Gov. Ivey signs SB149.

Alabama Governor Kay Ivey last week signed into law SB149, the Alabama Broadband Accessibility Act, authorizing the creation of a broadband accessibility grant program to be administered by the Alabama Department of Economic and Community Affairs. The bill, sponsored by Senator Clay Scofield (R-District 9) and Representative Donnie Chesteen (R-District 87), also creates the Alabama Broadband Accessibility Fund.

According to a press release from the governor’s office, there are more than 842,000 people in Alabama without access to a wired connection capable of 25 Mbps download speeds. Over 1 million people in Alabama have access to only one wired provider and another 276,000 people don’t have any wired internet providers available where they live.

“The internet is vital to economic development, health, education, and to be honest, all areas of our modern life. This common sense legislation will help us attract new broadband to areas that need it most, especially in rural Alabama,” Governor Ivey said. “I congratulate Senator Scofield and Representative Chesteen for a job well done in seeing this bill through the legislature. It is just another step forward as we improve access to high-speed internet sooner rather than later.”

Sen. Scofield

Media reports claimed the new bill would help “thousands” of Alabama’s unconnected to get access to broadband service for the first time. A closer look at the legislation shows an effort to encourage private internet providers in the state to expand their networks in areas they currently consider unprofitable to serve.

At the heart of the new law is up to $20 million in state tax credits for providers willing to expand broadband:

1. A state income tax credit equal to 10% of the new investment a provider spends to build or upgrade broadband service in a qualified unserved area.
2. A 10-year exemption from sales tax for any qualified broadband network facilities that are built with new investment, starting the date those upgrades go live.
3. A sales tax exemption applicable to the purchase of equipment needed for the upgrade.

Rep. Chesteen

There are annual caps on the credits, limiting the amount Alabama is willing to spend on the program:

1. $750,000 limit per provider if the upgrade provides up to 10/1 Mbps service;
2. $1,400,000 limit per provider if the upgrade delivers up to 25/3 Mbps service.
3. $20 million annual cap on program – $18 million designated for rural projects, $2 million for areas that do not receive at least 10/1 Mbps service.

In contrast, New York State’s rural broadband expansion effort paid $209.7 million in the third round of its funding program alone to extend service to an additional 122,285 rural homes, businesses and community institutions. Fairpoint Communications (today doing business as Consolidated Communications) received $3.2 million — more than twice the maximum amount Alabama will pay any one provider — to extend service to just 407 homes in the Capital and mid-Hudson region of the state.

Alabama is also counting on the Trump Administration’s infrastructure improvement spending program that will enable applicants to finance a project by combining loans and grants to provide broadband to eligible rural and tribal areas. But almost all that money will be spent on private providers, and will cover only a small portion of their costs. For a broadband expansion program to be successful, providers will have to determine if the amount of tax credits and exemptions available will allow such projects to pass the critical Return On Investment (ROI) test companies use to decide where to offer service.

Dommermuth

The billionaire founder of United Internet, a Frankfurt based ISP with a 14% market share of Germany’s broadband market, has proposed the creation of a new jointly owned company to construct a nationwide fiber-to-the-home broadband network to improve German connectivity.

Ralph Dommermuth said German telecom leader Deutsche Telekom must be a decisive member of the alliance in a country where only 2.5% of homes are connected to fiber optic broadband. Dommermuth complained that the new government formed by Chancellor Angela Merkel only pledged €10-12 billion over the current parliamentary session to create what she calls a “Gigabit Society” by 2025. He believes that amount is completely inadequate.

In an interview with newspaper Welt am Sonntag, Dommermuth said Merkel’s government would contribute only a small fraction of the €80 billion he estimates is needed to wire up to 70% of the country with fiber optics.

German companies have already warned Germany’s economy was at risk from underinvestment in broadband, especially as business and transportation systems are increasingly powered by broadband networks.

Deutsche Telekom (DT) is frequently blamed for the mediocrity of German broadband. Its CEO Tim Hoettges has been heavily criticized for his decision to embrace upgrading its existing copper-based DSL service with “vectoring” instead of rebuilding its network using fiber optics. Although vectoring can significantly improve the speed of DSL connections, critics say it is a technological dead-end and further upgrades are limited and costly.

Hoetgges answers his critics by arguing Deutsche Telekom has spent more money on broadband — €5.4 billion — in the last year than all of its competitors put together.

