59 Twists and Turns to Verizon's Calculated Play to Go Wireless and Dismantle the State-Based Wired Utilities

A wireless phone is really a wired phone with an invisible extension cord. Every time you make a wireless call walking down the street, within a few hundred feet there's a 'cell site' that is attached to a wire. Almost every wireless 'hot spot' is connected to a wire and every time you use a device at home, it most likely connects to the wired broadband connection.

Verizon, AT&T and Centurylink have monopoly controls over most of these wires to the cell sites (sometimes called 'backhaul' or 'special access') in their own territories which gives these companies control over your wireless service prices, even speed, as well as control over the wireless service offered by competitors who use these wires.

And the wires used to connect the wireless sites, which can be copper or fiber optics, are part of a larger network of wires, the state-based telecommunications utility, which are the wires that go to homes and offices, not just for voice calling but for everything from alarm services to the wires used for FiOS services or DSL.

Verizon has a very simple but very calculated plan -- go wireless (mobile) at the expense of the wired networks. Fran Shammo, Verizon's CFO, discussing the second quarter 2015 earnings, made it clear that the focus of Verizon is wireless, advertising and digital media.


"As always, we continue to invest in our networks and platforms to position us for future growth. We are very focused on developing new products and services in mobile video and the Internet of Things. We are excited about the potential for revenues from these new products and services to grow quickly and become more meaningful in the future. Our acquisition of AOL will be a key piece in our over-the-top mobile video strategy, accelerating our capabilities in digital media and advertising."

Verizon will point out that wireless is much more profitable than the wired networks, that the wired networks are, in fact, unprofitable and that the plan is to stop doing any upgrades and just shut off the copper wires in large areas of the company's state holdings and force-migrate customers to wireless.

But Verizon (et al.) control most of the critical wired infrastructure throughout America -- If they are not upgrading and maintaining the networks, who will? (Municipalities? Google? I'll get to that.)

And there are others that will say that none of this matters as the companies are deregulated, that the price of service is not related to the expenses. Or that Verizon should be able to move money to the wireless side of the business; it's their money. -- The facts tell a different story.

Let me expose the underbelly of this plan. To summarize:

1) Make the wires look unprofitable through the manipulation of the financial accounting.

2) Dump the expenses for the wires to the cell towers into the wired local service network costs, which makes them look 'unprofitable'.

3) Pump and inflate the profits of wireless and the other businesses by moving the majority of expenses into the local service networks.

4) Give the other Verizon subsidiaries financial advantages, from not paying market prices, moving expenses into local service, or handing over wired customers to the wireless company.

5) Stop maintaining the copper, even in areas where the networks are not going to be upgraded.

6) Continually raise wired phone raise rates by using this claim of 'unprofitability'.

7) "Shut off the copper" in large areas and make wireless the only choice.

8) Stop upgrading the fiber, claiming it, too, is unprofitable.

9) In areas that are upgraded, shut off the copper and move customers onto the fiber optic service or wireless.

10) Don't shut off the wires to the cell towers and keep the monopoly on these wires.

11) Charge competitors inflated rates to use these networks and make money off of every wireless call, etc.

12) Cut a deal with the cable companies to bundle wireless with the cable Triple Play in areas not upgraded.

13) Continue the turning of the screw: Continue this process for years until completed.

Almost all state and federal broadband and infrastructure build out discussions and public policy issues are tied to this plan.

14) This is about the FCC's "IP Transition"-- which claims that "Internet Protocols" are replacing telecommunications and the hype is that it is about going from copper to fiber optics. That's just a 'con'; this transition is using the technology as a 'carrot' to shut off the copper wires and force customers onto wireless.

15) Case in point -- In AT&T's Carbon Hill, Alabama, IP Transition trial, 60% of working phone lines will be shut off and replaced with a wireless phone service that can't even do Internet service or handle alarm services.

16) The migration of the 'copper' is really, then, more about shutting off the copper and forcing customers onto wireless (or the upgraded service where it exists).

17) There's also the American Legislative Exchange Council's (ALEC) "IP Transition" which is based on "model" state-based legislation targeted at removing regulations on the wires to get rid of the obligations so that the ALEC members, AT&T, Verizon and Centurylink, can shut off the networks.

The Impacts

18) This plan helps Verizon get rid of the union staff as their fate is tied to the wires.

19) This plan shuts down wired competitors' ability to compete as they are restricted from using the fiber optic wires and must use only the copper wires.

20) Verizon's control of the wires controls the price of 'special access' service to the wireless competitors, such as Sprint and T-mobile.

21) This controls the final price to customers for all services, wireline or wireless.

22) This even controls the price of cable service and the Triple Play as there is no competition coming from Verizon et al. to lower prices on all services. Nor is there serious competition to fix industry-wide abusive behavior, like the deceptive advertising that offers prices a customer can never get for the Triple Play, or that the overall costs goes up 100%+ after the promotion ends.

