Phillip “They Want to Save You Money By Charging You More” Dampier

The pro-Internet Overcharging forces’ meme of “pay for what you use” sounds good in theory, but no broadband provider in the country would dare switch to a true consumption-based billing system for broadband, because it would destroy predictable profits for a service large cable and phone companies hope you cannot live without.

Twenty years ago, the cable industry could raise rates on television packages with almost no fear consumers would cancel service. When I produced a weekly radio show about the cable and satellite television industry, cable companies candidly told me they expected vocal backlashes from customers every time a rate increase notice was mailed out, but only a handful would actually follow through on threats to cut the cord. Now that competition for your video dollar is at an all-time-high, providers are shocked (and some remain in denial) that customers are actually following through on their threats to cut the cord. Goodbye Comcast, Hello Netflix!

Some Wall Street analysts have begun warning their investor clients that the days of guaranteed revenue growth from video subscribers are over, risking profits as customers start to depart when the bill gets too high. Cable companies have always increased rates faster than the rate of inflation, and investors have grown to expect those reliable profits, so the pressure to make up the difference elsewhere has never been higher.

With broadband, cable and phone companies may have found a new way to bring back the Money Party, and ride the wave of broadband usage to the stratosphere, earning money at rates never thought possible from cable-TV. The ticket to OPEC-like rivers of black gold? Usage-based billing.

Since the early days of broadband, most Americans have enjoyed flat rate access through a cable or phone company at prices that remained remarkably stable for a decade — usually around $40 a month for standard speed service.

In the last five years, as cord-cutting has grown beyond a phenomena limited to Luddites and satellite dish owners, the cable industry has responded. As they learned customers’ love of broadband has now made the service indispensable in most American homes, providers have been jacking up the price.

Time Warner Cable, for example, has increased prices for broadband annually for the last three years, especially for customers who do not subscribe to any other services.

Customers dissatisfaction with rate hikes has not led to broadband cord cutting, and in fact might prove useful on quarterly financial reports -and- for advocating changes in the way broadband service is priced:

1. Enhance revenue and profits, replacing lost ground from departing video customers and the slowing growth of new customers signing up for video and phone services (and keeping average revenue per user ((ARPU)) on the increase);
2. Using higher prices to provoke an argument about changing the way broadband service is sold.

Pouring over quarterly financial reports from most major providers shows remarkable consistency:

• The costs to provide broadband service are declining, even with broadband usage growth;
• Revenue and profits enjoy a healthy growth curve, especially as increased prices on existing customers make up for fewer new customer additions;
• Earnings from broadband are now so important, a cable company like Time Warner Cable now refers to itself as a broadband company. It is not alone.

Still, it is not enough. As usage continues to grow in the current monopoly/duopoly market, providers are drooling with anticipation over the possibility of scrapping the concept of “flat rate” broadband, which limits the endless ARPU growth Wall Street demands. If a company charges a fixed rate for a service, it cannot grow revenue from that service unless it increases the price, sells more expensive tiers of service, or innovates new products and services to sell.

Providers have enjoyed moderate success selling customers more expensive, faster service, also on a flat rate basis. But that still leaves money on the table, according to Wall Street-based “usage billing” advocates like Craig Moffett, who see major ARPU growth charging customers more and more money for service as their usage grows.

Moffett has a few accidental allies in the blogger world who seem to share his belief in “usage-based” billing. Lou Mazzucchelli, reading the recent New York Times piece on Time Warner’s gradual move towards usage pricing, frames his support for consumption billing around the issue of affordability. In his view, usage pricing is better for consumers and the industry:

It costs real money to upgrade networks to keep pace with this demand, and those costs are ultimately borne by the subscriber. So in the US, we have carriers trying to raise their rates to offset increases in capital and operating expenses to the point where consumers are beginning to push back, and the shoving has come to the attention of the Federal Communications Commission, which has raised the possibility of treating Internet network providers as common communications carriers subject to regulation.

I believe that flat-rate pricing is a major source of problems for network carriers and consumers. In the carrier world, the economics are known but ignored because marketers believe that flat rates are the only plans consumers will accept. But in the consumer world, flat rates are rising to incomprehensible levels for indecipherable reasons, with little recourse except disconnection. Consumer dissatisfaction is rising, in part because consumers feel they have no control over the price they have to pay. This is driven by their sense of pricing inequity that is hard to visualize but comes from implicit subsidies in the current environment. The irony is that pay-per-use pricing solves the problem for carriers and consumers.

