Susan Crawford’s new book, “Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age,” is on the receiving end of a lot of heat from industry lobbyists and those working for shadowy think tanks and “consumer groups.”

Most of the critics have not disclosed their industry connections. Stop the Cap! will.

Crawford’s premise that Americans are suffering the impact of an anti-competitive marketplace for broadband just doesn’t “add up,” according to Zack Christenson and Steve Pociask, both with the American Consumer Institute Center for Citizen Research.

Christenson and Pociask’s rebuttal of Crawford’s conclusions about broadband penetration, price, and its monopoly/duopoly status relies on industry-supplied statistics and outdated government research. For instance, the source material on wireless pricing predates the introduction of bundled “Share Everything” plans from AT&T and Verizon Wireless that raised prices for many customers.

Their proposed solutions for the problems of broadband access, pricing, and competition come straight from AT&T’s lobbying priority checklist:

• Free up more wireless spectrum, which is likely to be acquired by existing providers, not new ones that enter the market to compete;
• Allow AT&T and other phone companies to abandon current copper-based networks, which would also allow them to escape legacy regulations that require them to provide service to consumers in rural areas.

One pertinent detail missing from the piece published in the Daily Caller is the disclosure Pociask is a a telecom consultant and former chief economist for Bell Atlantic (today Verizon). The “American Consumer Institute” itself is suspected of being backed by corporate interests from the telecommunications industry. ACI has closely mirrored the legislative agendas of AT&T and Verizon, opposing Net Neutrality, supporting cable franchise reform that allowed U-verse and FiOS to receive statewide video franchises in several states, and generally opposes government regulation of telecommunications.

Critics for hire.

The so-called consumer group’s website links primarily to corporate-backed astroturf and political interest groups that routinely defend corporate interests at the expense of consumers. Groups like the CATO Institute, the Competitive Enterprise Institute, the Koch Brother-backed Heartland Institute, and the highly free-market, deregulation-oriented James Madison Institute are all offered to readers.

The Wall Street Journal trotted out Nick Schulz to handle its book review. Schulz is a fellow at the American Enterprise Institute, which is funded by corporate contributions to advocate a pro-business agenda.

Schulz attempts to school Crawford on the definition of “monopoly,” eventually suggesting “oligopoly” might be a more precise way to state it.

“Washington’s fights over telecommunications—and just about every other industrial sector—could use a lot less militancy and self-righteousness and a lot more sound economics,” concludes Schulz, while ignoring the fact interpretation of what constitutes “sound economics” is in the eye of the beholder. All too often those making that determination are backed by self-interested corporate entities with a stake in the outcome.

Hance Haney from the Discovery Institute claims Crawford’s conclusions are “misplaced nostalgia for utility regulation.” Haney cites AT&T’s breakup as the spark for competition in the telecommunications sector and proof that monopolies cannot stand when voice, video, and data service from traditional providers can be bypassed. That assumes you can obtain those services without the broadband service sold by the phone or cable company (that also likely owns your wireless service provider and controls access to cable television programming).

Haney also ignores the divorce of Ma Bell has been amicably resolved. AT&T and Verizon have managed to pick up most of their former constituent pieces (the Baby Bells) and today only “compete” with one another in the wireless sector, where each charges identically-high prices for service.

Crawford’s critics often share a connection with the industry she criticizes in her new book.

Haney places the blame for these problems on the government. He argues exclusive cable franchise agreements instigated the lack of cable competition and allowed “hidden cross-subsidies” to flourish, causing the marketplace to stagnate. Haney’s argument ignores history. In the 1970s, before the days of USA, TNT and ESPN, the two largest cable operators TelePrompTer and TCI nearly went bankrupt due to excessive debt leverage. With a very low initial return on investment, exclusive cable franchise agreements were adopted by cities to attract cable providers to wire their communities. Wall Street argues to this day that there is no room for a high level of competition for cable because of infrastructure costs and the unprofitable chase for subscribers that will be asked to cover those expenses. Government was also not responsible for the industry drumbeat for consolidation, not competition, to protect turfs and profits.

