Monthly Archives: November 2016

Unlimited Cellular Data

SONY DSCAll four major wireless carriers have been in the news recently concerning unlimited wireless data plans. The unlimited plans get even more intriguing when you consider that the upcoming FCC is likely to be hands off and may allow the carriers to have zero-rating plans. With zero-rating the carriers will give customers unlimited data for the carrier’s own content, but put limits on all other data.

There has also been a lot of talk this year in the industry that people are dropping landline data plans and migrating back to cellphone data. But when you look at the plans available to customers it’s hard to see any of these plans being competitive with good landline data (emphasis on good). Here are the unlimited data plan options of the four big wireless carriers:

Verizon is the easiest to understand and they hate unlimited data plans. They had unlimited plans years ago and worked hard to migrate customers off unlimited data. But about 1% of Verizon customers are still on these plans. The company recently notified customers who actually use their unlimited data that they are going to be disconnected unless they migrate to a suitable plan. And by suitable, the company offers a plan with 100 GB of download for $450 per month. This means that only a customer who doesn’t use their unlimited plan will be allowed to keep it.

AT&T introduced a new unlimited data plan this year, but it has a lot of strings attached. For example, customers of this plan are not allowed to create mobile hotspots for their laptop or tablets. For anybody that travels a lot like me, this is my primary use of mobile data and there are still many hotels around where the bandwidth is barely adequate to read emails. The AT&T unlimited plan also allows the company to throttle customers in two instances – if they are in a congested area or if they exceed 22 GB per month of download. To put that into perspective, my family of three cord-cutters used 660 GB of data last month – so it’s hard to think of 22 GB as ‘unlimited.’ AT&T’s plan is not cheap and costs $60 for the data plus $40 per phone, meaning it costs $100 per month for a single user.

Sprint and T-Mobile both came out with unlimited plans at the end of the summer. Sprint’s ‘Unlimited Freedom’ plan costs $60 for the first line, $40 for the second and $30 per additional line up to ten lines. Sprint’s unlimited plan doesn’t allow HD video and streams all video in standard definition. They also restrict music steaming to 500 kbps and gaming to 2 Mbps.

T-Mobile’s unlimited plan costs $70 for the first user, $50 for the second and $20 after that up for to eight users. T-Mobile is probably the least restrictive of the four companies. Their only restriction on the unlimited data is that they stream video in standard definition. But for $25 more per month customers can get HD video.

The big caveat on all of these plans is that LET data speeds in the US are among the slowest among developed countries. The OpenSignal report this year ranked the US at 55th in the world, placed between Russia and Argentina, at an average speed just under 10 Mbps.

I read a lot of news articles on my phone when traveling using Flipboard – a news site that lets me customize my news feed. Reading articles on my smartphone is the one part of my digital world that is still agonizingly slow. I often have to wait for 30 seconds or more for a news article to open – and it reminds me of the days when trying to open files back in the dial-up days.

The restrictions on these plans really highlight the hypocrisy of zero-rating. These carriers don’t want you to use their cellular data because they say it harms their network. And yet they are perfectly okay with letting customers view company-supplied content all day without restriction. This, more than anything, tells us that cellular data caps and other restrictions are all about making money and not about the network.

It’s still hard to think of any of these plans as a substitute for a landline connection. A cellular data plan like T-Mobile’s might make sense for somebody who is always on the go and not physically in one place very often. These plans are not cheap and I can certainly see households having to make a choice between a landline connection and a cellular plan. My gut tells me that any migration of landline customers to mobile-only data is probably a lot more about family economics than it is about being happy with one of these cellular data plan.

AT&T and Time Warner

ATTI have been thinking about the AT&T and Time Warner merger since it was first announced. Generally the reasons for megamergers are apparent – there is generally some big efficiency or cross benefit to both companies that makes sense. But I had a very hard time seeing very much benefit to either company with this merger.

The obvious intersection between the two companies is programming. Time Warner produces a lot of content – networks including HBO, TNT, TBS, CNN and a host of smaller networks.  And AT&T has a lot of cable customers through DirecTV and U-verse.

