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Cable Companies' $46+ Billion Robbery -- Subscribers Have Been Ripped off for $5 a Month Since 2000

The cable companies are diverting money that is intended to improve infrastructure, creating a perpetual cash machine for greedy execs.
 
 
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When cable television subscribers open their monthly bills they will not see a charge for the “Social Contract.” Since the mid-1990s, it appears that every cable subscriber has shelled out $1 per month increasing to $5 a month by 2000 to subsidize cable companies’ system upgrades. There has been no accounting for the total monies raised through this subsidy nor a thorough assessment of whether the cable operators fulfilled the system upgrades (including wiring and services to public institutions) the subsidy is suppose to underwrite.

We estimate that the total Social Contract or “social con” ripoff has cost American cable subscribers $46 billion. But the true costs of the social con could be much higher, as the cable companies may have “double billed” on their construction upgrades. These new construction payments underwrote cable operators implementing multiple revenue streams and a monopoly on their wires. This helped cable companies to now offer broadband, Internet, telephone and other services.

As of this writing, the Social Contract is a black hole, with no audit trails, no removal of a charge that seems to have ended up a perpetual cash machine. We call upon the Federal Communications Commission (FCC), the Congress and state Public Utility Commissions (PUCs) to provide a thorough, complete and transparent assessment of the Social Contract.

On September 24, 1997, the FCC’s then-chairman Reed Hundt testified before Congress on the Social Contract. As he reported, “The Commission has found social contracts to be a useful tool for providing for the upgrade of cable facilities allowing operators to expand service offerings.” And added, “the Commission's social contracts have allowed recovery for upgrades only through adjustments to rates charged for cable programming services tiers, the tiers that are within the Commission's exclusive jurisdiction.”

Surely, Jean-Jacques Rousseau is turning in his grave over the systematic misuse of his coveted concept of political freedom. Over the two-and-a-half centuries since his classic work, Of The Social Contract, Or Principles of Political Right, was published in 1762, the concept has been appropriated for all manner of misuse. From a concept that acknowledged the human relations that underwrites modern democracy, this Social Contract has become just another scam through which huge corporations rip off the public.

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The FCC adopted the concept of the “Social Contract” on November 30, 1995. It is intended “to provide rate stability, improved quality of service, and incentives for upgrades and system improvements.” Under the contract, cable operators agreed to commit significant capital to upgrade their cable systems and offer what is known as a “cable programming service tier” (CPST), which are basic services and allow subscribers either to rent or purchase a converter box. In return, the FCC gave cable operators guaranteed subscriber rate increases and new programming tiers at higher rates. The rate increase was, in effect, a $1 tariff per month per subscriber to recover the capital investment, and that appears to have increased each year to $5 per month by 2000.

The Social Concept was formally institutionalized with the passage of the Telecommunications Act of 1996. This landmark act, which was created through a Republican Congress and signed by President Clinton with much fanfare, was intended to end (in Hundt’s words) “nearly 100 years of monopoly and restricted entry in communications and replaced them with a national commitment to open markets, competition and deregulation.” In the decade and a half since its passage, “deregulation” has led to the re-monopolization of the communications industry, the establishment of the telecommunications trust. Ironically, this deregulation was also given to the cable monopolies with the idea that they would compete with the phone companies.

The Social Contract was an unstated effort by the FCC to help subsidize the deployment of what Al Gore, in 1991, proposed as the “Information Superhighway.” Under the Social Contract, cable operators would be subsidized so they could build-out their networks to meet the needs of homes, schools, hospitals, libraries, businesses and government offices with advanced optical fiber networks. Gore envisioned that by 2010 all public institutions and 100 million homes would have fast, two-way broadband communications.

Now, after a decade and a half of deregulation, what have we got? AT&T and Verizon combined have only five-plus million fiber-based subscribers and the cable operators account for only about 20 percent of the residential voice market, a much smaller amount of the business telephone service and no major presence in the wireless market. Thus, deregulation, after all is said and done, gave us slower Internet speeds, less choice over service provider and higher prices. Competition within the telecommunications industry is a myth.

