The usually business-friendly editorial page of the Wall Street Journal published a surprising editorial this morning which threatens to cause a tear in the very fabric of space.  Why AT&T Killed Google Voice: Telecom Operators Are Yesterday’s Business — It’s Time for a National Data Policy That Encourages Innovation, strikes at the heart of the telecommunications industry’s business models, and dismisses them as increasingly outdated, anti-innovation and anti-consumer.

Welcome to our world.

Using the example of AT&T’s blocking Google Voice from iPhone users, which would allow them to bypass their AT&T plan to make long distance calls, author Andy Kessler, a former hedge fund manager, believes this was the moment America wakened to the realization that telecommunications companies and government policies block innovation and limit competition.

To that, I have to wonder, where has Kessler been the last decade?

Perhaps the Google Voice debacle impacted him personally, and that got his fur in a ruffle.  What AT&T did represents business as usual for those of us who have seen it all before.

Telecommunications companies have influenced most of the government policies that govern them, using high priced lobbyists, astroturfing friends, and bait and switch promises of magical service at dirt cheap prices, if only their legislative agenda becomes law.

Supporting them are many of the subscribers of the Wall Street Journal, investors and the investment media that tut-tuts new competitors or game-changing innovation that shakes up the marketplace, and launches price wars that threaten shareholder value. Legislation that hampers industry profits or enacts consumer protection is called “government interference” in most WSJ editorials, while deregulation that strips away oversight and ignores the abusive practices common in highly concentrated markets is advocated as the one-size-fits-all “free market solution.”

Apple has an exclusive deal with AT&T in the U.S., stirring up rumors that AT&T was the one behind Apple rejecting Google Voice. How could AT&T not object? AT&T clings to the old business of charging for voice calls in minutes. It takes not much more than 10 kilobits per second of data to handle voice. In a world of megabit per-second connections, that’s nothing—hence Google’s proposal to offer voice calls for no cost and heap on features galore.

What this episode really uncovers is that AT&T is dying. AT&T is dragging down the rest of us by overcharging us for voice calls and stifling innovation in a mobile data market critical to the U.S. economy.

I wonder what Kessler will think if AT&T’s market trials in Beaumont and Reno suggest they can limit his Internet access and then charge overlimit fees per gigabyte thereafter?  AT&T may have a lot more “dragging” capability than he realizes.

Andy Kessler

Is AT&T dying?  In the traditional wired phone line market, there is evidence they are headed into a slow decline as consumers dump overpriced and overtaxed phone lines for Voice Over IP or mobile phone service.  They certainly aren’t hurting in their mobile phone business.  They’ve become quite comfortable, thank you very much, splitting the majority of mobile telephone customers in the United States with Verizon Wireless.  The companies in real trouble are the smaller players fighting for the scraps thrown from the table — a declining Sprint, T-Mobile, Cricket, MetroPCS, among many others.  They are being told to merge with each other or die by Wall Street.

Is AT&T stifling innovation by being run badly?  Of course not.  They are leveraging their market power to limit potential competition or innovation that forces them into costly upgrades they’d prefer not to do.  With their expensive “public policy” initiatives (read that “K” Street lobbying), they’ve also got a lot of elected officials and government agencies on their side as well.  A Congress that doesn’t demand greater competition, strong antitrust oversight, and a ban on anti-consumer practices, coupled with a bunch of “don’t ask, don’t tell” oversight agencies that only respond to the most egregious abuses (until the media spotlight is turned off), represents the real problem here.

The trick in any communications and media business is to own a pipe between you and your customers so you can charge what you like. Cellphone companies don’t have wired pipes, but by owning spectrum they do have a pipe and pricing power.

True, except Kessler ignores the fact AT&T and Verizon do own wired and wireless pipes, from coast to coast.  Both companies are highly vertically integrated, often serving customers with everything from their basic telephone service to television, broadband, and mobile phone needs.  Customers are heavily marketed to pick up additional product lines from both companies — products not available from the smaller guys like Sprint, T-Mobile, and others.

