Inside Corporate America
The Few Cyberati Dial Handouts from the Many

Greg Palast

By Gregory Palast for The Observer/Guardian UK

It’s 2022 and my grandchildren ask, ‘Grandpa, when did the communications counter-revolution begin?’ As we huddle round the cyberfire, they guess it all went wrong in October 1999. That was when MCI WorldCom paid $115 billion for Sprint Corporation which, once it had merged with AT&T in 2002, gave the telephony behemoth 80 per cent of America’s long-distance market.

No, I tell the wee ones, corporate monsters such as these don’t spring forth spontaneously from test tubes. The seeds of the communications industry mergers were sown in 1996. President Bill Clinton, after the massacre of the Democrats in Congressional elections, found himself abandoned by all except a young intern delivering pizza, and a handful of television moguls. But Hollywood, too, would halt its funding of the Democratic Party unless the Clinton administration dropped plans to auction digital TV licences.

The Treasury expected to collect $50bn in licence sales. The President did not hesitate to agree to parcel out the valuable spectrum space to holders of analogue licences. But he had just cut $35bn from the food-stamp programme for the poor, so he had to find a place to conceal the spectrum deal.

His solution was to tuck it deep inside a proposal even more putrescent and costly – the Republican scheme to deregulate the telephone and cable TV industries.

The resulting Telecommunications Act of 1996 was the closest America ever came to a coup d’état by lobbyists. A half-century of tight government limits on telephone prices and profits went out of the window. Vice-President Al Gore, having just fathered the Internet, hailed Telcom ’96 as the beginning of the Communications Revolution.

Deregulation would remove the dead hand of government from the market. The Bell telephone companies would compete in each other’s regions. Cable TV operators would offer cheap phone service, and phone companies would fire back with low-cost video. Every family in America would be wired into one classless info-nation based on networks too cheap to meter.

But here’s what happened. The huge local service monopolies merged into four bigger ones. The new phone trusts locked up market shares averaging 98 per cent in their collusively divided territories. Wireless operators dated and mated with land-wire competitors. AT&T, unchained by the law, was expected to battle with cable titan TCI. But it made love, not war. When the two companies merged, basic cable TV prices hopped up, 21 per cent higher than before the Telecoms Act. Instead of investing in new plant technology, operators spent the big money buying each other.

As a result, despite the much-touted drop in telephone prices, unit prices charged to the average household rose. Since the beginnings of deregulation in 1984, local phone service charges in the US have ballooned by 52 per cent per unit.

Jerrold Oppenheim, America’s top lawyer in utility consumer rights, notes that the old system of regulation would have slashed prices by a third to reflect the extraordinary jump in productivity when the industry moved from cross-bar switches to computers. Instead of lower prices, the productivity gain has fattened the bottom line of operators earning average returns on equity of 29 per cent last year, versus the 12 per cent caps once imposed.

Long-distance charges are indeed way down, but that means nothing to Joe Average. The Consumer Federation of America and the Consumer’s Union report that the 25 per cent of US households that make few long-distance calls, and the 20 per cent who make none at all, have seen their phone bills rise.

Deregulation is a bust, but the effect goes beyond one more consumer rip-off. What is happening is a counter-revolution. Instead of democratising the system by reducing prices, there is a huge shift in funding the communications system from business to home customers, from long-distance callers to local-use customers. An electronic élite link together across continents via low-cost networks and new technology, while the disconnected are cut off by price from the new means of communicating.

The touted benefits of competition have left a fifth of low-income US households without phones.

The pay phones they rely on have increased in price by 300 per cent since 1984. In 1997-98, the gap between black and white Americans with access to the Internet grew by 50 per cent. Plans in the US for voting via the Internet could complete their disenfranchisement.

The rise in prices for average users, a worldwide phenomenon, is one of the great unreported stories, because reporters are members of the privileged cyberati class, the high-use market segment lavished with discounts. Journalists and politicians don’t dine with people who lack cell phones, fax machines and email, though that wired group represents less than one in four US households.

In the jungles of Nepal, tourists can watch tigers hunt prey. Goats are staked to the ground and the predators pounce. Tied-goat pricing lies at the heart of communications inequity. The industry has pushed the system’s costs on to the local-use residential customer who is tied to a local provider. No predation of the working class by the rich has taken place in the past 20 years without an economic theorem to justify it.

Worldwide, the huge shift in telephone costs from business to residences, from long-distance to local calling is called, ‘rebalancing’. The theory is that local-use customers must pay for the entire system because long-distance is merely a by-product, imposing few new costs.

‘Rebalancing’ has led to my own calls from New York to London costing less per minute than my calls to my next-door neighbour. Local calls in the US are wildly overpriced at 1.6 cents (1p) a minute. This may seem a bargain for those paying British Telecom’s 3p, but the relatively low US price is not the result of competition but the drag of old regulations.

A mere bad idea in America can, however, become disastrous when it travels to nations where World Bank edicts are strong and democracy is tenuous. The bank puts conditions on infrastructure loans, forcing deregulation and rebalancing. In Peru, this led to a 3,000 per cent increase in local charges.

Then came the WorldCom Sprint merger. ‘The assertion that deregulation cuts prices and promotes competition is simply false, but it can’t be questioned,’ says Oppenheim. ‘It’s the new religion.’

So I tell my grandchildren that the millennium ended as it began, with an oligarchy ruling by power of superstition.

Gregory Palast’s other investigative reports can be found at www.GregPalast.com where you can also subscribe to Palast’s column.

Gregory Palast’s column “Inside Corporate America” appears fortnightly in the
Observer’s Business section. Nominated Business Writer of the Year (UK Press
Association – 2000), Investigative Story of the Year (Industrial. Society – 1999), Financial Times David Thomas Prize (1998).