Phillip “Tollbooths are not innovation” Dampier

Federal Communications Commission chairman Julius Genachowski last week wrote a guest editorial on TechCrunch espousing the benefits of faster broadband networks, but the advances he celebrates often come with innovation-killing usage caps and overlimit fees he continues to ignore.

We feel the need – the need for speed. As Tom Friedman and others have written, in this flat global economy a strategic bandwidth advantage will help keep the U.S. as the home and most desired destination for the world’s greatest innovators and entrepreneurs.

[…] But progress isn’t victory, particularly in this fast-moving sector. Challenges to U.S. leadership are real. This is a time to press harder on the gas pedal, not let up. The first challenge is the need for faster and more accessible broadband networks. We need to keep pushing because our global competitors aren’t slowing down. I’ve met with senior government officials and business leaders from every continent, and every one of them is focused on the broadband opportunity. If we in the U.S. don’t foster major investments to extend and expand our broadband infrastructure, somebody else will take the lead.

We need to keep pushing because innovators need next-generation bandwidth for next-generation innovations – genetic sequencing for cancer patients, immersive and creative software to help children learn, ways for small businesses to take advantage of Big Data, and speed- and capacity-heavy innovations we can’t yet imagine.

We need to remove bandwidth as a constraint on our innovators and entrepreneurs. In addition to steadily increasing broadband speed and capacity for consumers and businesses throughout the country, we need – as we said in our National Broadband Plan – “innovation hubs” with super-fast broadband, with speed measured in gigabits, not megabits.

[…]Some argue the private sector will solve these challenges itself, and that all government has to do is get out of the way. I disagree. The private sector must take the lead, but the public sector has a vital though limited role to play.

Among the policy levers government needs to use is the removal of barriers to broadband buildout, lowering the costs of infrastructure deployment with new policies like “Dig Once” that says you should lay fiber when you dig up roads. The President recently issued an Executive Order implementing this idea, suggested in our Broadband Plan. Government must promote competition, which drives innovation and network upgrades.

We must ensure the Internet remains an open platform that continues to enable innovation without permission.

Genachowski

Genachowski’s vision for faster broadband has the noble goal of maintaining competitiveness with the rest of the world and putting the United States back on top in broadband rankings and innovation. But while hobnobbing with his industry friends at recent industry conventions, he may have gotten too close to one of the biggest impediments holding us back — big cable and phone companies merrily working their magic to create a comfortable duopoly with pricing and service plans to match.

Back in the late 1990s, most cable operators thought of broadband as an ancillary service easy enough to operate, but probably hard to monetize. Just like digital cable radio services like Music Choice and DMX, “broadband” would likely appeal only to a tiny subset of customers.

“Back in the 1990s, Time Warner was primarily a TV company in a TV industry.  Broadband then was an innovating and radical thing, and a lot of people thought it was stupid and wouldn’t work,” Time Warner Cable CEO Glenn Britt said in April, 2009.

The launch of “Road Runner” was not the most auspicious marketing effort undertaken by the cable operator. In fact, the service was rarely targeted for price adjustments, hovering at around $40 a month for a decade.

When the Great Recession hit the United States, something unexpected happened. Cable operators discovered people were willing to cancel their cable and phone services, but not their broadband. In fact, as high bandwidth online video became an increasing part of our lives, the cable industry realized they were in the catbird seat to deliver the best broadband experience, and be well-paid for it. With little competition, increasing prices brought little risk and, thanks to the insatiable drive to boost revenue and reduce costs, implementing usage caps to control “excess” usage and costs were within their grasp.

In 2008, when Stop the Cap! launched, only a handful of ISPs had usage caps. Now most providers, with the exception of Time Warner Cable, Verizon, Cablevision, and a handful of others, all have usage allowances and overlimit fee Internet Overcharging schemes to further pad their bottom lines.

Innovation: Rationing Your Internet Experience — Stick to e-mail and web pages.

