10/29/2012 06:25 pm ET Updated Dec 29, 2012

Cable's Social Contract on America and Other Cable Scandals: But Who's Counting?

The last presidential debate has concluded and it is now clear that no party is going to bring competition to broadband, Internet, or phone, much less cable service.

In our last few articles we discussed that America paid over $360 billion for fiber optic networks they will never receive from Verizon, AT&T and CenturyLink, and that there is no real 'Internet freedom' because there is no serious Internet and broadband competition. You have more choices for candy bars or diet beers than there are for Internet and broadband services.

But AT&T and Verizon are not the only ones with skin the game. The cable networks are also closed to broadband and Internet competition as well, even though they, too, were able to charge customers for upgrades of the networks.

Here's the smoking gun: By the end of 2012, based on an FCC Order known as the "Social Contract", cable customers were charged an additional $54 billion and counting; that's over $1000 per customer, for upgrades of the cable plant.

And this is only part of the largesse the cable companies appear to be getting from customers. There's probably another $30-$40 billion that's been charged over the last decade for 'pass-throughs' and made-up fees that have been added to the cost of cable services.

There's also possibly another $10 billion or more extra paid by customers in Universal Service Fund (USF) taxes as the cable companies were supposed to wire the schools in areas they passed at cost; I'll come back to that.

Then add to this the tens of billions of dollars in rate increases to customers' bills for cable service that never would have happened if there was actual competition for cable services.

If America is paying all this money, shouldn't we have some rights as de facto investors? Shouldn't we get to choose who offers us Internet or broadband or cable programming services over the wires we've helped to upgrade? And if there's no serious competition, shouldn't the cable companies' prices for cable services be regulated again?

Welcome to the Cable Social Contract on America.

In the 1990s, the cable companies complained to the FCC that they needed rate increases to pay for upgrades to the cable plant for new services, as well as fixing quality-of-service issues. The original cable franchises were only for 'cable services,' but the companies wanted the new revenues from broadband, Internet and even phone service.

In 1995, the FCC created the Social Contract -- a deal with the cable companies -- where they could charge up to $5 a month extra on America's cable bills for upgrades and fixing their service quality issues. These payments were to stop in the year 2000 -- 12 years ago. Instead, there's been no formal investigation by the FCC and even when it has been brought up in the states, nothing has been done to remove the charge, hidden as part of basic service.

And let's be specific. The original agreement was for five years. Time Warner was supposed to spend $4 billion on their networks. According to the Order:

"The Social Contract is for a term of five years. From 1995 through 2000, Time Warner is required to invest $4 billion to rebuild and upgrade all of its domestic cable systems, including deployment of fiber optic technology, increased channel capacity and improved system reliability and signal quality."

Thus, if you have cable service, not only is it a monopoly in many parts of the country, not only are there made-up taxes, fees and surcharges that have been added to your bill, but customers, in fact, paid extra for the upgrades without any benefit -- as a stealth charge on the bill.

With an average of 64 million customers annually over the last decade, the estimated Social Contract payments were $320 million dollars extra a month -- $3.8 billion a year. By the end of 2012, this means customers paid about $54 billion from 1996-2012.

However, $42 billion of this was overcharged since 2000, though, again, without audits it is impossible to tell the exact amount. From the reader's perspective, if you had cable since 2000, you paid about $60 a year or about $720 extra. And because there's no competition it will continue add infinitum.

What Happened to the Internet Services and Wiring for Schools?

Oh, but it gets stranger -- and worse. Schools were all supposed to be given free cable modem service, and even a free cable modem -- and even do the inside wiring at cost. We decided to include this entire paragraph from the Comcast Social Contract as most people -- and regulators, appear to have forgotten about this.

"Comcast will provide a free service connection to each public and private school located within 200 feet of Comcast's activated cable plant. Comcast will provide a service connection at cost to public and private schools beyond 200 feet of its activated cable plant. Comcast will also provide a free modem and free modem service to all such schools within a year after Comcast makes personal computer-based Internet access service via cable commercially available to residential customers. Free cable service, including basic and enhanced basic service, and service offered on migrated and new product tiers, will be provided to all connected public and private schools. ...Additional internal wiring to serve additional outlets in any school will be provided at cost. Such wiring will be provided at no charge if Comcast is able to coordinate installation with other comparable electrical wiring installation being done in new or rehabilitated schools."

Meanwhile, the Time Warner "Social Contract" specifically states that the first modem, the box to use the Internet, is free, and all of the other modems in the school will be 'at cost.' "If requested, each school will receive one free modem to use this service with additional modems provided at cost." Notice the word "requested." Based on interviews with auditors of school districts' telecommunications bills, including E-Rate recipients, it is clear that most schools were never informed of this option as most schools didn't get the free modem and service, much less the rest 'at cost.'

