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The Great Broadband Scam

[]- As President Obama’s American Recovery and Reinvestment Plan begins to be implemented, all the hoopla about infrastructure renewal has evaporated.

Unfortunately, as the Associated Press estimates, only $7 billion of the estimated $789 billion stimulus plan (or less then 1 percent) will be targeted to expansion of broadband service and only in underserved rural areas. Other “infrastructure” spending topped $78 billion.

These allocations are far below what advocates called for and what America really needs to address the specific requirements of infrastructure renewal, let alone to effectively stimulate the economy. [AP, February 12, 2009]

During the presidential campaign, a diverse assortment of technology advocates had urged significant spending for internet broadband upgrade – and the Obama administration-in-waiting seemed to be listening. Educause proposed $100 billion in spending, while Free Press called for $40 billion, the Information and Technology Innovative Foundation asked for $30 billion and Business Week advocated for $20-$30 billion in tax breaks and spending. All were pissing in the wind.

The pathetic level of broadband spending will do little to address the fundamental failures of America’s internet service. And these failures have nothing to do with rural service.

First, the U.S.’s share of worldwide internet traffic has shrunk over the last decade from 70 percent to 25 percent. Second, the Organization for Economic Cooperation and Development (OECD) ranks the U.S. 15th out of 30 post-industrial nations in per capita broadband use. Third, and most troubling, Americans are getting poorer broadband telecommunications services (i.e., lower bandwidth) and paying more than citizens in most other advanced countries. [NY Times, Aug. 30, 2008; broadband]

Even more critical, since the passage of the 1996 Communications Act, the Federal Communications Commission (FCC) has facilitated increased media monopolization. For example, while the Act called for increased competition, telecom lobbyists and compliant regulators rewrote FCC rules so that internet services are no longer covered under traditional “common carriage” requirements.

As part of a shortsighted policy to encourage globalization, both the Clinton and Bush administrations championed greater domestic industry consolidation by the leading telecommunications conglomerates. The outcome of this strategy is the creation of an essential duopoly marketplace where two firms dominate the two principal sectors of mass communications. What was once the telephone business is now controlled by AT&T and Verizon; and what used to be the cable television industry is dominated by TimeWarner and Comcast. However, as all communications goes digital, a slugfest among these dominant players will only intensify and lead to further consolidation.

While these companies have witnessed significant growth in terms of their respective market capitalization, America’s rank in broadband standing has systematically declined. Much of the responsibility for this decline in internet standing is due to the telecom industry’s efforts to maximize short-term financial gains over long-term innovation.

Bruce Kushnick, Executive Director, New Networks Institute, recently argued in the Harvard-Neiman Watchdog, “Examining some of the 25-year statistics on capital expenditures, it’s clear that in the period 2000 to 2008, the [telecom] companies have spent a lot less money on new construction (averaging 14%-18%) as compared to revenue than they did from 1984 through 2000 (averaging 20-25%).” [Watchdog, Feb. 3, 2009]

In all likelihood, the economic recovery will do little to address rural America’s communications needs and only further intensify conglomerate control over the communications marketplace.

According to Speed Matters, a broadband advocacy group, the National Telecommunications and Information Administration (NTIA) will receive $4.7 billion to distribute as grants designed to improve broadband deployments and the Department of Agriculture’s Rural Utility Service will receive $2.5 billion to connect rural Americans to broadband.

Among the spending targets are: $350 million to create a “broadband inventory map”; $250 million for innovative programs that “encourage sustainable adoption of broadband service”; $200 million to enhance and increase public computer center capacity at community colleges and public libraries; $100 million for distant learning and telemedicine; and $10 million for Department of Commerce audit and oversight — i.e., transparency and accountability. [see]

(Two questionable provisions — one, proposed by Dianne Feinstein, would have restricted net neutrality and, another, to provide Verizon with a $1.6 billion tax credit — were dropped from the final bill.)

In May 2008, Pew Research estimated that 55 percent of all adult Americans had a high-speed internet connection at home — up from 42 percent in 2005. Among home internet users, nearly four-fifths (79%) have a high-speed or broadband connection while 15 percent still use dialup. However, internet usage among rural Americans is a different story. According to Pew, only 38 percent of those living in rural American have broadband at home, up from 31 percent in 2007. [Pew Internet & American Life Project, May 2008 survey]

The 1934 Communications Act frames America’s telecommunications policy. Seventy-five years ago, rural America was recognized as suffering from underdevelopment. Little has changed. Rural America accounts for between 10 to 15 percent of the population. Then, as today, a different economic model was required to underwrite rural communications services. This model had to take into account rural America’s significantly smaller, more dispersed and often-poorer population compared to urban areas. Thus, the cost of wiring homes is more expensive. To bring communication to rural Americans, it has to be subsidized.

