulators to oversee broadband service. In Charter’s view, state regulators have no such authority. In the state’s view, the PSC has the right to consider a myriad of factors because its regulatory mandate  requires approving or rejecting a merger based on the public interest. Its 2016 merger order found the transaction was not in the public interest unless the parties agreed to certain deal conditions, which closely resembled those required by the FCC. When Charter allegedly failed to meet the conditions it agreed to, the New York regulator could not directly compel Charter Spectrum into compliance, but it could and did decertify the merger itself.

Should the D.C. Court of Appeals find in favor of CEI, the deal conditions imposed by the FCC would be revoked, although Charter could continue to honor those conditions voluntarily. Separate legal cases would have to be brought in state courts to invalidate deal conditions imposed by state regulators.

Windstream announced this week it was ditching EarthLink, the internet service provider it acquired in 2017 that has been around since the days of dial-up, in a $330 million cash deal.

Trive Capital of Dallas, Tex., is the new owner of the consumer-facing ISP, which today primarily serves customers over some cable broadband and DSL providers.

EarthLink launched in 1994, when almost everyone accessed online services over dial-up telephone modem connections using providers like AOL, CompuServe, Prodigy, and MSN. EarthLink rode the Dot.Com boom and secured funding to build its own multi-city, dial-in access network, allowing customers to reach the service over local, toll-free access numbers. This allowed EarthLink to be among the first ISPs in the country to offer unlimited, flat rate access for $19.95 a month at a time when some other providers charged in excess of $12 an hour during the business day to use their services.

EarthLink grew to become America’s second largest ISP, reaching 4.4 million subscribers in mid-2001 — still dwarfed by 25 million AOL customers, but well-respected for its wide-reaching availability over more than 1,700 local dial-in numbers around the country. But 2001 was as good as it would get at EarthLink.

The newly inaugurated administration of George W. Bush and its deregulatory-minded FCC Chairman Michael Powell quickly threatened to derail EarthLink’s success.

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As EarthLink’s balance sheet increasingly exposed the high wholesale cost of the company’s growing number of DSL and cable internet customers, executives calmed Wall Street with predictions that EarthLink’s wholesale costs would drop as networks matured and the costs to deploy DSL and cable internet declined. The phone and cable industry had other ideas.

Under intense lobbying by the Baby Bell phone companies, the FCC voted in 2003 to eliminate a requirement that forced phone companies to allow competitors fair and reasonable access to dial-up infrastructure and networks. The cable industry had never lived under similar guaranteed access rules, a point frequently made by telephone company lobbyists seeking to repeal the guaranteed “unbundled” access requirements. Lobbyists (and industry funded researchers) also claimed that by allowing competitors open access to their networks, it created a hostile climate for investors, deterring phone companies from moving forward on plans to scrap existing copper wire networks and invest in nationwide fiber to the home service instead.

Both the FCC (and later the courts) found the industry’s argument compelling. EarthLink protested the move was anti-competitive and could give the phone and cable company an effective duopoly in the business of selling internet access. Others argued the industry’s commitments to build out fiber networks came with no guarantees. FCC Commissioner Michael Copps warned that Americans would pay the price for the FCC’s unbundling decision:

I am troubled that we are undermining competition, particularly in the broadband market, by limiting — on a nationwide basis in all markets for all customers – competitors’ access to broadband loop facilities whenever an incumbent deploys a mixed fiber/copper loop. That means that as incumbents deploy fiber anywhere in their loop plant — a step carriers have been taking in any event over the past years to reduce operating expenses — they are relieved of the unbundling obligations that Congress imposed to ensure adequate competition in the local market.

[…] I fear that this decision may well result in higher prices for consumers and put us on the road to re-monopolization of the local broadband market.

Blinky, EarthLink’s mascot, was featured in instructional videos introducing customers to “the World Wide Web” and how to buy books on Amazon.com

In the end, the industry got what it wanted during the Bush Administration, and was also able to effectively wiggle out of its prior commitments to scrap copper networks in favor of fiber optics. Phone companies were also able to raise wholesale prices on providers like EarthLink. In 2002, EarthLink paid about $35 per month to phone companies for each subscriber’s DSL connection, for which the ISP charged customers $49 a month. Financial reports quickly showed EarthLink started losing money on each DSL customer, because it could keep only about $14 a month for itself. The cable industry was slightly more forgiving, if companies voluntarily allowed EarthLink on their emerging cable broadband networks. In general, cable operators charged EarthLink $30 a month for each connection, which gave EarthLink about the same revenue it earned from its dial-up business.