Mazzucchelli reposted his blog piece originally written in 2010 for the benefit of Times readers. Two years ago, he measured his usage at 11GB a month. His provider Verizon Communications was charging him $64.99 a month for 25Mbps service, which identifies him as a FiOS fiber to the home customer.  Mazzucchelli argues the effective price he was paying for Internet access was $5.85 for each of the 11GB he consumed, which seemed steep at the time. (Not anymore, if you look at wireless company penalty rates which range from $10-15/GB or more.)

Mazzucchelli theorized that if he paid on a per-packet basis, instead of flat rate service based on Internet speed, he could pay something like $0.0000025 per packet, which would result in a bill of $31.91 for his 11GB instead of $65. For him, that’s money saved with usage billing.

On its face, it might seem to make sense, especially for light users who could pay less under a true usage-based pricing scenario like the one he proposes.

Verizon Communications is earning more average revenue per customer than ever with its fiber to the home network. That’s about the only bright spot Wall Street recognizes from Verizon’s fiber network, which some analysts deride as “too expensive.”

Unfortunately for Mazzucchelli, and others who claim usage-based pricing will prove a money-saver, the broadband industry has some bad news for you. Usage pricing simply cannot be allowed to save you, and other current customers money. Why? Because Wall Street will never tolerate pricing that threatens the all-important ARPU. In the monopoly/duopoly home broadband marketplace most Americans endure, it would be the equivalent of unilaterally disarming in the war for revenue and profits.

That is why broadband providers will never adopt a true usage-based billing system for customers. It would cannibalize earnings for a service that already enjoys massive markups above true cost. In 2009, Comcast was spending under $10 a month to sell broadband service priced above $40.

Mazzucchelli

Instead, providers design “usage-based” billing around rates comparable to today’s flat rate pricing, only they slap arbitrary maximum usage allowances on each tier of service, above which consumers pay an overlimit fee penalty. That would leave Mazzucchelli choosing a lower speed, lower usage allowance plan to maximize his savings, if his use of the Internet didn’t grow much. On a typical light use plan suitable for his usage, he would subscribe to 1-3Mbps service with a 10GB allowance, and pay the overlimit fee for one extra gigabyte if he wanted to maximize his broadband dollar.

But his usage experience would be dramatically different, both because he would be encouraged to use less, fearing he might exceed his usage allowance, and he would be “enjoying” the Internet at vastly slower speeds. If Mazzucchelli went with higher speed service, he would still pay prices comparable for flat rate service, and receive a usage allowance he personally would find unnecessarily large. The result for him would be little to no savings and a usage allowance he did not need.

Mazzucchelli’s usage pattern is probably different today than it was in 2010. Is he still using 11GB a month? If he uses double the amount he did two years ago, under his own pricing formula, the savings he sought would now be virtually wiped out, with a broadband bill for 22GB of consumption running $63.82. By the following year, usage-based pricing would cost even more than Verizon’s unlimited pricing, as average use of the Internet continues to grow.

That helps the broadband industry plenty but does nothing for consumers. Mazzucchelli might be surprised to learn that the “real money to upgrade networks to keep pace with this demand,” is actually more than covered under today’s profit margins for flat-rate broadband. In fact, if he examines financial reports over the last five years and the statements company executives make to shareholders, virtually all of them speak in terms of reducing capital investments and the declining costs to deliver broadband, even as usage grows.

Verizon’s fiber network, while expensive to construct, is already earning the company enormous boosts in ARPU over traditional copper wire phone service. While Wall Street howled about short term capital costs to construct the network, then-CEO Ivan Seidenberg said fiber optics was the vehicle that will drive Verizon earnings for decades selling new products and services that its old network could never deliver.

Still, is Mazzucchelli paying too much for his broadband at both 2010 and 2012 prices? Yes he is. But that is not a function of the cost to deliver broadband service. It is the result of a barely competitive marketplace that has an absence of price-moderating competitors. Usage-based pricing in today’s broadband market assures lower costs for providers by retarding usage. It also brings even higher profits from bigger broadband bills as Internet usage grows, with no real relationship to the actual costs to provide the service. It also protects companies from video package cord-cutting, as customers will find online viewing prohibitively expensive.

One need only look at pricing abroad to see how much Americans are gouged for Internet service. Unlimited high speed Internet is available in a growing number of countries for $20-40 a month.