This subsidy was originally known as Universal Service fees. The 1996 Communications Act refashioned the subsidy into the Universal Service Fund (USF) and run by an arm of the FCC, the Universal Service Administrative Company (USAC). The fund is suffering due to a variety of factors. Historically, the principal source of fees came from taxes on long distance calls but, over the last few years, these rates have fallen. Second, in 2006, the telecom’s leading broadband offering, Digital Subscriber Line or DSL service, was mysteriously removed from the approved list of “telecommunications services,” thus no longer subject to being taxed.

According to telecom analyst Fred Goldstein, the rural USF is a boondoggle. AT&T is the biggest winner in USF payouts, receiving $440 million in 2007; Verizon received $287 million. As Goldstein laments, “So this [USF] system fails in both directions: Bells have an incentive to do as little as possible in these unprofitable areas, while rural carriers have an incentive to spend with reckless abandon.” [ Dec 19, 2008] Rural communications is also witnessing an unprecedented level of consolidation as exemplified by AT&T’s recently announced acquisition of Centennial wireless for $944 million and Verizon’s acquisition of Rural Cellular Corporation (RCC) for $2.7 billion, among other deals. [, Nov 7, 1008]

In all likelihood, Obama’s rural broadband recovery plan will benefit the dominant players, further fuel telecom consolidations and only marginally improve broadband service in rural America.

Today, America is in the midst of the greatest economic crisis since the Great Depression. One can only hope that the Obama recovery plan not only stimulates the economy, but stimulates the spirits of his fellow Americans. Ironically, as the Clinton and Bush administrations pushed an aggressive campaign to deregulate the financial services industry that led to the collapse of the U.S. economy, similar FCC policies of deregulation led to the faltering of the nation’s broadband services.

A quarter-century ago, American legislators undertook a bold effort to deregulate the telecommunications industry. In 1984, AT&T, then the largest company in the U.S. with over one million customers, was broken up because it didn’t want to open its networks to competitors, notably the small MCI, to offer long-distance service. Now, as we celebrate the 25th anniversary of the AT&T breakup, we are witnessing the reconsolidation of communications market, but with even graver, longtime consequences.

In 1984, AT&T controlled long-distance telephony and some 1,300 small companies operated the local phone services. Then Judge Harold Greene broke-up AT&T into seven operating companies spread across the country. Today, the old communications industry has essentially reconstituted itself, with two massive companies, AT&T and Verizon, together controlling thirty-five states and expanding service offerings to not only long-distance and local telephony (wiping out the small local providers), but the internet, wireless and broadband video as well. Now they are aggressively expanding against the cable and broadcast television industries.

The two dominant telecom behemoths, AT&T and Verizon, have been constituted through mergers, not competition. AT&T controls the largest long-distance company and dominates 22 states; it took shape through the integration of Southwestern Bell (SBC), Pacific Telesis, SNET, Ameritech and BellSouth, the legacy-AT&T. Verizon controls the second-largest long distance company and dominates 13 states and 28 former-GTE territories throughout the U.S.; it took shape through the integration of Bell Atlantic, NYNEX, GTE and MCI and, with its recent $27 billion acquisition of ALLTel, has become the nation’s largest wireless provider.

A parallel, although mostly invisible, process of consolidation has also remade the Internet Service Providers (ISPs) sector. ISPs provide individual internet users access to the World Wide Web and, not unlike the fate of small providers in other sectors of the culture industries, the large and diversified collection of small companies that provide internet access is shrinking. According to the Census Bureau, between 2000 and 2005, the number of ISPs shrank by almost 75 percent, from 9,335 to 2,437.

Equally significant, as of 2008, the top five ISPs controlled 56 percent of all internet access; the top twenty-three ISPs controlled approximately 75 percent of all access. The top five ISPs and their relative market share are: Time-Warner, 16.7% (Road Runner, 9.0%, and American Online, 7.7%); AT&T 15.4%; Comcast, 15.3%; and Verizon, 8.7%. Further shakeout among ISPs should only intensify during the economic crisis. [ISP-Planet, Dec. 13, 2007]

Many in Congress have raised a red flag about the banking industry’s move to jack up credit cards fees as a way to make up for the loses it incurred playing the speculator’s game of casino capitalism. Similar, the Congress needs to carefully review ever-increasing telephone and cable television bills and finally expose the monumental rip-off American consumers have suffered at the hands of the telecom industry. As a new spirit of re-regulation has begun to be raised over the questionable if not corrupt practices of the financial services industry, a similar jaundiced eye needs to be focused on the telecommunications industry.

As new regulation is applied to the financial sector to clean up a troubled industry, a new spirit of re-regulation needs to be applied to the telecom sector, once again returning real competition (under the principals of net neutrality) to America’s communications industry. Only through such a thorough housecleaning will America begin to regain its leaders stature in broadband to meet the needs of the 21st century.


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