The Fine Print: How Big Companies Use "Plain English" to Rob You Blind (10 page)

The cross-marketing deal Verizon and Comcast made is not competition, but the start of a cartel. It is much closer to the intertwined corporate ties that dominate the economies of Japan and South Korea than the American ideal of competitive markets. It reinforces the economic interests of telephone and cable companies by not extending lines to rural areas or poor neighborhoods and not wiring apartment buildings where few people could afford the new services.

Cable companies jacked up prices, too. Since 1995, average cable prices have been rising 2.6 times faster than the cost of living, reaching an
average of almost $53 a month for basic, no-frills service in 2009, FCC reports show. Some cable companies are not content with annual price hikes. Comcast raised prices twice in ten months in 2011 and 2012 on its 1.8 million Boston-area customers. Service that cost $58 in 2009 came to almost $67 in early 2012, increasing at more than twice the rate of inflation.

The strongest evidence that the cable companies exert monopoly power to raise prices comes from a survey of prices for basic service plus the most commonly purchased extra features such as handheld remotes and premium channels like HBO. In 2008, the worst economic year since the Great Depression, when the national economy shrank and millions lost their jobs, cable prices rose. What is more astounding is that, for the first time in decades, there was no inflation that year. A dollar was actually worth 3.6 percent more in 2009 than in 2008. But the cable companies raised prices 5.9 percent that year, according to a survey that the FCC relies on. That’s a real price hike of 9.5 percent.

Of course, the FCC figure may be wrong, too, as it might understate actual increases. According to SNL Kagan, a market research firm, the average cable television bill in 2011 was $78, almost double the $40 price in 2001 and significantly higher than the FCC figure. Had the price just increased at the rate of inflation it would have gone up only $11, not $38.

What do these prices mean? In 2010 half of all workers made less than $507 a week, according to Social Security Administration wage data. After taxes, then, a single person at the median wage had to work for two full weeks, plus most of the following Monday, just to make enough, after taxes, to pay the annual cost of cable service.

While cable prices rose sharply from 1999 to 2010, the median wage, adjusted for inflation, was essentially flat during those twelve years. That means cable television consumed a growing share of people’s incomes, leaving them less money to buy other goods and services. Because they are monopolies or part of a duopoly in most localities, the cable companies leave the consumer with a simple choice: submit to cable-company pricing or go without the service.

LET’S GO TO GLASGOW, KENTUCKY

One community unwilling to submit to monopoly pricing was a small Kentucky city whose name recalls the Scottish heritage of its early settlers. Cable service wasn’t merely a convenience for the 15,000 people in
Glasgow, as the nearest broadcast stations are across the Tennessee border in Nashville, ninety-five miles away, too far for TV signals to carry over the air. But Glasgow residents complained of poor service and high prices from their monopoly cable provider, Telescripps (later acquired by Comcast).

The Scots have a proverbial reputation for being thrifty. After all, Scotsman Adam Smith first identified and explained market competition in his 1776 book
An Inquiry into the Nature and Causes of the Wealth of Nations
. So perhaps it is not surprising that there was popular support in Glasgow for creating competition by building a city-owned cable system. In 1987 the Kentucky town built its own broadband system, spending $10 million (in 2012 dollars), about $667 per resident. Once municipal cable became available, prices plummeted. The cost of basic service dropped by half; the cost of a handheld remote fell from $4.95 a month to under a buck.

The handheld-remote charge illustrates how modern price gouging works. Cable companies typically just provide one when signing up a customer. Many people assume the company-owned remote is required to change channels to avoid getting up to push the tiny buttons on the cable box, but in fact you can buy your own remote at an electronics store for under $10 retail. Remotes are so inexpensive that most companies don’t require their return with the cable box when service is cancelled. However, the remote the cable company rents you comes preprogrammed, while a remote you buy retail involves some setup.

Telescripps charged nearly $5 a month for the remote, generating an annual profit on devices in the range of 2,000 percent. Telescripps’ charge was high, but even at the seventy-five cents a month some cable companies charge today for a remote channel changer, the annual profit remains several hundred percent annually.

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.