Garofalo

Outrage from Minnesota’s elected officials representing rural districts around the state has embarrassed Minnesota House Republicans into grudgingly restoring a token amount of broadband funding to help small communities get online.

Earlier this month, the GOP majority’s budget proposal completely eliminated broadband development grants, which amounted to $20 million in 2014. Republicans attacked the spending as unnecessary and a wasteful “luxury.” The money was reallocated towards promoting tourism.

Budget point man Rep. Pat Garofalo (R-Farmington) said hardwired Internet access was outdated.

“The future is wireless and satellite Internet,” Garofalo declared, adding these were better, cheaper options for rural Minnesota.

Rural Minnesota strongly disagreed.

The West Central Tribune in Willmar declared the GOP budget proposal very disappointing to everyone in rural Minnesota.

“Rural Minnesota will continue to fall behind in broadband access and, in turn, the critical factors of quality of life, education, economic opportunities, access to health care and many other positive benefits,” the newspaper wrote in an editorial.

Rural Minnesota Broadband: Nothing to write home with a quill pen about.

“We are astonished as to why the House would ignore one of the state’s biggest economic development needs,” said Willmar City Council member Audrey Nelsen, a member of the Coalition of Greater Minnesota Cities’ board. “The lack of high-quality broadband affects communities and regions all across the state.”

“We agree,” the paper declared.

“High-speed Internet service is not a luxury, it is an absolute necessity for job and business growth,” said executive director Dan Dorman of the Greater Minnesota Partnership.

House Republicans seem intent on stomping out rural Minnesota’s digital economy. Broadband coverage in these areas is a disgrace: Kandiyohi County is third lowest in Minnesota, at only 13.18 percent, in the percentage of households with access to broadband that meets state-speed goals. Surrounding counties with low access percentages include: Chippewa at 24.47 percent, Yellow Medicine at 25.69, Swift at 30.41, Pope at 31.40 and Renville at 58.29.

In 2013, Gov. Dayton’s Broadband Task Force Report recommended a $100 million infrastructure fund to start addressing the $3.2 billion total investment needed statewide to address this issue. Garofalo seems ready to concede to an $8 million token allocation some Democrats call insulting.

Rep. Tim Mahoney said he believed 10 years of an annual $20 million investment would solve the rural broadband problem in Minnesota in a decade. The St. Paul Democrat believes with the GOP’s budget, it will take forever.

“For them to come up with $8 million is kind of ridiculous,” Mahoney said. “It’s almost a slap in the face.”

Garofalo believes AT&T and Verizon’s forthcoming home wireless broadband solutions will solve Minnesota’s broadband problems, without considering those services are expensive and tightly usage-capped. Satellite Internet is condemned by critics as costly “fraudband,” often speed-throttled and usage capped.

Fiber Internet, in Garofalo’s world view, is “yesterday’s technology,” despite ongoing investments in fiber to the home Internet around the world, including investments from companies including AT&T, Verizon, Google, and others that now offer fiber technology capable of speeds in excess of 1Gbps.

Sober assessments of the different broadband technologies available in Minnesota are already available from the state’s Office of Broadband Development. Garofalo’s budget resolves the ideological conflict between his views and theirs by eliminating the agency.

Garofalo said to save rural broadband, the state government must first kill any plan that might interfere with the private sector.

“The private sector won’t invest if it senses that the government is coming in with something else,” he said.

Without throwing Garofalo totally under the nearest tourist bus, House Ways and Means Committee chairman Jim Knoblach said the state needs rural broadband funding, even if other options such as wireless Internet may be a more efficient way to tackle the problem down the road.

“There are people waiting for broadband now that I think this would help,” the St. Cloud Republican said, supporting the restoration of $8 million in funding.

Verizon’s FiOS expansion is still dead.

Verizon Communications does not see its remaining landline customers as part of the company’s future growth and customers should not be surprised if Verizon sells more of its legacy network to other telephone companies including Frontier, Windstream, and CenturyLink.

Speaking at the Morgan Stanley Technology, Media and Telecom Conference 2015 on March 2, Verizon chief financial officer Fran Shammo made it clear to investors Verizon will dump “non-core” assets that do not align with the company’s future long-term growth strategy, even in areas where FiOS predominates.

