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Cities Take On AT&T, Time Warner and Verizon

| Written by Christopher | 2 Comments | Updated on Jun 22, 2010 The content that follows was originally published on the Institute for Local Self-Reliance website at http://www.ilsr.org/cities-take-att-time-warner-and-verizon/
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A battle is raging for control of the Internet and it is not taking place in Washington. Scores of cities, fed up with the recalcitrance and outright arrogance of their providers and Washington’s lack of action are taking their information future into their own hands by building their own high-speed networks. To Harold DePriest, head of Chattanooga’s municipally owned fiber network, currently the largest in the country, the issue is clear: “Does our community control our own fate or does someone else control it?”

He who owns the information highways makes the rules of the road. Today those rules are made by a handful of global corporations with little public oversight.

The 1996 Telecommunication Act was based on the almost religious belief that if we deregulated the Internet sector competition alone would improve services, drive down rates and generate even more competition. Just the opposite has happened. Competition is down. Rates are up. The combination of deregulation and monopoly has resulted in sky-high prices coupled with laughable slow speeds compared to those readily available to households and businesses in Europe and Asia. 

Today states can require phone and cable companies to offer a low basic rate. The result is that in Minneapolis the cost of basic cable — 20 channels including CNN and CSPAN — is about $15 a month.

But Congress prohibited states from regulating Internet service providers even though broadband is increasingly essential even when applying for a job. So providers can charge $35-$45 a month for slow service and $100 a month for fast service, a practice that maximizes both their profits and the digital divide of people who cannot afford those prices.

Cable and DSL are fine if all you want to do is surf Web pages or receive some basic photographs. But we’re rapidly exiting the text and image era and moving into the high-definition video age. In the home, more and more devices share bandwidth from the single Internet connection. Multiple devices offer video chatting capability; DVRs and other home entertainment devices constantly download content from the Web; computers require massive operating system patches; video game systems feature games requiring a fast broadband connection.

Meanwhile, “cloud computing” applications now allow anyone to do their work online, and offer essential backup solutions, often ones that operate continuously.

All telecommunications will soon be delivered by broadband. The only infrastructure with the capacity to handle that vast flow of information is fiber-optic cables running all the way to the home. A single glass fiber can carry thousands of times the amount of information as a coaxial cable or a copper wire. 

Incumbent broadband providers claim their copper can handle the load, but their networks are bogged down worse than metropolitan interstates at rush hour. That’s why cable and phone companies’ ads always contain two key words: “up to.” The Federal Communications Commission reports that Internet speeds often are only half as fast as the advertised maximum rate.

Incumbents have little incentive to lay new fiber. Their monopoly position allows them to continue to reap high profits while amortizing their investments in old technologies.

And when they do lay in fiber we are at their mercy. Karl Bode, a longtime reporter on broadband, notes that Verizon, which has laid the most fiber, has a very low tolerance for “towns or cities asking for much of anything in negotiations.” Verizon shunned Boston when it was asked to pay property taxes like everybody else. Wilmington, Delaware was rejected because it wanted to ensure the company would serve the entire community, not just wealthier neighborhoods. Pointedly, Verizon serves the affluent suburbs of Seattle, Portland and Baltimore, but not the inner cities. 

 

Brave Cities

Fed up with slow and overpriced service, anxious to design a network that can meet the demands of a modern economy and serve the needs of their businesses and households, cities have begun constructing and operating their own fiber to the home (FTTH) networks. Unsurprisingly, most of today’s municipal broadband pioneers were municipal electricity pioneers a century ago. That movement, which resulted in over 2,000 cities owning their own electric networks, was driven by startlingly similar concerns: the knowledge that electricity would become essential infrastructure in 20th-century economies and the fear that private companies would bypass small cities and poor and working-class neighborhoods.

Today cities know that high-speed information networks will be the essential infrastructure of a 21st-century economy and fear that private cable and phone companies will again ignore smaller cities and target wealthier households and businesses. 

So far some 55 cities in 27 states own a publicly owned fiber network. Most are small: Bristol, VA; Morristown, TN; Spencer, IA; Windom, MN. Recently larger cities have joined their ranks: Chattanooga, population 170,000; Lafayette, population 120,000. Seattle’s new mayor was elected on a platform that included building such a network

Although the vast majority of municipal fiber networks are in cities that also own their own municipal electric companies, a number are not: Loma Linda, CA; Churchill County, NV; Baldwin, WI; North Kansas City, MO, and most recently, Monticello, MN

Despite the current often-virulent anti-government sentiment, support for municipally owned telecommunications networks cuts across party lines. Indeed, it is likely the majority of cities with such systems vote Republican. Lafayette’s fiber initiative gained the endorsement both of the Parish Democratic Executive Committee and the Parish Republican Executive Committee as well as the Greater Lafayette Chamber of Commerce. The socialist label loses its sting when a city owned “socialist” utility has successfully been delivering reliable, low-cost electricity for 50-100 years.

