Phillip “It’s hard to trust a group that so spectacularly flip-flopped on Internet policies when its benefactor AT&T changed its tune” Dampier

When Republican FCC Commisioner Ajit Pai turned up last week at a telecom symposium to warn a more activist FCC could ruin broadband providers’ efforts to charge consumers more money for less service, he was speaking to a very friendly audience.

The conservative Phoenix Center, which ran the event, has been spewing out industry-friendly “research reports” for years that attempt to justify the country’s sky-high broadband pricing. It also promotes a “hands-off” mindset on industry oversight, calling it common sense and consumer-friendly.

Unfortunately for the group and its supporting authors, it has a serious credibility problem — exposed as an industry-funded “think tank” operating as a mercenary research arm for AT&T and other phone companies. In fact, the same group that today generates endless research condemning Net Neutrality had a very different position in 2004 when it published an Op-Ed entitled, “Net Neutrality: Now More Than Ever.”

What changed? Its benefactor. In 2004, AT&T was a competing long distance carrier fighting local phone companies. Today it –is– one of those phone companies. With its Baby Bell owners controlling AT&T’s purse-strings starting in 2006, the Phoenix Center dutifully flip-flopped to maintain continuity with the ‘new AT&T,’ strongly opposed to most forms of broadband regulation.

So it comes as no surprise the Phoenix Center continues pumping out cheerleading “research reports” that attempt to bolster credibility to forces opposing Net Neutrality and supporting an Internet Overcharging free-for-all with the help of usage billing and caps.

One particular bit of nonsense that completely ignores marketplace reality came in Phoenix Center Chief Economist Dr. George Ford’s report, “A Most Egregious Act? The Impact on Consumers of Usage-Based Pricing.”

For example, Ford argues:

A prohibition of differential pricing renders a single price that lies between the low price for the restricted service and the high price for the unrestricted service. Therefore, prohibitions against usage based pricing forces some consumers to pay more for services they do not want or use, while others are allowed to pay less for services they do. The prohibition, in effect, results in a transfer of wealth from one group of consumers to another, and profits are also reduced. Overall consumer welfare is diminished, even though some consumers are better off.

We’re number one… in prices, even with the increasing prevalence of usage-based pricing Ford believes benefits consumers. (Image: CRTC)

But Ford completely ignores the current conditions in today’s broadband market that have made it easy for providers to promulgate an unpopular end to flat rate, unlimited broadband in favor of a highly-flawed, usage-based billing policy:

1. Ford ignores the broadband market is essentially a duopoly for most consumers and effectively a monopoly in rural America. That gives providers what they call “pricing power,” the ability to increase prices at will and change pricing models because consumers are dependent on the service and have limited options to take their business elsewhere;
2. The only “transfer of wealth” involved here is from consumers to providers. While profits soar and costs drop, Ford complains that those using the service more are somehow subsidized by lighter users, when it fact providers enjoy a 90-95% gross margin on broadband. As Time Warner Cable CEO Glenn Britt admitted, the most significant cost attributed on the cable company’s balance sheet for broadband comes from its backbone traffic costs, which are minuscule in contrast to the increasing prices the cable company charges for its broadband service;
3. Consumer welfare is reduced primarily from the high costs charged by providers, made possible by scant competition that would otherwise drive prices downwards, not from expenses associated with broadband traffic;
4. Ford is careful not to advocate for a true usage-based billing system that would be a revenue nightmare for his benefactors. In a strict usage-based pricing model, customers would pay a small fee for infrastructure, support, and equipment expenses and a variable charge based on actual usage. But no provider in the United States advocates for this system. Instead, providers force consumers into tiered broadband plans that include different usage allowances the vast majority of customers will either not exhaust or will exceed, which raises profits even higher with usage overlimit penalties. With no unused usage rollover, most customers are in the same position Ford claims will diminish consumer welfare: paying for service they do not want or use;
5. Most consumers favor unlimited, flat use plans even if they could save money with a usage-constrained pricing model. Since keeping customers happy with a more expensive unlimited plan they like instead of a lower priced plan they don’t want would seem to enhance provider profits. But Ford ignores this reality, perhaps understanding providers are actually laying the groundwork to broadly monetize Internet usage. Whether a provider adopts usage-based billing or a strict cap on usage, which is growing in most households, the inevitable result is still the same: more profits, less cost from constrained usage. Inevitably this will force customers into higher-priced, higher-profit upgrades that deliver a higher usage allowance, again something consumers simply do not want. This is already a reality in the wireless marketplace, and is well-acknowledged by both AT&T and Verizon Wireless.

