The Telecom Scam: 5 Behemoths That Strangle Innovation and Ensure You Pay Too Much for Bad Service
America’s communications system is in crisis and the longterm consequences will be profound. Most distressing, this issue is not on the political agenda for the 2012 electoral campaign.
The nation’s historic strength is embodied in the ongoing development of its communications infrastruture: the telegraph helped launch 19th-century modernity; the telephone fashionend the 20th-century business and consumer society; and broadband communications is shaping the 21st-century global marketplace.
Unfortunately, where the U.S. was once a world leader in communications, it is now devolving into a secondrate telecom nation. In a December 2010 report, Europe’s Organization for Economic Co-operation and Development (OECD) ranked the U.S. 15th in “broadband” subscribers.
Making matters worse, Akamai, a leading technology service-provider company, ranks the U.S. 15th globally in average connection data rate speed, averaging only 5.3 megabytes per second (Mbps) in Q-1 2011. In comparison, Korea’s average data rate was nearly three times faster (14.4 Mbps), Hong Kong's nearly twice as fast (9.2 Mbps) and even Romania had an average rate of 6.6 Mbps.
Americans are getting inferior services at higher rates -- yet we are told (and believe!) that our communications system is the best in the world. Advances in smartphone operating systems and applications, most evident in Apple’s iPhone and Google’s Droid, dazzle the eye but hide the sins of the communications system’s underlying weaknesses.
Most disappointing, the U.S. Congress, the Federal Communications Commission (FCC) and state public utility commissions (PUCs) have been collaborating in this process. At the root of this crisis is the shared commitment, if not complicity, of government and regulatory agencies to protect existing corporate interests, restict meaningful competition and further industry consolidation.
An assessment of five key corporate players in the communications sector – a) two telecom companies (AT&T and Verizon), b) two cable companies (Comcast and Time Warner) and c) one Internet “applications” company (Google) – lays out the underlying control exercised by the trust over telecom services and the future of American progress.
The Phone Companies: One Big Duopoly
When AT&T was broken up in 1984, it was America’s largest corporation. It was divided up into seven “Baby Bells,” including Bell Atlantic and Southwestern Bell; they were suppose to compete with independent phone companies like GTE and SNET. AT&T and MCI retained control over long-distance service.
The Telecom Act of 1996 was suppose to open the telephone networks to competition. However, starting in 1996, first Southwestern Bell (renamed SBC) and then Bell Atlantic started to gobble up other Bells. The Act ended the ability of AT&T and MCI to offer local services, leading SBC to buy AT&T and Verizon to buy MCI, thus closing down the Bells’ two largest competitors. By 2005, competition was over.
Today, two mega companies, AT&T and Verizon, have operational control over America’s telecommunictions network of wireline and wireless services. (Qwest, formerly US West, controls the northwestern states, such as Idaho and Montana.)
With each merger, AT&T and Verizon “guaranteed” that each would compete for wireline, broadband, Internet and cable television. Competition has been replaced by a “gentleman’s agreement” that simply splits up America into fiefdoms.
AT&T is ranked seventh on the “Fortune 500” list. Its 2010 revenues topped $123 billion; if its current effort to acquire T-Mobile is approved, it will add an additional $21 billion to its bottom line.
AT&T is one company with two faces, one wireline, the other wireless. It exercies essentially monopolistic control of wireline telecom in 22 states, offering a host of services, including wireline (local and long distance), Internet Service Provider (ISP) Internet access, broadband and cable programming. As a wireless service, AT&T has 95 million wireless customers.
According to its 2010 annual report, AT&T’s revenues were split nearly equally between its wireline and wireless operations. The breakdown is as follows:
- Wireline – 47 percent or $57.7 billion (with voice at 22% or $27.0 billion and data at 25% or $30.7 billion)
- Wireless – 47 percent or $57.8 billion
- Other – 6 percent or $6.8 billion
The current AT&T was created by the shotgun marriages of one Baby Bell sibling after another. In 1996, Southwestern Bell Corporation (SBC) acquired PacBell; two years later, SBC acquired SNET. (In 1997, SBC attempted to acquire AT&T long distance, but the FCC rejected the bid.) It then went on to gobble up Ameritech (which controlled midwest states like Illinois and Indiana) and BellSouth (that controlled states from Florida to Texas, up to South Carolina and west to Kansas). SBC finally devoured long-distance AT&T.