23) Bait and Switch -- In some states where there were/are commitments to have territories wired with fiber optics, such as Verizon New Jersey or Pennsylvania, the plan now is to not finish any requirements for fiber optics and replace it wireless broadband.

24) Cities Left Unupgraded -- It has harmed the cities, including those in upstate NY, where the monies to build out fiber to residential and business customers turned into construction budgets for the fiber to the cell towers.

25) The plan is used to claim that Net Neutrality is harming investment and is increasing the slow down of wired construction, even though the companies' investments have been made via rate increases and making the customer a defacto investor.

Some of the Details

First:

26) Verizon Wireless (VW) is a separate company from the wired business and VW's business plan is based on building out wireless coverage that requires cell towers that are connected to the high speed wired networks.

27) Most of these wires to the cell towers are part of the state utility, (though Verizon will claim it is not true).

28) Verizon's wired business are the state-based utilities, such as Verizon New York, which control the "PSTN", Public Switched Telephone Networks, that includes the aging copper wires as well as the fiber optic upgrades that have been replacing some of the copper wires.

The Fiber Optic Upgrades and Wires are classified as Telecommunications, "Title II", and Part of the State Utility.

29) In 2004, Verizon announced a fiber optic-based wired service called FiOS.

30) "FiOS" is not the fiber optic wire but uses these wires; FiOS is a group of services -- cable TV, digital phone, Internet and broadband, commonly known as the "Triple Play".

31) In 2005, Verizon went to the NY Public Service Commission ("NYPSC") and claimed that the fiber optic wires to be used by FiOS TV were just an extension and upgrade and part of the state utility networks.

32) This means that the fiber optic networks are being put in as "Title II", common carriage, telecommunications networks.

Phone Customers Are Charged for the Fiber Optic Construction.

33) Starting in 2005, Verizon went to the NYPSC and was able to secure what would the first of multiple rate increases in 2006 on basic copper-based phone service and add-ons, like nonlisted numbers, to pay for -- "investment in the state telecom infrastructure", and 'losses'.

34) Verizon New York received additional rate increases in 2008 and 2009 on basic service and increases to add-on services for "massive deployment of fiber optics" and 'losses'.

35) The NYPSC allowed Verizon to 'harvest' customers by continually raising rates which helped to force many to drop their lines and use wireless for voice service.

In New York State there have been continuous increases to local rates. Since 2006, basic local service has been raised multiple times, 84 percent, and local phone customers have paid an additional $750.00, not to mention about $300.00 extra for each added item, like nonlisted numbers.

And customers have been 'harvested'-- i.e., the plan has been to continually raise rates until the customer screams 'uncle' and leaves (for wireless) or are gouged.
Policy Shift to Wireless Starts Around 2010

36) Around 2010, Verizon Communications decided it would focus its attention on wireless services and promotes Lowell McAdam, former CEO of Verizon Wireless, to be the new head of Verizon Communications.

37) In 2010, Verizon also announces it will halt any further deployments of FiOS, except based on existing contracts.

38) 'Cut the Copper' in 2012 -- To speed up this process, after the Sandy Storm in 2012, Verizon states it will 'cut the copper' wherever possible.

39) In Pennsylvania, Verizon was able to erase the original agreement to have 100% of their territory covered with fiber optic services by 2015, with speeds of 45 Mbps in both directions. Instead, the company is being allowed to offer wireless as a substitute at DSL speeds.


Divert the Wireline Budgets to Wireless and Other Fiber Deployments.

40) Verizon has taken the budgets for maintaining and upgrading the utility and diverted the money to build out the fiber optic wires to the cell towers.

41) Basic phone customers end up paying for some/most of the construction expenses.
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42) This diversion of the utility construction expenditures stops the maintenance of the networks, allowing them to slowly deteriorate (though this has been going on since at least the year 2001).

43) Verizon's refocus of the construction to do wireless leaves areas in major cities in New York State unfinished.

Fran Shammo, Verizon's Chief Financial Officer stated to investor representatives that the wireline construction budgets have been diverted to charge regulated wireline budgets for the less regulated wireless affiliate's construction needs.

"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 2011, the New York State Attorney General's Office noted that while there was a billion+ budget for construction, 75% of it had been diverted to wireless and fiber optics.

Dump Most Expenses into Local Service

44) Place as many expenses as you can into the state utility, including the costs of the upgrades for wireless and all other lines of business that use fiber optic wires, like special access.

45) Place most of the "Corporate Operations" expense into local service to help make it look unprofitable.

