Verizon, AT&T and CenturyLink Created the Digital Divide on Purpose: Where’s All the Money?

CLICK TO READ PART 1

THIS IS PART 2

Unknown to virtually everyone in America, Verizon, AT&T and CenturyLink are three holding companies, created through mergers, that control most of America’s state-based telecommunications public utilities. Since the 1990’s they have announced both state and federal plans to upgrade these mostly copper-based networks to fiber optics. In fact, by 2010, America should have been a fiber optic nation, as states announced massive deployments — which never happened. AT&T California should have had 5.5 million homes by 2000, and Bell Atlantic announced that the East Coast would have 12 million homes by 2000, from New Jersey to Virginia, while NYNEX claimed it would have 5 million homes in Boston and NYC with fiber by 2000. (Bell Atlantic and NYNEX merged, then merged again with GTE to form Verizon.)

And these network upgrades would be funded via tax perks and rate increases, replacing the existing copper wires, some of which had been in service since the 1920’s. With no institutional memory on the part of the public or government, Verizon made another wave of commitments to roll out a fiber optic service to the home called FiOS and AT&T announced U-verse, which was a bait-and-switch as U-verse is based on the existing copper wires attached to a shared fiber optic ‘node’ in the neighborhood. These announcements started in 2004 and were used to close out the local networks to competitors and to push forward more mergers: SBC, (one of the Bell Holding companies) bought AT&T and renamed itself AT&T, and Verizon took over MCI.

PART 1 detailed how AT&T et al. had announced plans to upgrade their networks to bring broadband to the states, and instead, Verizon and AT&T both halted their high-speed broadband deployments of FiOS and U-verse in 2011, claiming that they had completed their buildouts. CenturyLink, it appears, never had a fiber optic plan to even halt.

Unfortunately, both companies left 30–50% of their territories incomplete, and this was mainly the rural and low-income urban areas. Moreover, the companies told investors that they would provide wireless LTE instead of doing any more upgrades, an additional bait-and-switch, as this story was not told to the public when they asked the question: “Where are the upgrades we paid for?”

In short, they created the Digital Divide — on purpose — to make more profit by migrating customers from landline to wireless and cross-subsidizing the wireless buildout with state public telecom utility construction budgets and rights of way.

PART 2: Follow the Money Trail.

Every state telecommunications utility has a large budget for construction and maintenance. As we quoted, this budget appears to have been illegally diverted to the buildout of the companies’ wireless networks, as told by the NY Attorney General’s 2012 filing we reference below.

Additionally, what is truly appalling and needs immediate investigation is that “Local Service” has been forced to pay 60+% of the entire construction cost, even though there is no serious budget for copper-wire based maintenance, much less the replacement of the copper wire with a fiber optic wire as part of the state telecommunications public utility. Instead, the other lines of business are getting a free ride on the use of the network.

In the opening graphic you can see that there are three separate columns representing the three revenue streams. The first category, ‘Nonregulated’ services, are revenues from FiOS and VoIP and various other IP services. “Local Service” is the revenue generated from the basic, copper-based phone networks; and the third are the “Backhaul” services, also called “Business Data Services” (BDS) or “Special Access”, which are data services used by banks and the fiber wires to the cell sites.

Over the last 2 decades the large telcos manipulated accounting formulas to allocate 60%-70% of the construction budgets to Local Service, despite there being no serious construction or maintenance for the existing Local Service networks.

The Local Service column towers over the other columns — the other lines of business are paying a fraction of the construction expenses. This resulted in Verizon New York overcharging its ‘Local Service’ line of business over a billion dollars in 2020 alone, which should have been spent on fiber optic network upgrades, including rural and low income urban areas, as part of the state PUBLIC telecommunications utilities. Instead, Verizon diverted the funds to its other lines of business, especially wireless, which is a separate subsidiary and should not be using the utility construction budgets.

The pandemic exposed the gaping holes in deployment of high-speed broadband infrastructure to homes and businesses. AT&T and Verizon created the Digital Divide by their failure to honor their fiber commitments and transfer the construction to their other subsidiaries. Their selective avoidance of less profitable, rural and low-income areas is particularly egregious — all of the customers were charged rate increases for network upgrades but Verizon decided it would only cherry-pick areas that were more profitable, and ignore those that they could get away with.

Let’s walk through what happened slowly; and we will also supply documentation to make the case.

1) The fiber buildouts were part of the state telecommunications public utility and are supposed to provide common carrier services under Title II of the Communications Act of 1934.