On the wireless side, the old AT&T’s wireless business began 1992 when it acquired a one-third share of the industry innovator, McCaw Cellular; two years later, it swallowed McCaw. In 2004, Cingular, a joint venture of SBC and Bell South, acquired AT&T and, in 2006, the “new” rebranded AT&T acquired Bell South.
AT&T’s most advanced service, U-verse, is intended to compete with cable television as a programming service. As of June 2011, it reported only 3.4 million subscribers. U-verse’s high-end version, the High Speed Internet Max Turbo, offers downstream service at 18.1 Mbps to 24 Mbps; its high-end TV and Internet packages offers up to 410 TV channels but downstream Internet speeds only up to 12 Mbps.
However, U-verse is not a “true” broadband optical-fiber platform. Rather, it’s a Fiber-to-the-Node (FTTH) or Fiber-to-the-Premises (FTTP) installation that, when in the home, runs over the old, already-installed “twisted pair” copper network; sadly, copper can’t handle more than 25 Mbps. AT&T does not advertise its upstream data rates; they are important for Skype, video conferencing, user-generated content (UGC) videos and other user-initated options. Thus, in the states that AT&T controls, consumers will never get true broadband service.
To put this into perspective, in Hong Kong, France or Korea, customers get 100 Mbps in both directions for less money than Americans pay.
Like AT&T, Verizon was created by mergers of a second group of Baby Bells. In 1997, Bell Atlantic (which covered the territory from New Jersey to Virginia) merged with the New York Bell operating company, NYNEX, that covered Maine through New York. Verizon had control of local communications services throughout the East Coast.
In 2000, Bell Atlantic acquired the independent phone company GTE, which had over 20 different territories throughout the US, and rebranded itself Verizon. In 2005, illustrating growing industry consolidation, Verizon acquired MCI, the company that, ironically, initiated the campaign that brokeup Ma Bell. More recently, it also acquired another independent, AllTel. (Verizon is concentrating on urban territories, dumping more rural areas; it sold off Maine, New Hampshire, Vermont and other territories as part of its acquistions of GTE and Alltel.)
Its 2010, Verizon’s revenues were $107 billion; it ranks 13th on the Fortune 500 list. Like AT&T, Verizon controls local service in multiple states and offers wireline (local and long distance), wireless, Internet access (as an ISP) and broadband content (e.g, video, music).
According to its 2010 annual report, Verizon’s wireline services are its cash cow. Its revenue breakdown is as follows:
- Wireline – 60 percent or $63.4.7 billion
- Wireless – 39 percent or $41.2 billion
- Other – >1 percent or $1.9 billion
Verizon Wireless is the brand name for a joint venture formally named the Cellco Partnership; Verizon, the former Bell companies, controls 55 percent and the British-based Vodafone controls 45 percent. In January 2009, Verizon Wireless acquired Wireless as part of a deal valued at $28.1 billion.
Verizon Wireless originally grew out of the separate wireless divisions of the companies that it merged with or acquired to create Verizon. These companies include Bell Atlantic Mobile, NYNEX Mobile, PrimeCo and GTE Mobile. In 1999, AirTouch merged with Vodafone and, later that year, Vodafone entered into a joint venture with Bell Atlantic, creating Verizon Wireless.
Verizon advanced broadband wireline service is FiOS, launched in 2005 to compete with cable television. It is based on Fiber-to-the-Premises (FTTP) topography and offers standard and high definition TV channels, video-on-demand (VOD) programming, music services as well as Internet access. As of April 2011, it claimed a paltry 3.7 million subscribers.
