Yearly Archives: 2016

Video and Broadband Speeds

slow-downAkamai has released their latest quarterly report on the state of broadband around the world. Akamai runs network monitoring software for large ISPs and the Internet backbone providers and they get a peek inside actual broadband speeds achieved by end users.

Overall the worldwide Internet keeps getting faster each year. The average speeds achieved by end users was 5.1 Mbps download in the third quarter of 2015, up 14% from the year before. Topping that list was South Korea at 20.5 Mbps followed by Sweden at 17.4 Mbps and Norway at 16.4 Mbps. The US placed 16th globally with an average speed of 12.6 Mbps, up 9.4% from a year ago.

Akamai says that only about 15% of the connection in the world are ready for 4K video which they estimate will require about a 15 Mbps connection. That’s not a totally accurate figure, but rather an average speed for a 4K video connection. Like with all video, the speeds required for any given video clip varies by how much the picture changes, with high action video requiring more bandwidth than low-action scenes.

And so a house that had exactly a 15 Mbps connection could watch some 4K video, but they might not be able to watch a very high-action film. Further, this measurement ignores the fact that these days homes have an additional need for bandwidth for a host of other uses that range from emails, programs and apps that talk to the cloud and a host of other things that happen in the background. It’s more realistic to think that a home is going to need something closer to 20 Mbps if they are going to want to reliably watch 4K video while accommodating other normal uses of bandwidth.

One of the most interesting statistics of the survey is that the number of homes that get at least 15 Mbps rose to 15% from only 5.2% a year earlier. It’s obvious that ISPs are selling more higher bandwidth connections.

There was a recent announcement that is going to have a big impact on the ability of people to watch quality video. Netflix announced that it is rolling out a new technology that is going to maximize the quality of video to each user experience. It is going to offer what it thinks is the best bit rate based upon the content being viewed and the viewer’s video stream. Again, this goes back to the fact that there is a significant difference between a high-action movie and one that just has people sitting and talking.

In the past Netflix only had a few standard speeds that they tried. If they were unable to get a stream through at the speed that people requested they would step the speed down to a fairly low level and hoped it worked. But for people on slow connections, this often has meant lower quality movies, but also transmission problems such pauses in the movie stream when viewing outpaced download.

The new technology is supposedly going to be a lot more dynamic. Before, if somebody asked for an HD stream then Netflix tried to send it out at 5.8 Mbps. If a customer’s ISP couldn’t handle this they were automatically downloaded to something much slower.

But now, Netflix will first set the download speed according to the content. There are low-action HD videos that might only need 4 or 4 Mbps. And so Netflix will figure out the optimum target speeds for each type of content. Further, they will use a wide range of possible step-downs in speeds rather than going directly from HD to a very slow speed.

I’ve seen this being touted in a number of articles as something that will save a lot of bandwidth for Netflix since they will not force all HD content into 5.8 Mbps streams. But those articles also see this as a savings for ISPs and I think they are wrong. I think this means that ISPs with very fast speeds will also see a bandwidth savings, but interestingly, ISPs with slow network speeds will probably see an overall increase in bandwidth demand from Netflix.

Today if an ISP offers 3 Mbps, then Netflix might send them an HD video at a third of that speed. But with this new technology Netflix is going to try to maximize the customer experience and will use up more of the available bandwidth. This technology will also make it easier for households with somewhat slow bandwidth to watch more than one video at a time and the Netflix algorithms will try to fit the content into the available data path.

For now Netflix is the only company doing this, but like with all breakthroughs you can expect the rest of the industry to catch up in a year or so. One thing is certain, and that is that web video is here to stay and ISPs are going to be under tremendous pressure to provide enough bandwidth to allow people to watch what they want online. There doesn’t seem to be any end in sight for the demand of household bandwidth.

 

Fighting Against the Cost of Programming

Numismatics_and_Notaphily_iconToday I want to talk about the cost of programming from the perspective of a small cable provider. In the cable world, any company without many millions of cable customers is considered small because they have no effective negotiating power against the programmers.