Still keeping their fingers on the pulse of West Virginia’s broadband.

The state of West Virginia has a money problem.

In 2009, the state applied for and won a $126 million federal Broadband Technologies Opportunity Program (BTOP) grant to expand broadband service in a state plagued with some of the worst Internet access around. That grant will expire Jan. 31, without all of the money spent and equipment in place.

Whatever money is left unspent will be returned to the federal treasury and lost for good. That represents the absolute worst-case nightmare scenario for government officials loathe to leave money on the table. As a result, the state continues to hurry depleting the remaining grant funds before the clock runs out, even if it results in controversial spending decisions.

Last week, the chairman of the West Virginia Broadband Deployment Council openly admitted the state does not have a unified, coherent broadband deployment plan and has been running the broadband expansion effort on an ad hoc basis. That’s a big mistake in the eyes of Dan O’Hanlon, a retired Cabell County circuit judge who leads the Council.

It should not be this difficult. Ask virtually any consumer in rural West Virginia about what needs to be done and the answer is always the same: expand access in unserved areas and raise speeds for those who already have the service.

Unfortunately, $126 million of consumers’ tax dollars will be spent without really doing either.

The Obama Administration’s efforts to expand rural broadband came with lofty rhetoric, but far too often failed to directly address the problem. Consumers and small businesses want Internet access, and the local phone company simply won’t deliver it. Forget about cable broadband — most rural areas without Internet access are not served by any cable operator.

Phillip “Verizon and Frontier have built West Virginia’s taxpayer-funded broadband network in their own image” Dampier

That leaves the federal government in the position of trying to fund rural Internet connections in ways that don’t appear as blatant corporate welfare — paying off phone companies to provide service where they have simply refused for revenue and cost reasons. Competitors are also outraged at the precedent of directly subsidizing certain players but not others, and a lot of taxpayers might question why their tax dollars are going to the phone company.

As a result, the government has discovered a politically palatable alternative: throwing money at non-controversial “institutional” networks built to serve local governments, hospitals, public safety agencies, libraries, and schools. They also have political cover funding obscure “middle mile” networks that interconnect telecommunications company offices, but don’t directly serve any homes or businesses.

Since most people don’t understand the differences between these types of networks and the services they actually provide, broadband expansion projects offer politicians headache-free ribbon cutting ceremonies, applause, and positive publicity from local media reports that mistake institutional and middle mile networks with broadband finally coming to rural towns and villages. Long after the cartoon-sized ribbon-cutting scissors are put away, rural residents still find themselves stuck with dial-up or satellite fraudband.

Last week, the Joint Committee on Technology overseeing the BTOP grant learned the state lacks a plan to get the most broadband bang for the buck, despite hiring some big dollar Verizon subcontractor-consultants that are supposed to be experts at this kind of thing.

As Stop the Cap! reported in May, the state decided to spend $24 million of taxpayer money to buy 1,064 overpowered Cisco routers built (and priced) for big city university use. Imagine the surprise of rural schools and libraries when routers valued at $22,000 each arrived to serve a handful of concurrent users that would have been just as well-served with equipment you can find at Best Buy. Those routers were coincidentally supplied by a familiar vendor: Verizon Network Integration.

Two years later, more than 300 of those routers were in storage, unused. As of this week, 175 are still there.

This $22,000 router, paid for at taxpayer expense…

Two rural librarians in May told Stop the Cap! they were in a quandary over the equipment installed in their tiny libraries because they had no idea how to switch them on, much less maintain them over the long term. Even worse, both told us, they cannot begin to afford the ongoing monthly service fees that are required to participate in the new broadband network.

“We are getting a Hummer network on a Kia operating budget,” one librarian told Stop the Cap! last spring. “The network sounds great, but in our case we have to find the money to pay the bill to run it every month, and that money is hard to find in a library with five outdated public terminals.”

Seven months later and not a lot has changed.

“We have complained to our local leaders this has created more problems for us than it solved,” that same librarian, who could not use his name because of local politics, told Stop the Cap! “If you have worked in government or community service as long as I have, you cringe whenever you have one of these grants because you have to follow the federal government’s rules and you end up spending the money where it least needs to be spent.”

