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Network Failure

In late January, Steve Jobs announced the introduction of Apple’s new iPad, its long-awaiting tablet computer. Apple has replaced Sony as the technology innovator and every time Jobs walks on stage in his trademark jeans and black T-shirt to announce a new product, it’s a media event. The iPad joins the Mac, iPod (and iTunes) and iPhone in Apple’s successful effort to redefine computing, entertainment and mobile communications.

Sadly, when Apple entered the telecommunications market in 2007 with the iPhone, it made a deal with the devil, AT&T, that not only hamstrung its potential market dominance, but illuminated the deeper crisis besetting the nation’s communications infrastructure. As the New York Times recently reported, “Wireless carriers have dramatically underestimated the network demand by consumers, which has been driven largely by the iPhone and its applications ….” [Jan. 28, 2010]

iPhone users know the AT&T wireless network is a dysfunctional mess, their calls either not connecting or failing in mid-call. Making matters worse, video clips and Internet connections run like old dialup feeds. So flawed is AT&T wireless that it was forced to stop selling iPhones in December to limit network usage.

If the iPad or another tablet device, be it a tablet PC (from Sony, etc.), book reader (from Amazon or B&N), TV-DVD or videogame player, catches on, its adoption will likely be driven by a breakthrough video application. Video drives today’s online media market and tablet devises will likely further increase the proportion of video over the net. The online market-tracking firm, comScore, reports that 173 million U.S. Internet users watched 33.4 billion videos (with a total of 173 billion unique page views) in January 2010.

Most illuminating, comScore found that the top five nontraditional media sites, including Google, Microsoft and Yahoo, dominate online video distribution. It estimates that this sector accounts for more then 40 percent of all videos viewed (43.7%); Google sites alone, especially YouTube, accounted for 39.5 percent of viewers. YouTube accounted for nearly 13 billion views in January and individual viewers watched an estimated 93 videos on average during the month, a 50 percent increase from January 2009.

The enormous growth of video over the web is pushing the U.S. telecommunications network to the breaking point. According to the European Organization for Economic Cooperation and Development (OECD) as of Q-2 2009, the U.S. ranked 15th out of the 30 post-industrial nations. The U.S. standing is likely to only further decline as more and more video is pumped over its failing networks.

Equally troubling, as Andrew Odlyzko, an Internet scholar at the University of Minnesota, found, America’s share of worldwide Internet traffic is shrinking. “While the U.S. carried 70 percent of the world’s Internet traffic a decade ago,” but in 2008 that “portion has fallen to 25 percent.” The economic consequence of this decline in the nation’s communications prowess is significant. According to a phone company sponsored Brookings report by Robert Cradwell, America would gain $500 billion annually from the full deployment of high-speed broadband. Unfortunately, this means that America lost about $7.5 trillion in economic growth since the 1990s due to its troubled communications infrastructure.

* * *

The problem at the heart of this mounting crisis lies with AT&T and the other telecommunications companies. Their collective failure is one of the gravest untold stories of recent American history; it is a story of systemic lies and deceptions that has been perpetuated on the American people and has gone on for decades. Today, we are paying more for not only slower broadband Internet and wireless systems but also for less meaningful choice than any advanced country in the world. A further decline the country’s position in telecommunications delivery will contribute to the continuing erosion of nation’s productivity and the stifling of its creativity.

President Obama has rightly called for strengthen of the nation’s infrastructure of highways, electricity and communications (e.g., broadband to rural communities). However, without addressing the structural tension at the heart of the telecom industry, between its role as a regulated utility (i.e., wireline phone services) vs. its new-business services (i.e., wireless, video, etc.) little will change. And to begin to turn this system around, one has to unmask and redress the failings of AT&T and the other dominant telecoms.

One of the top issues before the FCC and Congress this year is the development of a 21st century “national broadband policy.” In keeping with the Obama administration’s public performance style, we are likely to see much fulmination over this issue. Hearings will be held; media barons and NGO critics will testify; much deliberation will take place. Experts from all sides of the debate will admit to the woeful inadequacy of the country’s communications system. And when all is said and done, there will be calls to raise communications’ taxes, including the Universal Service Fund, to pay for broadband “upgrades.”

