DOJ Opposes AT&T / Time Warner Merger

The US Department of Justice filed an antitrust lawsuit against AT&T opposing the upcoming merger with Time Warner. The filing was surprising since it came so late in the merger process with the proposed merger on the table for much of 2017.

There are those saying that the DOJ objections are political, but the DOJ objections are all legitimate. Some of the major concerns of the DOJ include:

  • The merger could disadvantage AT&T rivals like Comcast and Charter by forcing them to pay hundreds of millions more for access to Time Warner programming.
  • The merger will slow the industry transition to online video through OTT and MVPD providers.
  • The vertical integration of last-mile network and programming gives AT&T the ability to create an unfair advantage over competitors.

I don’t think AT&T or anybody can dispute these objections with a straight face, and in fact, these findings are exactly what AT&T has in mind. AT&T already has major synergies between its various business lines. For example, the latest expansion of the AT&T FTTP network is largely taking advantage of fiber routes that are already in place to support the cellular network. It’s something that AT&T probably should have taken advantage of long before now. AT&T also is starting to take advantage of the synergies between its large acquired DirecTV customer base and its cellular products. It’s also the existing programming contracts of DirecTV that have enabled the successful launch of the MVPD offering DirecTV Now.

What this DOJ suit does not acknowledge is that AT&T is just trying to keep pace with Comcast. Comcast has already integrated programming with a last-mile network when the DOJ and FCC let the company buy NBC Universal in 2009. And now that Comcast is entering the cellular business I have a hard time seeing any real difference between what Comcast has today and what AT&T is trying to become with this merger.

The question that must be asked is if the DOJ is going to block the AT&T merger, then shouldn’t their next step be to ask for the divestiture of the Comcast business lines? If they are not going to pursue that, then this filing is largely political. But if the concern is monopoly abuse, as the DOJ document indicates, then they should pursue the only fully-integrated monopoly like the one that AT&T is asking to create.  In fact, Comcast has already gone far past where AT&T is headed and also bundles in smart home, security and even solar panels with other telecom services.

There is no question that Comcast, and AT&T, if they are able to complete the merger, will have a competitive advantage over any other last-mile network provider. Any other ISP that wants to offer video will have to pay significant amount of money to these two companies as part of competing with them. It can be argued that Comcast cable also has to buy the various Comcast programming – but the fact is that when calculating earnings all intercompany purchases cancel out, so whatever Comcast pays itself for programing is largely funny money. And this gives these big conglomerates an instant $5 / $10 advantage per month in costs over any rival.

It’s an interesting filing, and if the DOJ sticks to its guns this is likely to end up at the Supreme Court. My gut tells me that the courts are going to have a hard time saying no to AT&T for trying to create the same synergies that their primary rival Comcast already has.

We haven’t even seen the full power of the new Comcast bundle yet. The company has so many possible ways to tie down a customer and make it hard to break the bundle. Once Comcast has millions of cellular customers and millions of smart home customers they are going to be a fierce competitor against any newcomer. Combine this with the fact that they will soon have gigabit broadband available everywhere and they can match broadband speeds in any market (while keeping prices higher in non-competitive markets). That is the real power of the big conglomerate ISPs – the ability to compete unfairly in any one market by charging more elsewhere.

I doubt that the DOJ petition will hold up. We don’t really need another company with the same market power as Comcast – but stopping the second big conglomerate is already too late.

Net Neutrality – Time to Reassure Your Customers

The recent net neutrality decision by the FCC has created an amazing amount of fear for broadband subscribers who are worried that they will be losing access to popular aspects of the Internet. There is also general confusion in the public from numerous rumors circulating on social media – some potentially true and many others false.

And I think this worry and confusion creates a good opportunity for smaller ISPs to let customers know that you will continue to uphold net neutrality, even if it is no longer required. This is an easy pledge for small ISPs to make because it’s difficult for small ISPs to violate net neutrality rules even if they want to. The net neutrality rules were aimed at the largest ISPs, the ones that have enough market power to put pressure on web content providers, or ones that might implement intrusive requirements on customers.