Community broadband networks have a strong record. Lafayette offers the fastest speeds at the lowest prices and Chattanooga offers the nation’s fastest available broadband tier. These networks have brought thousands of jobs to communities. Major employers often cite high-capacity broadband networks as a deciding factor in choosing a new site while existing businesses have prospered in a more competitive telecommunications environment. In southwest Virginia, where the loss of textile and manufacturing jobs has devastated communities, Bristol’s public network has led directly to the creation of at least 750 jobs paying well above the local median income.

A community broadband network introduces real competition and, as one would expect, often dramatically reduces prices for everyone. Tacoma Washington’s Click! Network elicited this comment by a resident: “I have Comcast in Tacoma and all I know is since there is competition down here Comcast is about half the cost as it is in Seattle. A friend in Seattle once called Comcast with both of our bills with similar service and mentioned my price and they said I must live in Tacoma and they wouldn’t match the price.” 

Cox Communications, famous in Louisiana for regular rate increases, froze its rates in Lafayette for several years following the city’s initial announcement that it would offer telecommunications services. Meanwhile Cox continued to raise its rates in other parts of the state. The result was that even before Lafayette’s system began operating it had saved its residents and businesses nearly $4 million.

Now that Lafayette is offering citywide services, it is teaching companies like Cox a thing or two about next-generation broadband. In addition to offering the best value in the country (the fastest speeds at the most affordable prices), everyone on the network gets the fastest possible speeds to others within the city’s local network (100Mbps). This approach is spurring a wave of innovation as entrepreneurs and local media activists take advantage of unprecedented speeds throughout the city. Others just enjoy the opportunity to work from home, accessing their local office network as though they were still in the building.

Community broadband networks also offer subscribers something that few private networks do: symmetrical speeds for both upload and download. Internet offerings of telephone and cable companies typically have upload speeds that are about one-tenth of download speeds. Rather than encouraging a purely consumptive approach to the Internet, symmetrical connections allow subscribers to produce content as well, a hallmark of the modern Internet.

Despite the advanced architecture, modern telecom networks can experience problems. And if they do customers may encounter one of the biggest differences between privately owned and community owned networks. Telecom companies are infamous for their abysmal customer service. Cable companies are among the most hated corporations in the country, up there with Wall Street banks. Indeed, in 2004 and 2007, the American Customer Satisfaction Index survey found that Comcast had the worst customer satisfaction rating of any company or government agency in the country, including the Internal Revenue Service.

A public network, on the other hand, is a local network. When it comes to customer service, the head of the municipal fiber network in Wilson, North Carolina talks of the “strangle effect.” If you have problems with their network, you can find someone locally to strangle. Public entitles are local and directly accountable to citizens.

Although some public networks have stumbled, their success rate is remarkable. These successes are all the more noteworthy because overbuilding — that is, the building of a second or third telecommunications network in a community — is costly and the incumbent telecommunications conglomerates have placed numerous obstacles in their path. 

When communities decide to introduce competition into their telecommunications sector, the incumbents use every tool at their disposal to stop them. And they have a lot of tools.

AT&T, Comcast, Verizon, Qwest and Time Warner use the profits from areas they monopolize to subsidize lower prices in these new competitive markets to try to starve the infant public network of customers. Municipalities, on the other hand, are typically prohibited from cross subsidization, for example, tapping into public power revenues.

Incumbents file lawsuits that can cost hard-pressed cities millions and delay competition for years. Bristol endured several court proceedings over three years and had to spend some $2.5 million to defend its right to be the first city in the nation to own a full FFTH triple play (telephone, cable and internet) network. Battles with incumbent telecoms cost the city of Lafayette nearly $4 million. TDS, an incumbent telephone company, forced Monticello to spend $170,000 in legal fees and delay the construction of its system by a year. Instructively TDS used that time to upgrade its network to offer FTTH services it previously maintained were not needed or wanted. Now Monticello is the only city in North America with two competing all-fiber networks and boasts faster Internet speeds at lower prices than Minneapolis or Saint Paul.

