Monthly Archives: August 2015

Cord Cutting Might Finally be Here

Fatty_watching_himself_on_TVRecently, Wall Street has been hammering media stocks due to the fact that most of them have reported falling US subscribers. That makes me ask a question I have asked several times before: are we finally seeing the impact of cord cutting? Most cable companies just released 2nd quarter 2015 cable subscriber numbers and except for Verizon FiOS, all of the other large cable providers lost cable customers for the quarter, as follows:

  • DirectTV               -133,000
  • Dish                        -81,000
  • Comcast                 -69,000
  • Time Warner         -45,000
  • Suddenlink            -44,000
  • Charter                  -33,000
  • AT&T                      -22,000
  • CableOne              -21,000
  • Cablevision           -16,000
  • MediaCom            – 3,000

Just for this group of companies that’s a loss of 423,000 cable customers. And the numbers are actually worse. For instance, the Dish numbers might be as high as a loss of 187,000 because they are now netting the gains from Sling TV into the reported today. And Cox is not in these numbers since it’s privately held. The total losses above are something greater than 530,000 for the quarter.

Then you have to consider the fact that historically cable companies would have captured a significant share of new households. With the improved economy there will probably be at least 1 million new households added to US housing this year, and cable would normally have added about 200,000 customers each quarter from these new potential customers. That brings total net losses compared to historic trends to over 700,000 in a quarter.

The large cable companies have been losing customers for several years now. For a while these losses were offset by increases in satellite customers. More recently there was nearly a one-for-one between the losses experienced by the cable companies and the gains of the telcos, mainly AT&T and Verizon. But in this latest quarter Verizon gained only 26,000 and AT&T lost nearly that many, so that sector is no longer growing.

The second quarter is traditionally one of the poorest performing quarters of the year. For example, the cable industry as a whole suffers when campuses shut down for the summer, although those losses generally net out to gains again in the fall. And so it’s unlikely that these losses are going to annualize to the 2 million customers you might expect from these figures. But for the first time there is going to be a significant loss of cable customers for the year.

The cable companies almost all reported improved revenues. Even though they lost a lot of cable customers, the group as a whole gained 377,000 new data customers. Further, the cable companies had significant cable rate increases (although they also had significant increases in programming costs).

But it’s not hard to see how these kinds of losses affect the programmers. Take ESPN – it’s been reported that they charge cable companies more than $5.50 per customer per month. At that rate the loss of 530,000 paying customers annualizes to almost $35 million per year in lost revenues. And if you look at the historic trend including new housing units their loss is even greater than what they traditionally could have expected.

Not reported in the above numbers is the impact of cord shaving. It’s been anecdotally reported that there are a lot of customers cutting back to smaller TV packages, meaning that they are paying for fewer channels. The channels in the premium tiers have to be losing revenue at a significantly higher rate than the basic channels that everybody gets. But the cord shaver numbers are hard to come by and are not reported in cable company press releases.

ESPN is part of Disney which is a very large corporation with diversified revenues, and $35 million lower revenues gets lost in the rounding on their corporate books. But Wall Street is looking at the long term trend and is worried about programmers in general.

Finally, there is another industry measure that may have also spooked Wall Street. Nielsen recently released trends in TV viewing time. Since 2010 viewing hours per week have dropped for all age groups, but particularly for younger viewers. Viewing by 50-64 year old was down 1%, 35-49 year olds down 10%, 25-34 year olds down 23% and 18-24 year olds down a whopping 32%. That speaks tons about the dropping trend for future advertising revenues, which are aimed more heavily at young viewers.

It’s no wonder that Wall Street is punishing the media companies when they are losing revenues from both subscribers and advertising. Many of the programmers are selling enough new content overseas to make up for the US losses, but analysts are obviously worried that this trend is going to quicken in the same manner it did for landline telephones. This could get ugly fairly quickly.

The Promise of Hyper-Local Ads

Wi-FiApple Watch is now being promoted as a platform to deliver hyper-local ads. These are ads that are provided to you locally at a given store or other location – essentially instant specials that are provided at the point of shopping or purchase. The advertiser’s dream has always been to use hyper-local ads to get you to pause to look at things you might have otherwise walked past, or even to lure you into a nearby store you might have otherwise gone past.