It’s also a good time to tell customers of plans to continue to protect their privacy – something that the public probably associates with the net neutrality headlines. While the two topics are not the same, I am sure that many people equate net neutrality and privacy.

In the short run I recommend contacting customers and making a big splash about the topic. Perhaps send a heartfelt email or even mail a paper letter to customers that pledges a continuation of net neutrality and respect for customer privacy.

Small ISPs that are competing directly with the big ISPs also ought to consider making this one of the highlights of any sales or marketing campaign. This is a differentiation from the big ISPs that customers will value that really doesn’t cost a small ISP anything. It should be easy to promise not to block Internet traffic, throttle customer broadband speeds or force paid prioritization of Internet traffic. It also should be easy to pledge to not share customer data.

If the current reversal of the net neutrality rules lasts for a while (something I am doubtful about) this could get a little more complicated. I am positive, for example, that at some point over the next few years that bigger ISPs or data brokers are going to offer to pay small ISPs for access to customer data. Small ISPs ought to reject such offers because the benefit of maintaining customer privacy is worth more than payments from selling customer data.

I also suspect that small ISPs will eventually get offers to take part in programs or products that would violate net neutrality rules. You might be offered software that will create bundles of Internet products, like the ones likely offered by the big ISPs. You might be offered cheaper backhaul bandwidth that includes some blocking and prioritization of traffic. Again, my guess is that maintaining a totally open Internet product is worth more than can be gained by implementing such future products.

The big ISPs are unwittingly handing their competitors a chance to take the high road and it would be silly not to take advantage of this opportunity. I know that if I had an option to buy broadband from a small ISP I would jump at the opportunity as long as they were making this pledge. I currently have broadband from Charter. They haven’t said what they might have in mind due to the end of net neutrality, but I find it impossible to believe that they won’t copy things done by the other big ISPs that prove to be profitable. As a consumer my real fear about the end of net neutrality is that the public won’t be told what their ISP is doing. For example, you might experience slowdowns of some kinds of web traffic and not know that you were being throttled. The big ISPs are already quietly monetizing customer data.

Even if some of the net neutrality rules should be put back in place I think any marketing advantage from the topic will still favor small ISPs. Small ISPs will be able to claim for many years that you never lobbied to end net neutrality and you never violated customer trust, even after the net neutrality rules were killed.

Telecom Predictions for 2018

It’s that time of year to pause and look at what the next year might bring us. I see the following as the biggest telecom trends for 2018:

End of Net Neutrality Not a Big Deal. At least during 2018 we aren’t going to see the end of the Internet as predicted by many in the press and on social media. First, there are going to be a series of lawsuits challenging the FCC ruling, and ISPs are generally unwilling to do anything that might be changed by the courts. But I also think the big ISPs are unlikely to immediately do anything that will be unpopular with the general public. We might instead see subtle changes like more zero-rating that the public seems to favor. The big ISPs understand that this FCC ruling is immensely unpopular and they have to be worried about Congress or a new administration reversing a lot of the ruling. For now I think this means we won’t see any drastic changes in ISP behavior in the coming year. The big ISPs want the issue to quietly die away, and the best way for them to accomplish that is to not do anything unpopular right away.

Cable TV Declines Faster as a Product. We are seeing the perfect storm of events attacking the traditional cable market. First, programmers are raising programing rates to cable providers at historically high rates. It’s almost as if they want to get the last drop of profits out of the product before it wanes. This means another round of noticeably high cable rate increases – the primary reason that cord cutters cite for leaving traditional cable. We are also seeing a proliferation of alternate programming choices. The most popular cable networks are now available in lower-priced online alternatives. The growth in OTT alternatives has been significant in 2017 and in 2018 a lot more people are going to be lured into switching to one of the alternatives. The 3rd quarter of 2017 saw the cable providers lose a million customers and losses will accelerate in 2018.