Universal Service Fund E-Rate Monies?

Let's assume that the schools were wired and done 'at cost' and that this was as of 1995. Then why has America been paying massive Universal Service Fund (USF) taxes to fund the "E-Rate"? According to the FCC, the E-Rate is "to provide discounted eligible telecommunications, Internet access, and internal connections to eligible schools and libraries." (There are other parts of the USF which include High-cost funds, and other funded areas.)

The E-Rate, which gives the schools discounts of 20 to 90 percent off the cost of these services was capped at $2.25 billion annually. But talk about a scam; the phone companies get reimbursed their full business retail rates.

If the cable companies had provided Internet access at their 'cost' then over the last decade, billions of dollars in charges to customers for USF would not have been required. Today, the USF tax is at 15 percent and is applied to cell phone service and any long distance service so if the cable companies had shown up, then the schools would have spent a fraction of the 'cost' as compared to AT&T and Verizon business retail rates.

We estimate that this has added at least an additional $10 billion extra over the last decade, just for the E-Rate, but without audits there is no way to complete an exact accounting for this.

The Not So Hidden Charges on the Cable 'Triple Play'.

In a previous article we highlighted various charges on the communications bills, but let's do it by the numbers. This next chart highlights the taxes, fees and surcharges that appear on a standard Time Warner Triple Play in New York City. The advertised cost was for $99.99 yet the total bill comes to $121.95 -- an additional 22 percent. The reason? These are all of these additional charges added to the bill. We divided them up into "mandatory"---fees that the state or federal government requires, and "questionable" --- fess that are not required to be charged.

Of the "questionable" charges, it is clear that the company is charging costs to customers that are not 'mandatory', and some are simply made-up, such as the "Regulatory Recovery Fee."Even the Universal Service Fund is not mandatory and in fact, most of these charges are taxes applied to the company -- which they pass through to customers.

  • Cable Franchise Fee: "State regulations do not require that there be a franchise fee for cable television service." In fact, most of the cable companies claim that they pay franchise fees when in fact, it is passed through.
  • Regulatory Recovery Fee: "These charges ARE NOT MANDATED by state or federal authorities and are therefore not charged separately by all telephone companies."
  • Universal Service: "This line item appears when a company chooses to recover its USF contributions directly from its customers by billing them this charge. The FCC does not require this charge to be passed on to customers."
  • Telecom Excise Tax: "Unlike the sales tax, the excise tax is imposed on the telecommunications provider, but it may be passed through to the consumers of the service and appear on their monthly bill."

The mathematics to calculate how much extra cable customers are paying would require more data than is available, as the price of service, the franchise fees and every tax, fee and surcharge varies by city and state.

But using just $5 a month, with about 64 million cable customers, (about half having two or more products, such as the Triple Play) -- there could be an additional $3-$4 billion extra a year --- over the last decade that would be $30-$40 billion dollars.

And there are other odious things. GigaOm's recent article points out that Time Warner is charging for cable modem rentals and is making an additional $350 million a year.

Meanwhile, the Triple Play at $99.99 doesn't come with a cable set-top box, which adds an additional $9.99 fee. And the $99.99 price is a 'promotional price'; it goes to $156.25, so the company gets not only get a 56 percent rate increase but this also means that every tax, fee and surcharge goes up 56 percent as most of these charges are not flat fees but are applied as a percentage against some of the service costs.

Cable Association Hype

The cable companies, of course, will argue that they have been working to help America. Former FCC Chairman Michael Powell, now the head of the cable association, NCTA, claims that 80 percent of the U.S. has 100 Mbps capability. And yet the FCC's data shows none of this capability. The FCC's standard for broadband speed in America is only 4 Mbps in one direction (noted from FCC 8th Broadband Progress Report, August 2012). Meanwhile, in the previous FCC report, (October 2011) only 32 percent of broadband customers had "at least 6 Mbps down, 1.5 Mbps up", with only 17,000 residential customers having service that supplies 100 Mbps or more.

Ironically, as Chairman of the FCC, Powell didn't bother to examine or investigate the Social Contract; instead he heads the association of the companies that have potentially overcharged America.

Powell has a lot more to worry about however. Customers don't like the cable companies. The "American Customer Satisfaction Index" showed that four of the top 10 "Most Disliked Companies in America" were the cable companies, including Time Warner, Comcast, Cox and Charter Communications.

Isn't it time we opened up these networks to real competition to lower prices and offer competitive services, such as à la carte cable programming? Isn't it time we had investigations into all of the monies being collected by the cable companies?

Isn't it time for "The Internet & Broadband Competition Freedom Act"?

We'll get back to this question over the next few articles.