Phillip Dampier

Now that the initial shock of an aggressive — some say “audacious” — move by the Justice Department to block a merger AT&T confidently called “a done deal” is past, analysts of all kinds are attempting to discern the inside reasons for the merger’s rejection, where the deal can go from here, and what signals this will send the rest of America’s telecom industry.

In short — was this one merger proposal too far over the line?

The Justice Department reviewed reams of data, document-dumped by AT&T, on the company’s rationale for wanting to absorb T-Mobile and its implications for employees, consumers, and the dwindling number of wireless competitors.

They quickly discovered they did not like what they were seeing:  an all-new AT&T with a combined 132 million wireless customers, completely dwarfing all of their competitors and signaling a full-scale retreat from the company’s historic landline network.  An unregulated, increasingly concentrated wireless marketplace, represents the Wild West of fat profits, ripe for the picking by those large enough to control the market.  Increasingly, that means two former Baby Bells — AT&T and Verizon.

The Wall Street Journal charted more than two decades of mergers and acquisitions, which reduced nearly two dozen players down to five supersized telecom companies.

The Politics

Decisions at Justice are hardly made in a vacuum.  Politics always plays a role, and it’s a safe bet Obama Administration officials well-above rank-and-file lawyers in the Antitrust Division sent clear signals to the Department about how it wanted the review handled.  After all, this same team of lawyers had almost no trouble approving a mega-merger between NBC-Universal and Comcast Corporation, not finding anything ‘antitrust’ about that deal.  But Justice officials hurried out their own lawsuit with a wide-ranging, harsh condemnation of the deal at yesterday’s press conference.  As most Americans already know, competition in the cable industry is hardly robust, but market concentrating mergers and acquisitions are approved regularly in that industry.  So why did the Justice Department have such a problem with AT&T?

America's Wireless Market: Beyond well-behind, third-place Sprint, no other carrier comes close to AT&T or Verizon Wireless.

Many analysts seem to blame the company’s “arrogance” in telling reporters the merger was a breeze to be approved, others point to spectrum issues, as well as complaints about AT&T’s poor service potentially ensnaring T-Mobile customers.  But above all, Justice lawyers believe that America’s wireless marketplace needs at least four national wireless carriers, particularly scrappy T-Mobile, which has a long history of being a disruptive player in the market, loathe to offer the kind of “identical twin”-pricing common at AT&T and Verizon Wireless.  Losing T-Mobile’s aggressive performance in the market would mean declaring open season for price increases and abusive business practices.  After all, where would wireless consumers go?

That “four national carrier”-test could be a big problem for T-Mobile, as it could mean Justice lawyers would also reject an presumed alternative — combining Sprint and T-Mobile,  rumored before AT&T moved in and stole the show.  A new entrant willing to buy-out Deutsche Telekom’s U.S. wireless interests may be the only palatable solution acceptable to Justice lawyers because it would keep T-Mobile intact and running, independent of other wireless carriers.

Justice also completely discounted the relevance of regional carriers like MetroPCS, Cricket, U.S. Cellular, and other smaller providers.  The reason is simple: roaming.  All of these smaller providers are completely dependent on the four large national carriers to deliver essential roaming services for their customers who travel outside of the regions where these smaller companies deliver service themselves.  All national carriers would have to do to control an overly-competitive “problem” carrier is withdraw roaming agreements or raise prices for them.

Sprint, among others, is obviously the most relieved by yesterday’s events.  Their long term viability as a national carrier dwarfed by AT&T and Verizon Wireless would have raised numerous questions about whether that company could survive in the long term.  Sprint would have also felt pressure to beef up its own operations, likely through acquisitions of several regional carriers, particularly MetroPCS and Cricket, which share its CDMA network standard.

Wall Street is livid, of course.