The cable industry repeated that argument with cable broadband service, claiming oversight and regulations would stifle innovation and investment. The industry even won the right to exclude competitors from guaranteed access to those networks, claiming it would make broadband less attractive for future investment and expansion.

Haney never discloses the Discovery Institute was founded, in part, to support the elimination of government regulation of telecommunications networks. Broadband Reports also notes the Discovery Institute is subsidized by telecom carriers to make the case for deregulation at all costs.

The Discovery Institute is essentially a PR firm that will present farmed science and manipulated statistics for any donating constituents looking to make a political point.

Broadband for America, perhaps the largest industry-backed astroturf telecom group in the country and itself cited as a source by the American Consumer Institute, seized on the criticism of Crawford’s book for its own attack piece. But every book critic mentioned has a connection to the telecom industry or has ties to groups that receive substantial telecom industry contributions.

NetCompetition chairman Scott Cleland, who accused Crawford of cherry picking information, does not bother to mention NetCompetition is directly funded by the same telecom industry Crawford’s book criticizes. Cleland in fact works to represent the interests of his clients: large phone and cable operators.

Randolph May’s criticism of Crawford’s book is unsurprising when one considers he is president of the Free State Foundation, a special interest group friendly to large telecom companies. FSF also supports the work of the American Legislative Exchange Council (ALEC), a group with strong ties to AT&T.

Richard Bennett, who once denied to Stop the Cap! he worked for a K Street lobbyist (he does), attacked the book on behalf of his benefactors at the Information Technology and Innovation Foundation, a group Reuters notes  receives financial support from telecommunications companies. He also received a $20,000 stipend from Time Warner Cable.

In fact, Broadband for America could not cite a single source criticizing Crawford’s book that does not have ties to the industry Crawford criticizes.

Follow the money to the real root of this argument.

After conclusive evidence that cable broadband upgrades have eliminated any congestion problems, the cable industry has finally admitted usage caps are not about “congestion relief,” but are, in their view, “about fairness.”

Reports of the Internet data exaflood, tsunami, brownouts, or even blackouts are highly exaggerated and always have been. But we knew that from the first day Stop the Cap! got started.

In the summer of 2008, Frontier Communications attempted to define a top limit on their residential DSL accounts at a staggeringly small 5GB per month. Time Warner Cable initially thought 40-60GB a month was more than fair when it tried to ram its own Internet Overcharging scheme down the throats of customers in New York, North Carolina, and Texas in April 2009. Comcast said using more than 250GB a month could create congestion problems on their network and be unfair to other customers. To this day, AT&T, one of the nation’s largest telecommunications companies, claims that anything more than 150GB on their DSL service or 250GB on U-verse could bring their entire network to its knees.

The Holy Grail of Wall Street economics for broadband is to monetize its usage, creating an endless money party for what is today a utility service. Millions have been spent lobbying anyone who will listen that usage caps and consumption billing were essential to promote investment, upgrades, and to expand broadband service into rural America. Since those arguments have been made, broadband rates have increased, investment has decreased on a per customer and often real basis, and the government is now trying to chip in public taxpayer dollars to get providers to wire areas that will never pass demanding return on investment formulas.

The second prong of selling this meme is the creation of an Internet boogeyman — the “data hog,” a largely fictional creature that supposedly cares only about consuming every possible bit of bandwidth and slowing your web browsing to a crawl. Shouldn’t he pay more, you are asked, at the same time these same companies continue to raise your rates and now attempt to limit your use of a service that should cost less.

This week, Michael Powell, former FCC chairman turned head of the nation’s largest cable lobby — the National Cable & Telecommunications Association, capitulated on the “congestion” myth to an audience at the Minority Media and Telecommunications Association.