But as I think through the programming advantage it’s not as big as you might think. AT&T is not likely to buy any more cable content from Time Warner after a merger than it does today. It’s likely that all of Time Warner’s content is already delivered to AT&T’s video customers. In fact, once the two companies combine, any transactions between the two of them disappear upon consolidation when creating the financial statements for the combined companies.

The non-accountant will say, “Wait, doesn’t that mean that AT&T gets the content for free”? And the answer is no, because it also means that the revenue that AT&T pays to Time Warner today in real cash also disappears. On the consolidated books both sides of the transaction disappear, as if they never happened.

And it’s hard to see any of the typical merger savings from consolidating management. The two businesses have almost nothing in common and it would make no sense for program executives to run a giant ISP or for AT&T executives to make programming decisions.

The only other obvious benefit is for AT&T to somehow leverage the Time Warner content to grow the wireless business. When the merger announcement was first announced the FCC sent a letter to AT&T and told them they would be investigating their zero-ratings practices. Zero-rating is when an ISP provides content to customers without counting the usage against any data caps. AT&T already does this today with a limited amount of content, but if they owned Time Warner they would have far more content they could send over cellphones that wouldn’t count against data caps. An AT&T customer could watch Game of Thrones, for instance, on their AT&T cellular plan without worrying about their monthly data cap. But if they watch non-AT&T video they would be penalized.

With the new administration it looks like zero-rating (and net neutrality in general) is likely dead. But how much of a benefit is zero-rating to a wireless company? Certainly this could drive more advertising revenue to the combined company, but that doesn’t seem like a big enough motivation for the mega-merger. And unless one cellular companies gets killer content that everybody wants to watch on a cellphone, it’s hard to think that zero-rating is going to be a big game changer in terms of shifting wireless customers between providers. I have a hard time seeing AT&T zero-rating as a Verizon Wireless killer.

The only real benefit I can foresee is a bit of a scary one. With each of these mergers between ISPs and programmers the industry collapses to fewer and fewer major players. This merger would put AT&T on the same footing as Comcast in terms of programming content. And maybe that is the major reason for the merger – just keeping up.

But what is to stop the biggest companies from selling content to each other in bulk? I could foresee AT&T and Comcast agreeing to sell content to each other at a reduced price based upon some volume discount. This would end up giving both companies an edge over every other ISP. These two mega-companies (and probably a few others) would then be able to leverage that advantage to crush their other competitors – leaving the nation with even fewer competitors than today.

I don’t know that this scenario could be sustained. It seems like the public is migrating away from a lot of traditional content towards programming produced independently by companies like Netflix. But if the AT&T / Time Warner merger is allowed to happen, what will stop one of these big companies from buying Netflix and every other independent content provider that pops up?

An Effective Federal Broadband Program, Part 4

outdoor-indoor-cable-161This is the final in a series of ideas on establishing a federal broadband construction program. It is assumed in these comments that such a program would include some form of federal financial assistance to build fiber networks such as grants, loans or loan guarantees.

Fix the Pole Problem. One of the biggest impediments I see for building fiber is getting reasonable access to poles. The Telecommunications Act of 1996 established the right to get on commercially-owned utility poles. But that new set of rules excluded poles owned by municipalities and rural electric cooperatives. Those exclusions need to be ended.

But the biggest problem with pole access is that there is no remedy for dealing with pole owners that are uncooperative or that fight the connections. Recalcitrant pole owners can easily destroy a business plan through delays. There are states that have solved this issue by allowing a new connector to build without permission if a pole owner takes too long to respond to a request for connection – and the FCC should adopt something similar. In areas where it’s too expensive to bury fiber, access to poles is the only way to bring real broadband.

The Financing Dilemma. The stimulus grants and other grant and loan programs have generally required that an applicant has already lined up the rest of the financing required to complete the project. This is a great example of the chicken and the egg dilemma in that most financial institutions are not going to expend their resources to thoroughly review a loan applications until the applicant cam prove the remainder of the funding (the grant). This one requirement stopped a lot of good projects from asking for stimulus funding because they were stuck in financial limbo between bankers and the federal government that each wanted the other side to commit first. Obviously a grant can be paid until all of the funding is in place, but there must be a reasonable time allowed to secure financing after a grant award.