The great gnashing of teeth has begun on Wall Street, evident as stock analysts begin raising questions about President Obama’s “anti-business” policies.  While executives at both AT&T and T-Mobile are at risk of losing substantial bonuses for pulling the deal off (and providing special retention packages to keep key talent from leaving), there is also a lot of money to be lost in New York and Washington should the deal collapse.  Take the “little people” that will be out tens of millions in deal fees and proceeds from extending credit, implementing the merger itself, and structuring the legal mechanics.  They include:

Arnold & Porter: The now infamous law firm that accidentally posted an un-redacted document on the Federal Communications Commission website that exposed, in AT&T’s own words, what consumer groups already strongly suspected: AT&T preferred the long term benefits of knocking pesky T-Mobile out of the marketplace, even though the $39 billion dollar price tag dwarfed the $4 billion estimated cost of building AT&T’s own 4G LTE network.  That’s the 4G network executives deemed “too expensive” earlier this year.  With a deal collapse, the firm can say goodbye to lucrative legal fees and perhaps more importantly, their reputation of properly managing their clients’ business affairs.

Greenhill & Co.: Greenhill is one of several all-star, platinum-priced advisory firms hired by companies acquiring other companies to structure and implement their mergers.  With Greenhill hoping for a substantial piece of at least $150 million set aside by AT&T to cover these specific costs, a merger-interrupted could cost key people some nice year-end bonuses.

JPMorgan (Chase): The House of J.P. Morgan handed over a check for AT&T worth up to $20 billion to help finance the deal.  JPMorgan doesn’t do that for free.  In addition to any interest proceeds, JPMorgan also charges a range of underwriting and administrative fees that could easily total $85 million dollars.  AT&T might have to send the check back.

Cable Business News & Business Media: One of the most ironic developments watching the Justice Dept. decision unfold was the unintentional amount of AT&T advertising promoting the merger that preceded video reports and appeared adjacent to AT&T-related stories.  Those ads may soon end, costing cable news and the business press substantial ad revenue.

Cable business news networks offered up scathing analyses. Among anchors and analysts upset with the news of the merger’s potential derailment, it didn’t take long for “couched questions” to begin, pondering whether President Obama was against big companies, jobs, or the concept of the private sector in general.  Completely missing: coverage of the benefits for consumers who potentially don’t have to endure a further concentration in the wireless marketplace.

Craig Moffett from Sanford Bernstein, who usually celebrates all-things-cable, today told the Wall Street Journal the actions at Justice will harm business at every U.S. wireless carrier.

“Put simply, the industry will be structurally less attractive than it would otherwise have been,” he said. “Pricing is likely to be less stable, and profound technological risks, including free texting and bandwidth arbitrage, that would be manageable in the context of a significantly consolidated industry now become much more threatening.”

Judge Ellen

In other words, a hegemony of AT&T and Verizon Wireless could play rough with third party developers trying to undercut text message pricing and deliver data plan workarounds. With more competitors, consumers could simply abandon abusive providers.  Without those competitors, consumers have to pay AT&T’s asking price or go without service.

The Law

AT&T may be hoping it scored one potential success in its anticipated legal challenge against the Justice Department’s antitrust case.

The judge assigned to hear arguments is Ellen Segal Huvelle, who has a track record of slapping down government overreach.  Huvelle previously rejected Justice Department objections to the merger of SunGard and Comdisco — two disaster-recovery businesses.  The government argued the merger would leave just two major players in that business.  Judge Huvelle dismissed that, claiming the government too-narrowly defined what a disaster-recovery business entailed.  If she finds AT&T’s arguments of robust competition from regional carriers, landlines, and Voice Over IP credible, Justice lawyers may have a problem.  So could consumers.

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PBS Newshour explores where the AT&T/T-Mobile merger goes next, now that the Justice Dept. sued to stop it on antitrust grounds.  (7 minutes)

The U.S. government has filed a lawsuit to block a $39 billion dollar merger deal between AT&T and T-Mobile USA, citing substantially reduced competition for American cell phone customers.

“AT&T’s elimination of T-Mobile as an independent, low-priced rival would remove a significant competitive force from the market,” the Justice Dept. said in its filing.