Asked by MMTC president David Honig to weigh in on data caps, Powell said that while a lot of people had tried to label the cable industry’s interest in the issue as about congestion management. “That’s wrong,” he said. “Our principal purpose is how to fairly monetize a high fixed cost.”

He said bandwidth management was part of it, though a more serious issue with wireless.

But he pointed out that the cable industry had to spend a bunch of money on its network before the first customer was signed. So, for a business that requires “enormously high” fixed costs — digging up the streets, put the wires in — and operational expense, “it is a completely rational and acceptable process to figure out how to fairly allocate those costs among your consumers who are choosing the service and will pay you to recover those costs.”

When will Washington regulators and lawmakers stop drinking the Kool-Aid handed them by high-paid lobbyists?

But our readers know Powell’s arguments are based on nothing more than the same empty rhetoric that declared the Internet exaflood was at hand.

Cable broadband was introduced as an ancillary service in the late 1990s utilizing cable television infrastructure that was constructed and paid off years earlier. Introducing broadband required only incremental investment and that remains true to this day. Cable operators more than cover their costs with sky high prices for service delivering some operators as high as 95% gross margin on broadband. Capital investments have broadly declined for years as have the costs to deliver the service on a per customer basis.

Suddenlink president and CEO Jerry Kent admitted the days of expensive system upgrades were over and it was now time to rake in profits.

“I think one of the things people don’t realize [relates to] the question of capital intensity and having to keep spending to keep up with capacity,” Kent said. “Those days are basically over, and you are seeing significant free cash flow generated from the cable operators as our capital expenditures continue to come down.”

Powell’s arguments ironically may apply partly to Verizon’s FiOS fiber network, which requires the retirement of copper wire infrastructure around since Alexander Graham Bell, but even Verizon covered much of its costs winning permission to raise rates years earlier to cover fiber upgrades. Much of that money was diverted to their wireless business instead. Today, Verizon FiOS manages just fine with no usage limits at all.

In fact, the only argument about fairness that should be open for debate regards the current cost of broadband service in the United States when compared against operators’ enormous profit margins. The lack of competition has allowed providers to increase prices and introduce “creative pricing” that always guarantees protection for the incredibly high average revenue per customer already earned.

Too often, Washington regulators and lawmakers drink the Kool-Aid handed them by an industry with an incentive to distort the truth. That incentive is the billions at stake in this fight.

Powell has even shelved the notion of the Cheetos-eating data hog burning up the Internet in his parent’s basement and has elected to try class warfare instead, claiming the most capacity is used “by a high end elite subsidized by the rest.” The real high-end elite are the telecom company executives cleaning up overcharging customers for a service that has become a necessity. Arguing for usage caps as a way to offer “lower prices” for those who cannot afford the ridiculously high prices the industry charges today only creates a new digital divide – the have’s and the have only so much.

Either way, providers laugh all the way to the bank.

A new report critical of broadband providers’ implementation of usage-based billing and data caps finds providers are not using them to handle traffic congestion, instead implementing them to monetize broadband usage and protect pay television from online video competition.

The New America Foundation and the Open Technology Institute today released its report, “Capping the Nation’s Broadband Future?,” which takes a hard look at the increasingly common practice of limiting subscribers’ broadband usage.

The paper finds that provider arguments for limiting broadband traffic don’t make sense, but do earn more dollars from customers forced to upgrade their service to win a larger monthly usage allowance.

“Although traffic on U.S. broadband networks is increasing at a steady rate, the costs to provide broadband service are also declining, including the cost of Internet connectivity or IP transit as well as equipment and other operational costs,” the reports argues. “The result is that broadband is an incredibly profitable business, particularly for cable ISPs. Tiered pricing and data caps have also become a cash cow for the two largest mobile providers, Verizon and AT&T, who already were making impressive margins on their mobile data service before abandoning unlimited plans.”

The study finds providers are attempting to invent a climate of broadband scarcity, particularly on the nation’s wired networks, to defend the introduction of various forms of Internet Overcharging, including data caps, usage-based billing, and overlimit fees.