Most ISPs in Germany are dependent on Deutsche Telekom to reach customers. United Internet, which does business under the 1&1 brand, pays DT for access to its DSL lines, over which it offers internet access.

Behind the controversy is what company ultimately controls Germany’s fiber optic telecom future. DT argues since it has spent the most money necessary to bring limited optical fiber connectivity to Germany, it should not have to share access to that network equally with its competitors. Hoettges said that would allow companies like United to profit from his company’s investments. To attract additional investment, DT wants control over the fiber optic network it is slowly building.

Dommermuth argues the country cannot wait the significant number of years it will take DT to expand that network on its own, which is why he proposes a consortium, with each member company paying a portion of the costs relative to its market share.

Verizon will spend most of the benefits gained from the Trump Administration’s tax cuts on writing off investments that will reduce the company’s tax exposure and boosting its dividend to shareholders.

Verizon’s chief technology officer Hans Vestberg told shareholders at an investment conference the company had no plans to spend the $3.5-$4 billion more in operating cash flow that will result from tax cuts on network upgrades, while it will continue to cut as much as $10 billion in costs out of its business over the next four years.

Verizon has attempted to converge its traditional wireline business with its wireless unit since buying out its partner Vodafone. As the two networks gradually merge, Verizon is continuing job cuts and expense reductions, even as the company will enjoy a $16.8 billion reduction in its deferred tax liabilities because of the new permanently lowered 21% corporate tax rate.

Vestberg argued Verizon was likely to waste money if it spent its anticipated windfall on accelerated network upgrades.

“You probably don’t want to have big spikes in the capital allocation because then in the end it drives inefficiencies. We want to be consistent,” Vestberg said. “From an execution point of view you want to be consistent. It’s not helpful to go up and down in capital allocation because it ramps up and down resources—money wasted … But we are always debating. And we should debate in a leadership team the size of Verizon.”

Verizon currently pays out more than three-quarters of its annual income to shareholders in the form of quarterly dividend payments. This morning, Verizon announced it would award 50 shares of restricted Verizon stock to virtually every employee except those in top management. On Tuesday, Verizon stock traded at around $53 a share, making the stock bonus potentially worth around $2,650 for each worker. But employees may not be permitted to sell their shares immediately. In earlier compensation packages that included restricted shares, the stock could not be sold for at least two years, and was subject to forfeit if an employee left the company during that window.

Verizon’s operating plan for 2018 includes a spending budget of $17 billion, an amount that has not changed as a result of the new tax law. Verizon is expected to allocate a significant amount of its budget towards its wireless services, particularly 5G development.

Western New York

In a recent survey of 2,000 residents living in Erie County (Buffalo), N.Y., it was clear almost nobody trusts their internet service provider, and 71% were dissatisfied with their internet service.

Seventeen years after many western New York residents heard the word “broadband” for the first time at a 2000 CNN town hall at the University of Buffalo, where then U.S. Senate candidate Hillary Rodham Clinton called for increased federal funding for high-speed internet, many upstate residents are still waiting for faster access.

The Buffalo News featured two stories about the current state of the internet in western New York and found it lacking.

Erie County Executive Mark C. Poloncarz blames internet service providers for serving up mediocre broadband, and no service at all in some parts of the county he represents.

“It’s been put in the hands of the private sector, and the private sector has, for whatever reason, elected to not expand into particular areas or not increase speeds in particular areas, putting those areas behind the eight ball,” he said.

Poloncarz effectively fingers the three dominant internet providers serving upstate New York – phone companies Verizon and Frontier and cable company Charter/Spectrum. He argues that companies will not even consider locating operations in areas lacking the most modern high-speed broadband. The digital economy is essential to help the recovery of western New York cities affected by the loss of manufacturing jobs and the ongoing departure of residents to other states.

Poloncarz

An important part of Gov. Andrew Cuomo’s statewide broadband improvement initiative is prodding Charter Communications and its predecessor Time Warner Cable to do a better job offering faster internet speeds and more rural broadband expansion. The New York Public Service Commission, as part of its approval of Charter’s acquisition of Time Warner Cable, extracted more concessions from the cable giant than any other state. Among them is a commitment to expand the cable company’s footprint into adjacent unserved areas by 2020 to reach at least 145,000 homes and businesses now outside of Charter’s service area.

