Holder

The Justice Department has been quietly conducting a wide reaching investigation into whether cable operators are using Internet Overcharging schemes like usage caps and metered billing to squash online video competition, according to a report in this morning’s Wall Street Journal.

The Antitrust Division has spoken to major online video providers like Netflix and Hulu as well as cable operators, including Time Warner Cable and Comcast.

At issue are data caps — limits on how much a subscriber can use their broadband account.  Justice officials are exploring whether major broadband providers like Comcast and AT&T are using usage limits to protect their video businesses from cord-cutting — canceling a cable subscription to watch shows online.

Providers of online video like Netflix are particularly concerned about operators showing favoritism to their own video platforms. Comcast, for example, exempts partnered content from its usage allowance while continuing to count Netflix viewing against its cap. Comcast’s Xbox “free pass” is attracting particular attention in the Justice probe, in part because it could violate the merger agreement with NBC-Universal which requires the company to not discriminate against third party video content.

Some cable operators claim usage caps protect their networks from heavy users overwhelming their facilities. Comcast claimed its decision not to count Xbox video traffic against the operator’s monthly usage cap was fair because the video content did not travel across the Internet. Now the company has temporarily suspended  usage caps altogether in preparation for testing a new usage limit that also carries overlimit penalty fees.

Federal Communications Chairman Julius Genachowski last month publicly announced his support for usage limits and metered billing, describing both as innovative and enabling customer choice. The Justice Department probe would indicate otherwise, because it suggests customers are finding their options increasingly limited, possibly in violation of federal antitrust laws.

The Justice Department is also investigating the industry’s TV Everywhere project, which provides access to cable network online video exclusively to those with an existing cable television package. Most cable networks specifically prohibit online streaming of their live content, which itself might run afoul of antitrust rules.

The Journal notes Attorney General Eric Holder on Tuesday suggested he would like to be a cord-cutter himself, picking and choosing only the channels he wants to watch. At a recent Senate hearing, Sen. Al Franken (D-Minn.) said cable bills were “out of control” and consumers want alternative options to watch shows online. Holder responded, “I would be one of those consumers.”

[flv]http://www.phillipdampier.com/video/CNBC FCC Chairman on Spectrum Crunch TV Everywhere 5-22-12.flv[/flv]

FCC Chariman Julius Genachowski spent the day hobnobbing with cable industry executives at the Boston Cable Show. In an interview with CNBC, Genachowski defended usage-based pricing, claiming it will bring lower prices to light users, spur “innovation” and enable consumer choice. Verizon Wireless customers on the cusp of being thrown off their grandfathered unlimited data plans may have a bone to pick with the FCC chairman about how innovative and enabling such policies have on them. Genachowski also suggests his controversial Net Neutrality policy is working, despite recent attempts by Comcast to exempt its content from the company’s usage cap and the wireless industry toying with toll-free data for preferred partners. Genachowski had little to offer consumers in the interview, instead suggesting his deregulatory stance on “innovation” will eventually benefit them.  (5 minutes)

FAIL

AT&T announced Monday it has officially dropped its bid for Deutsche Telekom’s T-Mobile USA.

The company blamed regulator opposition for the failure of the merger, underestimating the Obama Administration’s tolerance for super-sized acquisition deals that could reduce competition and raise prices for consumers.

The real challenge for AT&T initially came not from the Federal Communications Commission, but from the U.S. Department of Justice which filed suit against the merger in August. FCC Chairman Julius Genachowski soon followed with statements that suggested the merger would have a difficult time at the Commission as well, and after a scathing report from FCC staffers was made public, Wall Street began to reduce the chances of the merger getting through to the single digits.

Had AT&T successfully merged with fourth-place T-Mobile, it would have easily become the nation’s largest and most powerful wireless provider, advancing beyond current leader Verizon Wireless.

The failure for AT&T will cost the company at least $4 billion in cash and spectrum it earlier agreed to give T-Mobile if the merger failed to complete.  Industry analysts say the real winner this year will easily be Verizon Wireless, which successfully accomplished its own spectrum acquisition by quietly buying unused spectrum from some of the nation’s largest cable companies.  With that spectrum now under Verizon’s control, AT&T has been reduced to signing new roaming agreements with an independent T-Mobile to share their GSM technology networks.  That will do little to alleviate AT&T’s dropped call problem in large cities, analysts say, because most roaming agreements specify sharing network resources only in areas where one carrier does not provide service.

