Unsimplify

When is a rate increase not a rate increase? When it is an “administrative surcharge” of course!

Verizon FiOS phone customers will soon find the company’s latest innovation in the form of a new line on their June bill, along with a $0.99 surcharge.

Notice of Price Increase
Effective May 17, 2014, Verizon will apply an FDV Administrative Charge of $0.99 per FiOS Digital Voice line. This monthly surcharge helps defray account servicing costs associated with providing voice services. This is a Verizon surcharge, not a tax or governmental fee. Visit verizon.com for more information.

Instead of simply raising the advertised price of the service, Verizon added a new opaque charge which they admit is nothing more than an effort to increase revenue. Prospective customers will still see Verizon’s attractive promotional pricing, but only later discover the final bill is higher once taxes, fees, and other surcharges are tacked on.

In fact, Verizon’s new FiOS Digital Voice fee is subject to taxes as well, so for some the true cost of the rate increase is $1.21.

Some angry Verizon customers are switching to Ooma, a service that asks customers to pay upfront for the hardware but offers basic telephone service for free (customers pay well under $10 a month to cover taxes that Ooma does not pocket itself.) A more deluxe option including more phone features runs around $10 a month.

One annoyed customer considers the fee an end run around consumer contract law:

My concern [is] with a regulated utility’s ability to get around a contract price by labeling an increase as an “administrative charge.”

I called their customer service line to discuss/complain.  When I asked what would prevent Verizon from using this as a vehicle to increase prices by $10 or $15, assuming Time Warner/AT&T/DirectTV raised their prices as well, he admitted that he was not aware of any restrictions.  Neither am I.

I can’t find anything in my contract with Verizon that lets them increase my price by instituting back-end increases.  I’m pursuing with government regulators and encourage you all to do so as well.  If this gets through, there will be more.

In fact, one of the reasons why Verizon loves their digital voice product so much is because it is unregulated and not subject to government oversight. They can set rates at will and their current contract allows for the addition of administrative fees without violating any “price lock” agreements. So far, most companies implementing these fees have kept them low enough to avoid provoking government scrutiny, but the number of them and their respective amounts have increased over time.

Customer recourse? Complain and ask for a credit for the administrative fee or cancel service.

And then there were three?

Deutsche Telekom has agreed to sell T-Mobile USA to the Japanese parent company of Sprint in a deal that would combine the third and fourth largest wireless companies in the United States under the Sprint brand.

Japan’s Kyodo News Agency said they learned about the buyout agreement from industry sources, but did not reveal any further details.

SoftBank CEO and Sprint chairman Masayoshi Son and his lobbyists have been promoting such a merger for weeks, so the outlines of a deal between the two companies come as no surprise.

Softbank CEO Masayoshi Son

U.S. regulators have repeatedly signaled their discomfort with any merger between Sprint and T-Mobile, however. Both the heads of the Federal Communications Commission and the U.S. Justice Department have repeatedly raised concerns about the emergence of just three national wireless competitors in the U.S.

AT&T is largely responsible for that perception after its failed attempt to buy T-Mobile in 2011. The large breakup fee and spectrum T-Mobile received after the deal collapsed helped T-Mobile relaunch as a feisty competitor that has forced competitors to cut prices. To regulators, it demonstrated the importance of having at least four national competitors, if only to check the dominance of leaders AT&T and Verizon Wireless. Both the FCC and Justice Department fear any additional mergers would lead to increased prices for U.S. consumers.

Son has argued that the four-competitor policy has left AT&T and Verizon dominant against their two much-weaker competitors. An enlarged Sprint would force broadband speeds upwards as a combined Sprint and T-Mobile launch a massive network upgrade that would force prices down.

Both Softbank and Deutsche Telekom seem eager to close a deal. Softbank is already arranging financing for the estimated $50 billion Deutsche Telekom is expected to ask for T-Mobile USA and the German owner of T-Mobile has sought to exit the U.S. market for at least two years, with the proceeds of any sale used to improve its operations in Germany and eastern Europe, where the company has been more profitable.