In 2014, Verizon New York's financials showed an expense item called "Corporate Operations" , which came to a whopping $2.6 billion dollars -- that's just in one state and in one year. However, the majority of this expense, 60 percent, has been dumped into the "Local Service" category. This comes to about $1.5 billion in 2014. Problem is -- "Local Service" only brought in $1.4 billion and this one line item alone made local service unprofitable.

Make Local Service Look Unprofitable; Make Wireless Be Very Profitable.

46) Make sure that the wireless company pays a fraction of what the competitors pay.

47) Have the monies from various subsidiary companies that use of the wired networks go into different financial buckets that do not pay for the upgrades of the wires, making the local networks look even more unprofitable and help the revenues continue to decline.

In our previous report we found that AT&T and Sprint paid 2-3 times more than Verizon Wireless paid to the incumbent utility, Verizon NY, for access fees and related expenses for the years, 2009-2010. This was based on Verizon NY's own SEC-filed financial statements.

Moreover, we found "black hole" revenues when comparing different Verizon NY financials. In 2009, there was an additional $2.7 billion dollars in revenues in the SEC books vs the annual reports filed with NY State, but the construction budgets were identical, indicating that a large chunk of revenues was accruing off the regulated books and not paying for the network upgrades.

Manipulate the Accounting of Access Lines

48) Only supply an accounting of copper-based 'basic phone service' access lines and leave out almost all other access lines in service, including any data lines, like special access, or FiOS broadband, or the wires to the cell towers or...

49) Verizon, the FCC and the NYPSC do not have or provide an accurate accounting of all wired lines in service, copper or fiber.

Get Control of the State Commission and FCC or even the State Legislature; No Audits, No investigations, and No Rate Cases.

50) Make sure that the State doesn't audit the books in a 'rate proceeding' over the decade and never investigates the cross-subsidies.

51) Make sure that the FCC erases the requirement to file financial books by state.

52) Make sure there is never a check of the affiliate transactions between and among the state utility and the Verizon affiliate subsidiaries.

53) Make sure that the public has no clue about any of this and thinks that the wires have nothing to do with their wireless phone service.

54) Get the State to issue a report that claims that there is plenty of competition and that ignores or fluffs off any major problems.

55) Get ALEC-like bills to be continually pitched by politicians, and even attempt to stick language in the budget appropriations bills

There has never been an audit of the incumbent phone utilities and the cross-subsidies with the affiliate companies for at least 15 years in any state we could find. In New York, while the NYPSC granted multiple rate increases, there was never any rate case to examine the expenses being claimed.

Cut Business Deals to Solidify the Wireless Plan

56) Cut a deal with the cable companies to bundle the wireless service with the cable Triple Play in areas that are not upgraded (or the wires are shut off).

57) Consolidate -- Pay $130 billion to buy out Vodaphone.

In 2014, Verizon paid approximately $130 billion dollars to buy out the Vodafone group, which had a 45 percent interest in 'Cellco Partnership', (which had a D/B/A as Verizon Wireless).

58) When questioned about the holes in broadband fiber optic deployment...punt.
In June 2015, the City of New York released an audit of the status of Verizon's fulfillment of their commitment to have FiOS cable TV available to 100% of New York City's residences by July 2014.

The New York Times wrote:

"The city's Department of Information Technology and Telecommunications released a scathing audit report in June concluding that Verizon 'systematically refused to accept orders for residential service.' By the company's admission, nearly one-fourth of the blocks in the city have no buildings wired for FiOS, the report said."

Verizon has stated that it has finished the deployment and the rest is just clean up.

And upstate New York, Verizon has left massive broadband gaps in cities and has stopped deploying FiOS and doing fiber optic upgrades, only covering 186 communities with a FiOS cable franchise out of 932 towns and 62 cities.

WAMC

"Despite what you may have heard from civic leaders, upstate New York areas currently not served by Verizon FiOS won't be getting the high-speed internet service soon. And maybe, not at all.

"From Central New York to the Catskills and the Southern Tier to the Capital Region, people are clamoring for high-speed internet, and they've heard good things about broadband, especially when it comes to Verizon's fiber optic FiOS service. But Verizon says it has no plans to bring that service to places where residents currently make do with less than desirable or no service at all, such as large parts of cities like Kingston and Albany along with Delaware, Sullivan and Schoharie Counties."

59) Municipalities are not going to rise up.

There are some who believe that Google Fiber is the savior of municipality gigabit speed broadband. While inspiring, even with all the hype, Google Fiber only has about 30,000 customers, total.

Bloomberg writes:

"Google Fiber, which started in 2012, has 27,000 video subscribers combined in Kansas City, Kansas, and Kansas City, Missouri, and less than 3,000 in the other cities, according to U.S. Copyright Office data collected by MoffettNathanson."

The cities and towns aren't going to rise up to do bypass of the incumbent companies.

We will be discussing other options in the next few weeks as leaving everything on this course harms America, except for maybe Verizon's executives.