Where U.S. Cell Phone Companies Stand Today

AT&T: AT&T still retains a considerable amount of unused wireless spectrum, but some of it is located on frequency bands that provide a lower quality of service indoors.  AT&T may have a difficult time finding new spectrum, because other carriers have signed partnership deals with most of the companies still holding unused frequencies. One of the largest holders of unused, warehoused spectrum is DISH Networks, and they’ve indicated no interest in selling.  DISH may partner with T-Mobile now that AT&T has exited.  That leaves AT&T with lobbying the government to speed up new spectrum auctions and working internally to expand their cell tower network to divide the traffic load.  It’s an expensive proposition, and several Wall Street analysts are advising their clients to dump AT&T stock.  Kevin Smithen, a Macquarie Capital USA Inc. analyst who downgraded AT&T to “sell” from “hold” last week advised AT&T was running out of options.

Verizon Wireless: Big Red remains in excellent shape to maintain its current market leadership position, particularly as it uses recently-acquired spectrum to bolster its 4G LTE network.  A UBS analyst was more direct: It will have 56 percent more 4G spectrum than AT&T in the top 10 markets and 46 percent more in the top 100, giving it a “meaningful competitive advantage.” Verizon has also cut a deal with cable operators that could reduce competitive pressure on Verizon’s landline/FiOS network from cable companies.  That fringe benefit comes courtesy of an agreement to market each others’ products to consumers.

Sprint: In addition to building its own 4G network, the company still has an agreement with Clearwire that allows Sprint to purchase the former company’s spectrum if it ever becomes available for sale.  With T-Mobile still obviously up for sale, Sprint could attempt its own merger, although it may be wary of stirring the same regulatory pot that got AT&T into trouble.  That leaves T-Mobile’s next buyer likely to be a regional cell phone company, a foreign firm entering the U.S. market, or an existing telecommunications company that decides a wireless division would be of benefit.

Extended Video Coverage

News of AT&T/T-Mobile Merger Failure Breaks

[flv width=”480″ height=”290″]http://www.phillipdampier.com/video/AP T-Mobile Merger Dead 12-19-11.mp4[/flv]

This report from the Associated Press informs consumers of the basics — the merger is no-go, leaving AT&T and T-Mobile as competitors, at least for now.  (1 minute)

[flv width=”360″ height=”290″]http://www.phillipdampier.com/video/Bloomberg ATT Pulls T-Mobile Bid After Regulator Opposition 12-19-11.mp4[/flv]

AT&T Inc. abandoned a $39 billion takeover bid for T-Mobile USA after underestimating opposition from regulators, thwarting its ambitions to become the biggest U.S. wireless carrier. AT&T will take a pretax charge of $4 billion to reflect cash payments and other considerations due to T-Mobile-owner Deutsche Telekom AG, the Dallas-based company said in a statement today. Peter Cook, Lisa Murphy, Adam Johnson and Sheila Dharmarajan report on Bloomberg Television’s “Street Smart.” (7 minutes)

[flv width=”360″ height=”290″]http://www.phillipdampier.com/video/Bloomberg Blair Says ATT’s T-Mobile Bid Was All About Spectrum 12-19-11.mp4[/flv]

Brian Blair, an analyst at Wedge Partners Corp., talks about AT&T Inc.’s decision to abandon a $39 billion takeover bid for T-Mobile USA and Apple Inc.’s victory in a final patent-infringement ruling that bans some HTC Corp. smartphones from the U.S. Blair speaks with Emily Chang on Bloomberg Television’s “Bloomberg West.”  (11 minutes)

[flv]http://www.phillipdampier.com/video/CNBC Baird on ATT T-Mobile Failure 12-20-11.mp4[/flv]

Apologists for AT&T on CNBC wring their hands over how wireless networks will get built out into rural areas now that the T-Mobile deal is dead. Will Power, R.W. Baird & Co, weighs in with a host who clearly cheerleads AT&T’s world-view.  (5 minutes)

[flv]http://www.phillipdampier.com/video/CNBC ATT Drops Bid for T-Mobile 12-20-11.mp4[/flv]

