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Beibei Que, a law student, at a laptop in Chicago in February 2006. City officials said they were launching an effort to offer wireless broadband, similar to initiatives in Philadelphia and elsewhere. (AP file photo)

Telecoms, cable and the ‘Net neutrality’ fight

ASK THIS | May 03, 2006

Who paid for, who owns the broadband ‘pipes?’ Customers largely paid for them; phone companies claim ownership. Also: Open vs. closed networks. (Third in a series)

By Bruce Kushnick

Q: What is the record of the companies entrusted with bringing broadband services to homes and businesses in the United States? How have mergers affected the deployment of new services?

Q: The United States is ranked 16th worldwide in broadband services. What, if any, are the plans to rectify this situation? How have current laws harmed our digital future?

Q: Are the main telecoms competing with each other?

Q: What are cable and telephone “franchises?” How did companies secure these exclusive rights?

The key to understanding the state of America’s telecommunications and broadband is infrastructure—who owns and controls the delivery wires into our homes and businesses, who restricts their use, who pays for upgrades on the “first mile” or the last hundred feet, who enforces the laws (or doesn't), and where new services are and are not deployed. Who regulates it (or not), who enforces the laws and regulations (or not) are also part of the infrastructure equation.

The biggest fight is over who owns the “pipes” (i.e., the wires) into homes, businesses, schools and libraries. Naturally, the phone companies argue that they own the pipes and can therefore control who accesses them. Ed Whitacre of SBC (now AT&T) has summed up this position:

“Now what [content providers] would like to do is use my pipes free, but I ain't going to let them do that because we have spent this capital and we have to have a return on it . . . The Internet can't be free in that sense, because we and the cable companies have made an investment and for a Google or Yahoo!, or Vonage or anybody to expect to use these pipes [for] free is nuts!”

But in truth, customers have been a major funder of new networks. More to the point, the networks customers funded were meant to be open, not shuttered and not for the exclusive use of some. It should be stressed that phone companies are utilities: they control essential services but customers have rights, although the FCC has erased some of them through deregulation.

The phone companies even admit this, in a way. According to SBC, the money to build new services comes out of the budgets for local phone service.

"SBC now expects that three-year deployment costs for Project Lightspeed [see below] will be approximately $4 billion . . . Because a significant portion of capital expenditures for Project Lightspeed will replace and refocus ongoing spending for its current network, SBC expects incremental capital investment for this project to be relatively small." (emphasis added)

The phone companies have seriously cut their wireline construction budgets and never put into the ground the fiber they promised – that’s fiber to the home or office, not somewhere in the ether of the network. In truth, their “exclusive, proprietary” interstate information product is being directly funded by customers.

Based on recent history, America should not trust or rely on the phone companies’ fiber-optic deployment plans. Turning over the responsibility to build infrastructure to phone companies without enforceable commitments is poor public policy and will continue to harm America’s technological economy.

Crippled networks: FIOS and Lightspeed

As we discussed in the first installment, the phone companies promised to wire tens of millions of homes with fiber-optic lines and never did so. Nevertheless, new laws are being proposed in Congress and the state legislatures to give these companies additional benefits, such as writing laws where the phone companies get exclusive rights to customer-funded networks, limiting competition, or charging extra fees to Google and Ebay and other service providers.

Since 2004, the phone companies have revised their schedules, and have made new announcements. Verizon’s new residential fiber-optic product is “FIOS”, and SBC had developed Lightspeed. Our conclusion is that Verizon and SBC made their latest deployment announcements as part of a push to merge with MCI and AT&T, respectively. The companies promised to wire more homes only to curry favor, so the FCC to would approve mergers. Therefore, these stated deployments may have already fulfilled their purpose.

There is absolutely no guarantee that any of these services will be available, much less offered to all. Indeed, SBC was still in testing stages as of March 2006, and it is very doubtful they will achieve their announced deployments to 18 million homes by 2007. Verizon claimed that delays in local franchise negotiations may also slow down deployment and leave them behind schedule.

According to the latest data from the 2005 FTTH (fiber-to-the-home) Council, as of January 2006, only 548,000 customers have fiber optic services. And in many cases, it was not the Bells, but cities and municipalities that undertook the wiring projects.

More importantly, the networks that are being rolled out by the phone companies are “crippled” networks – they are not “open” to other competitors (thanks to a bad FCC decision), they will not be rolled out ‘ubiquitously’ as promised by state law, and they are slow and cannot compete with what is being offered today throughout Asia. They also come with rules that block full use of the service, such as potentially limiting customers’ file sharing and downloading capabilities.

Franchise fights and false competition

The Bell companies have started an aggressive campaign to be granted “statewide franchises,” which would allow them to offer cable television in addition to their phone services. At the same time, the Bell companies have gone to Congress and the FCC for a national franchise. Cable companies today have “local franchises,” where they negotiate a deal with a municipality or a franchise area. These franchises carry with them various obligations, from requiring public access programming to making sure they serve low-income parts of a community.

A national franchise or statewide franchise would allow the Bells to simply pick and choose which areas they want to offer service in without having to negotiate with communities. They might only want to serve rich areas, or not be bothered with specific less-populated areas even within a community.

In theory, after FCC deregulation, the cable companies and the Bells were to compete for customers. Cable companies would start offering phone services, phone companies would go into cable television, and both would extend their broadband services. In fact, this “inter-modal competition” was one of the primary justifications for allowing the Bells to run many Internet Service Providers and CLECs out of business.