For decades most small cable systems have purchased a lot of their programming with rates negotiated by the National Cable Television Cooperative (NCTC). There are currently 850 member of this cooperative. Altogether the NCTC group represents the second biggest pile of cable customers after Comcast. It’s hard to know the exact number of customers they represent because a few of the larger cable companies like Cox and MediaCom have joined and then left the cooperative over the last few years. At one point I heard the number 20 million subscribers bandied around the industry but it’s probably smaller now.

Not all programmers will work with NCTC and some require cable providers of any size to sign a contract directly with them. But NCTC represents a significant portion of the channels used by cable systems. Within that negotiated pile of content members must still sign a contract with each programmer and are free to sign the NCTC contract, negotiate directly with the programmer, or else sign no contract if they don’t want to carry a given programmer.

Back in 2014 there was a big furor among small cable companies when the Viacom group asked for a huge rate increase, reported to be over 60%. Viacom includes channels like MTV, VH1, Nickelodeon, Comedy Central, Spike, BET, and other music channels. At the time about 60 NCTC members, representing about 900,000 subscribers, decided that they could not afford to pay the higher rates and so dropped the Viacom channels from their cable systems.

We are seeing a similar battle brewing today as AMC is asking for a huge increase in rates with NCTC. I’ve not seen the new proposed rates, but have seen news articles describing this as a 379% rate increase over the term of the new contract, which is probably for five years. AMC includes the channels AMC, We tv, IFC, and Sundance TV. Additionally the new contract also covers BBC America and BBC World News, which are 50% owned by AMC.

How can a programmer ask for such a big increase? Programmers are very attuned to the Nielsen ratings which constantly track the number of people that watch each network. The general concept used by programmers is that their network is worth at least as much as other networks that get the same number of eyeballs, very similar to the way that a professional baseball player sets his worth by comparing his statistics to his peers.

AMC’s popularity has exploded in the last few years as it changed from a channel showing old movies to one which now carries very popular original programming like Mad Men, Breaking Bad, and The Walking Dead. This has raised their Nielsen rating and the network wants to charge more due to being a lot more popular.

The whole programmer industry owes a debt of gratitude to ESPN which was the first network to constantly and significantly increase their fees over the years. Every time that ESPN signed a new deal to carry programming for a sports league they then raised their prices to cover the new fees they were paying to those leagues.

But in doing so ESPN was setting an industry pricing standard against which other networks can be measured. We saw this happen with retransmission agreements with the major broadcast networks that have grown from zero to several dollars each per customer per month over the last decade. And we’ve seen popular channels ask for more as they get more viewers. The funny thing is, though, that when a network loses viewers they never seem to drop their rates.

Caught in the middle of all of this are the service providers that offer cable TV. They keep seeing bigger and bigger increases each year in programming costs and some are reporting overall programming costs growing by at least  15% per year. They are left with little choice but to raise rates, which puts many of them into a poor position compared to the satellite providers. And with each rate increase comes more customer impetus to cut the cord or at least cut back on the programming they purchase.

It’s been my experience that few of my small clients that carry cable have been bold enough to pass on all programming cost increases, and so their margins on cable keep shrinking. On a fully allocated cost basis many of them are underwater with the cable product. And sadly, as is shown by the recent AMC rate demands, there is no end in sight for continued huge increases in programing costs. It’s a lousy time to be a small cable provider, that’s for sure.

Why Regulate Broadband?

FCC_New_LogoOften lost in the discussion of how much the big ISPs in the country hate Title II regulation of broadband is the more general discussion of whether the broadband market ought to be regulated. When I first entered the industry telephone service was heavily regulated in almost every manner imaginable, and this was due to the gigantic monopoly power of AT&T at the time. Over the years various parts of the telephone industry have become lesser regulated or even deregulated. And somehow during this process we seem to have gotten used to the idea that communications services are best when deregulated.