Usage-based billing is a dead end that might deliver temporary savings now, but considerably higher broadband bills soon after. It is not too late to turn the car around and join us in the fight to keep unlimited broadband, enhance competition, and win the lower prices users like Mazzucchelli crave.

Consolidation of the wireless industry into two or three mega-carriers is a dream come true… if you are one of those carriers (or Wall Street). But for everyone else, it’s a competition wasteland, where innovation and disruptive marketing wane into comfortable and predictable businesses where participants learn not to rock the boat. If they did, a lot of their accumulated money could fall overboard.

AT&T believes consolidation is already upon us, despite their setback in failing to acquire T-Mobile USA.

John Stephens, AT&T’s chief financial officer, tried to calm Wall Street’s fears that the government has signaled its intent to preserve robust competition.  At yesterday’s Nomura investment conference, Stephens said a reduction in the number of wireless companies in the United States is part of the natural order:

I think it is just logical that the industry is going to consolidate in some form or fashion. I think the marketplace has spoken to that with what it has done to pricing in the valuations on some of the companies. From an economic perspective and a highly CapEx-intensive business, I think it is logical to assume you’re going to have two or three and certainly not six and seven competitors in any marketplace. So I think consolidation is logical.

We’ve heard this argument before. It is commonly trotted out in opposition to community broadband initiatives when existing phone and cable companies fear a third player will ruin the market for everyone. AT&T joins the chorus with the same old excuses: the costs to build and run networks are too high for several players to comfortably compete. Consolidation reduces that pressure as customers are forced to choose among one or two providers, giving each a larger market share and healthier revenue to cover upgrades.

What companies like AT&T always obscure to their customers is the resulting pricing power, where price increases from one often lead to price increases from others. But Stephens has no trouble letting his investors know:

We are going to grow margins year-over-year. Last year’s margins were about 38.5% in wireless and our guidance says we are going to grow. I have said publicly, and some of my peers and coworkers have said publicly we expect we are going to have north of 40% margins this year in our wireless business and still believe that.

Margins = profits. In the absence of aggressive competition which forces companies to invest more in their networks, provide more value in their service offerings, or reduce pricing, increased profits are always the result.

Unfortunately, ZDNet’s editor in chief Larry Dignan seems to buy AT&T’s arguments and talking points, telling readers:

[…] It’s hard to argue against the idea. All industries boil down to two or three players eventually. The big question for wireless consolidation is timing. When will get to two or three carriers? And if so will this consolidation lead to price increases or will the mergers occur after wireless services is commoditized?

Stephens

It is actually very easy to argue against the idea, and the evidence is plainly visible if Dignan would take a look.

First, there is no evidence “all industries boil down to two or three players eventually.” Auto companies, banks, retailers of all kinds — even cell phone manufacturers all compete with more than just one or two other players in the market. A germinating monopoly or duopoly in any market is a signal federal regulators have failed to do the job assigned to them since the days of trust-busting railroads, oil, steel, and the securities business.

The drive to consolidation can be found first on Wall Street, where every industry is under pressure to cut costs, reduce profit-eroding competition, and return higher profits. The drumbeat for consolidation in the wireless industry starts there, is echoed in the executive offices of the cell phone companies themselves, and results in powerhouse deals that have picked off one competitor after another. That is why Cingular, Alltel, Cellular One, and Centennial Communications are no longer familiar names in wireless. They have all been swallowed nearly whole by AT&T or Verizon Wireless.

AT&T would argue that consolidation is a good thing, because through their willingness to sell, those companies indicated they wanted to exit the business. AT&T’s buyout of T-Mobile would have done everyone a favor because the company had lost interest in competing in the United States and wanted out.

The industry has held all of the cards of wireless consolidation until recently, primarily because supine regulators refused to provide a critical “check and balance” on industry pressure, accepting just about any premise to approve whatever wireless carriers wanted. Sure, a few companies had to divest certain assets, as Verizon Wireless did in certain Alltel markets. But AT&T ended up acquiring the majority of those divested territories. When AT&T bought Centennial Wireless, it had to divest a few markets in the southern United States. Verizon Wireless bought most of them. Customers were left in the middle, as always.

A remarkable thing happened when the federal government said no to AT&T over T-Mobile. Predictions of the smaller carrier’s imminent demise and its slow bleed to irrelevance has not happened. In fact, Deutsche Telekom picked its American asset up, shook the dust off, and is now investing in upgrades to keep the competition coming. At least $4 billion in improvements and some major network upgrades are on the way, and the company has even refreshed its marketing in a new, get-tough campaign against AT&T, Verizon Wireless, and Sprint. Now all three of those companies are watching to see what T-Mobile pulls next.

