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The Charlatan’s Cartels

December 3rd, 2012 by | 4 Comments »

OK, this is almost too easy to bother with, but I can’t help myself. Last week a former journalist with a book to sell wrote an Op-Ed for the New York Times touting the “woe is us, our network sucks” premise of said book. Because it neatly encapsulates the nonsensical thinking of so many people, it’s worth comparing it to the facts to see just how poorly it stacks up. So in the finest traditions of blogging, here we go with a “fisking” of David Cay Johnston’s “Bad Connections” and his related book,”The Fine Print: How Big companies Use “Plain English” to Rob You Blind,” not to be confused with his previous classic, “Temples of Chance: How America Inc. Bought Out Murder Inc. to Win Control of the Casino Business” on the mafia.

He begins his New York Times Op-Ed with the following pearl:

SINCE 1974, when the Justice Department sued to break up the Ma Bell phone monopoly, Americans have been told that competition in telecommunications would produce innovation, better service and lower prices.

What we’ve witnessed instead is low-quality service and prices that are higher than a truly competitive market would bring.

The average price of telephone service in 1974 was $19.95, which comes to $93.61 in today’s dollars. Basic telephone service from AT&T is now $21 per month with unlimited local calling, which would be $4.48 in 1974 dollars. Lower prices? You betcha.

Do we also have more innovation? Well, gee, how about DSL, DOCSIS, and cellular? Does the Internet, which was invented in roughly the 1974-1980 time span, count? What do we make of the millions of mobile apps? Innovation, check.

And higher quality? Hmm…Skype and Facetime video calling vs. POTS? Not always perfect, but we didn’t have picture phones in 1974, did we?

The $93.61 in today’s dollars that basic phone service cost in 1974 will buy you a smartphone package today that includes an iPhone or Android phone, local calling as well as long distance, text messaging, e-mail, LTE broadband access to the whole Internet, access to an app store, and a GPS navigator from any of the big four cellular providers, almost exactly. Is this something to complain about?

After a brief fling with competition, ownership has reconcentrated into a stodgy duopoly of Bell Twins — AT&T and Verizon. Now, thanks to new government rules, each in effect has become the leader of its own cartel.

Century Link is also still in business, so the original group of seven “Baby Bells” has been reduced to three, each operating in its own territory. At the same time, cable companies have entered the telephone business, so there is side-by-side competition in the vast majority of moderately and highly populated areas of the U. S. And while we have furious competition for both landline telephone and cable TV services, we also have the satellite companies in the TV business and all the cellular companies in the voice business. This obviously isn’t your grandpa’s “cartel.”

The AT&T-DirectTV [sic] and Verizon-Bright House-Cox-Comcast-TimeWarner [sic] behemoths market what are known as “quad plays”: the phone companies sell mobile services jointly with the “triple play” of Internet, telephone and television connections, which are often provided by supposedly competing cable and satellite companies. And because AT&T’s and Verizon’s own land-based [sic] services operate mostly in discrete geographic markets, each cartel rules its domain as a near monopoly.

Gulp, there’s that “c” word again, I’m sensing a pattern, so I have to ask if the facts actually, you know, fit it. AT&T has a deal with DirecTV that allows them to bundle DirecTV television service in some areas, mainly places where the telephone network runs on wires that are too long to support VDSL+, the technology that AT&T uses to deliver video programming to its “Uverse” triple play customers. So AT&T competes with DirecTV in some markets, and bundles it in others. What self-respecting cartel would do that?

On the other side, some but not all of the cable companies have joined forces with Verizon to co-market quad play bundles alright, but consumers are free to shop for the best deals they can find by freely mixing services as they see fit. The cable companies are happy to sell you an Internet service that you can mix with satellite TV and a mobile phone from AT&T, for example. If you go that route, you may pay more than you paid in 1974, and you may pay less, but in every case you’ll get a vastly more comprehensive service than the POTS plan and separate cable service that were your only options in the “good old days.”

The result of having such sweeping control of the communications terrain, naturally, is that there is little incentive for either player to lower prices, make improvements to service or significantly invest in new technologies and infrastructure. And that, in turn, leaves American consumers with a major disadvantage compared with their counterparts in the rest of the world.

So how do we explain AT&T’s announcement that it’s increasing its investment in infrastructure by $14B, or Sprint’s $8B increase, or lowly T-Mobile’s $4B bump? These companies are motivated to catch up with Verizon, a company that has invested in fiber to the home as well as in a massive LTE network nationwide. We’re also left wondering why the United States leads the world in the deployment of the next-generation mobile broadband technology, LTE.

On average, for instance, a triple-play package that bundles Internet, telephone and television sells for $160 a month with taxes. In France the equivalent costs just $38. For that low price the French also get long distance to 70 foreign countries, not merely one; worldwide television, not just domestic; and an Internet that’s 20 times faster uploading data and 10 times faster downloading it.

Yes, you certainly can buy a low-cost triple-play package in France if you’re willing to do business with Free.fr, a budget-priced new entrant who’s desperate to make an impact, although it’s not nearly as cheap or as good as all that. Free’s basic package offers the equivalent of basic cable programming, not the kind of premium channel triple play package you’ll get in the U. S. for $89 per month that certainly does include some foreign TV.