Last week, the cable company told the PSC it was ahead of schedule on its expansion commitment, now reaching 42,889 additional households and businesses, which is above its goal of 36,771. It has two years left to add at least another 102,111 buildings.

Charter also recently increased broadband speeds to 100 Mbps for 99% of its customers in New York and has committed to boosting those speeds to 300 Mbps by the end of next year.

But where Charter does not provide service, broadband problems come courtesy of western New York’s biggest phone companies – Verizon and Frontier. In Erie County, a broadband census found a lack of service in parts of South Buffalo, the far West Side and East Side of Buffalo, as well as in parts of every town in the county except in the prosperous communities of West Seneca and Orchard Park. Verizon FiOS can be found in a handful of well-to-do Buffalo suburban towns, but not in the city itself or in rural parts of the region.

Verizon spokesman Chris McCann said the company had no further plans to expand FiOS service in upstate New York, and stopped announcing additional expansions in 2010. In the rest of its service area, Verizon supplies DSL service as an afterthought, and has made no significant investments to improve or expand service. Frontier Communications, which is the dominant phone company in the greater Rochester region, also provides service in some other rural western New York communities, but its DSL service rarely meets the FCC’s minimum speed definition to qualify as  broadband.

Rep. Collins

Both phone companies have no plans for significant fiber optic upgrades that would boost internet speeds. There is little pressure on either company to begin costly upgrades. In rural communities, both companies lack cable competition and in more urban areas, both have written off their ongoing customer losses to their cable competitor. That leaves towns like North Collins in a real dilemma. Poloncarz told the newspaper residents frequently park in the town library parking lot at night to connect to the library’s Wi-Fi service, because they lack internet service at home.

A political divide has opened up between area Democrats and Republican officials on how to solve the rural broadband problem. Democrats like Poloncarz are exploring solving the rural internet problem with a county-owned fiber network that would be open to all private ISPs to assist them in expanding service. He is joined by Erie County legislator Patrick Burke, who thinks it is time to spend the estimated $16.3 million it will take to build an “open access network” across Erie County.

“There are literally geographic dead zones, and it’s unnecessary,” said Burke, a Buffalo Democrat. “There’s no excuse.”

Poloncarz is more cautious and told the newspaper he will only propose the idea if he is convinced it will solve the problem, but is willing to continue studying it.

Republicans from the western New York congressional delegation believe deregulation and other incentives may give private companies enough reasons to begin upgrades and expansion.

Rep. Chris Collins, a Clarence-area congressman with close ties to the Trump White House, defended FCC Chairman Ajit Pai’s recent decision to eliminate net neutrality. Pai was born in Buffalo.

Collins argues net neutrality only raised the cost of business for ISPs, and being rid of it would inspire cable and phone companies to boost investment in 105 exurban and rural towns in his district, which covers eight counties and extends from the Buffalo suburbs east to Canandaigua, 80 miles away. More than 65% of those areas are under-served because DSL is often the only choice, and at least 3.3% had no internet options at all.

Rep. Tom Reed (R-Corning) has just as many internet dead zones in his district, if not more. Reed represents the Southern Tier region of western New York in a district that runs along the Pennsylvania border from the westernmost part of New York east nearly to Binghamton. Much of recent broadband development in this part of New York comes as a result of Gov. Cuomo’s state-funded broadband expansion initiative, not private investment.

Reed has a record in Congress that is better at explaining the rural broadband dilemma than solving it.

“In a rural district, there are areas that are just physically difficult to serve,” Reed shrugged.

Collins’ hope that the banishment of net neutrality will inspire Frontier, Verizon, and Charter to use their own money to expand into the frontiers of western New York seems unlikely. Gov. Cuomo’s plan, which uses public funds to help subsidize mostly private companies to expand into areas where Return On Investment fails to meet their metrics has had more success.

But the rural broadband debate has been accompanied by a fierce pushback among upstate New Yorkers against the Republican-controlled FCC and elected officials like Collins who support the recent gutting of net neutrality. A backlash has developed in his district, and some have accused Collins of aiding and abetting a corporate takeover of the internet.

“The hysteria and narrative that this will kill the internet is blatantly false,” responded Collins. “Internet service providers have said they do not increase speeds for certain websites over others, and I have signed onto legislation that would make such a practice illegal.”