“We are seeking to block this deal in order to maintain a vibrant and competitive marketplace that allows everyone to benefit from lower prices and better quality and innovative products,” said James M. Cole, deputy attorney general.

News that the merger could be ultimately blocked by the Justice Department caused AT&T and T-Mobile shares to lose as much as seven percent of their value.  But shares of competitor Sprint, considered the most vulnerable remaining competitor to AT&T and Verizon Wireless are soaring this morning by more than seven percent.

Cole’s statement was harsh in its condemnation of the merger’s benefits touted by AT&T:

The Department filed its lawsuit because we believe the combination of AT&T and T-Mobile would result in tens of millions of consumers all across the United States facing higher prices, fewer choices and lower quality products for their mobile wireless services.

Consumers across the country, including those in rural areas and those with lower incomes, have benefitted from competition among the nation’s wireless carriers, particularly the four remaining national carriers.   This lawsuit seeks to ensure that everyone can continue to reap the benefits of that competition.

Right now, four nationwide providers account for more than 90 percent of the mobile wireless connections in America, and preserving competition among them is crucial.   For instance, AT&T and T-Mobile currently compete head-to-head in 97 of the nation’s largest 100 cellular marketing areas.   They also compete nationwide to attract business and government customers.   Were the merger to proceed, there would only be three providers with 90 percent of the market, and competition among the remaining competitors on all dimensions—including price, quality, and innovation—would be diminished.

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Bloomberg News delivered the breaking news that the Department of Justice would oppose the merger of AT&T and T-Mobile on antitrust grounds.  (2 minutes)

The deal falling through would cost AT&T a $3 billion dollar failed deal breakup fee, and a parting gift of wireless spectrum to T-Mobile USA, a unit of Deutsche Telekom AG.

Observers suggest part of the reason for the rejection may have been an attempt by the Obama Administration to draw a line in the sand for the size of large mergers and acquisitions it will tolerate.  The antitrust division of the Dept. of Justice has recently become more aggressive in reviewing large corporate merger transactions, and had the Administration approved the deal between AT&T and T-Mobile, the acceptance of permitting two companies to control the majority of wireless customers would have arguably meant virtually any merger deal would have passed muster, regardless of the implications of concentrated market share.

Traditionally, opposition from the Dept. of Justice spells doom for most merger proposals.  But AT&T is no ordinary corporate entity.  In addition to being confident enough to agree to a $3 billion breakup fee and giving away valuable spectrum should the deal fail, AT&T’s lobbying efforts and legal budget are unparalleled, and the company may decide to fight to preserve the deal using political and legal channels.  The terms of the merger could also be renegotiated, agreeing to spin off more customers to reduce market share, or compromising on consumer protections or other givebacks.

But for most companies, opposition from the government’s antitrust division is a high hurdle to overcome, and many won’t even try.

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CNBC delivered the stunned reaction among its own anchors and telecommunications industry analysts about the Justice Department’s strong objections to the proposed merger.  Many on Wall Street predicted this was a ‘done deal.’  (12 minutes)

Should AT&T and T-Mobile abort the deal, that doesn’t necessarily guarantee Americans will still have four major carriers to choose from.  Deutsche Telekom maintains a strong interest in selling off T-Mobile USA, and has reduced investment in the company.  That could renew rumors of a merger deal between T-Mobile and Sprint.

AT&T executives as late as this morning seemed to have no advance warning of the Justice Department’s decision.  CEO Randall Stephenson spent much of his morning suggesting AT&T would hire thousands of call center workers as a result of the merger.

After learning of the impending lawsuit, AT&T released a statement: “We are surprised and disappointed by today’s action, particularly since we have met repeatedly with the Department of Justice and there was no indication from the DOJ that this action was being contemplated,” the statement said. “The DOJ has the burden of proving alleged anti-competitive affects and we intend to vigorously contest this matter in court.”

