Jacking Up Prices
The distribution of wealth is not determined by nature. It is determined by public policy.
—Eric Schneiderman, New York State attorney general
Friends and colleagues have always known that Adam Leipzig husbands his own money and reliably earns profits on funds others entrust to him. As a young executive at Disney, Leipzig oversaw Dead Poets Society; Good Morning, Vietnam; and Honey, I Shrunk the Kids. Later, as president of National Geographic Films, he was behind March of the Penguins.
His films have brought in $2.1 billion, seven times what it cost to produce them. That makes him a Hollywood rarity—a reliable steward for investors in the risky business of moviemaking. Because it was so small, the one thing Leipzig never gave much thought to was his monthly phone bill. When it came, Leipzig checked to see how many long-distance calls, if any, had been made and wrote a check. But his casual view changed one day near the turn of the century during a meeting at the AT&T offices in Los Angeles.
Leipzig had wrangled a meeting with AT&T marketing executives to propose a strategic alliance to help him start his own film production company. Leipzig left with everything he wanted, but a decade later the terms of his successful deal were mostly forgotten. What remained vivid in his memory was what the phone guys had said about the future of his and everyone else's telephone bills. Their private comments differed dramatically from what everyone in America had been hearing for a quarter century about the costs of telephone calls and, for the previous five or so years, about this wondrous new thing called the Internet. The promise of cheap and abundant telecommunications service, to be available almost anywhere, was becoming a major theme in telecommunications industry marketing. But that was not at all what the telephone guys said in private while meeting with Leipzig.
"They said their corporate strategy was that, within a few years, AT&T wanted to draw at least $100 a month from each client household," Leipzig recalled. "They would do this with phone service, and also things they were not offering at the time, or had not expanded as much — mobile, Internet and cable."
As your monthly phone bill probably tells you, this is exactly what has happened. At the time, Adam Leipzig's home phone bill ran $35 a month. A decade later, the total amount due AT&T every month was more than $200, even though he buys his cable television service from another company. What the marketing executives had forecast had indeed come to pass.
THE RISE OF FALLING PRICES
Since 1974, politicians, pundits and professional economists all have said that, thanks to competition, the cost of telephone service would fall. The Justice Department sued that year to break up the American Telephone and Telegraph Company, saying Ma Bell's monopoly hindered new technologies and shouldered aside competitors who wanted in on the lucrative business of long-distance calls. (Back then calls were so expensive that many people kept little sand dials by their telephones when calling loved ones long distance so as not to go a second too long saying good-bye and be charged for another full minute.) Eventually the antitrust case was settled by negotiation and, in 1984, Ma Bell spun off seven regional telephone monopolies known as the Baby Bells.
AT&T kept the lucrative long-distance business, but even before the breakup, another monopoly business, a railroad, found a way to compete in long-distance calling. Southern Pacific Railroad began offering limited long-distance service in 1972. SP microwave towers, which kept the trains running on time, sent signals along the narrow rights-of-way that the federal government had given the railroad in the nineteenth century. These towers had the capacity to handle calls, too, and by 1978 SP was providing a cheap long-distance system connecting business customers in Los Angeles, San Diego and Anaheim, California, with those in three East Coast cities, Boston, New York and Philadelphia.
Southern Pacific Communications would eventually evolve into today's Sprint Nextel, but by the 1990s, a number of competing systems were being served by a growing network of glass fibers buried alongside the tracks. These braided glass strands, each thinner than a human hair, held vastly more capacity than the microwave system, which in turn was far more powerful than the old copper wires used to make the first commercial telephone call in 1878 and still in use today in most homes and small businesses. In the last decade of the twentieth century, the whole country buzzed with talk of a new Information Superhighway that would connect everyone in America; the oft-expressed expectation was that, thanks to competition, prices would fall lower and lower. Some published studies even showed that the cost of long-distance calling would fall more than 99 percent, which was not exactly good news for AT&T as a dedicated long-distance company, nor for its nascent competitors. In Washington, awestruck lawmakers marveled at the idea that every word and image in all 22 million books in the Library of Congress could be sent in the blink of an eye to any place connected by the new fiber-optic cables.