The Cable Companies: The Carriage-Content Juggle
Cable television emerged in the late-1940s as a “retransmission” service improve the signal quality of over-the-air broadcast TV channels. Viewers of these channels often received signals that were dimmed or blocked because the local station’s signal was weak or due to interference from natural obstacles (e.g., mountains).
Over-the-air broadcast TV was limited to a fixed number of analog channels. Cable slowly improved the carrying capacity of the underlying coaxial “cable” and, with digital technologies, increased the number of channels it could offer. Thus was born the cable television programming business of basic, enhanced and premium or pay services.
Today, the cable industry consists of two overlapping (and increasingly integrated) oligopolies: 1) cable “operators” or distribution companies and 2) powerful “content” or programming companies. As evident in the 2010 Comcast-NBC-Universal merger, the line between these sectors is eroding. Cablevision, the ninth largest operator, owns Rainbow Media Holdings that controls the AMC Networks consisting of the IFC, Sundance, We and other (intellectual) properties.
The cable industry’s power is twofold. First, cable companies operate on the basis of an exclusive franchise negotiated with a particular locality. Second, cable companies long controlled in-home access to video programming through a subscriber’s rental of the cable converter or set-top box. Until recently, the cable industry effectively limited competition by restricting programming sources to major media conglomerates and resisting alternative signal providers especially via the Internet.
The traditional cable model of control of television programming is in crisis. Between 2001 and 2010, cable subscriptions have shrunk by 11 percent, from 66.9 to 59.8 million.
Erosion is driven by the growing popularity of programming accessed via online broadband. The coveted cable box faces increased challenges from new devices like Apple TV, Roku, Vudu and Boxee as well as gaming consoles (e.g., Sony’s Playstation 3 and Microsoft’s Xbox), BluRay DVD players and Wi-Fi enabled television sets. A growing number of online programming options offer TV viewers new choices; these include conventional TV shows from Hulu; streaming movies from Netflix, Amazon or Apple’s iTunes; and an infinite array of programming from YouTube.
The twin-headed cable hydra of carriage and content has attempted to halt these challenges. In 2008, FCC issued an order against Comcast for blocking technologies used to deliver online TV, noting the anti-competitive effect of this blocking. More recently, the industry has adopted a “TV Everywhere” strategy to restrict online competition.
Under “TV Everywhere,” cable programmers like TNT, TBS and CBS will not make content available to a user via the Internet unless the user is also a pay TV subscriber through a cable, satellite or phone company. According to a 2010 report from FreePress, “TV Everywhere consists of agreements among competitors to divide markets, raise prices, exclude new competitors, and tie products.”
Comcast acquired its first cable system in Tupelo, MS, in 1963; in 2010, it acquired NBC-Universal. The pre-merger Comcast of 2010, which operates in 29 states and has 23 million cable and 8 million Internet subscribers, reported revenues of $35.7 billion and ranked 59th on the Fortune list.
Comcast has long coveted “content” or programming as part of its business model. While it failed in an effort to acquire Disney in 2004, it succeed securing interests in the Golf Channel, E! Entertainment, G-4, Style and regional sports cable services as well as the lifestyle website, Daily Candy. It also runs the Philadelphia Flyers NHL franchise and the NBA's Philadelphia 76ers. This whetted its appetite for a bigger play.
In its pre-acquisition days, NBC was one the nation’s leading media conglomerates. Owned by GE, it was one of the four major broadcast networks and controlled 33 local TV stations, the Spanish-language network, Telemundo, 13 cable networks (including USA, CNBC, Bravo, SyFy, MSNBC, CNBC, NBC Sports, Oxygen, the Weather Channel) as well as Universal, a major movie studio (and Focus Features, a boutique “art house” micro-studio) as well as the Universal theme parks in LA and Florida. In addition, it controls numerous websites including a stake in Hulu, the free online TV rebroadcaster owned with Fox and Disney; Hulu is now on the block.