AT&T drops its $39 billion bid for T-Mobile USA, with Todd Rethemeier, Hudson Square Research.  AT&T’s talking points don’t fly with Rethemeier.  (4 minutes)

T-Mobile’s CEO Speaks About the Merger Failure

[flv]http://www.phillipdampier.com/video/CNBC Deutsche Telekom CEO on Failed T-Mobile Merger 12-20-11.mp4[/flv]

Rene Obermann, Deutsche Telekom CEO, explains why the merger between AT&T and T-Mobile USA should have gone through. “This transaction would have solved a number of industry issues,” he says.  Obermann is in friendly territory on CNBC.  (8 minutes)

The Impact on Sprint

[flv width=”360″ height=”290″]http://www.phillipdampier.com/video/Bloomberg Horan Sees T-Mobile Eventually Merging With Sprint 12-19-11.mp4[/flv]

Tim Horan, an analyst with Oppenheimer & Co., talks about AT&T Inc.’s decision to abandon a $39 billion takeover bid for T-Mobile USA, thwarting its ambitions to become the biggest U.S. wireless carrier. Horan speaks with Adam Johnson and Lisa Murphy on Bloomberg Television’s “Street Smart.” (3 minutes)

[flv width=”640″ height=”500″]http://www.phillipdampier.com/video/Bloomberg Gamcos Haverty Says Sprint an Endangered Species 12-19-11.flv[/flv]

Larry Haverty, portfolio manager at Gamco Investors Inc., talks about AT&T Inc.’s decision to abandon a $39 billion takeover bid for T-Mobile USA, and the outlook for Sprint Nextel Corp. and the wireless industry. Haverty speaks with Cory Johnson on Bloomberg Television’s “Bloomberg West.” (6 minutes)

 Will DISH Network Be AT&T’s Next Acquisition Target?

[flv]http://www.phillipdampier.com/video/CNBC Trading on ATT’s Failed T-Mobile Bid 12-20-11.mp4[/flv]

Shares of Dish Network up 9% in the aftermath of AT&T’s failed bid to acquire T-Mobile. Michael McCormack, Nomura telecom analyst, weighs in on whether Dish is the next target for AT&T.  (2 minutes)

Watching two governments — one in Ottawa, the other Washington — debate important broadband issues has been an illuminating experience for this American.  As Canada continues to deal with a firestorm of protests against broadband pricing ripoffs from usage-based billing, the debate over Net Neutrality achieved new levels of absurdity in Washington yesterday as a largely Republican crowd fought to overturn the FCC’s watered-down open Internet protection policies.

Watching and listening to a combined eight hours of hearings both north and south of the border this month has cast a striking contrast between our two governments.  After it was all over, I can forgive anyone who decides Congress is filled with a bunch of uninformed meat-heads who fight for the talking points attached to their fat contribution checks from the telecommunications industry.

It is unseemly watching Republicans fall all over themselves to impress AT&T, Verizon, and Comcast with their grasp of these companies’ arguments against an open and free Internet.  There are also some bad Democrats on AT&T and Verizon’s virtual payroll, but the hearings this week in the House of Representatives were over the top — a Republican Valentine’s Day present for Big Telecom, replete with clueless representatives who clearly don’t understand the concept of Net Neutrality beyond the 3×5 index cards handed to them by one of their respective staffers.  For the most reactionary members, handing out photoshopped-pictures of Leon Trotsky hugging Barack Obama in front of a spool of fiber optic cable would have been just as effective.

The deservedly-undercovered Judiciary Committee hearings featured a single wireless ISP (WISP) owner who appears to spend most of his free time writing in the Comment sections of major American newspapers and social media sites.  His concern?  A technicality in the current Net Neutrality rules about customers running web servers.  ServerGate.  There’s a hot button issue if there ever was one.  Brett Glass’ customers are much more interested in watching online video, a concept that frightens a lot of WISP owners into placing usage caps on their service to discourage them from doing that.

Chairman Walden

Another witness at that hearing came straight from a telecom industry funded think tank.  Inviting AT&T to appear themselves would have effectively cut out the middleman and saved everyone a whole lot of time.

Gigi Sohn from Public Knowledge was left alone to stick up for Julius Genachowski’s cowardly-lion Net Neutrality rules, which in this author’s opinion are barely better than nothing, fatally flawed and one court decision away from oblivion.

