Did the Bells Rip Off America? and Is There An Alternative?

I want to put two pieces side by side here: Bruce Kushnik’s magnum opus The $200 Billion Broadband Scandal, accusing the Bell Companies of ripping off the U.S. public to the
and Bob McChesnney’s and John Podesta’s visionary Let There Be Wi-Fi talking about the power of unlicensed spectrum as a broadband solution.

Bruce Kushnick’s book, meticulously documents how the incumbent telcos have used the promise of broadband to win subsidies and regulatory goodies. The pattern Bruce describes is a fairly straightforward one. Bell companies go to [name state] legislature and promise to provide fiber networks (which will bring high-speed internet access, video services, jobs, education etc. to [name state]. All the telco asks in exchange is deregulation of prices, deregulation of competitive obligations (such as opening the network to rivals), and subsidies or tax incentives to reach the areas where it is not profitable to deploy. Then take the goodies, make some high profile efforts to deploy, then quietly forget about it while enjoying deregulated monopoly and tax subsidies. Don’t worry, state legislators and the public will forget about it as well, and will accept the current state of the universe as the best possible world that can be achieved.

While apparently lifted from today’s headlines, Kushnick traces this kind of behavior back to the early 1990s. His book asserts that this behavior has cost the U.S. tax payers over $200 Billion, at a minimum over the last ten years. Lest one ask “how could the Bells ever get away with such a thing?!?!” I will observe that what Kushnick documents are no secrets. Rather, like the purlioned letter, each broken promise, terminated project, absorbed tax incentive, and regulatory bonus happened in plain sight.

For example, check out this 2003 piece in Forbes (hardly a scandal monger for the left) describing how the Bells leveraged regulatory accounting to bilk subscribers out of $3 Billion. As the article observes, the deal in question stemmed from a spot FCC audit in 2000 that found that the Bells were missing $5 Billion in equipment they claimed to have spent and attributed to customer rates under standard regulatory processes (when Bells had rate regulation, the rate was supposed to be based on network cost. Inflate the cost of equipment by $5 Billion in dummy equipment and you can charge ratepayers $5 Billion more).

And that was obvious outright theft, covered up by the agency that discovered it and blessed by Congress. Much of what Kushnick describes are cases where the Bells promised to do something and didn’t deliver, despite having implementation projects. Was this a deliberate strategy of fraud, as Kushnick alleges, or simply the response of companies to shifting technology and shifting markets. I dunno, but I notice they kept the money.

The importance of Kushnick’s book to me lies not in the likelihood that Americans will ever get the $200 B back again, or even whether the Bell companies genuinely tried to defraud rate payers (after all, markets and technologies do change, and promises to bring fiber to every home in the early and mid-1990s may have stemmed from optomistic projections and miscalculations). Rather Kushnick’s book should serve as a warning for the promises made by the Bells today. As the Bells make the rounds in every state, on Capital Hill, and at the FCC, making the same arguments for deregulation, they should have to explain why this time will prove different than the times before. How will state franchising make a difference? How can legislators and regulators hold the Bells accountable if things don’t work out this time? What happens if rate deregulation doesn’t lead to the promised competitive Nirvana of cheap broadband and cheaper telephone service? What if the merged companies do not produce the “efficiencies” and price savings they promised?

Or shall rate payers and the business world be expected to once again shrug, sigh, and pay more money for the same service?

Which brings us to the McChesney and Podesta piece. If no other way existed to secure broadband deployment and video and telephone competition to cable other than deregulating the Bells, we might have no choice but to roll the dice and hope this time will be different. But we do have a choice, we call it “community broadband” or “community wifi.”

The McChesney & Podesta piece will come as nothing new to usual readers of Tales of the Sausage Factory. The authors advise that, as I have argued, competition from local governments will spur private broadband providers to do a better job deploying and will bring broadband to the places private companies refuse to deploy. (although, as usual, McChesney manages to say these things better than I do.) Rather than try to shut down municiple efforts, legislators should free up better spectrum for unlicensed use and protect the ability of local governments to serve their residents and local businesses with what is fast becoming a vital service for the 21st Century.

McChesney and Podesta’s article goes side-by-side with Kushnick’s book. Trusting in the promises of major corporations is a risky affair, Kushnick’s work warns us. When you give billions of dollars in benefits to corporations up front, in the expectation they will follow through on their commitments, you may end up holding the $200 Billion bag with nothing to show but another round of requests for more deregulation and incentives. By contrast, argue McChesney and Podesta, competition (or even potential compettition) from local governments can do a much better job providing needed service to Americans and spurring the private sector to deploy without new incentives. As the history of the electric industry shows, it’s perfectly o.k. to expect companies to work for a living and compete, even when it involves big investment in infrastructure.

So I hope all the folks in Indiana, thinking about the latest Bell backed effort to deregulate and ban local governments from competing will consider these lessons from history well. It’s be shame to once more sell the broadband cow to slick talking bells for a handful of magic beans. ‘Cause unlike in the fairy tale, these magic beans don’t grow to reach the sky and get you a goose that lays the golden egg. Instead, you end up with three bean plants and the slick talking Bells get the rest of your field.

As one politician famously (tried) to observe: “Fool me once, shame on you. Fool me twice, shame on me.” As the Indiana legislature, state legislatures, and Congress work on the issues this year, I rather hope they will read Kushnick’s book and McChesney and Podesta’s articles. Or, as someone else observed: “[don’t] get fooled again.”

Stay tuned . . . .