This is an idea that has been around for many years; advertisers are chomping at the bit to make this work. The problem has always been finding a method of transmitting the ads to people in a way that can be widely accessed and used by enough shoppers to make it worthwhile for the advertisers.

For a long time retailers have been working on ways to make this work using a smartphone. But there are issues with that. The primary issue is that a shopper needs to download an app for each store they shop at in order to participate. This works fine in large department store or a grocery store, but it’s unimaginable to make this work in a busy mall or shopping district with hundreds of stores.

There are also privacy issues. Currently the easiest way to contact strangers would be to send them a text message, but it’s against FCC rules to send unsolicited text messages to people with whom a business doesn’t have a relationship. Plus texts are quite limited in content and looks and don’t have the pizazz that advertisers want.

A lot of stores have customer loyalty programs today that are a tiny start towards a hyper-local ad system. For instance, my wife likes Target and she uses their shopping app. When shopping she can scan any item with her smart phone and the app will tell her more about the product and also offer coupons if there are any. But this is not hyper-local advertising and my wife describes this more like a scavenger hunt where it takes a lot of effort to find the best specials in the store.

There is also the technology platform issue. Apple has assumed that an eventual winner for hyper-local shopping is going to be beacons; they have built the ability to communicate with beacons into all of their devices using the iOS7. Beacons are small devices that will communicate with shoppers using low-power Bluetooth technology. This means that the communications will be very short-range and a person needs to be pretty close to a beacon to get a notice from it.

There are retailers now testing beacon technology. Target, for example, just installed beacons into 50 of their larger metropolitan stores. Even in this first run Target is worried about overwhelming shoppers. They are making a shopper confirm three times that they want the beacon messages and they are then limiting these messages to two times per given store visit. Of course, power shoppers like my wife are probably going to demand many more pings!

With beacons the retailer can provide coupons to a shopper as they shop. And with loyalty shoppers they can provide the coupons that they guess will be most effective based upon that shopper’s past purchasing history. When fully implemented this will be one of the first truly hyper-local ad experiences.

The precautions that Target is taking highlight the risks of hyper-local ads. If they become too overwhelming or annoying then most customers will likely turn them off. And off course, reluctant shopper like me are never going to use this, and so the system is not going to work with everybody in the store. And there are still going to be technical issues. If a person has turned off their Bluetooth then this isn’t going to work.

One of the biggest concerns expressed by a survey of Target shoppers is that they don’t want the store to use the technology to track them when they are in the store. Target says they will not do this, but one has to suspect that they are going to have a hard time not mining that data when it’s lying right in front of them. The more any given store knows about the overall habits of their customers will help them increase sales. But even scarier, the more they know about you personally, the more they can coax you to spend.

The Architecture of the Internet – Freedom Encoded

The InternetThe early architects had a clear vision about what they thought the Internet should be. The folks who worked to create the Internet were largely technical liberals and they deliberately created some of what we consider the best aspects of the web today.

The Internet is amazing when you stop and think about it. It’s a framework that moves packets of information without any central management or control. It moves these bits without bias based on the content, the sender, or the type of application. It enables any two people to connect and communicate without asking permission. In effect, the underlying architecture of the Internet values free and open access to information, the ability for people to express themselves and read and post comments, and a platform for the creation of open markets for both goods and ideas.

There was a lot of discussion about this in the early years of the Internet and the underlying framework we have now was not the only option. But in the end the architecture of the Internet reflects the beliefs and mores of the technical liberals who created it and who thought that allowing free expression was the most important aspect to build into the new platform.

What we often forget is that everything about the Internet is code, and code can be changed. In the US as we still largely enjoy the open platform that was first created, it’s easy to think that the Internet is the same everywhere. But it clearly is not. There are those extreme places like North Korea that largely blocks its citizens from having access to the web. But much more common these days are countries that are building a firewall around themselves and modifying the basic code of the Internet to their own liking.

The biggest example of this is the Great Firewall of China that has found a way to layer a centralized authority over the basic Internet topology. In China nothing a person does on the Internet is assumed to be private and everything passes through hordes of state monitors who keep a close eye on what people say and do on the web. People routinely get jailed there for something they say on the Internet and so their flavor of the Internet has turned into the exact opposite of what we have in the US today and what the original creators of the Internet intended.

