Big ISPs Fighting Privacy

Old padlock with the key in the keyhole lying on a wooden board

One of the quietest regulatory battles is happening at statehouses rather than with regulators. The large ISPs and big Silicon Valley companies have joined forces to kill any legislation that would create Internet privacy.

The privacy battle got started in 2016 when the FCC passed new privacy rules that required ISPs to get permission from customers before selling their personal data or browsing history. Those new rules would have gone into effect in April of 2017. But Congress intervened to kill the new privacy rules before they went into effect. In an effort led by Senator Jeff Flake, Congress added language to the Congressional Review Act, the bill used to approve the federal government budget, that rolled back the FCC’s new rules and that also prohibited the agency from introducing new rules that were ‘substantially similar’.

Since that time there have been numerous attempts in state legislatures to provide privacy rights for citizens. According to Michael Gaynor of Motherboard there have been over 70 bills in state legislatures in the last year that have attempted to introduce consumer privacy – and all have failed.

That’s an amazing statistic considering the public sentiment for putting curbs on ISPs being able to use customer data. A Pew Research poll from earlier this year showed that over two-thirds of people support stronger privacy rules.

The legislative failures have all come due to intense lobbying from ISPs. The big telcos and cable companies have always had a strong presence in statehouses and have contributed to campaign funds for key legislators for years. The lobbying effort has paid off many times in the past, but not always. The lobbying effort for the privacy issue has been particular effective since the big Silicon Valley companies like Google and Facebook have joined forces with the big ISPs.

Those two sets of companies are rarely on the same side on issues, but they all have a vested interest in monetizing customer data. The big web companies like Facebook and Google make most of their money by leveraging customer data. The big ISPs are newer to this business line, but they all have acquired data firms over the last two years to help them compete with Google for advertising dollars.

It’s not talked about a lot, but Silicon Valley firms now spend more money on lobbying in DC than the big ISPs. These companies are newer to lobbying at the state level, but the privacy issue has drawn them into local lobbying in a big way.

The privacy laws passed by the last FCC are similar to those in effect in Europe. Web users there get the choice to opt out of being tracked by online companies and ISPs. Interestingly, a lot of people in Europe elect to make their data available to the web companies. Many people like the personalized advertising and other benefits that comes along with the surveillance. It turns out that many people, particularly Millennials don’t mind being tracked, and are not opting out. Apparently, though, that’s not good enough for the big web companies who want to track everybody online.

There are still ways for consumers who don’t want to be tracked to reduce their web presence. People can use VPNs to bypass their ISP, although there is still a risk of the VPN provider harvesting their data. There are several companies working on creating an encrypted DNS service that hides web searches from ISPs. Numerous people (like me) have dropped services like Facebook that are openly tracking everything done inside the platform. Search engines like Duck Duck Go, which don’t record web searches are growing in popularity.

Of course, one of the best ways to cut down on surveillance is to change service to a small ISP. Small telcos, WISPs, fiber overbuilders and municipal ISPs don’t track and monetize customer data. Unfortunately, most people don’t have an option other than a big ISP. I always advice my clients, who are all small ISPs to emphasize that they don’t spy on their customers – it’s a strong selling point to people who care about privacy.

Killing Net Neutrality Again?

The current FCC repealed the net neutrality rules earlier this year, with that repeal going into effect last month. In a move that is a head-scratcher, the Department of Justice recently filed a petition with the Supreme Court asking them to squash a lower court ruling in favor of net neutrality.

The original net neutrality rules were implemented by the FCC in 2015. The FCC’s order relied upon the use of Title II regulations as their authority to pass those rules. AT&T and other opponents of the ruling immediately appealed the FCC’s action, and in 2016 the DC Circuit Court of Appeals ruled that the FCC had the authority to invoke Title II. The same opponents of net neutrality appealed that decision to the whole Circuit Court, and in 2017 the court refused to take the case, thus upholding the 2016 decision.

The Department of Justice is now asking the Supreme Court to overturn the 2016 order that upheld net neutrality. It’s an unusual request because net neutrality has already been repealed by the FCC, so it seems like the issue is moot.

Nobody is sure about the reason for this filing, because neither action or inaction by the Supreme Court would realistically change anything. The Department of Justice argues that it is cleaning up loose legal ends. Proponents of net neutrality say that it’s an action to make it more difficult for a future FCC to reinstate net neutrality. They say that the administration is trying to kill a precedent that could be used by a future administration to reinstate net neutrality.

