Broadband Adoption and Income

eyeballThe Brookings Institute just released a report, Broadband Adoption Rates and Gaps in U.S. Metropolitan Areas, that looks at metropolitan broadband rates around the country. The report uses a broad definition of broadband that includes cable modem, DSL, fiber, cellular data, satellite, and fixed wireless service.

The report acknowledges that broadband is still growing and the country saw 2.6 million households add broadband from 2013 to 2014, bringing the overall national penetration rate to 75.1%. But Brookings found that there is a lot of variance in the penetration rates in different parts of the country.

There are metropolitan areas like San Jose where the broadband penetration rate is greater than 88%. The top ten metro markets for broadband has Washington DC in tenth place at 84.7%. But there are a number of other cities that lag behind these national statistics. At the bottom is Laredo, TX at 56.2%, joined at the bottom of the list with places like McAllen, TX, Visalia, CA, Dothan, AL, and Beaumont, TX.

Brookings looked at a number of different factors that affect broadband usage for households. It’s not surprising that household income is a factor. Households with an annual income greater than $50,000 have an 88.8% broadband penetration rate while those with less than $20,000 income are only at 46.8%. Education also seems to be an influence and 91.5% of households with somebody with a bachelor’s degree have broadband while households where nobody finished high school are at 54.1%.

The report did not find a big correlation between race and broadband adoption. While there were cities where blacks or Hispanics have low broadband adoption rates, there were others where they did not. The report concludes that the determining factor is household income and not race.

The report also found some correlation with age and households that have a family member under 18 had a penetration rate of 81.9% while those with everybody over 65 were at 64.5%. But the correlation with age did not hold across all markets and the places where the elderly have lower broadband acceptance seems to be where their income is the lowest. So again, income seems like a more important factor than age.

The report found a few correlations that make a lot of sense. For instance, it found that almost all homes that include a telecommuter have broadband.

Overall the report concludes that metropolitan areas with the highest incomes, with the highest percentage of tech workers, and with the highest average education also have the highest broadband penetration rates.

The report observes that households widely value broadband and that the rate of broadband subscriptions continues to climb. But they conclude that we cannot make the transition to an all-digital society until broadband penetration rate is as ubiquitous as the rates for water and electricity. They conclude that it is going to take targeted assistance programs to get broadband into more homes. While they point to the federal Lifeline and the newly named ConnectHome programs as being a needed part of the solution, they don’t see these kind of programs closing the digital divide. They recommend many more local initiatives, including programs by carriers, to try to get broadband into more households.

FCC Issues for 2016

Alexander_Crystal_SeerIn what seems to be the new normal the FCC has a lot of issues on their plate at the end of this year. Following are the regulatory issues that I think will most affect small telcos, cable companies, and ISPs in the coming year.

Net Neutrality: Assuming that the courts don’t completely overturn this, this is liable to be at the top of the list for several years to come. The ink is barely dry on the new rules and companies like Comcast, T-Mobile, and Verizon are pushing new products that will test the FCC’s resolve to implement net neutrality. And if the courts uphold the law, expect to see a slew of arbitrations between content providers and ISPs. If the courts overturn parts of the new rules, expect the FCC to take one more shot at fixing the parts that don’t pass court muster.

TDM to IP Conversion: This is an ongoing process that is looking at modernizing the backbone telephone network to IP. The large telcos like AT&T and Verizon have commandeered the docket to try to use it as a way to get rid of rural copper lines. The FCC has been micromanaging this process so far and there should be a lot of activity in 2016.

USF Reform: The FCC wants to transition the Universal Service Fund from paying for rural telephone lines to paying for high speed data connections. This process has already started but there is still a lot to be decided. Further, the FCC is facing a crisis in funding the USF and the latest USF contribution factor, representing the ‘tax’ on interstate telecom services, is up to an astounding 18.2% for the first quarter of 2016. The FCC is going to have to find some other ways to help fund this as interstate telecom revenues keep shrinking. This is becoming a big burden on carriers that are buying interstate special access.

Lifeline Reform: Lifeline is another part of the USF that is used to help pay for telecom services for low income households. The FCC decided last year that this should cover both telephone and data expenses for low income households and there is not enough money in the fund to do that. So this year they need to figure out a way to make it work.