The original Internet was heady stuff for technology geeks when they were the main people using the new media. I remember the days of Usenet when there were discussion boards on thousands of topics, and for the most part the conversations on these boards were civil, informational, and entertaining. It was an experience of watching the brightest people in the world discussing topics of interest.

But over time there were overlays developed that made the Internet more accessible to everyone. First came platforms like Compuserve and AOL that provided each person with a home page to tailor their Internet experience. This quickly brought tens of millions of people to the Internet where before there had been only tens of thousands.

And those early platforms have been superseded by social networking sites like Facebook, Twitter, and Reddit that brought hundreds of millions of people to the Internet. Today there is such a proliferation of platforms that you can no longer point to an Internet experience that is shared by even a majority of people. You can be a heavy Internet user and only use one or two applications like Facebook, Netflix, or Pinterest.

And one can argue that you are a big Internet user if all you do is play games on your smartphone. There is such a wide array of applications available that people are free to pick and choose one or many as fits their preference and lifestyle.

But interestingly, in most of the world the underlying framework is largely unchanged. Much of the same basic code that established how bits are routed is still in place. The basic protocols have largely been upgraded, mostly due to finding ways to protect against hacking, but the same basic processes still govern how a given user interfaces with the rest of the world.

As we saw with the protesters in Hong Kong last year, even in places like China that keep a tight lid on the Internet, a group of determined users can find a way to bypass the central authority and communicate with each other without being monitored. We still have the original creators of the Internet to thank for this because that freedom all derives from the underlying architecture. Unless the fundamental structure of how the Internet routes bits changes, the ability to find free expression is always going to be there for the determined user.

A Better Way to Fund USF

USF-logoThe Universal Service Fund (USF) is shifting its focus dramatically and this leads me to ask if there ought to be a more equitable way to fund this effort.

Historically, the USF was established to help pay for providing telephone service in high cost and remote parts of the country. Largely, it worked and telephone networks were expanded to places that certainly never would have gotten service without these funds. Then, over the years, Congress and the FCC expanded the role of the USF and it was also used to provide telecom services to schools and libraries and to bring telecom and data services to rural health care providers. And as each of these new functions was added the size of the fund grew to over $8 billion.

But now there are big shake-ups in all of the traditional functions of the USF. Subsidies for rural telephony are being phased-out and instead these subsidies are going to be used to promote rural broadband. A significant number of billions of dollars are going to be given to companies over the next seven years that are willing to build rural broadband to places that don’t have it today. The money provided for schools and libraries has been refocused on getting gigabit connections to schools and libraries.

And so the fund is becoming very much focused on bringing better broadband to places that need it. But surprisingly, this is still being funded almost entirely by a surcharge on interstate and international telecommunications services. And there are some real problems with using interstate long distance as the base for collecting the fee.

First, the revenues used for long distance have dropped annually since the turn of the century. Long distance has gotten so cheap that it’s not something that is even noticed much by consumers any more, except perhaps in some rural communities that still charge a lot for long distance. Long distance has become such a commodity that it is often built into the base rate for telephone service. About the cheapest charge I’ve seen for this is where Charter is selling telephone lines with unlimited long distance in some of their markets for $15 per month.

The same thing has happened to interstate transport for special access service. It was routine just a decade ago to charge $4,000 – $6,000 per month for a DS3, which is about 45 Mbps of dedicated bandwidth. But today you can buy a gigabit of bandwidth for a fraction of that cost – and buy it from somebody who is not selling it as special access and who does not add a fee for USF to that charge.

As the amount spent on interstate long distance has continued to drop, the USF assessments have climbed as a percentage of the interstate revenues. I have a few clients who now have a USF assessment of over 17% of their interstate billings. Years ago this started as a rather small fee, but it is a noticeable item on customers’ bills, particularly on buyers of special access.

So if the new data-centric USF is going to work, we need to somehow expand the assessment base. Interstate telco revenues are going to continue to drop. There are only a few places that the assessment base can be expanded, but they are major sources of new revenue. First, cell phones get some USF assessment today, but not as large of a share as landlines. There is also the possibility of expanding USF to include intrastate long distance, but that gets into a messy jurisdictional fight.

