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There Is No Internet Freedom Without Internet and Broadband Competition

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The unknown history of Internet Service Providers (ISPs) in America is an ugly tale of government intervention, not free market enterprise.

Most reporters and pundits today call AT&T, Verizon and Comcast et al "Internet Service Providers". They are not. AT&T and Verizon (and Centurylink) are the incumbent telecommunications utilities that have taken control of the wires as have the cable companies. In fact, they were able to get the government to protect their businesses to keep monopoly controls over the wires.

In most of America, customers are stuck with one or two wired providers. Customers have more choices in deodorant or toothpaste than they do of Internet or broadband providers as the incumbent wires are controlled by the cable or phone company. And with AT&T and Verizon having announced they are not going to upgrade most of their territories, or worse, that they plan to abandon whole areas of their wired customers, it's more like an Internet prison for customers.

And now, with the new threats by AT&T, working with the American Legislative Exchange Council, ALEC, to close down the entire telecommunications networks and obligations on both a state as well as federal level, it is time to stop these movements and start by bringing America real "Internet freedom", not simply freedom for the companies from regulation.

And it isn't simply about the Internet or broadband but includes all services over the wire, such as phone and cable, as well as the costs of service. The companies have "vertically integrated" their services through the companies' affiliates, commonly called bundling -- i.e., the local, long distance, Internet, broadband and even cable services are all part of the "walled-in gardens" where customers are forced to "bundle" or pay more.

However, this is not just about the competitors. It's about you, your family and your business. You lost the right to choose a competitor -- a competitor who doesn't track where you go on the web, a competitor that doesn't act as the police or gatekeeper and monitor your activities, or has the discretion to just shut off your service, or a competitor that doesn't put on bandwidth caps or create a governor over the speed of your service. Maybe the competitor charges you less money or offers your services a la carte, or helps and respects your privacy, or provides other perks like actually answering their phones or emails when you have service problems.

Most importantly, however,it is about America's economic growth and innovation. The largest growth of telecommunications services and one of the largest periods of economic growth in America was created by the opening of the networks to competition for Internet, broadband and phone service. And this growth was created by the small Internet providers, not the incumbents. I'll present the facts in a moment.

Net Neutrality Is Solved by Competition.

There are those who yell that Internet freedom is about Net Neutrality. They are missing the main point -- you can not have Internet freedom if you do not have Internet and broadband competitors.

"Net Neutrality" is currently back in the news as Verizon has taken the FCC to court so that they can tighten their controls over the wires. The FCC has a set of basic "open Internet" or more commonly called "Net Neutrality principles," which Verizon objects to.

Net Neutrality is an attempt to supply protections against a phone or cable company from degrading or interfering with the customers' service or giving their own services preferential treatment, among other harms.

However, if you examine these principles closely, they do not say that the networks should be open to competitors. No one is talking about the fact that the government helped now-AT&T and Verizon close down Internet, broadband and phone competition over the customer-funded wires.

With competition, Net Neutrality is moot; most of the problems vanish. If the phone or cable company harms your service, you simply choose someone else. But there isn't anyone else. As we mentioned, customers have more choices in pizza parlors or bubble gum than they do for Internet or broadband providers.

In fact, Net Neutrality only became an issue once the phone and cable companies got the government to protect their businesses from competition by blocking who could use the wires -- even wires that were upgraded.

And this is about to get ugly as some experts believe Verizon will actually win parts of the case with their claim that the FCC has "overstepped" their legal authority to impose Net Neutrality rules on information services. Our belief is the only way to deal with this problem long term is to bring back competition on the wires.

Small Was Beautiful: The History of Internet and Broadband Provisioning in America that You Probably Don't Know

In the 1990s a new breed of tech entrepreneurs appeared who started small Internet service companies to help America get online. This craze was tied to the newly created World Wide Web and empowered with a web browser and other items like wizzy-wigs web design tools that allowed almost anyone to create a web site, or new tools to get email. The Internet boom was upon us.

Using a regular computer with a modem attached to a phone line, customers could dial-up their Internet provider who would connect them to the Internet. The Internet is not the wire and it is not broadband, which is the speed and capacity of the wire. It is an "information service" by definition and it travels over the networks.

Online services had been around for the previous decade. There were thousands of computer bulletin boards (bbs) which were separate places someone could go via a modem connection. However, there were a number of larger players offering online services. AOL, CompuServe and Prodigy were three of the largest online companies, but they were walled-in gardens; the Internet was a separate outside-the-walled-in-garden service. (We note that the incumbent phone companies tried to create online services in the 1980s but failed miserably; they lost about $1/2 billion on their efforts.)

By 1995 there were about 15 million people already online.

Starting in the 1990s, it was clear that the local phone monopolies were a "bottleneck" to competition. While the break up of AT&T in 1984 opened the long distance services to competition, the local wire was still closed to any competitors. The Telecommunications Act of 1996 was created to open the utility networks to all forms of competitors and there was an explosion of new companies offering Internet, broadband and even phone services.

You, the customer, made the choice of who offered you service over that utility wire. And it was never 'just phone' service but cable, broadband, Internet and phone service that were to be supplied through competition.

And even though Verizon and now-AT&T hadn't bothered to upgrade their wires to fiber, they started offering "DSL" over the old copper wiring. Under the law, this service was supposed to be available to any other Internet Provider. This was known as "line sharing" where the average copper phone line could also have a separate broadband (DSL) service on the same wire.

There were also "CLECs", Competitive Local Exchange Companies, and "D-LECs" (data) that offered data and phone service. And note -- these companies started to offer DSL service before the incumbent phone companies. Then-AT&T and MCI became the two major local phone competitors, offering local, long distance and even Internet service.