Shammo told investors Verizon’s growth strategy is predicated on Verizon Wireless, which will continue to get most of the company’s attention and future investment.

“It’s all around the wireless network and I’ve consistently said before, you should anticipate that wireless CapEx continues to trend up while wireline continues to trend down,” Shammo said.

The bulk of Verizon’s investments in its wired network are being made in areas that are already designated as FiOS fiber to the home service areas. Shammo explained that the company is required to invest in FiOS expansion to comply with agreements signed in cities like New York and Philadelphia to make the service widely available in those communities. Beyond those commitments, Shammo signaled the company isn’t planning any significant new spending to upgrade the rest of its legacy copper network.

“We continue to invest in those things that we believe are the future growth of the company,” Shammo said, and anything involving its wired networks outside of Verizon’s core FiOS service area in the northeast and Mid-Atlantic states probably doesn’t qualify.

What will happen in Verizon service areas that are not considered priorities?

“For the right price and right terms, if there’s an asset we don’t believe is strategic to Verizon and can return shareholder value, we’ll dispose of that asset,” Shammo said.

An example of that strategy was Verizon’s sudden announcement in February it would sell its wireline assets in Florida, California, and Texas to Frontier Communications for $10.54 billion. Although a significant part of those service areas are served by FiOS after Verizon invested more than $7 billion on upgrades, Verizon still plans to abandon customers and walk away from that investment because it is not part of Verizon’s future growth strategy.

“If you look at Florida, Texas, and California, these are three island properties,” Shammo told investors. “FiOS is a very small footprint of those properties compared to the copper [except in] Florida because it was just Tampa. But you look at that and you say strategically there’s really not much we can do with those properties because they are islands.”

Verizon will spend the proceeds from its latest landline sale on the wireless spectrum it just acquired and will pay down some of the debt incurred after buying out Vodafone’s former ownership stake in Verizon Wireless. The company has also undertaken a massive share repurchase program, planning to buy back 100 million shares by 2017 to help its shareholders. To ease investor concerns about some of Verizon’s latest strategic moves, it also announced plans to buy back an extra $5 billion worth of shares in the second quarter of this year.

A close review of the latest Verizon sale to Frontier shows the extent Verizon believes in its wireless business at the cost of its legacy copper and FiOS networks. That comes as no surprise to Verizon observers who note its current CEO used to run Verizon Wireless.

Shammo, as featured on a recent cover of CFO Studio magazine.

“It’s been clear for years that Verizon has wanted out of the copper business,” said Doug Dawson from CCG Consulting. “They first sold off large portions of New England to Fairpoint. Then in 2010 they sold a huge swath of lines in fourteen states to Frontier including the whole state of West Virginia. And now comes this sale. It’s starting to look like Verizon doesn’t want to be in the landline business at all, perhaps not even in the fiber business.”

Verizon’s latest sale involves “higher margin properties than the rest of our wireline business,” Shammo said, in part because large parts of the urban service areas involved were previously upgraded to FiOS.

“So if you look at Dallas, we were over 50% penetrated both in TV and broadband,” said Shammo. “So, it was a very highly penetrated market that was delivering a lot of cash flow and delivering a lot of earnings. So by just divesting of the three properties, if you just did it on an apples-to-apples basis, there would be dilution.

Giving up that amount of cash flow — needed to win back the $7 billion in FiOS upgrade investments Verizon made in the three states — would normally concern investors worried about the “stranded costs” left over from investments that were never fully repaid. But Verizon has a plan for that: an “Involuntary Separation Plan” (ISP) for more than 2,000 Verizon employees, a polite way to describe job-cutting layoffs.

“We have a year to plan for this and the plan is similar to what we did with the last time we rolled properties out from Frontier,” Shammo said. “We will plan to offset the stranded cost and those plans are already being worked. You saw a little bit of that in the fourth quarter where we gave some ISPs to the represented employee base and we had 2,100 people come off payroll.”

Verizon’s growing preoccupation with Verizon Wireless leaves some analysts questioning the company’s wisdom giving up high-profit FiOS broadband in favor of wireless at a time when competition among wireless companies is finally emerging.