Incumbents are not above using dirty tricks to ward off competition. Common tactics are "push polls" and glossy mailings with inaccurate claims to scare people — particularly before a referendum. A Lafayette resident recorded one polling call that asked a question that alluded to city requirements for lawn watering during dry summer conditions. “Since the city only allows you to water your lawn only three days per week, how do you feel about the city offering you cable TV service where you could only watch television three days per week?” 

We can laugh at such a question but make no mistake; these polls are often effective at confusing and scaring people away from publicly supporting a community network.

 

Obstructionist States

When cross-subsidized predatory pricing, lawsuits and push polls don’t work, incumbents lobby state legislature to change the rules in their favor.

To date 18 states have passed laws that discourage publicly owned networks. Some, like Arkansas, Missouri, Nebraska and Texas have strict bans. Others impose a de facto ban. In Pennsylvania, for example, a community can only proceed if the incumbent has not provided the speeds it requests within 14 months. There is no provision that the price of accessing these speeds be affordable.

Huge telecommunications conglomerates argue with the straightest of faces that they need these new laws in order to “level the playing field ” when a town of 10,000 people wants to build a modern broadband network. Terry Huval, director of the Lafayette telecommunication utility, in testimony before Congress, responds.

“(W)hile Cox Communications can make rate decisions in a private conference room several states away, Lafayette conducts its business in an open forum, as it should. While Cox can make repeated and periodic requests for documents under the Public Records Law, it is not subject to a corresponding obligation – a ‘show me your plans, but don’t dare ask to see mine’ mentality. Louisiana law limits the ability of a governmental enterprise to advertise, but nothing prevents the incumbent providers from spending millions of dollars in advertising campaigns. An important focal point of the legal challenges involved the right or ability of Lafayette to pledge assets of the utilities system as security for the bonds, something that the private corporations do all of the time without the slightest scrutiny.”

“To be sure, the ‘playing field is not level," Huval concluded, “but it is the government which is disadvantaged, not the private companies…”

 

Unhelpful Federal Government

In the 1930s the federal government actively and successfully intervened to help communities access electricity by directly financing rural electric cooperatives owned by their customers. When the program was created only about 10 percent of farms had access electricity (and about a third of America lived on farms). Ten years later, 90 percent did.

Tragically, the federal government today has offered no help to the brave communities that are trying to control their economic futures. Indeed, it often stands in the way.

The Supreme Court has ruled that states have the right to prohibit cities from offering telecommunications competition. Though the FCC has called for overturning these preemptions, neither the Obama administration nor Congress has taken concrete steps to do so.

Some federal programs inhibit the growth of public networks. The e-rate program is one example. E-rate is a federal tax that generates funds that help local schools and libraries afford broadband. The money cannot be used to build a public network that could permanently solve the problem of access. It can be used only to lease a line, ensuring the need for ongoing subsidies to private companies. Neither the administration nor Congress is moving to change this provision.

As part of its stimulus package, Congress appropriated $7 billion to help bring broadband to rural areas. Hopes were high that this money could help communities build their own networks since the law explicitly favored non-profit or public ownership. The law did allow private companies to bid for federal money but only if a for-profit company, on a case-by-case basis was found “to be in the public interest.” Disturbingly, the administration declared, a priori, that all private companies are in the public interest. Large for-profit companies surged to the head of the application line. The vast majority of stimulus money to date has gone to private providers.

The vast majority of cities with municipally owned networks didn’t want to get into the telecommunications business. But after being spurned by the private sector they built their own networks and have found that a public network has many advantages. Ownership allows communities to establish the rules that will play a large part in determining their economic futures. The success of these public networks has spurred the interest of hundreds of communities big and small, and the implacable opposition of the telecommunication companies that now monopolize the Internet’s future.

 

Photo used under Creative Commons License – Courtesy, Baldinger

About Christopher

Christopher Mitchell is the Director of the Community Broadband Netwroks Initiative with the Institute for Local Self-Reliance. He runs MuniNetworks.org as part of ILSR’s effort to ensure broadband networks are directly accountable to the communities that depend upon them. More

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  • http://www.smartcommunities.org John M. Eger

    Freeing Cities From Telco and Cable Monopolies

    I believe broadband today is as important as waterways, railways and highways were in an earlier era. Unfortunately, this concern, indeed urgency, is not widely held. From a policy standpoint, clearly, at the federal, state and local level, we have lost our way, much to our peril.

    In the early 1970s I was part of an administration that helped break up AT&T — not because they didn’t have the finest telephone system in the world, they did, but because AT&T had become an impediment to the development and nurturing of a new knowledge-based economy and society.