Don’t be Afraid to Impose Policy Objectives. The stimulus grants imposed a handful of rules that were meant to benefit the public good. For instance, they made middle-mile fiber builders serve ‘anchor institutions’ such as schools, city halls and other government institutions.

But if large amounts of federal monies are given for building last mile fiber then there should be some requirements imposed on funding recipients to meet important broadband social goals. This might include a few things like:

  • A Robust Low-Income Broadband Product. Anybody taking federal funding for fiber should be mandated to participate in the federal broadband Lifeline program to provide affordable broadband to low-income homes. Today carriers participating in the Lifeline program are allowed to offer horrendously slow speeds to customers – 10/1 Mbps for wireline connections. If somebody is taking federal money to build fiber, then Lifeline speeds ought to always at least be at whatever is determined by the FCC to be broadband, which is currently 25/3 Mbps.  Further, the current Lifeline products have FCC sanctioned small data caps that punish customers for using the Lifeline broadband. The monthly cap is 150 gigabits for landline, and an unbelievably small ½ gigabit for cellular. These stingy data caps invalidate the stated purpose of the Lifeline program which is to enable low-income households to benefit from a broadband connection. These caps ignore the basic cost drivers of the industry and there is virtually no cost difference between a household using 150 GB per month and one using 500 GB per month. These caps are social policy decisions, not ones based upon the economics of the industry.
  • No Data Caps. Again, if the federal government pays a significant portion of the cost to build a fiber network, then that network should impose no data caps on any customers at any speeds. Data caps are a way to say to customers – here is broadband, just don’t use it. Data caps are clearly a way to extract more money out of customers over and above the base broadband rates.

I Cut the Other Cord

facebookIt’s the day before Thanksgiving and rather than talk about anything too serious I’m going to talk about my experience in cutting the other cord – the social media cord. I recently left Facebook – and it feels great.

I’ve been on Facebook for years. I had over 200 friends that were a mix of family, people I went to schools with and various other people I’ve met over time. When I first got on Facebook many years ago it was a fun experience. I was able to catch up with old high school friends and was able to see what my family was up to. It really was a social site in the true spirit of that phrase, and my memory is that my Facebook feed in those days were mostly personal postings from my friends and very little else.

But over the years a lot new things crept into the Facebook feed and it became far less personal. I would bet that not more than 10% of my recent feeds were things directly posted by my friends. Instead my feed became a long stream of ‘news’ articles and a ton of other impersonal content.

Facebook is currently under fire for allowing too much ‘fake’ news on the platforms that critics say influenced the election. Companies like the New York Times or the Huffington Post pay to suggest content on Facebook in the hope of driving people to their own content. These sponsored posts apparently drive several billion dollars a year to Facebook. But not everybody is the New York Times and there are lots of other websites paying to post much more questionable content. Facebook says they are going to figure out how to ban the worst of these sites from adding fake news or misleading content.

But I don’t think that will put a dent in the problem. The fact is that any one of Facebook’s 1.65 billion members can link to any web site that doesn’t violate things like Facebook’s ban on nudity. And since personal posts can go viral and I can’t imagine the amount of untrue content will decrease a whit.

The fake content is not all political. A huge percentage of the things I see on almost any topic have the same problem. I would venture to say that most of the posts I see talking about nutrition, global warming, vaccinations, or almost any other current topic are also untrue or misleading. I would estimate that as much as half of the ‘content’ I saw on my feed was of questionable veracity.

I’m one of those people that hates obvious untruths and I would routinely tell my friends when they had posted something untrue. I’m guessing they will be glad to see me gone, because nobody ever thanked me for this! I’m afraid Facebook was turning me into the cranky neighbor sitting on the porch and trying to fix the world by pointing out untruths. But it is clear that I’ve been trying to swim against the tide.

My wife, as usual, gets things a little faster than me and she dropped Facebook a while back because the tone was growing so mean. Regardless of the topic the whole site now invites trolling and argumentation.

The other thing that has been bothering me about Facebook is that the company has been getting really sophisticated in collecting information about us and is either using it for advertising or selling it to others. I’ve grown more uncomfortable over time that everything I do on the site has been helping Facebook create a detailed profile on me. I sit and watch my friends take ‘quizzes’ that ask them a bunch of personal questions that they would never answer for a stranger. But companies have become good at disguising this data gathering as something fun.