Skinny Bundles and OTT: There has been a docket open for most of 2015 that asked for comments on how the FCC ought to regulate video services on the web. There hasn’t been a lot of talk about this for a while, but it’s likely that the FCC is going to have to do something with this in 2016, and anything they do will be groundbreaking. Further, the FCC is in the process of cleaning up their operating rules and Congress is also mandating that they resolve dockets sooner, so this is liable to be forced to come to a head in 2016.

WiFi versus LTE-U: The large wireless carriers really want to dip into WiFi to make cellular data connections using a technology they are calling LTE-U. In places where cellular data is already overloaded this would almost certainly swamp WiFi, making it hard for anybody else to use. The FCC is going to have to decide if and how cellular carriers might be allowed to do this. In a related area, the FCC is also likely to look at opening up new public spectrum next year.

Federal Legislation: While this is nothing to count on, there has been a lot of noise about seeing a new telecom act of some sort out of Congress. If that happens there is no way to predict what Congress might tackle. If a new law passes expect the FCC to get swamped with implementing new law like they did after the Telecom Act of 1996.

Why Carriers Hate Title II Regulation

FCC_New_LogoOne of the many industry blogs I follow is the Eldo Telecom blog. Frederick L. Pilot, the author of that blog, contends that the FCC has the obligation to enforce universal service rules on broadband in the same way that they have for many years on telecom service. For telephone service this requirement has often been called the ‘carrier-of-last-resort’ obligation and it has been used by the FCC and state commissions to require telephone companies to serve everybody within a defined service area. If somebody builds a new house, for example, the telephone company has been obligated, within reason, to build to serve them.

Pilot says that the FCC created this same obligation for broadband with the newly approved Title II regulations. I’ve followed his chain of logic through the FCC rules and he is right. The carrier of last resort rules are covered under Section 254 and Section 214(e)(3) of the FCC’s rules. And those rules are in place as part of the rules that govern broadband.

The FCC created the Title II regulations by forbearance – they excluded some sections of the existing telephone rules that they did not want to apply to broadband services. The choice of which FCC rules to forbear was arbitrary and the FCC left themselves wiggle room to come back in the future and add to and/or subtract from the list of the rules that apply – and it is this flexibility that the big ISPs most hate about the Title II regulations.

The FCC didn’t really have any other options because they are not allowed, on their own, to write new FCC code – those basic laws come from Congress and the sections mentioned above, for example, come from the Telecommunications Act of 1997.

But I come to a different conclusion than Pilot. He thinks that since the carrier-of-last-resort language is part of the Title II rules for broadband that the FCC should enforce them. I read these particular rules to instead be something that the FCC can choose to enforce if they want to. A carrier-of-last-resort obligation gets triggered by a complicated process of requiring carriers to become am Eligible Telecommunications Carrier (ETC). In order for the FCC to create a universal service obligation for broadband, the FCC and the states would have to go through the ETC process for broadband, like they did in the past for telephone companies. And the rules make it clear that the triggering of ETC is completely at the FCC’s discretion.

The FCC has never mentioned a desire to force carrier-of-last-resort obligations on ISPs, and they may never do so. But they have very obviously reserved this right for use in the future should they so choose. And there are other parts of the Title II rules that now can apply to broadband if the FCC decides to enforce them. If the courts uphold the challenges to the net neutrality ruling there are a whole slew of regulations that apply to telephone service that the FCC could try to impose on ISPs.

I really don’t think the FCC is interested in forcing universal broadband requirements on ISPs for broadband. That would force carriers, for example, to build broadband facilities in rural areas. They know there would be huge and immediate political pushback and probably a reaction from Congress. The FCC instead seems to be trying to entice the large companies to do better.

But since these rules are on the books the FCC could decide at any time to try to enforce them. This creates what I consider to be permanent uncertainty for ISPs. Not only on this one issue, but on a number of potential obligations that are buried inside the FCC rules. I think that these potential, and unenforced rules hang over ISPs like the sword of Damocles.

