Copps

Americans need to stand up and say “no” to more telecom mergers and lobbying efforts that push for additional deregulation and corporate protectionism in the telecommunications sector. Unfortunately, we are in for a fight, thanks to Washington’s problem disappointing a multi-billion industry that lavishly finances political campaigns, conventions, and vacation outings.

Michael Copps, former commissioner on the Federal Communications Commission from 2001-2011 and acting chairman for the first six months of the Obama Administration ought to know.

“The consolidated world of telecom broadband did not evolve from the hand of God, the mysterious workings of natural law, or the inevitability of market-based dynamics,” Copps wrote in his essay, “Why Give Up on Competition?” “It was enabled by conscious decision-making at the federal level, largely through the abdication of its oversight responsibilities by the Federal Communications Commission over the better part of 30 years.”

In short, it did not have to turn out this way, no matter what the telecom industry and their astroturf friends have to say.

“Go to just about any telecom conference these days, and some industry maven will make the case that restoring competition to the telecom world is so 1990s,” Copps writes. “Why don’t we all just recognize the inevitable, they ask: telecom is a natural monopoly, competition is a chimera, and the sooner we flash a steady green light for more industry consolidation and less government oversight, the better off we’ll all be.”

Provider-backed ALEC advocates for the corporate interests that fund its operations.

Too many in Washington are already true believers, according to Copps, and the result is two companies controlling over 2/3rds of the wireless marketplace and a broadband duopoly for most Americans. This did not happen overnight. Enormous and expensive lobbying campaigns run for over a decade have convinced lawmakers that less is more when it comes to telecom regulation and oversight. Regulators ringing alarm bells about deregulation without sufficient competition have been picked off, says Copps, by the telecom industry-backed American Legislative Exchange Council (ALEC), which has convinced at least 19 state legislatures to wipe away authority from state public service commissions that for years have been trying to protect consumers and preserve competition.

The Telecommunications Act of 1996 was originally designed to open the telecommunications marketplace to increased competition, but also ensure a level playing field for competitors by charging the FCC to implement and enforce strong rules to keep incumbent telecommunications companies from steamrolling new competitors.

No surprises here: Michael Powell was FCC chairman during the deregulation frenzy of the first term of George W. Bush. Today, he’s the president of the National Cable & Telecommunications Association, the largest cable industry lobbying group in the country.

With the arrival of President George W. Bush, the new Republican majority at the FCC promptly began obliterating checks and balances at the behest of some of the nation’s largest phone and cable companies. The results:

• Reselling rights and wholesale leasing of facilities to competitors were wiped away, guaranteeing monopoly control of already-established networks;
• Opening up the long distance and local market to Baby Bell competition with their promise they would compete nationwide failed. Like Big Cable, the Baby Bells sold local and long distance only to their own customers, not to those located in another Baby Bell’s service area;
• Instead of competing, phone companies simply bought each other. “As soon as one transaction was approved, another one came through the door,” Copps reported. “Sometimes it seemed like the merger approval business was our only business.”;
• ” The FCC voted, over the strenuous objections of Commissioner Jonathan Adelstein and me, to remove advanced telecommunications (broadband) from the purview of Title II of the Telecommunications Act—where consumer protections, competition, privacy, and public safety are clearly mandated—and placed them instead in the nebulous and uncharted land of Title I, where regulatory authority is uncertain, consumer protections are virtually non-existent, and where the huge companies are better positioned to wreak havoc on the promise of competition,” Copps said.

To right the wrongs, Copps wants some major changes to reignite competition and return to telecom innovation, eliminating the stagnation we have from today’s cozy, barely competitive marketplace:

1. Learn to say “no” to more industry mergers. Consolidation has not brought communications nirvana for consumers, just higher prices and fewer choices, often from a monopoly provider;
2. Encourage innovative approaches like municipal broadband. Copps: “‘My way or nothing’ may be the mantra of the big guys, but that means no broadband in places they don’t wish to serve.” Copps wants to see the federal government pre-empt state bans on public broadband laws provider-backed ALEC has gotten through legislatures across the country;
3. Smarter stewardship of wireless spectrum, including unlicensed spectrum use, shared spectrum, smarter technology, and a “use it or lose it” policy that pulls back unused/warehoused spectrum held by some of the nation’s largest wireless carriers.

AT&T has sent the Federal Communications Commission a bait and switch checklist that, despite the stated purpose of modernizing telecommunications networks, would also allow the company to completely abandon its landline network and win near-complete deregulation of its broadband service.

On Tuesday, August 28, Christopher Heimann and I met with Matthew Berry and Nicholas Degani, respectively Chief of Staff and Legal Advisor to Commissioner Pai, to discuss actions the Commission can and should take to facilitate the retirement of legacy TDM-based networks and services and transition to an IP-based Network/Ecosystem, consistent with federal policies and objectives, including those enunciated in the National Broadband Plan.

At the request of Commissioner Pai, AT&T has prepared and is submitting herewith a checklist of those actions, which identifies the critical first steps the Commission should undertake without delay to begin the transition as well as additional steps that would facilitate completion of that transition.