Kessler also suggests it’s the bidding war for wireless spectrum that results in high prices for consumers.  Even if true, his free market friends would suggest that is the marketplace at work.  Of course, the real reason for high pricing in mobile service is the lack of competition coupled with the convenience of “stable pricing.”  Namely, the current carriers are quite comfortable not rocking the boat too much with one another, which explains why virtually all of them charge comparable prices for wireless data, text messages, and voice plans.  What they will fight for is handset exclusivity, because it never threatens price and service models.  In fact, it allows them to charge even higher premium pricing for highly-sought handsets and the mandatory service plans that sometimes accompany them.  The iPhone is a perfect example of that at work.

Kessler has four prescriptions to cure the American telecommunications ailment:

• End phone exclusivity. Any device should work on any network. Data flows freely.

• Transition away from “owning” airwaves. As we’ve seen with license-free bandwidth via Wi-Fi networking, we can share the airwaves without interfering with each other. Let new carriers emerge based on quality of service rather than spectrum owned. Cellphone coverage from huge cell towers will naturally migrate seamlessly into offices and even homes via Wi-Fi networking. No more dropped calls in the bathroom.

• End municipal exclusivity deals for cable companies. TV channels are like voice pipes, part of an era that is about to pass. A little competition for cable will help the transition to paying for shows instead of overpaying for little-watched networks. Competition brings de facto network neutrality and open access (if you don’t like one service blocking apps, use another), thus one less set of artificial rules to be gamed.

• Encourage faster and faster data connections to our homes and phones. It should more than double every two years. To homes, five megabits today should be 10 megabits in 2011, 25 megabits in 2013 and 100 megabits in 2017. These data-connection speeds are technically doable today, with obsolete voice and video policy holding it back.

An end to phone exclusivity will require government regulation, something unlikely to gain much support from his free market friends.  An even better idea is to stop the cozy relationship between carriers and phone manufacturers by allowing phones to be sold independently, without customers being pressured into two year contracts to enjoy a phone subsidy.  Any phone, sold anywhere, with compatible technology (GSM, CDMA, etc.) should work on any network without a company trying to browbeat customers into contracts, even when bringing along their own phone.  That customer should also be allowed to reprogram their phone to work with another compatible carrier at any time.

Kessler is naive about “owning” airwaves.  Since the government decided it could profit from auctioning them off to the highest bidder, they’ve become monetized and highly valuable.  They are no longer truly licensed in the public interest — they’ve become private property, to be vigilantly protected from encroachment.  Be it satellite, wireless telephony, radio, television, or innovative new services not yet launched, the moment someone applies for a license to share spectrum with existing providers, a chorus of complaints about potential interference arrives at the FCC, with scare stories about potentially massive disruptions.  In reality, the grounds for these hissyfits are more frequently about the fear of competition.

It’s time to admit the concept of airwave auctions has been shortsighted.  While it may bring the government revenue, it will be recouped from consumers as part of provider pricing models.  The higher the bids, the higher the price providers will charge customers for that service.  Let’s consider granting licenses not based on who can bid highest, but rather who can provide the best possible service at reasonable prices to the public.  Those that fail to serve the public interest, or engage in bad behavior, have the very real opportunity of losing that license.  That’s quite an incentive to serve customers first.  It’s such a pro-consumer, novel idea, expect millions of dollars to be spent on lobbying to make sure it never happens.

Municipal exclusivity deals for cable companies ended in 1992 as part of the Cable Television Consumer Protection and Competition Act (the only bill President George H.W. Bush vetoed that was overridden by Congress).  I know because I was integrally involved in fighting for that legislation.  In the last 17 years, there hasn’t exactly been a rush to wire up communities with competing cable companies, now has there?

Let’s be honest here.  Less regulation will not compel cable competition, no matter how much the astroturfers and special interest lobbyists promise it.  Construction and capital costs to “overbuild” a cable provider in most American cities are high enough to discourage investment from the private sector, particularly when they fear a price war will result and reduce profits, and shareholder value.  Overbuilders like El Grande in Texas had to sell themselves to a more capital-rich company just to find financing to build out their network.