Don’t get me wrong – I am a big fan of regulating broadband. It’s vital to our way of life now and I think that without net neutrality the big ISPs would run roughshod over all of us. So I love the concept, but like many I am not particularly fond of the specific way that this regulation came about. The long-term problem I foresee is that the political sentiment in the country swings from left to right fairly regularly and regulation by forbearance gives a future FCC the ability to drastically change the way the net neutrality rules are applied and implemented. And that means permanent uncertainty.

New Skinny Bundles on the Horizon

television-sony-en-casa-de-mis-padresAll of a sudden I am seeing the term skinny bundle all over industry press. The term refers to web video programming offered by a company that is already somehow in the telecom business, with the inference that it’s probably only available to their own customers. The line between skinny bundles and OTT programming like Netflix is likely to get blurred over the next year as a few of the skinny bundle providers make their packages available to everybody.

It seems like all of the largest cable companies and telcos either have skinny bundles or are working on them. In a recent blog I talked about the Comcast skinny bundle they are calling Stream TV. It’s a lineup containing mostly major network channels plus HBO. It’s likely to be controversial because Comcast wants to exclude usage on the bundle from any data caps while counting data usage for watching Netflix and other OTT offerings.

As has been anticipated since they bought DirecTV, AT&T plans to launch their skinny bundle in January. The company hasn’t released the details yet but recently gave some hints about what might be in it. For one thing, through DirecTV the company has the ability to air current season shows, including the latest episodes. AT&T may be offering different options to wireless and wireline customers. CEO Randall Stephenson was quoted recently saying that the bundle will “turn some heads”, but I guess we’ll have to wait until January to see what that means.

Their chief rival Verizon Wireless launched Go90 earlier this year. The package is an interesting mix that Verizon says is aimed at Millennials. Verizon describes the package as halfway between YouTube and Netflix. It has a lot of unique content produced by YouTube stars but also carries some traditional programming content. The service is currently free to Verizon wireless subscribers but is expected to soon have a premium tier.

On the landline side, Verizon offers a package called Custom TV. That bundle is sold in combination with 25 Mbps Internet service for $65 a month, and includes a lineup of about 35 channels plus a few additional add-ons options available. The package has been so popular that Verizon reports that one third of their new customers in the second quarter of this year opted for the skinny bundle. While Verizon says that might hurt revenue targets, they affirmed what many have thought in that they expect sales of skinny bundles to increase the bottom line. It makes sense that the skinny bundles, while smaller, are more profitable than the giant bundles of hundreds of channels.

CenturyLink has also announced that they will launch a skinny bundle in early 2016. They say that their main motivation is to sign up new customers without the need for a truck roll, and so they might offer both a skinny bundle as well as the full TV line-up over the web. This will save them on settop boxes and other costs associated with being a full-service video provider.

There are other companies also considering skinny bundles. For instance, Frontier has reported that they are talking to programmers about skinny bundle options. There was an announcement in October that Tim Warner Cable was trialing a skinny bundle but I haven’t seen any press on that since then. CEO Rob Marcus has been quoted several times in the last six months saying that he doesn’t think his customers are looking for a cheaper alternative.

We’ll have to wait a while to see what kind of interest the public has in the skinny bundles. The companies like Verizon that have already launched skinny bundles are not reporting customers counts for the new products, making it hard for the rest of the industry to understand the customer demand.

The skinny bundles are clearly an attempt to try to keep cord cutters on the big company networks. But just about all of these big companies publicly say that cord cutting is not a concern for them. There has to be some concern that offering smaller bundles will invite customers to downsize, but if what Verizon admits is true, it might be that there is more profit in skinny bundles than in the giant cable packages – in which case you can expect to see more skinny bundle options.

The Battle for Public Spectrum

Wi-FiIt’s fairly obvious that we are going to need more unlicensed spectrum going into the future. We are already stressing the existing WiFi blocks of spectrum and there are more planned uses for WiFi coming in the near future. Cisco recently estimated that by next year that over half of all mobile data is going to be off-loaded to WiFi. Cisco also estimates that by 2020 that there will be over 50 billion IoT devices and that most are going to use WiFi to communicate with the world. In possibly the biggest use of WiFi on the horizon, the large cellular companies want to use the most common WiFi blocks of spectrum for making cellular calls during busy times of the day.