Genachowski has completely ignored the growing pervasiveness of usage caps, and even excused them as an experiment in marketplace innovation. But limits on broadband usage will also limit the broadband innovation revolution he wants, especially when most Americans have just one or two realistic choices for broadband service:

1. Usage caps are the product of artificial scarcity. Rationing Internet usage, even with now-pervasive cost-effective upgrades like DOCSIS 3, simply does not make sense (but it will make dollars). Cable operators are switching off analog television service to free up bandwidth to provider faster Internet speed and fatten the pipeline that delivers it. They have plenty of capacity, but continue to proclaim they must limit usage for “fairness” reasons, without providing a single shred of evidence to prove the need for usage caps. Consumers will self-ration just to avoid the prospect of being cut off or handed a bill with overlimit fees.
2. Usage caps make faster speeds irrelevant. Selling customers premium-priced, super fast broadband speed is hardly compelling when accompanied by usage caps that constrain the benefits of buying. Why pay $20-50 more for faster speeds when customers cannot take practical advantage of them. Customers using their Internet service to browse web pages and read e-mail have no interest in upgrading to 30+Mbps. Customers streaming video or moving large files do.
3. Usage caps retard innovation. Google’s new 1Gbps fiber optic network was built on the premise that usage caps were unnecessary on a fiber-based network and would retard innovation. Developing the next generation of innovative apps that Genachowski celebrates will never happen if developers are discouraged by Internet usage toll booths and stop signs. The cost to provide the service is not largely dependent on customer usage. It is the initial price of last mile infrastructure that really matters. Both cable and phone companies have reduced their investments to upgrade their networks, and AT&T and Verizon both contemplate getting rid of their rural landlines. Most cable operators paid off their networks years ago.
4. Usage caps create a whole new digital divide.  Time Warner Cable’s discounted Internet Essentials program delivers only a $5 discount with a harsh 5GB usage cap. For an income-challenged home compelled to switch to a provider’s budget plan, the result is a different Internet experience than the rest of us enjoy. Imagine if your home broadband account was limited to 5GB a month. What online services would you have to avoid to stay under the provider’s limit? Traditionally, operators sell the lowest speed tiers with the lowest usage allowances. Slower speeds already offer a disincentive to use high bandwidth services, but many providers typically drive that disincentive home even harder with a paltry allowance that will cost plenty to exceed.
5. Usage caps harm our broadband standing. While Genachowski celebrates increasing broadband speeds, he ignores the fact the rest of the world is moving away from usage caps even as the United States moves towards them. Both Australia and New Zealand elected to construct their own national fiber networks in large part because the heavily usage-capped experience was holding both countries back. Usage caps are a product of a barely competitive market.

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/Bandwidth Caps 7-2011.flv[/flv]

Tech News Today debunks providers’ claims that usage caps are fair and control those who “overuse” their networks, noting the same phone companies (AT&T) pushing for usage caps are also moving voice calling to unlimited service plans. (August, 2011) (4 minutes)

Time Warner Cable has lost between 10-15 percent of their analog cable television customers over the past year, according to Time Warner Cable president and chief operating officer Rob Marcus.

Speaking at this morning’s Goldman Sachs Communacopia Conference, Marcus noted the economic downturn has continued to cost the cable operator “single play” subscribers. Marcus noted that roughly 60 percent of the cable company’s customers are now on discounted or retention plans, and the company has no plans to reduce aggressive retention offers and promotions in the immediate future. Time Warner Cable will also exercise caution when customer promotions expire, an allusion to the company’s practice of gradually resetting rates to retail prices over an extended period of time to avoid antagonizing customers into switching providers.

Marcus acknowledged broadband is now a key service for Time Warner Cable, one that the company will continue to exploit to drive earnings. Some investors have complained Time Warner has only managed an increase of 2-3 percent in Average Revenue Per User (ARPU) for broadband, a key metric for Wall Street. Marcus was asked why Time Warner, with its superior market share over telephone companies, was not “exercising the price lever a little bit more” in a marketplace lacking serious competition.

Marcus

“I think it is fair to say that as the utility of the [broadband] product increases in customers’ minds, their willingness to pay for it (assuming they are able) goes up, so I think it stands to reason that we can continue to increase rates on high speed data,” Marcus said.

But even more important to Time Warner Cable is its differentiated broadband speed tiers, which the company is refining to pick up additional revenue and price-resistant customers. Broadband usage caps will be a part of that equation.