But it is ridiculous to expect that a duopoly of cable and phone companies controlling the wires will result in robust competition. FCC regulations helped put 6,000 Internet Service Providers (ISPs) and Competitive Local Exchange Companies (CLECs) out of business in recent years. Does this help to bring America competition? What about closing off competitors such as AT&T and MCI, who tried to offer competitive local phone services?

Net neutrality: open networks

The concept of Net neutrality is simple. Granted, the phone and cable companies want total control of the infrastructure. They want to control all the bits and bytes over the lines. However, one of the hallmarks of the Internet has been that all service providers, regardless of size or income, receive equal treatment. The first position is known as a “closed” network, the second as an “open” network. Net neutrality is having an open network.

It is interesting to note that the current Net neutrality issue for many is just about the Net and not larger telecom issues, such as bundling or open networks – that is, competitors’ ability to use the networks. To the “Bellheads”, those on the telecom side of the equation, Net neutrality is a subset of the larger “open networks” issue.

The view promoted by phone companies and their hired think-tanks, such as Progress and Freedom Foundation, is that Net neutrality is really the “theft of property of [broadband] infrastructure providers.” And Wall Street analysts claim that “mandated Net neutrality would further sour Wall Street’s taste for broad-band-infrastructure investments.”

On the other hand, people such as Jeff Pulver of Pulver.com, a company dedicated to everything VOIP (Internet-based telephone), has called control measures “legalized extortion”: "I think it's probably true that companies are coming to Qwest willing to pay for better treatment on their network," he said. "But I think they're doing it out of fear.”

Customer overcharging from packages and bundles

The practice of “bundling” costs customers billions in excess charges. According to Verizon’s 4th quarter report from 2005, 65% of their clientele purchase two or more services. The primary reason is that if you purchase DSL, you must also purchase local service, and the company also offers discounts if you get a package of local and long distance. For high-volume users, these packages can be a good deal. For many customers, however, it isn’t.

Teletruth’s phone bill audits found that about 20% of the population pays more for local-long distance package than they would a la carte, mainly because the phone companies do not reveal the total cost of the packages. Extra “taxes and surcharges” can add 35% to the purchase price, even though many of these charges are not taxes, but direct revenues.

The second problem with bundling is that it allows the phone companies to cross-subsidize. That is, they are able to charge the local phone subscriber for the advertising and implementation of their long distance and DSL business. For example, 4-color, 4-page inserts in phone bills in New York City—which were only supposed to provide “consumer education and information”—are now used to advertise Verizon products. Money for this insert came directly from costs built into local rates.

The third problem with bundling is that it blocks other competitors, because the customer is obligated to get the bundle if they want the discounts. For example, if you are obligated to purchase the local service from Verizon when you get a DSL line, why would you not simply get the long distance portion as well? Thus, any VOIP service that offers a bundle of local and long distance will be harmed because it is easier to just get the Verizon bundle than pay for services from two companies. Also, the phone company may give the customer worse phone service if they get the VOIP product.

Some municipalities got tired of waiting 

In an ironic twist to the saga of broadband in the U.S., municipalities got tired of waiting for Godot, and decided to fund their own networks. Yet the phone monopolies – by using fake consumer groups, well-paid research firms, and substantial amounts of lobbying money – are trying to block deployments state by state. The attempt to block “muni” competition is being played out on federal as well as state levels. Bills in Congress would eliminate the ability of municipalities to create competitive networks. 

A Wall Street Journal headline on June 23, 2005, shows that the phone companies are once again screaming – “Phone Giants Are Lobbying Hard to Block Towns' Wireless Plans. As Cities Try to Build Networks, SBC and Other Companies Say It's Unfair Competition."

Take the case of Pennsylvania. By 2004, Verizon was supposed to have rewired 50% of the state with 45 Mbps services, distributed equally over rural, urban, and suburban areas. These numbers were based on a 1994 law that gave the phone companies financial incentives in the form of profits and tax perks to roll out upgraded networks.

A decade later, Philadelphia still had no network and plans for the city to build one were almost scuttled. Pennsylvania passed HB30, a new law that banned municipalities from offering competitive services, unless they first asked permission of the incumbent phone company.  Philadelphia was allowed to offer Wi-Fi services as a concession, but every other city in the region – none of which got deployments – was blocked from offering competitive services. Yet the infrastructure and network services had already been paid for by customers in the form of higher rates.

As the Washington Post stated:

“The signal is clear: In the tug of war between Big Telecom and little governments, the powerful telecommunications lobby is winning, which could have major implications for how wireless Internet and other high-speed Internet service is doled out countrywide.”

There is some hope. There are many innovative plans, both wireline and wireless, in the works. For instance, the Utah Telecommunications Open Infrastructure Agency (UTOPIA) which has survived legal battles and is now “a 14-city consortium.”  It plans to offer “as a minimum . . . 100 Mbps of bandwidth to every connected home and 1 Gbps of bandwidth to every business over fiber optic lines.

Similarly, in 2005 Google announced it was going to offer cheap or free Wi-Fi internet services in San Francisco. To do so, it partnered with Earthlink, one of the few remaining major Internet service providers. Earthlink was the company that had the contract to wire Philadelphia as well.

America needs a solid plan for a national, open, ubiquitous infrastructure that is capable of high-speed broadband. Based on history and current plans, we should not put our trust in the companies that have failed to deliver previously, unless there are enforceable obligations.

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