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CNBC reporters and analysts react to the impact the Justice Department’s objections are having on the entire telecommunications business sector.  The question now being pondered at AT&T: Will it fight for the deal or will it fold?  (5 minutes)

Consumer Reports underlines the point: America's worst cell phone company promises America better things by merging with America's second-worst cell phone company. Is this a good deal for America or just for AT&T and T-Mobile?

This morning’s announced deal of a merger between AT&T and T-Mobile is what antitrust rules were made to prevent.  This bold merger would not have even been attempted had the two companies believed they could not get it past supine regulators and members of Congress who receive substantial contributions from AT&T.

Ordinary consumers can see right through AT&T’s business plans, so why can’t our regulators and policymakers?  In a word, money.

The FCC’s own National Broadband Plan delivers clear warnings that the growing concentration in the wireless industry will hamper better broadband in the United States, not enhance it.  Reduced consumer choice and competition takes the pressure off carriers to innovate, expand, and keep wireless costs under control.

Reducing the number of players on the field delivers countless benefits to carriers and their shareholders.  But for consumers, there is nothing but a few promised spoonfuls of sugar to help the industry’s agenda go down — with vague promises of better rural service, faster wireless data, and new handsets.

In a truly-competitive marketplace, Washington regulators need not exact promises of better service from mega-sized carriers: the much-vaunted “free market” would deliver them naturally, as competitors invest and innovate to succeed.  But that kind of market is increasingly disappearing with every merger.

Nowadays, officials at the FCC and Justice Department are willing to accept deals if they promise some token bone-throwing, at least until the company lobbyists inevitably manage to get those conditions discarded during the next round of deregulation — cutting away rules that “tie the hands” of companies picking your pockets.

Money makes the impossible very possible, and AT&T intends to spend plenty to earn plenty more down the road.  Let’s review how the game will be played, and what you can do to stop it.

The “Free Market” Crowd Sells Out

Randolph May is willing to sell robust competition down the river if it means he can get 4G network access faster.

When the chorus of capitalism capitulates on the most important formula for success in a deregulated marketplace — robust competition on a level-playing field, we know there is a problem.  Take Randolph May.  He works for the free market think tank Free State Foundation.  Watch what happens when even the most ardent supporter of ‘letting the marketplace sort things out’ twists and turns around admitting America is facing a future duopoly in wireless:

“In an ‘idealized’ marketplace, the more competitors the better. But the telecom marketplace is not an idealized market. It is one that requires huge ongoing capital investments to build broadband networks that deliver ever more bandwidth for the ever more bandwidth-intensive, innovative services consumers are demanding,” he says.  “My preliminary sense is that the benefits from the proposed merger, with the promise of enhanced 4G network capabilities implemented more quickly than otherwise would be the case, outweigh the costs. Even after the merger, the wireless market should remain effectively competitive with the companies that remain.”

That’s a remarkable admission for someone who normally argues that marketplace fundamentals are more important than individual players.

May is willing to sell a robust competitive marketplace down the river in return for 4G — a standard AT&T is hurrying to bring to its customers threatening to depart for better service elsewhere.  With this deal, disgruntled customers will have one fewer choice to turn to for service.

Make no mistake: a free, unregulated wireless marketplace requires more than two national carriers and a much-smaller third (Sprint) to deliver real competition.

The Dollar-A-Holler Phoney Baloney Astroturf Groups

AT&T will waste no time trotting out comments from non-profit groups essentially on their payroll who will peddle filings with regulators promoting AT&T’s business agenda in return for substantial sized donation checks to their causes.  The usual suspects, which include groups serving minority communities, will tout the “wonderful things” the deal will bring to their constituencies.

Already out this morning is this curious remark picked up by Broadcasting & Cable from Debra Berlyn, who claims to represent consumers as part of a group called the Consumer Awareness Project:

Beryln's consumer group has a few problems: It's not a group, it doesn't represent consumers, and she is an industry consultant.