But I want to step back to a general discussion about regulation in general. Governments tend to regulate industries for several different reasons. For example, there is generally regulation of the financial industry because failures of large banks can devastate the rest of the economy. We also regulate businesses that can harm people, and so we do things like inspect food or have rules about transporting dangerous chemicals.

And finally, we regulate companies that provide services that most people need and for which a given provider can hold huge power over customers by nature of being a monopoly. This is why we regulate electric and water companies – because they tend to be natural monopolies in a given market. And it’s why we used to regulate Ma Bell.

When broadband first became a product there was no discussion of regulating it because it didn’t appear at the time that there were going to be monopoly providers. In the dial-up days there were all sorts of new companies like AOL and Compuserve entering the market. And then along came faster broadband and the cable companies and the telcos launched new and faster broadband products at almost the same time. It looked like there would be vigorous competition between DSL and cable modems.

But in the few decades since then it’s become obvious that cable modems have won that battle. Cable companies are growing to the point in many markets of having a virtual monopoly since the DSL products are too slow to keep pace. Every quarter when broadband customers are announced by all of the big companies it’s obvious that there are still people flocking from DSL to cable modems. It’s been clear for some time that broadband, which has largely been a duopoly market, is trending towards monopoly as DSL fades.

The other test that regulators use when considering regulation is if there is any effective substitute for the monopoly products or services. Cable companies argue that cellular wireless data and fiber are both effective substitutes for cable modem. But are they really?

I’ve written a number of times about how lousy cellular wireless is as a competitor to landline broadband. While there are certainly people who are satisfied with only a cellular data connection, the bandwidth and pricing of cellular data make it a poor second cousin to landline data, and most cellphone users seek out WiFi rather than rely solely on cellular data. And while there is talk about going to 5G and gigabit wireless networks, this talk is still almost all hype.

There are certainly markets where fiber is a good competitor for cable modems. But the other day I looked at the list of the 200 largest cities in the country and the majority of cities on that list do not have fiber and are not on anybody’s list to bring fiber. And even where there is some fiber there are no large markets where there is fiber everywhere in a city – ask all of the eastern cities how they feel about how Verizon built FiOS to only parts of their cities. Further, the cable companies are all implementing DOCSIS 3.1 which is going to give cable systems the ability to keep up with fiber speeds for the next decade.

And even where somebody builds fiber, at best we end up in a duopoly situation. When you look at where Google has brought fiber it looks to me like most of the competition is with data speeds and not with prices. If anything, the average price paid for broadband is higher where Google has built fiber.

It’s obvious that Comcast doesn’t think there is any effective competition as witnessed by their trial with data caps, which everybody expects to go nationwide soon. Their data caps are going to mean a big rate increase for a lot of customers, something that could never happen in a competitive market.

So, when looked at from a regulatory perspective, the broadband market is ripe for regulation. In fact, it probably should have been regulated much sooner. I see nothing on the horizon that is going to improve broadband choice for the vast majority of Americans and I hope the FCC can find a way to put some teeth in the way they regulate broadband.

How Comcast Pays for Bandwidth

comcast-truck-cmcsa-cmcsk_largeToday’s blog is more about Comcast’s data caps. I recently saw a quote from Brian Roberts, the Comcast CEO during an interview by Business Insider. When asked about the data cap trials he said the following:

We don’t want anybody to ever not want to stay connected on our network, but just as with every other thing in your life, if you drive 100,000 miles or 1,000 miles, you buy more gasoline. If you turn on the air conditioning to 60 vs. 72, you consume more electricity. The same is true for usage, so I think the same for a wireless device. The more bits you use, the more you pay.

He is basically saying that it costs Comcast more to buy Internet bandwidth for customers who use more bandwidth. Certainly his first example means that – you certainly must buy more gas to drive a vehicle more miles. Is this a good analogy? For it to be true Comcast would have to be buying raw bandwidth each time a customer uses the Internet – this would mean when you download something at your house that Comcast is somehow buying more bandwidth from the big Internet spigot.