I’m afraid without incentives like tax credits or other benefits, the prevailing attitude is that all but the largest cities will make due with one wired phone company and one wired cable company at best.  Only one major provider has seen fit to rewire their service areas with the most robust technological advancement – fiber to the home.  Verizon has done so, with considerable resistance from investors, in their effort to avoid the obsolescence Kessler foresees in the telephone line business.  But Verizon is only wiring limited areas, primarily in urban areas, but almost never in smaller communities.  For customers of other phone companies, particularly smaller independent providers, too bad for you.  Their only hope may be a publicly financed, or public-private partnership, fiber optic wiring project that acts as a common carrier.  Any provider can deliver their service over it, allowing customers to choose.

Because of the duopoly/monopoly state of cable and broadband service in the United States, Net Neutrality will never be protected through competition.  In Canada, when Bell throttled and interfered with Internet service, most cable competitors simply joined the party and did the same.  When a few upstarts, resold un-throttled Bell wholesale broadband service and made that a selling point, Bell simply throttled them, too, without warning.  That put a stop to that pesky competition problem.  Canada foreshadows what will likely happen in the United States without strong Net Neutrality legislation.

Finally, Kessler’s vision of what is holding back broadband speed totally ignores provider complicity in the slow momentum forward.  While some providers have a progressive attitude about speed, seeing faster broadband’s revenue earning-potential, others see it as an unnecessary expense that most consumers don’t really need.  Time Warner Cable, the nation’s second largest cable company, remains on record as being in no hurry to upgrade to DOCSIS 3 technology, unless one of their competitors threatens to beat their speeds.  In fact, they’ve expressed repeated interest in cost controls by experimenting with ways to limit data consumption, protect their video business model, and extract more revenue from customers at current speeds.

If Kessler was looking to the phone companies for an alternative, most Americans can forget it.  Most phone companies, especially smaller independents, have maintained a death grip on old school DSL technology, which provides 1-3Mbps service in rural areas, and “up to 10Mbps” (if you are very, very lucky) in urban and suburban areas.  They are rapidly losing wired phone customers and are holding out for whatever revenue they can grab from yesterday’s broadband technology, usually doing best only where cable doesn’t compete at all.  Some even want to limit consumption at the slow speeds those networks operate at today.  They are in no hurry to upgrade their existing copper wire networks, much less agree to the “double speed” plan Kessler has.

I’m sorry to say Kessler’s marketplace-based hopes and dreams for a better telecommunications world tomorrow are not forthcoming.  Without radical changes in the current “whatever the providers want is okay with us” regulatory approach we have today, the only innovation Kessler should expect to see is providers finding new ways to charge more money for the same service we have today.

We need a complete review and reality check about the total failure of the deregulation-solves-everything approach we’ve lived under for more than a decade.  If Kessler wants faster speeds, more competition, lower prices, and less market abuse, he will never find it without government involvement.  Remember, in the absence of real competition from those that actually want to compete to win, not just share the healthy proceeds from the status quo, we need stronger arguments than “the free market solves everything” and “won’t you please do it out of the goodness of your heart and civic duty?”

Om Malik managed a quick interview with the new chairman of the Federal Communications Commission, Julius Genachowski. In a wide-ranging interview about the competitive landscape of mobile broadband, which is to say there isn’t a whole lot at present, Malik managed a direct question about Internet Overcharging schemes:

Om: Phone companies and cable companies are trying to impose bandwidth caps on Internet access. By doing so, I feel (and many agree) that they’re actually limiting the scope of innovation. Maybe in that that case, we should think about the need to separate services (TV, video, etc.) from the pipe. What are your views on metered broadband?

Genachowski: It ties into an important policy decision the FCC will be confronting with how we drive a ubiquitous broadband infrastructure that’s open and robust and delivers on the promise of the Internet for all Americans. To tackle these questions we will be focusing on the real facts around what’s going on and what policies will best promote ubiquitous broadband and innovation. It’ll be an ongoing topic. It’s something that consumers of Internet services pay a lot of attention to and we’ve seen that in reactions to some of the events over the last year.