What’s most interesting about the whole net neutrality fight is that both the past and current FCC have had to get creative to first pass the net neutrality rules, and then to repeal them. What’s been missing in this fight is a Congress willing to vote on the issue, because legislation would put the issue to rest. The messy court battles over net neutrality for the last decade are all due to a Congress that won’t weigh in on the issue.

The FCC is mandated to follow the direction of Congress. It seems unlikely that net neutrality is ever going to come up for a vote in Congress. Polls have shown huge public support for net neutrality with various polls over the last few years showing support between 76% and 85%. Nobody in the GOP wants to go on record as opposing the issue.

We are badly in need of a new Telecom Act. Many of the rules that govern the FCC are far out of date. We need to fix cable rules that are massively out of synch with a world of on-line content. We need updated privacy laws that deal with current technology. And we need to know definitively if Congress thinks that we should or shouldn’t regulate some aspects of broadband.

But we’re not likely to get a new Telecom Act to a vote since net neutrality is going to get dragged into any discussion of new regulations. That means we’re likely to see the FCC continue to deal with current issues for which they have no direction of basis of action. That can only result in an FCC that grows gradually weaker and ineffective in its ability to tackle the communications issues that we need to face.

What we don’t need is a government that is looking backwards and wasting legal resources to kill a court order for an issue that has already been decided by the current FCC. This is one of the dumbest and most wasteful court actions I’ve ever seen in the industry. We don’t need to fill the over-busy courts with frivolous lawsuits – we need a Congress and an FCC to together tackle the current pressing issues in the industry.

Verizon’s Case for 5G, Part 1

Ronan Dunne, an EVP and President of Verizon Wireless recently made Verizon’s case for aggressively pursuing 5G. On an investor call he talked about potential ways that the company might monetize the new technology. Over a series of blogs I’m going to look at the various market applications of 5G envisioned by Verizon.

Mr. Dunne thinks 5G cellular can be used to develop advanced networks to provide better long-term patient monitoring. The solution he envisions would use cellular technology to power medical monitoring devices worn by patients or used in homes.

This one application gets to the heart of Verizon’s vision of the future with using 5G as the primary technology to connect to IoT devices. Today there are already health and medical devices connected through the cellular network. For example, there are GPS-enabled running watches today that require a cellular subscription. These devices communicate 2-way with the cloud through cellular. They can upload a runner’s statistics like heart rate and can also download things like a map of the runner’s location.

However, there are huge numbers of similar devices that don’t use cellular. For example, there are running monitors that provide the same features by connecting through a runner’s smartphone, which the runner must carry to get the same kind of feedback. Many of the most popular devices like Fitbit don’t require cellular at all and can store runner’s statistics until they can sync with their home WiFi network. There are also many in-home medical monitors that connect only through WiFi.

Verizon wants to capture the IoT market, and medical devices are just one of the many market niches they envision. In their vision of the future, all medical monitors would come with a cellular subscription. For medical devices that need to be connected 24/7 this application makes a lot of sense. For example, out-patients after surgery could be monitored at all times and wouldn’t be restricted to being in range of a WiFi network.

But this comes with a cost, at least today. Currently WiFi and Bluetooth technology is cheap and there is very little incremental cost of building these technologies into the chips in devices – many common chips already have built-in WiFi. It’s more expensive today to provide a 2-way cellular device.

There are also weaknesses with cellular coverage that would need to be addressed. For example, I can see a weak Verizon signal from my upstairs office, but I have zero bars of coverage on the first floor or in my yard. There are still a lot of homes today who have no cellular coverage, or coverage only outside or in some parts of their home.

Like many of the applications that Verizon has in mind, the goal is for them to sell many more cellular subscriptions. Practically everybody in the country now has a cellphone and Verizon envisions IoT-monitoring subscriptions as a way to boost sales. But this is going to require a public willing to pay more for the extra connectivity. In the case of medical monitoring, a device that can connect to WiFi in the home or to a smartphone outside the home can provide the same connectivity at zero extra cost to the consumer. My guess is that Verizon will be pushing sales of medical monitoring through doctors and hospitals, because a lot of consumers would choose the cheaper alternative if they are given a choice.

