Disaster Capitalism: Separate the Wireline and Wireless Subsidies and Fix the Digital Divide.

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For better or worse, because of the Coronavirus pandemic, the world order and even the way we live are now in motion. Families are now having to hunker-down at home and rely more on broadband and internet services to be connected, while even business meetings are now moving online. But in many rural areas (or low income areas) parents are being told to get into their cars and take the kids to the school or library parking lots to use the WiFi service. These and other stories about the current Digital Divide make it clear that we need serious long term solutions for America — and that wireless is not a substitution for a wireline service.

America needs robust, ubiquitous, symmetrical, wireline fiber optic connectivity everywhere for everyone at reasonable rates, all the time.

What should bother everyone is that we have already paid for this multiple times, and what has been going on over the last decade is a bait-and-switch to swap the fiber optic wired services for wireless, including 5G.

Unfortunately, the plans being announced by the FCC, Congress, as well as city and state governments, have been using this emergency to bundle financial giveaways for wireless to companies that already failed to deliver. Worse, it is now clear that through the manipulation of the accounting, AT&T and Verizon created the Digital Divide and this glaring example of greed vs the public interest must be confronted- now.

As we will discuss, there is plenty of funding that could have America upgraded to fiber optics; billions are being squandered today. Because of this manipulation of the accounting, Verizon et al. were able to subsidize the wireless business as well as dump excessive Corporate Operations expenses into the wired-side of this equation. (These are billions in executive pay, lawyers, lobbyists, and even the corporate jets and golf tournaments.)

The IRREGULATORS v FCC DC Court opinion in March 2020 freed the states from the FCC and they are now independent and can go after these funds. I’ll get back to this in a moment.

Let’s Start: Follow the Money.

1) 5G and Wireless has Been a Bait-and-Switch of Massive Proportions.

5G requires a fiber optic wire — and the wireline utility networks, and thus customers, all paid/cross-subsidized the wireless buildouts in America.

In 2012, Fran Shammo, former Verizon CFO, told investors that the wireless company’s construction expenses have been charged to the wireline business.

“The fact of the matter is Wireline capital — and I won’t get the number but it’s pretty substantial — is being spent on the Wireline side of the house to support the Wireless growth. So the IP backbone, the data transmission, fiber to the cell, that is all on the Wireline books but it’s all being built for the Wireless Company.”

I.e., almost the entire wireless business, including 5G, has been built by charging low income families, rural customers, seniors, small businesses — anyone using wireline service, for the wireless networks.

Moreover, the plan has always been to shortchange the rural areas (and low income areas, including inner cities). In fact, the rural areas were not ‘upgraded’; the plan has been to let them deteriorate and/or ‘shut them off’ for wireless because it makes the company more money.

2) Rural Areas have been Short Changed for the Last Two decades.

“Cut the copper off” said Lowell McAdam, former Chairman and CEO of Verizon Communications, speaking at the Guggenheim Securities Symposium, June 21, 2012.

“And then in other areas that are more rural and more sparsely populated, we have got LTE [Verizon Wireless] built that will handle all of those services, and so we are going to cut the copper off there. We are going to do it over wireless. So I am going to be really shrinking the amount of copper we have out there, and then I can focus the investment on that to improve the performance of it.” (Emphasis added.)

At the September 2012 J.P. Morgan analyst conference, McAdam said moving the customers to wireless makes the company more profits:

“And in many areas we’re also taking customers that aren’t performing well on copper and we’re moving them over to the wireless technology. So that improves our cost structure significantly and streamlines all those ongoing maintenance costs.”

3) Verizon Stopped Fiber to the Home Buildouts; Used the Wireline Budgets for Wireless.

This bait-and-switch was discussed with the investors, but, of course, not with the public. Around 2010, Verizon announced it was halting the deployment of their fiber to the home service, known as FiOS.

Why? According to the Verizon executives it saves big money, it gets rid of the staff, and whatever budgets were set for this fiber optic deployment could now be used for wireless — illegally cross-subsidizing, 5G, for example.

Francis Shammo stated at the Goldman Sachs Communacopia Conference, September 22, 2016:

“But it’s going to be a fixed broadband wireless solution.

“And if you think about the cost benefit of that, today, if you think about FiOS and what it costs me to connect a premises to FiOS. I have to lay the fiber down the street, but then I also have to then connect the home, go into the home, make sure the wiring is right, put in install the boxes, install the routers.

“If you think about 5G, you put the fiber down the road, which is what we’re doing in Boston. Then all of the labor and the expense of drilling up your driveway connecting the ONT to your house and all the labor involved with that, all that goes away, because now I can deliver a beam into your — into a window with a credit card size receptor on it that delivers it to a wireless router, and there’s really no labor involved and there’s no real hardware other than the router in the credit card. So the cost benefit of this is pretty substantial, at least, we believe it is.”