“Verizon reports an overall 41% market penetration for its data product on FiOS networks,” said Dawson. “Data has such a high profit margin that it’s hard to think that FiOS is not extremely profitable for them. The trend has been for the amount of data used by households to double every three years, and one doesn’t have to project that trend forward very far to see that future bandwidth needs are only going to be met by fiber or by significantly upgraded cable networks.”

Considering the wireless market is maturing and most everyone who wants a cell phone already has one, there are questions about where Verizon sees future growth in a business where it is getting harder to attract new customers.

“Verizon was a market leader getting into the fiber business. FiOS was a bold move at the time,” Dawson reflects. “It’s another bold move to essentially walk away from the fiber business and concentrate on wireless. They obviously think that wireless has a better future than wireline. But since they are already at the top of pile in cellular one has to wonder where they see future growth?”

Phillip “I Want My Money Back” Dampier

For months, Time Warner Cable has deployed its legal team to prevent public interest groups from gaining access to the company’s exhibit of rural broadband buildout plans it had for New York, sent confidentially to the Public Service Commission as part of its proposal to merge with Comcast.

“This information would be difficult and costly for a competitor to compile, such that disclosure would significantly harm Time Warner Cable’s competitive advantage,” Time Warner Cable’s lawyers complained to regulators handling the case. “To allow competitors to have access to this information before Time Warner Cable has had a chance to market customers for which it speculatively built the line would not only negate any competitive advantage, it would allow its competitors to reap the benefits of Time Warner Cable’s investment, causing substantial competitive and financial injury to Time Warner Cable.”

“The compilation of information on all the Time Warner Cable New York deployments, distances, and passings into one document would be of enormous value to a competitor,” the lawyers added. “This information could not be developed independently by competitors, and any estimates developed through publicly available data or data from third-party sources, if possible at all, would be expensive and burdensome to assemble, and less accurate than the data provided in Exhibit 46. […] Therefore, disclosure of the compilation of information on the New York Rural Builds would cause substantial competitive injury to Time Warner Cable, and should be granted exception from disclosure.”

One might expect the mighty Exhibit 46 to contain all of Time Warner’s deepest secrets — secrets that if made public would hand the “competition” the keys to the cable kingdom.

Despite the haughty demands that such information was not to be shared with the public, Stop the Cap! secured our copy of the “top-secret” Exhibit 46 (and here is a copy for you as well).

After reviewing it, it quickly became clear the only thing Time Warner Cable intended to keep secret is how little expansion (and money) the company is devoting to rural New York. The nine-page spreadsheet shows Time Warner spent $5.3 million of New York’s money to expand service to, at most, 5,320 homes or businesses that had no access to cable before. The largest beneficiary of this expansion was the rural (and more affluent than its neighbors) town of Grafton, in Rensselaer County, where 1,152 homes now have access to Time Warner Cable if they want it. An additional 875 homes in Carlisle, Schoharie County now have access as well. Despite dire warnings from Time Warner, “competitors” are hardly rushing to the scene to engage in hand-to-hand combat with the cable company, which is the only provider of broadband service for many of these residents.

As for the rest of upstate New York, Exhibit 46 offers about as much relevance to “competitors” as it does to the rural residents still being bypassed by the cable company. Most of the entries show Time Warner’s expansion projects reached fewer than 10 homes in any particular area. In a large number of those instances, the expansion ended up serving just one additional home or business.

Some examples:

• Town of Clarence, Erie County – 4 homes or businesses
• Town of Henrietta, Monroe County – 1
• Town of East Bloomfield, Ontario County – 22
• Town of Paris, Oneida County – 1
• Town of Manheim, Herkimer County – 1
• Town of Kirkwood, Broome County – 7
• Town of Tupper Lake, Franklin – 116
• Town of Gouverneur, St. Lawrence County – 29
• Town of Brookfield, Madison County – 139
• Town of Jefferson, Schoharie County – 3
• Town of Big Flats, Chemung County – (either 2 or 4 – the entry is duplicated)
• Town of Pompey, Onondaga County – 1

Of the 5,320 homes or businesses now provided access to Time Warner service, 4,104 were subsidized up to 75 percent by the State of New York. Just 1,216 locations were apparently reached exclusively at Time Warner Cable’s own expense.

New Yorkers paid most of the bill because Time Warner Cable couldn’t find $5.3 million in their company coffers to bring broadband to rural residents. But Time Warner Cable could find $80 million to cover the golden parachute compensation package available to just one employee – CEO Robert Marcus, if the company is successfully sold to Comcast for around $45 billion.