The battle to connect to in-home medical devices will be an even harder sale for Verizon to win because most homes today have WiFi. Verizon pictures a future world where all of our IoT devices connect using cellular. This connectivity is made easier with 5G since the new specification calls for allowing 100,000 simultaneous connections to devices from each cell site. However, WiFi already has a huge market lead in this area and IoT devices come WiFi enabled, I foresee a huge uphill fight for Verizon to try to capture this business. I know personally that, given a choice, I’m going to buy an appliance with WiFi connectivity over a model that requires an additional cellular subscription, no matter how small the extra fee. Verizon ultimately foresees homes paying an additional $20 or $30 per month for IoT connectivity, which translates to huge profits for the company.

As a consumer I also worry about privacy using the cellular network. Today my landline ISP needs to somehow pick out my IoT signals from the rest of bits generated from my home – something I can easily hide if I wish to. But Verizon would automatically know the source of the communication from each IoT device connected to their network, allowing them to more easily spy on my IoT outputs – particularly if they are the ones translating the signals to send back to doctors, hospitals or whoever is at the other end of each IoT device. I really don’t trust Verizon enough to let them peer that easily into my personal data.

This application is no slam dunk for Verizon. There is certainly an opportunity for them to convince health care companies to use devices that require an extra 5G connectivity charge each month. But when this choice is left up to consumers I think most of them will choose to keep using WiFi once they understand all of the facts.

Defining Competition

One of the hardest things for regulators to do is to define when a given telecom market is competitive. It’s an important question because, by definition, regulators are largely obligated by law to regulate monopoly or oligopoly providers in any market that is considered to be non-competitive. That’s the basic reason that regulators exist.

The telephone industry provides a good story of an industry that went from non-competitive to competitive. For a century most people in the country got telephone service from AT&T who had a monopoly franchise to provide service in defined geographic areas. Smaller telcos had the same monopoly power in smaller footprints. The FCC and state regulators heavily regulated the telephone industry to protect against monopoly abuses. The system worked, and we had low telephone rates and quality service.

Over time the monopolies broke. Some of this came from budding competitors like MCI. Eventually the government jumped into the fray. Judge Green forced the divestiture of AT&T and the Congress passed the Telecommunications Act of 1996 to finish the job – and at that point telephone service, at least in urban areas was assumed to be competitive.

We’ve seen the same thing happen with cable TV. Most markets in the country traditionally had one cable provider monopoly that was regulated under FCC rules and through local franchise agreements. Technology has allowed others to compete with the cable companies and there is a formal process for a cable company to ask the FCC to declare a given market to be competitive – the test generally being that a competitor has won some significant portion of the customers in that market.

AT&T just made a filing at the FCC that argued that the cellular market is competitive, and Verizon made a similar filing. The obvious reason for these filings is to get the FCC to relax or eliminate relating the cellular industry. A competitive industry doesn’t need the same level of regulator oversight and it’s presumed that the market will take care of monopoly or oligopoly pricing and protect consumers.

However, the smaller cellular carriers don’t see the same market. The Competitive Carriers Association (CCA) represents over 100 of the smaller cellular carriers in the country, including T-Mobile and Sprint. The group made a filing that argues that the cellular industry is not competitive. They argue that AT&T and Verizon have grown to control 70% of the market and that regulatory barriers and competitive practices of the two big providers have negatively impacted their ability to fairly compete.

It’s an intriguing read and is a good primer for many of the issues facing the industry. For example, the filing looks at the many different spectrum bands used by the cellular companies and shows how FCC spectrum policies award most of the good spectrum to the largest providers.

These filings were prompted by an FCC proceeding that is considering the creation of a new annual report on competition in the mobile broadband market. As cellular broadband grows in importance the FCC is interested in measuring progress of the industry and wants to get ahead of the curve before the introduction of 5G. AT&T and Verizon want to quash this effort by arguing that the industry is already competitive. Such a declaration by the FCC might not only eliminate this proposed new report, but it might eventually lead to a reduction in regulations of the cellular industry.

Like with other broadband technologies, urban America has more options than rural America. The FCC seems to have pinned its hopes on cellular wireless to fix huge coverage gap for rural broadband. This proposed report would gather data about cellular customers and product speeds – something the big companies don’t want to see published. Everybody in rural America knows that there are huge gaps in cellular coverage like there is with other broadband technologies. There are still huge areas with no 4G coverage and many places without even voice coverage.

