A Practical Navigator for the Internet Economy

Does Verizon Have a Social Responsibility to NJ or to Any of the States it Serves?

In NJ, State Government Has Abrogated its Regulatory
Responsibility Leaving Verizon to Act as Economic Predator

Our feature interview describes a multi year long streak of questionable practices by Verizon in New Jersey. We see the situation as a symbiotic relationship between politicians in state government who are happy to let Verizon continue to act as an unregulated free market engine that works to benefit its executives and the expense of its customers in a way reminiscent of pre meltdown Wall Street.

The predatory enablement of the telco incumbent in New Jersey began 20 years ago with the successful effort of the Deloitte Touché - NJ Board of Public Utilities funded study on New Jersey’s telecommunications future. This study was used by the BPU and NJ Bell, later Bell Atlantic, and finally Verizon to, in the aftermath of the 1984 break up and the rise of free market funamentalism, change the regulatory environment for the state’s local phone company. The change was from the staid rate of return utility model that had made ATT a blue chip for people to count on for retirement since 1934 to a darling of Wall Street model that would take whatever risks necessary to participate in the beginning of the great bull market that ended last year. It opened the way for the NJ incumbent to earn vast new sums of money. In return for the change, NJ Bell and Bell Atlantic agreed to a course of action that they asserted would increase NJ tax revenues and employment. Most important of all they promised to reinvest their increased revenue by building a fully symmetric 45 megabit per-second fiber optic infrastructure to all customers in the state.

The Consequences of Deregulation Run Amuck

As is by now well known, this did not happen. Verizon got a huge windfall. New Jersey lost jobs, and lost tax revenue. Our discussion with Tom Allibone recounts these events in detail. We outline the ways in which Verizon, by getting itself effectively deregulated on the federal and state level, has been able to enforce practices on its customers that leave them with little choice but to accept. Customers, without the protection of tariffs, are forced into contracts of adhesion where Verizon billing systems send incorrect bills and the customer has no choice but to pay or loose service.

We trace in great detail an as yet little recognized struggle on Verizon’s part to quit paying the state’s Business Personal Property Tax. Verizon has been paying NJ municipalities about $100 million dollars a year as recently as 2000. It is down to 43 million a year now and Verizon’s lobbyists are informing municipal governments that payments will soon cease because they claim to be under fierce competition and point to a clause that says the tax is applicable only to companies that have 51% or more of the local phone lines in a political jurisdiction.

The only problem is that as Verizon makes these assertions there is no means of independent audit and ample reason to believe that the company is not telling the truth. We present evidence that, to support this assertion, Verizon has tried to spin off its FiOS arm as an independent unregulated information service and claim therefore that lines lost to its FiOS customers are lines lost to competition – all of which brings Verizon closer to its “trust us” 51%-of-the- phone-service belongs to competitors so we do not pay BPPT to your township any more.

But this line of revenue enhancement on Verizon’s part seems to involve some other issues. Verizon’s FiOS marketing has involved deceptive practices that have become so blatant that the NJ State Attorney General actually launched a class action lawsuit against Verizon on March 19th. sadly the State AG Office is the only part of state government to lift a finger on behalf of its citizens. In looking for a down loadable pdf of the complaint I just found that the NJ Divsion of Consumer Affairs is soliciting input from residents who bought FiOS in the past 24 months.

Our discussion with Tom shows that verifiable inventories of Verizon property in the state have never been taken since divestiture. Some local audits now are uncovering poles that are, in effect, off the tax records. A Verizon VP of Taxes sent written assurance to Tom’s mayor that Verizon in payment of local taxes did not depreciate more than 80% yet a councilman in Summitt New Jersey claims to have records that show 90% depreciation. Verizon is legally required to remove broken poles but there is no enforcement of penalties for non removal.

The BPPT situation is set up in such a way that the ability to enforce the state law governing the tax is removed from the hands of municipal authorities. Verizon has constructed an arrangement with the State Division of Taxation where records of the value of Verizon’s inventory and the nature of the inventory itself are sent every year to Trenton. There, with no public transparency or oversight, each township is told every year the dollar amount of Verizon property on which it can level its local tax rate.

Yet when Verizon decides it wants more revenue, it goes to NJ politicians be they the Seantor Doria’s of the legislature or Governor Corzine. the politicians always come through. When it threatens to close its Newark offices, it winds up being relieved of its legal responsibility to pay 1.9 million in taxes every year to Newark. There is no one following the big picture – no one speaking on behalf of the public just the Verizon friendly former investment bank billionaire who is now Governor of NJ and free to help a business friend out. It is a sordid picture full of interrelated complexities of Verizon is using its cozy relationship with NJ politicians to maintain a one-sided predatory relationship with the state of New Jersey. One may only wonder if we will every see the day when, as a part of the pendulum swing, the people of NJ and other states will be able to demand redress from the abuses of the currently all powerful incumbent.