    Some of you may find this hard to believe, but in the 60′ and even the 1970s, AT&T didn’t allow French phones to be connected to its network. Such attachments, they argued, would destroy the finest telephone system in the world. It took many years of regulatory reform — not to mention billions of dollars in litigation — to get those French phones attached to the network to create the first specialized common carrier, known as MCI, and to give birth to teleprocessing to connect computers to the network and help usher in the modern-day Internet.

    Clearly we were ahead of the pack. Most countries had not yet deregulated or privatized their postal telephone and telegraph companies, or PTTs as they were known. In 1996, as you recall, we ushered in what was considered to be landmark telecommunications reform with the telecom act of that year that opened the regulatory floodgates to new entry.

    Wall Street quickly followed by opening its wallets to any business plan that had the word Internet attached to it. As we know now, after just a few short years, and some two trillion dollars — more than it cost to build the interstate highway system — most of the new competition went bankrupt, or simply died trying to find an opening.

    COVAD — one of the new broadband local exchange carriers, as they were called — said it died of a thousand cuts, referring to the difficulties they had getting the Baby Bells to sublease their facilities; a critical first step to competing in the marketplace for new information services.

    Today, according to the ITU or the OECD in Paris, we’re either 13th or 15th, depending on how you interpret the report in deploying broadband communications. Smaller countries like Korea, Singapore or Japan, are leading the world by offering broadband [much faster] and at a fraction of the cost.

    Even in the Middle East, tiny Dubai — which we’ve heard a lot about recently — boasts the largest Internet facility in the world, which they practically give away as in incentive to the multi-national and global companies as an enticement to headquarter their Middle East/North Africa [operations] there.

    The telcos, and now the cable companies, are clearly fighting for leadership as America’s next monopoly to dominate all telecommunications. If AT&T has his way, even though the modern AT&T is quite different, he would put Humpty Dumpty together again and emerge as the single largest provider.

    Sadly, this is not much improvement in 30 years. Instead of one large telephone company, we now have, for all practical purposes, two large entities dominating the market. Clearly satellites and wireless communications offer the promise of changing the shape of the market. Even the electric companies might still enter the field and provide a third and fourth entity as a counter weight to the cable and telcos.

    For the present, however, the cable and telcos have joined forces and are blocking what I consider to be the single largest user that must retool and reinvent itself for America to succeed, let alone survive, in the new global economy. I’m talking of course about the city.

    Right now in state capitols across America,and in Washington DC legislation is being discussed or enacted to prevent the municipality [from playing] any role whatsoever in shaping its new information infrastructure.

    Over 100 other American cities have expressed the desire to provide municipal services. Their city councils, their mayors, as well as their state legislators have threatened them. They have been told in no uncertain terms that the telecommunications business belongs to the private sector. Read that: the existing cable or telecommunications firms.

    Most cities — already subsidized in some small way by a cable franchise — are not willing to make the investment and possibly lose that subsidy. I’m convinced most, however, are simply afraid to act in the face of such state and local obstacles.

    The city traditionally has been the center of all commerce and in the wake of a global knowledge economy, it is the cities who could be the incubators of creativity and innovation which will be the hallmarks of our success in the future. As I think you know, cities of the future aren’t cities in the usual sense.

    As Kenichii Ohmae, author of The Borderless Economy has put it: “There are no national economies anymore; only a global economy — which no one’s in charge of — and a constellation of regional economies with strong cities at the core.”

    Given this devolution of power which has occurred worldwide and a redefinition of wealth — which is information broadly defined — renewing and reinventing our cities is a strategy that cities everywhere must begin in earnest.

    John M. Eger, of San Diego State University is president of the World Foundation for Smart Communities. Eger was Chair of the City of the Future Commitee for San Diego and director of the California Smart Communities Program. From 1974-1976 served as telecommunications advisor to Presidents Richard Nixon and Gerald Ford and was director of the White House Office of Telecommunications Policy.

  • Michael J. Watza

    The story Christopher Mitchell and David Morris wrote isn’t shocking for its factual statements, since they are obvious. But it is a bit of a shock seeing the truth so plainly stated, against the nearly overwhelming noise created by the industry to try and silence the obvious. If the industry spent their marketing and lobbying money instead on upgrading their antique copper systems, they and we would all be far better served.

    But for profit industry is going to do what it is allowed to get away with in order to expand the bottom line for its shareholders. I get that.

    The real problem is the legislators who are willing to take industry money and turn their heads while Americans are fleeced and, even more regretably, the lazy voters who allow those corrupt self serving legislators to remain in office.