08/21/2012 07:00 pm ET Updated Oct 21, 2012

DOJ, New York AG and Verizon to the Majority of Verizon Customers: Drop Dead

The Department of Justice and the New York Attorney General's office have decided that more than 50 percent of Verizon's territories will never get cable, broadband or Internet competition.

In our previous article we highlighted that the DOJ was considering whether to allow Verizon to purchase spectrum as well as do a joint co-marketing deal with the incumbent cable companies.

And the Department of Justice, joined in this by the New York State Attorney General's office, has agreed to the deal, with the caveat that Verizon is restricted from co-marketing its wireless service with the cable companies' services in areas that already have been upgraded to Verizon's FiOS. This leaves the rest of the Verizon territory with only one wire -- the cable company -- as the wired choice for broadband, Internet or cable service.

And since Verizon is planning on closing down the areas that are not upgraded, as one insider put it "It's a real feint -- Verizon is now prohibited from doing what they wouldn't have done anyway." Another chimed in "Can't wait for the Colbert coverage."

It now awaits only the approval from the FCC, and Chairman Genachowski is running around trying to get the rest of the commissioners to push the deal through so as to close down any hopes that Verizon will finish the upgrades to the state public switched telephone networks, thus bringing in cable competition. Instead, the FCC is hell bent on closing down the U.S. utilities, the Public Switched Telephone Networks, and forcing customers onto either cable or expensive wireless choices -- like 'Cantenna.'

The DOJ and NY AG don't see it that way. Couched in self-congratulating terms that would make a mother cry -- the agencies are trying to make it appear that they were 'being hard' on the wireless and cable companies -- really. Protecting consumers and benefiting consumers -- are the buzzwords that should be a comfort to everyone who just got screwed.

The Justice Department wrote:

Justice Department Requires Changes to Verizon-Cable Company Transactions to Protect Consumers, Allows Precompetitive Spectrum Acquisitions to Go Forward. Resolution Preserves Broadband and Video Services Competition between Verizon and the Cable Companies and Frees Spectrum to Benefit Consumers.

The New York Attorney General:

"A.G. Schneiderman Announces Legal Action To Protect Competition For Broadband And Video Services In New York... NYS Attorney General And U.S. Department Of Justice Require Verizon And Cable Operators To Make Pro-Competitive Changes Antitrust Settlement Prohibits Verizon Wireless From Selling Time Warner Cable Services Where Verizon Sells Or Will Sell FiOS."

Who knew the regulators had a sense of humor. There's nothing pro-competitive or "benefiting and protecting consumers" in any of this.

Let's do this by the numbers, shall we.

1) Verizon Claims it Is Almost Finished FiOS Deployment and Will be Passing 18 Million Households -- Pure Baloney

Is FiOS really going to be in 18 million households? This quote is from 2006:

"Verizon said it would spend $23 billion on its fiber optic network by 2010. By then, about 18 million households, or more than half the homes in Verizon's territory..."

At this time, the company also still owned Maine, New Hampshire and Vermont as well as a host of other former GTE territories it got when it merged with the company; most have been sold off, including the state of Hawaii. (And as we've written elsewhere, investors never spent the $23 billion -- most of the money came from monies that were supposed to be used to maintain and upgrade the Public Switched Telephone Networks.)

But Verizon keeps using the same 18 million number as if it was 'real.' Verizon's second quarter report showed a bit over four million FiOS TV users. Throw in another million for just broadband and that's less than 1/3 are currently FiOS users.

And who's wired now? This is what one of the union heads and FiOS installer wrote:

One thing Verizon always reports "18 million households." All this means, the fiber cable passed the house, not hooked up. In some cases, the fiber runs down a main street, not the side streets. They report all homes, including the side streets that have no fiber. As for how many FiOS customers are actually on FiOS. They never give us a correct number. We have a number of towns in NJ where the fiber is run, but the service was never turned up.

And we need to note how sleazy the DOJ has become. The DOJ, in order to inflate the FiOS services, presented this quote from Verizon's 2nd quarter 2012, Verizon SEC report:

As of the second quarter of 2012, Verizon Telecom had more than four million FiOS video subscribers, more than five million FiOS broadband subscribers, more than 2.5 million FiOS voice telephony subscribers, and more than 3.5 million DSL broadband subscribers.

Impressive... until you read, in a separate DOJ 'competitive impact statement', that over 90 percent of customers have the 'triple-play. So, there are only about five million total households"

Residential voice, video, and broadband services are commonly purchased together in bundles with one another. For example, Verizon offers a triple-play bundle of voice, video, and broadband FiOS services, and over 90 percent of FiOS customers subscribe to some form of bundle.

