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South Koreans play online computer games in Seoul. More than 70 percent of South Korea's population uses the Internet, and the country has the highest per-capita rate of broadband connections in the world. (AP file photo)

Where’s that broadband fiber-optic access?

ASK THIS | March 14, 2006

The head of Teletruth, a consumer advocacy group, writes that in spite of huge payments and other financial incentives to the country’s monopolistic telecommunication giants, the United States is 16th in broadband Internet technology and falling. How did things go wrong in your state?

By Bruce Kushnick

Q: Why is the United States 16th in broadband Internet technology and falling? DSL lines and cable modems, when compared to alternatives such as fiber-optic lines, are inferior products. How, then, did they become the standard in America?

Q: Why have U.S. customers paid an estimated $200 billion in higher services rates and tax breaks for fiber-optic networks they never received? How has this affected American industry and technology, given the economic benefits of better connectivity?

Q: How did the mergers in the past decade of SBC (now called “AT&T”) with PacBell, SNET, and Ameritech, or Verizon with GTE, NYNEX and Bell Atlantic, harm the future of fiber-optic lines? What happened to the competition these companies promised?

Q: Is the recent announcement of AT&T to purchase BellSouth, one of the two remaining original Bell companies in the Public Interest?

Q: Each state had a separate contract with a different phone company that was supposed to provide fiber-optic based broadband. What is the history of fiber optic deployment in your state? How much money was collected in your state for fiber-optic and other technologies that were never brought to market?

Q: Did local phone companies use money slated to improve broadband connections in homes to enter the long-distance telephone market? Why do phone companies charge a “hidden broadband tax” on phone bills?

Through most of the 1990s, the United States led the world in high-speed connectivity. Yet according to the International Telecommunications Union (ITU), the United States, despite having the most broadband connections, has stumbled to 16th in broadband technology and continues to fall.

This situation has directly harmed this country’s technology edge, and makes the U.S. a backwater compared to South Korea, Japan and even Slovenia.

By 2006, according to telecommunication companies’ own documents, 86 million customers in the United States should have received 45 Mbps service. In fact, South Korea and Japan do even better: they routinely offer 100 Mbps connections in both directions, uploading and downloading, for around $40 per month. But in the United States, the best connections top out at 1/3 this speed and cost 400% more—and very few places even have access to the new fiber-optic services being offered. The United States once led the world in Web technology. What happened?

The answer is, the merger of the phone companies that control the phone networks decreased competition. Instead of deploying the high-speed fiber-optic lines they promised, they were content to collect profits, tinker with existing copper connections instead of rewiring, and roll out inferior DSL services. The FCC defines anything above 200 Kbps as broadband (1000 Kbps = 1 Mbps), allowing them to claim that Americans have broadband access. However, this definition is a politically-driven embarrassment for technologists, the equivalent of two tin-cans with string.

Yet—and here is the most troubling part—the phone companies got paid anyway. Through tax breaks and increased service fees, Verizon and the old Bells reaped an estimated $200 billion since the early 1990s to improve subscriber lines in the United States. And what have American consumers received? The most common DSL Service over the old copper networks tops out at 768 Kbps in most areas—a hundred times slower than routine connections in other countries. (There are faster, more expensive versions of DSL, but most have a top speed of 1-3 mbps in one direction, and it varies based on how far a person lives from a network hub.)

Background and Context

Beyond enabling web-surfers, why is broadband speed an important topic? The answer: economic activity. Over the last fifteen years, there have been multiple reports outlining how ubiquitous broadband would be a boon to everything from healthcare to education. For example, a report dubbed “Opportunity New Jersey”, created by Deloitte & Touche, was so successful in helping to change state regulation that it was replicated in Pennsylvania, Ohio, Indiana and Illinois. According to the New Jersey study, fiber-optic broadband was "essential for New Jersey to achieve the level of employment and job creation in that state …advance the public agenda for excellence in education…improve quality of care and cost reduction in the healthcare industry."

One study—titled “Dataquest: Implementation of ‘true’ broadband could bolster U.S. GDP by $500 billion a year,”—claimed that with “true” high-speed broadband  services, the United States could add $500 billion annually to its GDP because of new jobs, new technologies, new equipment, and new software designs. It might even lead to less dependence on oil because of a growth in telecommuting. Moreover, countries that lead the world in broadband technology, like Korea and Japan, turn out more scientists and engineers. It is clear that connectivity drives technology design and creation.