The New America Foundation is calling on policymakers to take a more active role in defending online innovation and controlling provider zeal to cap the nation’s broadband future.

The False Argument of Network Congestion

Providers’ tall tales.

The most common defense for usage caps providers put forward is that they curb “excessive use” and impact almost none of their customers. The report points out many of the providers implementing usage caps have left them largely unchanged, despite ongoing usage growth patterns. In 2008, the report notes Comcast measured the average monthly usage of each broadband customer at around 2.5GB. Just four years later that number has quadrupled to 8-10GB. While many customers rely on Comcast’s broadband service for basic e-mail and web browsing, the cable operator has begun to entice customers into utilizing its online video platform, which in certain cases can dramatically eat into a customer’s monthly usage allowance, which remained unchanged until earlier this year.

Many broadband providers are less generous than Comcast, some imposing caps as low as 5GB of usage per month.

“Data caps encourage a climate of scarcity in an increasingly data-driven world,” the report concludes. “Broadband appears to be one of few industries that seek to discourage their customers from consuming more of their product. Thus, even as the economic and engineering rationale for data caps on wireline broadband does not hold up given the declining costs of providing service and rapid technological advancement, the proliferation of data caps is increasing. The trend is driven in large part by a woefully uncompetitive market that allows the nation’s largest providers to generate enormous profits as well as protect legacy business models from new services and innovators.”

The argument that increased usage puts an undeniable burden on providers is untenable when one examines the financial reports of providers.

The study found, for example, Time Warner Cable’s latest 10-K report shows that connectivity costs as a percentage of revenue have decreased by half, from an already modest 1.20% in 2008 to a little over 0.60% in 2011.

In 2012, the company is again exploring ways to introduce usage caps on at least some of its customers, in return for a modest discount.

Upgrade? Spend Less and Charge Customers More Instead!

The report notes cable companies like Time Warner Cable and Comcast, whose networks were originally built for television services and have now been repurposed for broadband as well, are enjoying lucrative profits on
networks that have long been paid off. In fact, Time Warner Cable recently disclosed it earns more than 95 percent in gross margins on its broadband service, with additional rate increases for consumers likely in the near future. The company recently began charging its customers a modem rental fee as well.

Shammo

At these margins, the report concludes selling broadband service to “data hogs” who consume hundreds of gigabytes of traffic per month are still profitable for providers.

As financial reports disclose capital spending on network upgrades continue to fall, operators are instead content imposing usage limits on customers to control traffic growth and further monetize an already enormously-profitable business.

The nation’s largest phone companies also come in for criticism. The report quotes from Stop the Cap!’s coverage of Verizon’s chief financial officer openly admitting it is investing most of its available capital in the highly profitable wireless sector.

“It is clear that in shifting a greater percent of their overall capital expenditures to their wireless segments, Verizon and AT&T are more interested in expanding their dominance in the wireless industry than they are in upgrading DSL or expanding fiber connectivity to provide aggressive competition for residential broadband service,” the report found.

Verizon’s chief financial officer recently made the following statement at an investor relations event:

“The fact of the matter is wireline capital — and I won’t give the number but it’s pretty substantial — is being spent on the wireline side of the house to support wireless growth,” [Verizon CFO Fran Shammo] said. “So the IP backbone, the data transmission, fiber to the cell, that is all on the wireline books but it‖s all being built for the wireless company.”

Wall Street Educates Providers on How to Lead the Way With Data Caps

Although the majority of subscribers loathe usage restrictions on their already-expensive broadband accounts, a vocal group on Wall Street strongly favors them, and routinely browbeats providers on the issue.

Helping educate cable companies how usage caps can protect against cord cutting and further monetize broadband.