The acquisition of the NBC-U may radically transform Comcast. It will likely raise to a new level the classic battle between the demands of the “pipe” and the “content.” It may also well spike a round of media mergers in which the big pipes, most notably AT&T and Verizon, will seek to acquire major content companies like Viacom and possibly Paramount or Sony Entertainment.
Most instructive, the federally approved merger made few demands on Comcast. It agreed to offer programming at competitive terms and not discriminate “in the transmission of an online video distributor's lawful network traffic to a Comcast broadband customer." However, it was not required to open its network to other ISPs or cable operators.
Comcast is introducing new programming services to hold onto its subscribers. One is called Xcalibur that integrates social media into TV viewing; it allows customers to “like” shows through Facebook and offer suggestions based on their friends’ recommendations. Another new service is X-Finity that offers significantly higher data transport speeds. For example, Extreme 50: downstream at 50 Mbps and upstream at 11 Mbps and Extreme 105: downstream at 116 Mbps and upstream at 11 Mbps. And, of course, one pays a higher rate for higher speeds.
This practice of metered pricing based on usage, or data caps, is effectively ending an Internet and web based on the principals of net neutrality. Exploiting a fictitious crisis over network capacity, a new pricing and value system has been introduced to turn the Internet into just another metered service. The Internet was originally conceived as a free public thoroughfare for digital communications. The telecom trust seeks to reduce it to a walled garden to maximize quarterly profits.
Time Warner Cable
Henry Luce and Briton Hadden founded Time magazine in 1923 and it peaked as a media conglomerate in the mid-2010s. At its height, its tentacles stretched from print publishing, music, TV programming and movies to a huge cable operation (offering telephone services) and a leading online network. Today, it is a shadow of its former self.
A half-century after it was founded, in 1972, Time-Life launched Home Box Office (HBO), a breakthrough monthly pay service, distributed through coax and microwave relays; in 1975, it was the first “cable” service to jump to satellite signal distribution. In 1989, Time merged with Warner Communications creating TimeWarner (TW) and, in 1996, it acquired Turner Broadcasting. In 1999, TW entered into a joint venture with AT&T to offer local telephone service in 33 states over its cable infrastructure.
With much fanfare, in January 2001 TW merged with American Online (AOL) in a $164 billion deal. Within a year AOL-TW’s stock price plunged and the much-hyped “synergies” that was the merger’s rationale turned out to be a mirage. The company wrote off $99 billion in losses. Only bankers and corporate management benefited from the get-rich-quick scheme.
The AOL-TW merger exemplified the financial scams at the heart of the tech bubble. Under increasing financial problems resulting from its shotgun marriage with AOL, TW moved in March 2009 to shed its cable operations, creating the self-standing company, Time Warner Cable (TWC).
In 2010, TWC had revenues of $17.9 billion and ranked 131st on Fortune 500 list. It has 14.6 million subscribers.
Like the telcos and other cable companies, TWC is promoting what are called “bundles” of services that can include voice (local and long-distance), Internet access (as an ISP) and digital TV, including HD video, recording and video-on-demand [VOD].
Earlier this year, TWC had a dustup with three of its major content providers, Discovery, Fox and Viacom, over distribution rights for streaming video to the iPad. Unable to resolve their differences, TWC has taken the issue to federal court. It claims that it has the right to distribute licensed programming to its subscribers no matter whether they are watching a show on their home TV or computer or a mobile device. Its argument is simple: it “owns” the subscriber.
This issue points to the deeper challenge facing the cable industry’s “TV Everywhere” strategy, one shared by Comcast and other cable operators. The cable operators are trying to lockup content through exclusive deals (e.g., with TimeWarner subsidiaries like Turner) so that other distribution providers cannot offer them to their mobile subscribers. This could be a hot issue in 2012.
Wild Card: Can the Communications Trust Be Broken Up?
For the last two decades, as the nation’s telecommunications system has been upended by an explosion of new digital technologies and capabilities, those with the deepest pockets and most strategic positions have triumphed. Most importantly, the Internet has remade communications, and sadly, strengthened the hold of the communications trust. Old dogs like Apple have found new life; new dogs like Google, Amazon and Facebook have fueled enormous growth.