I haven’t dropped some other social media sites because they serve purposes that benefit me. For example, I only use Twitter to follow people in the telecom industry or to follow my favorite sports teams. I post these blogs on Twitter but I rarely comment or read comments there. And I use LinkedIn as my online rolodex since it gives me a quick way to contact colleagues that I may have lost track of otherwise. The way I use these sites doesn’t have any negative aspects for me.

I can tell you that dropping Facebook has been a positive experience and I’m never going back. It was a time eater that could nibble away from a few minutes to hours on some days. The obviously fake, false and untrue content that has overtaken the platform was driving me crazy. And I feel glad to no longer be feeding my likes, preferences and opinions into the advertising grist mill. I heartily recommend leaving Facebook to anybody that is bothered by these same things. Facebook started as something fun, but I recommend anybody who is not having that original fun any longer to drop the site and spend your time elsewhere. I can tell you that it feels really great to let go of something so negative.

Some OTT Statistics

sling-tvAs usual the quarterly Digitalsmiths and TiVo recent Video Trends Report contains a ton of interesting statistics about the industry. The following table shows the number of households that subscribed to the various OTT services during the third quarter of each of the last four years.

 

‘                                              Q3 2013          Q3 2014          Q3 2015          Q3 2016

Netflix                                     41.7%              46.4%              49.9%              51.8%

Amazon Prime                        12.9%              17.9%              19.9%              24.8%

Hulu                                          9.4%                9.6%              12.1%                9.9%

HBO Now                                                                                  4.3%                5.2%

YouTube Red                                                                                                      3.1%

Shomi                                                                                                                2.7%

CBS All Access                                                                           2.1%                2.1%

Sling TV                                                                                      1.0%                1.7%

Play Station Vue                                                                         1.3%                1.6%

Blockbuster                               1.8%                1.2%                 1.0%                1.0%

Other                                         1.5%                1.4%                 1.7%                1.8%

Nothing                                    51.8%              47.3%               43.7%              38.1%

Netflix has continued to dominate the industry and has grown to cover an additional 10% of all homes nationwide since 2013. Hulu increased market share in 2015 but is back down again. But expect Hulu to grow again since they are picking up a lot of new content from its owner programmers. In four years Amazon Prime has doubled, although there is a lot of debate about how many people actually watch the video service since it comes free with the Prime shipping program.

What springs out most from the chart is how the industry is diversifying. In just the last year YouTube Red and Shomi sprang to fifth and sixth place in the industry. And 2014 saw the introduction of Play Station Vue, SlingTV, CBS All Access, and HBO Now. It’s also striking to see the number of homes that don’t watch OTT content drop from 52% in 2013 to only 38% today.

You may be surprised to see Blockbuster still active on the list. While all their stores have closed, the Blockbuster brand is still being used to market OTT movies and is now integrated into SlingTV.

The ‘Other’ category is interesting. On last count there were over 100 different video pay services on the web, yet outside the major OTT players these services together are only seen in 1.8% of households.

This next chart shows what people pay for OTT content, comparing 2014 and today

Monthly Expense                  Q3 2014                      Q3 2016

$1 – $2                                     2.0%                            3.6%

$3 – $5                                     2.3%                            3.2%

$6 – $8                                    33.4%                          16.5%

$9 – $11                                  21.7%                          30.1%

$12 – $14                                  8.1%                           10.0%

$15 – $20                                 14.0%                          15.8%

$21+                                           6.8%                          10.7%

Use But Don’t Pay                    11.1%                          10.1%

In just two years the average bills have crept significantly upward. Currently over 2/3 of homes report paying more than $9 per month for OTT service, while in 2014 that was only 51%. Probably more interesting is that 26% of homes pay more than $15 per month for OTT content. My household is in this category and we have subscriptions to Netflix, Hulu, Amazon Prime (including Starz), and SlingTV.

The percentage of households who told an interviewer that they watch but don’t pay for OTT content dropped slightly, but represents about the same number of people from 2014 to 2016.

