The Fine Print: How Big Companies Use Plain English to Rob You Blind

by David Cay Johnston

  Under historic notions of fair commerce, either price would be considered unconscionable. But cable companies are free to charge such high prices, having persuaded Congress to enact a law in 1992 that bars cities and towns from granting exclusive franchises to provide cable service. Congress also forbade localities to regulate prices. All of that might seem like a guarantee of competition, but in the cable marketplace, the opposite often proves true.

  Cable systems are capital intensive, meaning their biggest cost is wiring homes and running the necessary equipment. The most efficient way to operate a cable system is to sign up as many homes as possible; the greater the density of customers, the lower the initial capital costs per customer and the higher the eventual profits. That’s obvious enough.

  A company that wants to enter the market and compete must bear the cost of stringing cable, wiring homes and then convincing existing cable customers that it will be in their interests to switch to the company’s services. The argument is easy enough to make when a product is obviously different—a one-piece swimsuit instead of a bikini or an SUV instead of a sedan. But while the lineup of channels may differ slightly, one cable system is pretty much like another. As a result, price is likely to be determinative. Let the competition begin, right?

  In practice, the technically nonexclusive franchises in most localities and the ban on price regulation hasn’t resulted in widespread competition of the sort the industry’s expert witnesses said would happen. Look around: Where do you see Comcast going into a territory served by Cox? Or Cox taking on Time Warner? Each stuck to its existing territory and raised prices. As with the twin railroad duopolies in the West and East, there’s an unspoken understanding that, so long as none of the monopolists tries to poach customers from another by cutting prices, everyone gets to earn fat profits, all thanks to Congress.

  Now, let’s go back to Glasgow, Kentucky, and the city-owned cable system. Telescripps looked askance at its upstart competition, which charged much less, threatening Telescripps’ profits. Telescripps took the Glasgow Electric Plant Board to court. Telescripps spread campaign money around and lobbied state and local politicians. A study by the Progress & Freedom Foundation said the Glasgow municipal system was a money-losing disaster propped up by taxes. The study’s conclusions were unsurprising to those who knew that the foundation was not an independent research organization, but a front for the big telecommunications companies. Newt Gingrich founded it when he was Speaker of the House to raise money from telecommunications companies lobbying the terms of the 1996 Telecommunications Act.

  Billy Ray, the Glasgow municipal system superintendent, admits that the study findings were true—sort of. The system was indeed in the hole when the study came out, but the reason had nothing to do with inefficiency or mismanagement. “The Progress & Freedom Foundation study neglected to mention that the only reason was all the money we had to spend on lawsuits fighting Telescripps,” Ray said, as well as “all of the dirty, underhanded, dishonest tactics they used to stop us so they could keep their monopoly.”

  For a pretrial hearing in its federal lawsuit against the city, Telescripps brought in Burt Braverman, a high-powered Washington media lawyer. Braverman laid out the company’s grievances before federal district court judge Ronald Meredith in Bowling Green, a jurist well known for his rock-hard conservatism. The judge listened to Braverman and then, looking down from the bench, told the lawyer that “it sounds like you don’t want any competition down there in Glasgow.”

  Braverman later wrote an article denouncing “curious and disturbing” municipal cable television systems, claiming they lose money and are “fundamentally unwise and unfair, and amount to bad public policy.” It was like most such attacks by the telecommunications industry: long on rhetoric but short on hard facts. Braverman is one of the most influential figures shaping cable industry policy, working hard to make sure it favors the industry rather than its customers, so his words deserve attention. He wrote that the “justification for municipal forays into cable—the need to subject private cable providers to competitive discipline—rings hollow” because of growing competition from commercial providers. He also claimed that municipal systems “divert scarce public funds to the provision of nonessential services that can be more than adequately provided by private enterprise.”

  Experience shows otherwise. Municipal systems cover their costs from subscriber payments, not taxes. They make money for the public, unlike tax-free debt financing, which Congress has now made available to many private enterprises. Municipal systems are run as a public service rather than a profit-making venture—with the emphasis on service. Municipal systems generally use newer and faster technology than commercial cable companies offer, in some cases allowing cities to attract large digital businesses with big payrolls. Chattanooga, Tennessee, became in 2011 the only American city with a one-gigabyte Internet, providing municipal service that is two hundred times faster than the commercial system average. Many other municipal systems offered speeds five to twenty times faster than the commercial purveyors.

  Glasgow upgraded its system twice since 1987 but continued to charge significantly less than Comcast in surrounding communities. By 2010 Glasgow residents had saved a total of $30 million compared to what Telescripps and, later, Comcast charged. That amounts to more than $2,000 per Glasgow resident over twenty-three years. These savings alone come to triple the original $10 million cost of building the system.

  So Glasgow residents saved substantial money and got a superfast and efficient Information Superhighway; elsewhere Americans spent, on average, more than $3,000 each. Many do not now have and under current law never will get on that digital highway. Unwilling to invest to match the Glasgow system, Comcast dropped its lawsuit and sold out in 2002, accepting $3 million from the city for its wires and equipment in and around Glasgow. Yet ten years later, Comcast still advertised that it served the city. I put in the home addresses of both Billy Ray and the mayor at Comcast’s Web site, which said service was available, even though it is not. You won’t be surprised to learn that the listed prices were higher than the city charges.