Priorities.

No wonder Time Warner Cable’s attorneys fought so hard to keep the “expansion” effort a secret.

Verizon’s FiOS expansion is still dead.

Verizon Communications signaled today it plans further cuts in investments for its wireline network, which includes traditional copper-based telephone service and DSL as well as its fiber-optic network FiOS.

“We will spend more CapEx in the wireless side and we will continue to curtail CapEx on the wireline side,” Verizon’s chief financial officer Fran Shammo told investors this morning. “Some of that is because we are getting to the end of our committed build around FiOS.”

Instead of expanding its FiOS fiber to the home network to new areas, Verizon is trying to increase its customer base in areas previously wired. It is less costly to reconnect homes previously wired for FiOS compared with installing fiber where copper wiring still exists.

Verizon continues to lose traditional landline customers, so the company is increasingly dependent on FiOS to boost wired revenue. The fiber network now accounts for 77% of Verizon’s residential wireline revenue.

Wherever FiOS exists, it has taken a significant number of customers away from cable competitors. FiOS Internet has now achieved 41.1% market penetration, with 6.6 million customers, up 544,000 from last year. Of those, the majority want broadband speeds they were not getting from the cable company. At the end of 2014, 59% of FiOS Internet customers subscribe to broadband speeds above 50Mbps, up from 46% at the end of 2013.

Despite the success of FiOS, Verizon’s senior management continues to devote more attention to its highly profitable Verizon Wireless division, spending an even larger proportion of its total capital investments on wireless services.

In 2014, Verizon spent $17.2 billion on capital expenditures, an increase of 3.5% over 2013. But only $5.8 billion was spent on maintaining and upgrading Verizon’s landline and FiOS networks, down 7.7% over 2013. Verizon Wireless in contrast was given $10.5 billion to spend in 2014. The company is using that money to add network density to its increasingly congested 4G LTE network. In many cities, Verizon Wireless is activating its idle AWS spectrum to share the traffic load and is accelerating deployment of small cell technology and in-building microcells to deal with dense traffic found in a relatively small geographic area — such as in sports stadiums, office buildings, shopping centers, etc.

Verizon Wireless is branding its network expansion “XLTE,” which sounds to the uninitiated like the next generation LTE network. It isn’t. “XLTE” simply refers to areas where expanded LTE bandwidth has been activated. Unfortunately, many Verizon Wireless devices made before 2014 will not benefit, unable to access the extra frequencies XLTE uses.

With Verizon increasing the dividend it pays shareholders, the company is also cutting costs in both its wired and wireless divisions:

• Verizon Wireless’ 3G data network will see a growing amount of its available spectrum reassigned to 4G data, which is less costly to offer on a per megabyte basis. As Verizon pushes more 4G-capable devices into the market, 3G usage has declined. But the reduced spectrum could lead to speed slowdowns in areas where 3G usage remains constant or does not decline as quickly as Verizon expects;
• Verizon will push more customers to use “self-service” customer care options instead of walking into a Verizon store or calling customer service;
• The company will continue to move towards decommissioning its copper wire network, especially in FiOS areas. Existing landline customers are being encouraged to switch to FiOS fiber, even if they have only landline service. Copper maintenance costs are higher than taking care of fiber optic wiring;
• Verizon has accelerated the closing down of many central switching offices left over from the landline era. As the company sells the buildings and property that used to serve its network, Verizon’s property tax bill decreases;
• Verizon will continue cutting its employee headcount. Shammo told investors in December, Verizon Communications cut an extra 2,300 employees that took care of its wired networks.

President Barack Obama

President Barack Obama will be in Cedar Falls, Iowa today to announce steps his administration plans to take to improve broadband in the United States, including a call to end laws that restrict community broadband development that limits competition.