A few weeks ago Senator Brian Schatz (D-HI) introduced the Promoting Unlicensed Spectrum Act. This bill, if passed, would require the FCC to consider unlicensed spectrum any time they make a change in the allocation of spectrum. It would require the FCC to establish a long-term strategy to make sure that there is always enough unlicensed spectrum to meet our needs. This is most recent of several attempts to take a stab at the issue and this is becoming one of the new policy battlegrounds at the FCC.

Of course, like any big national battle these days, money is behind the battle and the lines have been drawn on both sides of the issue. On one side is the Wi-Fi Alliance which represents all of the companies that make money from WiFi. This includes the vendors that make WiFi devices and radios and all of the companies that have products that want to use WiFi like the IoT companies. On this side of the fight are also the groups that represent the public interest like Public Knowledge as well as Silicon Valley where all of the big web companies like Facebook and Google want as many people connected the Internet as possible.

On the other wide are groups that are pro-licensed spectrum. For example, TV station owners are very upset that the FCC is considering setting aside several UHF bands for WiFi in each market. The license holders of this spectrum view this as taking their valuable spectrum without offering them fair compensation.

And so, like most commercial battles, there will be the war of lobbyists. But there seem to be a lot more large companies on the side of expanding WiFi, which should give that side an edge in the battle. Besides, this seems to fit into the FCC’s existing mindset and they have been considering more WiFi even without such new laws.

WiFi has been called the spectrum of innovation, which seems like a pretty apt name. Over the last few decades there has been a huge number of different ways to use WiFi, which was only made possible because companies were willing to tackle the R&D knowing that they had the spectrum available.

Much of our licensed spectrum in the country goes to waste. The FCC divvies out huge blocks of licensed spectrum. In metropolitan areas where there is a huge amount of demand this spectrum sometimes gets used to the maximum. But even that is not always the case because there are large sections of spectrum, like the LMDS and the MMDS spectrum that was auctioned a decade ago where the technology was never fully developed and where the spectrum now sits mostly unused.

That is probably the biggest drawback of licensed spectrum. The ways that it can be used are limited to the interests and plans of the license holders. When a new block of licensed spectrum gets awarded the vendors all descend making sales pitches on how to best use it. But the final call is up to the license holders, and they generally have a fairly specific and narrow vision of what they want to accomplish with the spectrum. There generally is no innovation in licensed spectrum other than what the license holders are willing to pay for.

And in rural America most blocks of spectrum go unused. Rural areas will see some cellular spectrum used as well as a handful of point-to-point microwave spectrum, but for the most part the vast majority of spectrum blocks go completely unused in rural areas. This is sad because there is spectrum that could do a much better job at delivering rural data than WiFi, but which is off-limits for public use.

I have no idea if this legislation is going to move out of Congress, and perhaps it doesn’t matter much if it does. The FCC already seems to favor more WiFi and so this legislation just forces them to do what they already seem to be doing. But you never know when the political tide will change and so it’s probably better to make this the law rather than leave it as an FCC policy.

Big Government and Broadband

Capitol_domeOne of the platforms of Hillary Clinton’s campaign is to create a 5-year $275 billion infrastructure plan that would, among other things, foster faster broadband for rural America. The plan would also pay for crumbling roads and bridges and other infrastructure. I’ve seen estimates that as a country we have a several trillion dollar infrastructure deficit, and so this plan would be the proverbial drop in the bucket towards bringing our infrastructure back to where it needs to be. But it’s a start and is better than doing nothing.

This plan leads me to speculate on the role that big government might be able to play in solving our broadband needs. What might the US government do with billions of dollars aimed at improving broadband?

We’ve seen two previous big federal broadband programs and the results have not been very good. First was the billions that were part of the broadband stimulus package. This money was used mostly to create middle mile fiber – that is fiber that stretches between communities. Some of that fiber has been used to get better broadband to the last mile, but the vast majority of that investment has not benefitted a whole lot of people other than the cellular companies who use that fiber to get cheaper access to cell towers.