That’s about as non-committal an answer as ever out of the FCC.  The usual formula is there:

1. Express concern.
2. Define the issue in terms of the Commission’s general policy direction and goals.
3. Promise sober assessment of the issue.
4. Under no circumstances commit to anything specific that might get the attention of the press and/or Congress.

Consumers cannot enjoy open and robust broadband that delivers on innovation from providers that are rationing access and charging top dollar for it.  Internet Overcharging schemes represent the best way to run a bypass around Net Neutrality by simply limiting and/or overcharging for access, killing enthusiasm for high bandwidth services like video that challenge current cable television business models.

At least he notes consumers have been pounding the issue with elected officials and the Commission sufficient to warrant mention of it.

Preston County, WV

Verizon issued a press release this morning celebrating the availability of DSL service to nearly 200 new lines in Albright, West Virginia.  They even pinpointed the service expansion to “areas along Coal Lick Road near the intersection of Route 22 and 26.”

Satellite image showing the sparsely populated Coal Lick Road/Rt. 26 Intersection (click to enlarge)

While that presumably makes residents on Coal Lick Road happy, vast areas of West Virginia remain unserved by DSL or any other broadband service option, except for prohibitively expensive satellite Internet.  Preston County has 30,000 residents spread 0ut over 651 square miles, and is typical of many sparsely populated counties in West Virginia.  The nearest large city is Pittsburgh, Pennsylvania.

Verizon has stopped referring to its broadband solution for copper wire telephone networks as “DSL,” now marketing it as “Verizon High Speed Internet” instead.  Speed is in the eye of the customer, however.  Like most rural areas with Verizon DSL, the entry level tier offers speeds only up to 1Mbps downstream and 384kbps for the upstream.  Customers willing to pay more can select the “premium” service offering up to 3Mbps downstream and 768kbps upstream.  In larger towns and smaller cities, service up to 7.1Mbps may be available.

“Verizon is enabling more residents and businesses across West Virginia to make the high-speed connections that are important to them,” said B. Keith Fulton, president of Verizon West Virginia.  “Verizon’s investment in the Albright area means that more customers have access to affordable High Speed Internet service, backed by the reliability and security of Verizon’s network.”

Verizon is also demonstrating its commitment to West Virginia by leaving the state, intending to sell off its telephone service to Frontier Communications, a deal still pending regulatory approval.

For West Virginia, broadband expansion to just a few hundred homes, warranting a press release, demonstrates the incremental, slow progress of broadband expansion outside of urban America.

Here comes the Astroturf

Deborah Taylor Tate, a Bush-appointed ex-commissioner on the Federal Communications Commission is now earning her paycheck regurgitating telecommunications industry talking points of behalf of the astroturf group, the Free State Foundation.

In an editorial in today’s Washington Times (thanks to reader Mitchell for alerting us about it), Tate perfectly falls in line with the talking points Stop the Cap! readers can repeat in their sleep, right down to ripping off AT&T’s “grandmother” analogy from several weeks ago.  Her employer, the Free State Foundation, has a long history of advocating pro-industry positions in opposition to consumer interests.  Having a former credentialed FCC official doing the industry talk is designed to impress.

Tate, who was never impressive as an FCC commissioner and maintains her ongoing unimpressive credentials at FSF, phones it in with a fact-free piece entitled, “Paying for Use is Fair,” in which she directly advocates for Internet Overcharging schemes, attempting to convince readers it will somehow save them money on their broadband service.

Her efforts to tell the story of “paying for what you use” will be comical to those in the communities where such “experiments” were conducted, because Tate either doesn’t know or care about the details of the market experiments she writes about.

Most broadband consumers would be astounded that some members of Congress want to block our ability to pay for broadband Internet use in precisely the same way we now pay for other commodities: Pay more if you use more; pay less if you use less.

Most consumers would be astounded an ex-FCC commissioner got the basic facts wrong about the basis of such pricing schemes.  No broadband provider has ever offered a “pay for what you use” pricing scheme.  They have only offered “pay MORE for what you use, and a lot more if you use more than you thought.”