I.e.; the company runs a fiber optic wire down your street then refuses to connect it to your home; in many states this fiber was supposed to just be a replacement of the existing copper wire that could have been there for 50 years.

And it is worth noting that Lowell McAdam also pointed out in the second quarter 2016 investor call that — I paraphrase: ‘Well, wireless is so much cheaper (and more profitable), why bother doing fiber to the home? (“ONT” is an “Outside Network Terminal”.)

“From a pure cost perspective, again I think it’s a little too early to tell, but what I will tell you is about half of our cost to deploy FiOS is in the home today and the next biggest thing outside the home is the drop. And so our take is that with the router roughly costing the same — and, remember, we wouldn’t have to have an ONT as we think about it today.”

4) Wireless Charged to the State Utility through Deceptive Financials.

In most cases, this money is coming illegally out of the state wired telecommunications utility budgets. In a response to an inquiry by the NY State Public Service Commission and the NY State Attorney General’s Office about capital investment, Verizon stated that in 2011 the company spent over $1 billion. The Attorney General claimed this was misleading as the money had been shifted to fund Verizon Wireless and FiOS TV, the cable TV service.

“Verizon New York’s claim of making over a ‘billion dollars’ in 2011 capital investments to its landline network is misleading. In fact, roughly three-quarters of the money was invested in providing transport facilities to serve wireless cell sites and its FiOS offering. Wireless carriers, including Verizon’s affiliate Verizon Wireless, directly compete with landline telephone service and the company’s FiOS is primarily a video and Internet broadband offering.

“Therefore, only a fraction of the company’s capital program is dedicated to supporting and upgrading its landline telephone service.”

In fact, Verizon NY, the NY State public wireline telecommunications utility, appears to have diverted $2.8 billion dollars from 2010–2012, to be used by Verizon Wireless, which is not part of the state utility that is offering ‘landline’ service.

These shenanigans occurred in every state we examined as the FCC’s accounting rules, which are still in use, are federal.

Emergency Chicanery: The Government Giveaways

5) The Buffoonery of the FCC’s $9 Billion Dollar 5G Wireless Plan

By the time the ‘all clear’ is sounded from this pandemic and we can attempt to resume our lives, we will be left with an appalling bait and switch; the government will have given billions to the companies for WiFi and 5G.

Fierce Wireless wrote:

“FCC Chairman Ajit Pai circulated a Notice of Proposed Rulemaking Wednesday for the 5G Fund for Rural America that would dole out up to $9 billion in Universal Service Fund (USF) support in two phases, to be distributed through multi-round reverse auctions. Phase 1 would make up to $8 billion available for rural 5G deployments over 10 years.”

The idiocracy of this has many layers. 5G requires a fiber optic wire and has a range a 1–2 city blocks (though there are different flavors that are nothing more than 4G with rouge and lipstick). So it is not a service that will be seriously deployed in rural areas.

Second, by the time this proposal is implemented, one would hope that this plague has passed and so we’ll be left with a giveaway to the wireless companies for deploying crap wireless — and the networks being subsidized by the wireline customers.

Next, the Universal Service Fund is actually a tax on the interstate portion of your communications bills. At around 20+%, (it varies every quarter), besides the other fees, we’re all paying for this with higher charges.

But what is really ridiculous is the idea that the companies that failed to properly upgrade their state utilities with fiber optics over the last 30 years will suddenly wake up and do it now.

Since wireless requires a fiber optic wire, whatever is built to support the wireless service will most likely have been subsidized by the very people — low income families, rural families, inner cities, that are still using the wires.

6) The FCC Is Captured and Clueless

The fact that the FCC is clueless and captured also requires investigation. For example, now-Commissioner Brendan Carr worked as a lawyer for Verizon in 2007, and helped Verizon push accounting regulation changes that overcharged local customers and created the cross-subsidies of wireless. He also was the lawyer for the CTIA, the wireless association, in a case against San Francisco over the rights of the City to discuss wireless issues. And to add insult to injury, when he started working for former Verizon attorney, now-Chairman Ajit Pai, Pai claimed this CTIA decision was a 1st Amendment, freedom of speech victory. Pai never mentioned that it was a victory for the Wireless industry against the public interest.

More recently, Carr announced the FCC’s 5G plan, which is based on ‘model legislation’ that was created by the AT&T et al. funded group ALEC, the American Legislative Exchange Council. Worse, as we pointed out, the FCC has never, ever examined whether their accounting formulas were still in use, or that they had become deformed so that they cause these wireless cross-subsidies.

7) Congress Is also Supporting Wireless and Giving Billions.