Under the existing statutory and regulatory framework, carriers already can undertake the steps necessary to make the transition, including, in some cases, steps requiring Commission approval (such as withdrawing legacy TDM-based services). But, insofar as the transition raises a number of novel and likely contentious issues, Commission action on the items included on the attached list would greatly facilitate and thus hasten completion of the transition. The steps we identify implicate an array of issues raised in the above-referenced dockets. Accordingly, we are filing the checklist in each such docket.

Respectfully submitted,

Robert W. Quinn, Jr.

AT&T’s letter and attached checklist are documents only a policy wonk or careful observer of Big Telecom could easily navigate. Despite the thicket of opaque terms like “TDM” and the not-immediately-apparent importance of the difference between an “information service” and a “telecommunications service,” AT&T has, to borrow a phrase from President Obama, some brass ones making its intentions perfectly clear.

With the help of Bruce Kushnick, executive director of New Networks Institute and a former telecom industry insider, we will guide you through AT&T’s filing and what it really means.

AT&T lists several “critical first steps” (we have put them in bold) to achieve the transition to an all-IP telecom world, retiring the traditional “public switched telecommunications network” (PSTN) which you know better as a landline.

1. Establish a date certain for an official TDM-services sunset, after which no carrier would be required to establish and maintain TDM-based services/networks, and purchasers of such services (including circuit-switched and dedicated transmission services) would have to switch to IP or other packet-based services.

No casual observer of FCC filings would be expected to understand the implication of setting a date to officially sunset “TDM services.” TDM is synonymous with the landline network Ma Bell established more than 100 years ago — the one that gives you a dial tone, DSL, and access to dial-up Internet where broadband is unavailable. AT&T wants the FCC to manage what the company has not been able to consistently accomplish on the state level: setting a final date when traditional landline service can be permanently disconnected, preferably at the convenience of the phone company.

2. Clarify that any state requirements forcing service providers to maintain TDM networks and services […] following the TDM sunset are preempted. Such requirements could deter investment in broadband, and thus are inconsistent with and pose an obstacle to federal law and policies encouraging the transition to all IP networks and services.

This provision would effectively eliminate any existing state laws or regulations that require AT&T to deliver a fairly-priced, well-run landline service for customers throughout its service area. Some states have not bought into AT&T’s lobbying juggernaut, often delivered with the help of the American Legislative Exchange Council (ALEC). Despite the enormous sums spent lobbying legislators, some states have kept oversight in place requiring AT&T to serve everyone that wants phone service. With this provision, those state laws and regulations would be pre-empted.

AT&T claims state requirements somehow deter broadband investment, a curious conclusion considering AT&T has already largely ceased its expansion of DSL and U-verse services.

3. Complete action in the IP-enabled services proceeding, and classify such services as information services, subject to minimal regulation only at the federal level. The Commission could permit service providers to offer DSL or other broadband transmission services on a common carrier basis if they so choose, but in no event should a provider be required to do so. 

Quinn

This is AT&T’s provision to kill regulation and destroy competition. Government rules, regulations, and oversight apply largely to “PSTN” landline services, not to IP-based or broadband networks. Basic landline service is designated a “telecommunications service” by the FCC, which makes it subject to regulator review. Broadband, on the other hand, and anything else using IP, is typically classified as an “information service,” where most oversight regulations do not apply.

AT&T’s plan is to shut down today’s landline “telecommunications” service in favor of IP-based Voice over IP, which would effectively reclassify your phone line as an “information service.” That means by changing just one word — “telecommunications” to “information” — AT&T can walk away from a century of basic consumer protection rules and regulations. AT&T also gets a divorce from its telecommunications service obligations as a “common carrier,” which requires AT&T to deliver service to any customer who requests it, at a fair and reasonable price, without changing its form or content.

If AT&T’s broadband networks were reclassified as a “telecommunications service,” Net Neutrality would be easy to enforce under the “without changing its form or content” provision of common carrier rules. Back in the 1996 Telecommunications Act, AT&T’s lobbyists had already made their mark, creating new “distinctions” of telecommunications services, some more regulated than others. Now AT&T is back to kill off the last regulatory obligations it still has to endure, taking Net Neutrality to the grave once and for all.

4. Reform Interconnection – after the official date for the TDM sunset, no carrier or other provider of TDM based services should be entitled to require others to interconnect in TDM. The Commission should take action to maintain the market-based, regulation-free interconnection regime that has applied to IP-based interconnection for decades.

[…] Reform wholesale obligations under section 251/271 to eliminate unbundling, resale, collocation and other requirements that could require ILECs to maintain TDM networks and services.

These particularly opaque sections give AT&T’s competitors real nightmares because they would wipe out requirements that phone companies open certain facilities to competitors who deliver services over AT&T’s network. If AT&T’s recommendation is adopted, no competitor would be safe if AT&T eventually padlocks access to its network.