This comes on the heels of Time Warner’s rapid retreat from a pilot test of pay-for-use broadband pricing, bowing to congressional pressure and protests from consumer groups. Studies have indicated the top 25 percent of users have consumed 100 times more bandwidth than the bottom 25 percent. So, what is fair about one-price-fits-all if someone uses 100 times more than you do?

At least Tate barely acknowledges another basic truth about these pricing schemes: the overwhelming majority of Americans do not want this kind of pricing model, and more than half would leave their existing provider if they tried to force them into one.

The “studies” Tate writes about do not exist.  They are claims by the providers themselves, which have never allowed for an independent review of the raw data the companies claim to base their findings on.  Nor does it account for the industry’s “need” to increase every consumer’s broadband bill with overcharging schemes based on limited consumption allowances and credit card-like overlimit penalties and fees.  Indeed, this is an industry with profits well into the billions of dollars whose costs are actually declining, along with their willingness to invest in growing their networks.  One need only review quarterly and annual financial reports issued by the providers’ themselves to learn the truth.  These companies are not hurting for profits.

Even where monopolies exist, pricing has generally been based on the notion that customers are charged more if they consume more and less if they use less. Obviously, beyond basic necessity, they could exercise some self-control, and could even save money through metering that measured consumption. This is especially true in an environment where consumers have options for providers of broadband, cell phones and now, in many cases, electricity.

Broadband pricing has been flat rate since the service was launched by phone companies providing DSL and cable operators launched cable modem service in most areas of this country.  That’s because broadband has been cheap, capacity plentiful, and profits high.  Absolutely nothing has changed in that equation, except a desire by broadband providers to dramatically grab additional profits, reduce demand with threats of overlimit fees or service being cut off for overuse, and attempts to invest less in their networks.  Controlling online video is critical for most of the providers who find that a competitive threat to their television service business model.

Tate doesn’t bother to contemplate increased competition, seeming happy enough to acknowledge monopolies do exist and then moving on to something else.  That mimics the FCC’s position over the past eight years, so that comes as no surprise either.

Whether run by local co-ops, governments or profit-making firms, any network has substantial capital costs to build out infrastructure, provide service, expand capacity and meet higher demand, particularly at peak periods. The same network cost issues also apply to Internet service providers. Expanding bandwidth and capacity for the exponential growth of Internet traffic is expensive. Updating security applications to prevent cybercrime are increasingly necessary for government, business and individuals, driving up costs even further. The supply of fiber optic cable and computer servers is not infinite, and we are already facing network constraints. We have all experienced the network being slowed by periods of heavy usage. Broadband providers — just like wireless providers — should be allowed to use a consumption model without government interference as long as consumers know and understand what they are paying for.

To date, there has been a surprising uniformity in billing for broadband Internet service. But why should a grandmother who checks e-mail once a day or makes an occasional purchase online be charged the same monthly rate as a researcher downloading massive data files or teenagers watching full-length movies every day? Why not provide consumers the freedom to monitor and control their own use — and to benefit from volume-based rate packages?

AT&T should consider legal action against Tate for plagiarizing their talking points.  In fact, her entire argument is part of the grand Re-education campaign we’ve written about since Time Warner Cable temporarily shelved their overcharging scheme back in April.  The “exaflood” nonsense, the “it’s expensive to spend money to upgrade our networks” whining, and the hissyfit over consumers using their service just as these same providers marketed them are all in there.

Deborah Taylor Tate: The Marie Antoinette of Internet Pricing

At least Tate is consistent — she never cared about consumers like you and I during her stay on the FCC, and she still doesn’t care about consumers by doing the bidding of groups like the Free State Foundation.

What do Washington Times readers think?  Not much of Tate or her positions.  Among them:

“Wow, did you just pull a page out of the telecom’s lobbyist manual to come up with this article?  They are doing this to prevent new technologies from making them an antiquated model, and they are doing it to get more money out of the customer. I promise it has nothing and I mean nothing to do with saving your grandma a single cent.”

