Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age (42 page)

True, wireless is and will remain a useful complementary mobile service. Many Americans who either cannot afford the cable companies’ high-priced offerings or prize mobility above quality of communications will depend on it. Americans love their smartphones, and they are buying more of them all the time.

But the country is headed toward a complete duopoly, in which wireless access will be like having a portable cable network: consumers will choose subscription-based premium bundles of content and click on highly compressed, favored applications in which the carrier has an interest. AT&T has never pretended that it planned to provide nondiscriminatory Internet
access across its wireless connections, or to allow devices to connect to its network without permission.

And there appears to be no appetite in the federal government to change this state of affairs. To the contrary: the “open Internet” rules the FCC proposed in December 2010 shielded wireless carriers from any obligation to treat communications or devices equally. Americans will be able to entertain themselves only on the carriers’ terms; every pixel of the screen and keyboard real estate will be managed in some way by AT&T and Verizon. But this relatively slow and hyper-controlled data world is nothing like the fast and open Internet based on wholesale fiber availability that other countries demand for their citizens. It is much more like the Comcast experience.

The AT&T–TMobile transaction, like Comcast-NBCU, showed that the country's communications providers are actually competing with access to the Internet. They would like to ensure that a private-carriage mindset prevails that allows them to favor their own business partners and enormous profit margins over access to online applications that might be available to Americans at lower cost. So far, they face almost no regulatory oversight. There is no competitive pressure that would drive them to install next-generation fiber networks to make America globally competitive.

To be sure, the blocking of the AT&T–TMobile deal in 2011 ensured that a single company would not be controlling 45 percent of the U.S. wireless market. The day after the Department of Justice sued to stop the deal, Mike Isaac of
Wired
quoted a TMobile user: “I'm so happy I don't have to be an AT&T customer.”
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But it was not clear that the two companies left in charge of the marketplace—AT&T and Verizon—would be lowering prices or providing better services any time soon thereafter. Sprint and TMobile did not appear to have the financial wherewithal or spectral resources to exert competitive pressure on the two behemoths. In February 2012, AT&T senior vice president John Donovan floated the idea of charging sources of content for the privilege of reaching AT&T subscribers: “Reverse billing,” a “1-800” structure for applications, would provide a path for developers of applications to pay for the consumer's bandwidth usage so that use of favored applications would not count against a consumer's data plan.
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As Colin Weir, a telecommunications analyst, noted when Donovan suggested
this plan, “When AT&T introduced toll-free long distance calling back in the late 1960s, its rates were regulated by the FCC and in many cases 800 Service—which was offered under a bulk usage pricing arrangement—was actually cheaper than by-the-call outbound long distance rates.”
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AT&T would be subject to no such constraints. Bernstein Research asserted that the idea of reverse billing signaled that duopoly pricing power might be just ahead: “If reverse billing ‘sticks’—and bear in mind that it hasn't even been tried yet, so the public policy debate really hasn't yet begun—then there is perhaps hope for the carriers yet; at least for the lucky two duopolists.”
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AT&T would have the power to ensure that only its content partners reached AT&T's subscribers reliably while imposing steep overage charges on consumers who exceeded their data caps; both sides of the market, supply and demand, would pay tribute to the carrier. Unregulated duopolies do well when they are selling services that Americans cannot live without.

14

The Costly Gift

TERRY HUVAL IS A LARGE, FRIENDLY MAN
with a lilting southern accent who plays Cajun fiddle tunes in his spare time. He is also the director of utilities in Lafayette, Louisiana, where the system is owned by the local government. “Our job is making sure we listen to our citizens,” he says. In recent years, the citizens of Lafayette have been asking for speedier Internet access.
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In 2004 the Lafayette utilities system decided to provide a fiber-to-the-home (FTTH) service. The new network, called LUS Fiber, would provide everyone in Lafayette with a very fast open Internet connection; the plan was also to use the system to bring down electricity costs by allowing people to monitor and adjust their electricity usage.