So far, Wall Street has had only a muted reaction to the merger news. Many analysts still expect U.S. regulators to shoot down any deal that proposes merging any of the four current large wireless carriers.

SoftBank CEO and Sprint chairman Masayoshi Son was interviewed at this week’s Code Conference. On the current state of wireless: “Oh my god, how can Americans live like this?” (1:23)

While the New Jersey Board of Public Utilities was able to quickly settle its differences with Verizon by granting the phone company’s wish to walk away from its commitment to offer 45Mbps broadband across the state, New Jersey ratepayers are out $15 billion in excess phone charges levied since 1993 for promised upgrades many will never get.

The Opportunity New Jersey plan the state government signed with Verizon was supposed to expand advanced broadband across the state in return for “a modest amount of pricing flexibility” in the fees Verizon charged customers in New Jersey. But Verizon is not a modest company and a new report shows the phone company used the agreement to boost rates as much as 440% — primarily through ancillary surcharges including inside wire maintenance, wire investment, an investment recovery fee, a local number portability surcharge, merged local calling area charge, and various other charges for phone features including Caller ID, Call Waiting, etc.

Tom Allibone, the president of LTC Consulting joined forces with New Networks’ Bruce Kushnick to analyze more than 30 years of Verizon New Jersey phone bills and discovered when it comes to tallying up rate increases, Verizon’s addition skills are akin to taking out a bag of M&M’s and only counting the yellow ones.

“This Verizon New Jersey bill from April 2002 […] has an “FCC Subscriber Line Charge”, which was $6.21 cents per line. Verizon’s quote doesn’t include this charge in their analysis of no increases between 1985 to 2008,” Kushnick writes. “The FCC Line Charge (it has many names), is on every local phone bill and the charge started in 1985. You can’t get service without paying this charge and the money does NOT go to fund the FCC but is direct revenue to Verizon New Jersey.”

After adding up various other surcharges, Kushnick’s bill increased a lot.

“Add up the ‘Total Monthly Charges’ for 2 phone lines— It’s ugly,” Kushnick said. “While the cost of the ‘monthly charges’ was $25.62, there’s an extra $17.70 cents — 70%. I thought that Verizon said there were no ‘increases.’”

“Anyone who has ever bought a bundled package of services from Verizon (or the other phone or cable companies) knows that they all play this shell game; the price of service you have to pay is always 10-40% more than the advertised price. That’s because the companies leave out the cost of these ancillary charges and taxes in their sale pitch,” he added.

Verizon raised local residential service rates 79% in 2008, according to Kushnick. Business customers paid 70 percent more. Caller ID rates increased 38% — remarkable for a service that has a profit margin of 5,695%. But Verizon did even better boosting the charge for a non-published number by 38% — a service that has a 36,900% profit margin as of 1999 — the services are even cheaper to offer now.

Telephone service is one of those products that should have declined in price, especially after phone companies fully depreciated their copper wire networks — long ago paid off. Companies like Verizon have cut the budgets for outdoor wire maintenance and the number of employees tasked with keeping service up and running has been reduced by over 70 percent since 1985, dramatically reducing Verizon’s costs. But Verizon customers paid more for phone service, not less.

The cost of service might not have been as much of an issue had Verizon taken the excess funds and invested them in promised upgrades, but that has not happened for a significant percentage of the state and likely never will. Instead, they just increased company profits. More recently, Verizon has directed much of its investments into its more profitable wireless division.

Even though Verizon achieved total victory with the Christie Administration-dominated BPU, the company is still making threats about any future plans for investment.

“It’s important that regulators and legislators support public policies that encourage broadband growth in New Jersey rather than ones that could jeopardize the state’s highly competitive communications industry, or risk future investments by providers like Verizon,” wrote Sam Delgado, vice president of external affairs.