“Wireless acquisitions over the course of the past decade have not led to price increases for consumers and, in fact, the statistics show that prices have declined during this period. While some consumer voices have focused on the loss of a wireless competitor in relation to AT&T’s recently announced plans to acquire T-Mobile USA, the news for consumers should be seen in another light with a focus on the benefits that this merger can bring to consumers across the U.S.”

Perhaps the first goal of any group trying to make consumers aware of anything is to actually have a website associated with your group.  The “Consumer Awareness Project” forgot this important first step, but we eventually found the “group” using a re-purposed web address, “consumerprivacyawareness.org,” and note they have only recently become significantly active on this issue, now peddling AT&T’s agenda with gobbledygook.

When Berlyn isn’t pounding out prose to benefit AT&T, she is making guest appearances in Comcast’s corporate blog or being a favorite source of industry-connected groups like the nation’s largest broadband astroturf effort, Broadband for America.

In fact, after some digging, one learns there are no actual consumers involved with the “Consumer Awareness Project.”  The entire affair is actually a project of a Washington, D.C., lobbying-consultancy firm — Consumer Policy Solutions, which counts among its services:

• Federal advocacy: Legislative and regulatory advocacy work before Congress, federal agencies and the administration.
• State and local advocacy: Policy development and implementation and grassroots mobilization.

That is the very definition of interest group “astroturf.”  But my favorite section of this company’s website is the promise paying clients will get Berlyn’s experience “in communicating complex language and issues into easily understandable, applicable messages for consumers.”

Such as: AT&T’s merger with T-Mobile is good for consumers, even if it raises prices and reduces competition.

I’m sold.

The Cowardly Lion & A Myopic Justice Department

FCC Chairman Julius Genachowski's cowardly cave-ins set the stage for AT&T's bold merger move, believing they have government oversight under their control.

The first hurdle this deal will need to overcome is among Washington regulators, most of whom are either way over their heads understanding the implications of super-sized mergers like this or are simply terrified of going out on a limb with a multi-billion dollar company that can create headaches for your agency in Congress.

AT&T will sell this deal within a very limited context of the deal itself, and urge regulators to ignore “emotional” issues about the increasingly concentrated wireless marketplace.  Verizon did much the same with its acquisition of Alltel — urging regulators to ignore the fact they were removing a player in the market and focus instead on the benefits Verizon’s size and scope could bring to existing Alltel customers.  Of course, in many areas Alltel served, customers were free to do that themselves simply by signing up for Verizon service.

Dan Frommer, a senior staff writer at Business Insider, delivers a TripTik outlining AT&T’s roadmap to deal approval:

“AT&T believes its experience with regulatory review has given it a good picture of what’s realistic and what isn’t from an approval standpoint, and believes it can frame the deal in a way that won’t be rejected,” he writes.  “AT&T says the Feds are looking at “the facts” — hinting that they aren’t acting based on emotions or politics. Though, no doubt, there will be plenty of jockeying in the press and among lobbyists from those on both sides of the deal.”

But Frommer wades in too deep and drowns his credibility claiming the combination of some of the largest wireless carriers in the country still leave plenty of competitors.  Besides Verizon, there is just a single national player of consequence remaining – Sprint.  MetroPCS and Cricket deliver service in urban areas in selected cities. US Cellular, Cellular South, and several others deliver service to an even smaller number of communities, entirely dependent on large carriers for roaming coverage.

The Justice Department’s typical solution to antitrust concerns is to force limited concessions like divestiture of assets in particularly concentrated markets.  In most cases, companies agree because those assets are often redundant and would be sold anyway, or cover such a limited area as to be inconsequential to the greater deal.  Former Alltel customers found themselves traded first to Verizon and then divested away to AT&T.

Most of the customers divested away from T-Mobile’s future with AT&T will likely end up switched to Verizon, hardly a success story for increased competition.

FCC lawyers will likely review this transaction with a narrow scope, too.  Instead of contemplating the implications of the inevitable duopoly that could result, the FCC will likely find itself negotiating over individual details of the deal without considering an outright rejection of it.