The challenge for the coming decade is whether any new, wildcard player can overcome the corrosive effect the telecom trust is having on the nation’s communications system. The chances for a breakup, let alone a shakeup, of the communications trust look pretty grim.
Is Google the next Microsoft or Ma Bell?
While a classic “garage shop” startup like Apple, some believe that Google is increasingly coming to look like the Dark Force out of a Star Wars movie. For all the high-tech mumbo jumbo relating to its corporate mission -- “Don’t be evil” -- the company does not embrace Star Trek’s legendary motto, “Do no evil.” And Google’s new evil is what seems to worry an increasing number of people.
Founded in 1998, Google’s 2010 revenue was $29.3 billion; more impressive, its market cap is approximately $170 billion. It ranked 102nd on the Fortune 500 list.
Google’s enormous wealth is derived from its breakthrough search technology and how it revolutionized the advertising business. Its patented, underlying technology, PageRank, transformed Internet search and turned its company name, like FedEx, from a noun to a verb. And its search inquiry is “free” to users.
Its search capabilities transformed advertising. It changed the industry’s accounting paradigm: “click-throughs” replaced “page views.” Ad services account for approximately 95 percent of its revenues. So powerful is its ad business that the company makes more from advertising than all the nation’s newspapers combined.
Its enormous wealth and smart strategic thinking has led it to introduce an ever-growing variety of services, products and capabilities. The Google octopus ranges from AdSense (ad placements) to Gmail, from its digitalized library of copyrighted books to the Android OS, from its acquistion of Motorola Mobile to the build-out of a 1-Gig fiber network in Kansas City – and even a smart, self-driving car venture. When you’ve got the bucks, have fun.
The dark side of Google is whether it's become the corporate NSA. Google’s vast data archives capture and preserve every search inquire, every ad click-through and every g-mail message (including key words in the content). This allows it to not simply monitor users' online behavior, but – with sophisticated artificial intelligence software – it can “predict” individual users' usage patterns. More troubling, this vast data archive can be harnessed to meet “security” needs. (Google partnered with the CIA in a venture called “Recorded Future.”)
Many critics wonder whether Google, like Facebook, is capturing too much data (i.e., personal information) about its users. Americans have long battled over the meaning of personal “privacy,” a cherished belief that while not formally in the Constitution has been repeatedly affirmed in Supreme Court cases as an implied right. The looming question is: does one lose their right to privacy once they go online?
A series of ongoing incidents have upped the ante for Google. Its 2004 decision to accommodate the Chinese government's request to remove references to the 1989 Tiananmen Square massacre raised the concerns of many. It recently made a $500 million settlement with the Justice Department to avoid prosecution on charges that it knowingly accepted hundreds of millions of dollars in illegal ads from Canadian online pharmacies. Currently, it is facing a Federal Trade Commission antitrust investigation over whether it’s rigging its search and advertising system.
Most troubling, because it may well signal Google’s long-term strategy, it offered a joint proposal with Verizon to the FCC on the future of the net neutrality. The Electronic Frontier Foundation warned in no uncertain terms: “Unfortunately, … [it] included some really terrible ideas. It carves out exemptions from neutrality requirements for so-called ‘unlawful’ content, for wireless services, and for very vaguely-defined ‘additional online services.’ The definition of ‘reasonable network management’ is also problematically vague. As many, many, many have already pointed out, these exemptions threaten to completely undermine the stated goal of neutrality.”
This may well exemplify the difference between “Don’t be evil” and “Do no evil.”
Gore's Vision: The Information Superhighway
In 1991, Al Gore proposed the “Information Superhighway” in which every home, school, hospital, library, business and government offices would be wired with fiber-optic cable, replacing the old twisted-pair copper network that had linked the country for more than a century. Gore and the telecoms promised that 100 million homes would have fast, two-way broadband by 2010.