The most recent FCC report, published July 2005 (for the year 2004), on broadband reveals the extent to which fiber-optic lines have been neglected.

Phone companies have documented plans to wire 86 million homes with fiber optics by 2006 but the United States had only 38 million high-speeds line of any sort at the end 2004. And "high speed" in this case is defined as anything faster than 200 Kbps in one direction. The most common U.S. broadband access runs at 768 Kbps top speed in one direction, hundreds of times slower than the routine 100 Mbps, bi-directional service in other countries, even though consumers in those countries pay about the same price: an average of $40 a month.

The U.S. does face the challenge of wiring huge rural expanses, a problem not faced by, say, Japan. But this does not explain why close-packed metropolitan areas like New York and Chicago lag far behind Tokyo and Seoul.

Some History

In the 90s, the Clinton-Gore Administration called for a "National Infrastructure Initiative" to upgrade American homes, offices, schools and libraries with a fiber-optic network that would replace the older copper wiring.

Even pre-Clinton, as far back as 1991, the Bell companies made very promising statements about their commitment to fiber-optic networks. (The original Bells were Ameritech, Bell Atlantic, BellSouth, NYNEX, Pacific Telesis, Southwestern Bell, and  US West. They also controlled various states’ telecommunications infrastructure. GTE and SNET were other notable local phone companies.)

For example:

  • The California-based Pacific Telesis’ annual report stated that the company would rewire 5.5 million homes at a cost of $16 billion by the year 2000.
  • Bell Atlantic (which covers New Jersey to Virginia) promised to complete 8.75 million homes by 2000, for $11 billion.
  • Ameritech, which controls Indiana, Ohio, Wisconsin, Michigan and Illinois was to have 6 million homes by 2000.

Promises vary by state, but by 2006, if all the Bell companies had implemented a fiber-optic future as outlined in their annual reports, 86 million households would have been upgraded to fiber-optic broadband.

(Click here to see California's planned deployments by region, as shown in the Pac Bell Fact Book, 1994.)  

These upgrades in the infrastructure were also outlined by the companies in documents filed with the  FCC. In 1992, various Bells filed applications with the FCC for something called "video dialtone," which would have allowed phone companies to use their networks to compete with cable television distributors. By 1995, according to FCC reports, 24 applications were completed representing 43 different cities/states to be upgraded. As far back as 1997, 9.7 million homes should have received this service. These upgrades were supposed to handle 500+ channels on average. One company, NYNEX, claimed it would provide 800-1000 channels.   

Here's a compilation of those commitments filed with the FCC.

The speed of these broadband connections was to be 45 Mbps in both directions, a speed that could handle high-definition TV without serious distortions.

By 2006, there are no Verizon or SBC fiber-optic, 45 mbps, bi-directional 500 channel services as outlined in the FCC filings, annual reports or filed with the state commissions. Some of the companies, such as Ameritech, rolled out vanilla cable services, but, those were closed down after the merger of SBC and Ameritech.

$200 billion

In order to pay for these new networks, the phone companies lobbied state governments for financial incentives to upgrade their fiber-optic plants. The plans vary by state, but the methods used were similar: increased rates for certain services and tax breaks. In addition, “rate-of-return” regulation—laws which monitored phone-company profits—were replaced with either price caps or alternative regulations. The former cap the prices of certain products; unlike before, however, no regulator would examine the profits to see if they were out of line. While this provides benefits to customers, the price-freezes were accompanied by cuts in staff and cuts in new construction, allowing the companies to increase profits. Some services were also deregulated, including Call Waiting, which costs less than a penny to offer and yet earns $4-5 a month per customer.

About the promises of fiber-optic lines, there's been a collective amnesia. Few, if any, remember the decade-old promise of upgrades. In most states, customers funded the networks and the costs are still included in local service charges as a de facto broadband tax. Overall, using a 20-year analysis of major revenues and expenses, we found that once deregulation laws went through, the Bells became a cash machine.

Phone companies were once regulated like other utilities, under the “rate of return” model. Profits were essentially capped somewhere between 11-13% (as a percentage of revenues) and monitored by regulators. Under “alternative regulation” (i.e., deregulation), phone-company profits were no longer required to undergo the same scrutiny. Many services have very high profit margins and with a lack of examination, Bell profits (return on equity) jumped to 30%, more than double the original. The companies also received massive tax write-offs on the promise they would build fiber-optic networks (over $25 billion).