But AT&T does not want its intentions to be that obvious. It throws a transparent bone to regulators to offer a facade of competition in both this and the preceding recommendation.

AT&T instructs the FCC it can mimic the time-honored patina of an open, competitive industry by allowing AT&T’s competitors to sell DSL or other broadband services over AT&T facilities, but only if AT&T feels like it (at comfortable prices that don’t undercut AT&T).

5. Eliminate regulatory underbrush/superstructure that accompanies TDM-based services. For example, phase out equal access, residual ONA/CEI, record-keeping, accounting, guidebook, dialing parity, payphone, and data collection (which should be limited to that which is collected on the Commission’s Form 477) requirements.

AT&T leaving town.

What AT&T calls “underbrush,” consumers and regulators call oversight and consumer protection.

“Sayonara any telco rules, regulations and oh yes, your rights,” says Bruce Kushnick. “Your service breaks… tough. Prices go up and there’s no direct competition — too bad. Networks weren’t upgraded — so what.”

Kushnick notes this provision would allow AT&T to avoid maintaining a public record of its performance (and its potential abusive practices, bad service, and high prices), including any requirement on the state or federal level to tell the public anything about how well we are being served by the wired monopoly.

Other things on AT&T’s hit list: “Equal Access,” which opened the door to competitive long distance calling and lower rates, “Dialing Parity” which lets you avoid dialing ten (or more) digits for every call (or being forced to learn more complicated numbers for things like directory assistance or other shortened dialing numbers), and public payphones. AT&T’s desire to kill off “residual ONA” refers to the costs to establish Open Network Architecture — the framework for opening up the nation’s phone monopoly for competition. Re-establish the monopoly and there is no reason to fret about the costs to maintain access for competitors AT&T will eventually eliminate.

6. Further reform USF to provide support for broadband regardless of the regulatory classification of broadband services, eliminate any obligation to offer such services on a common carriage basis to be eligible for such support, and provide incentives for service providers to invest and offer services necessary to ensure that no one is left behind by the transition to an all-IP, broadband ecosystem.

The reform of the Universal Service Fund has already opened up opportunities for rural telecommunications companies to apply for broadband infrastructure grants to expand broadband in rural America. Only AT&T has refused to participate in the current round of broadband grants because they do not like the rules. AT&T wants a free hand to receive broadband funding, so long as it faces no questions about where the money gets spent. Under AT&T’s recommendation, the company would receive money with no obligation to ensure everyone who wants broadband in rural America can get it. It also wants the government to hand out money to providers to implement their goal of regulatory nirvana — the conversion of basic landline service to Voice over IP, idolized as the golden calf of ultimate deregulation.

But although providers won’t be left behind, consumers might be:

7. Establish/reform rules to facilitate migration of customers from legacy to IP-based services and to prevent customers that procrastinate or fail to migrate from holding up the transition. For example, establish a process for identifying a default service provider if a customer fails to migrate, and/or permit service providers to notify customers that they will be dropped from service as of a date certain if they have not migrated to an alternative service/service provider. 

This particularly arrogant provision would put a stop to Aunt Maude holding up AT&T’s grand plan to live a regulation-free lifestyle. How dare she drag her feet with AT&T’s agenda at stake? If your elderly parents or extended family don’t understand why AT&T is meddling with their landline service and don’t want to change, AT&T has an unsympathetic solution. Under their recommendation, your parents would find themselves with a “default service provider” they might not want to do business with or, even worse, simply leave them with a dead phone line AT&T has no interest in repairing. But AT&T would likely still get their way. In rural areas they already cover, AT&T would be the “default service provider” because it is the only service provider. If Maude wants her phone line back, the only way she will get it is choosing the migration to Voice over IP AT&T intended all along.

AT&T’s language is remarkably frank, but was never intended to be viewed and explained to the public at large. It was the product of a phone company lobbyist talking to a politician, staffer, or regulator that one day could become an employee of that phone company. The only way to stop this cozy relationship is to tell regulators you are watching (and understanding) the game being played here.

Phillip “Artificial Scarcity for Fun and Profits” Dampier

It would be an understatement to say I’ve heard the argument once or twice that there is simply no economic room for additional players to enter what Big Telecom companies always claim is a robustly competitive marketplace for Internet access.

Virtually every company facing inquiries from regulators, politicians, and consumers always makes the point today’s deregulated broadband playing field is an excellent example of free market competition at its best.

While they advocate for even more deregulation, oppose the entry of community-owned broadband services, and demand more spectrum from Washington lawmakers, we endure a veritable monopoly/duopoly for Internet access. Their defense, after a dismissive rolling of the eyes, is that we just don’t understand business.

Enter Tim Lee, writing for the alternate reality reader of Forbes, who decided to prove his argument by comparing broadband with Supercuts:

Being the first to build a hair-cutting shack in a particular customer’s backyard can be pretty lucrative. It gives you a de facto monopoly on that household’s haircut business. Let’s assume that it takes 4 years worth of haircuts to recoup the costs of building a shack for a particular household. While barbers will need to raise some extra capital to build the shacks, in the long run the owner of the first shack may be able to earn big monopoly rents.