[flv]http://www.phillipdampier.com/video/WSJ ATT Buys DirecTV 5-19-14.flv[/flv]

For $48.5 billion, AT&T will vault itself into second place among the nation’s largest pay television providers with the acquisition of DirecTV. The Wall Street Journal reports the executives at AT&T have been looking to for a giant deal for several years. Most executives earn special bonuses and other incentives worth millions for successfully completing these kinds of transactions. (3:03)

AT&T plans to spend $48.5 billion to acquire the nation’s biggest satellite television provider, allowing AT&T to become the second largest pay television company, behind a merged Comcast and Time Warner Cable.

The deal, finalized on Sunday, pays $95 per DirecTV share in a combination of stock and cash, about a 10% premium over DirecTV’s closing price on Friday. Including debt, the acquisition is AT&T’s third-largest deal on record, behind the purchase of BellSouth for $83 billion in 2006 and the deal for Ameritech Corp., which closed in 1999, according to data compiled by Bloomberg.

“This is a unique opportunity that will redefine the video entertainment industry and create a company able to offer new bundles and deliver content to consumers across multiple screens – mobile devices, TVs, laptops, cars and even airplanes. At the same time, it creates immediate and long-term value for our shareholders,” said Randall Stephenson, AT&T chairman and CEO. “DirecTV is the best option for us because they have the premier brand in pay TV, the best content relationships, and a fast-growing Latin American business. DirecTV is a great fit with AT&T and together we’ll be able to enhance innovation and provide customers new competitive choices for what they want in mobile, video and broadband services. We look forward to welcoming DirecTV’s talented people to the AT&T family.”

The announced acquisition has left some on Wall Street scratching their heads.

“Like any merger born of necessity rather than opportunity, the combination of AT&T and DirecTV calls to mind images of lifeboats and rescues at sea,” telecommunications analyst Craig Moffett of MoffettNathanson Research wrote this week. AT&T, Moffett wrote, is in “dire need of a cash producer to sustain their dividend.”

[flv]http://www.phillipdampier.com/video/Bloomberg ATT DirecTV Deal a Head Scratcher 5-19-14.flv[/flv]

Craig Moffett, founder of MoffettNathanson LLC, talks about AT&T Inc.’s plan to buy DirecTV for $48.5 billion. Moffett speaks with Tom Keene, Scarlet Fu, William Cohan, and Adam Johnson on Bloomberg Television’s “Surveillance.” StockTwits founder Howard Lindzon also speaks. (5:12)

The deal would combine AT&T’s wireless, U-verse, and broadband networks with DirecTV’s television service, creating bundling opportunities for some satellite customers. As broadband becomes the most important component of a package including phone, television, and Internet access, not being able to offer broadband has left satellite TV companies at a competitive disadvantage. AT&T’s U-verse platform – a fiber to the neighborhood network – has given AT&T customers an incremental broadband speed upgrade, but not one that can necessarily compete against fiber to the home or cable broadband.

Some analysts are speculating AT&T will eventually shut down its U-verse television service and dedicate its bandwidth towards a more robust broadband offering. Existing television customers would be offered DirecTV instead.

But deal critics contend AT&T is spending a lot of money to buy its competitors instead of investing enough in network upgrades.

“The amount of cash alone AT&T is spending on this deal — $14.55 billion — is as much as it cost Verizon for its entire FiOS deployment, which reaches more than 17 million homes,” Free Press’ Derek Turner tells Stop the Cap! “Add in the $33 billion in AT&T stock and $18.6 billion in debt, and you can see just how wasteful this merger is.”

In effect, AT&T is spending nearly $50 billion to buy DirecTV’s customer relationships, its satellite platform, and its agreements with programmers, all while removing one competitor from the market. Cable has 54 percent of the pay TV market, satellite has 34 percent, and AT&T and Verizon share 11 percent. AT&T’s U-verse has 5.7 million TV customers. DirecTV has 20.3 million. Combining the two gives AT&T 26 million television customers, second only to Comcast/Time Warner Cable.

Rural Americans will effectively see their choice in competitors drop by one-third, giving them the option of the phone company or Dish Network.