The stimulus money also put a lot of emphasis on getting fiber to ‘anchor institutions’ which it defined as schools, libraries, city halls, and other government institutions. So we ended up with rural fiber networks that serve only a handful of these anchor institutions, but not to the neighborhoods surrounding these locations. As I’ve written many times, bringing fiber only to anchor institutions is actually a disincentive to get fiber everywhere because it removes these large bandwidth customers from being potential customers of locally built fiber networks.

To give the federal government a little credit, the stimulus money popped onto the scene with no notice and there was no plan in place or even people in place to review the various grant proposals. There were some last mile networks financed from the stimulus money and I’m sure those communities are thrilled to have been the lucky few that benefitted from the many billions in spending.

More recently we have seen the FCC throw billions of dollars at the large telcos with the CAF II funding. They have given Frontier, AT&T, and CenturyLink billions of dollars to improve rural DSL broadband to 10 Mbps. And gave them six years to get it done. This is such a bad idea on so many levels that you’ll have to go and read my other rants on this. But this is mostly the equivalent of pouring money onto the ground and it going to bring no real broadband to anybody. This is a classic case of a government boondoggle that spends a lot of money and accomplishes almost nothing useful.

So what might the feds do if they were to give out more billions? One thing they will probably do is to overspend on broadband like was done with the stimulus money. Those grants included rules that inflated the cost of building fiber. The companies taking the money had to do expensive environmental and historical studies, something that makes no sense for fiber that is placed into pre-existing road rights-of-ways. And they required the contractors building the networks to use prevailing wages, which mostly meant paying large city wages for projects that could have normally been done in rural areas for a lot less. Altogether these extra requirements probably added 15% – 20% to the cost of the projects.

What is scary is that in order to shovel the money out the door quickly the federal government might either give the money to the incumbents as corporate welfare or else end up backing projects like more middle mile that largely build fiber to nowhere.

The most cost effective way to use federal money would be to give it to local groups in some sort of matching arrangement. This would stretch the federal money the farthest and would also enable communities to find the best local broadband solution. Some communities might tackle this directly using bond money for the match, while many others would seek out public/private partnerships with local carriers. And the small telcos and coops around the country could use this money to extend their fiber networks – many of them have already showed us how to bring fiber to remote places.

I have no idea if there will even be another big pile of federal money aimed at broadband – it’s a long way from a campaign platform to reality. But if this does happen I hope that this time they have a better plan that would use the money to build last mile fiber to rural communities – the only permanent solution to closing the rural broadband gap. I hope they take the time to listen to the industry and this time that they do it right – or at least better.

Sports Will be the First Victim of Cord Cutting

Maryland TerrapinsThe common industry wisdom is that sports programming is the most powerful weapon of the cable companies since it provides content that cannot be found anywhere else. But from what I have been reading lately, I think perhaps that sports programming might be the first victim of cord cutting and skinny bundles.

There is no doubt that there are a lot of rabid sports fans in the country. And to satisfy this base the programmers have come up with a slew of sports networks. Not only is there the ESPN suite of channels, but we have channels that specialize in golf, tennis, and a number of other sports. And there are local sports networks in every major market.

But except for NFL football, which is in a universe of its own, there are a lot fewer sports fans than you might imagine. In a recent poll that asked people what channels they would most like to have on an a la carte basis, no sports network including ESPN registered as even a 30% choice. Sports fans find having sports programming to be a necessity, but the fact is that a large majority of people would gladly do without sports networks if that lowered their cable bills.

And now along comes cord cutting and skinny bundles. Cord cutters are those that abandon all big cable packages in favor of either no programming, or programming offered on-line. Skinny bundles are slimmed-down channel line-ups being offered by telecom providers as an alternative to their bigger channel alternatives. Add this to people who are down-sizing from large line-ups to smaller packages and there is a lot of change going on in the cable industry.

In looking at both of these alternatives today there is a dearth of sports programming offered on-line. Sling TV has the ESPN suite of channels. But most other on-line packages have little or no sports programming. The people abandoning cable are obviously not the sports fanatics.

There are many industry experts that want to pretend that cord cutting is not real. And for most of the networks that sell content, it really much doesn’t if it is real. In the US there are still around 100 million people buying some sort of cable package and sales of content from most programmers is booming worldwide as the US market ebbs.