Now along comes a new barber who wants to enter the hair-cutting business, but every household already has at least one hair-cutting shack. So he needs to build hair-cutting shacks in backyards where another barber has already built one. And that’s an economically precarious situation. Remember, we assumed a monopolist needs to do 4 years worth of haircuts in order to break even. But if you build a shack in a backyard that already has another barber in it, you shouldn’t expect to get more than half of the customer’s business, on average, over the long run. Not only that, but competition will push down prices, so you’ll have to do more haircuts to recover the costs of construction. So you’ll be lucky to recover your initial investment within 8 years, and it could easily take more than a decade.

And things are even worse for the third or fourth barber who builds in a particular backyard. The fourth barber will be building in a yard that already has three barbers. He can only expect to attract 25 percent of the household’s business, and strong competition among barbers means his margins will be pretty thin. It’s hard to see how he could ever recover the costs of his investment.

Brushing away the hair-cutting analogy, Lee’s point is that it is wasteful and inefficient for competitors to overbuild new networks where others already exist. The phone and cable companies that dominate the marketplace today decry additional competition as a death blow to their business models, because with so many providers fighting for customers (by lowering prices and offering better service), not every provider can sustain a profit Wall Street investors expect quarter after quarter. This argument is particularly common when attacking those dastardly socialist community-owned broadband providers they say destroy private enterprise (while unconvincingly also warning they will always fail and cost taxpayers millions on the way down). It is also why Wall Street continues to beat the drum for additional consolidation in the wireless marketplace, where anything more than AT&T and Verizon Wireless represents too much revenue destruction.

Lee does make some valid points:

1. Infrastructure costs are the biggest expense in launching a new network, especially wiring the last mile to customers;
2. Verizon FiOS overestimated its potential market share and found it harder to turn a profit than first anticipated;
3. Other utilities have avoided building redundant networks (ie. you don’t have two companies providing their own electric, water, and gas lines).

When communities decide to offer their own broadband service, incumbent cable and phone companies spend big bucks to scare residents.

But Lee’s conclusion is entirely favorable to the industry he often defends — that is just the way things are and customers should not expect anything better.

Those arguments are usually also the basis for free market declarations that if a private company cannot find a way to deliver a service at a profit, then those left out will just have to do without.

Thankfully, despite Lee’s criticism of Google Fiber in Kansas City as “extremely wasteful,” the search engine company is perhaps best positioned of all to turn the industry’s common refrain against new competition on its head.

Every so often, a surprising third party shows up with the resources to ignore Wall Street’s conventional wisdom. Enter the deep pockets of Google Fiber or a bond-backed community provider threatening to deliver service far better than what a community currently enjoys. The predictable defense from incumbent providers:

• Nobody needs faster broadband speeds;
• Community networks are a government takeover of the Internet;
• Fiber optics are expensive and represent an unnecessary investment;
• Public broadband destroys private investment and jobs at incumbent commercial providers;
• This is just a political stunt, not a real effort at taking Internet speeds to the next level.

Without the kind of competition on offer from Google, community providers, and private providers like Verizon taking a chance on FiOS fiber optics, there would be no room for innovation in the marketplace.

Provider tolerance for today’s marketplace duopoly and the lackluster service that results is reminiscent of a joke told by President George W. Bush’s in 2000: “If this were a dictatorship, it would be a heck of a lot easier…just so long as I’m the dictator.”

It is easy for today’s comfortable duopoly providers to take shots at would-be competitors while dragging their feet on network upgrades. They have little to fear with Wall Street on their side, joining opposition to new competition as harmful to profits. Even Verizon Communications, one of the two dominant providers, quickly heard from analysts irritated with the infrastructure expenses involved upgrading to a fiber optic network. At the heart of that criticism was a sense it was an unnecessary expense, with no reason to change the safe and reliable status quo. Innovation that costs money is the enemy of Wall Street, unless competition warrants the investment.

Therein lies the key. Effective, disruptive competition demands companies do something different. Lee may be right that three companies cannot easily bring home the big profits. Wall Street may have to make do with less. In a competitive market, the player offering the least will be the first to innovate to keep or attract customers, or eventually close their doors. Those remaining will compete in turn to deliver the best possible service at the lowest possible price. That itself is a departure from the comfort zone enjoyed by phone and cable operators today where neither feels much pressure. Cable companies won’t ever compete with other cable companies and the same is true for phone companies. But if a company like Google arrives, the decade-long coffee break is over.

Want proof? Just look at cable operators struggling to keep video customers who are now finding alternatives with Netflix and online viewing. They are increasingly looking for ways to enhance the value of cable television by offering online viewing themselves. Even rate increases have slowed. If Netflix and cord-cutting were not factors, would cable companies have changed the way they do business?

Google’s marketplace disruption delivers for consumers.