 

An Effective Federal Broadband Program, Part 3

outdoor-indoor-cable-161This is the third in my series of blogs looking at the best way to administer a federal broadband construction program. Since there is talk of having an infrastructure program that might include money for broadband, I hope that the folks at places like the NTIA are giving these issues some thought. The last time around the stimulus grants caught them and the whole industry by surprise. But this time, with some advanced thought and planning we can do better and get more bang from any federal dollars. After all, if there is a broadband program, it ought to have the number one goal of bringing broadband to as many people as possible. Following are some additional thoughts on structuring a federal program:

Consider Local Conditions More. The stimulus grants included a simplistic formula that offered different levels of grant funding to served and underserved communities. We need to get more sophisticated this time around and realize that the cost of broadband networks has a lot more to do with terrain and density than it does with whether customers are served or unserved. There is a huge difference in the cost to reach an unserved customer in the open plains of the Midwest compared to Appalachia. And other local conditions like the state of poles can make a big difference in cost. The CAF II funding took a stab at the differences by using proxy cost models to try to reflect the relative cost to construct in different parts of the country. But even those models are too simplistic and we can do better.

This also means that there should be no predetermined formula that determines of the amount of matching funds that are available for any project. Sparsely populated areas might require more than 50% federal matching to make the numbers work. I know it’s difficult to not be formulaic, but ideally each proposal for funding should be analyzed on its own and the appropriate funding award made according to the circumstance.

Be Open to Funding All Qualified Providers. The stimulus grants (particularly the ones awarded by the RUS) had a built in bias to give the money to existing RUS borrowers. For broadband that means basically small telcos and some electric coops. If we want to get broadband to the most rural places, then anybody willing to step to the plate with a good business plan and some experience needs to have an equal chance. This might mean ISPs, municipalities, cooperatives, cable companies or fiber overbuilders. There is angst among smaller carriers that any federal funding will go to the largest telcos and that smaller providers won’t get an opportunity to try for the money, as was done with CAF II.

Takes Time to have Shovel Ready Projects. At any given point in time there are not many shovel ready projects that are positioned to take funding immediately. My fear is that any federal program is going to come with a built-in clock ticking and will try to give out the money in a relatively short amount of time like was done with the stimulus grants. It can easily take a year to create a shovel ready project even for a community that is highly motivated. There are a lot of steps that must be undertaken before completing a grant application. And if there is a requirement that the matching funding must be in place in order to participate then that time frame can easily be a lot longer. So my hope is that any program gives the industry enough time to get ready. If the funds are going to be awarded within a year then it’s going to be a disaster and a lot of bad projects will get funded just because they were able to scratch together the funding request quickly. This can be successful if broadband money can be awarded over a two to four-year period rather than all at once. The longer the time frame, the better the proposed projects will be.

Don’t Break the System. There are a limited number of firms available to help put together business plans and to make engineering estimates. If a federal program tries to give out a lot of money too quickly there are not enough qualified engineers and financial consultants available to get the work done – and it’s not easy for these firms to staff up with people that have the necessary existing knowledge. We also saw shortages with fiber cable and electronics right after the stimulus plan. All segments of the industry are staffed and geared to an anticipated level of demand and it’s hard for the whole industry to pivot and react quickly to a massive new demand for services and components.

Make the Grant Forms Understandable. I have been doing telecom accounting since the 1970s and there were things on the stimulus grants forms that I didn’t understand. Bring in a panel of industry experts early to make sure that the forms used to ask for money are done in a way that the industry understands. A format that asks for financial input in the manner that the industry keeps their books will provide a lot more consistency between grants requests.

Economic Lives of Fiber Assets

outdoor-indoor-cable-161One thing that anybody who builds a fiber network needs to deal with at some point is depreciation expense. Fiber networks are expensive and depreciation expense is a key component for measuring profitability and success. This is even true for non-taxable entities if you still create financial reports that include depreciation.

Companies differ in their approach to depreciating their assets. If the owner is a taxable corporation or cooperative they may prefer higher depreciation expense in the early years to shield the business from income taxes. But other owners care a lot about what their financial reports say and I know some fiber network owners that like lower depreciation. Accountants all understand that depreciation is a non-cash expense, but this is a nuance that is often lost on the public or the non-sophisticated reader of financial statements.