…will provide service for this rural library’s four public terminals. (Image: West Virginia Gazette)

Committee members echoed that sentiment, observing facilities are ending up with equipment they don’t know how to use or cannot afford because monthly service charges for upgraded broadband from Frontier Communications, the state’s largest phone company, are unaffordable.

One proposed solution to cut further taxpayer expense would be to sell the excess network capacity, deemed significant in many communities, to third party Internet Service Providers to directly resell to individual homes and businesses. After all, taxpayers are footing the bill for the $126 million grant that largely paid for the network and independent ISPs would help solve the problem of extending broadband to the unserved.

No deal. Frontier claims it is selling the project broadband access far below normal commercial rates, offering high capacity speeds at an unspecified “entry-level” price. Allowing third party companies to resell that service would put independent ISPs in direct competition with Frontier.

Unfortunately, well-intentioned members the West Virginia Broadband Deployment Council, the Joint Committee on Technology, and other government officials are in over their heads and increasingly appear captive to the design, recommendations, and implementation of a network plan heavily influenced by high-paid Verizon consultants and implemented on a broadband network owned and operated by Frontier Communications.

That left Gale Given, the state’s chief technology officer claiming critics of earlier spending decisions were engaged in “second guessing.” With the expensive routers mostly already in place, Given offered it was better for schools and other institutions to have more capacity than they need now so they won’t be hamstrung if they ever want to expand.

“Only one problem: Ms. Given assumes we can afford to turn the key on the network they are building us now,” said one librarian this week. “Only we can’t. Worrying about what we can do tomorrow is pointless when we can’t even afford to do it today.”

As much as 90 percent of your monthly broadband bill represents pure gross profit for your phone or cable provider, according to the Wall Street Journal:

Cable executives and analysts say that about 90% of the money cable operators charge for broadband goes straight to gross profits, since there are minimal operational costs for providing Internet service.

Canadian Radio-television and Telecommunications Commission

Most of the expenses incurred by cable operators that today dominate the broadband market came from cable system upgrades that began in the early 1990s to accommodate the introduction of digital cable television and other services like digital cable radio, expanded pay-per-view and on-demand features, home security, telephone service, and the launch of cable broadband.

Most of those upgrades were paid off years ago, and the costs of bandwidth and network upgrades to handle increased data demands are proving to be both incidental and declining.

What has not declined is the price consumers pay for service.

Among Canada, the USA, Japan, the United Kingdom, France and Australia, Americans pay the highest prices and are seeing the largest rate increases for Internet access, especially after 2011, according to the Canadian Radio-television and Telecommunications Commission which tracks global broadband pricing.

Canadian Radio-television and Telecommunications Commission

Tomorrow is election day in the United States. Stop the Cap! has reviewed both presidential candidates’ positions (or the lack thereof) as well as the past voting records and platforms of members of both major political parties. With this in mind, it is time for our election guide for broadband enthusiasts. Regardless of what candidate you support, please get out and vote!

Neither political party or candidate has been perfect on broadband advocacy or consumer protection.

We’ve been disappointed by the Obama Administration, whose FCC chairman has major problems standing up to large telecom companies and their friends in the Republican-led House of Representatives. Julius Genachowski promised a lot and delivered very little on broadband reform policies that protect both consumers and the open Internet. Both President Obama and Genachowski’s rhetoric simply have not matched the results.

Bitterly disappointing moments included Genachowski’s cave-in on Net Neutrality, leaving watered down net protections challenged in court by some of the same companies that praised Genachowski’s willingness to compromise. Genachowski’s thank you card arrived in the form of a lawsuit. His unwillingness to take the common sense approach of defining broadband as a “telecommunications service” has left Internet policies hanging by a tenuous thread, waiting to be snipped by the first D.C. federal judge with a pair of sharp scissors. But even worse, the FCC chairman’s blinders on usage caps and usage billing have left him unbelievably naive about this pricing scheme. No, Mr. Genachowski, usage pricing is not about innovation, it’s about monetizing broadband usage for even fatter profits at the expense of average consumers already overpaying for Internet access.

Obama

Unfortunately, the alternative choice may be worse. Let’s compare the two parties and their candidates:

The Obama Administration treats broadband comparably to alternative energy. Both deliver promise, but not if we wait for private companies to do all of the heavy lifting. The Obama Administration believes Internet expansion needs government assistance to overcome the current blockade of access for anyone failing to meet private Return On Investment requirements.