Lee is right saying it is not easy to break into the broadband business. Only some might realize the same investors and Wall Street barons that dislike profit-eroding competition also often happen to be in the business of loaning money to finance new businesses. More than a few will turn those loans down as too risky to contemplate.

But here comes the rhetorical trap Lee’s argument gets ensnared in: If running redundant networks is wasteful and we still need competition, the logical solution would be to construct or nationalize one advanced network on which all providers would market their services. Why waste time and money on duplicate copper and coaxial networks when a single fiber to the home network could deliver improved service well beyond what the local phone and cable company can offer.

Isn’t the answer to run a single telecommunications line into customer homes (one preferably not controlled by any provider), and let competition bloom on that advanced infrastructure? That is the solution Australia has chosen, scrapping the country’s ancient copper wire phone lines in favor of one national fiber network. Most community providers also operate open networks that other cable and phone companies can utilize (but often petulantly refuse).

Somehow, despite the enormous savings possible from sharing or offloading network infrastructure expenses, I doubt providers will consider that the kind of innovation they want or need.

The views of the Adam Smith Institute, despite the near-global financial meltdown engineered by the Masters of the Universe.

Forbes columnist Tim Worstall is unimpressed with Google’s foray into fiber optics.

Worstall, a Fellow at the Adam Smith Institute in London, has repeatedly penned columns tsk-tsking the global broadband speed race.

In his world view, nobody except certain specialists needs any connection faster than 2Mbps:

The most obvious being that outside certain very specific uses (video editing for example, where people can pay up for their own T1 line) there’s not really much evidence that speeds above 2 Mbps or so actually improve productivity or economic performance/growth. Sure, they’re great for consumers who want to download movies but that’s not really a justification for a large scale infrastructure program.

Worstall’s Luddite-like knowledge of broadband technology makes it difficult to take him seriously. Notwithstanding the fact a T1 line delivers just 1.5Mbps (at a cost several times a typical cable or DSL broadband connection), Worstall’s declaration that faster speeds are only good for “downloading” movies (the concept of streaming also escapes him) is simple nonsense.

Worstall’s tantrum is really part of a bigger discussion about how to do broadband better in both the United Kingdom and the United States. Incumbent providers are dragging their feet while reaping profits for overpriced, too-slow service. Consumers and businesses are fed up, and some are now increasingly turning to the government to do-something to shake up the status quo.

Government? For those slavishly devoted to free market ideals at the Adam Smith Institute, such a notion guarantees an intemperate outburst with phrases like “government takeover,” “government interference in private business,” or “government monopoly” — all ideas Worstall complains are “blindingly awful.”

“The idea that the solution to anything is a government run engineering monopoly just boggles the mind,” Worstall declares.

In his piece, “Why High Speed Broadband Just Doesn’t Matter,” Worstall has just a single litmus test to define broadband worthiness: how much economic value can be extracted from the Internet — Ferengi economics at their finest.

Worstall (Image: Forbes)

Worstall:

So more people can watch TV. Apologies, but this doesn’t really convince. Higher definition TV just isn’t the sort of technology that boosts the economy of a country. It might be nice to have but it most certainly does not justify taxing some to provide the service to others.

[…] The truth is that as long as you’re getting broadband of a kind (2 Mbps say) then it’s possible to extract that economic value. Faster speeds might be nice but they’re just not necessary for economic development.

Even if you accept Worstall’s inaccurate contention fast Internet is only good for watching online entertainment, he evidently forgets PricewaterhouseCoopers estimated the value of that industry at $2 trillion, and that was by 2011. Why even have a cable television business, if the only thing it is good for is watching reality shows and Law & Order reruns? Because it makes money — lots of it.

Back to Google, which is creating a bit of a pickle for the cable and phone companies — an increasingly fat and happy bunch earning easy profits selling broadband at duopoly market prices. Proponents for better broadband advocating for new, publicly-owned broadband networks have had to confront astroturf and conservative groups using popular memes that “big government” cannot do anything right and if there was a market for gigabit broadband, private companies would already be selling it.

Starting this summer, Google is.

That spells t-r-o-u-b-l-e for the corporate love muffins at the Adam Smith Institute and their industry friends who are quite happy with the way things are today, thank you very much. Google just happens to be an example of a free market success story — a ‘responsible’ company willing to invest money in the game-changing broadband Worstall and friends spent years arguing we don’t actually want or need.

As Kansas City residents line up around the virtual block, eagerly plunking down $10 to “pre-register” for Google service, it becomes difficult to continue the standard line that super-fast Internet is just a tech-geek curiosity.

So what does a free-market-knows-best-devotee do in light of all this? Change the story.

Worstall picks up a premise first offered by The Guardian and runs with it. Namely, Google is actually riding the wave of past phone company failures to cheaply benefit from assets those companies deployed first:

There’s a very large difference between being able to do something usefully experimental with an orphaned asset and having to pay for the construction of that asset in the first place. The telecoms companies lost fortunes on laying that fibre (indeed, several, including such as Global Crossing, went resoundingly bust for billions in doing so). That something that was built for $100 can find a use when it is sold for $1 (just to make up some numbers) is not an argument in favour of spending the $100.

