Free Press Responds to 'Sloppy' Incumbent Broadband Arguments

Ben Scott, Free Press
Derek Turner, Free Press
Publication Date: 
Tuesday, 2009, July 21

The American Recovery and Reinvestment Act of 2009 directed the Federal Communications Commission (FCC) to develop a national broadband strategy. FCC invited comments and then invited replies to those comments in summer 2009. The Free Press Reply Comments deserve to be singled out for revealing some of the lies of large telecommunications companies like Verizon, AT&T, Comcast, Qwest, and others. It also describes many of the ways that these companies harm the communities that are dependent on them for essential services. I've highlighted some passages below that show the ways in which these companies put profit above all else. These companies claim that regulation discourages investment and deregulation (allowing a higher degree of concentration or larger monopolies) encourages increased investment in better networks - an incredibly self-serving claim that Free Press shows to be false on pages 13-29.

Competition -- meaningful and real competition -- and not regulation is the primary driver behind investment decisions. Where meaningful competition exists, incumbents are compelled to innovate and invest in order to maintain marketshare and future growth. Where competition is lacking -- such as it is in our broadband duopoly -- incumbents will delay investment, knowing full well they can pad their profits on the backs of captured customers who have no viable alternatives. (Page 14)

Regulations like open access and non-discrimination encourage competition and should be strengthened. Free Press offers an in-depth explanation of how Verizon has dumped millions of customers on other companies that clearly could not handle the burden.

Verizon began the purging of less lucrative areas with the sale of Verizon Hawaii to the Carlyle Group in 2005, a company that had no previous experience in operating telecommunications services. By Dec. 2008, the company, now called Hawaii Telecom, had lost 21% of customers and filed for bankruptcy. (Page 26)

Verizon then sold most of their New England lines to Fairpoint, which is currently heading for bankruptcy. Fairpoint's customers are not the only ones suffering - the independent companies that resell services over that infrastructure are also suffering because Fairpoint is utterly unable to meet its obligations.

Most recently, Verizon announced that it intends to sell-off mostly rural areas in 14 additional states. Frontier, the purchasing company, will be saddled with an additional $3 billion in debt. The company will increase their access lines from 2.2 million to 7 million. Thus, seemingly indifferent to the lessons of recent history, Verizon is eager to offload its rural customers onto another small company. Furthermore through a tax loophole, known as a Reverse Morris trust, Verizon did not pay taxes on the FairPoint transaction, and has similar plans for the Frontier deal. But the loophole requires Verizon to sell its assets to a smaller company - so Verizon not only sought to get rid of these customers, but sold (or will sell) to small and perhaps ill-equipped companies in order to further enrich their bottom line. (Page 28)

Lest you think everyone is suffering from the worst economy since the Depression, consider this:

In 2008, AT&T used 70 percent of their free cash flow on dividends to shareholders. AT&T is currently “the highest dividend yielding DOW company.” Verizon is not far behind. Furthermore, the four largest broadband providers all increased their dividends since the economic crisis began. In other words, despite soaring revenues and high demand, providers are spending large sums on shareholders, rather than investments that benefit both shareholders and customers in the long-term. (Page 30)

Their refusal to invest in modernizing our networks as the U.S. falls farther behind our international peers shows that the U.S. makes a poor policy choice by continuing to depend on private companies to build essential infrastructure. As for whether these companies should be treated as monopolies (in that they have too much control over the market), I think the evidence is clear.

The fact that carriers are able to earn increasingly large profits, while also reducing net investment and raising retail prices makes it quite clear that the broadband market lacks effective competition. The fact that these high profit margins have failed to entice new competition is further evidence that the barriers to entry for new competitors are insurmountable. (Page 31)

The entire report (65 pages with half text and half footnotes) reads quickly and is enlightening.