Marcus confirmed that Time Warner Cable will provide unlimited broadband packages to its premium tier customers, but will introduce usage-limited service on its budget tiers. Currently, the company only imposes a usage cap of 5GB on its Internet Essentials package, which offers a $5 discount off regular prices. But Marcus seemed to acknowledge that the company plans to experiment further with additional limits.

“We are going to deliver very fast speeds, unlimited consumption, and now mobile capability via our Wi-Fi network to those customers who demand it and are willing to pay premium prices for those tiers of service,” Marcus said. “At the other end of the spectrum we are going to have budget products as we do today that offer lower speeds, more limited consumption like our Internet Essentials product, and those probably won’t have access to our Wi-Fi hotspots. We think that is the best way to drive revenue and profitability.”

Marcus also told investors the company was working on the next generation of the company’s electronic program guide, which he said will be cloud-based. Time Warner Cable continues to signal it is willing to work with third party set top box manufacturers to let customers dump traditional set top boxes, but only so long as Time Warner Cable gets the credit in the minds of customers. The company is also working on rolling out video-on-demand for its online video apps.

Despite industry propaganda touting an “unlimited broadband future” (possibilities, that is, not an end to usage caps) and good sounding headlines about robust competition in the broadband market, the reality on the ground isn’t as rosy.

Americans looking for a better deal for broadband are largely stuck negotiating with the local cable company or putting up with less speed from the phone company to get a cheaper rate.

That is hardly the “success story” being pushed by the Mother of All Broadband Astroturf Front Groups, Broadband for America. BfA, backed by money from some of America’s largest telecom companies calls today’s marketplace “dynamic” and “rapidly changing.” For them, competition is not the problem, the way we define competition is.

Tell that to San Jose Mercury News columnist Troy Wolverton, whose dynamic and rapidly changing Comcast cable bill has now reached $144 a month, and threatens to go higher still when his two-year contract expires.

Wolverton is a case study of what an average American consumer goes through shopping around for broadband service. Despite assertions of a vibrant, competitive Internet access paradise from groups like Broadband for America, Wolverton found very little real competition on the menu, despite being in the high tech heart of Silicon Valley.

Valley residents can typically choose between AT&T and Comcast, if they have any choice at all. Neither company offers a great deal for consumers.

Comcast offers faster speeds at considerably higher prices that can be reduced somewhat by signing up for a costly triple-play service. AT&T’s prices are lower, but its service is slower and is based on a technology that in my experience is less reliable.

So it goes for millions of Americans who face the same dilemma: take a higher-priced package from the cable company or settle for less from the phone company. With the exception of Verizon FiOS, most large telephone companies still rely on basic DSL service to deliver broadband. AT&T’s U-verse and CenturyLink’s Prism are both fiber to the neighborhood services that deliver somewhat faster speeds than traditional DSL, but also have to share bandwidth with television and traditional phone service, leaving them topped out at around 25Mbps.

Wolverton could not believe his only choices were Comcast and AT&T, so he visited the California Broadband Availability Map, one of the state projects earnestly trying to identify the available choices consumers have for broadband access. Despite California’s vast size, it quickly became apparent that even companies like AT&T and Comcast largely don’t deliver broadband outside of cities and suburbs. Several smaller, lesser-known providers emerged from the map that were open to Wolverton, which he explored with less-than-satisfying results:

In addition to Comcast and AT&T, it listed Etheric Networks, which offers a wireless Internet service directed at home users that’s based on Wi-Fi technology, and MegaPath, which offers Internet access through a variety of wired technologies, including DSL.

After further research I found that neither of those companies was a legitimate option. MegaPath can’t deliver residential service to my house that’s faster than 1.5 megabits per second. Etheric, which focuses on business customers, offers a service level with speeds of up to 22 megabits per second, but it costs a cool $400 a month.

Other non-options for Wolverton included the highly-rated Sonic.net, which in his neighborhood is entirely dependent on AT&T’s landlines for its DSL service. That was a no-go, after Wolverton discovered he would be stuck with 3-6Mbps service. Clearwire also offers service in greater San Jose, but not at his home in Willow Glen.

That left him back with AT&T and Comcast.