Verizon gave its lead attorney a ten million dollar plus retirement bonus last year – one that was written up in the New York Times. One that caused another well known telecom attorney to write on our list that this was to be expected. Under the mantra of market fundamentalism “the best investment a regulated company can make is in regulation and litigation, not infrastructure or new products.” I would only add that this avarice need not be not a sine-qua-non of regulation if we can only do a fundamental reset of the expectations for our political system and economy.

Symposium Discussion

Data Traffic Growth and Associated
Financial Strategy  p. 34

A discussion on estimated of traffic growth rates something for which there is little reliable data and which our exp[erts point out has been slowing down.  Ecxcept for perhaps I-phone traffic on the mobile side.

Rood: T-Mobile in the Netherlands has reported a sevenfold year-on-year data traffic growth for the month of Dec 2007 to Dec 2008.

The difference has been the iPhone 3G (launched together with the iTunes App Shop last July).

Iliad versus Orange

Illiad is using  favorable circumstances in the Paris area to do a Fiber over build of Orange’s mobile network.  Benoit Felten has subtitled the iliad investor conference and put the results on his blog.  Iliad is announcing ‘investing in optic fiber will make our margins explode. Today an unbunbled customer is 50% margin or thereabouts. When we migrate the customer to optic fiber, we move to 85 or 90% margin."

Hndrick Rood explains hat Illiad is using the ladder of investment strategy for its overbuild.

1. Companies that enter the telecoms market start to invest first in assets that are easy to enter.
2. They then expand by selling services and building assets into complementary areas with partially leased network elements.
3. When successful, they follow it up by creating a deeper asset base to serve their customer base and get rid of the costs of leasing.

The key strategy point of the "ladder of investment" is that you enter a new market from a complementary asset base by leveraging your existing customer base onto your new assets.

Electronic Medical Records  p. 41

COOK Report: according to the NY Times; the current health record suppliers as offering pre-Internet era software - costly and wedded to proprietary technology standards that make it difficult for customers to switch vendors and for outside programmers to make upgrades and improvements."

Is there was a business opportunity to develop open source records?

Harrowell There already is - see www.hardhats.org.

Editor: It turns out that the Veteran’s Administration has a major open source efforts called VistA VISTA (Veterans Health Information Systems and Technology Architecture. http://www.hardhats.org/dhcptovista.html

Fiber versus Wireless in Rural Areas  p. 45

All eight of these points were made in generally in our comments to the FCC.  While everyone agrees we want both fixed and wireless broadband, the reality is we don't have enough money in the stimulus to do either.  Getting the biggest bang for the buck is crucial and middle mile fiber/first mile wireless wins that competition by a miles.

COOK Report: I'd like to add however that while from a technology point only - I agree with Jaap that fiber - all fiber - is the goal, I am in Mark Cooper's camp.

Why? Because after talking with Mark in some considerable detail, I have come to realize that there are political, procedural and economic issues in the current US situation that make his approach strategically much more sound.

Mapping of Service Areas in Rural
America Has Become a Huge issue p. 47

Estrada: Mapping has its place - mostly as a community organizing tool to create collaborations between local communities and local providers. There is a LOT more analysis that needs to take place about a region that is way beyond a simplistic, distorted mapping of combined upload/download speeds that will drive sensible spending of the ARRA funds.  [snip]

But, Sara's experience with Broadband Census, the known issues with the California map, the continuing saga of Connected Nation vs. North Carolina, all point in one direction - mapping, while a handy tool if you know what to map and you have verifiable, reliable data sources, is like any other data base - garbage in leads to garbage out.

Or, in the alternate view, one can make a map say anything they want. The question really boils down to where the data comes from --what I think Sharon Gillette posited very succinctly in her Roundtable remarks and what Sara Wedeman. is talking about in her posting - publicly accessible, verifiable data is the most reliable way to build the maps and the only way the government should spend our tax dollars.

Atkinson: On the Broadband Mapping rountable, John Horrigan of the Pew Internet Project seemed to support the idea of greater Census involvement and he, like you, recalled Census involvement in previous years.