AT&T admits they are on a mission to monetize data usage.

At the FCC, Julius Genachowski’s performance as a regulator has been nothing short of a disaster, pleasing almost nobody in the process.  His “cowardly lion” approach to regulation has delivered rhetoric without substance and a whole lot of broken promises.  Genachowski has proven to be unable to stand up to the companies he is tasked with regulating.  With two Republican commissioners likely to favor the deal and Michael Copps almost certainly in opposition, it will be up to Julius Genachowski and Mignon Clyburn to vote this deal up or down.

But regulators are also responsive to Congressional pressure and dramatic backlash by consumers, such as what happened just a few years ago when big media companies lobbied to relax media ownership rules.  When consumers (and voters) revolt, regulators will change their tune… and fast.

What You Can Do

Consumers can make a difference in what comes next for T-Mobile and AT&T.  The first step is to make this an issue with your member of Congress and two senators.  Let them know you have profound concerns about another huge wireless merger.

There is simply no tangible benefit that can outweigh the loss of another important competitor in the American wireless marketplace.

AT&T’s bottom-rated service will not become any better acquiring the second-to-last rated service.  The company must invest in its network to compete, not simply pick off competitors to save money.  The loss of T-Mobile would mean only three national carriers, and it is highly unlikely Sprint would be able to withstand pressures on Wall Street to merge themselves away, probably to Verizon.

Tell your elected officials the AT&T/T-Mobile deal is a consumer nightmare and should not be approved under any circumstances.

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The always optimistic Bloomberg News says AT&T’s deal could still get past regulators, but there is a substantial risk as well.  Consumers can help make that risk unsustainable by telling the Obama Administration and Congress better broadband does not come from a duopoly, no matter how well-intentioned.  (4 minutes)

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Getting AT&T’s deal with T-Mobile approved by U.S. regulators could be difficult, as the Obama Administration contemplates the loss of the fourth largest national carrier, leaving just three national players.  Michael Nelson, analyst at Mizuho Securities USA Inc., discusses AT&T Inc.’s agreement to buy Deutsche Telekom AG’s T-Mobile USA unit for $39 billion in cash and stock. Nelson talks with Erik Schatzker on Bloomberg Television’s “InsideTrack.”  (5 minutes)

For the first time, a state has announced it is returning stimulus funding made available by the Obama Administration to improve broadband service.

Wisconsin governor Scott Walker said thanks, but no thanks to the U.S. Department of Congress, returning $23 million in broadband stimulus funds allocated to build a fiber-optic “middle mile” network to 380 Wisconsin communities — including 385 libraries. 82 schools, and numerous public safety offices in rural areas.

The decision to reject the money came in concert with a public relations push by Republicans in Washington this week calling on governors to curtail “wasteful spending” and reject stimulus projects.  Walker’s timing of the rejection has political watchers suspicious of an orchestrated campaign by state and national Republicans to call out the president’s economic programs.  Critics of the Walker administration are also accusing the governor of doing AT&T’s bidding in rejecting the public money.

AT&T has plenty of good friends in the state government, which has historically granted most of AT&T’s legislative checklist in the past ten years.  Wisconsin has taken a “hands-off” approach to cable and phone companies.  Statewide video franchising makes AT&T’s efforts to expand its U-verse IPTV system easy, without having to answer to local communities.  Rural commitments to landline phone service have also been eased for AT&T, thanks to a large lobbying effort.  Publicly-owned municipal broadband networks open to ordinary consumers are few and far between in the state, thanks to heavy opposition from the phone giant.

Walker’s track record of being extremely pro-business, and the fact he accepted more than $20,000 in campaign contributions from AT&T made it easy to claim Walker was delivering another favor to the state’s largest phone company.

But is Walker’s rejection of the state’s broadband stimulus money a help or a hindrance to AT&T?  Is Wisconsin’s governor correct when he says federal government bureaucracy was at fault?

Stop the Cap! decided to investigate.