  A handful of other cities and towns followed the Glasgow example to improve their local economies. One was the tiny Alabama town of Scottsboro, which built a municipal system in 1998 to get television signals from Chattanooga. The city offered 150 channels. That put Scottsboro in competition with Charter Communications, the cable company controlled by Paul Allen, one of the cofounders of Microsoft, a company that grew fabulously valuable by pursuing monopolist strategies in personal computer software. But Congress’s rule about pricing came to Charter’s rescue.

  Charter, which has more than 6 million subscribers nationwide, immediately cut its price to under $20, about a quarter less than the city charged. It also forgave old bills owed it by former customers if they returned to Charter. The municipal system began bleeding customers.

  “Charter was still charging much more in the surrounding area,” said Jimmy Sandlin, the Scottsboro municipal system manager. “It was classic predatory pricing. Charter used its profits from all of its other customers to subsidize selling service in Scottsboro at below cost so it could run us out of business.”

  Sandlin fought back. He sent a letter to everyone in town showing the much higher prices charged in the suburbs. Sandlin told people that unless they stayed with the city system, a short-term bargain from Charter would soon enough become a larger expense once the city system failed. The campaign worked, and people stopped leaving the city system for the Charter offering; many others came back. Since then the city has expanded its service, adding Internet and telephone, all at prices far below what commercial providers charge in the surrounding communities.

  Terry Huval, whom we met earlier at Lafayette Utilities System, believed that economic growth in his city was held back by the costly and slow information systems available in his Louisiana city from Cox Communications, the nation’s third largest cable provider and a subsidiary of
Cox Enterprises, which is controlled by a wealthy Atlanta newspaper family. At the special election to decide whether to build a municipal broadband system, Huval predicted that just 5 percent of voters would turn out. He was wrong: 30 percent cast their ballots to approve overwhelmingly an expanded municipal electricity network that includes telecommunications.

  Places like Chattanooga, Glasgow, Lafayette and Scottsboro that have built their own municipal systems are attracting new industries and enjoying savings at the same time. Communities stuck with the emerging cartel of AT&TVerizonCenturyLinkComcastCoxTimeWarner pay higher prices for much slower connections. In large parts of the country, the unwillingness of the cartel to invest in infrastructure means that residents there face continued reliance on nineteenth-century copper-wire technology or mid-twentieth-century coaxial cable for television and Internet.

  In the twenty-first century, economic growth requires the ability to move huge volumes of information instantly. The Internet is to the digital age what highways and airports were to economic growth in the twentieth century and what railroads and canals were to the nineteenth century. America prospered in its first two centuries because of massive public investments in the common modes of transportation that business needed to carry its goods. As it proceeds into its third century, the United States suffers from massive overcharging for poor-quality telecommunications services that carry its information.

  The economic interests of these companies simply are not in line with those of the country. Corporate executives look first to the profit statements they issue every ninety days and then to annual figures, not to what is best for all of us a decade or two into the future.

  LIVING IN THE INTERNET SLOW LANE

  There’s a mountain of data from numerous surveys that helps reveal how the companies that most Americans and most businesses must rely on for Internet access are damaging the economy. Let’s take a short hike up that steep trail.

  The United States invented the Internet, so it ranked number one when the first file was transferred between distant computers in 1969. Taxpayers financed that project through DARPA, the Defense Advanced Research Projects Agency of the Department of Defense. Browsers, which made it easy to use the Internet, also were first used here. Mosaic Netscape, the first popular browser, became available in 1994, spawning the dot-com (and, by the way, the dot-con) era(s) on Wall Street. That browser was the product of research at Indiana University.

  By 2011, America’s Internet leadership was strictly historical, as we lagged far behind the rest of the modern world by every standard measure except one.

  South Korea has taken the lead in average Internet speeds. Its average download rate was 18 megabits per second, according to Pando Networks, which helps Internet game and video companies move their data efficiently from servers to customers. Romania came in second at 15 mbps, Bulgaria was next at 13 mbps with Lithuania and Latvia tied at 11 mbps. Next came Ukraine, Moldavia, Sweden and Norway.

  America was settled well back in the pack—in twenty-ninth place. It was really twenty-ninth and falling, however, because of a continuing failure to make wider investments in universal high-speed access using glass fiber. Under current government policies, we’re likely to be stuck in the slow lanes for a very long time.

  The average broadband download speed in 2011 in the United States was just five mbps. That means that a large file someone in Seoul could download in one minute would require closer to four minutes in the United States.

  For an extra fee, American companies like Time Warner do offer some urban and suburban customers souped-up service with speeds up to 50 mbps. However, the qualifier “up to” remains a big caveat. Customers complain at message boards about much slower downloads, sometimes only 60 percent of the advertised speed. When lots of people use the same connection point, known as a node, speeds can slow to 15 mbps.