Under the Social Contact, cable operators were required to upgrade their networks to a minimum data rate; technically, it was set at 750 MHz per second analog and “at least 200 MHz is expected to be dedicated to digital distribution.” The FCC required that “at least 60 percent of the capital expended to complete the required upgrades must be applied for the benefit of basic service tier and CPST subscribers.” In addition, all upgraded systems were required to offer at least 15 CPST or basic service channels and three-fifths CPST had to be offered over analog services.

Like most federal rules, the Social Contract is slippery. In 1997, Comcast applied to the FCC to “complete certain upgrades and improvements” under the Social Contract. It agreed to provide free modems and online service to 4,000 public and private elementary and high schools and up to 250 public libraries within a year after rolling out Internet-access service commercially to residential customers in the same franchise area. In return, Comcast was permitted to create “product tiers in those systems which had not been previously granted comparable tier flexibility.” Sadly, there is no apparent report as to whether Comcast met these system upgrade requirements.

In 1999, TCI (now part of Comcast) sought to swap cable systems for Time Warner’s systems in Illinois, Indiana, New Jersey, Oregon, Pennsylvania and Wyoming, and the FCC extended the benefits of the Social Contract originally awarded to Time Warner, but not the upgrade obligations. In the original agreement, Time Warner agreed to invest $4 billion for system upgrades, “this financial commitment will not apply to TCI. Instead, TCI will be required to make such capital expenditures as may be necessary for it to complete the required upgrades.” With a regulatory slight of hand, one company’s obligations turned into another’s opportunities.

In 2001, the New York PUC revealed how the Social Contract really worked, in this case for Time Warner subscribers. Time Warner sought to increase the original $1 per month per subscriber charge for basic CPST services. As it stated without subterfuge: “The charge was an annual increase of $1 per month for a total charge to CPST customers of $12 in 1996, $24 in 1997, $36 in 1998, $48 in 1999 and $60 in 2000.”

The PUC “tentatively concludes” that Time Warner should decrease its total upgrade surcharge attributed to the Social Contract. Did the hidden Social Contract on subscribers increase fivefold? Sadly, yet again, there appears to be no public report as to whether this increase or decrease went into effect. How much has Time Warner received from the Social Contract over the last decade and what system upgrades, especially to public institutions, has it provided?

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Since the Social Contract went into effect, numerous state and local legal challenges have been raised about its imposition. For example, in 2000, Massachusetts’ Division of Cable Television conducted a hearing to determine whether Time Warner propose rate structures for the communities of Athol, Orange, Dalton, Pittsfield and Richmond. It determined that Time Warner did not meet the criteria established by the FCC under the provisions of the social contract, and denied its request. In 2009, Hawaii’s Dept. of Commerce, Cable Television Division determined that Time Warner had “opted out of certain rate regulation provisions under the 'Social Contract'."

Further clarification was revealed in a 2009 class action suit against Time Warner brought by Patricia Crumley in Minnesota. She charged Time Warner overcharged or double billed its customers in Minneapolis for network upgrades that it made to its cable systems. According to the suit, Time Warner had agreed to commit $4 billion for upgrades and “the Social Contract allowed Time Warner to charge its customers a surcharge of up to $180 each over a five-year period between 1996 and 2000 to cover the cost of the upgrade.” In addition, the suit contended that the company was also collecting for the same upgrades through the franchise agreement, thus double billing the customer. What happened? “The district court dismissed the suit under Federal Rule of Civil Procedure, concluding that the claims were barred by the filed rate doctrine.” So much for determining whether Time Warner engaged in double billing. The unasked, and unanswered, question is whether other cable companies throughout the country engaged in such double billing over the last 15 years.

Since the social con came into effect, no thorough analysis of monies raised by cable companies appears to have taken place or an accounting as to how the monies have been spent. The commitments made by Comcast in 1997 to provide free online service to schools and libraries is representative of the commitments made by Time Warner and other cable operators for the Social Contract. Have the operators fulfilled these commitments? It's time we found out, especially as Comcast attempts to acquire NBC-Universal.

David Rosen is author of Off-Hollywood: The Making & Marketing of Independent Films, and a regular contributor to CounterPunch, Z-magazine and other publications. He can be reached at drosen@ix.netcom.com. Bruce Kushnick is a telecommunications industry analyst who serves as the broadband and telecommunications expert for the Nieman Watchdog. He can be reached at bruce@newnetworks.com.