BadgerNet: An Introduction

Governor Walker

Wisconsin’s institutional broadband network, which delivers broadband connections to large educational facilities, public libraries, and government users, is named BadgerNet — which makes perfect sense for the Badger State.  State law limits who can utilize the service — ordinary residential customers cannot — so the network is not well known outside of the circle of groups authorized to access it.

Currently BadgerNet largely exists as an extension of AT&T’s network in Wisconsin.  That is a critical point.  Had BadgerNet initially been created as an independent entity, today’s stimulus rejection might never have happened.  Wisconsin, no doubt at the behest of AT&T, built its network with a leasing arrangement, signing five-year term contracts to rent space on AT&T’s fiber-copper wire facilities.  That kept initial construction costs down, and allows the state to theoretically “walk away” from part of the network if something better comes along — a highly unlikely proposition in a state like Wisconsin.  It’s not an economic leader and has large numbers of rural counties competitors would be unlikely to serve.

Wisconsin Republicans call this arrangement with AT&T a “public-private partnership.”  Democrats call it a giveaway to AT&T, and BadgerNet officials call it one big fat headache.

Wisconsin's BadgerNet

Obama’s Broadband Stimulus

President Obama

When the Obama Administration unveiled its broadband stimulus program, it not only promised to deliver new broadband projects, but also the employment prospects for an army of consultants hired to navigate through the terms and conditions that always accompany money from Washington.

The control measures established by the Department of Commerce, which administers the money from the federal government, are designed to protect against waste, fraud, and abuse.  Unfortunately, they are often more impenetrable than software licensing agreements.  If you want the money, you must follow every requirement, or risk forfeiting it back to the government.

Wisconsin’s proposal to expand BadgerNet with broadband stimulus funding would mean discarding slower speed data connections for super-fast fiber optics.  Some 203 new miles of optical fiber were to be laid, serving 385 school districts, 74 libraries, and eight community colleges.

The federal government liked what it saw and awarded nearly $24 million in funds to launch the “middle-mile” project.  Along with the virtual check came pages of fine print — rules about how the money could and could not be spent.

As state officials and BadgerNet 2.0’s planners poured over the documents, they began reaching for the Tylenol.  AT&T’s ownership interests in the existing network turned out to be a major problem.

The ‘AT&T Problem’

“We, as a state, do not own our network. We purchase a managed service through the BadgerNet contract,” Diane Kohn, acting administrator for the Division of Enterprise Technology in the Department of Administration told the Milwaukee Journal Sentinel.

Most grant recipients either plan to build a new network from the ground up or build on an existing non-profit network.  Neither is the case in Wisconsin because of AT&T’s involvement.

“From a federal perspective, it was like we were some kind of unknown start-up firm with all of these risks attached to it,” said Robert Bocher, an information technology consultant for the Department of Public Instruction. “In fact, our network has been around since the mid-1990s.”

But it got even more difficult when BadgerNet discovered the federal government requires new fiber networks built with stimulus funds to be utilized for at least 20 years.  This important control measure protects taxpayers from fronting the costs to build state of the art fiber networks, only to be later sold off to private interests or discarded as a budget cutting move.

Wisconsin’s agreement with AT&T runs for five years, not 20.  Additionally, since AT&T largely administers the infrastructure, much of the $23 million could have ended up going straight to AT&T to cover construction costs.  BadgerNet lacks sufficient funding to completely sever ties with AT&T and build its own network, and Gov. Walker isn’t about the deliver the money required to start a new network from scratch.

BadgerNet learned a lesson most grant recipients discover after winning the money — spending it comes with plenty of wires attached, and none of them transport data.

The Davis-Bacon Act

A Depression-era law is also being blamed for supposedly creating major hurdles for broadband network construction.  The 1931 Davis-Bacon Act was enacted to require public works projects be built at local prevailing wages.  The Act became law after contractors began importing cheap labor (typically underpaid African-Americans from southern states) to work competitively bid public construction projects during the Roosevelt Administration.