An even bigger threat to EarthLink’s future came when phone and cable companies got into the business of selling internet access as well, usually undercutting the prices of competitors like EarthLink with promotional rates and bundled service discounts.

EarthLink’s subscriber numbers dropped quickly as DSL and cable internet became more prevalent, and customers defected to their providers’ own internet access plans. Attempts by EarthLink to diversify its business by offering security software, web hosting, email, and other services had limited success in the residential marketplace.

By the mid-2010s, EarthLink primarily existed as a little-known alternative for some cable broadband customers and DSL users. But beyond initial promotional pricing, there was no compelling reason for a customer to sign up, given there was usually little or no difference between the prices charged by EarthLink and those charged by the phone or cable company for its own service. EarthLink’s competitors, including AOL and MSN, also saw subscriber numbers start to drop for similar reasons, especially when their customers dropped dial-up access in favor of broadband connections. This was strong evidence that companies that do not own their own networks were now at a strong competitive disadvantage, held captive by unregulated wholesale pricing and no incentive for phone or cable companies to treat them fairly.

In 2017, Windstream paid $1.1 billion for EarthLink, primarily to consolidate fiber-optic network assets and improve its business services segment. After more than a year, Windstream realized EarthLink’s residential ISP service had little relevance to them.

“People paid $5 to $10 a month for email,” Windstream spokesman Chris King told Bloomberg News. “It was not a strategic asset for us.”

With subscriber numbers still dropping to around 600,000 today, Windstream decided the time was right to sell.

“This transaction enables us to divest a non-core segment and focus exclusively on our two largest business units. In addition, it improves our credit profile and metrics in 2019 and beyond,” said Tony Thomas, president and CEO of Windstream.

An EarthLink television ad from 2004. (1:00)

The telecom industry wants a new tax on broadband services to pay for rural broadband expansion.

Nearly two years after FCC Chairman Ajit Pai announced the formation of a new federal advisory committee on broadband development, the telecom industry-stacked panel has recommended implementing a new tax on websites and online subscription services like Netflix, Hulu, and Amazon Prime Video and turning over the proceeds to many of the same companies dominating the Committee.

The proposal is part of a large set of recommendations from the Broadband Deployment Advisory Committee (BDAC) designed to promote and streamline broadband expansion, especially in rural areas. If adopted by the states, the new tax would create a large broadband deployment fund that could be accessed by telecommunications companies like AT&T and Comcast to expand service without having to pay back the funds or give up part ownership of the taxpayer-funded expansion.

What caught many by surprise was the sweeping impact the new tax could have on the internet economy, because online businesses, streaming services, and even many website owners could be subject to the tax, if enacted:

Entities that financially benefit from access to a broadband system located in the state, including advertising providers, shall contribute to the Broadband Deployment Fund.

A comprehensive piece by Jon Brodkin on Ars Technica points out defining the meaning of “entities” and “advertising providers” will be crucial to determine who will have to pay the tax and who won’t:

Article 11 of the BDAC’s model state code would create a Rural Broadband Deployment Assistance Fund, paid for by contributions from broadband providers and “Broadband Dependent Services.”

The definition of “Broadband Dependent Services” is where things get interesting. An earlier version of that definition—available in this document—reads as follows:

“Broadband Dependent Service” means a subscription-based retail service for which consumers pay a one time or recurring fee which requires the capabilities of the Broadband Service which the consumer has purchased and shall also include entities that financially benefit from access to a broadband system located in the state, including advertising providers.

The BDAC met on December 7 and pared that definition back a bit to exclude “entities that financially benefit from access to a broadband system.” Video is available here; the discussion on the definition starts around 2:04:45.

BDAC Chair Elizabeth Bowles, who also runs an Arkansas-based wireless Internet service provider called Aristotle, expressed concern that the original version of the definition “was including every small business in America,” potentially forcing them all to pay the new tax.

Nurse

AT&T has been one of the strongest advocates for the new tax, and argued it should be as expansive as possible.

“It basically is everybody [that should be taxed] because this is a societal objective,” said Chris Nurse, assistant vice president for state legislative and regulatory affairs at AT&T. “Universal service is a societal objective. We want to spread that $20 or $30 billion burden more broadly so the tax is low on everybody.”

Google Fiber policy chief John Burchett objected, claiming under AT&T’s vision, everyone who has an internet connection would be taxed. In his view, AT&T’s proposal was “absurd.”

As the debate raged on, it became clear AT&T was once again looking for a way to be compensated by companies like Amazon and Facebook — using its ‘pipes’ without contributing towards the cost of the network.