But that is not really a problem in the eyes of industry defenders like Jeffrey Eisenach, managing director and principal at Navigant Economics and an adjunct professor at George Mason University Law School. Navigant is a “research group” that counts AT&T as one of its most important clients. The firm provides economic and financial analysis of legal and business issues cover for clients trying to sell their agenda. Navigant’s “experts have provided testimony in proceedings before District Courts, the Department of Justice, the Federal Trade Commission, the Federal Communications Commission, the Federal Energy Regulatory Commission, and numerous state Public Utilities Commissions.”

Eisenach goes all out for the broadband industry in his paper, “Theories of Broadband Competition,” which throws in everything but the kitchen sink to defend the status quo:

• The cost of broadband service is declining;
• The duopoly of cable and phone companies are still competing for customers and introducing new services;
• Competition can take the form of provider innovation (ie. providers compete by offering a better services, not lower prices);
• Wireless competition is accelerating, citing LightSquared and Clearwire as two conclusive examples of competition at work;
• The cost of service on a per-megabit basis has declined.
• Competition in today’s broadband market delivers ancillary benefits not immediately evident when only considering the customer’s point of view;

Eisenach’s pricing proof stopped in 2009, just as cable providers like Time Warner Cable began raising broadband prices. TWC’s Landel Hobbs to investors: “We have the ability to increase pricing around high-speed data.” (February, 2010)

Eisenach has appeared at various industry-sponsored evidence touting his views of broadband economics and competition that later turns up as headline news on Broadband for America’s website. But just as Wolverton’s initial optimism finding other choices for broadband faded with reality, so do Eisenach’s conclusions:

1. Eisenach’s evidence of broadband price declines stops in 2009, coincidentally just prior to the recent phenomena of cable broadband rate increases, which have accelerated in the past three years;
2. Competition still exists in urban and suburban markets, as long as phone companies attempt to stem the tide of landline losses, but it’s largely absent in rural markets and in decline in others where companies “reset” prices to match their cable competition. AT&T’s U-verse and Verizon’s FiOS both effectively ended their expansion, leaving large swaths of the country with “good enough for you” service. Cable operators have even teamed up with Verizon Wireless to cross-market their products — hardly evidence of a robustly competitive marketplace;
3. Innovation can take the form of services customers don’t actually want but are compelled to take because of bundled pricing or, worse, the decline in a-la-carte add-ons in favor of “one price for everything” models. Verizon Wireless set the stage for providers of all kinds to consider mandatory bundling for any product or service that can no longer deliver a suitable return on its own. For customers already taking every possible service or fastest speed, this pricing  may deliver lower prices at the outset, but for budget-focused consumers, compulsory packages or high prices on a-la-carte services assures them of a higher bill;
4. Eisenach’s examples of competition are a real mess. LightSquared is bankrupt and Clearwire has shown it cannot deliver an equivalent broadband experience for customers and throttles the speeds of those perceived to be using the service too much. Other wireless providers typically limit customer usage or cannot deliver speeds comparable to wired broadband;
5. While the cost per megabit may have declined in the past, cable providers are still raising prices, and as Google and community-owned providers have illustrated, delivering fast speeds should not cost customers nearly as much as providers continue to charge, with no incentive to cut prices in the absence of equally fast, competitive networks;
6. While broadband may open the door for additional economic benefits not immediately apparent, competitive broadband would further drive innovation and reduce pricing, delivering an even bigger bang for the buck.

Wolverton recognized taking a promotional offer from AT&T will temporarily deliver savings over what Comcast charges, but he would have to set his expectations lower if he switched:

I’m reluctant to switch to AT&T. [U-verse] Max Plus is the fastest level of service it offers at our house, but with a top speed of 18 megabits a second, it’s significantly slower than Comcast’s Blast. Speed matters to us, because my wife and I often share our Internet connection, and we frequently use it to transfer large files such as apps, videos, photos or songs to or from the Net.

[…] What’s more, as the FCC outlined in another recent report, Comcast does a better job of delivering the speeds it advertises than does AT&T.

What’s worse in my book is that AT&T’s U-verse’s Internet service is a version of DSL. It’s faster than regular DSL, because the copper wires in your house and neighborhood are connected to nearby high-speed fiber-optic cables. Even with that speed boost, though, I’m hesitant to go back to any kind of DSL service, because my wife and I suffered through years of unreliable DSL service from AT&T predecessor PacBell and then EarthLink, which piggybacked on AT&T’s lines.