The phone companies argued for deregulation in part because they said it would allow them to use the extra profits to construct new services, including fiber-optic lines. In fact, however, such “capital expenditures” dropped from 24% of Bells’ total expenses in the early 1980s to just 14% of expenses in 2004. Instead of deploying fiber-optic lines to homes, the money was diverted to everything from overseas construction to increased pay for senior executives to funding for long-distance service and DSL and wireless connections. If the phone companies had kept up their original capital expenditure rates, an additional $92 billion would have gone into new construction and thus, high speed networks could have been built.

The primary difference today between the United States and other countries is that instead of diverting funds away from upgrade commitments, Japan and Korea and other countries made sure the money went into ground wiring and other upgrades. The U.S. lacked the regulatory will for enforcing the agreements, and thus, the phone companies were able to simply spend less and not be held accountable.

While some argue that the phone companies in the other countries are “state run”, I view the wiring as a utility and an essential facility. In the United States, large corporate concerns make their own decisions, which proved detrimental to critical infrastructure needs for the public.

A Dark Secret

What ever happened to the networks? The dark secret was that the networks couldn't be built at the costs being quoted by the phone companies. The Bell companies submitted cost analyses to the public service commissions, such as the New Jersey Board of Public Utilities, which were supposed to outline the actual costs of doing the upgrades. These “actual costs” models were intentionally kept low so the commission would approve. The original cost models showed costs of about a thousand dollars a customer; the actual cost in an installation in Dover, New Jersey, as reported by the New York Times, was $17,000 a line. The low figures ensured that the law would go through, by making upgrades seem more feasible.

DSL was a bait-and-switch. The service was considered inferior as far back as 1992, because it travels over the old copper wiring. In fact, providers originally rolled it out only as a stop-gap, since the Internet craze that had been raging since 1995 led to immediate customer demands for fast products.

More importantly, various mergers meant the death of fiber-optic deployment in 26 states. Upon merging, companies either wrote off or closed down many assets, including fiber optics projects. In short, the Bell companies gamed the regulatory system: after the state deals went through and the mergers were completed, they simply closed everything, even though they had commitments under state laws. SBC had promised to be competing in 30 states by 2002, while Verizon claimed that it would be in 24 cities in 18 months. Neither of those commitments was fulfilled. It is now clear that in most states companies did minimal work, and the public was scammed as a result.

Ironically, we sit here today and hear of yet another proposed merger – to allow AT&T to buy up BellSouth, one of the two remaining independent Bells. If history is our guide, any claims made about the future of this merger should be suspect, but more importantly, prove to be not in the public interest.

Tens of thousands of documents in the form of statements, filings, testimony, state commission orders and state legislature decisions have gone into changing state and federal laws to give broadband companies more money—money supposed to be spent on fiber optic-to-the-home upgrades that did not happen. There are still no 45 Mbps services, the Bell companies' fiber based services still have trouble deploying Internet based video (IPTV) and some services have never been seriously deployed. Customers paid an estimated $200 billion for networks they never received. America is 16th in broadband because the Bell companies didn't deliver. The question remains: How do we fix that?

The Bells may argue that they have IPTV, though it isn’t being ‘deployed’. As of March 2006, Verizon’s video services are based on some other technology and SBC doesn’t have serious deployments, except in ‘limited’ deployments – a few towns as tests.

The Legal Questions

There are a number of different legal issues, both state and federal. In the case of New Jersey, I believe that what happened was illegal. Verizon NJ had a contract with the state to rewire, got paid for that rewiring and didn't do it. However, the Board of Public Utilities did not enforce the contract. Teletruth will file a case about this because documentation provided to the state by Verizon NJ claimed it would provide 45 Mbps, bi-directional residential services to 68% of the state by 2003. Currently, no one in the state has such a service. However, the state commission hasn't acted or examined its books and may clear them.

In other states, as Teletruth outlines in its Federal Trade Commission Complaint, we argue that the laws were changed based on deceptive speech. We know that the networks couldn't be built when the contracts were signed. This happened in the majority of states: laws were changed as a direct action of deceptive statements made to the public.

The FCC has done a horrendous job protecting the public interest. The FCC's data about these cases have serious flaws. Not one state case was presented in any FCC “Advanced Network Report”, even though the FCC's advanced network studies were supposed to tell Congress whether the deployment of advanced networks was “timely and reasonable,” as required. In New Jersey, the entire state was supposed to be rewired by 2010, and yet, except for some recent fiber-optic deployments, nothing was ever accomplished.