But that’s not how it works. While Comcast is really big, they are not one of the companies that owns the Internet, so they must buy bandwidth just like any other ISP. So how do ISPs buy Internet access? They buy it with two cost components – transport and raw bandwidth. Transport is the cost of getting the bandwidth from one of the major Internet POPs to a market. At Comcast’s size they either have a direct physical presence at each major Internet POP or they have an arrangement with some carrier who does. Due to their sheer size, I have to imagine that Comcast’s cost for transport on a per-megabit basis is lower than anybody else in the industry other than maybe AT&T, who is one of the owners of the Internet structure.

Transport can be a major cost for an ISP that operates a long distance from a major POP. I have small ISP clients that spend between $10,000 and $20,000 per month on transport, which is a lot if you only have a few thousand customers. But for Comcast this cost has to be miniscule on a per customer basis. And the cost is fixed. Once you buy transport to a market it doesn’t matter how much bandwidth you shove through the pipe. So this cost doesn’t increase due to customer usage.

The other cost is to buy the actual Internet connectivity — an expense that is sometimes referred to as an Internet port. This is an electronic connection directly into the main Internet routers. My small clients pay anywhere from $1 to $5 per raw dedicated megabit per month for Internet bandwidth. Generally the more you buy the cheaper it gets. Again, one has to imagine that Comcast pays a lot less than my clients due to their huge size.

And even that cost can be significantly reduced by large ISPs like Comcast through peering. Peering is where a carrier like Comcast makes a direct connection to companies with a lot of Internet usage like Netflix or Google. From an economic standpoint, peering is essentially the sam as transport and bypasses paying for the Internet port. Any traffic that goes through the peering connection does not increase with a customer’s use of the bandwidth.

An ISP’s total cost for an Internet port is based upon the average of the busiest times of the month. For instance, a small ISP might use 500 raw megabits of aggregate usage on most evenings, but if their customers have a few nights per month where they use 700 megabits, then the ISP pays for that larger amount for the whole month.

The interesting thing about this pricing structure is that the ISP pays the same every day of the month whether the customers are using the data or not. The cost to Comcast wouldn’t change if any one customer, or even all of the customers in a city, were to use more data, as long as that usage doesn’t create a new fastest day of the month. From a cost accounting basis, this means that the cost of Internet bandwidth can also be considered as a fixed cost. There is nothing that any one customer, or even a fairly large pile of customers, can do to change the cost of the bandwidth to Comcast. It does not cost them more when you watch an extra movie.

The idea that Comcast is paying more for somebody who downloads 500 gigabits per month than somebody who uses half of that is false. If that 500 gigabit customer was to instead use zero bandwidth in a given month then Comcast’s costs wouldn’t change by a penny.

To put this into a different perspective, many of my clients have done the math and in aggregate their bandwidth costs them between $2 and $5 per customer per month depending upon how small they are. This is the average of transport costs, any peering costs and the Internet port costs. I would be surprised if a large ISP like Comcast is spending much more than $1 to $2 per customer per month for bandwidth. For them to charge $35 for going over their data cap is outrageous and that charge is 100% profit to them.

Roberts did make one true analogy when he compared his data caps to wireless carriers like Verizon and AT&T. They buy bandwidth in the same way that Comcast does, and so it also doesn’t cost them extra when a customer uses an additional gigabit on their cellphone. US wireless data is very close to the most expensive bandwidth in the world and you have to go to places like Africa to see bandwidth being sold for as high pf a price. The cable companies like Comcast have eyed the Verizon and AT&T wireless profits with envy and the data caps are nothing more than an attempt to greatly bump up what they can bill for data. They will be billing customers for going above an arbitrary cap, while in reality using more bandwidth doesn’t cost Comcast anything extra.