The report’s authors discovered some Wall Street banks even invest time and money developing presentations advocating usage caps and consumption billing to protect video revenue. A 2011 Credit Suisse presentation outlined ways usage-based billing can protect cable operators’ video revenues:

“…over the longer term, consumption based billing could reduce the attractiveness of over the top video options (e.g., Netflix and Hulu), as the economic attractiveness of such over the top options could be partially offset by a [broadband] bill that is higher, due to [broadband] overage charges that would be driven by large amounts of data being streamed via a customer’s [broadband] connection.”

Yet most cable operators vehemently deny usage caps and consumption billing are designed to decrease usage or protect video revenue. Credit Suisse and other Wall Street banks and analysts say otherwise, and express little concern over network congestion.

The report finds compelling evidence that data caps have effectively stopped new competitors and online innovation already, noting a Sony executive stated that the company was putting the development of its own online video service on hold, citing Comcast’s monthly usage cap.

The Wireless Cap Shell Game: Caps Protect Scarce Airwaves While Companies Promote More Usage, For a Price

The report also found suggestions of a forthcoming wireless traffic tsunami are greatly exaggerated. AT&T and Verizon Wireless have issued repeated alarmist rhetoric claiming that wireless data’s exponential growth is threatening to overwhelm available network capacity.

But both carriers recently changed pricing models to encourage consumers to bring more devices to their networks, along with suggestions customers upgrade to higher allowance plans to handle the additional traffic generated by those devices. In fact, both AT&T and Verizon Wireless see profitable futures in forthcoming “machine to machine” wireless traffic that will allow cars, appliances and medical devices to communicate over their respective mobile networks. AT&T’s security and home automation system also relies on its own wireless network, offering customers remote access to their homes, chewing up wireless bandwidth as they go.

Despite suggestions from both providers their new wireless data plans would save customers money, it has brought overall increases in the average revenue earned from each subscriber instead.

Riding away with your phone subsidy.

T-Mobile USA has thrown down the gauntlet, announcing it intends to end the kind of phone subsidies that have allowed customers to pick up pricey smartphones like the iPhone for as low as $99, with a two-year contract.

Wireless subsidies have been part of the North American wireless experience for nearly two decades. In an effort to bring new customers on board, carriers wanted the upfront cost to consumers to be as low as possible. Until expensive smartphones arrived, consumers were assured they could get a new, cutting-edge phone at contract renewal time for very little money. Carriers tolerated the subsidy even for existing customers because the difference between the company’s cost and the amount consumers paid wasn’t large enough to negatively affect a carrier’s balance sheet.

Companies gradually earn back the subsidy over the course of a typical two year contract by artificially inflating prices for service plans and add-ons. Because wireless rates have been set with the assumption a customer has received a subsidized phone, it made sense to keep getting new equipment every two years, because customers pay for it on each monthly bill.

In most countries outside of North America, it works very differently. Most customers either pay for a phone outright or agree to finance its purchase through a wireless company, paying monthly installments for smartphones that often cost more than $600. Some companies offer more aggressive discounts if one agrees to a 1-3 year contract, but buyers still cover much of the cost themselves. In return, wireless companies abroad typically charge much lower rates for service and do not force people into lengthy contracts. Customers also find they can switch companies as easily as replacing a SIM card, activating an old phone on a new carrier’s network.

There are pros and cons to the subsidy model:

PROS

• Consumers get the latest phones at a reduced up-front cost up to every two-years;
• The subsidy win-back is collected gradually over the course of 24 months;
• Carriers aggressively compete on huge subsidies for popular phones;
• The reduced price of a subsidized phone brings reticent consumers into the market;
• Carriers have increased control over the equipment that is used on their network through price incentives;

CONS

• The subsidy model gives carriers an incentive to lock discounted phones to their network;
• Customers pay artificially higher prices for service, whether they take advantage of a subsidized phone offer or not;
• Consumers don’t realize the true cost of the phones and expect them to cost less than $200 regardless of their retail price;
• Customers are locked into lengthy contracts with stiff early termination fees to protect the subsidy win-back structure;
• Without a subsidy, equipment manufacturers would face natural market pressure to cut costs to remain affordable;

Legere

T-Mobile announced last week it was ending its phone subsidy program next year, and customers will be expected to bring their own phone, buy one at an unsubsidized rate, or finance a full price phone with the carrier. In return, customers will get a lower priced T-Mobile calling and data plan.