More to the point, the FCC has defined broadband as 200Kbps, allowing the FCC to claim that America has broadband. However, statutes in the 1996 Telecommunications Act (Section 706) defined "Advanced Networks" as networks with “high-speed, switched, broadband telecommunications capability that enables users to originate and receive high-quality voice, data, graphics, and video telecommunications using any technology.” DSL and 200K can't handle video. We have filed on this issue since 1998, 10 different dockets, and all have been ignored.

No state has ever held the Bell companies fully accountable for any of their contractual agreements, though some commissioners at some states have tried.  Regulators should understand the public was duped and they should not only enforce the laws but take legal actions to correct what has happened.

Teletruth has documented as best it could the commitments and the outcomes with the hope that state Attorneys General and state commissions will wake up and do their job. We are also filing a complaint against the FCC's broadband actions, again, and with two new commissioners we hope to spur them into action. Finally, we will be calling on Congress to do a GAO report to examine the FCC's previous reports and to either prove or disprove our case.

Technical Information:

Dial-up service through telephone lines goes at a speed of 50 Kilobytes per second (Kbps), while the most common DSL service has an average speed of 768 KBPS (the exact speed depends on how far the your home is from the phone company’s central office, the building where the phone lines are aggregated for the neighborhood). Often, it is faster to download something than it is to upload something; this is termed "ADSL,” for "asymmetric digital service line". Cable modems, which are offered over the cable networks are also broadband and their speed is comparable or faster than DSL.

However, there are caveats. The advertised speed is never the actual speed the customer will receive because of various network issues, such as simultaneous users slowing down the system, or even the customers' own computer.

The major distinction of Kilobyte range service vs. megabit range services is the "TV Video" barrier. None of the current American Bell-offered broadband is fast enough to deliver high-quality video, though promises of something called "IPTV" (using the Internet Protocol for Video) are supposed to be coming. More importantly, the services need to be 2-way in order to have applications such as full video conferencing.

Verizon recently launched its new fiber optic service “FIOS,” which is still not available in major cities; AT&T is launching Lightspeed, still in limited deployment. None of these services can handle the original promise of 45 Mbps or 500 channels.

IT Professional
Posted by Paul
02/17/2010, 08:11 PM

I enjoyed reading this article, especially nearly 4 years removed now in 2010. While Verizon has made great strides with FIOS, I feel that this country is slipping further as far as communications infrastructure goes.

We still pay exorbitant rates for sub-par services when compared to the rest of the world. The density / rural argument has long worn thin. If we were talking specifically about the state of broadband in rural America, then that would be a valid point.

Take the densest 20 square mile region in the USA and compare it to the densest 20 square mile region in any of the countries above us on the list and you'll find that even in the most affluent and dense areas of this country, we cannot get even close to the level of service that is available elsewhere, even at twice or three times the price.

It's time we realize that the reason for this disparity is 100% due to corporate greed and politics. I agree with many of the other posters here that it's time we start holding the telecom companies and politicians accountable.

How many decades will we allow to pass before we realize that the current models are not doing the job? I dream of a day when we wake up and treat data transport as a necessary utility and build the infrastructure that this country desperately needs and allow anyone to compete to sell services on this infrastructure. Separate the data services from the physical plant!

Posted by foggy too
10/21/2010, 04:31 PM

Given the prepayment to the monopolizers and the return of zilch, I believe the government should in the interim subsidize companies that will provide the more expensive satellite service to anyone in this nation. At the same time, all the tax breaks and overcharges permitted the modern robber telco barons ought to cease completely and instead be given to the satellite industry.

The current monopolists clearly are not going to do the job and if cloud computing takes on a different definition, then Verizon, AT&T, Comcast and the others will quite properly fail. They are greedy and dishonest and even this government has to see they are creating a huge security problem.

This happened with electricity and with roads and both issues were addressed and cleaned up. The current administration seems to care only about government needs for clerks. We the People just are not getting our share of the huge pie we paid for and we won't unless drastic measures are taken right now.

Technical help
A broadband primer and a good bit more.

Who are the Bell Companies?
Teletruth, Bruce Kushnick's group, on the telecom industry.

Kushnick's book
A link to Bruce Kushnick's online book.

A report on the impacts of the SBC-Ameritech-Pacific Telesis-SNET mergers.

The NiemanWatchdog.org website is no longer being updated. Watchdog stories have a new home in Nieman Reports.