Across the country from our friend Adam Leipzig, Bruce Kushnick in Brooklyn, New York, had his own epiphany. Visiting an aging aunt, Kushnick discovered twenty years' worth of monthly telephone bills. Kushnick worked as a telephone industry consultant, paid to extol the virtues of the coming new era of digital communications.
Kushnick knew a research gold mine when he saw one, and he set to work. When he cross-checked his aunt's telephone bills over the years, he could hardly believe the numbers. His aunt paid $9.51 for her local phone service in 1984. By 2003 her bill had swollen fourfold to $38.90. In the two decades since the breakup of the AT&T monopoly, even after adjusting for inflation, his aunt's telephone cost $2.30 for each dollar paid in 1984. And that was without any charges for long-distance calls. His little history lesson prompted Kushnick to think about the telephone bill itself. Old telephone bills—from the era of the Great Depression of the 1930s, for example—often consisted of three lines. One was the monthly charge. The second was the cost of long-distance calls. The third was the total.
With the passing years, Kushnick noted, the bills had gotten more and more complicated. When AT&T started offering phones in colors, colored phones came with an extra charge. So did the immensely popular Princess telephone for the bedroom in 1959. In 1963 the first push-button phones were introduced (called Touch-Tone), and people paid extra to escape rotary dialing. Two years later came sleek Trimline phones with lighted dials—along with another extra charge.
The publicly switched telephone network, as it was known in the industry, was upgraded for emergency calls to 911. Then it was upgraded again with ANI (automatic number indicator) so that emergency dispatch centers would know the numbers of callers, and later with ALI, or automatic location indicator. The cost of ALI was justified, as it saved the lives of many people in the midst of medical emergencies or assaults, even if they were unable to say where they were. But the public paid both for its installation and for some other things, too, as some of the money collected was diverted to other uses, including new equipment the phone companies said was necessary to make ALI work.
Soon after the railroad rights-of-way microwave towers made possible the first sliver of long-distance calling competition, telephone bills became even more complicated. In the late 1970s, while the breakup of Ma Bell was under negotiation with the Justice Department, AT&T began seeking limits on free directory-assistance calls. It seemed a curious move — Ma Bell executives and spokesmen at the time told anyone who would listen that free directory-assistance calls encouraged more calling — but the AT&T shift away from free directory assistance was brilliant in the way that it quietly raised prices.
State utility regulators were told that telemarketing companies were taking advantage of free directory assistance, placing many thousands of calls to 411. That, in turn, was described as a hidden cost borne by residential and small-business customers. Thus, AT&T was able to argue that the consumer would pay a little bit less if fewer operators were employed looking up numbers for "junk calls."
The state utility regulators might have just slapped a charge on any business that made large numbers of directory assistance calls. Or a rule could have been adopted that applied only to telemarketing firms and commercial customers. Instead, as the telephone company had requested, the state regulators limited how many free calls to directory assistance any customer could make.
At first, the limit was ten calls. Over time, the limit was trimmed in stages to zero; by 2008, "free" had become a fee, with many customers paying $1.99 each time they called directory assistance, adding more lines of fi ne print to telephone bills. Verizon Wireless and some other companies did not list charges for calling directory assistance separately, but hid them in plain sight among the monthly list of calls made, a portion of the bill many people typically find tiresome to examine line by line.
Today it's typical to be charged for not being listed in the telephone directory, and, by the way, it's not a one-time fee to defray the cost of flipping an internal computer signal, but a monthly fee. Think of it as a charge for no service. Over the years the white pages, which used to be dropped free on every doorstep, became less common and less thorough; they no longer appear in some communities. That translates to an increased number of calls to directory assistance—for which a fee is collected. While various white-pages listings appeared on the Internet, the telephone companies spent little to keep them up to date, which of course drove more business to paid 411 services. When new services such as call waiting and three-party calling were introduced, they bore stiff additional charges, too.