My job allows me see the books of a lot of different kinds of telecom entities and I see that depreciation rates used for telecom assets vary widely. There was a time when the FCC and state commissions set depreciation rates for big companies, and the rest of industry usually followed. But today a fiber provider is free to set depreciation lives within a surprisingly wide range.

There is only one authoritative source for depreciation lives which is from a bulletin published by the IRS in 2015.  That bulletin establishes a baseline for depreciation for tax purposes for fiber networks that assumes a conservative and short life for fiber assets. For example, the IRS life for fiber cable is 24 years. At the other end of the scale, I have clients who are using a 40-year life on fiber. From an accounting perspective this wide range is like night and day.

In my experience the economic lives suggested by the IRS are ridiculously short. There was a time in the 1980s when a 20 to 25-year life for fiber was probably reasonable. The early generations of fiber cable had manufacturing flaws that allowed small cracks to develop over time that eventually cause the fiber to become opaque and lose usefulness. Most of the fiber built in those days has deteriorated over the years and has been retired or is of limited use today.

But the manufacturing process for fiber cables has improved drastically in each succeeding decade. I’ve talked to engineers at the fiber manufacturers who estimate that today’s fiber cables might easily last for 50 to 75 years as long as it’s installed properly and not unduly stressed. And there is speculation that fiber might last even longer – we’ll just have to wait and see.

The same thing is true for fiber electronics. Thirty years ago electronics in general were not as well made or as robust as today. There were large clunky circuit cards that expanded and shrunk in outside use and then eventually went bad. And these cards were full of individual components that could fail. But today a lot of the brains of electronics is embedded in chips that can last for a long time.

I can remember back in the 1990s when the engineering mantra was that you designed electronics to last from 7 to 10 years. Within that time frame the equipment would either start having operational issues or else the manufacturer would stop supporting it. But today’s electronics are much hardier and more reliable. I have several clients that still operate the first generation BPON fiber network networks. The electronics on these networks were made 12 – 15 years ago and are still going strong, and during that time they have had almost no failures. But most companies used depreciation lives for the BPON electronics of between 7 to 10 years. The same thing is true with the electronics used to power backbone networks. I have clients still operating networks built 15 years ago at twice the expected economic life.

So my advice to clients is that if they they are not stuck with whatever deprecation rates they are using. If they have reasons to might want shorter or longer depreciation lives there might be a justification for changing the depreciation rates. When I first got into the industry everybody used rates within a narrow range, but today there is a huge amount of flexibility in settling depreciation rates.

If your financial statements are audited then your auditor might want a professional opion of why it’s okay to change rates. But there is a huge amount of empirical data to support using longer lives for both fiber and electronics. And if you want to shorten lives it’s fairly easy to point to the IRS rules.

Accounting is not supposed to be this flexible and one would expect the industry to have a more consistent range of depreciation practices. But once the regulators stepped out of the business of regulating depreciation lives it’s been the wild west from an accounting perspective. So if you don’t like what depreciation expense is doing for you, contact me and I can help you find a better answer.

What the New Administration Means for Small ISPs

white-houseI’ve seen a dozen articles in the last week speculating what the change in administration means to the telecom industry. The articles range from predictions of doom and gloom (mostly from a consumer perspective) to near glee (from the giant telcos). But my audience and clients are primarily small telcos, ISPs, cable companies and municipalities, so I’ve been thinking about what this change means for small carriers.

There has been a lot of speculation about a big spending program to build infrastructure. But nobody has any idea if this might include money for broadband infrastructure. And even if it does, might that money go to a wide number of broadband providers or just to the big companies like the CAF II funds? So until we find out more details, any talk about infrastructure is pure speculation. I’m sure details will start solidifying in the first quarter after the new administration is in place.

One thing that every prediction I have seen agrees on is that we are going to see reduced regulation. This might come about due to having a republican majority at the FCC. Every major decision during the Wheeler regime has been passed with a 3-2 democratic vote. So it would be easy to see a new FCC reverse everything that Wheeler got passed. There is also speculation that Congress might pass a new Telecom Act which would direct the FCCC to cut regulations.