In most parts of France, you’ll also get DSL at a speed lower than the average cable connection rate in the U. S., but in some parts of Paris you will get blazingly-fast fiber speeds, although the service quality tends to be quite variable because Free.fr’s network is over-subscribed. You’ll also be unable to call cell phones, because Europe has a “calling party pays” system that penalizes those who call cell phone users.

One of the main reasons the bill is so low in France, however, is that taxes on connectivity go in the opposite direction compared to the U. S. We add taxes to your bill to pay for things like universal service, while France subsidizes connectivity.

But seriously, when’s the last time you deliberately watched a French TV show?

America’s Internet started out as No. 1 in speed. It now ranks 26th, far behind the networks in Bulgaria, Ukraine and Lithuania. Americans pay the sixth highest median price in the modern world for Internet data — 16 times the rates paid by South Koreans, according to the Organization for Economic Cooperation and Development.

This is some seriously factually-challenged stuff that Johnston has obviously lifted from New America. In the first place, there’s no reason to expect the United States will ever have the fastest or cheapest broadband networks in the world, and it would be ridiculous for us to out-spend every other nation on earth just for the bragging rights. This is mainly because of the way our population is distributed. The lowest costs and highest speeds are always going to found in nations like Singapore, Korea, and Hong Kong where most people live in high-rise apartment buildings, and there’s no getting around that.

Geographic disadvantages aside, the U. S. ranks 13th in connection speed per the Akamai reports, and we’re on an upward trend at the moment thanks to the rollout of DOCSIS 3. As AT&T and Verizon build up their backhaul per their current plans, and Century Link and AT&T deploy vectored DSL, our position will end up in the top ten next year or the year after, which is as high as we should ever hope to get.

The price-per-bit number depends on distance as well, since throughput degrades with distance in every known communication system. The nations that have just undergone a major upgrade are always going to do best on this scale, and for the U. S. the important fact is that our price per bit is falling. Cable broadband, for example, provides users an average speed of 25 Mpbs today for the same price that 2 Mbps cost at the dawn of the broadband era, and cable customers can sail up to 100 Mbps or more if they want to pay more. The price per bit in a $100/100 Mbps plan is obviously better than in a $50/25 Mbps plan, but that doesn’t make a meaningful difference to the consumer. Price per bit is a junk statistic, what counts is the price for the level of connectivity that’s sufficient for you to do the things you want to do.

Just as serious is the problem of coverage: in France, South Korea and other modern countries a superfast Internet is or will soon be available everywhere. In America, AT&T’s fiber optic lines stop short of homes and small businesses, while Verizon plans to end its fiber-optic installation work once it reaches 18 million residences.

America has more cable in more places than France, and more cable miles than Korea, but so what? 90% of America has access to cable broadband, a system that currently goes up to 160 Mbps and potentially can go several gigabits per second, so the plans and realities of the AT&T and Verizon networks don’t tell the whole story even if they’re accurately reported, which this sentence doesn’t do.

As mentioned, AT&T is investing heavily in reducing the copper in their network. Verizon is also replacing copper damaged by Sandy with fiber. As time goes by, the entire copper network will be replaced with fiber, but there’s no hurry to do this faster than consumers are willing to switch. That’s the lesson Verizon has learned from FiOS. And in any event, consumers are clamoring more for mobile capacity right now than they are for faster wired networks.

As of now huge parts of the United States will never get on the information superhighway but will rather slog along on the digital equivalent of a country road. This presents a genuine economic threat to America: the future industries and jobs that require a universal ultra-high-speed network, after all, will most likely be developed somewhere else.

Johnston is dead set on ignoring the realities of cable and mobile networks that are better in the U. S. than in any other part of the world, despite our geographic challenges. Why is that?

But the problem is more immediate for consumers. That’s because both of these cartels are telling lawmakers that they need less regulation, not more. A lighter government hand, they say, will mean more competition and yield a better deal for consumers.

So the U. S. leads the world in LTE, offers two wired alternatives to 90% of the nation, leads the world in privately-financed fiber, invents DOCSIS, DSL, VDSL+, and OFDM, but these cartels (that aren’t really cartels at all since they compete with each other) are destroying our competitiveness because our cable TV bills are higher than they are in France?

That’s the argument as I understand it so far. My goodness, what’s next?

In practice, though, deregulation has meant new regulations — written by corporations and for corporations — that have often thwarted competition and run roughshod over the customer.

Clearly, this explains why TV programming developed in the United States is exported all over the world, we lead the world in smartphone platforms (iOS and Android) and mobile apps, and why our Internet-based businesses like Netflix, eBay, Amazon, Facebook, Twitter, and Google dominate the world market in the their categories. It’s because the phone companies are writing regulations that suit their interests while they strangle innovation. That has to be the reason we’re in such an abysmal place in all the international rankings that matter, right? Cool, thanks for explaining that.