But this gets even sleazier -- notice it says "residential." How many small businesses are 'fiberized'? The 18 million number is about "households" not businesses. How many businesses are not getting FiOS or some other fiber optic service, much less whole municipalities? With businesses historically being 50 percent of the lines, this means that 50 percent or more of customers are not going to be serviced.

Why aren't either the DOJ or the New York AG asking fundamental questions? How many total lines are there? How many are FiOS? How many residential customers actually have the service? Does this mean that the rest of the 18 million are still on the old copper wiring?

With the announcement by Verizon is 'abandoning' DSL in the areas that are not on the 'FiOS footprint' (read FiOS Jack boot), it means that the only wired choice will be cable for broadband, Internet or even cable. Where's the 'robust competition' going to come from? This is like opening a Crackerjack box and no 'prize inside.'

And why hasn't the DOJ or the NY AG bothered to investigate why the rest of the New York or the other Verizon states upgraded? As previously discussed, New Jersey is supposed to have 100 percent of the state finished by 2010 with fiber optic services capable of 45 Mbps.

2) Customers Are Being Illegally Charged for FiOS -- Services They Will Never Receive.

Adding insult to injury, it gets worse when you realize that those who are not in the FIOS Jackboot are really being hosed on multiple levels. For example, the New York State Department of Public Service (DPS) raised rates in all of New York State in 2009, claiming that it was doing this based in part on "massive deployment of fiber optics in New York" -- read FiOS.

"We are always concerned about the impacts on ratepayers of any rate increase, especially in times of economic stress," said Commission Chairman Garry Brown. "Nevertheless, there are certain increases in Verizon's costs that have to be recognized. This is especially important given the magnitude of the company's capital investment program, including its massive deployment of fiber optics in New York. We encourage Verizon to make appropriate investments in New York, and these minor rate increases will allow those investments to continue."

The 'minor rate increases were anything but minor -- Since 2004 there was an 84 percent increase of local service in New York with some services going up over 130 percent.

Thus, about 1/2 of New York business and residential customers were burdened with major rate increases for services -- FiOS -- for services they will never get as Verizon announced it is not expanding FiOS.

3) Customers Are All Being Charged Illegally to Fund Wireless Services.

As we've discussed elsewhere, Verizon, it appears, has been moving construction budgets for the utility upgrades to pay for FiOS, then for their connections to wireless towers, while elsewhere it appears that Verizon Wireless may not paying its fair share back to the state utility for access fees. This has created massive losses, which were then used as part of the decision to raise rates.

Notice that in this 2009 Order to raise rates it specifically states that Verizon needed financial relief, meaning rate increases, because of the losses:

Verizon's financial condition is 'relevant' when the Commission considers pricing changes because "the state has an interest in a viable company... There seems to be little question that the company is in need of financial relief; Verizon reported an overall intrastate return of a negative 4.89 percent in 2006 and its reported intrastate return on common equity was a negative 73.6 percent.

For 2007, Verizon reported an overall intrastate return of negative 6.24 percent and a return on common equity of negative 46.0 percent... for 2008, the company reported a negative overall rate of return of 6.70 percent, a negative return on common equity of 48.66 percent and negative intrastate earnings of $396 million.

In fact, over a four-year period, 2007-2010, Verizon, New York claimed to have lost $4.25 billion and received an 'income tax benefit' of $1.74 billion. In 2010 Verizon, New York lost $2.2 billion dollars alone! So the company is actually making money from dumping the expenses, as well as making money from the rate increases.

If the wireless company didn't pay its fair share back to Verizon and if they get to dump/use the wireline construction budgets -- and if these losses were used to raise customers' rates -- then those who live in the 50 percent not upgraded are actually helping to fund an anti-competitive next step against them -- not to mention higher phone rates.

More importantly, AT&T's 2010 Annual Report claims that the company has been goosing the wireless profits, which depresses the wireline profits even further.

4) Ripley's Believe It Or Not Isn't As Odd as These Final Statements.

a) The DOJ writes: "The settlement also forbids any form of collusion."

We stop laughing long enough to ask: Are wireline customers actually being overcharged to pay Verizon Wireless for this spectrum deal? Is Verizon's FiOS overcharging customers for a service they will never get? Are the state utility and the affiliate 'colluding' to pull off this accounting shell game? Where are the business lines?

b) The New York AG writes: "The revised agreements reinforce incentives to continue to market and build broadband, something that is desperately needed to reduce the digital divide in New York State."

Forgeddaboutit. The AG and DOJ just killed any serious building and competition in 50 percent of the state or more. Ironically, while the AG has been investigating service quality issues in this up-upgraded part of the state, with this new deal Verizon has no incentives to fix or maintain half of the state.