  The Central Intelligence Agency, the Organization for Economic Cooperation and Development (which counts the United States among its thirty-four member nations) and other organizations issue annual reports measuring Internet speed, quality, market penetration and other factors. All of these rankings put the United States in the middle of the pack and falling further back from year to year.

  We do consistently rank at or near the top in one category: price. The average American consumer pays 60 percent more than a South Korean user. By one measure Americans pay thirty-eight times the Japanese rate to transmit data. Americans who buy a triple-play package (cable television, Internet and telephone bundled together) typically pay four times what the French pay. The French get live television from around the world, not just domestic shows. The French also get unlimited free telephone calls to seventy countries; Americans typically get free international calls only to Canada. The French Internet is ten times faster downloading and twenty times faster uploading than what most Americans can buy. For all this the French pay a total of €29.99 (about $40) per month.

  Millions of Americans, including my household, pay $160 or more, including tax, for a triple-play package. Taking into account the much more expansive and faster services the French get, and depending on how much use one makes of them, Americans pay six to ten times as much for their triple-play packages as the French.

  Since most Americans don’t travel abroad, they have no idea that the quality of our nation’s Internet services are slowly devolving toward the third world’s standards. Even for those who do know how poorly our network compares to the rest of the modern world, there is little they can do to improve their own service. Most Americans have only two Internet choices—pay the local monopoly provider or go without. In places with two broadband providers—typically a telephone company and a cable television company—pricing and speeds are likely to be interchangeable. And now even the appearance of competition is disappearing with the cartelization of the industry.

  Having looked at the numbers, what are their economic implications?

  We’ve all heard the talk about the twenty-first century’s economy being digital. And about how the industrial economy that began in the mid-nineteenth century, which produced vast numbers of good-paying jobs into the late twentieth century, is giving way to a new world of services.

  One practical consequence of this transition is that, because many of those services are delivered over the Internet, many white-collar jobs are at risk. As long as Internet traffic moves down two-lane country roads instead of the Information Superhighway, America’s economy will lack momentum, too.

  The Internet’s digital economy has resulted in a new way of defining jobs, with the categories tradable and nontradable. The first kind of job can be sent offshore, the second cannot. The shift of tradable jobs offshore explains most of the wage stagnation in America, especially among blue-collar workers. Millions of factory workers lost their jobs as fifty thousand factories closed in the last three decades, many thanks to government policies that traded jobs to the benefit of Wall Street under free-trade policies.

  In terms of job creation, tradable jobs accounted for only 2 percent of newly created positions between 1990 and 2008, according to Professor Michael Spence, an economist at New York University’s Stern School of Business, and researcher Sandile Hlatshwayo. Their analysis of jobs data found that 98 percent of new jobs were positions that require physical presence here and that the two largest providers of nontradable positions in 2008 were in government and health care. Government at all levels accounted for 22.5 million jobs in 2008, health care some 16.3 million jobs.

  Yet in the digital economy, what might appear to be comforting news may not be. Consider that any job done at a computer is also tradable. And, as the Spence report explains, “The tradable side of the economy is shifting up the value-added chain, and higher-paying jobs may therefore leave the United States, following the migration pattern of lower-paying ones.”

  This trend is already visible. Tax returns for clients of the Big Four accounting firms are routinely prepared in India, not the United States. Ar
chitectural, engineering, design and statistical firms send growing volumes of work offshore. Los Angeles Times display ads are put together in India, not Southern California, because the finished digital page can be transmitted halfway around the world in the time it takes to carry it from one office to another in Los Angeles. The labor cost savings are huge because India—like China and the rest of Asia—is filled with educated workers who work for a fraction of what Americans with the same skills cost.

  The hard truth about the digital age is that future American jobs, and how well they pay, will be determined in good part by whether America climbs back from twenty-ninth place in Internet speed or continues to slip further behind countries like South Korea, with their lower wage scales and superior Internet.

  The few places in America where local government leaders recognized this years ago are now prospering relative to the rest of the country because they are attracting digital businesses. But instead of emulating such successes, the monopolists seek rules that let them force their captive customers onto the slow digital lanes while charging heavy tolls. To stop more cities from building high-speed Internet systems, the monopolists get laws passed to shut down the competition where they can. In North Carolina they got a law essentially banning municipal systems. Robust profits remain the top priority for the growing cartel; world-class service that engenders economic growth goes largely unmentioned.

  So what has happened to that promise so brilliantly packaged in the Qwest ad from Roy’s Motel? Looking back, we see a massive scheme that took $360 billion from telephone customers, and at least $100 billion from cable customers, to build a new fiber-optic system that serves only those the telephone and cable companies wanted to serve in densely populated areas (provided they were not poverty-stricken). Instead of universal service, we are getting a retrenchment made possible by companies selling the public on one idea and then getting laws written that let them serve only those customers who can afford high prices. Curious, isn’t it, how politicians who denounce Social Security, Medicare and even public education as wealth redistribution schemes never mention these privatized systems that take from the many to benefit the few?