I have not always been a fan of FCC annual reports because in recent years they have sometimes become political and the FCC has emphasized or de-emphasized facts to suit their preferred narrative. But we can’t even know the broadband situation with facts – so I hope this particular report moves forward.

Technology Promises

I was talking to one of my buddies the other day and he asked what happened to the promise made fifteen years ago that we’d be able to walk up to vending machines and buy products without having to use cash or a credit card. The promise that this technology was coming was based upon a widespread technology already in use at the time in Japan. Japan has vending machines for everything and Japanese consumers had WiFi-based HandiPhones that were tied into many vending machines.

However, this technology never made it to the US, and in fact largely disappeared in Japan. Everybody there, and here converted to smartphones and the technology that used WiFi phones faded away. As with many technologies, the ability to do something like this requires a whole ecosystem of meshing parts – in this case it requires vending machines able to communicate with the customer device, apps on the consumer device able to make purchases, and a banking system ready to accept the payments. We know that smartphones can be made to do this, and in fact there has been several attempts to do so.

But the other two parts of the ecosystem are problems. First, we’ve never equipped vending machines to be able to communicate using cellular spectrum. The holdup is not the technology, but rather the fear of hacking. In today’s world we are leery about installing unmanned edge devices that are linked to the banking system for fear that such devices can become entry points for hackers. This same fear has throttled the introduction of any new financial technology and is why the US was years behind Europe in implementing the credit card readers that accept chips.

The biggest reason we don’t have cellular vending machines is that the US banking system has never gotten behind the idea of micropayments, which means accepting small cash transactions – for example, charging a nickel every time somebody reads a news article. Much of the online world is begging for a micropayment system, but the banking fee structure is unfriendly to the idea of processing small payments – even if there will be a lot of them. The security and micropayment issues have largely been responsible for the slow rollout of ApplePay and other smartphone cash payment systems.

This is a perfect example of an unfulfilled technology. One of the most common original claims for the benefits of ubiquitous cellular was a cashless society where we could wave our phone to buy things – but the entrenched old-technology banking system effectively squashed the technology, although people still want it.

I look now at the many promises being made for 5G and I already see technology promises that are not likely to be delivered. I have read hundreds of articles that are promising that 5G is going to completely transform our world. It’s supposed tp provide gigabit cellular service that will make landline connections obsolete. It will enable fleets of autonomous vehicles sitting ready to take us anywhere at a moment’s notice. It will provide the way to communicate with hordes of sensors around us that will make us safer and our world smarter.

As somebody who understands the current telecom infrastructure I can’t help but be skeptical about most of these claims. 5G technology can be made to fulfill the many promises – but the ecosystem of all of the components needed to make these things happen will create roadblocks to that future. It would take two pages just to list all of the technological hurdles that must be overcome to deliver ubiquitous gigabit cellular service. But perhaps more importantly, as somebody who understands the money side of the telecom industry, I can’t imagine who is going to pay for these promised innovations. I’ve not seen anybody promising gigabit cellular predicting that monthly cellphone rates will double to pay for the new network. In fact, the industry is instead talking about how the long-range outlook for cellular pricing is a continued drop in prices. It’s hard to imagine a motivation for the cellular companies to invest huge dollars for faster speeds for no additional revenue.

This is not to say that 5G won’t be introduced and that it won’t bring improvements to cellular service. But I believe that a decade from now that if we pull out some of the current articles written about 5G that we’ll see that most of the promised benefits were never delivered. If I’m still writing a blog I can promise this retrospective!

 

p.s – I can’t ignore that sometimes the big technology promises come to pass. Some of you remember the series of AT&T ads that talked about the future. One of my favorite AT&T ads asked the question “Have you ever watched the movie you wanted to the minute you wanted to?”. This ad was from 1993 and promised a future where content would be at our finger tips. That was an amazing prediction for a time when dial-up was still a new industry. Any engineer at that time would have been skeptical about our ability to deliver large bandwidth to everybody – something that is still a work in process. Of course, that same ad also promised video phone booths, a concept that is quaint in a world full of smartphones.

Socket

Today I’m discussing another ISP I’ve found interesting. The company is Socket from Columbia, Missouri. The company has a long competitive history and began in 1994 as a dial-up ISP. They were successful in the local market and by 1999 had grown to 30,000 dial-up customers.