“Who are we cutting out and who are we leaving in?” Nurse asked. “Today it’s basically the telephone companies [who pay] and not Google and not Amazon and not Facebook, right? And they’re gigantic beneficiaries from the broadband ecosystem. Should they contribute or not? Someone has to pay.”

Burchett

In the end, the BDAC settled on adopting a compromise over what broadband entities will be subject to the new tax:

“Broadband Dependent Service” means a subscription-based retail service for which consumers pay a one time or recurring fee, and shall also include advertising-supported services which requires the capabilities of the Broadband Service which the consumer has purchased.

This compromise definition primarily targets the new tax on streaming video services — the ones AT&T itself competes with. But it will also cover any websites sponsored with online advertising — like Facebook and Google, ISPs, subscription services delivered over the internet, as well as AT&T’s broadband competitors.

The proposal also seeks to guarantee that rural residents be granted access to affordable broadband, but the industry-dominated Committee chose to define “affordable” as the cost of internet access in urban areas, which some would argue isn’t affordable at all.

The draft proposal has been criticized by many stakeholders, including the National Rural Electric Cooperative Association, representing electric cooperatives. The group implied the new proposal was just the latest attempt to get the telecom industry’s wish list enacted.

“Instead of focusing on solutions for unserved and underserved rural communities, many of the recommendations focus on issues specific to urban areas where broadband is already available,” said NRECA CEO Jim Matheson. “Ignoring the precedent of federal law and laws in 20 states, the state model code would treat co-op poles like those belonging to large investor-owned utilities. The state model code would also cap pole attachment rates in state statute, effectively making those rates permanent. This code, in effect, increases regulatory burdens while giving co-ops less time and less money to comply with those regulations.”

The National Multifamily Housing Council also objected to another proposal approved in the draft.

“Article 8 of the MSC grants broadband providers the unilateral right to install facilities in all multifamily residential and other commercial buildings and mandate construction of broadband facilities at the property owner’s expense without regard to the rights and concerns of the owner,” the organization claimed. “NMHC/NAA and its real estate industry partners argued that Article 8 of the MSC is riddled with many practical and legal problems. Among the most serious issues with the MSC is that it interferes with private property rights, disrupts negotiations and existing contracts between property owners and communications service providers and will lead to costly regulation and litigation at the state level without any assurance of actually spurring broadband deployment.”

AT&T would be among the biggest beneficiaries of the tax fund, already receiving $428 million annually from another rural broadband fund to expand wireless internet access in rural areas. If Nurse’s predictions are correct, the tax could collect $20-30 billion, far more than has ever been spent on rural broadband before.

Liccardo

Critics also contend the BDAC’s industry-friendly proposals are predictable for a Committee created by FCC Chairman Ajit Pai and well-stacked with telecom industry executives and lobbyists. The former head of the BDAC was arrested by the FBI on fraud charges, and San Jose Mayor Sam Liccardo quit the Committee in January, writing, “the industry-heavy makeup of BDAC will simply relegate the body to being a vehicle for advancing the interests of the telecommunications industry over those of the public” in his letter of resignation.

Whatever the BDAC ultimately decides, the final proposal has a long road to travel before becoming law. Each state can choose to adopt the proposal, part of it, or none of it. In the end, it is just a “model code” for states to consider. But it will be part of the argument made by the telecom industry that laws must be streamlined to prevent delays in deploying service, and that those benefiting from broadband should cover more of the costs to provide it.

Ironically, the person most likely to be embarrassed by the model code could be FCC Chairman Ajit Pai, who has almost universally rejected new taxes and fees on broadband services. But his approval is not required to advance the argument and the model code to the states, where the telecom industry’s lobbyists are waiting to begin advocating the passage of new state laws enacting its recommendations.

Forty companies, including hedge funds, phone companies, and wireless carriers have collectively bid $336,265,480 so far for about 2,500 28 GHz licenses (out of 3,072 available) that will be a part of the buildout of 5G millimeter wave wireless service.

The FCC is currently auctioning off spectrum in the 27.5–28.35 GHz (28 GHz) band — a very large chunk of frequencies which can offer bidders the opportunity to launch a wide bandwidth cellular data service capable of very fast internet speed. But because the frequencies involved are line-of-sight, the winning bidders will have to invest in large networks of small cell antennas that will be required to reach customers.

Citigroup analysts reviewing the auction results so far told clients they suspect there are “two outsized bidders” winning many of the available licenses, including Verizon. This is not a surprise, considering Verizon already has significant spectrum holdings in the 28 GHz band. Verizon’s current 5G service relies on this millimeter wave spectrum, but is available so far only in a handful of markets. The identity of the second major bidder remains a mystery. The spectrum licenses getting no bids are mostly in rural areas with low population density.