While this sober business analysis has kept private providers from upsetting investors with expensive capital investments, it has also allowed millions of Americans to go without service. The “incremental growth” argument advocated by private providers has allowed the United States’ leadership role on broadband to falter. In both Europe and Asia, even small nations now outpace the United States deploying advanced broadband networks which offer far higher capacity, usually at dramatically lower prices. Usually, other nations one-upping the United States is treated like a threat to national security. This time, the argument is that those other countries don’t actually need the broadband networks they have, nor do we.

The Obama Administration bows to the reality that private companies simply will not invest in unprofitable service areas unless the government helps pick up the tab. But those companies also want the government to spend the money with as little oversight over their networks as possible.

That sets up the classic conflict between the two political parties — Democrats who want to see broadband treated like a critically-important utility that deserves some government oversight in its current state and Republicans who want to leave matters entirely in the hands of private providers who they claim know best, and keep the government out of it.

FCC Chairman Julius Genachowski’s regular cave-ins for the benefit of Big Telecom brought heavy criticism from us for his “cowardly lion” act.

Just about the only thing the two parties agree on is reforming the Universal Service Fund, which had until recently been directing millions to keeping traditional phone service up and running even as Americans increasingly abandon landlines.

But differences quickly emerge from there.

The Obama Administration believes broadband is increasingly a service every American must be able to access if sought. The Romney-Ryan campaign hasn’t spoken to the issue much beyond the general Republican platform that market forces will resolve virtually any problem when sufficient demand arises.

Republicans almost uniformly vociferously oppose Net Neutrality, believing broadband networks are the sole property of the providers that offer the service. Many Republicans characterize Net Neutrality as a “government takeover” of the Internet and a government policy that would “micromanage broadband” like it was a railroad. Somehow, they seem to have forgotten railroad monopolies used to be a problem for the United States in the early 20th century. Robber barons, anyone?

President Obama pushed for strong Net Neutrality protections for Americans, but his FCC chairman Julius Genachowski caved to the demands of AT&T, Verizon, and the cable industry by managing Net Neutrality with a disappointing “light touch” for those providers. (We’d call it “fondling” ourselves.)

Democrats favor wireless auctions and spectrum expansion, but many favor limits that reserve certain spectrum for emerging competitors and for unlicensed wireless use. Republicans trend towards “winner take all” auctions which probably will favor deep-pocketed incumbents like AT&T and Verizon. The GOP also does not support holding back as much spectrum for unlicensed use.

Republicans have been strongly supporting the deregulation of “special access” service, critical to competitors who need backhaul access to the Internet sold by large phone companies like AT&T. Critics contend the pricing deregulation has allowed a handful of phone companies to lock out competitors, particularly on the wireless side, with extremely high prices for access without any pricing oversight. The FCC under the Obama Administration suspended that deregulation last summer, a clear sign it thinks current pricing is suspect.

Romney

Opponents of usage-based pricing of Internet access have gotten shabby treatment from both parties. Republicans have shown no interest in involving themselves in a debate about the fairness of usage pricing, but neither have many Democrats.

As for publicly-owned broadband networks, sometimes called municipal broadband, the Republican record on the state and federal level is pretty clear — they actively oppose community broadband networks and many have worked with corporate front groups like the American Legislative Exchange Council (ALEC) to ban them on the state level. Democrats tend to be more favorable, but not always.

The biggest problem broadband advocates face on the federal and state level is the ongoing pervasive influence of Big Telecom campaign contributions. While politicians uniformly deny that corporate money holds any influence over their voting, the record clearly indicates otherwise. Nothing else explains the signatures from Democrats that received healthy injections of campaign cash from companies like AT&T, and then used the company’s own talking points to oppose Net Neutrality.

But in a story of the lesser of two-evils, we cannot forget AT&T spends even more to promote Republican interests, because often those interests are shared by AT&T:

• AT&T has spent nearly $900,000 on self-identified “tea party” candidates pledged to AT&T’s deregulation policies;
• AT&T gave nearly $2 million to the Republican Governors Association — a key part of their ALEC agenda;
• AT&T gave $100,000 to everyone’s favorite dollar-a-holler Astroturf group — The Heartland Institute, which opposes Net Neutrality and community broadband.

Extensive flooding caused by Hurricane Sandy swamped the ground floor of Verizon’s headquarters at 140 West St. in lower Manhattan.