Like other dial-up ISPs that are still around the company became a CLEC in 2002 and began using unbundled network elements to reach customers. This allowed Socket to expand their focus to provide their customers with high-speed internet and voice services. Over time the company expanded its sales network to serve hundreds of towns in the state from Kansas City to St. Louis and can connect businesses with multiple branch locations throughout the state.

Socket was able to serve a large geographic area by the wide use of EELs (combining an unbundled loop and interoffice transport), allowing them to serve customers in almost any large ILEC exchange in the state. They used other unbundled network elements as appropriate but became perhaps one of the largest users in the country of the EELs product.

The use of unbundled network elements allowed Socket to be a direct competitor to Southwestern Bell (which became AT&T), CenturyTel and Embarq (which became CenturyLink) and in many towns they were the first competitor. Socket had a huge impact on the cost of business telecom services in Missouri. For example, when they entered a new market the price for PRIs (T1s with multiple channels used mostly to feed business phone systems) plunged from $1,180 per month from the telco down to $400.

In many places Socket is still the only competitive alternative. The FCC is considering ending the requirement for the big telcos to unbundle their copper – and if that happens prices in many of these markets will climb back to monopoly levels. This demonstrates the true value to a community of having a competitive provider. Having at least one competitor in a market improves pricing for most businesses since the telco is forced to lower their prices or lose most of their customers.

Socket also thrived by being the only provider to offer naked DSL (DSL that doesn’t required a telephone line). The company purchased their own telephone soft-switch to be able to provide the full range of telephone products, but they didn’t force the customer to pay for a voice line as required by the telephone company.

In recent years the company has turned their focus to building fiber. Customers are demanding faster broadband speeds than are available through UNEs and the company can see the writing on the wall hinting at the slowly dying telco copper network. They can see that their long-term survival depends upon having customers on their own network.

The company has now built over 500 miles of fiber. They typically build fiber when they can find an anchor tenant that can justify the cost of construction, or a large group of residential customers who sign up through their “fiberhood” pages, showing where speeds are lacking. The company has done well over the years in serving the health care and banking industries and much of their network expansion is to reach customers in these industries. They will also build to reach a cellular tower or large business that requires significant broadband. They then sell to customers living near the anchor routes in order to maximize the revenue stream generated by an individual fiber build.

Like many competitors, Socket provides the kind of customer service that businesses and residents have never had in the past. For example, they recently talked to a new potential business customer who would only consider using them if they promised to resolve billing disputes quickly. Apparently, this customer had numerous billing disputes with the telco that took many months to resolve. Socket surprised them by promising that they could normally resolve billing disputes on the first phone call, and certainly within a day.

As part of my consulting practice I’ve interviewed hundreds of rural businesses and I’m always amazed at how poorly they are treated by the incumbent providers. They are still charged high monopoly prices from decades ago, they often wait too long for repairs and they have to fight to fix problems like billing errors. Companies like Socket reset customer expectations and in doing so rarely lose a customer.

Using USDA’s New $600 Million

Earlier this year Congress passed an Omnibus Budget bill that okayed the US budget until this September. Buried in that bill was $600 million for rural broadband expansion, to be administered by the USDA. The USDA has dressed this up as an ‘E-Connectivity pilot program’ and is asking current borrowers and others for feedback on how to use the money. Comments are due to them by September 10.

This new program will be allowed to supply grants for up to 85% of the cost of building in an area. That might create a viable business case in rural areas if the loan recipient only has to come up with 15% matching funds.

However, Congress made it challenging for the USDA to use the money. Normal USDA programs broadband loans can be used to cover areas where as few as 15% of the homes in the coverage area don’t have access today to 10/1 Mbps broadband. It looks like big ISP lobbyists got to the author of the bill and this new $600 million flips that around and can only be used in areas where 90% of homes don’t have access to 10/1 Mbps.

That’s a difficult hurdle to overcome for a number of reasons. First, the big cellular companies report widespread coverage of cellular broadband that meets that threshold. Many such areas don’t really have that speed, and in many cases can’t even get a cell signal, but the presumption will be that such areas can get broadband. Second, the big telcos are supposedly busy implementing the CAF II program which will bring 10/1 Mbps speeds to millions of rural homes. Those homes will be counted as having sufficient broadband.

The CAF II reverse auction is underway and it’s going to fund building in the most remote places that were not covered by the CAF II program. Most of the reverse auction census blocks will not pass the 90% no-broadband test.