Rose: Susan,  It is not about humiliation.  It is about control.  The private sector enjoys access to a national resource, the electronic spectrum, only on the sufferance of the public.  Spectrum is a resource allocated by the state.  The deregulatory madness which has gripped the American political economy has encouraged the private sector to ignore this basic fact and pretend to property rights in a public resource.  Demanding full public access to broadband availability and subscribership data for all providers is a first, small step to restoring the proper relationship between public and private interests.  It is only with the restoration of a regime of much tighter regulation that unserved and underserved areas can be accurately identified because it is in the economic interest of incumbent providers to conceal the information.  

Australia New Zealand Fiber: p 57

Cooper: These two announcements signify the near disappearance of market fundamentalism from the global communications space.  Virtually every national government, except the U.S., has recognized the need for a well regulated communications infrastructure that receives a substantial subsidy and is operated on an open basis.

Communications networks are collective goods that produce massive, massive positive externalities, and the information that flows over those networks is a public good.  Market failure is inevitable  The U.S. continues to labor under the fiction that the market will deliver the infrastructure, confining its public policy to those few areas where the market is deemed to have failed (un and under-served), rather than admit there is a pervasive market failure.  As long as the U.S. clings to a failed economic ideology, its standing in the global communications race will continue to decline

: In the long term, the owner of a shiny new fibre network will have the "firepower" to win against an incumbent running aged infrastructure with significant performance limitations - and hopefully this reality might motivate a level of collaboration that historically has not come naturally to a party like Telstra.

Please don't let the financial challenge that I'm highlighting detract from the enthusiastic support I have for this initiative - it "ticks every box" (and more!) on a number of issues that I have been lobbying for several years. The devil will be in the detail!

Macaulay: A few NZ oriented  notes in response to recent  posts.  snip 4) The key to success in the NZ/Aus market will be the ability to get start-ups to focus on providing a wide range of revenue earning services over the network to  make the cash flow hum.

Loan Guarantees for Rural Build out?  p. 60

Cook Report: Personally I would hope that Susan Crawford and other folk involved at at RUS and NTIA would not let the expertise of private lenders anywhere near this.

I have also been reading Geoff’s much more detail explanation at  his blog.  I am reminded of Geithner's  proposed public private leveraging to buy up toxic assets. Personally I am against adding layers of complexity to this..  no thanks.  Let individual projects stand or fall on their own merit.

Daily: Gordon,  The reason to pursue loan guarantees is simple: it could make tens of billions more in capital available to fund broadband deployment. In particular, I know of at least $3 billion in shovel-ready fiber projects that would start moving immediately if there was money available to do so.


Does Verizon Have a Social Responsibility to NJ or to Any of the States it Serves?

In NJ, State Government Has Abrogated its Regulatory Responsibility Leaving Verizon to Act as Economic Predator

Introduction                                                             p. 1
Early 90s -- New Jersey Bell Aided by 
Deloitte BPU Study Gets Deregulated                            p. 4
Buildout Promised Increased Revenue and Employment –
The State Did Not Enforce                                 p. 7
Verizons’ Tax Obligations to NJMunicipalities -
The Business Personal Property Tax                            p. 8
The State of NJ Unable to Question Verizon’s Compliance with
its Own Tax    Law                                                p. 10
PPT and the 51% Opt Out Clause                                    p. 11
Is the Word of Verizon Credible? Ask the NJ State Attorney General    p. 13
Carrier Tax Revenues Are Disappearing As Well as the Jobs the
Carrier Promised to Maintain                                    p. 14
Access New Jersey is Ignored by More Savvy School Districts        p. 16
Deregulation Eliminates Tariffs and Leaves
Customers at Mercy of the Predator                            p. 17
The Competition Smell Test                                        p. 19
Dennis Bone Enlists the Legislature and the League of
Municipalities to Overthrown the PPT                            p. 21
Pole Audits and Tax Avoidance                                     p. 27
West Amwell’s PPT Data                                            p. 29
The People Must Demand Change                                p. 32
Conclusion: the Problem is Systemic                                p. 33

Symposium Discussion March 18 - April 14

Data Traffic Growth and Associated Financial Strategy                                                      p.34

The Financial Metrics of Iliad versus Orange            p. 37

The Ladder of Investment Theory                        p. 39

Declining Costs Make New Frontiers Possible            p. 40

Electronic Medical Records                                p. 41

Incumbents (Like the Banks) Spurn Stimulus Funds    p. 43

Fiber Versus Wireless in the Rural Broadband Last Mile  p. 44

Broadband Mapping
Perils, Promise and Politics                                p. 47

Fiber Buildouts in Australia and New Zealand

New Zealand Fiber Buildout                                        p. 54
Australian National Broadband                                    p. 55

Fast-track Partial Loan Guarantees at RUS and NTIA    p. 60

Executive Summary                                         p. 64