The biggest way to spread out the USF fee and make it more reasonable and more sustainable is to assess it on broadband services. This is now easier to do since broadband is covered under Title II. But Congress has real heartburn against ‘taxing the Internet’ which I can’t understand. The original push to not tax the Internet came during the late 1990s as the new broadband services were growing. At that time the political wisdom was that you don’t tax a burgeoning industry and give it a chance to get on its feet.

But there is probably not a more mature industry in the country now than broadband. As far as home utilities, it now comes in third in penetration rates behind electricity and water. Adding a 50 cent per month tax on broadband would not cause any great economic burdens and would spread out the funding to the USF fund. Besides, who better to tax to get broadband to rural places and schools than all of the people who already have broadband?

Unfortunately it will take an act of Congress to change the way that the USF is funded. That is likely only to happen as part of a larger new Telecom Act, something that is overdue. But I can’t see any realistic way that this is going to happen with our split government. Republicans are likely to use a new telecom act to try to defund network neutrality and to cut back on the FCC’s powers in general. And as long as there is a democratic president a new act is not going to get signed. So I guess USF funding reform goes on hold with many other telecom issues that we ought to be addressing.

When Will We See Landline Data Caps?

Numismatics_and_Notaphily_iconThe National Journal asked the FCC how it was going after one month of net neutrality and also asked how many complaints they had gotten from consumers during this time. The FCC estimated they had gotten about 2,000 complaints, and further said that most of them were not about net neutrality issues, but were more generally about service issues with ISPs. One of the more common complaints was about data caps.

The FCC has already ruled that customers with unlimited plans can’t be throttled. Just recently the FCC fined AT&T $100 million for throttling its unlimited wireless data customers for actually trying to use the data they paid for. But it’s a harder case to say that data caps are somehow prohibited by net neutrality. Perhaps an argument might be made that data caps can unreasonably interfere with a consumer’s internet access, something that is prohibited by net neutrality.

But for the most part, data caps are just a way of getting more money out of customers. The US has high broadband rates compared to the rest of the developed world and the rates charged on our cellular traffic have to be among the most expensive Internet access in the world.

Net neutrality does define a few things that carriers can’t do. For example, in the past the FCC has ruled that carriers can’t have a data cap and then provide some of their own programming for free, not to be counted against the caps. The FCC has also frowned on sponsored data where a content provider or somebody else will pay the fee for data so that it won’t count against a cap. If you recall, Netflix had worked out a deal to pay AT&T so that their customers would get the ‘fast lane’ and so that Netflix usage wouldn’t count against data caps.

But there is probably not much of an argument to be made against data caps as long as the customer is fully informed that they are part of the product. The FCC is likely to enforce hidden data caps or plans that were not openly obvious to consumers.

Data caps are also a big issue with satellite data. Customers with that service get very small monthly data caps, and unlike cellular that lets you keep using data and charging you more money, some of the satellite companies cut off your service once you reach the cap. That has to be painful and perhaps that starts crossing the network neutrality line.

Cable companies and telcos have fewer hard data caps, but they do exist. Many cable companies with caps today don’t strictly enforce them. Interestingly, they often use the argument that data caps are necessary to avoid network congestion. They argue that big users tie up networks and make it hard for others to get good service. But two years ago, Michael Powell, ex-FCC Chief and head of the NCTA admitted that data caps are not about congestion but are about ‘pricing fairness’ – which means they are not about fairness at all, but about charging large users more.

I believe we are going to see data caps become a much bigger issue. I wrote recently about how cable companies will be struggling to find ways to grow revenues in the future. They are losing cable customers and they are no longer seeing double digit growth of new data customers as that market gets saturated. They are likely to start routinely raising data monthly rates, but they are also likely to introduce and then fully implement data caps as a way to extract more revenue from their biggest data users. Unfortunately, the large cable companies are publicly traded firms and they will be punished with lower stock prices if they can’t find a way to keep revenues growing quarter over quarter.

I know that Comcast has been ‘experimenting’ with data caps for a number of years in the southeast. They put them in on a trial basis and then get so many complaints that they withdraw the test. But I feel certain that when the extra revenues are needed to meet earnings goals that Comcast and others will then ignore complaints. And sadly, if Comcast or any one other large ISP introduces and enforces data caps and shows a lot of revenue from the process, the other large ISPs are going to follow suit.