Yet that is exactly what the argument being proposed is. Look, Google’s got really cool fast broadband, now we should build it for everyone! What’s being missed is that, at least so far as we know as yet, that really fast broadband isn’t worth the cost of building it. It only makes sense even for Google because they’ve not had to pay full price for it.

Google got a discount, so that is why they are in the business.

Worstall’s declaration is news to Kansas City, which has been enduring Google’s construction crews for months as they lay fiber infrastructure across the metropolitan area. Evidently Google hired illusionist David Copperfield to perform the masterful trick of shading the truth:  re-purposing already-there fiber while pretending it was being buried and strung for the first time.

Adam Smith didn’t have super fast broadband when he posited his views on unfettered free markets in the 1700s. If his devoted followers are left in charge, you won’t either.

McAdam

Verizon CEO Lowell McAdam wants you to spend more with the phone company, and if his vision of Verizon’s future comes true, you will.

The company’s newest CEO spoke on a wide-ranging number of topics for the benefit of Wall Street investors at the Guggenheim Securities Symposium. A transcript of the event delivers several newsworthy revelations on the company’s future plans.

McAdam rose through the ranks of Verizon Communications with a specialty in the company’s immensely profitable wireless business. His predecessor, Ivan Seidenberg, spent his career at Verizon Communications working with the company’s legacy wireline (landline) network. While Seidenberg envisioned a new future for Verizon’s landline business with an upgraded fiber optic network called FiOS, McAdam maintained a different vision having run Verizon Wireless as a profit-making machine since 2006. McAdam believes Verizon’s future earnings and focus should be primarily on the wireless side of the business, because that is where there is serious money to be made.

“The first thing I did when Ivan sort of named me as the Chief Operating Officer was we had a very well-defined credo in the wireless side,” McAdam said. “We created it when we first came together in ’99 because we had seven different companies and we knew we had seven different cultures and we needed to tell people what it was we were really looking for. So we created that document. We spent a lot of time on it. We do a lot of reward and recognition as a result of it and that culture really took root in wireless.”

McAdam’s leadership also aggressively challenged the long-standing telephone company philosophy of earning a stable, predictable profit as Verizon did when it was a regulated monopoly. Instead, McAdam shifted the work culture towards an obsession with shareholder value.

“We took the top 2000 leaders through what we call ‘Leading for Shareholder Value’ and that was really a cultural shift for us because, if you think about it, the wireline side of the business has come out of the defined rate of return culture and we left that competitively a while ago. I am not sure we left it culturally,” McAdam said. “So we have been far more pushing why do you make that investment, what is the return on it, what is the priority of that investment versus another investment.”

Verizon’s Plans to Abandon Rural Landline Customers – Sign Up for Our Expensive LTE 4G Wireless Broadband With a 10GB Usage Cap Instead

Some of the most revealing commentary from McAdam came in response to questions about what Verizon plans to do with its enormous landline phone network, dominant in the northeastern United States.

In comments sure to alarm rural Verizon customers from Massachusetts to Virginia, McAdam clearly signaled the company is laying the groundwork to abandon its rural phone network (and DSL broadband) as soon as regulators allow. Dave Burstein at DSL Prime estimates that could impact as many as 18 million Verizon customers across the country.

“In […] areas that are more rural and more sparsely populated, we have got [a wireless 4G] LTE built that will handle all of those services and so we are going to cut the copper off there,” McAdam said. “We are going to do it over wireless. So I am going to be really shrinking the amount of copper we have out there and then I can focus the investment on that to improve the performance of it.”

Elsewhere, in more urban and suburban areas, McAdam also wants Verizon to purge its network of copper.

“The vision that I have is we are going into the copper plant areas and every place we have FiOS, we are going to kill the copper,” McAdam said. “We are going to just take it out of service and we are going to move those services onto FiOS. We have got parallel networks in way too many places now, so that is a pot of gold in my view.”

In other words, McAdam would shift money spent maintaining and upgrading rural landline service into the company’s wireless network in rural America and its FiOS network in more urban environments, both of which will improve profits. FiOS allows Verizon to pitch television, broadband, and phone service in one profitable triple-play package, while also discontinuing standalone DSL service. Rural customers pushed to wireless LTE for broadband will face onerous usage limits and more expensive service for phone calls and broadband. Using Verizon’s LTE network for video would be prohibitively expensive.

McAdam hints the company has used its lobbyist force to make preparations to abandon rural customers first in Florida, Virginia, and Texas where state regulators approved legislation that eliminates the requirement Verizon serve as “the carrier of last resort.” That law required Verizon to deliver landline phone service to any customer in its service area on request. With that provision stricken in those three states, Verizon can abandon any landline customer it chooses after serving written notice.

McAdam said he intends to continue lobbying other states to adopt similar deregulation, and chided legislatures in both New York and New Jersey for “being backward” because they have repeatedly refused to allow Verizon to walk away from its rural customer obligations.