Perhaps predictably, there was immediate push-back from the local telephone company, BellSouth, and the local cable company, Cox Communications. Huval faced a deluge of efforts to stop the public utility service from serving its public. The private carriers, he said, “tried to pass laws to stop us from doing it, passing laws to make it more difficult for us to do it, suing us.” BellSouth even forced the town to hold a referendum on the issue, in which the people voted 62 percent in favor of the project. But the fight was not over. “Then those private companies sued us again, then they found someone to sue us on their behalf.” Finally, after weathering five civil lawsuits opposing the idea of a city's offering fiber communications to its residents, in February 2007 the Louisiana State Supreme Court voted
7–0 in favor of the project. “That opened the doors for [LUS Fiber] to be able to afford to borrow money for the project, which we did.”
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A less resilient public servant might not have made it through the long fight between announcement and service to his customers. “We had to go through a long haul, legally, in our state,” says Huval. “I think it's going to be difficult for anyone to jump into [a service like] this without having themselves prepared.”
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Because Cox, the local cable incumbent, offers voice-video-data packages (but at much slower speeds for data than LUS Fiber), Huval and Lafayette have felt it necessary to provide cable channels to Lafayette customers. LUS Fiber applied to join a cooperative of cable systems, the National Cable Television Cooperative, so that it could be part of a larger group negotiating with the programmers for content, but after Cox joined the cooperative, LUS Fiber's application was denied.
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Huval told the
Lafayette Advertiser
that this denial was “totally unanticipated.” Huval and LUS Fiber are thus on their own when it comes to making deals with programmers—and this has proven to be a very expensive and uncertain proposition. All the same, LUS Fiber estimated in mid-2011 that people in Lafayette had saved $5.7 million on telecommunications services since 2007—because of LUS Fiber's cheaper services and because Cox cut its rates (though only in areas around Lafayette where LUS Fiber was not providing services, so as to keep LUS Fiber from expanding).
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Since Lafayette went down this path, other communities have followed suit, and many have fought similar battles. According to the Institute for Local Self-Reliance, a group that advocates for municipal fiber networks, these community-owned networks are generally faster, more reliable, and cheaper than the private carriers—and provide better customer service.
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It's not free: it costs between twelve hundred and two thousand dollars to connect fibers to individual houses from a network node, and often business buildings need retrofitting so that their wiring will bring the fiber inside to serve tenants. It can thus take two to three years for revenues from any given customer to offset the up-front investment. But the advantage is that fiber lasts for decades.
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These days, municipal networks that are providing the fastest speeds at the lowest costs are seeing very high (more than 50 percent) adoption rates.
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At the same time, scores of
communities are discovering that the new networks have brought new jobs to their areas.
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In Chattanooga, Tennessee, the municipal utility offers FTTH along with “smart meter” services for businesses, allowing companies to use lightning-fast communications connections to schedule their energy-intensive activities at times when utility prices are low. Residents of Chattanooga can sign up for excellent fiber service that is installed for free and is much cheaper than that offered by Comcast or AT&T (DSL, a hundred times slower than fiber).
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Some businesses based in Knoxville—a hundred miles to the northeast—are adding jobs in Chattanooga, where they can save on connectivity.
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But when the utility tried in 2011 to expand its fiber services to towns outside Chattanooga, the area's private carriers launched a lobbying assault and defeated a bill that would have allowed the expansion.
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Also in 2011, six Time Warner lobbyists, working full-time, successfully persuaded the North Carolina legislature to pass a “level playing field” bill that will effectively make it impossible for cities in that state to launch their own municipal high-speed Internet access networks.
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Time Warner, which reported $26 billion in revenue in 2010, donated more than $6.3 million to North Carolina politicians over four years.
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Eighteen other states have laws that make it extremely difficult or impossible for cities to provide this service to their citizens.
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Other experiments are beginning to emerge. When Google announced an FTTH pilot project in 2009, more than eleven hundred communities applied. As of mid-2012, people in the Kansas City area, which was chosen for the project, were looking forward to the launch of a fiber network—the standard communications medium, and the fastest and most reliable way to access the Internet—that will spur economic development for their citizens.
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The alternative fiber story is still being written; hundreds of communities are interested in serving their citizens with inexpensive fiber connections and routing around the incumbent high-speed Internet access providers.

Electricity, provided by largely reliable, taxpayer-supported entities, is crucial to the economic and social health of the country. It is an essential public good, something that no neighborhood or private company would have an incentive to provide on its own to everyone at reasonable prices.
Providing electricity is also an economic activity, though hardly ever a profitable one. It is a social service because it is a platform for other economic activity.

No one seems to think the country would be better off if a purely private, wholly deregulated operator were in charge of electricity. Such a service would be unsatisfactory in many ways; the company might find it worthwhile to provide service only in New York and Washington and other big cities, at very high rates for those who could afford it, and refuse to serve small towns and less-successful areas even though the absence of electricity there would damage the overall economy. Needing to attract short-term attention from Wall Street, a private service would have little incentive to invest in upgrades with only long-term payoffs. Looking for higher revenue per customer, it would carry out as much price discrimination as possible to ensure that it captured as much profit as the market could provide.

This is exactly what happened in the 1880s, when privately owned electric companies served big cities and the homes of the rich, and everyone else intermittently if at all. Electricity was a luxury, synonymous with wealth and power. Glenn Fleishman of
Publicola
found this October 24, 1905, statement from lawyer Henry Anderson in the Richmond, Virginia,
Times-Dispatch:

The private electrical companies consolidated, wielded enormous influence in state and national legislatures, cherry-picked their markets, and mounted huge campaigns against publicly owned electrical utilities, calling them “un-American.” At the beginning of the twentieth century, private
power companies electrified only the most lucrative population centers and ignored most of America, particularly rural America. By the mid-1920s, fifteen holding companies controlled 85 percent of the nation's electricity distribution, and the Federal Trade Commission found that the power trusts routinely gouged consumers.
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In response, recognizing that cheap, plentiful electricity was essential to economic development and quality of life, thousands of communities formed electrical utilities of their own. Predictably, the private utilities claimed that public ownership of electrical utilities was “costly and dangerous” and “always a failure,” according to the November 1906 issue of
Moody's Magazine.
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Now more than two thousand communities in the United States, including Seattle, San Antonio, and Los Angeles, provide their own electricity.
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And electricity is a regulated public utility, not a luxury.