“Today, too few Americans have affordable and competitive broadband choices, but some communities around the country are choosing to change that dynamic,” says a statement issued by the White House. “As a result – as outlined in a new report being issued today – cities like Lafayette, Chattanooga, and Kansas City, have broadband that is nearly one hundred times faster than the national average, yet still available at a competitive price. By welcoming new competition or building next-generation networks, these communities are pioneers in broadband that works, and today in Cedar Falls, Iowa, the President is highlighting their remarkable success stories and providing municipal leadership and entrepreneurs new tools to help replicate this success across the nation.“

The report, produced by the National Economic Council and Council of Economic Advisers, finds no evidence to support industry contentions that community-owned broadband duplicates existing broadband services and wastes taxpayer dollars. It also challenges cable and phone industry-backed groups claiming publicly owned broadband networks are business failures.

It cites the success of Chattanooga’s EPB Fiber service, operated by the local municipal utility. Not only is EPB successful financially, but it has introduced Chattanooga residents to the kind of competition sorely lacking in most cities for telecom services.

“EPB’s efforts have encouraged other telecom firms to improve their own service,” states the report. “In 2008, for example, Comcast responded to the threat of EPB’s entrance into the market by investing $15 million in the area to launch the Xfinity service – offering the service in Chattanooga before it was available in Atlanta. More recently, Comcast has started offering low-cost introductory offers and gift cards to consumers to incentivize service switching. Despite these improvements, on an equivalent service basis, EPB’s costs remain significantly lower.”

In Wilson, N.C., Time Warner Cable customers pay significantly less for cable and broadband service than other North Carolina customers because of the presence of Greenlight, the community-owned fiber to the home provider. TWC customers in Wilson pay stabilized prices for service while residents in the nearby Research Triangle pay as much as 52 percent more for basic Internet service, according to the report. Greenlight’s competition has brought gigabit broadband to the community as well as lower prices for customers who decide to remain with Time Warner. The combined savings is estimated at more than $1 million annually for Wilson residents.

EPB is the municipal utility in Chattanooga, Tenn.

Those who believe municipal broadband is a waste of taxpayer dollars should consider the story of Lafayette, La.’s LUS Fiber. In addition to bringing superior broadband service to a city dominated by a cable operator that used to treat the market as an afterthought, the presence of LUS’ fiber to the home network has forced Cox Cable to improve service, offer significant customer retention deals to departing customers and defer rate increases. The investment in community broadband has saved residents an estimated $4 million from rate hikes that went ahead in other Cox cities, with an estimated total savings of between $90 and $100 million for Lafayette-area broadband customers over LUS’ first 10 years of service.

Taxpayer-supported institutions like local government, law enforcement, and schools have also seen dramatic savings by switching to municipal solutions. In Scott County, Minn. the local government’s annual bond payment for constructing their own broadband network is $35,000 less than what the county used to pay private companies for a much slower network. Area schools that formerly paid private sector telecom companies $58 per megabit of Internet speed now pay $6.83 — a savings of nearly 90 percent. Schools also received dramatic speed increases from 100 to 300Mbps. They paid less for more service — from $5,800 a month before to $2,049 a month today. Those payments go straight back to the county government instead of into the hands of out-of-state investment bankers and shareholders. On the state level, Minnesota’s public institutional network is saving taxpayers almost $1 million a year.

With the broadband profit gravy train for big cable and phone companies grinding to a halt in competitive areas, several of these companies have spent millions lobbying state governments to outlaw public broadband services. They have succeeded in 19 states, primarily with the assistance of the corporate-funded American Legislative Exchange Council (ALEC), which appeals to primarily Republican lawmakers with claims government broadband is unfairly competing with the private sector. In fact, private providers have not been driven out of communities where they face municipal competition, but they have been forced to lower prices and improve service for customers.

Today the president will call for a new effort to support local self-determination for broadband by strongly opposing industry-backed, anti-competitive deterrents and bans on community-owned networks. The president will also sign a letter addressed to FCC chairman Thomas Wheeler encouraging him to move forward with a federal ban on state broadband laws that restrict broadband development.

He will also announce additional funding for rural broadband expansion and take steps to bring local leaders together to explore how the development of community broadband initiatives in their cities and towns can make a major difference in the 21st century digital economy. The president recognizes that most Americans lack sufficiently competitive choices for broadband service and often have just one choice — the cable company — for broadband speeds greater than 25Mbps. That means many Americans are seeing their broadband speeds lag while their monthly bills continue to grow.

Community-owned broadband may be the only alternative many cities have for better broadband as would-be competitors are scared off by high construction costs and an inability to secure cable television programming at competitive prices for their customers.