In the two decades since Gore’s proclamation, the communications trust has failed to deliver on this promise. Park Associates’ optimistic forecast projects that by yearend 2011 only 18 million U.S. households will subscribe to a fiber optical service.
A more sobering assessment was provided in a FCC’s 2010 Internet access report. It found that of the 152.9 million Internet fixed and mobile broadband “connections” in the U.S., only 714,000 (0.5%) could support between 25 and 100 Mpbs and a whopping 35,000 (0.02%) offered over 100 Mbps service; in addition, there were only 4.1 million FTTP homes in the U.S., representing 2.7 percent.
Nevertheless, since Gore’s proposal, the telecom trust has become enormously profitable, effectively blocking meaningful competition and leaving the U.S. and ordinary telephone, wireless and cable customers with inferior services. The cause of this failure is twofold: well-orchestrated and aggressive trust efforts and compliant oversight. Regulators, whether state or federal, legislative or oversight agency, are in the telecom trust’s pocket. And ordinary subscribers to one or more of trust service pays the price.
The five profiled companies – AT&T, Verizon, Comcast, Time Warner Cable and Google – suggest the practices of the leading companies that make up the communications trust. Their respective efforts to expand their scope of business and to offer new services are intended to increase market share, maximize profits and restrict competition.
Three of the more significant consequences of these efforts are:
- Industry consolidation fuels collusion. AT&T and Verizon, along with the smaller cousins in the cable industry, not only own the wireline and wireless networks, but cut deals for content from the same handful of giant media conglomerates that are in bed with the cable operators.
- Consolidated industry power leads to regulatory capture. One has only to examine the “experts” serving at the FCC’s various advisory committees to understand that the phone and cable companies have stacked the deck. The head of the Technical Advisory Committee is the former head of the wireless association and cable association while the head economic adviser on the National Broadband Plan had worked for multiple astroturf groups and trust-funded think tanks.
- There’s no “balance of forces,” no one taking up the fight. Prior the mergers following the 1996 Telecom Act, AT&T and MCI represented a modicum of competition containing the markets' monopolisic impulses. While not as well-funded as the Bell operating companies, the two long-distance carriers were a stop-gap force. Today, there’s no balance. The cable companies lobby with the phone companies opposing net neutrality and other issues; Google, Apple and Microsoft have deals with the telcos. There is nothing on the horizon to stop the oncoming train.
The outcome of these consequences is scandalous: the nation’s telecom network is stuck!
In place of Gore’s vision of high capacity, two-way fiber-optic system, the telecommunications infrastructure is being “dumbed down” to a lower-performing but more convenient wireless services. This is most evident in AT&T’s decision to not properly upgrade its network in 22 states. After repeated commitments to rewire these states with a fiber-optic network so as to secure various mergers, rate hikes and tax breaks, it has instead maintained its same, inferior copper wiring as the basis of its “advanced” U-verse service.
In similar fashion, Verizon has failed to invest in infrastructure while continuing to raise rates. For example, in New York State it has benefited from an 80 percent rate increase since 2005. In New Jersey, it committed to a 100 percent fiber upgrade by 2010 and, since 1992, has received an estimated $10 billion to cover these costs. Sadly, it has slowed its fiber optic construction and shifted construction budgets to wireless.
The inferior quality of America’s telecom system is one more symptom of the nation’s deeper structural crisis. The “regulators” who should have guided the nation’s telecom development to realize Gore’s “superhighway” have been effectively taken over by the telecom trust. The former overseers became subservient stooges, blindly approving rate increases, massive tax breaks, accelerated depreciation allowances and mergers that further consolidated the telecommunications trust – and degraded the quality of the nation’s communications network.
Most shameful, following the FCC’s approval of the Comcast-NBCU merger, one of the Republican members took a well-paying job at Comcast. As a great American once observed during the now legendary Senate Army-McCarthy hearings of 1954, “Have you no shame?”
To the communications trust, and its regulatory handmaidens, one must ask: Have they no shame?