AT&T intends to persuade regulators to approve the deal despite its antitrust implications by offering several commitments the company says are in the public interest and protect consumers:

• 15 Million Customer Locations Get More High Speed Broadband Competition. AT&T will use the merger synergies to expand its plans to build and enhance high-speed broadband service to 15 million customer locations, mostly in rural areas where AT&T does not provide high-speed broadband service today, utilizing a combination of technologies including fiber to the premises and fixed wireless local loop capabilities. This new commitment, to be completed within four years after close, is on top of the fiber and Project VIP broadband expansion plans AT&T has already announced. Customers will be able to buy broadband service stand-alone or as part of a bundle with other AT&T services.
• Stand-Alone Broadband. For customers who only want a broadband service and may choose to consume video through an over-the-top (OTT) service like Netflix or Hulu, the combined company will offer stand-alone wireline broadband service at speeds of at least 6Mbps (where feasible) in areas where AT&T offers wireline IP broadband service today at guaranteed prices for three years after closing.
• Nationwide Package Pricing on DIRECTV. DIRECTV’s TV service will continue to be available on a stand-alone basis at nationwide package prices that are the same for all customers, no matter where they live, for at least three years after closing.
• Net Neutrality Commitment. Continued commitment for three years after closing to the FCC’s Open Internet protections established in 2010, irrespective of whether the FCC re-establishes such protections for other industry participants following the DC Circuit Court of Appeals vacating those rules.
• Spectrum Auction. The transaction does not alter AT&T’s plans to meaningfully participate in the FCC’s planned spectrum auctions later this year and in 2015. AT&T intends to bid at least $9 billion in connection with the 2015 incentive auction provided there is sufficient spectrum available in the auction to provide AT&T a viable path to at least a 2×10 MHz nationwide spectrum footprint.

[flv]http://www.phillipdampier.com/video/CNN ATT DirecTV Merger 5-19-14.flv[/flv]

CNN says AT&T’s buyout of DirecTV is about getting video programming to customers using all types of technology, but public interest groups suspect it’s about reducing competition. (1:17)

A closer look at AT&T’s commitments exposes several loopholes, however.

AT&T U-verse and DirecTV compete head-on in these areas.

• AT&T’s “commitment” to expand broadband to 15 million new locations is in addition to their Project VIP U-verse expansion now underway. However, AT&T does not say how many rural customers will see wired U-verse service finally become available vs. how many will lose their landlines permanently and have to rely on AT&T’s wireless landline replacement and expensive, usage-capped wireless broadband;
• AT&T’s speed commitment is largely unenforceable and falls apart with language like, “where feasible.” Anywhere they don’t deliver 6Mbps DSL speed can easily be explained away as “unfeasible.” AT&T also only commits to providing DSL where it already offers DSL, so no expansion there;
• The FCC’s Net Neutrality protections never covered wireless and three years is a very short time to commit to the “light touch” approach the FCC had with Net Neutrality back in 2010;
• AT&T’s wireless auction commitment comes with loopholes like “meaningfully,” “provided there,” and “a viable path to at least.”

“You can’t justify AT&T buying DirecTV by pointing at Comcast’s grab for Time Warner, because neither one is a good deal for consumers,” said Delara Derakhshani, policy counsel for Consumers Union, the advocacy arm of Consumer Reports. “On the heels of Comcast’s bid for Time Warner Cable, AT&T is going to try to pull off a mega-merger of its own. These could be the start of a wave of mergers that should put federal regulators on high alert.  AT&T’s takeover of DirecTV is just the latest attempt at consolidation in a marketplace where consumers are already saddled with lousy service and price hikes. The rush is on for some of the biggest industry players to get even bigger, with consumers left on the losing end.”

“The captains of our communications industry have clearly run out of ideas,” said Craig Aaron, president of Free Press. “Instead of innovating and investing in their networks, companies like AT&T and Comcast are simply buying up the competition. These takeovers are expensive, and consumers end up footing the bill for merger mania. AT&T is willing to pay $48.5 billion and take on an additional $19 billion in debt to buy DirecTV. That’s a fortune to spend on a satellite-only company at a time when the pay-TV industry is stagnating and broadband is growing. For the amount of money and debt AT&T and Comcast are collectively shelling out for their respective mega-deals, they could deploy super-fast gigabit-fiber broadband service to every single home in America.”