Burstein thinks the changes in progress at Verizon will be a disaster for affordable rural broadband.

“This makes a mockery of ‘affordable broadband,’ especially when Verizon and AT&T are boycotting the plan for discounts for poor schoolchildren,” Burstein says. “The detente between telcos and cable companies means the prices of modest Internet speeds (3-15 megabits down) are typically going up from $30-45 to $55-70.”

Burstein also notes the change spells disaster for competitors who sell DSL service over existing phone networks.

“Nationwide, alternatives to the telco/cablecos have less than 5% of the residential market but in some areas they remain important,” Burstein says. “The most interesting, Sonic.net in California, offers unlimited calls and Internet up to 20 meg for $50/month, 20-50% cheaper than AT&T.”

“High prices, unacceptable service choices and further rural depopulation are bad policy,” he adds.

Verizon still earns enormous revenue from its remaining landline customers, revenue McAdam hopes will be replaced by selling business-focused services instead.

“Cloud [service] is continuing to pick up for us. Security is I think going to be an even more important play for us as we go forward,” McAdam noted. “I think these large enterprise accounts, offering them kind of a global service with those up the stack […and…] applications on top of it drive it as well. So there is a number of pieces in the portfolio that I think will take us up and more than compensate for some of the falling off of copper-based services like DSL and voice and that sort of thing.”

Verizon’s Unionized Employees Are Wrong-Headed Defending Verizon’s Landline Network

McAdam also blamed the company’s unionized employees for remaining loyal to the company’s traditional role in the landline business.  Unions like the Communications Workers of America continue to push Verizon to expand its FiOS fiber optic network in more places, but the company has left its FiOS expansion on hold, diverting investment into its wireless business. Both McAdam and the union agree the days of copper wire networks are numbered, but McAdam hints that union concessions (and fewer unionized employees) are required before the company will again expand FiOS.

“Our employees see that it is not sustainable to keep having copper plant out there. You really can’t invest in it; it is difficult to maintain it; and they want to see us improve on FiOS,” McAdam said. “And when I am out in the field, the techs and the reps will be the first to point out kind of some of the dumb policies I call them that we have around the business. Well, a lot of those are based on rules that were negotiated with the union back in the ’60s and ’70s.”

“So we have to get the union leadership to understand that if the company is able to be more flexible in meeting customer needs then we can grow things like FiOS, which will provide good long-term jobs,” McAdam added. “Will it be the same number as what we had in the past? No.”

Verizon’s Enormous Offshore Bank Accounts: Waiting for a ‘Business-Friendly’ Administration to Let Them Bring the Money Back, Tax-Free

McAdam also signaled investors that the phone company’s profits massed in overseas bank accounts are going to remain in place until they know who wins the next election. Verizon wants to repatriate some of that offshore money, but they want to do it tax-free.

“Everybody is kind of waiting to see who controls the Senate and who controls the White House and they are waiting to make those — you have got to understand what the tax situation is going to look like, so we are all waiting to make those investments,” McAdam said.

‘Share Everything’ Lays the Foundation to Monetize Your Data Usage… Forever

McAdam is a big supporter of the company’s new Share Everything wireless plan, which charges smartphone owners $90 a month for unlimited voice calling, texting, and a small 1GB bucket of data that he is convinced customers will be prepared to spend more to enlarge.

“If I know that I have an intelligent home that I can get to any number of ways. If I know that I can do everything I want in my car that I can do in front of my TV set or my PC or on my tablet, I think it just takes away a lot of the restraints,” McAdam said. “Is it going to cost them more money? Yes, but it will probably shift their wallet spend from other things that they do individually into this sort of a bucket of gigabytes. And so I think it will be a significant [revenue] stream for us.”

FitchRatings, a credit ratings agency, agrees in a new report.

“The new pricing structure taken by the industry leader is a disciplined pricing action that could create more cash flow stability longer term within the wireless industry,” the credit ratings agency said last week.

Fitch notes data services are increasingly becoming a larger source of revenue for wireless phone companies. In the first quarter alone, data revenues at Verizon Wireless, AT&T, and T-Mobile USA — all carriers that abandoned flat rate wireless data plans, grew 19% year over to year to $14.2 billion. That represents 41 percent of the companies’ service revenues.

Despite assertions from Verizon that the new plans deliver convenience and better value for subscribers, Fitch found they actually represent a substantial price increase for many customers.

“These increases are sometimes material, depending on whether the legacy rate plans have low recurring charges for text messaging or calling minutes. As a result, prices have generally increased for new subscribers,” Fitch reports.

Fitch warns investors Verizon is likely to lose customers over its new pricing strategy, and experience a slowdown in new customer growth as well, at least until competing carriers realign their pricing and plans to be similar (or match) those Verizon introduced last month.

The Days of Your Subsidized Android/iPhone May Be Numbered

McAdam’s vision also includes a re-examination of device subsidies as customers increasingly depend on wireless devices. McAdam previously indicated the wireless device subsidy was designed to get customers to adopt and embrace new technologies, and as adoption rates have soared, the need to keep discounting technology that customers depend on diminishes.