Sadly, what will likely go unsaid or little reported is the staggering fact that, by 2010, an estimated $320 billion has already been collected from America’s phone customers by AT&T and Verizon to pay for the rewiring of America. This policy continues today in the form of phone rate hikes currently happening throughout America. These monies were collected to upgrade the old copper wire phone system with high-speed fiber optics. Remember back in 1993 when Al Gore announced “the information superhighway”? Almost every home, office, school, library and hospital were supposed to be knit together through superfast broadband connections. Now, nearly two decades later, where is the information superhighway, what is the status of fiber deployment?

* * *

The Information Superhighway remains a fantasy, a con man’s come on. AT&T controls telecommunications in 22 states and yet, as of year-end 2010, it has deployed fiber to only 2.1 million households. Verizon recently sold its landline assets in 14 states to Frontier; it held on to its fiber program, FiOS, which has nearly 3 million subscribers. And this in a nation with over 120 million households and, according to Nielsen, approximately 228 million Internet subscribers as of August 2009.

The failure with fiber deployment does not begin to address the equally scandalous conditions of the telecom’s wireless networks as represented by the troubles associated with an iPhone running over the AT&T system. But system failure is only one of the troubles defining America’s wireless market. Over the last decade, AT&T and Verizon have claimed that they were “very small businesses” so as to qualify for over $8 billion in wireless spectrum license fee savings. (This spectrum is supposedly reserved for small businesses to compete.)

To top it off, AT&T’s recent filing at the FCC claims there it is now two networks: the old, public switched telephone network (PSTN) and the new “broadband” network. It is now seeking to close down the PSTN, claiming it is draining monies to build out it broadband business. However, its real reason for abandoning the public network is to remove all regulations on its businesses. If this move succeeds, customers will have less choice, slower broadband speeds, higher fees and an end to what is known as net neutrality.

Making matters worse, wireless telecoms have developed ingenious schemes to gouge their customers. For example, they charge for calls that don’t get connected, including busy signals; they double-bill all calls, meaning the caller and receiver both pay for the call; they’ve created bogus taxes to add to the expense; and there are separate fees for voice or data or web or pictures or text messages. Only a Mafia Don could have played it better.

* * *

How do they get away with not only system failures, but their sophisticated pricing schemes? Telecoms know the art of lubricating politicians’ coffers as well as any long-established lobby. They give generously to both parties at the state and federal levels on an ongoing basis. Equally important, they have created a web of fake “astroturf” consumer groups and give millions to “co-opted” minority groups (including the NAACP and LULAC ) who lobby on their behalf. They also retain the services of non-profits think tanks like Progress & Freedom Foundation and Competitive Enterprise Institute to author studies designed to “substantiate” their claims for greater subsidies. Power comes not from the barrel of a gun but from the end of a telephone headset. Few if any politicians stand up to the telecom industry.

As all communications becomes a series of digital Os and 1s, the separate and parallel worlds of media communications and voice telephony are merging. Telephone companies and cable operators are competing with comparable product offerings. And as Internet knits the communication matrix together, as Jupiter Research estimated in 2008, the top four Internet Service Providers (ISPs) – AT&T, Comcast, TW-AOL and Verizon — controlled more than half (56.2%) of subscribers; two years later, that number is likely increased. The telecom industry is becoming a single “duopoly” controlling not only the distribution “conduit,” but the information or media “content” as well.

Comcast’s announced plan to acquire a controlling interest of GE’s entertainment operations, including NBC and Universal Studios (NBCU), suggests the likely further integration of conduit and content, the pipes and the media. And with it, there should be further increase in the relative share of video on the web. Sadly, given the Obama administration’s conduct with regard to the “public option” in the health-insurance reform debate, one can expect a similar fate for “net neutrality,” under which all data travels at the same speed over the net, in the upcoming FCC deliberations. These and other actions will only serve to further strangle America telecommunications infrastructure and erode our economic recovery.

David Rosen is author of “Off-Hollywood: The Making & Marketing of Independent Films” and can be reached at drosen@ix.netcom.com.

Bruce Kushnick is a telecommunications industry analyst who serves as the broadband and telecommunications expert for Harvard Nieman’s Foundation for Journalism’s “Watchdog”; he can be reached at bruce@newnetworks.com.

 

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