So what does less regulation mean for smaller ISPs? When looking at every regulation that has passed over the last decade I come to the conclusion that, from a regulatory perspective, this will have very little effect on smaller service providers. Almost everything that has been passed has been aimed at curbing the practices of the giant telcos and cable companies.

Smaller carriers would see some benefit due to reduced paperwork. For instance, competitive voice providers have had to provide an option to customers for battery backup. That sort of requirement might disappear. There was undoubtably going to be some new paperwork involved with the new privacy rules that will likely be canceled. My clients all find some of the federal paperwork to be annoying and unneeded and perhaps some of that will go away.

But the big changes over the last decade didn’t really impact small companies at all. I have to laugh to think of one of my clients somehow creating a product package that violates net neutrality. It’s silly to think that small ISPs might might somehow profit from using their customers’ data. If those big initiatives get reversed it will mean almost nothing to small companies since none were engaging in the activities that these new regulations are trying to fix.

There is one downside for small ISPs to reduced regulation. A lot of small carriers compete against the giant telcos and cable companies. Anything that takes away restrictions on the giant companies probably gives them even more of a competitive edge than they have today. So I guess my biggest concern is what an unfettered Comcast or AT&T will be able to do to crush smaller competition.

There are aspects of Title II regulation that help the small carriers compete against the big ones. My favorite, which is due to be implemented soon, is the requirement that ISPs tell their customers the truth about their broadband products. This will be done in the format similar to the label on foods where the ISPs have to disclose actual speeds, latency, prices, etc. about their products. I think that will give small carriers a way to show that they are better than the big companies. If Title II regulation goes away then the good parts go away along with the bad parts.

I’ve always thought that net neutrality was focused on reining in the big companies from developing products that nobody else can compete with. The big carriers have wanted to make exclusive deals with content providers and social media networks that would give them a leg up over anybody they compete against.

So my message to small ISPs is not to worry too much. If the FCC reverses everything done in the last ten years you are not going to see much practical change in your regulatory processes or costs. The only real worry is what an unregulated Comcast or AT&T might look like. And who knows? Maybe you’ll get some federal dollars to expand your broadband network – we’ll just to wait and see about that one.

Broadband Access to Apartment Buildings

Seal_of_San_FranciscoMark Ferrel of the Board of Supervisors for San Francisco has proposed an ordinance that would require multi-tenant buildings to provide access to broadband providers. This would apply to both residential and commercial properties.

You can understand why the city wants to tackle this issue. The nationwide percentage of families living in apartments is around 35%, but in San Francisco apartments represent 63% of housing units. And the percentage of families living in apartments is high in a lot of big cities – in New York City it’s 68%; in Seattle it’s 54%; in Atlanta it’s 56%.

Cities understand that bringing fiber to their city is not enough if it only benefits single-family homes and standalone businesses. As I wrote in a recent blog there are millions of urban households that don’t have access to broadband, and a lot of these situations are due to apartment owners that have excluded broadband providers. It’s fairly normal for apartment owners to have made deals years ago with service providers to serve their buildings on a revenue-sharing basis. The landlord may or may not include the triple-play products in the rent, but they get a kick-back from the service providers as a reward for exclusive access.

A few years back the FCC put some restrictions on cable companies and ISPs from entering into certain kinds of exclusive arrangements with building owners. It was a fairly common practice, for example, for an ISP to agree to wire a building for free, but then retain ownership of all of the wiring. In these cases the owner gave up all rights to the cable company or telco and it’s those entities that keep out competition.

I think there is a general impression that the FCC order forbade the cable companies from entering into all exclusive arrangements. But unfortunately it did not and it instead bans only certain types of arrangements – but not all. So I would expect at some point for this ordinance to be challenged at the FCC when it bumps into arrangements that are still allowed. But I think cities expect legal challenges when they tackle new ground.

This is also not going to be as clean-cut as Mr. Ferrel is hoping for. The ordinance grants access to multi-tenant buildings to any state-licensed ISP. Unfortunately, in many buildings there are physical restrictions to allowing even a second ISP. There might be very limited space for an ISP to put a rack of equipment. There are often issues with having enough space in the risers (the conduits that carry wires between floors).