Some in the tech press are heralding the announcement as a consumer victory and a breakthrough for lower priced service plans. But before throwing the confetti, consider this.

T-Mobile is making customers bring or buy their own phones, but will still lock them into a two year contract with a $200 early termination fee.

T-Mobile’s retention of its contract plans might delineate the postpaid side of its business and its month-to-month, contract-free, prepaid business. But that does not mean much for customers.

John Legere, the new CEO of T-Mobile USA hinted the measure is designed to reduce customer churn — customers coming and going. Locking a customer in place with termination penalties assures shareholders customers are more likely to remain with T-Mobile for the life of their contract.

That represents a win for T-Mobile, but not for customers. Legere explained the benefits to investors:

“[We are going] to have a lower device subsidy obviously and overall value,” Legere told attendees at the Capital Markets Day Conference. “[… because of the] device margin — $200 to $250 — which we do not have to eat. Over a 24-month period [we get] a customer life value that is the difference between $550 on a Classic [traditional subsidy contract] plan and $600 on a Value [no-subsidy] plan.”

In other words, T-Mobile doesn’t have to front a device subsidy, still holds a customer with a two-year contract, and despite the lower-priced service plans, comes out $50 richer when the contract expires.  T-Mobile is essentially admitting it does not return the entire value of its former subsidy back to the customer.

What is more, T-Mobile may pave the way for other carriers to also drop handset subsidies, keep the traditional two-year contract, and only slightly lower prices.

Nothing peeves Wall Street more than the huge subsidy costs carriers pay up front to discount the latest smartphones. Getting rid of subsidies while only mildly adjusting prices could be the next hidden “price increase,” the perfect gift for an investor that demands higher revenue from every customer.

Verizon and Redbox will launch an unlimited online video streaming service next year that will undercut Netflix’s monthly subscription price and offer discounts off movies rented from Redbox’s ubiquitous DVD kiosks.

Details emerged about Redbox Instant when GigaOm discovered the online help section intended to assist beta test customers was initially available to the public.

Some of the points GigaOM uncovered:

• Subscriptions start at $6 a month, but the number of movies and TV shows available will be considerably smaller than what Netflix offers. There will also be a considerable amount of title duplication between Netflix, Amazon Video, and Redbox Instant;
• For $8 a month, the service will also bundle four Redbox credits redeemable for kiosk rentals, with movie reservations taken online and through mobile apps. Unused credits expire at the end of the month;
• In addition to online viewing, customers can also watch on Android/iOS devices, Xbox 360 and select Samsung Smart TVs and Blu-ray players;
• Newer titles will be available on-demand starting at $0.99 each;

Redbox is accepting e-mail addresses of potential customers interested in more information about the service. It is very possible the venture will expand its beta test, inviting those pre-registered to try the service before it is formally introduced to the public.

Some investors on Wall Street have gotten increasingly jittery about Netflix’s largest competitors, because all of them operate diverse businesses that can help subsidize entertainment licensing costs and still undercut Netflix pricing. Amazon charges $79 a year for its Amazon Prime + Video service. Comcast offers its service at $4.99 per month. Netflix has already been under pressure to raise prices even before signing an exclusive streaming deal with Disney estimated at a value of $300 million per year.

“That figure is ironic to say the least because $300 million is what Starz demanded of Netflix 15 months ago as condition for renewal of that exclusive arrangement, and Netflix turned that bid down,” said Eric Savitz in Forbes. “Now, it appears Netflix is paying $300 million per year for the Disney-branded content which would have been on Starzplay in the first place.”