Mikonowicz

Republicans currently suspect the Act of being little more than a union protection law, raising labor costs artificially and helping to bust budgets.  Wisconsin Republican senator Ron Johnson used complications in a Sauk County broadband project to bash the Act, accusing it of being responsible for wasting taxpayer dollars.

David Mikonowicz, the utility superintendent for Reedsburg, complained the Act would require him to pay more than double his anticipated labor costs for a fiber project in the community.  Mikonowicz claimed the Act didn’t provide a prevailing wage for fiber contractors, so he was forced to bid out the project at wages suitable for high voltage wiring projects — $40 an hour.

That false premise made it to the pages of the Journal Sentinel in an earlier piece — a bit of political theater to bash unions, the federal government, and play up local communities as the innocent victims of both.

Stop the Cap! had no problems finding a prevailing Davis-Bacon Act wage covering Sauk County fiber installers, so we are unsure why Mikonowicz could not:

Teledata System Installer/Technician $11.70-21.26/hr

Low voltage construction, installation, maintenance and removal of teledata facilities (voice, data, and video) including outside plant, telephone and data inside wire, interconnect, terminal equipment, central offices, PABX, fiber optic cable and equipment, micro waves, V-SAT, bypass, CATV, WAN (wide area networks), LAN (local area networks), and ISDN (integrated systems digital network)

The Loyal Opposition & Everyone Else

The loss of nearly two dozen million dollars in federal government money was catnip for the loyal opposition.

Rep. Pocan

State Rep. Mark Pocan (D-Madison) said Walker’s broadband money giveback was hurting the state.

“Not only is he turning away construction jobs that would have come with the federal grant to expand broadband fiber to schools and libraries across Wisconsin, but he’s closing off potential to business growth that comes with bridging the digital divide,” Pocan said. “What’s worse, the root of his decision wasn’t what was in the best interest of Wisconsin, rather the best interest of his big telecommunications campaign donors.”

Gov. Walker used the occasion to blame the federal government for unnecessary bureaucracy. Mike Huebsch, appointed by the governor to serve as secretary of the state Department of Administration, issued a memo warning if they didn’t return the money, state taxpayers could be on the hook for the entire amount if the federal government found the state didn’t comply with grant requirements.

Ordinary Wisconsin residents would never see improved broadband in their homes from the middle mile project, so much of their reaction comes from a reflexive dislike of the governor, taxes and spending, AT&T, or a combination of all three.

AT&T has kept quiet through the entire affair, only stating it wasn’t interested in becoming a formal grant recipient stuck with the federal government’s rules.

Republicans and “tea party” members are thrilled Wisconsin is a leader in throwing federal money for broadband, railways, and other public works projects back to Washington, in hopes it will set an example for the federal government to follow.

What Happens Next

The state says it is negotiating an extension of the existing AT&T contract for another five years, and points to advances in copper wire-delivered bandwidth and the fact AT&T already provides fiber connectivity for certain parts of BadgerNet.

While AT&T has been labeled the ultimate culprit for the broadband stimulus debacle, it’s not as guilty as some might think for these reasons:

1. The initial failure of the state to own and operate its own network, instead of leasing access from AT&T;
2. AT&T gets the money whether Wisconsin leases another five years of service from AT&T, or stimulus funding gets diverted to AT&T to bolster BadgerNet’s existing network;
3. AT&T is sitting pretty whether it has a five year lease or a 20-year stimulus-mandated contract.  In fact, AT&T could set its rates at today’s relatively high prices for network connectivity that Wisconsin would still be paying two decades from now.

That doesn’t mean AT&T is a good actor in Wisconsin.  While the company has steered clear of this debate, its lobbyists continue to fight off any potential competition from community-owned networks that threaten to deliver service to residential and business customers.  Few Big Telecom providers complain about institutional networks like BadgerNet, because heavy lobbying on their part several years ago won state laws that forever prohibit ordinary consumers from ever buying service from them.