In most places in the country it’s going to be challenging to draw a contiguous study area that meets the 90% test. It doesn’t take too many homes with good cellular broadband or with a CAF II upgrade to fail the eligibility test. I’m sure such areas exist, but almost by definition somebody is going to have to ask for funding for small pockets of homes, or else jerry-rig a service footprint to try to meet the 90% test.

I have a hard time even seeing the big incumbent telcos meeting the 90% test in many places. There might be small telcos that didn’t accept ACAM money that might still have such pockets – but most small telcos upgraded to speeds greater than 10.1 Mbps many years ago.

The USDA is asking for the following feedback:

  • How to evaluate if rural homes have sufficient access to 10/1 Mbps speeds today. I think this gets at the heart of the FCC databases where homes are incorrectly shown to have broadband availability.
  • How to consider affordability and pricing.
  • How to demonstrate the benefits of projects using publicly available data.

The USDA didn’t ask about the speeds that must be provided to customers and I’d be surprised if they exceed the 10/1 Mbps speeds required by CAF II.

It’s possible I’m being pessimistic. It’s possible that this funding will make sense for building to small pockets of rural homes that meet the 90% no-broadband test. Perhaps the right strategy for an applicant is to apply for the funds for small clusters of ten or twenty homes – although that makes it hard to justify the overwhelming paperwork that must accompany a federal funding request.

Anybody that knows of areas that will meet this test ought to consider asking for the funds. I imagine the USDA will issue the rules near the end of this year. Getting what is effectively an 85% grant sounds attractive – but anybody who has asked for federal funding knows there will be nothing easy about the application process.

The Evolution of Smartphone Pricing

Smartphones are so ubiquitous that’s it’s easy to forget that the first iPhone was announced in June 2007 and released to the public later that year. The Apple App store at the time of the first phone had only 500 apps, most for pay. Apple had convinced developers that smartphone users would pay big bucks to download useful apps and most app prices ranged from $1 to $25. It became clear that users preferred free apps, and Ebay and other free applications found great success. But some for-pay apps like Super Monkey Ball, priced at $6 found good commercial success.

The cellphone companies at the time had mostly deployed 3G networks. The cellular companies saw the smartphone as a way to lure new customers and they all offered unlimited data plans. Unlimited plans were not a problem at first because the average phone didn’t use much data. However, the smartphone boom surprised everybody with Apple selling 4.7 million iPhones in the third quarter of 2008 – and sales skyrocketed from there. Android phones also entered the market in 2008 and the 3G cellular networks were quickly getting swamped. The cellular carriers quickly stopped selling unlimited data plans and tried to lure people from existing plans through practices like the way that AT&T slowed data speeds on unlimited plans.

About this same time was the introduction of 4G, which offered faster speeds and could connect more customers per cell site. The cellular companies had migrated entirely to metered pricing and sold data by the gigabyte. The market was clearly trying to extract as much revenue from customers as possible like they had done in the past with products like text messaging. The few cellular carriers were effectively monopolies who were selling a product with great demand, and prices steadily rose.

For many years there was enough capacity on the cellular networks to have supported unlimited and larger data plans. I remember a few unguarded comments by cellular executives admitting that they had plenty of network capacity – but the cellular companies cared more about profits than in accommodating the needs of customers. I remember years when both AT&T and Verizon were earning cellular profits of more than $1 billion per month.

T-Mobile upset the market equilibrium by offering cheaper data. They did this by offering more gigabytes of data for the existing market price and the other cellular providers responded by dropping the price per gigabyte. jumped on the bandwagon. We started seeing plans that promised gimmicks like rolling over unused data so that customers didn’t have to fear exceeding their data caps.

During this time we started seeing big customer volumes for MVNOs – carriers that repackaged wholesale minutes from the big cellular companies. The MVNOs offered options numerous options that lowered prices, such as low-price plans for small data users or large packages of data plans for the larger data users. All of this was aided by the continued evolution of the 4G networks that improved steadily as more of the 4G specification was introduced – we finally saw the first fully 4G compliant cellular sites at the end of 2017.

In early 2017 we sy another sharp turn in market pricing when all of the carriers announced ‘unlimited’ data plans. This was largely in response to T-Mobile which had launched ‘T-Mobile One’, a truly unlimited plan. The unlimited data plans from other carriers weren’t actually unlimited and most were capped at a little over 20 gigabytes of data per month. This seems to have created the expectation from the public for large data plans.