[flv]http://www.phillipdampier.com/video/CNN Al Franken Skeptical About DirecTV Deal 5-19-14.flv[/flv]

Sen. Al Franken (D-Minn.) appeared on CNN’s New Day this morning to express his skepticism about the consumer benefits of a merger between AT&T and DirecTV. “We need more competition, not less.” (2:40)

“Comcast Corp.’s bid to buy Time Warner Cable Inc. may be the opening act for a yearlong festival of telecommunications deals that would alter Internet, phone and TV service for tens of millions of Americans.” — Bloomberg News, May 14, 2014

Wall Street analysts remain certain Comcast and Time Warner Cable won’t be the only merger on the table this year as the $45 billion dollar deal is expected to spark a new wave of consolidation, further reducing competitive choice in telecom services for most Americans.

While the industry continues to insist that the current foundation of deregulation is key to investment and competition, the reality on the ground is less certain.

Let’s review history:

For several decades, the cable industry has avoided head-on competition with other cable operators. They argue the costs of “overbuilding” cable systems into territories already serviced by another company is financially impractical and reckless. But that did not stop telephone companies like AT&T and Verizon from overhauling portions of their networks to compete, and in at least some communities another provider has emerged to offer some competition. Some wonder if AT&T was willing to spend billions to upgrade their urban landline network to provide U-verse, why won’t cable companies spend some money and compete directly with one another?

The answer is simple: They can earn a lot more by limiting competition.

When only a few firms account for most of the sales of a product, those firms can sometimes exercise market power by either explicitly or implicitly coordinating their actions. Coordinated interaction is especially suspect where all firms seem to charge very similar prices and few, if any, are willing to challenge the status quo.

Since the 1980s, the telecommunications industry has been deregulated off and on to a degree not seen since the pioneer days of telephone service. That was the era when waves of mergers created near-monopolies in the oil, railroad, energy, tobacco, steel and sugar industries. By the late 1890s, evidence piled up that proved reducing the number of providers in a market leads to higher prices and poor service. The abuses eventually led to the passage of the Sherman Antitrust Act of 1890 and later the Clayton Antitrust Act of 1914.

Here is what happened when the cable industry was reined in during the early 1990s, only to be deregulated again.

The generation of political leaders that dominated Washington during the 1980s developed selective amnesia about economic history and dismantled many of the regulatory protections established to protect consumers, arguing competition would keep markets in check. In the broadband and cable business, that has not proved as successful as the industry represents.

At the heart of the problem is the 1996 Telecommunications Act, signed into law by President Bill Clinton. The sweeping law is littered with lobbyist landmines for consumers and their interests. Under the guise of increasing competition, the 1996 law actually helped reduce competition by removing regulatory oversight and, perhaps unintentionally, sparking an enormous rampage of industry consolidation followed by price increases. The Bush Administration kept the war on consumers going with the appointment of Michael Powell (now the CEO of the cable industry’s lobbying group) to chair the Federal Communications Commission. Under Powell, non-discriminatory access to networks by competitors was curtailed, and Powell’s FCC gave carte blanche to the cable industry’s plan to cluster its territories into large regional monopolies and a tight national oligopoly. The FCC’s own researchers quietly admitted in the early 2000s “clustering raised prices.”

By January 2001, cable operators had settled on rate increases that averaged three times the rate of inflation. While the national inflation rate hovered around 1%, cable companies routinely raised basic cable rates an average of 7% annually. Powell declared rising cable rates were not a consumer problem and adopted the industry’s classic talking point that rate increases reflect the “value of the programming” found on cable. In fact, even as cable customers grew increasingly angry about rate increases, Powell told three different reporters he wanted to further relax the FCC’s involvement in cable pricing. (McClintock, Pamela, “Powell: No Cable Coin Crisis” Variety, April 30, 2001; Hearn, Ted. “Powell: Value Matters in Cable Rates,” Multichannel News, March 13, 2002; Powell Press Conference, February 8, 2001; Dreazen, Yochi. “FCC Chairman Signals Change, Plans to Limit Intervention,” Wall Street Journal, February 7, 2001.)