He echoed that sentiment at the Guggenheim Securities Symposium, noting that Verizon this month abandoned subsidies on tablet devices. For McAdam, discounting wireless technology serves one purpose: to quickly establish a new business relationship with a customer that probably would not buy their first device at full price.

But McAdam recognizes changing the company’s subsidy that customers expect to receive must happen gradually. It has already started, first by eliminating early upgrade discounts, then by dropping the company’s loyalty discount “New Every Two” plan. Now, the company will only allow grandfathered unlimited data plan customers to keep those plans if they agree to forego any subsidy on their next smartphone.

“If you look at the telematics industry today [services like OnStar], the car companies subsidize a device that goes into the car. So I think that we have a tendency over the years to sort of look and say, oh, something is going to happen very quickly,” McAdam said. “Things have a tendency to evolve over a long period of time, so I think you will have some devices, like the tablet today, that [are] not subsidized and you’ll probably still have certain devices that are because you want to establish that relationship with a customer and that is the easiest way to get there.”

Verizon Wants You to Use the Cable Industry’s Growing Wi-Fi Network

McAdam’s vision also offloads as much of Verizon’s 3G and 4G traffic to other networks as possible. Ironically, one of the biggest networks he hopes customers will use instead of his are the growing number of Wi-Fi services offered by his competitors in the cable industry.

“It is interesting that a lot of people have said, well, I can’t believe you’re going to partner with [cable companies],” McAdam said. “You are not going to use their Wi-Fi are you? Well, of course, we are. I mean we want to shift as much onto FiOS or onto the fixed network where we can and then provide — use that capacity to provide those higher demand services like video.”

McAdam added he does not want customers sitting in their homes watching video over his LTE 4G network. He also wants that traffic shifted to Wi-Fi.

“So our thinking going forward as we talk about kind of the ‘One Verizon’ approach is we want to use every network asset we have and if that means jumping onto FiOS or using the cloud services for mobile as well as fixed line, using security across all of our different access technologies, we want that network to be seamless and that is what our CTO, Tony Melone, is driving hard on in the business right now,” McAdam said.

One preview of that thinking at work can be found on Verizon Wireless’ hottest new device — the Samsung Galaxy S3. Verizon’s version of the phone browbeats customers with prominent menus that encourage Wi-Fi use wherever possible. The phone’s persistent reminder has become a pest according to many of the phone’s owners, who consider both the message and the difficulty keeping Wi-Fi shut off obtrusive.

Verizon’s partnership with large cable companies including Comcast, Time Warner Cable, Cox, and Bright House Networks originally involved the acquisition of excess wireless spectrum cable companies originally intended to use to compete with the mobile phone industry. With the cable industry abandoning those plans, the proposed collaboration involving Verizon Wireless grew to include cross-marketing each other’s products and services, and now apparently includes sharing the cable companies’ growing Wi-Fi networks.

Verizon Believes The Future of Telecommunications Needs to Be In the Hands of Two Companies — Verizon and AT&T

A point of shared belief between market leaders Verizon CEO Lowell McAdam and AT&T CEO Randall Stephenson is that excessive competition just does not make sense. Both believe federal regulators have it all wrong when they push to maintain the level of competition that still exists in the telecommunications business. When the Department of Justice effectively pulled the plug on a merger between AT&T and T-Mobile, Stephenson was outraged and, in one investor conference call, launched a tirade against regulators and suggested that AT&T would throw in the towel on expanding rural broadband in a retaliatory move.

McAdam and Stephenson both believe that competition in telecommunications represents wasted investment, inefficiency, and value destruction.

“I think the fundamental problem here, and it is sort of like fighting gravity I think, is that it is so expensive to build these networks that you are not going to support seven or eight carriers,” McAdam told investors. “I don’t — frankly, I think you’ll be lucky if you can support three in a healthy environment.”

But McAdam recognizes that if it achieves a wireless duopoly with AT&T, it must be a benevolent one, or else the marketplace abuses the wireless industry has a track record engaging in will invite regulatory scrutiny.

“We have a tendency to create a great club and hand it to our detractors and say please beat me with this because we do some dumb things like fighting some of the number portability and trying to push a direct wireless directory,” McAdam said. “I mean there are things that have really upset customers and that invites regulation. So I think the industry has the responsibility to act in the best interests of the customer as part of the mix with a shareholder, but I think there is always going to be the battle with regulation.”

McAdam admits he is uncomfortable with the fact the Obama Administration has allowed the regulation pendulum to swing more towards enforced competition and checking the power of dominant carriers in the marketplace. He prefers the Bush Administration’s “hands-off” approach that allowed both Verizon and AT&T to snap up smaller competitors with scant regulatory review.

McAdam believes the Obama Administration’s FCC and Justice Department is slowing down wireless investment, innovation, and the industry’s ability to earn profits at a time when unemployment in sky high and increased investment will help drive the economy forward.