There are other kludge proposals to bring wireless and WiFi immediately.

According to Newsweek, thirty-five senators

“penned a letter to congressional leaders calling for $2 billion to be set aside for schools and libraries to provide Wi-Fi hotspots or other devices with internet capability for students who have inadequate connectivity”.

Along side this, The National Law Review writes:

“A bill was introduced in the Senate that would allocate between $2 billion and $4 billion of C-band auction proceeds for a Homework Gap Trust Fund…. On February 27, 2020, Senator Van Hollen introduced the Homework Gap Trust Fund Act. If enacted, the bill would require the FCC to use revenues from the upcoming C-band auction to administer the Homework Gap Trust Fund. The Fund would be used to ensure that all students — in both urban and rural communities — have access to broadband internet access services at home. In addition to wireless devices, the funds could be used to purchase wireless hot spots.”

On April 2nd, 2020, Senators Wyden, Murray and others asked for the Lifeline internet service providers to provide:

“better mobile internet service for people with low incomes impacted by the coronavirus pandemic. Improved internet access is crucial to helping families…across the country better work and learn from home and access vital telehealth resources”.

It includes:

“Enable hotspot access for all Lifeline subscribers, so they can connect laptops or tablets to smartphones that support this feature;

“Ensure all Lifeline subscribers have access to 4G service, where available, with at least the same speed and priority of service that other resellers of mobile services of that network offer to their customers.

While increasing usage of the wireless service or enabling WiFi hot spots sounds great, with 9 million Lifeline users, some of these plans are impossible to implement in the near future.

Every one of these proposals begs the question — Where’s the fiber? Where’s the investigations of the cross-subsidies of wireless, and how did this massive Digital Divide show up when AT&T et al. had obligations to build out fiber optic networks throughout their territories since the 1990’s?

And not one proposal ever mentions that there are still public telecommunications state-based utilities that are being dismantled and handed to the wireless company as private property for private use.

And There Is a Digital Divide…

8) There Are Massive Holes in Broadband and Internet Deployment, even in New York City.

In January 2020, NY City released The Master Internet Plan to fix the Digital Divide. The report details specific holes in New York City’s broadband:

“Current broadband subscription costs can be a burden on the budgets of low-income families. For example, 46% of New York City households living in poverty do not have broadband in the home.”

“18 percent of residents — more than 1.5 million New Yorkers — have neither a mobile/wireless connection nor a wireline home broadband connection.”

However, the plan never discusses more basic issues that impact all of us. The City didn’t mention that all of the services offered are excessively inflated as compared to parts of Europe and Asia:

  • The wireless plans in America, (and in NYC) are labeled, “unlimited”, yet most plans come with only 20–50GB. Unfortunately, the US plans are 6–10 times more expensive than overseas. Almost ½ of the Europe has true unlimited — over 1000GB, at half the price.
  • The price of America’s ‘triple play’ is now averaging over $200.00 and it costs 2–5 times more than overseas, where the average is about $45.00; there are packages at ½ the cost.

The primary reason these prices are out of control is the fact that those who control the wires control all services over the wires — and all prices for all services, not to mention the ability to keep competitors from using these wires. And the few companies that have taken control have a deal to not rock the boat and actually compete — like the cable and phone companies.

Conclusion: Separate the Wireline and Wireless Business and Get the Money Back to Fund the Fiber Optic Networks to All.

Unfortunately, this pandemic will have impacts for years and the plan for America should not be to make Wifi available in school parking lots so that parents can take their kids in cars to do their homework.

What should happen?

In April 2019, the IRREGULATORS v FCC was undertaken to expose one of the largest accounting scandals in American history and to free the states so that they could go after and use the billions of dollars per state that have been created through these massive financial cross-subsidies.

And the Court opinion in March 2020 clearly explains that the FCC’s rules that created this massive financial shell game do not have to be used by the state commissions — they are independent to clean up this mess.

Thus, stopping the flows of money from the wired construction budgets to wireless and the other billions of dollars being overcharged in Corporate Operations expenses would give the states access to new found funds to solve the Digital Divide, lower prices and bring in competition.

And throwing massive government party-favors for wireless that are poor bandages to the problem of the Digital Divide, and that will harm us longer term, must be vetted and proven. Just because they are being sold as ‘immediate’ fixes does not mean that they will be implemented before the ‘all clear’ of the coronavirus isolation is sounded.

More to come…

FREE: Since you are socially distanced and have more time to ponder just how we ended up in this mess, the full story can be found in The Book of Broken Promises: $400 Billion Broadband Scandal and Free the Net.

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Written by

New Networks Institute,Executive Director, & Founding Member, IRREGULATORS; Telecom analyst for 38 years, and I have been playing the piano for 63 years.

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