DSL Prime: Verizon and Time Warner

Both companies try to change the de facto rules of the internet.

by Dave Burstein of DSL Prime and Future of TV and the Web Video Summit [January 23, 2008]

Verizon Taking Manhattan
Staten Island, too. But the Bronx ...
Ivan is Giving His Regards to Broadway, and this Boy From New York City hopes 420 West 119th is one of the early buildings served. Tom Tauke tells me

"We're actively engaged with New York City on negotiations for a television franchise. We believe both sides want to reach an agreement, and I personally believe we will reach an agreement with the city by March 31. Then the NY PSC must approve the agreement before we can actually offer TV service in the city. Of course, we have been building the fiber network in each of the five boroughs, and some, like Staten Island, have very substantial FiOS internet service available now. So we hope to be able to offer FiOS TV in the City later this year."

That suggests it will be Autumn in New York rather than Summer in the City.

Larry Babbio told me in 2005 Verizon would fiber New York. I wrote then "Mayor Bloomberg Meet Larry Babbio" and urged a quick deal. After delaying three years, Verizon should move ahead by offering a world class network.

The Verizon and Time Warner franchises will define the high speed internet for 8 million people. So I was horrified when New York City stonewalled my requests for even basic information about the franchise rules. Juan Gonzalez meanwhile broke the story "City officials spent Tuesday in secret talks with phone giant Verizon." Juan (my dad's old colleague at the Daily News) added "The only time the public can get something back for those valuable rights is when the deal is being done. Others write history, I give you news: The deal is going down now."

The city told me this reporter or even a City Council member couldn't get relevant information without a FOIA request, which would take more than 12 weeks. Something is very rotten in downtown Manhattan, and I hope other reporters join Juan in getting the story.

Gonzalez writes the "big stumbling block between Verizon and the city, cable industry sources say, is the phone giant's desire to offer its service, known as FiOS, in the city's wealthiest neighborhoods first. Public housing projects and poor neighborhoods would just have to wait." Verizon replies, "there is absolutely zero truth to the assertion that we plan to deploy only in wealthy neighborhoods.... we're building fiber right now in each borough and from Harlem to the Bowery."

Claims and counterclaims like that are all the more reason the public shouldn't be in the dark. Beat the rumors by getting the facts out instead. P.S. I can confirm Verizon's early DSL deployments did not cherrypick. Harlem was connected before more affluent areas. At the time, we figured Verizon was deliberately getting the kinks out before going for their best customers. What I understand of the FIOS deployments are more skewed, but the data is hard to get.

Mark Wegleitner two years ago hoped 90 percent of the deployment would be true fiber to the home, and only 10 percent fiber to the basement + VDSL, pending testing. I suspect the proportion of VDSL will be higher.

More coming, including a review of what the city can reasonably expect as terms. Tauke asked my opinion on what was a reasonable time to serve everyone, and I replied 6 to 8 years. On reflection, I think I was too high. Verizon contractors are ready to do 2 million more lines every year than they currently do. There's no operational reason not to hit 95 percent in 3 to 4 years.

Firestorm Over Time Warner Caps
190 write the NY Times in protest
Time Warner Cable, New York's only other highspeed choice, sparked a nationwide furor by saying they want to charge for bandwidth. DSL Reports (again) broke the story. Saul Hansell in the NY Times followed with "Time Warner: Download Too Much and You Might Pay $30 a Movie," although Saul's examples made clear a few dollars each was more likely. Time Warner indicated the cap would hit at 40 gigabytes or below, and the overage would be charged at something like $1/gig.

There is nothing inherently wrong in charging for bandwidth, if the charge is reasonably proportional to the costs. Time Warner's numbers don't pass the smell test, however. The markup over cost on that bandwidth is between 1000 percent and 1500 percent. Hansell picked up from an interview with me, "The marginal cost of extra bandwidth is very small. For broadband internet service, 80 percent to 90 percent of the costs are fixed regardless of use. And the all-in cost of a gigabyte of use is about 10 cents or less. Most cable and phone systems keep their costs secret. Mr. Burstein cited an interview he conducted two years ago with Tony Werner, then the chief technical officer of Liberty Global, John Malone's collection of European cable systems. Costs in Europe, he added, are likely to be a bit higher than in the United States."

In addition, Moore's Law has brought the cost significantly down since then, to perhaps seven cents/gig for a large carrier like TW.

40 gigabytes at seven cents is less than three dollars per month. Time Warner charges over $40. That's like Starbucks drastically raising the price if you put sugar in your coffee. Any large carrier with a cap below 100 gigabytes and a price above $30 is abusing market power. Their bandwidth costs are less than the marketing budget, and the customer is profitable.

I believe Time Warner's interest in bandwidth caps has little to do with its own costs and a lot to do with the emergence of movie downloads and streaming television programs over the internet. "The smart people at Time Warner are scared of people watching TV directly over the internet. 'Lost' and 'Desperate Housewives' look better over the internet than they do on digital cable."

I think the only reasonable assumption is that Time Warner is pricing to prevent people from watching TV over the net. Most of the U.S. has only two highspeed providers, which makes cable and DSL "essential facilities" under classical antitrust law. At first glance, there's a prima facie case.

I've just "cut the cord" on Time Warner's own video package because I can now watch the video I want over the net, when I want. ABC and Move Networks are doing quality streaming at 1.9 Mbps. Hulu and the others will have similar quality soon.

Over 200 people commented on the Times blog, nearly all bitterly opposed to Time Warner's action. Several hope this one can be prevented through competition, the best way. "If and when FIOS becomes more available, the cable companies are going to be holding wire assets to nowhere because people will switch quicker than they did from dial-up." "I will drop them like a hot rock." "AT&T is looking a lot better now." "It's disgusting. I'm switching providers." "The Justice Dept. should look into anti-trust litigation against Time Warner. This is a transparent effort to choke out competition."

Glenn Britt, are you listening?

Note: Small carriers pay much more, as do those in high cost areas: India, South Africa, and some of the U.K. Rural carriers, like Brett Glass in Laramie, Wyoming, pay far too much for bandwidth. Japan brings down rural bandwidth costs by requiring NTT to share fiber at a reasonable price, a fair solution. OFCOM in the U.K. is considering similar. TRAI in India recently mandated lower bandwidth prices. The new East Africa fiber links should help South Africa. Rural areas often do need special support, but neither Time Warner nor the Bells need a subsidy.

Copyright 2008 Dave Burstein.
The DSL Prime Newsletter is reprinted with permission.

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