2) Verizon et al. claimed Title II harmed investment and broadband was Title I, directly contradicting what they told the states.

3) Telcos continually increased the rates charged to local phone customers on the false promise of a massive deployment of fiber optic infrastructure.

4) Telcos unlawfully diverted the construction budgets for Local Service from fiber to the home to wireless buildouts post 2011.

5) Telcos manipulated the accounting rules in every state over the last two decades in order to charge the majority of all construction to Local Service.

6) Telcos failed to make good on their promises and legal obligations to build fiber optic networks to homes and businesses in each state, starting in the 1990’s.

7) CONCLUSION: Halting the cross-subsidies would give NY State billions to build out the fiber network without government subsidies. Now multiply this by 50 states, as every state used the same accounting scheme.

==================

1) The fiber buildouts were part of the state telecommunications public utility and supposed to be used for Title II common carrier services.

When discussions occur pertaining to the FiOS fiber to the premises, “FTTP”, service, no one ever claims that the wires are part of the existing state utility for the provision of Title II common carrier services. Here’s the actual language from a Verizon NY FiOS franchise from 2005.

But, this is just one state. Click for a collection of quotes detailing that Title II was used as the investment mechanism to build out the FTTP fiber optic networks that was supposed to be used for FiOS — in MA, NY, NJ, PA, MD, DC, and other states. This excerpt below is part of the Verizon DC FiOS franchise.

2) Verizon et al. claimed Title II harmed investment and that broadband is “Title I”, which directly contradicts what they told the states.

We need to be very clear here. Verizon told its investors and the FCC and anyone else who listened that broadband was an “information” service, “Title I”, and that Title II harmed investment; They did not tell the truth.

This second excerpt is from Verizon’s Open Internet Comments, July 15, 2014

“Imposing a Title II common carriage regime on broadband providers would be a radical change in course that would only chill, not spur innovation. Title II is a regulatory dinosaur, crafted eighty years ago — and based on 19th-Century laws regulating railroads — to address the one-wire world of rotary telephones.”

We filed multiple complaints and comments about this Janus-faced story telling. From these documents, filings and press statements we see that Verizon’s claims that Title II harms investment is patently not true. (Click to read comments filed in the Net Neutrality proceedings.)

Why did Verizon do this? By classifying the fiber optic wires as “Title II”, they could have the budget for FiOS be subsidized by the local phone customers and rate increases. If it was classified as Title I, then it would be an “information” service and it is not legal to put the expenses into the ‘telecommunications’ state utility.

3) Telcos continually increased the rates charged to local phone customers on the false promise of a massive deployment of fiber optic infrastructure.

Verizon’s entire series of rate increases were based on ‘losses’ and the “massive deployment of fiber optics”. Unfortunately, as we uncovered, the losses were artificial, and the massive deployment was charged to local phone customers. But here’s the rub; by 2011, the construction budgets were diverted to wireless. This is from the NY State Public Service Commission pertaining to rate increases on basic local phone service.

4) Telcos unlawfully diverted the construction budgets for Local Service from fiber to the home to wireless buildouts post 2011.

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.”

In 2012, the NY Attorney General confirmed that wireless and FiOS cable were funded via the state ‘intrastate’ telephone utility construction budgets. In 2011, Verizon NY stated that the company spent over $1 billion on the utility capital investment. The NY Attorney General claimed that 75% of this construction budget did not go to upgrade and maintain the telephone utility but for the company’s other lines of business, including wireless and for FiOS, which is a ‘cable TV service’, as stated in the franchises granted in NY.

“Verizon NY’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.”

5) Telcos manipulated the accounting rules in every state over the last two decades in order to charge the majority of all construction to local service.

This is the “money” chart. The opening chart is based on this excerpt of the Verizon NY 2020 Annual Report dealing with network and construction expenses, including the underlying financials. We will get back to it in a moment. (Note: The Verizon NY 2021 Annual Report is due out on May 26th, 2022.)

The Verizon New York 2020 Annual Report is the state-based financial report that is required by NY State. It is the only publicly available state annual report that we know of that supplies all of the information in one place, though other states have some annual reporting requirements, their financial reports are not made public or do not present all of the information.

NOTE: This is NOT the Verizon Communications, Inc., Annual Report, which is for the holding company, and the link we provide supplies the Verizon NY Annual Report as well as a ‘walkthrough” we created to understand some of the significant areas.

This state-based financial report is for the primary state public telecommunications utility, which most reading this article do not know that they still exist.

The Majority of ALL Network Expenses have been put into Local Service.