But the same isn’t true for sports. ESPN has almost no appeal overseas and, like most US sports, the network is very much an American product made for Americans. I think that looking at ESPN is probably the best measure of the change in the industry. It’s been reported that ESPN has lost 7 million customers over the last few years, which is significant – and they aren’t going to make that up by selling their content anywhere else.

And so it looks like US sports networks, or the sports they support, might be the first real casualty of the changes in the industry. Every time somebody cuts the cord or flips to a skinny bundle the sports networks are going to lose a customer. And these customers are almost impossible to replace. Take ESPN: they charge nearly $6 per household per month to the cable companies to carry their programming. But if only 25% of households would actually value them enough to subscribe to their programming, then on an a la carte basis they would have to charge $24. But the big catch is that probably only a very tiny fraction of that 25% of sports fans would agree to pay that much. There is no model for a standalone ESPN that can make as much money as they make today.

Something is going to have to give as the sports networks lose customers. The most obvious thing to give is the millions that ESPN and the other sports networks pay to sports leagues to get exclusive rights to their content. As the sports networks make less money those payments are going to have to drop.

Many think that would be a good thing for sports. It is these TV payments that have led to college football teams paying multi-million dollar salaries for coaches. It’s these same TV payments that have led to crazy realignment of college leagues, such as seeing Maryland join the Big 10 or West Virginia join the Big 12. Big time college football and basketball have become all about the money and this has gotten carried to ridiculous extremes in recent years. Big TV revenues are also what feeds the giant payments to professional baseball and basketball players.

There are some sports networks that won’t survive a downsizing of the industry. But if a network like ESPN can be disciplined enough to not outspend their revenues then they should be around for a long time. There are a whole lot of folks who are going to be in for a rude awakening when this day hits – and the day of being realistic about payments for sports content is going to happen within the coming decade. It’s hard to imagine what college sports budgets will look like if a huge part of their revenues disappear = and the people in charge of those budgets better start thinking about that now before it’s too late to do anything about it.

AT&T – Building Fiber by Press Release

u_verse_truckIt seems like every few months AT&T makes a new announcement about markets where it’s going to bring its GigaPower broadband service. Just a week ago they announced more than three dozen new markets that include places like Memphis, San Francisco, and Detroit. And they supposedly already have this product available in over twenty markets today.

The trouble is that there is very little evidence anywhere that AT&T is actually building much, if any, new fiber. I’ve seen several reports that suggest that AT&T is offering the product only in those handful of places where they already have fiber – upscale high-rises and new housing developments where they decided to deploy new fiber rather than new copper.

The AT&T press releases make it sound like AT&T is undertaking a massive fiber building project in these cities similar to what Google is doing. Google pre-sells to neighborhoods and then follows up those pre-sales by building fiber past everybody in that neighborhood. I have my reservations about whether it’s really good for a city to let a carrier build to only select parts of their community, but at least Google is out spending the capital dollars on fiber.

In the communities where Google is building you find all sorts of evidence of the construction. There are tons of consumer reviews of the Google products. There are local news articles mentioning construction issues and warning people to stay away from certain streets on certain days. There are tons of local articles in each Google community speculating about who is going to get fiber and what it’s going to mean. The web becomes awash with local news of Google Fiber as it is being deployed.

And yet there is virtually nothing similar in the press in AT&T gigabit cities other than in Austin. In Austin, AT&T built fiber-to-the-home to some neighborhoods as a way to counteract Google, and so in that city the local news is awash with news of AT&T fiber. But there is almost nothing on the web from the other AT&T markets. I can only find a small handful of customer reviews about the AT&T GigaPower product outside Austin.

And other than corporate press releases there doesn’t seem to be big local advertising push by AT&T in the GigaPower markets. Verizon FiOS got their initial fiber customer base by an aggressive door-to-door campaign, a tactic also employed by Google. These campaigns also generate web noise and I can’t see any evidence that AT&T is doing this.