Few know, for example, that since 1913, Americans have had a legal right to telephone service at any address — or did until recently. Asserting that we now live in a world of competitive telecommunications, the Bell Twins have already managed to repeal this right in at least six states (Alabama, California, Florida, North Carolina, Texas and Wisconsin). And the cartels are apparently working vigorously to extend this repeal. Doubters have only to count the lobbyists hovering around state legislatures: in Kentucky, AT&T employs 36 of them.

Aha! Those damn cartels employ lobbyists! Clearly, they’re corrupt. Just like the ACLU, the Sierra Club, the World Wildlife Federation, the Red Cross and Save the Children, other organizations that employ lobbyists.

But the universal service concept is something that few people understand. Does it cost the Bell Twins (I like how Century Link has become the red-headed stepchild in Johnston’s America, don’t tell them) any money at all to provide service to any address in rural America? No, it doesn’t cost them a dime, because rural phone service is provided by small subsidized carriers, many of them co-operatives who are funded directly by telephone users in the cities. City dwellers can look for that “Universal Service” tax on their phone bill and ask why rural residents who benefit from this tax don’t help them with a subsidy for parking or housing, things that are less expensive in rural areas. Why indeed.

So this is an issue that depends on the friction between the taxpayers in the cities, many of them poor, and the tax recipients in the country, many of whom are not at all poor; Aspen is a rural area for USF purposes. We’re moving away from the a system of subsidized phone service in the countryside to a system of subsidized broadband and mobile administered by the FCC, so Kentucky law is irrelevant. How can Johnston not know this?

The new regulations have the potential to leave some customers with only mobile telephone service, which does not work in many areas. Moreover, some proposed new rules, if adopted, may actually put people at risk: AT&T, for instance, has suggested shutting down its old copper wire system — the only telecommunications platform that worked in some areas after Hurricane Sandy because it relies on a separate, minimal supply of electricity.

Gosh, shutting down the old copper wire system that served us so well for 100 years is just about as sad as, I don’t know, shutting down the buggy whip factories that kept our horses going at top speed before Henry Ford’s wicked Model T put them out to pasture. Shall I shed a tear? I don’t really think I will, thank you. It’s nice in theory to have two electrical grids, one for general power and the other only for phones, but in the overall scheme of things when one grid fails for weeks at a time, the other is not going to work too well either.

You see, the problem is that the phone network switching offices get their power from the general grid, so the two systems are Siamese twins. The phone companies have generators at key locations, but these need their fuel tanks refilled every few days when the general grid is gone, so what are we going to do? In general, the battery powered cellphone is a more reliable system than the old black telephone simply because it’s mobile and rechargeable in any automobile. I’ll keep my smartphone, thank you very much.

The remedy for these anti-consumer practices is straightforward: bring back real competition to the telecom industry. The Federal Communications Commission, the Justice Department and lawmakers have long said this is their goal. But absent new rules that promote vigorous competition among telecom companies, it simply won’t happen.

But we have more competition in the phone business than we’ve ever had before. How many carriers did the average American have to choose from in that golden year, 1974? I can only guess that Johnston means to complain about the new, super-evil “cartels” consisting of AT&T and DirecTV on the one hand and some of the cable companies (not all the ones on his list are actually joint marketing with Verizon, such as Cox) and Verizon. But these agreements are fairly recent, and all the statistics that Johnston uses come from the pre-agreement days when we did have more competition, in his estimation that we have now. The history since these agreements were signed, roughly a year ago, shows increased investment, higher speeds, lower price per bit, and more innovation. So he’s not really making any kind of a decent case here.

Just as canals and railroads let America grow in the 19th century, and highways and airports did so in the 20th century, the information superhighway is vital for the nation’s economic growth in the 21st. The nation can’t afford to leave its future in the hands of the cartels.

We can ill afford to leave it in the hands of charlatans and liars either. It appears that Mr. Johnston can turn a phrase, but that he has an aversion to doing actual research. His facts aren’t facts, and his Op-Ed displays no more insight that any teenager could gain from reading two or three blog posts at the New America Foundation’s site or similar ones provided by Free Press or “Stop the Cap.”

We have some serious issues in telecom policy in the U. S. these days related to the new subsidy plan for rural dwellers, the apportionment of radio spectrum between civilian and military users, the restrictions that keep networks healthy and the means of financing and managing next-generation fiber and wireless networks, but broadsided criticisms that are all but completely divorced from the facts aren’t going to help policy makers solve our problems. They may just sell some books, however, and that appears to be David Cay Johnston’s sole concern.

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Reader Comments

  1. brilliant take-down of ridiculous arguments, to which too many Americans (especially reporters) are susceptible.

  2. I cross-posted this blog at Innovation Files and got an interesting comment from David Cay Johnston that readers will find very illuminating. Go to http://www.innovationfiles.org/the-charlatans-cartels/#disqus_thread and scroll down to the bottom. If nothing else, it will make you appreciate the value of a good copy editor.

  3. Got another one from Bruce Kushnick, the eccentric crusader who’s made a career out of enforcing some deals he believes were made in the last days of the Bell monopoly. History has passed him by.