Line 1 of this chart supplies the ‘telephone network in service’, — (which is referred to in the industry as“plant”) and it shows Verizon NY’s networks at $32 billion dollars, and Local Service has paid almost $20 billion, 62% of the total, while Business Data Services, was only 35%, and Nonregulated was only 3% of the total.

How can this be possible if there are no upgrades and maintenance of the copper wired networks?

These numbers show that 2/3rds of the networks’ expenses have been built over the last 4 decades were charged to the copper-based local service line of business, while the ‘nonregulated’ services have paid a fraction of these expense.

Line 2 on the chart shows the “network under construction” i.e., the money being spent in 2020 for networks that are in progress of being built — had 73% of the total…$600 million, charged to Local Service while FiOS and VOIP only paid 11%, only $94 million.

There was no buildout of the copper-based networks nor are they even being properly maintained, and in 2020, Verizon NY only spent $42 million dollars. Over the last decade, the amount spent ranged from $18–57 million dollars per year, and the 10-year average was around $35 million.

And to say that this has been a long-time issue would be stating the obvious. The Verizon NY annual report from 2020 is not ‘unique’; this entire scheme has been going on for decades.

This is from the Verizon NY 2003 Annual Report and what is clearly seen is that the Local Service category (here called NY State), has $19 billion out of the $29 billion in networks (here called “plant”).

It would take too long to explain why these 2 charts, separated by 18 years, should be almost identical, but the simplest answer is — the books are cooked in multiple ways so the formulas for expenses have been frozen since 2000, putting the same amount of expenses into each of these business areas, regardless of the revenues.

6) Telcos failed to make good on their promises and legal obligations to build fiber optic networks to homes and businesses in each state, starting in the 1990s.

A National Problem Due to the Use of Corrupted Accounting.

Every state has a state telecommunications public utility and every state’s accounting, controlled by AT&T, Verizon and CenturyLink, is virtually identical to Verizon New York. Period.

This next chart details the construction expenses by telephone utility, as well as the separation between the Local Service and the Backhaul line of business. And this was the last data from the FCC for the year 2007 that covered the financial reports from every state-based telecommunication public utility. The names of the companies are the original Bell names for the state-by-state utilities.

As you can see, on average, 71% of the basic wired network infrastructure was put into the Local Service category while “Backhaul” only paid 29%.

7) CONCLUSION: Halting the cross-subsidies would give NY State billions to build out the fiber network without government subsidies. Now multiply this by 50 states, as every state used the same accounting scheme.

We took this information directly from primary sources, including the Verizon NY Annual Reports and the FCC. The charts we used only reflects specific parts of the construction and maintenance expenses.

Verizon New York’s total construction budgets charged to Local Service was $1.3 billion in 2020 and this was close to the annual average expense over the last decade. — If only $35 million was actually used by Local Service, where did the extra $1.2 billion go?

Or to bring this full circle:

• Verizon and AT&T had stopped upgrading the networks to FiOS and U-Verse in 2011, as told to investors.
• These networks are being built by charging the Local Service category, which has been paying the majority of the construction expenses.
• If the company was no longer upgrading and maintaining the networks, where did all of this money go, as it is still an expense item?

Without full audits it is impossible to give a final assessment by state but:

• In NY alone we estimate that over $10 billion would have been manipulated over the last decade,
• Nationwide, we estimate that the total for just one year is close $9-$15 billion;
• Nationwide, we estimate that the total over the last decade was $90-$150 billion. (This is based on the models we created over the last decade.)

But this number doesn’t make customers, who have been overcharged for the construction, whole, and that will also be billions per state. In New York, the rates increases were 100+% and each line item had increases of 50–250% or more. The revenues from these increases went to wireless, rather than to the local service customers who were charged.

As we have written:

Not a single dollar of the new government subsidies for broadband infrastructure should be given out to Big Telecom, especially AT&T and Verizon. They have failed repeatedly to deliver on their fiber optic broadband commitments in every state for the last three decades. Until now they have not been held accountable or regulated effectively. To give them billions more to deploy broadband to unserved and underserved areas will almost certainly have a similar unhappy ending. These giants do not want to build fiber; their strategy since 2011 has been to secure an all wireless future using bait and switch tactics. We have done our best to expose their malfeasance and the ongoing illegal cross-subsidies of the wireless networks. If the responsible state authorities don’t heed our warning, they will surely end up with egg on their faces. These companies created the Digital Divide; they are not honest actors who can be relied upon to close the Digital Divide.