One would also expect that if AT&T was really out building fiber that there would be a big bump in spending on the landline side of the business. It’s not easy to decipher the AT&T annual reports to figure out landline versus wireless capital spending, but there are several wireless analysts who think that the vast majority of AT&T’s capital budget goes to the wireless business. When Verizon was building FiOS there was a huge uptick in capital spending that had all of the telecom analysts buzzing.

The funny thing is that AT&T seems to be using the illusion of building fiber to gain regulatory favor. For instance, one of the ways they got approval of the DirecTV deal was by promising to bring fiber broadband to many millions of homes. In the net neutrality debate they threatened at one point to stop their largely non-existent fiber buildout if the FCC ordered Title II regulation of broadband.

The mainstream press seems to have been duped by the AT&T press releases. As an example, there was just an article last week by Brian Fung of the Washington Post that praised AT&T for entering so many new markets and which chided Google for going slowly. I don’t really want to criticize Brian too much because his tech reporting is usually on point, but he missed this one. Google is spending the millions of capital dollars needed to bring fiber to urban neighborhoods while AT&T seems to largely be building fiber by press release and by increasing speeds in the tiny percentage of their network already on fiber.

For a company that is crowing so loudly about fiber, AT&T is not reporting GigaPower customers separately, nor are they likely to. They do report ‘broadband customers’ which is a combination of fiber customers and customers added to the U-Verse DSL network. In the third quarter the company added 172,000 broadband customers, most of whom were regular DSL customers upgraded to U-Verse. That does not look like a statistic of a company that is aggressively rolling our fiber to almost sixty markets and which is supposedly going to add millions of customers to fiber.

Programmers Have the Power

huluIt was announced late last month that Time Warner is negotiating to buy a 25% share in Hulu. This would make them equal partners with Comcast, Disney, and Fox in ownership of the OTT service. I think this potential transaction highlights the very complicated dynamics in the industry between programmers and OTT companies.

It’s obvious that the programmers love Netflix, the largest OTT provider, but they also fear them to some extent. On the plus side, from the programmers’ perspective, the four companies (include Time Warner) currently get about $650 million per year just from Netflix to pay for selling rights to various programming, mostly older TV series, to Netflix. This is obviously a significant source of revenue.

But there is also a lot of unease in the industry since OTT providers, and Netflix in particular, are influencing people to demand alternate programming. And while the programmers have lost some money from cord cutters, the real threat to them is skinny bundles. While the revenue the programmers get from Netflix is good money, it is dwarfed by the revenues that come from traditional cable packages. I have never seen that exact number, but by looking at my clients I am going to guess that the average paid by cable companies per customer for programming is probably around $45 per month, not including premium movie channels. That would equate to more than $50 billion per year paid for programming.

The big threat from skinny bundles is that the cable companies will sell small packages of only the most popular programming. The owners of the most popular channels will do okay, but today the real money for a programmer comes from forcing cable companies to carry their entire large suite of channels. If skinny bundles get popular enough they are going to whack the revenue streams from the less popular channels in each programmer’s portfolio. And that means huge potential losses in revenue, far greater than what they will collect from OTT and skinny bundle providers.

There is talk in the industry that the major programmers might start withholding their best content from Netflix. Reed Hamilton from Netflix has voiced this concern many times and this is probably the reason that Netflix is spending so much money to create its own content.

The four programmers could instead funnel all of their own content to Hulu, and in effect pay themselves by hopefully drawing more paying customers to Hulu. The surveys I have seen have shown that a large percentage of viewers are becoming loyal to shows and not to networks, and so giving Hulu exclusive rights to content certainly sounds like a plausible strategy.

The above discussion makes me realize how much power the programmers still have in the industry. While these four programmers couldn’t destroy Netflix, they could probably hobble them. As Bill Gates said, content is king, and that certainly applies in this arm-wrestling match between programmers and service providers. Since there are only a handful of programmers, they collectively have the ability to pick winners and losers in the industry.

Since content is king one has to wonder how long a small group of programmers can keep their current power? Not only is Netflix creating popular content, but there other new content creators like YouTube and Amazon entering the fray and joining companies like HBO and AMC that are becoming mini-powerhouses on their own.