Should the FCC Regulate OTT Video?

FCC_New_LogoA funny thing happened on the way to make it easier for OTT video providers to get content. Some of the biggest potential providers of online content like Amazon, Apple, and Microsoft have told the FCC that they don’t think that online video companies ought to be regulated as cable companies.

Of course, these couple of large companies don’t represent everybody who is interested in providing online video, and so they are just another faction to deal with for the issue. For example, FilmOn X recently got a court order allowing them to buy video as a regulated video provider and in the past Aereo had asked for the same thing.

A lot of the issue boils down to companies that want to put local networks online or else deliver them in some non-traditional way as was being done by FilmOnX or Aereo. These kind of providers are seeking to get the ability to force the local network stations to negotiate local retransmission agreements with them. Under current law the stations are not required to do so and are, in fact, refusing to do so.

The FCC is in a tough spot here because they don’t have a full quiver of tools at their disposal. The FCC’s hands are very much tied by the various sets of cable laws that have been passed by Congress over the years – the rules that define who is and is not a cable company, and more importantly, the rules and obligations of being a cable company. It will be interesting to see how much the FCC thinks it can stretch those rules to fit the situation of online programming, which was never anticipated in the rules.

I can certainly understand why the large companies mentioned above don’t want to be cable companies, because there are pages and pages of rules about what that means; the FCC is unlikely to be able to grant a company just a few of those rules without also requiring ones that these companies don’t want.

For example, the current cable law defines required tiers of service. Cable companies must have at least a basic and an expanded basic tier, and those are very narrowly defined. A basic tier includes all of the ‘must-carry’ local networks and the expanded basic carries all of the things we think of as cable channels.

I think what the FCC has in mind is a set of rules that require programmers to negotiate in good faith with online companies that want to buy their content. Certainly any company that wants to put content online today is completely at the mercy of programmers saying yes or no to giving them the content they want to carry. And there is nothing from stopping the programmers from changing their mind if they see an OTT company being more successful than they like.

So I would think that even Amazon, Apple, and Microsoft would like the ability to force the programmers to negotiate with them, but they obviously don’t want other FCC rules that they think will come along with that ability. Of course, these are very large companies with deep pockets and one has to imagine that they get a fairly decent hearing when they talk to programmers. The FCC’s real concern is not these giant companies, but companies smaller than them who don’t have any ability to force the programmers to even talk to them. I think the FCC believes that if online content is to be successful that there ought to be widespread competition and innovation online, not just content provided by a few giant tech companies along with other huge companies like Verizon.

Today the programmers have most of the power in the industry. They are making a huge amount of money from the mega-subscription models where all of their content is forced upon US cable companies. And they have no reason to become more reasonable because most of them are seeing gigantic growth in selling content overseas, so they have no real reason to upset the cart in the US market.

If online content is to become a vibrant alternative and not just be expensive packages foisted on the public by a small group of huge corporations, then something has to change. I just don’t know how much the FCC can do realistically considering how they are hamstrung by the current cable laws.

The Battle Over Ad Blocking

advertise hereIt’s easy to forget that most forms of media are still paid for by advertising. While there are a few exceptions these days for services like Netflix and Amazon Prime that are paid for by subscription fees, most media still relies heavily on advertising to stay financially afloat. Even the most expensive cable networks, like ESPN, that earn huge revenues from subscription fees still also get significant revenues from advertising.

But advertising is changing rapidly as the way people use media is changing. Newspapers have lost the bulk of their advertising and magazines are similarly struggling. Radio seems to be holding its own, but other forms of media are starting to struggle as well. Numerous analysts have their eye on cable and TV advertising as it’s becoming obvious that people are cutting back on watching the big screen. And even many of those who watch TV are avoiding all of the commercials by watching TV on a time-delayed basis.

The hope of the advertising world was that they could shift dollars from traditional media to the web and still get people to see their ads. In fact, in some ways it’s easier to target ads to specific audiences on the web than it is on television. But now we are seeing a huge growth in the use of ad blocking software and one has to wonder what that is going to do to web advertising.