That is exactly the point.

The wireless world and Wall Street wants you to believe that consolidation is the only way the mobile phone marketplace of 2012 can work. Dignan has thrown in the towel, conceding they are likely right. But T-Mobile is proving they are exactly wrong. Instead of abandoning its asset, which DT still sees as valuable, it is investing in it to compete. Had the merger been approved, AT&T would never answer T-Mobile’s disruptive competition again. Rural America would still be waiting for better service. AT&T would have less pressure to keep prices down and upgrades up, and Wall Street would have turned its attention to the next targeted carrier ripe for the picking by AT&T or Verizon Wireless’ emerging duopoly.

As AT&T joins Verizon selling off its Yellow Pages publishing unit and payphones keep disappearing from street corners, the media is writing the landline obituary once again.

CNN Money asks today whether we’re witnessing the death of the landline.

In as little as 20 years, the concept of a wired phone line may become the novelty a rotary-dial phone represents today.  Yes, traditional phone lines will still be found in businesses and in the homes of those uncomfortable dealing with a mobile phone, but America’s largest phone companies are well aware the traditional telephone line is in decline.

[flv width=”412″ height=”330″]http://www.phillipdampier.com/video/ATT Archives What is the Bell System.flv[/flv]

The Bell System, as it was known until the 1980s, used to comprise AT&T, Bell Labs, Western Electric, Long Lines, and two dozen local “operating companies” like New York Telephone, Mountain Bell, etc.  This AT&T documentary, from 1976, explores how “the phone company” used to function.  New innovations like “lightwave” are showcased, promising to deliver voice phone calls over glass fibers one day.  

Much of the technology seen in the documentary may be unfamiliar if you are under 30 (and check out how customer records were maintained back then), but those who remember renting telephones in garish colors from your local phone company will recognize the phones that occupied space in your home not that long ago.  The only part of the landline network that hasn’t changed much in the last 40 years is the wiring infrastructure itself, which has been allowed to deteriorate as customers continue to depart.

Why was the company so darn big back then?  Because it had to be, the documentary says, to serve a big America.  Hilariously, the company defends its then-status as a “regulated monopoly” telling viewers “[a] regulated monopoly works well in communications because you don’t duplicate facilities and you produce real economies over the long haul.”  (14 minutes)

CNN reports nearly one-third of all American homes no longer have landline service, double the rate from 2008, triple that of 2007.  Verizon is feeling the heat the most, with revenue down 19% over the last five years.  AT&T has seen their revenue drop 16.5% over the same period.

But things are not all bad for phone companies willing to spend money upgrading their networks.  Verizon’s top-rated FiOS fiber to the home service is a compelling competitor to Comcast and Time Warner Cable.  AT&T’s U-verse has gotten a respectable market share larger midwestern cities and draws customers who like its DVR box and the chance to stick it to the local cable company they’ve hated for years.

But where both companies have decided against investing in upgrades — notably in their rural service areas — the traditional phone line is trapped in time.  Only the network it depends on is changing, and not for the better.

[flv]http://www.phillipdampier.com/video/ATT 1993-1994 You Will Ad Campaign Compilation.flv[/flv]

Back in 1993, AT&T produced seven advertisements dubbed the “You Will” series, showcasing future technologies AT&T would “deliver to you.”  Eerily, the vast majority of these predictions came true, but mostly from companies other than AT&T.  While the phone company predicted what would eventually become E-ZPass, Apple’s iPad, Apple’s Siri, the smartphone, Skype, Amazon’s Kindle, the cable industry’s home security apps, video on demand, and GPS navigation, most of those innovations were developed and sold by others.  

AT&T spun away Bell Labs and became preoccupied selling Internet access, cell phones and reassembling itself into its former ‘hugeness’ through mergers and buyouts. With limited investment in innovation, AT&T risks being left as a “dumb pipe” provider, selling the connectivity (among many others) to allow other companies’ devices to communicate. (Alert: Loud Volume at around 2 minutes) (4 minutes)

Verizon decided to ditch its rural service areas to FairPoint Communications in northern New England and Frontier Communications in 14 other states.  The results have not been good for the buyers (and often customers).  FairPoint went bankrupt in 2009, overwhelmed by the debt it incurred buying phone lines in Vermont, New Hampshire, and Maine.  Frontier has watched its sales fall ever since its own landline acquisition, and the company has gotten scores of complaints from ex-Verizon customers about broken promises for improved broadband, billing errors, and poor service.