“Are you being paid by the cable co? Seriously. Do you even realize with the utter lack of competition and the fact that the cable company enjoys a monopoly in most all of their markets, pricing for use is utterly bad for consumers.”

“Bill is right, you’re just reading talking points at this point, and not looking at the actual economics or technology behind it.”

“Deborah, Please take a moment to think for yourself instead of shilling for an industry. Metered billing has nothing to do with customer choice, please don’t pretend that it does. This is about making more money off of existing usage, while avoiding upgrading of networks and services.”

“So for instance, using the same logic and same company, when I call for traditional phone service, they are quick to sell me an “Unlimited” minute plan for $40.00/month.”

“Metered usage is nothing more than a money grab by the content providers. Their current business model is being threaten by media content being available via streaming services.”

In the end, consumers like you and I pay part of our monthly broadband bill to providers that are cutting checks to astroturf groups to advocate against consumer interests.  Imagine if they spent some of that money on their network upgrades, and a little less funneled to inside-the-beltway hackery written by underwhelming ex-officials-turned-insider-special-interests.

The quest for fiber-based broadband service from consumers has reached the point where many have decided to accept or decline offers to purchase property in new housing developments based on whether they’ll have access to fiber or not.  Those were the findings in a study from the Fiber to the Home Council, which surveyed more than 600 existing fiber-to-the-home (FTTH) customers and 600 other broadband customers nationwide.

The results clearly show consumers love fiber optic broadband, far more than cable modems or DSL service from the phone company.

For example, 67% of FTTH users were very satisfied with their broadband speed compared to 58% of cable modem users and 46% of DSL users. A total of 70% of FTTH users were very satisfied with their Internet service up time compared to 64% of cable modem users and 55% of DSL users.

Consumers also reported that FTTH service was faster… much faster than competing technologies.  The median tested download speed from FTTH users was 10.4Mbps. FTTH tested download speed was 51% higher than cable modem service and 593% higher than DSL (DSL has abandoned the speed war, having lost that race to competing technologies, and now prevails only on price and where other alternatives are not available).

Upload speeds offered by FTTH users blew away the competition.  The average subscriber had 2.4Mbps of upload speed, which is 380% higher than cable modem users and 500% faster than DSL.

The survey also showed that robust competition, with at least one provider bringing true fiber to the home service to consumers, meant an average of six percent lower broadband bills.

Some cable and telephone industry executives downplay the lust for speed by consumers, claiming that most don’t understand the differences in speed, and don’t utilize services where speed matters most.  But the FTTH survey found entirely different results.  Not only are FTTH customers extremely loyal and happy with their service, they are reluctant to move to places that don’t offer it.

When asked to imagine purchasing a new home and given a list of five real estate development amenities, both current and non FTTH broadband users rated “Very high speed Internet from a direct fiber line” more important than other amenities such as green space/walking trails, 24 hour neighborhood patrol, a community pool, and a fitness center/club house. 69% of non FTTH users and 82% of current FTTH users said “Very high speed Internet” would be an important factor in buying a new home.

Even in this difficult economy, 49% of FTTH users said their broadband service would be the “last thing” they would give up.  Only 11% said it would be among the first things to go.

The demand is there, but the competition is not in many American communities.  Unless consumers reside in an area where an aggressive provider such as Verizon is willing to deploy fiber to the home, the chances of service arriving anytime in the near future is dismally low.  Few telephone companies are interested in deploying widespread fiber networks to consumers, and most cable operators believe their existing hybrid fiber/coaxial cable networks are “good enough” for consumers.  Only when a third player arrives in town, be it a private competitor or a municipally-owned fiber network, do telephone and cable providers get interested in performing their own fiber upgrades.

AT&T believes in its own copper-wire-based U-verse technology.  Smaller independent telephone companies are doing only limited experiments with fiber deployment, primarily to multiple dwelling units like apartment buildings and condos, and other uniform, expansive new housing developments.

Until prevailing attitudes among providers change, consumers hungering for fiber may simply have to pack up and relocate to the lucky communities that already have it, or will soon.