And many apartments can’t accommodate having ‘open access’ where any ISP can gain access to the wiring for any unit from some central location. Unfortunately many apartments are not wired with ‘home run’ drops that go from a core to each unit, but instead often share the same cabling for multiple units.

There are often limited options for getting new wires to apartments. I can picture some really messy situations if multiple ISPs are granted access to the same buildings and each tries to string cables through hallways or other public areas. You can picture the same sort of clutter that we often see on urban poles with too many wires crammed into limited space.

But even with all of these issues, Mr. Ferrel is on the right track. The fact is that many apartment dwellers are being denied access to fast Internet due to arrangements made by the building owners. This ordinance is the first attempt I’ve seen for solving the lack of broadband and choice for a large percentage of urban households.

The ordinance tries to be fair to apartment owners and allows them to expect reasonable compensation for access to their buildings. Obviously that concept will need work to put into practice, but the ordinance doesn’t open up buildings to anybody to build without rules.

There is one thing the ordinance doesn’t tackle. What if nobody wants access to an apartment? A significant portion of urban apartments without good broadband access are low-income housing and ISPs and incumbents have been accused of redlining such customers for years. So this kind of ordinance can’t solve everything – but it’s a start.

The FCC’s Cable Price Report

FCC_New_LogoOnce a year the FCC releases a Report on Cable Industry Prices and this year’s report came out a few weeks ago. This current report has some very odd findings that make me think that perhaps this report is no longer needed.

The report looked at the prices charged for basic cable and expanded basic cable in 485 communities in the US, some where cable has a declaration of effective competition and others with no competition.

I think the results shown in the report are off because the findings show average rate increases that are far below what is reported everywhere else in the industry. The FCC says that the price of basic cable increased by only 2.3% over the last year to reach a price of $23.79. More surprisingly, the average price of expanded basic cable increased by only 2.7% to reach $69.03 which was slightly lower than the increase in inflation. This compares to the 10-year historical average of 4.8% increases per year from this same report.

The increase in basic cable might be accurate because there are years when many companies don’t increase this rate. But the expanded basic rate increase is baffling. I wrote a blog back in the beginning of the year showing much larger increases for all of the big cable companies this year except Charter, due to their impending merger – and they caught up later in the year.

I think that perhaps the FCC is no longer asking the right questions. It’s certainly possible that the published prices for expanded basic cable increased as they have said – but that doesn’t tell us anything about what customers are really paying.

I suspect the FCC is not picking up the plethora of new ‘fees’ that are being used to disguise the price of cable. These might be called network programming fees to cover the cost of buying local programming. Or they might be called sports charges to cover the ever-rising cost of sports programming. Every big company labels these fees a little differently. But these fees are part of the cable bill that people pay each month and the primary purpose of the fees is to allow the cable companies to claim lower cable rates. These fees also confuse customers who often think they are taxes. My guess is that the FCC did not include these fees – and they must be included because they are nothing more than a small piece of the cable bill labeled differently.

Additionally, I’ve seen a number of estimates that say that around 70% of households buy cable as part of a bundle, and for these households the change in the list price of the components of the bundle doesn’t matter – customers only care about the overall increase in the price of the bundle. Customers don’t know or care which piece of the bundle increases since they are rarely shown the cost of bundle components.

And this leads to a discussion of the fact that cable companies have recently began increasing the prices of other products in order to keep cable rates lower. Rather than raise the price of cable they might instead raise the fees mentioned above, raise the price of the cable modem or the settop box, or raise the price of the broadband products. And all the cable companies care about – and all most customers see – is the increase in the total bill.

Finally, we know that there are now many different rates in every market. Cable companies sell specials or negotiate contract renewals with customers. At CCG we often gather customer bills to try to understand a market and we often see customers with an identical package with prices varying by as much as 10 or 15 dollars. None of the variation in actual rates makes it into the FCC report. I think this report only looks at the published list price and those prices are largely irrelevant since they don’t reflect what customers really pay.

So I think the usefulness of this report is over. If I recall this report was mandated by Congress, and so the FCC is probably obligated to keep producing it. But the results it now shows have almost nothing to do with the rates that customers actually pay for cable TV in the real world.