Analysts predict AT&T will start dumping its rural landline customers in the near future as well, letting the company focus on its U-verse service areas.  But who will buy these cast-offs?  CNN reports nobody knows.  CenturyLink and Windstream, two major independent phone companies, don’t appear to be in the mood to acquire neglected landline facilities they will need to spend millions to repair and upgrade.

One thing is certain — both AT&T and Verizon are tailoring business plans to favor Wall Street approval.  The companies’ decisions to temporarily boost revenue selling pieces of its operations has helped stock prices, but has also made the companies shadows of their former selves.  Nearly 30 years ago, customers still paid the phone company to rent their home telephones, relied extensively on the companies’ lucrative White and Yellow Pages for directory information, and discovered new technology innovations like digital switching thanks to Bell Labs, the research arm of AT&T — today independent and known as Alcatel-Lucent.  Today, people in some cities cannot even find a telephone company-owned payphone.

[flv width=”360″ height=”290″]http://www.phillipdampier.com/video/WJBK Detroit Quest to Find a Working Pay Phone 4-10-12.mp4[/flv]

WJBK in Detroit this week ventured out across Detroit to see if they could find a pay phone that actually works.  That old phone booth on the corner is long gone, and some admit they haven’t touched a pay phone in 20 years.  (2 minutes)

Verizilla

The Communications Workers of America has a new, decidedly low-budget video decrying a spectrum swap between America’s largest cable companies and Verizon Communications that will leave Verizon Wireless stores pitching cable television service from one of Verizon’s cable company competitors.

To the CWA, this is nothing less than the birth of Verizilla, a new monster of a telecommunications company that has capitulated on competing with Big Cable and will instead devour the wireless communications marketplace for itself.  The CWA interest is obvious: many of its employees are responsible for constructing and maintaining Verizon’s now-stalled FiOS fiber to the home network.

From the CWA:

The deal, struck behind the closed doors of America’s corporate boardrooms, poses a threat to consumers and workers. If it goes through, it will be the death knell for competition between cable and telecom companies. Verizon Wireless, Time Warner, Comcast, and other cable companies will become a giant, unregulated quasi-monopoly. Verizon will have no incentive to challenge cable by building FiOS into new areas — meaning less competition, consumer choice, and higher prices for consumers.

Less FiOS also means fewer jobs building, maintaining, servicing, and installing the network. This deal will create a corporate behemoth that will use exclusive quad-play market power to shrink its future workforce.

Worst of all, Verizon Wireless and the cable companies are refusing to come clean about the details of the deal. Even as the FCC and Department of Justice review it, we still don’t know what it means for consumers or workers.

The CWA has so far collected more than 135,000 signatures on its petition opposing the current form of the deal. 

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/Verizilla.flv[/flv]

America, say hello to Verizilla, wreaking reduced investment havoc on Verizon service areas across the northeastern United States.  (2 minutes)

When the nation’s largest phone and cable companies get together, it’s never good news for consumers.

Verizon has struck a backroom deal with a cartel of cable companies — including Comcast, Time Warner Cable and Cox Communications — to stop competing against one another and instead divvy up the spoils of the growing mobile market.  And they’re keeping mum on the details of this arrangement.

The cable industry wants to sell Verizon the mobile phone spectrum it originally considered using to give Verizon Wireless a little competition.  In return, Verizon Wireless is going to start selling you Comcast/Time Warner/Cox cable TV service.  It’s all great for them, but if you were waiting for Verizon FiOS or a better deal for your cell phone, these phone and cable companies want to make sure you’ll wait a long… LONG time.

They claim they are not getting together in an anti-competition pact.  They are just getting differently apart. It’s like divorcing someone by agreeing to move in with them.

It’s a bad marriage for consumers and now is the time for the Federal Communications Commission to deliver some parental supervision.

Stop the Cap! joins Free Press in calling on consumers to tell the FCC to expose Verizon’s backroom shenanigans.

Tell the Commission you aren’t happy with secret handshake deals that hand over the public airwaves to Verizon Wireless to consolidate its market concentration.

Even worse, you don’t want America’s largest competitor for big cable TV — telco-delivered broadband, TV, and phone service — eliminated so the phone companies can pitch you overpriced, non-competitive cable service from their new best friends.

What part of “monopoly cartel” doesn’t the FCC understand?  Tell them you want these deals stopped and you demand real competition, not more of the same.