Some of America’s top telephone and cable companies will likely pay little, if any federal taxes as a result of the passage of a Republican-sponsored tax cut plan, while some may also receive generous “refunds” based on depreciation-related expenses and future investments the companies would have made with or without changes to the tax code.

For several years in the last decade, companies with significant infrastructure expenses often did not spend a penny in federal taxes thanks to generous loopholes and incentive programs designed to encourage corporations to invest in new equipment, research, and development. The new Republican-sponsored tax cut is expected to provide a windfall of tax savings for every corporation in the country, but telecom companies are expected to do especially well with a combination of a lower corporate tax rate and the GOP’s failure to fulfill a commitment to close many of the tax loopholes and incentives that were originally designed to get companies spending during the Great Recession.

No provider has promised customers lower rates as a result of the billions of additional dollars the companies are expected to keep in the bank starting next year. In fact, there are early signs that much of the anticipated windfall will be returned to shareholders in the form of increased dividend payouts and accelerated share buyback schemes that reduce the number of shares available for sale, boosting both the sale price of the stock and executive bonus compensation tied to the price performance of the stock.

Despite that, companies including AT&T and Comcast are cranking up their PR machines to get on the good side of the Trump Administration, suggesting the new tax cuts will directly benefit middle class employees at both companies.

AT&T’s capex increased $1.1 billion to $11.2 billion for the first six months of 2017 without the tax cut legislation.

AT&T announced it would pay a one-time $1,000 bonus to its workers and invest an additional $1 billion in network upgrades as a direct result of the tax cuts.

However, a closer look reveals AT&T’s commitments to boost compensation came not as a result of the tax cut but instead from nearly a year of hard negotiations with the Communications Workers of America (CWA), one of the biggest unions representing AT&T workers.

The CWA argued that AT&T needed to follow-through on the Republican Party’s promise that passage of the tax cuts would result in higher wages for the middle class.

“Republicans, including the president, said the average household would get $4,000 under this tax plan,” CWA spokesperson Candice Johnson told The Daily Beast. In November, CWA officials began to demand $4,000 raises for AT&T workers promised by the GOP. “This bonus came out of that conversation. It’s a start, and we’re going to keep holding our leaders accountable.”

Instead of $4,000 more a year for AT&T workers as a result of the tax cut bill, the union’s influence achieved a $1,000 one time bonus and an average salary bump of 10.1%. Without pressure from the union, many AT&T employees and union officials believe AT&T would have offered little, if anything to its employees as a result of the tax cut.

AT&T’s Christmas Bonus will cost the company a fraction of the amount it risks losing if its $109 billion merger deal with Time Warner, Inc., does not survive an antitrust review by the Justice Department and the courts. The Justice Department announced its opposition to the merger. The connection between AT&T’s press release, which plays into the Trump Administration’s talking points about the tax cut law, and AT&T’s need for a friendlier response to its merger deal by administration officials, was not lost on Crane’s Chicago Business:

By now, companies have learned the art of crafting the type of upbeat, largely symbolic press releases our president loves, with enough big numbers to get them on the White House’s good side. If this time around that also means some extra money in workers’ pockets, all the better. But some of these announcements come across as more gimmicky than others, and it’s not hard to wonder if there are also other motives at work.

AT&T is angling to overcome regulatory objections to its $109 billion merger with Time Warner Inc. and either way, needs to invest in the U.S. to build out its fiber-optic cable and 5G networks. Analysts estimate AT&T’s net income will be close to $14 billion this year.

AT&T’s commitment to spend up to $1 billion additional dollars next year as a direct result of the tax cut is recycled old news, critics charge, because AT&T previously announced the same $1 billion commitment in early November. Regardless, the extra spending is a small fraction of AT&T’s overall capex budget.

In 2016, at the height of so-called “investment-killing net neutrality,” AT&T exceeded its 2016 capex forecast, spending $22.9 billion — $900,000 more than it expected. In 2017, AT&T announced it expected to spend $22 billion again this year, primarily on its wireless network and wired business solutions. The other major former Baby Bell – Verizon Communications, spent $17.1 billion in 2016 and expected to spend up to $17.5 billion this year.