Advertising on the web has been growing quickly. For instance, Kantar Media reports that advertising spending on the Internet grew over 15% last year while advertising for network TV dropped 3.4%. But one can foresee a big gray cloud hanging over that growth due to ad blocking.

Several surveys show that 25% or more of US Internet users now say they are using some sort of ad blocking software. It’s been estimated that ad blocking cost Google about 10% of their advertising revenues, or $6 billion last year. So this is quickly becoming a huge problem for web sites and services that rely on advertising revenues.

It’s not hard to understand why people use ad blockers. Last week I was looking at fish aquariums, something I hadn’t looked at in years. Afterwards I think six of the next ten sites I looked at had ads for aquariums with a few showing the exact same one I had last looked at on Amazon. This whole process feels too targeted and a bit creepy to me.

We will probably be seeing a lot more ad blocking soon. For example, Apple has said that they are going to build ad blocking into the next version of Safari for the iPhone. That is clearly going to make web browsing on the smartphone a lot faster, but it’s going to remove a whole lot of users from advertisers.

There is also now a movement for web pages to fight back against ad blocking. For example, PageFair, a Dublin-based startup, has developed software that will defeat ad blockers and still allow the ads to pass to users. This presages a war between ad blocking software and the software to defeat it, much like the ongoing fight between virus purveyors and anti-virus software. Ad companies will find ways to get their ads viewed and then the blocking companies will find ways to block again.

It’s obvious that a lot of people don’t like ads. How many of you have looked at the web sites that show top ten lists for a wide variety of topics? These sites are so loaded with ads that they seem to take forever to load, and in some cases they simply freeze during the process of loading ads. I avoid these kinds of sites, but even just reading tech news pages every day gives me an average of 50 new adware tracking cookies, almost all of which are passed to me through ads.

I understand why advertising is needed on the web. There are many news sites and other interesting web services that are 100% funded through banner ads and other advertisements. As somebody who likes a lot of these sites I would hate to see them disappear, but I also hate the ads. I think this has always been the case and it’s the rare person who loved the ads on broadcast television. Even if you like a new ad the first few times, it gets very old by the fiftieth viewing.

This is going to be an interesting battle to watch and a lot of what we think of as the best stuff on the web is going to depend upon who wins between the advertisers and the ad blockers.

What’s the Case for Home IoT?

Goneywell LyricSome of the biggest names in tech have invested heavily into the Internet of Things for the home. But when I look around the marketplace and among people I know, almost nobody is yet using any of this technology. In fact, several recent polls have shown that over half of the people in the country haven’t yet even heard of IoT. This leads me to ask if there is yet a business case for home IoT.

The initial promise of home IoT is that it will make our life easier. The picture painted by the industry is one of having scores of smart devices in the home that all act in harmony to make daily life easier. I’m a huge fan of Star Trek and I look at their future with automatic doors and lights, background music, holodecks, and food replicators and I get it – and I want it.

But the IoT devices on the market today are still a long way away from that Star Trek future. The reality of the situation is that this is an industry that so far only caters to geeks and hobbyists. Today the technology involves buying some sort of central console and then connecting all of your devices to the hub. That alone looks like a lot of work. There are also no standards in the industry and each of the many hubs is proprietary, so you have to worry if a new device you buy will even work with the hub you selected.

Samsung has taken perhaps the first step to pull this all together. They bought a startup called SmartThings that has developed a hub that is controlled entirely by smartphone. Samsung is then developing their whole suite of products to work with this hub.

But I don’t think even the Samsung solution is going to make much of a difference. Just consider smart lights as an example. My house easily has fifty light bulbs, maybe more. Upgrading them all to smart lights sounds extravagantly expensive. And then I am imagining trying to use the smartphone to control my lights. In the time I could fish through a menu and find the right lights to adjust I could have just changed them manually and gone on to do what I was doing. The smartphone idea certainly provides a central way to control everything, but has it really made life easier than today? Unless this works a whole lot easier than I imagine it, what I’ve done is to create a new chore for myself whenever I want to do something simple like dim a light. Unless I’m bedridden, the manual way still requires less effort than a smartphone.