Verizon Communications, the largest telecommunications company in the northeast, has been trying to assess the widespread damage to its wireline, fiber, and wireless networks but remains hampered by major damage to its own operations centers and leftover flooding in coastal areas.

Verizon’s headquarters in lower Manhattan on West Street had several feet of water on the ground floor Monday night. At noon today, Verizon called conditions below 39th Street in lower Manhattan “bleak” because of flooding. Verizon’s network technical facilities received extensive damage in the area, and some facilities had water high enough in basements to damage backup power equipment. The company spent the last day just pumping flood water out of their facilities in the area and is now bringing in new generators to power buildings and restore service.

The venerable landline, now considered a relic by a growing number of Americans, may prove to be the hardy survivor of Hurricane Sandy, holding up well in areas upstate and in parts of New York City where spotty cell service has left residents doing the unthinkable – lining up in front of working pay phones.

With cell phone batteries all but dead and power restoration likely to take days if not weeks, Verizon’s self-powered landlines that survived the storm are holding up, even if customers’ memories are not.

“The good news is the payphones that are still left are working, the bad news is who can remember anyone’s phone number anymore?” says Stop the Cap! reader Richard, who has been without power since Monday night. “Cell phone contact lists don’t help much until you can recharge your phone.”

Several New Yorkers are joining Richard looking for community centers and public libraries with working electrical outlets to recharge cell phones while catching up with e-mail on computer terminals that still have Internet access. Some boroughs remain virtually cut off from the rest of New York with roads, tunnels, bridges and public transport only gradually reopening on a limited basis.

Verizon called conditions south of the Garment District in lower Manhattan “bleak.”

Verizon’s Satellite Solutions Group is sending several emergency mobile communications vehicles to New Jersey and New York this evening to provide communications services to the impacted region. The disaster recovery fleet is completely self-contained and does not require any commercial power to operate. The mobile vehicles offer voice, data and Internet connectivity as well as charging capabilities for mobile devices.

“Sandy has left a trail of destruction throughout the Mid-Atlantic and Northeast, with historic flooding in New York and New Jersey and a hurricane-fueled snowstorm in southwest Virginia and western Maryland,” said Bob Mudge, president of Verizon’s consumer and mass business division.  “We are asking the public to remain focused on staying safe as there may be dangerous conditions such as fallen trees or power lines.  Our dedicated employees – from technicians to customer service consultants – run to a crisis and will continue to do what it takes to put customers back in touch.”

For that to happen, Verizon is waiting for electric utilities to get service back up and running. The company suspects most of its problems are related to electric service interruptions that will resolve once power is restored. But in lower Manhattan and along the coastline, more significant damage is likely to take longer to repair.

Verizon facilities in lower Manhattan, Queens and Long Island have received major damage from severe flooding, interrupting commercial power and rendering backup power systems inoperable.  In some cases, Verizon teams have not been able to access the sites, due to flooding and safety concerns.

As battery backup and generated power fails, additional central offices could lose service until Verizon crews can reach those facilities. Where flood waters have wreaked havoc with Verizon’s equipment, it could take a week or more to restore service. In such cases, it’s crucial to consider hiring a water damage restoration service to expedite the recovery process. For detailed information on water damage restoration, please see page.

Verizon Wireless service is reportedly in better shape, with 94% of cell sites still working, according to the company.

But with heavy call volumes and interruptions to Verizon’s backhaul connections which connect cell towers to Verizon’s network, having good reception is no guarantee customers will be able to complete calls or receive them.

Many New Yorkers report outgoing calls go nowhere and incoming calls go straight to voicemail, even with phones powered on.

Other Verizon notifications affecting customers across the northeast:

“All circuits are busy” or “Your call cannot be completed at this time”

Some Verizon customers in the Mid-Atlantic and Northeast region of the U.S. may receive a message of “All circuits are busy” or “Your call cannot be completed at this time” when trying to make a call. This is due to an unusually large volume of calls in the network as a result of Hurricane Sandy. Our engineers are working to accommodate this additional call volume. We apologize for any inconvenience this has caused.

Shipment Delays

As storm related transportation disruptions clear, Verizon customers will begin to receive shipments of routers, set top boxes and cabling. However, there may continue to be delays in completing deliveries due to road conditions. We will continue to process orders and ship equipment to our customers as quickly as possible.

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