Wolverton also objected to Comcast’s bundled pricing scheme, which delivers the best value to customers who sign up for broadband, television and phone service. Wolverton does not need a landline from AT&T or Comcast, and would like to drop the service. He’s not especially impressed with Comcast’s TV lineup (or pricing) either. But he noted if he switched to broadband-only service, Comcast would effectively penalize him with a broadband-only rate of $72 a month, exactly half the current cost of Comcast’s triple-play package.

In a later blog post, Wolverton confessed he liked Comcast’s broadband service and speeds, and with the carefully-crafted pricing the cable and phone companies have developed, he expected to remain a Comcast customer given his choices and pricing options, which are simply not enough.

A surprise announcement from the U.S. Supreme Court that it will hear an appeal brought by Comcast Corporation in a class action lawsuit brought on behalf of Philadelphia consumers, despite a pending settlement, may mean the Supreme Court is on the verge of issuing another business-friendly ruling that will make class action cases more difficult to file.

Comcast had reached a tentative settlement in June with lawyers who brought a $875 million class-action lawsuit on behalf of Philadelphia area cable subscribers. The antitrust case, originally filed in 2003, accused Comcast of strategically swapping or acquiring cable systems owned by Marcus Cable, Greater Philadelphia Cablevision, Inc., Lenfest Communications, Inc., AT&T, Adelphia Communications Corp., Time Warner, and Patriot Media in and around Philadelphia for the purpose of creating a super-sized Comcast cable system that could deter competitors from entering the market and allow Comcast to charge higher prices for service.

RCN Telecom Services originally intended to compete for cable customers in the Philadelphia region, but found it could not break into the market because Comcast allegedly hired as many available technicians it could find and tied them down with exclusive contracts. RCN also claimed Comcast targeted potential customers with special, allegedly below-cost deals to retain their business. RCN later filed for bankruptcy.

“Stated bluntly, Comcast and other large cable operators have demonstrated both the inclination and the wherewithal to use their market power to crush broadband competition in their local markets whenever it has the audacity to appear,” RCN alleged.

In 2002, RCN went public with a series of allegations:

Comcast intimidates independent construction and installation contractors. Comcast prevented or tried to prevent about 15 Philadelphia-area contractors from doing business with RCN through “non-compete” clauses, RCN alleged. The company provided specific names of contractors and Comcast personnel in sealed documents.

Those practices dated at least to the late 1990s, when Comcast acquired Suburban Cable, RCN said. Both Suburban and Comcast went “to extraordinary lengths to document ‘violations’ and intimidate contractors who were thought to be in contact with, or working for, RCN,” RCN said.

RCN cited instances of Suburban Cable employees, many of whom later worked for Comcast, allegedly following contractors in their trucks and taking photographs to document contractors seen at an RCN office or work site. These photographs then became “evidence,” RCN said, to support contractors’ termination.

As for predatory pricing, RCN claimed that before its entry into Folcroft in 2000, Comcast allegedly established a sales “swat team” instructed to sign up customers for 18-month contracts in exchange for cheaper cable services.

The plaintiffs’ attorneys want subscribers to receive refunds representing the savings they would have enjoyed had a competitor successfully forced prices down.

Comcast and the plaintiffs’ counsel reached a tentative settlement in June after both sides learned the lawsuit would proceed to trial this September. But in a surprise announcement, the U.S. Supreme Court suddenly decided to step in and hear an appeal filed by Comcast. Comcast immediately declared the settlement incomplete and has now declined to proceed with it, believing it has a more favorable outcome waiting at the Supreme Court.

Kenneth A. Jacobson, a professor at Temple University’s law school, told the Philadelphia Inquirer the Supreme Court does not typically decide to hear a case “during the settlement negotiation and approval process.”

Other Supreme Court watchers suspect the Court’s sudden involvement in the case means it is likely to issue a precedent-setting decision, more likely than not in Comcast’s favor, that will be talked about in law journals for the next decade.