All the other major wireless operators — AT&T, T-Mobile, and U.S. Cellular — are also bidders. Only Sprint, currently in a merger deal with T-Mobile, is missing. AT&T has not shown much interest in offering its customers millimeter wave 5G service, and T-Mobile is planning to use 5G’s technology upgrade to bolster its existing network with more capacity and speed. Dish Network, which already controls a substantial portfolio of unused spectrum, is also a bidder and could be seeking to stockpile 5G spectrum for a future venture or sales deal with one of the other wireless companies.

The qualified bidders:

Bidding starts at $200 per available county, and many rural licenses could be won for precisely that amount, with only one interested bidder offering the minimum bid.

The highest bids are just over $10,000,000 each for two licenses in the Honolulu, Hawaii market. Bids in excess of $2 million are currently on the table in these counties:

California: Kern
Colorado: El Paso
Florida: Volusia
Illinois: Winnebago
Iowa: Linn
Louisiana: East Baton Rouge
Maine: Cumberland
Missouri: Greene
Nebraska: Lancaster
Nevada: Washoe
Oregon: Jackson
Pennsylvania: Lancaster, Berks, York, Lehigh, Luzerne, Northampton, Dauphin
Texas: Cameron, Hidalgo
Wisconsin: Dane

Pai

FCC Chairman Ajit Pai is leading the charge to define text messaging (SMS, MMS) as an “information service,” allowing phone companies a clear right to censor or block messages they do not like.

On Tuesday, Pai proposed a Declaratory Ruling that would deny a petition from consumer group Public Knowledge asking the FCC to once and for all affirm text messaging as a telecommunications service. The request goes all the way back to a 2007 dispute between NARAL — a reproductive rights group and Verizon Wireless. The wireless carrier blocked a text message campaign from NARAL, claiming it had the right to block “controversial or unsavory” text messages. It was the only wireless company to reject NARAL’s text-message program, which invited consumers to sign up for alerts and other information.

Legal experts told the New York Times private companies like Verizon probably had the legal right to decide which messages to carry, because text messaging was never defined as a “common carrier” service. Verizon Wireless at the time insisted it did not accept text messaging programs from any group “that seeks to promote an agenda or distribute content that, in its discretion, may be seen as controversial or unsavory to any of our users.”

Verizon claimed it was neutral on the subject of abortion, but the topic itself was forbidden to be discussed or raised in text messaging campaigns directed to customers.

That 2007 claim irritated then-NARAL president Nancy Keenan, who claimed Verizon was interfering with free speech and activism.

“No company should be allowed to censor the message we want to send to people who have asked us to send it to them,” Ms. Keenan told the newspaper in 2007. “Regardless of people’s political views, Verizon customers should decide what action to take on their phones. Why does Verizon get to make that choice for them?”

Pai says giving companies like Verizon the permanent right to manage the kinds of text messages allowed on their networks is a good way to stop texting spam.

“The spam rate for text messages is estimated at 2.8%, compared to a rate of over 50% for email. That’s not by accident,” Pai claimed. “Today’s wireless messaging providers apply filtering to prevent large volumes of unwanted messages from ever reaching your phone.”

Pai claimed that the effort underway to classify text messaging as a telecommunications service was anti-consumer and would open customers up to a lot more unwanted messages.

“This may not seem like a big deal, but such a classification would dramatically curb the ability of wireless providers to use robotext-blocking, anti-spoofing, and other anti-spam features,” Pai said in a blog post on Medium.

Feld

“It wouldn’t be the holiday season without Chairman Pai giving a great big gift basket to corporate special interests at the expense of American consumers,” said Harold Feld, senior vice president at Public Knowledge. “Chairman Pai proposes to grant the wireless industry’s request to classify text messages as Title I ‘information services,’ stripping away vital consumer protections. Worse, Chairman Pai’s action would give carriers unlimited freedom to censor any speech they consider ‘controversial,’ as Verizon did in 2007 when it blocked NARAL and prompted the Public Knowledge 2007 Petition.”

Feld claims Pai is only telling half the story.

“As the FCC made clear in 2016 (over then-Commissioner Pai’s dissent), text messages and robocalls are both ‘calls’ under the anti-robocall statute, and this Title II designation does not prevent filtering or other technological means to block unwanted robocalls or spam texts,” Feld said. “Indeed, Chairman Pai undermines his own argument by pointing out that email, which has always been an information service, has a 50 percent spam rate whereas text messaging, which the FCC treats as a ‘phone call,’ has a 2.5 percent spam rate.”

The FCC plans to vote on the matter, and is likely to adopt Pai’s proposal, at a meeting on Dec. 12.