Economists reviewing data found in publicly available corporate balance sheets soon found evidence that the “increased programming costs”-excuse for rate increases did not hold water. The less competition or number of choices available to consumers in the market unambiguously lead to higher prices. It has remained true since Consumers’ Union revealed the financial trickery in 2003:

The cable industry will claim that programming costs are driving prices up. While programming costs have certainly risen, a close look at the numbers shows that rising program costs account for only a small part of the rising rates.

If costs were really the cause of rising prices, then the cable industries’ operating margins – the difference between its revenues and costs — would not be rising. The facts are just the opposite. Operating margins have been increasing dramatically since 1997. The operating margin for the industry as a whole will reach $18.8 billion per year in 2002, $7 billion more than it was in 1997. Operating revenues per subscriber have increased dramatically over that period, from $208 per year to $273. That is, after taking out all the operating costs, including programming costs, cable operators have increased their take per subscriber by over 30 percent.

[…] The ability of cable operators to raise rates and increase revenues, even with rising programming costs, stems from the market power they have at the point of sale. They would not be able to raise prices and pass program price increases through if they did not have monopoly power.

Consumers’ Union also foreshadows what will happen if another wave of industry consolidation takes hold the way it did over a decade earlier:

While the cable industry has certainly increased capital expenditures to upgrade its plants, it has actually sunk a lot more capital into another activity – mergers and acquisitions.

It is the outrageous prices that have been paid to buy each other out and consolidate the industry that is helping to drive the rate increases. Between 1998, when the first mega merger between cable operators was announced, and 2001, when the last big merger was announced, cable companies spent over a quarter of a trillion dollars buying each other out. In those four years, they spent almost six times as much on mergers and acquisitions as they did on capital expenditures to upgrade their systems. At the same time, the average price paid per subscriber more than doubled.

When a cable operator pays such an outrageous price, the previous owner is reaping the financial rewards of his monopoly power. The acquiring company can only pay such a high price by assuming that his monopoly power will allow him to continue to increase prices. Monopoly power is being bought and sold and borrowed against. The new cable operator, who has paid for market power, may insist that the debt he has incurred to obtain it is a real cost on his books. That may be correct in the literal sense (he owes someone that money) but that does not make it right, or the abuse of market power legal.

Fast-forwarding to 2014, economist and Temple professor Joel Maxcy said the same basic economic truths still exist today with Comcast’s merger with Time Warner Cable.

“My concern is the merger and the consolidation of the cable and internet delivery system for consumers and what will happen to internet and cable rates and choices,” Maxcy said, voicing his hesitancy about a deal that merges the nation’s two largest cable providers. “As that industry has gotten more consolidated over time, we have seen rates go up. The answer from them is that we’ve got more choices. Are we better off or not better off? I don’t know, but certainly rates have gone up at a much faster rate than the inflation rate. The result of more monopoly power is always higher prices and less choices and it seems that this merger moves in that direction.”

“The threat from non-network content providers is a concern for the cable industry,” Maxcy added.

“We’re moving to a situation where we don’t need cable, but we still need the internet and the cable companies are the ones that have control of that,” he said. “Consolidating them together makes them more competitive against the outside forces, but the other argument makes the whole thing less competitive so they’ll have more ability to control the access to Netflix, YouTube and the like. People that may develop other similar sorts of services will have a hard time getting the access they would like to purchase those.”

Chris Stigall spoke with economist and Temple professor Joel Maxcy on Talk Radio 1210 WPHT in Philadelphia about Comcast’s attempt to purchase Time Warner Cable and what that means for consumers. Feb. 18, 2014 (12:10)
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