With AT&T's breakup into Ma and the seven Baby Bells, new charges were introduced for regional calls, those that were neither local nor long distance. Known as Local Access and Transport Area or LATA, the implementation of this system also meant that, in some metropolitan markets, the circle shrank within which unlimited calls could be made at no extra charge. In some cases a call to a neighbor went from free to dear because of illogical LATA boundaries.
New costs came at the consumer from all angles. Until the 1984 breakup, regulations required customers to use the telephone set installed by Ma Bell. After the breakup, customers were told they could either buy or rent their phone. At first, the rental seemed cheap, but gradually people learned how little a telephone costs to make and also realized how much an open-ended rental could cost.
And then there was the expense associated with making sure the phone line in your house actually worked. Ma Bell got state public utility commissions to transfer ownership of the telephone line at the point where it entered your home or office. Once that happened, customers had to pay to fix any wires inside their homes or businesses that, say, got wet or gnawed by a rodent. But there was an option, namely a monthly "wire maintenance" fee, which added yet another extra charge for what once had been included in the basic price.
Bit by bit, the line items grew, and others were added. It was easy to miss the escalating prices because they came separately over time — a nickel on one line of the bill, a quarter or two on another. With many small line items, people tended not to notice how the total was creeping upward much faster than the rate of inflation or the size of their income. Kushnick found his aunt's bills printed on multiple slips of paper, making it hard to spot everything at once. He noticed some charges were for services his aunt did not use; a few were for services she couldn't possibly use because her telephone was too antiquated. And the monthly rental for the phone itself? Kushnick calculated that his aunt had paid more than twenty times the price of the instrument with that small monthly rental fee.
One of the fastest-growing items Kushnick found on his aunt's bill was labeled "FCC Subscriber Line Charge." Other phone companies call this "FCC Charge for Network Access" or "Federal Line Cost Charge" or "Interstate Access Charge." Variations include "Federal Access Charge," "Interstate Single Line Charge," "Customer Line Charge," "FCC Approved Customer Line Charge" and even "End User Fee."
These may sound like government fees, or perhaps a disguised tax on telephone users that goes into federal coffers. Not so. Each of those labels identifies the charge for connection to the long-distance network. The government does not collect a penny from that charge. All the money goes to the phone companies.
According to Federal Communications Commission rules, phone bills are supposed to be easy to understand. The FCC truth-in-billing policy supposedly "improve[s] consumers' understanding of their telephone bills." According to the FCC:
Section 64.2401 of the rules requires that a telephone company's bill must: (1) be accompanied by a brief, clear, non-misleading, plain language description of the service or services rendered; (2) identify the service provider associated with each charge; (3) clearly and conspicuously identify any change in service provider; (4) contain full and nonmisleading descriptions of charges; (5) identify those charges. . . .
Despite the misleading labeling of the network "line charge," the FCC has approved it for years, officially helping confuse consumers. Among the honest descriptions the FCC might have required would be "long distance system access" and "telephone company network charge."
Inspired by his study of the evolution of the phone bill, Bruce Kushnick decided to find out how many people were misled by terms like "FCC Subscriber Line Charge." In a survey of one thousand Americans, he found three people who understood their phone bill, which means 99.7 percent did not. Round to the nearest whole number, and Kushnick's finding was that 100 percent of those surveyed did not understand their phone bill. In effect, no one understands his or her telephone bill, which amounts to a powerful rebuke to FCC policies that clearly harm consumers and benefit the telephone companies. In the years since that survey, however, the FCC has made no meaningful changes to rules that allow phone companies to confuse people. Don't blame the FCC staff for that. As with all government agencies, the bureaucrats do what the politicians tell them to do.
From The Fine Print by David Cay Johnston. Copyright David Cay Johnston, 2012. Excerpted by permission of Portfolio/Penguin.