Already since then the cellular carriers have subtly shifted the game again. They now offer multiple tiers of unlimited data. For instance, customers can buy unlimited plans that charge more to add on HD video. Customers can buy plan that add international roaming or plans that throttle usage when customers hit a certain cap. The multiple-plan approach looks to be a way for the carriers to extract more revenue from a product that they fear is becoming a commodity. They are offering add-ons that they hope will lure customers to spend more each month.

It’s hard to believe that all of this has happened within only eleven years. There must be grist here for dozens of economics PhD thesis papers looking at how an oligopoly market responded to major technical improvements and massively increased demand. There is no arguing that the cellular carriers have been successful and have convinced each person in a household to buy cellular plans that cost more than what most families spend on telephone services a decade ago.

Looking Closer at CAF II Broadband

AT&T is making the rounds in rural Kentucky, not too far from where I live, and is announcing the introduction of their residential wireless broadband product that is the result of the FCC’s CAF II program. Today I’m looking at more detail at that product.

AT&T was required under the CAF II rules to deliver broadband speeds of at least 10 Mbps download and 1 Mbps upload. AT&T says Kentucky announcement that they will be delivering products with at least that much speed, so it’s possible that customers might see something a little faster. Or the company could cap speeds at 10 Mbps and we’ll have to wait for reports from customers about actual speeds.

AT&T accepted nearly $186 million in FCC funds to bring CAF II broadband capabilities to 84,333 households in the state, or $2,203 per household. They say all of those homes will have the broadband available by the end of 2020 (although there is no penalty if some of the homes don’t get covered – which one would expect since many homes are likely to be too far from a cell tower).

AT&T will be delivering the broadband in Kentucky using LTE broadband from cellphone towers. This is delivered to homes by placing a small antenna box (not a dish) on the exterior of a home. They say that they will be using a different set of frequencies for CAF II broadband than what is used for cellular service, meaning there should be no degradation of normal cellular service.

I saw a news article in Kentucky that says the price will be $50 per month, but that’s a special one-year price offer for customers also willing to sign up for DirecTV. Following are more specific details of the normal product and pricing:

  • Customers can get a price of $60 per month for 1-year by signing a 12-month contract. After the year the price increases to $70 per month and is set at $70 per month for those not willing to agree to a contract.
  • Customers signing a contract see no installation charge, but otherwise there is a $99 one-time fee to connect.
  • There is an early termination charge for customers that break the one-year contract of $10 for each remaining month of the contract.
  • There is a $150 fee for customers who don’t return the antenna box.
  • There is a monthly data cap of 170 Gigabytes of downloaded data. Customers pay $10 for each additional 50 GB of download up to a maximum of $200 per month. AT&T is offering a 340 GB monthly data cap right now for customers who bundle with DirecTV – but that’s a temporary offer until October 1.
  • AT&T also will layer on a monthly $1.99 administrative fee that they pocket.

I think the pricing is far too high considering that the $186 million given to AT&T probably paid for all, or nearly all of the cost of the upgrades needed to deliver the service. Some of that money probably was used to bolster fiber to rural cell sites and the funding would have been used to add the new electronics to cell sites. AT&T used free federal money to create a $72 monthly broadband product, and before even considering the data cap is a product with a huge margin return since AT&T doesn’t have to recover the cost of the underlying network.

The small data cap is going to generate a lot of additional revenue for AT&T. The monthly data cap of 170 GB is already too small. Comcast just reported in June that the average download for all of their 23 million broadband customers was 151 GB per month. That means there are already a significant number of homes that want to use more than AT&T’s monthly 170 GB cap. We know that monthly home demand for broadband keeps growing and the Comcast average just a year ago was 128 GB per month. With that growth, within a year the average customer will want more than AT&T’s cap.

A few years ago when I was on Comcast they measured my 3-person home as using nearly 700 GB per month. On the AT&T plan my monthly bill would be $180 per month. Within a few years most homes will want to use more data than AT&T’s cap. The FCC really screwed the public when they didn’t insist that carriers taking the funding should provide unlimited downloads, or at least some high data cap like 1 terabyte. That stingy data cap gives AT&T permission to print money in rural America.