AT&T’s promise to spend an additional $1 billion is a token amount, especially when considering the tax cut savings likely to be won by phone companies like AT&T and Verizon. From 2008-2015, AT&T paid an effective federal tax rate of just 8.1%, according to the Institute on Taxation and Economic Policy. It will pay considerably less under the Republican tax law, potentially saving the company billions. During the same period, Verizon paid absolutely zero federal taxes during many of those years, and in fact won a refund from the IRS because of network investments and depreciation-related savings. Because the GOP did not close many of the corporate loopholes the politicians initially promised would be ended, many telecom companies could once again pay little, if any federal tax, and may secure hefty refunds.

Source: Institute on Taxation and Economic Policy

Comcast’s $1,000 Christmas Bonus and $50 Billion Spending Commitment

Not to be outdone, Comcast has also promised a $1,000 one time Christmas bonus for its employees as a result of the passage of the GOP tax measure, along with a commitment to spend $50 billion on its business over the next five years:

Based on the passage of tax reform and the FCC’s action on broadband, Brian L. Roberts, chairman and CEO of Comcast NBCUniversal, announced that the company would award special $1,000 bonuses to more than 100,000 eligible frontline and non-executive employees. Roberts also announced that the company expects to spend well in excess of $50 billion over the next five years investing in infrastructure to radically improve and extend our broadband plant and capacity, and our television, film and theme park offerings.

Roberts

Comcast’s spending on its theme parks acquired from NBCUniversal has been especially bullish, with Roberts announcing earlier this year nearly $2 billion in spending  in 2017. In fact, Comcast’s capex spending has trended higher year after year, especially after its acquisition of NBCUniversal. In 2014, the company spent $7.2 billion on capital investments. In 2015, as net neutrality rules took effect, Comcast raised investments to $8.1 billion. In 2016, the capex budget fell slightly to $7.597 billion in 2016, but was forecast to reach $8.445 billion in 2017. Ars Technica reports that from the fourth quarter of 2016 through the third quarter of 2017, Comcast spent $9.4 billion on capital investments.

Much of that spending has been to pay for its X1 set-top box, theme park upgrades, and scaling up its broadband infrastructure to handle faster internet speeds. Earlier in 2017, Comcast also boosted its commitment to spend billions on buying back shares of its own stock, which will benefit shareholders and company executive compensation plans.

As the industry marches towards fiber upgrades and DOCSIS 3.1 deployment, Comcast’s capex forecast without the tax cuts would like come very close to Roberts’ $50 billion estimate over the next five years, assuming the company spent a reasonable average of close to $10 billion annually. Roberts said he “expects” spending at that level, but did not commit to it formally, so there is no penalty for overestimating investment numbers.

AT&T earlier noted predictions about capital investments always relate to actual need at the time and the company doesn’t spend money it does not need to spend.

“There is no reason to expect capital expenditures to increase by the same amount year after year,” AT&T said at the time. “Capital expenditures tend to be ‘lumpy.’ Providers make significant expenditures to upgrade and expand their networks in one year (e.g., perhaps because a new generation of technology has just been introduced), and then focus the next year on signing up customers and integrating those new facilities into their existing networks, and then make additional capital expenditures later, and so on.”

But there are political upsides to making no-strings-attached investment predictions anyway.

Comcast’s share repurchase program also allows the company to boost dividend payouts to shareholders.

Issuing a favorable press release that dovetails with the Trump Administration’s tax cut plan could buy Comcast goodwill from the administration as the company faces calls from Congress to extend merger deal conditions and restrictions on its 2011 acquisition of NBCUniversal. Those conditions are scheduled to expire in September 2018.

Jon Brodkin notes that telecom companies frequently tie their spending plans to regulatory matters going in their favor:

When ISPs are asking the government for a specific policy change—such as the repeal of a regulation or a tax break—they are quick to claim that the desired policy will lead to more investment.

AT&T, for example, announced last month that it would invest “an additional $1 billion” if Congress passes tax reform. With the tax reform now passed by Congress, AT&T said yesterday that it will move ahead with that $1 billion increase.

But neither one of those AT&T announcements said what the exact level of investment would have been if the tax bill wasn’t passed.

And in 2010, AT&T told the FCC that capital expenditures are based on technology upgrade cycles rather than government policy. At the time, AT&T was asking the FCC for a favor—the company wanted a declaration that the wireless market is competitive, a finding that can influence how the FCC regulates wireless carriers.