And that is the big catch right now for the industry. They are coming out with devices that do all sorts of neat things, but they have not made life easier. Consider energy management. Programmable thermostats have been around for years and it’s been relatively easy to lower the heat while you sleep or to tone back the air conditioning when you are away at work. The newer smart thermostats go a step farther and help you understand your electric usage in detail so that you can save even more money than with a programmable thermostat. But in doing so they have not made life easier, they have instead created a new monthly chore, which is to interpret the data coming out of the energy monitoring system and then make changes in the way you use electricity. My electric bill is pretty affordable, and so I might be doing all of this new effort to save $20–40 dollars per month. That is certainly a good thing, and it’s probably the right social thing to do, but it is not compelling enough for me to add a new task into my already busy life.

I am guessing that home IoT isn’t going to really go very far until the whole system is smart, like in Star Trek. When I can sit in a room and say, “Dim lights” and it happens, then we are starting to get somewhere. When I can tell my house to play a certain piece of music and then have that music follow me around from room to room, then we are getting somewhere. That sounds like something that almost everybody is going to want, assuming it’s affordable, and assuming it doesn’t take too much effort to set it up and to make work.

That day will come. It’s going to require both better language interfaces that always understand me (something that is improving rapidly) as well as a computer assistant that is smart enough to know what I want and to be able to turn my wishes into real world events. And that is going to take smarter and more powerful computers, something that is also coming soon.

But until then I can’t make a case for home IoT in my own home. I’ve considered a smart security system and video monitoring, and that is likely to be the first thing I might buy. But most of the other things on the market seem to be more work than the satisfaction they will produce. Until that equation flips I am not yet sold, and I don’t think I am unusual in this.

Expect Higher Data Prices

Numismatics_and_Notaphily_iconThe US already has some of the highest Internet prices among developed nation. This is due largely to the lack of competition in most markets, meaning that there is no downward price pressure. Brian Fung of the Washington Post reported on a recent congressional hearing where Craig Moffett, a well-known market analyst, said that prices for Internet access are likely to climb in the future.

Moffett’s reasoning is that cable companies, who have most of the data customers in the country, are losing cable customers (or are running out of the ability to continually raise cable rates), and so they are going to have little option but to raise data rates.

The large cable companies, who together control the majority of the data customers in the country, are mostly publicly traded companies (except for Cox) and they are very much driven by the need to have profits climb quarter over quarter, year over year.

For many years the revenues and the profits of the large cable companies have been driven by two phenomena—the quickly growing data market and continual large cable rate increases. While data customer penetration rates are still growing, the rate of growth has slowed down and the vast majority of homes that want and can afford high speed Internet access already have it. And so the cable companies are no longer going to see the steady boosts to their bottom line that comes from double digit growth in very high margin data customers.

The cable companies have also been living off cable rate increases. They loudly blame cable rate increases on increases in programming costs. But the truth is that they have almost always raised cable rates more than what was needed to just cover higher programming costs, and so each rate increase added to the margins from cable and went straight to the bottom line.

But we are now seeing what I call consumer rate fatigue with cable rates. As cable keeps getting more expensive we are going to see more cord cutters, and even more cord shavers. Cable rates have climbed to the point where the cable companies should now hesitate when thinking of raising rates more than needed to cover cost increases. One only has to do the math to see that raising cable rates only 7% per year will increase an $80 monthly bill to over $100 per month in only four short years. The math is finally catching up to the cable industry, and at a time when there are finally online alternatives appearing for content.

Without those two historic bottom line drivers the cable companies are left with having to raise data rates if they want to grow profits to meet investor expectations. The cable companies are all dabbling with new revenue streams such as home power management, security systems, WiFi phones, and other new products. But these new products don’t have the same kinds of high margins as Internet data, nor is it likely that cable companies will sell enough of these new products to make a real bottom line difference.

The industry has been somewhat spoiled for the last couple decades due to having the powerful triple play bundle of voice, video, and data. While the margins on video aren’t great, the other two products have extremely high margins. The bundles have allowed the cable companies to have relatively high penetration rates of all three services. But nobody expects the new products to do nearly as well as the triple play services. Rather than having a few products with very high penetration rates, the cable companies are likely to end up with a product portfolio containing numerous products, each with a relatively small 5–10% penetration. That is going to make them into very different companies than today.

And so expect to start seeing data rates raised every year. This has already begun with the base rates for many cable companies and the large telcos like Verizon. I would expect the rate increases to be small at first but to climb over time to feed the bottom line expectations.

