AT&T and Verizon have been pushing federal regulators to sunset the nation's traditional copper-based communications network—and many of the pesky regulations that come with it.
Old dial telephone in restaurant in Mandeville, Louisiana. (Photo credit: Wikipedia)
Their latest effort to win support comes in the form of a new report written by a visiting scholar at Georgetown University and paid for by an organization known as the Internet Innovation Alliance that consistently supports AT&T's agenda. AT&T also provides an undisclosed amount of financial support to the group.
At its heart, the report asserts that regulations that force the carriers to maintain the traditional telecommunications network are unnecessarily diverting investment away from modern broadband networks that don't carry the same onerous regulatory requirements.
To be clear, the report, which is titled "Telecommunications competition: the infrastructure-investment race," frames the issue just a little differently and uses somewhat stronger language. It asserts that "outdated regulations that force companies to build and maintain obsolete copper-based legacy telephone networks are unnecessarily diverting investment away from modern broadband networks and services that 95 percent of U.S. households prefer, desire and use."
Shamelessly misleading, the report makes a big deal about the explosive growth of IP-based video traffic and how it dwarfs legacy phone calls in size. This isn't surprising given that phone calls are measured in kilobits and videos in megabytes. It's also not particularly relevant since video is not an alternative to phone calls. But the report treats the two as equivalent. "Legacy switched traffic amounts to less than 1 percent of IP traffic today and is likely to decrease to a small fraction of 1 percent by 2017," it states. "The regulatory framework, however, has not caught up to the marketplace reality."
The size of IP-based video traffic isn't the issue in determining how to best regulate next-generation networks. Rather, the issue is the 100 million people, together with millions of small businesses, who continue to rely on traditional copper-based phone lines.
Still, the report succeeded in reeling in a Washington Post journalist who wrote a blog post asking, "We spend billions a year maintaining phone lines (almost) nobody depends on. Should we get rid of them?"
It seems like an innocent question. It's certainly true that Americans are abandoning traditional telephone service in exchange for wireless or VoIP service. And it's entirely plausible that carriers—together with their bill-paying customers—spend billions a year maintaining those networks.
Should those billions be diverted to ensuring universal access to highly reliable, high-speed broadband at an affordable price?
That's the key question in this policy debate, and it's one that carriers would very much like to dissuade the public from asking too loudly. Defining and delivering highly reliable, high-speed broadband to everyone in the country at an affordable price—replacing traditional phone service—is likely to be expensive. The FCC has estimated the rollout could cost more than $350 billion. That happens to be roughly the amount that some advocates believe the public has already paid in broadband subsidies. Meanwhile, simply killing regulations around the traditional copper-line network could significantly boost carrier profits. If you were a telecom executive, which option would you fight for?
A key element of the carrier's argument for reducing regulation has to do with the cost of maintaining the traditional network. According to the report, if you assume that 50 percent of the cost per subscriber is variable then the total cost per subscriber at a rate of 30 percent for any particular geographic market is more than twice what it would have been at 100 percent penetration. Tweak those assumptions to 20 percent variable cost and 15 percent penetration and the cost per subscriber quintuples.
The report warned that AT&T is approaching the dreaded 15 percent penetration level in some states. According to an AT&T spokesman, big states like Michigan and Florida are already at 15 percent penetration. So, if you are a long-term AT&T investor, should you panic in the face of quintupling costs? Not to worry, the IIA report is not intended for you. The whole point of AT&T's support for the IIA is to keep these types of discussions at arm’s length.
In fact, the dire picture painted by the report appears to be at odds with AT&T's financial results. In the recent quarter, Chief Financial Officer John Stephens noted that U-verse broadband, which ends up being delivered in part over traditional networks, now makes up more than 50 percent of AT&T's broadband base as well as more than 50 percent of consumer revenues. The average revenue per broadband user is rising at a rate of more than 9 percent year over year. Revenues from business wireline customers also increased. "All this resulted in improved revenue growth, continued EPS gains and strong free cash flow," Stephens declared.
So what is the true cost to the carriers of maintaining the traditional network? And what would it cost to ensure universal service on an IP-based network instead? Looking for answers, the Federal Communications Commission has solicited comments on some potential trials. But its decades-long neglect of data collection is likely to make it more difficult for policymakers to effectively balance the competing interests of the telecommunications industry and the public.
In a 2007 journal article, "Toward A Federal Data Agenda For Communications Policymaking," Philip Napoli, now a professor at Fordham University, and Joe Karaganis, now a vice president at the American Assembly, Columbia University's public affairs forum, describe how data collection ceased to be an agency priority just as the telecommunications and media industries entered a period of dramatic evolution.
In the last six years, the General Accounting Office has taken the FCC to task for its data gathering practices around broadband and wireless communications. "In the past, the FCC has generally not collected data on many industry investments and metrics because of the complexity and burden associated with gathering this data from wireless carriers," GAO wrote in a 2010 report. "Additionally, FCC has generally taken a deregulatory approach to this industry, imposing few reporting requirements on wireless carriers. FCC officials stated that they must balance the benefit of collecting detailed industry data with the burden it places on carriers."
Information that would be particularly helpful to today's policymakers would include the effect of previous government efforts to promote broadband investments. Specifically, what happened the last time the carriers requested relief from regulation in exchange for Internet deployments?
Answering this kind of question isn't easy. Bruce Kushnick, a telecommunications analyst and public advocate, pieced together a rough estimate based on company disclosures. To get a precise accounting, he cautions, an audit would be required due to the companies' penchant for data manipulation and obfuscation.
Kushnick calculated that AT&T, Verizon and CenturyLink (formerly Qwest) collected more than $360 billion between the early 1990s and 2012 in subsidies that were intended to pay for Internet deployment at 45 Mbps throughout the country. Those subsidies, which varied from state to state, took the form of relief from regulations. For example, carriers were allowed to charge extra for services like call waiting or call forwarding that cost them next to nothing to provide.
The total amount of subsidy, according to Kushnick, came to more than $3,000 per American household. But the promised deployments have been disappointing. Broadband access in the United States is slower and more expensive than European countries like France and Asian countries like Japan and South Korea.
This is the type of problem that policymakers, armed with the proper data, should be able to fix. "Public policy should be made on the basis of publicly available data," said Karaganis in an interview. "In media and communications policy that is still the exception rather than rule."
