The $200 Billion Rip-Off: Our broadband future was stolen.
This is part three of my explanation of how America went from having the fastest and cheapest Internet service in the world to what we have today — not very fast, not very cheap Internet service that is hurting our ability to compete economically with the rest of the world. Part one detailed expected improvements in U.S. broadband based on emerging competitive factors, yet decried that it was too little too late. Part two explained how U.S. broadband ISPs are different from most overseas ISPs and how those differences make it unlikely that we’ll ever regain leadership in this space. And this week’s final part explains that this all came about because Americans were deceived and defrauded by many of their telephone companies to the tune of $200 billion — money that was supposed to have gone to pay for a broadband future we don’t — and never will — have.
I feel qualified to write about this because, for a short time, I was right in the middle of it. A key term here is video dial tone, which referred in the mid-1990s to the provision of video-on-demand and cable TV-equivalent service by U.S. telephone companies at (bidirectional!) speeds up to 45 megabits per second over fiber and hybrid fiber-coax networks. Much of the publicity back then was generated by an outfit called Tele-TV, which was a video partnership of Nynex, Bell Atlantic, and Pacific Bell. Howard Stringer, former president of CBS and current CEO of Sony, ran Tele-TV, which had some ambitious plans to deploy video service to millions of homes. The company twice asked vendors to submit proposals to build set-top boxes for this ambitious network. In those days I designed set-top boxes and in the case of both Tele-TV bids, my designs came in at the lowest price, first under the name of my own start-up and then under the Fujitsu brand after Tele-TV urged me to find a big manufacturing partner. I can’t claim to have actually WON either time, though, because not a single box was ever built or paid for and Tele-TV went out of business without ever actually having been IN business. At the time I had no idea what was going on, but today I know and now so will you.
The National Information Infrastructure as codified in the Telecommunications Act of 1996 existed on two levels — federal and state. As a federal law, the Act specified certain data services that were to be made available to schools, libraries, hospitals, and public safety agencies and paid for through special surcharges and some tax credits. Looking solely at the Federal side of the story, the so-called Information Superhighway still doesn’t appear to have been a success, but it wasn’t a criminal failure. Many schools and libraries were wired at considerable expense though the health care and public safety components never amounted to much.
It is on the state level where one can find the greatest excesses of the Telecommunications Act. All 50 U.S. states and the District of Columbia contracted with their local telecommunication utilities for the build-out of fiber and hybrid fiber-coax networks intended to bring bidirectional digital video service to millions of homes by the year 2000. The Telecom Act set the mandate but, as it works with phone companies, the details were left to the states. Fifty-one plans were laid and 51 plans failed.
Failure is not foreign to the information technology business. Big development projects fail all the time and I have written several times about this and how those failures come to be and how they can be avoided. But I find it hard to remember any company or industry segment ever going zero for 51. This is a failure rate so amazing that any statistician would question the motives of those even entering such an endeavor. Did they actually expect to succeed? Or did they actually expect to fail? We may never know and it probably doesn’t even matter, but one thing is sure: they expected to be paid and they were.
Over the decade from 1994-2004 the major telephone companies profited from higher phone rates paid by all of us, accelerated depreciation on their networks, and direct tax credits an average of $2,000 per subscriber for which the companies delivered precisely nothing in terms of service to customers. That’s $200 billion with nothing to be shown for it.
In a Federal Communications Commission (FCC) report from 1994 there were requests from U.S. telephone companies to provide video dial-tone service at unprecedented levels. Bell Atlantic (now part of Verizon) wanted to install service to 3.5 million homes in its service area. Nynex (now also a part of Verizon) requested permission to install service to 400,000 homes. Pacific Bell (now part of AT&T) wanted to install service to 1.3 million homes. Ameritech (now part of AT&T) wanted to install service to 1.2 million homes. GTE (now part of Verizon) wanted to install service to 1.1 million homes.