Yesterday’s hearing featured FCC Commissioners on a partisan griddle as members of Congress asked softball questions of those they favored, and strafed the ones they don’t with long-winded lectures.

Republican members had no time for stories of Providers Gone Wild, particularly Comcast’s secret squeeze of its customers’ broadband speeds when running peer-to-peer software.  Such stories conflict with their talking point world view that broadband from the private sector should be run any damn way they please.  When some go to far, “they are isolated incidents” claimed Republican members, to the nodding affirmation of the two Republican commissioners.

Julius Genachowski was reduced to defending his homeopathic net regulations as a regulatory “light touch” — like a dew kissed raspberry on a summer morning.  But representing regulation as harmless didn’t do him any favors, because he forgot his audience.

Drive-by Hearing: For much of the hearing, C-SPAN cameras caught most of the seats empty as members came and went.

No argument about moderated government regulation is ever going to fly in a room with members like Rep. Marsha Blackburn (R-Tenn.) who spent her five minutes of talk time scorching the FCC for holding up the Comcast-NBC merger with questions.  How. dare. they.

Congressional hearings used to be about fact finding and allowing members to educate themselves on the issues before casting their votes.  No more.  These days, hearings are an exchange of preconceived talking points as members switch between grilling or ignoring the witnesses they don’t like while fawning over those they do.

GigaOm called the entire affair “nauseating” and helpfully condensed the only three things you need to take from the hearings:

• FCC Chairman Genachowski said the Level 3 and Comcast debate over access to Comcast’s last mile subscribers is a business issue and not a net neutrality issue.
• FCC Commissioner Robert McDowell resurrected the ghost of unlicensed white spaces and set it up as a competitive threat to existing ISPs. He then used that threat of eventual competition to argue we no longer need net neutrality rules. I tend to agree that if we had robust broadband competition, we wouldn’t need network neutrality, but according to McDowell, white spaces aren’t dead. If they aren’t dead, that’s important.
• The FCC will keep the docket open on its effort to reclassify broadband, which would give the FCC the legal authority under existing laws regulate broadband as a transportation service (the so-called Title II authority). This is a good thing for network neutrality fans, as the existing net neutrality rules will likely be challenged in court, and keeping that docket open leaves a back door for the FCC to implement rules. However, the industry hates the idea of reclassification and will fight it tooth and nail. It also means more hearings, comments and arguments over the entire issue.

Contrast this with more than a week of hearings in Canada on usage-based billing.  The differences are nothing less than striking.  Members attending those hearings were well-informed about most of the issues surrounding the usage-based billing debate and aside from the occasional minor grandstanding and long-winded questions, got to the bottom of the issues at hand and were prepared to challenge assertions made in all sides of the debate.  They even pronounced everything correctly.  A 10 minute exchange over the pricing formulas for Bell’s wholesale Gateway Access Service (GAS) probably won’t get you a soundbite on the evening news, but it will enlighten a member of Parliament about just how unjustified these pricing schemes are.

Not so in Washington, where net policy nuance is a French word meaning “weakness” or “socialist takeover.”

Bell Canada must surely wish they lived in a country where the hired help in Congress can reflexively support whatever is on the company’s agenda… for the right price.  For the moment, they are stuck exchanging Valentines with their close friends at the Canadian Radio-television and Telecommunications Commission, most of whom came from the industry they now regulate.

Minutes after Washington’s hearings ended, several Republicans, with their minds already made up, introduced a Joint Resolution to override the FCC’s authority on Net Neutrality and sweep the free and open Internet into a dustbin.  There are new owners of the Internet in town and it’s past time you got used to it — they are AT&T, Verizon, and Comcast.  Your bill is in the mail.  You can thank us now or later.

Congress' Joint Resolution requires a simple majority -and- the President's signature to pass. Ironically, the Republicans touted the measure as "filibuster-proof," but considering the president is likely to veto it, a filibuster is the least of their problems.

[flv]http://www.phillipdampier.com/video/C-SPAN Hearing on Net Neutrality 2-16-11.flv[/flv]

Watch yesterday’s House hearing on Net Neutrality, but first remove all sharp objects from the room and avoid stomach upset by not eating during the show.  (3 hours, 41 minutes)