The 10 Mbps speed is also a big problem. That speed today is already inadequate for most households who now want to engage in multiple simultaneous streams. I’ve written many times about the huge inefficiencies in home WiFi and a 10 Mbps connection is just barely adequate for two video streams as long as there are no other broadband uses in the home at the same time. A typical home with kids these days is going to want to simultaneously watch video, do homework, play games, browse the web, download files or work from home. A home with a 10 Mbps speed is not close to equivalent to much faster urban broadband connections. You don’t have to look forward more than a few years to know that a 10 Mbps data caps is soon going to feel glacially slow.

Finally, cellular data has a higher latency than landline broadband, with latency as high as 100 msec. Customers might have problems at times on this product maintaining video streams, making VoIP calls or staying connected to a school or work server.

I’m sure that a home that has never had broadband is going to welcome this product. But it’s not going to take them long to realize that this is not the same broadband available to most homes. They are also going to realize that it’s possibly the last speed upgrade they are going to see for a long time since AT&T and the FCC want to check off these homes as now having broadband.

Plummeting Franchise Fees

The City of Creve Coeur, Missouri recently filed a suit against Netflix and Hulu claiming that the companies should be paying the same local franchise fees as Charter Communication, which is the incumbent video provider in the community. The City claims that it is losing franchise tax revenues as people cut the cord and they want to tax the companies that are taking that business away from Charter. They argue that Netflix and Charter ride the same wires and rights-of-way to deliver content and both should be taxed the same.

My quick reaction is that the lawsuit will get little traction due to the numerous differences between Charter and Netflix. However, I’ve learned over the years that it’s hard to predict tax disputes and it’s certainly possible that a judge might agree that Netflix can be taxed. If the courts see this as a regulatory battle the case will likely get referred to the FCC, but there’s no telling what happens if it’s instead considered as a tax dispute.

Most cable franchise taxes around the country are levied against the amount of cable TV revenues sold in a community. The nature of franchise agreements varies across the country and there are some jurisdictions that also tax telephone and broadband services.

There some interesting differences between a cable provider like Charter and Netflix.

  • I’ve read a lot of franchise agreements and one of the most common characteristics of these agreements is that, while the assess the tax levy on cable revenues, the basis of the agreement is to grant access to public rights-of-way to allow a cable provider to hang wires or bury cable in the community. Charter owns a wired network in the City while a company like Netflix does not.
  • Franchise agreements almost always create an obligation for a cable provider to serve everywhere in the community, or at least to the parts of the community that have a certain level of home density. For instance, cable companies are often required to build wires to any parts of town that have at least 15 or 20 homes per linear mile. The same obligation can’t really be applied to Netflix – they can only sell to homes that have sufficient broadband to use their service.
  • There are often other requirements that come with a franchise. For instance, the franchise holder might be required to dedicate a channel for local government programming. Franchise holders are often required to provide fiber or bandwidth to the City. Netflix wouldn’t be able to meet any of these obligations.

I don’t know if the City ultimately wants Netflix and Hulu to sign a franchise agreement, but if they do the City might not like the result. Current regulations require that a City can’t demand concessions from one franchise holder that doesn’t apply to all franchise holders. I can picture a stripped-down franchise agreement for Netflix for which Charter would immediately demand to use if Netflix was excused from any obligations required of Charter.

The FCC does not want this issue handed to them because it opens the door to defining who is a cable company. The agency opened an investigation into this issue a few years ago and quietly let it drop, because it’s not a decision they want to make. The FCC is constrained on many issues related to cable by laws passed by Congress. I think the FCC decided early in the investigation that they did not want to tackle the sticky issues of declaring online programmers to be cable companies. Had the FCC done so then this suit might have good traction.

Even a few years ago at the early start of online content the FCC could see that the online content world would become messy. There are now companies like Sling TV and DirecTV Now which look a lot like a cable company in terms of programming. But there are far more online providers that don’t fit the mold. Is a company that only streams British comedy, or soccer, or mystery movies really a cable company? Is a web service that streams blogs a content provider? I think the FCC was right to let this issue quietly die. I’m sure the day will come when the FCC finally acts on the issue, but when they do it’s more likely that traditional cable companies will be freed from regulation instead of dragging OTT providers into regulation.

It’s hard to think any city can justify the legal expense of pursuing this to the end – even winning might not give them the results they want. Without congressional action the City would have to tackle each of the hundreds of online video content providers to somehow get them to also pay a tax. This feels a lot like tilting at windmills. However, many taxes we pay today started when one jurisdiction tackled the issue and others climbed aboard – so this is worth keeping an eye on.