This is all counterintuitive. Most of my clients have 70–80% margins on Internet service today and it’s probably higher than that for the large cable companies. It takes some chutzpah to raise the rates on a product that is already that profitable. But I completely agree with Moffett and I think this is inevitable that data prices will rise, considering the lack of competition in most of our markets.

The Urban / Rural Gap

Seattle-SkylineI have written a lot about the urban/rural broadband gap. I work with a lot of rural communities that have either no broadband or connectivity so slow it shouldn’t count as broadband. In today’s world it’s nearly as frustrating to be stuck with a 1 Mbps Internet connection as it is to have no connection.

But in the last two weeks I have spent time in places like Philadelphia and Seattle/Tacoma and it strikes me that there are now a huge number of ‘gaps’ between urban places and the rest of the US. People in those urban places have opportunities that the rest of us don’t have. The tech press is full of news about various new start-ups, and a lot of these new businesses only do business in big cities. I suspect that people who haven’t recently spent time in downtown cities don’t realize how fast life there is changing.

So what kind of gaps am I talking about? Here are some examples, though you can find plenty more:

  • Wireless Coverage. There is a huge gap between the quality of cellular data in cities and the rest of the country. I routinely visit suburban and rural places where you still have to hunt for a signal. In the early days of cellular this was common everywhere and it used to be comical to watch people roving around airports trying to catch a bar of service. But this problem has largely been solved in urban areas. Now most urban places not only have good coverage, but there is usually good 4G coverage almost everywhere. This means that people in cities can use apps that don’t work well, or at all, in places with worse coverage. But even in urban areas there are holes in the coverage. For example, I talk to a friend in DC who loses voice coverage every time he drives across one of the Potomac bridges. But overall, the cellular experience in urban areas is far superior to the coverage in the rest of the country.
  • Sharing Economy. While the sharing economy is booming in urban areas, it’s harder to find anywhere else. The concept of sharing resources is applied to many services people need in cities. Cities have Uber and Lyft which makes it a lot easier to get around without a car. But if somebody in a city wants a car there are numerous vehicle sharing services like Zipcar and Car2Go where you can conveniently share a fleet of cars with others and use one whenever you need it. You can also walk up and grab a shared bicycle using Spinlister or other bike sharing services.
  • Delivery of Basic Services. It’s now possible to get almost anything delivered to you on demand if you live in a city. I live in an upscale small town in Florida and our only food delivery is a few pizza places. But in cities there are delivery services that will bring you food from almost every restaurant. People in cities now routinely shop for groceries online and have them delivered. And almost anything else you can imagine can be routinely and affordably delivered in a city.
  • Instant Shipping. There has been a lot of press in the last few years about Amazon and other delivery services offering same day, or even just a few hour, shipping. But these speedy services are only available in cities.
  • Ubiquitous WiFi. It is getting to the point in cities where you can walk around and find WiFi almost everywhere. It’s still a hassle at times to keep logging into new networks, but that is going to be fixed soon with the widespread deployment of Hotspot 2.0. Free WiFi allows people in cities to stay connected cheaply everywhere, which is a huge contrast with the rest of the country where there might be WiFi in a few restaurants and other places, but otherwise public WiFi is a rarity.

There have always been differences between living in a city versus living other places. But the proliferation of these better services in the cities is widening the gap much more than in the past. Years ago I lived in downtown cities like Dallas, St. Louis, and San Francisco and the differences were not nearly as great as they are today. Cities have always been noisier and more crowded and hard places to own a vehicle. Of course there has always been the added benefits of the accessibility of a lot of choices for food, entertainment, and culture. But overall it wasn’t all that different living in a city and you didn’t experience a huge change in lifestyle when you went outside the city.

But the proliferation of easy-to-use services, largely fueled by the Internet, is making city life very different than what the rest of us experience. One can imagine people being raised in the city who are going to feel like life elsewhere in the US is an alien experience. And these differences are going to grow greater as cities get even more services that are enabled by ubiquitous bandwidth and that also benefit by the economy of scale of large places. For many years it’s been common for young professionals to take jobs in big cities and then move out to the suburbs when they have kids and a family. But people that get used to the amazing service economy in cities might find that transition harder to accept than in the past.