Note that these applications were all prior to the Telecommunications Act of 1996 being passed, so they were covered under the prior 1934 Act. And by 1995 most of these applications had been withdrawn by the telephone companies, though the FCC oddly continued to act as though the applications were still valid.
What went wrong? First there were technical problems. Bidirectional 45-megabit-per-second service was going to be harder to install and more expensive than expected, though oddly more than one Regional Bell Operating Company tried to demur because of stated fears that the proposed technology would become obsolete, not that it was too advanced.
Then there were regulatory problems as the FCC tried to control deployment centrally while states and cities tended to view video dial tone as just another cable company to be taxed and regulated. Bell Atlantic switched its plans to MMDS (Multichannel Multipoint Distribution Service — so-called “wireless cable”) as did GTE, but MMDS suffered from interference by trees and was never fully reliable, though some of that spectrum is today being redeployed for WiMax networks.
When the 1996 Act was finally passed, though, the idea of video dial tone had been converted to a justification for deploying ADSL. Where telephone companies had been promising EITHER 45 mbps bidirectional service OR at least the ability to carry HDTV (nominally 20 mbps) suddenly it was an acceptable alternative to substitute ADSL, which for most users would be limited to 1.5 mbps downstream and 128 kbps upstream, which isn’t today considered adequate for any video service of higher quality than YouTube.
This could all be credited to technology misadventure and forgotten if it weren’t for the money. The telcos played games with state utility commissions, cutting deals with the states to deploy new technologies in exchange for “incentives,” which were new charges and new ways of charging customers. One typical ploy was to offer to freeze basic telephone rates for a period of years (typically five) then deploy a bunch of new services, which would be sold on an a la carte basis. The problem with this is that it applied analog economics to what were now digital services. The cost of providing digital services is always going DOWN, not up, so the telcos that might have been forced to cut rates instead offered to freeze them, locking in an effective multiyear rate increase.
It is an ugly story of greed and poor regulation that you can read in excruciating detail in a 406-page e-book that is among this week’s links.
The RBOCs cut heads, cut spending, cut construction, increased depreciation rates, failed to deliver promised services, increased telephone bills, and had booming profits as a result. Then each mega-merger brought with it new contortions that inevitably led to poorer service and higher charges. Twenty-two percent of telco equipment, for example, SIMPLY DISAPPEARED. Penalties for missing service goals were often folded into merger payments, so instead of paying the states a penalty for not doing what they had promised to, the companies paid themselves.
As just a small example of the way the phone companies took advantage of ineffectual regulation, they charged an average of $1 per month per customer to run Bellcore, the research organization set up to replace Bell Labs after the 1983 split up of AT&T. But when Bellcore was later sold and the profits from that sale distributed to the telephone companies, not to the customers, ALL BUT ONE RBOC CONTINUED THE $1 CHARGE DESPITE THE FACT THAT IT NO LONGER DIRECTLY SUPPORTED ANYTHING.
There are no good guys in this story. Misguided and incompetent regulation combined with utilities that found ways to game the system resulted in what had been the best communication system in the world becoming just so-so, though very profitable. We as consumers were consistently sold ideas that were impractical only to have those be replaced later by less-ambitious technologies that, in turn, were still under-delivered. Congress set mandates then provided little or no oversight. The FCC was (and probably still is) managed for the benefit of the companies and their lobbyists, not for you and me. And the upshot is that I could move to Japan and pay $14 per month for 100-megabit-per-second Internet service but I can’t do that here and will probably never be able to.
Despite this, the FCC says America has the highest broadband deployment rate in the world and President Bush has set a goal of having broadband available to every U.S. home by the end of this year. What have these guys been smoking? Nothing, actually, they simply redefined “broadband” as any Internet service with a download speed of 200 kilobits per second or better. That’s less than one percent the target speed set in 1994 that we were supposed to have achieved by 2000 under regulations that still remain in place.