Comcast Center in downtown Philadelphia

The specific point of Comcast’s appeal that interests the Supreme Court has to do with how a class action case certifies damages to the court hearing the case. The Supreme Court agreed to hear the case based on, “whether a district court may certify a class action without resolving whether the plaintiff class has introduced admissible evidence, including expert testimony, to show that the case is susceptible to awarding damages on a class-wide basis.

Currently, courts insist that the burden of proof for damages lies with the plaintiff, but they are not necessarily required to demonstrate the actual individual damages suffered by each member of a proposed class action. Many judges accept the concept of fixed group damages based on a composite of an average proposed class member. That amount gets multiplied by the number of members in the certified class action to arrive at the total requested damages. Typically, both sides negotiate a final settlement, deduct attorney fees and costs, and then class members typically get a change in a company’s policies, coupons good for a future purchase or an actual refund in the mail.

The Supreme Court may find that concept inadequate, and insist on a detailed analysis of actual harm done to each proposed class member — a high and potentially expensive hurdle to cross for many class action cases. Legal analysts suggest the intended effect of such a decision would be to further deter class action lawsuits against companies, because the costs and complexities involved would increasingly not be justified.

In the Comcast case, the cable company wanted the court to dismiss the case, and for some very novel reasons:

1. Since Comcast effectively kept competing “overbuilding” cable systems out of Philadelphia, there is no evidence of any theoretical competition benefits such as reduced prices;
2. Since no competitor actually got their service up and running in Philadelphia, Comcast argues there was no competition to eliminate;
3. RCN, in Comcast’s view, was never actually going to start service in Philadelphia because of their own financial woes;
4. Without actual competition in Philadelphia, there is no basis for any expert witness hired by the plaintiff to credibly estimate damages;
5. Even if Comcast was engaged in anti-competitive behavior in Delaware County, that cannot be used by plaintiffs to serve as evidence of class-wide impact for the entire multi-county Philadelphia Comcast cluster.

Over the past few years, the Court has ruled in favor of corporations trying to compel less-costly legal avenues — like mandatory arbitration — for consumers who feel harmed by a company’s actions.

CenturyLink is having a tough time competing against Tacoma, Wash.-based Click! Network, so the phone company hired third party vendors who are spreading lies about its community-owned competitor.

Click!, a division of Tacoma Power, recently upgraded its network to begin selling 100Mbps broadband to Tacoma residents. That proved a problem to CenturyLink’s outsourced sales force who cannot begin to offer those kinds of speeds to Tacoma residents over CenturyLink’s copper-wire facilities. So when you can’t compete, the next best thing is to lie.

The News Tribune reports CenturyLink’s door-to-door sales force is misinforming current Click! customers the service is shutting down and offering to transfer their service to CenturyLink.

“Customers have been told that Click! Cable TV is going out of business in the next couple of months,” said Tenzin Gyaltsen, Click! Network general manager. “That is not true. Click! Cable TV is still in business, offering competitive pricing – and will continue to do so for many years to come.”

A complaint will be filed with the Office of the State Attorney General against CenturyLink accusing them of an apparent violation of state law – RCW 19.86.020 – which states, “Unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce are hereby declared unlawful.”

“It’s a vendor we’re using,” Meg Andrews from CenturyLink admitted. “When we were made aware of the situation the vendor was told it is not in our best interest. It’s not really in our voice, or tone. It’s not a good thing for us. We’ve never had this type of experience before.”

Although the salespeople are not CenturyLink employees, the phone company hired the firm that employs them.

Tacoma residents enjoy the competition. Prices are lower than in nearby Seattle, and residents can choose from CenturyLink, Comcast, or one of three independent ISPs that provide service over the Click! Network.

One Tacoma resident told Community Broadband Networks the competition can’t afford to charge the usual prices other Washington residents pay:

I have Comcast in Tacoma and all I know is since there is competition down here Comcast is about half the cost as it is in Seattle. They give you a rate good for a year. When your year is up you call up and just say Click! and bam back down you go. A friend in Seattle once called Comcast with both of our bills with similar service and mentioned my price and they said I must live in Tacoma and they wouldn’t match the price.

The city asks anyone who hears a CenturyLink sales representative misrepresent Click! call 253-502-8900 to report it.

Pricing for broadband on Tacoma’s Click! Network