I find it unlikely that the programmers would just cut Netflix or anybody else dead from all of the content, which would seem to be an open invitation to an antitrust investigation. But they can withhold some content, raise the rates on other content and make it harder for companies like Netflix to continue to eat away at their revenue streams.

I have no idea where any of this is going to go. But my guess is that if we could look forward a decade from now that there will be major shifts in the industry. There are going to be some current programmers that wane and other new ones who will enter the market. But as a whole, no matter who the programmers are, they are still going to be in the driver’s seat.

The Problem with Data Caps

comcast-truck-cmcsa-cmcsk_largeI have been thinking a lot more about the Comcast 300 gigabit per month data cap. It’s now under trial in a few markets, but everybody expects it to be rolled out everywhere. I think this cap is going to do huge damage to the way we use the Internet.

I certainly am among those who have seen these data caps coming. Broadband penetration rates are now north of 80% of households nationwide and higher than that in many metropolitan areas. The largest cable companies are still adding new data customers at a decent pace – the latest statistics show that the largest ones are still growing at over 5% per year in new customers. Some of these new customers are people who are finally getting broadband for the first time and the rest are from the continued poaching of slow DSL customers.

But that customer growth has to stop or slow way down in the near future because the cable companies are starting to own most of the data market. And since these companies are all publicly traded, they want continuous growth in their bottom line. Since margins continue to shrink on cable TV, this means that all of the margin growth at a big cable company must come from their data products. Growing data revenues either means instituting across-the-board rate increases on data or introducing something like the data caps. I am sure we are going to see some of each. Certainly after they get their boost from the data caps, then in a few years their only way to improve bottom line will to be raise all data rates every year in the same manner they currently raise cable rates.

I see a number of specific problems with the proposed Comcast data cap. First, it’s too low. I am not totally against very large data caps because there are always a tiny percentage of customers that download massive amounts of data. And so I don’t have a problem if a cable company wants to charge somebody who downloads multiple terabits of data per month. Other than using their service to run some kind of business, it’s hard to imagine how somebody today can use something like 5 terabits month after month.

But the Comcast data cap is not set to catch the few really huge data users. Years ago Comcast trialed a data cap at 250 gigabits per month. At that time, before the widespread adoption of Netflix and web video that cap probably only affected a small percentage of customers each month. But the web statistics I see show that household usage of data has doubled every three years since the advent of the web. And so if a company is going to have a data cap aimed at charging more only to the very largest users, that cap should be grown every year. For instance, if 250 gigabits per month was a good cap 5 years ago, then the equivalent cap today would be 800 gigabits and five years from now would be 2.5 terabits. Those three limits would affect roughly the same number of households.

But Comcast is starting with a low data cap and will probably only raise it begrudgingly. To put the Comcast data cap into perspective, a household that uses streaming video for about 4 hours per day will hit this cap. This calculation assumes that they are also doing other things like web browsing, backing up pictures into the clouds, using social media, offloading cellphone data, etc. If there are three or more users in a home that is a ridiculously low cap. Remember that video usage doesn’t just come from watching Netflix. All of those little videos that autoplay as you scroll through Facebook or look at web pages with video ads also are streaming video to you.

So Comcast obviously is not out to charge more to only very large users, but to anybody that actually uses the Internet to watch video. This will nail cord cutters the most, but statistics show that even many homes with a cable package are streaming 3 – 4 hours per day of OTT video. And a few years from now this cap is going to catch the majority of households if the cap doesn’t grow each year.

Comcast is talking about charging something like $30 extra to buy unlimited usage, something I thought I was already buying. For my household this will raise the cost of my 50 Mbps data product from $50 to $85. I can afford to pay this, but a lot of households will not be able to afford it. And so we are going to quickly be back to the days when a household has to closely monitor web usage and curtail family members from using the web in the way they want. And this is going to mean stifling the use of OTT video – the competitors of Comcast.

When you consider that for all practical purposes in most markets the cable company is effectively a monopoly, then data caps are clearly anti-competitive behavior meant to stifle their competition. And when you consider that Comcast wants to introduce its own OTT product, Stream TV, that would live outside the data caps, I see massive antitrust problems here. Expect to see my complaining loudly and often about data caps if they move from a trial to become a regular part of the pricing structure for cable modems.