By the end of the year 2000 there were 9,335 independent Internet Service Providers and these small, independent companies had over 1/2 of the entire U.S. marketplace by the end of 2001. They helped sell phone lines and services as many people wanted a separate line for their Internet service.

According to ISP Planet's year end summary for 2001:

"Of course, 54.2 percent of American's accessing the Internet and the World Wide Web do so through thousands of independent ISPs scattered across the country, which totals some 77.5 million subscribers nationwide."

Click to see the full chart.

As you can see, the incumbent phone and cable companies weren't even in the top 10 Internet providers by 2001. Where's Verizon? -- 17th place. SBC would buy Prodigy, AOL would buy Time Warner and part of Excite@home would be sold to AT&T. However, now-AT&T and Verizon were not major players, nor were the cable companies, except by acquisition.

Hyper-Growth: This next chart shows the "hyper-growth" of phone lines in America based on the FCC data and telco SEC reports. Average growth rates were up 300-500 percent above the standard, from 1995-1999.

Historically, phone lines and household growth rates were in sync. More detail of that period shows that while the average growth rate for households was 1.4 percent from 1995-1999, the incumbent Bell company line growth was almost 5 percent, about 317 percent higher than the growth in households. In 1996, the year of the Telecom Act of 1996, there was a 658 percent growth above household increases. In fact, 1997 had a whopping 6.4 percent growth in lines.

This growth not only included phone lines but tech equipment and computers. Moreover, companies were offering new ways of selling their products via web sites and a new industry was borne.

Real Estate Weekly (11/5/1997) reported that "The results of the 1997 New York New Media Industry Survey found the $5.7 billion industry had added 30,000 new jobs in the past 18 months. A total of 631 new media companies have flocked to New York during that span, sparked by the city's creativity and talent..."

Jobs were created by the push of the small companies who were creating this future. Jobs were created by the ancillary businesses to help companies go online and jobs were created by the small companies acting as the sales and marketing group to handhold the customers into buying new technology or creating new uses of the wired world.

And it was competition which caused this tech revolution; it was competition that drove jobs.

By the end of the year 2000, America was Number 1 in the world in the Internet. Parts of the Internet did implode but one has to wonder what would have happened if the incumbents had actually properly upgraded their utility plant to fiber optics from copper, or had allowed the networks to remain open and competitive?

Today we are 15th or 29th or 33rd, depending on which international organization or research group you believe in. We killed the goose that laid the golden eggs.

What Happened? Verizon and Now-AT&T Got the Government to Regulate Competitors Out of Business.

To quote Patty Fusco, Managing Editor, ISP Planet, March 1, 2002

"We've been begging the FCC to establish a National Broadband Policy. On Feb. 14th the FCC took action-only it might turn out to be as bloody for ISPs as the St. Valentine's Day Massacre was for George "Bugs" Moran's North Side Gang in Chicago, circa 1929."

The death of the independent Internet providers was not done by market forces; it was stolen by what is now AT&T, Verizon, Centurylink and the cable companies with the help of the FCC. The small independent ISPs didn't have a chance.

First, the incumbents stopped supplying adequate services to the small companies. As documented by surveys and a Petition filed with the FCC, (which was never acted on by the agency), about 40 percent of all orders placed by an independent Internet providers for their customer to get a new DSL service did not go through the first time.

The FCC's didn't enforce basic laws. Imagine running a company where you have to tell your customers about ½ the time that the delivery they waited for -- and didn't show up -- also had some other problems.

But it got worse. With the help of now cable head Michael Powell, then former Chairman of the FCC, just a few years after the Telecommunications Act of 1996 was created it would be stripped bare of any obligations to rent the utility wires to competitors.

Way too detailed to discuss here, essentially, allowing the utilities to combine Internet and broadband service as 1 service, then redefining the broadband networks as 'information services' -- and not telecommunications, erased the laws.

As the next chart shows, 7,000 small Internet service providers (ISP) (and hundreds of CLECs) were basically put out of business as they could no longer use the networks, not because of a fair fight in a free market but because the utilities got the government to 'regulate' the companies out of business.

There were (and are) a new group of wireless ISPs, WISPs, currently serving mostly rural areas but the bottom line is that what we have today are now monopolies over most of the wires, and because of consolidation, AT&T can now harm 22 states.

These closures also happened to the major competitors. AT&T and MCI were forced to stop selling local service, which put the companies up for sale as their potential growth areas were regulated out of business. AT&T was bought by SBC, which had always wanted to be 'Ma Bell" and changed the name to AT&T; MCI went to Verizon.

But the real kicker in this tale is that prices skyrocketed in almost every state because the two largest competitors, AT&T and MCI, were closed with the other CLECs. By 2012, the price for basic service in California climbed 100 percent, as it did in multiple AT&T states, and every service had major increases; New York city went up 84 percent -- as documented by actual phone bills.

Cable? It was hiding in plain sight. While all of the attention was paid to the wireline companies, the cable companies just played everyone and remained closed to competition, even though as we pointed out, customers have been funding the Internet and broadband expansion of the cable plant. But there's also a dirty secret - The AOL-Time Warner merger, for example, required that the networks would be open to Internet/broadband competition. When the small ISPs attempted to use these services, they found that the companies' retail price was cheaper than the wholesale price ISPs had to pay to use the networks.

Where do we go from here? AT&T-Verizon-ALEC's current plans are to close down whatever is left of the competitive markets, removing the word telecommunications from the vocabulary and switching everything to an 'information service', which simply means blocking the remaining competition from the networks, as all telecommunications obligations are erased.

It is now clear we need to reopen the networks to competition as it drives lower prices, innovation, economic growth and jobs.