Is 5G Hype or Real? In 2018 we are going to find out if the 5G hype is real. Verizon has been talking about rolling out a residential 5G broadband solution to 30 million homes, with a few specific markets identified in 2018. AT&T has been hyping the near-term roll-out of its AirGig 5G product. I think in 2018 we are going to get a look at how these technologies function in real neighborhoods and we’ll find out the real-life benefits and shortcomings of the technologies.

Networked WiFi Goes Mainstream. Poorly configured home WiFi networks are one of the major culprit for poor broadband experiences. Many homes have decent broadband connections but then lose all of the power by using a poorly placed single WiFi router. Many ISPs are now offering managed WiFi as a way to solve this problem. But there are also numerous inexpensive solutions available directly to consumers. Word of mouth about the benefits of networked WiFi are making this into the preferred home solution.

Voice Controls Become Practical. Until now voice control devices like the Amazon Echo have been novelties. But there are now practical applications with these devices that will make them go mainstream in 2018. Functions like simple web searches, home intercom systems, initiating phone calls or texts, controlling TVs and other devices along with the ability to play music everywhere is going to make most houses try the technology. This will be the year when a lot of people accept the idea of a voice interface to technology as an alternative to computers or smart phones.

Real Cellular Competition. The entrance of Comcast and Charter into the cellular markets is going to be significant. We also see T-Mobile increasing competitive pressure by bundling video with cell service. It’s clear that the cellular market in the US is fully saturated and that everybody has a cell phone. This all adds up to another round of price wars between cellular providers. It also means that the ‘unlimited’ plans introduced by the cellular companies in 2017 will quickly move from a novelty to the become the expected norm.

Explosion in Rural Communities Looking for a Broadband Solution. The digital divide between towns and rural areas is now obvious to everybody. Broadband has grown to become a necessity rather than a nice-to-have commodity. Rural citizens are demanding that their local governments help them find a broadband alternative. This movement is accelerated by the numerous success stories from proactive communities that have found a broadband solution. The most common market solution I see is public-private partnerships, but communities are finding other creative solutions. I also see numerous rural communities willing to talk about bringing public financing to help solve the problem. Expect numerous rural communities to start looking for solutions in 2018.

Why Not More Collaboration?

I recently was working with some electric cooperatives that collaborate to perform many of the routine functions for operating their companies. This is a fairly common business model for small electric companies, and many cooperatives and municipal electric companies collaborate together.

I’ve always wondered why smaller telcos and ISPs don’t work together more with their neighbors. I know of a few telco cooperatives that work together. There are also small holding companies around that own multiple small telcos that effectively force this structure on their companies. There is some small degree of collaboration for companies that belong to statewide fiber network groups, but this is usually fairly limited in scope.

What do I mean by collaboration? It means sharing the cost of performing the routine functions of operating an ISP to achieve efficiencies and savings. When I look at the companies that collaborate I see some of the following functions being done together:

  • Accounting. Collaboration means hiring fewer accountants and also saving money on accounting software.
  • Benefits Administration. Assuming that benefits can be aligned it’s far more efficient to share the cost of acquiring, monitoring and administering benefits.
  • ISP Functions. For companies that do ISP functions in house there are significant savings from sharing email platforms, security monitoring, spam filters, etc.
  • Legal. Some of the routine legal costs such as negotiating interconnection agreements, pole agreements, vendor contracts, etc. can be less costly when done for several companies at the same time.
  • Software Sharing. There can be significant savings on software licensing fees for companies acting as one entity.

There are also possible economy of scale savings from collaboration, where looking like a larger company can save money. Almost everything larger ISPs do is cheaper per customer than for smaller ISPs, so collaboration can let a group of companies look like one larger entity. Possible collaborative functions include:

  • Billing. Larger ISPs are able to perform billing functions in house at a lower cost than outsourced services.
  • Engineering. Smaller companies working together can probably hire an engineer or two for a lower cost than each of them outsourcing the function.
  • NOC Monitoring. Companies working together might be able to afford 24/7 NOC coverage for less than what they are paying today for partial coverage.
  • Help Desk. Collaborating on a shared help desk can also mean better coverage hours for a lower cost per customer.
  • Purchasing. Collaborating can mean using a full-time buyer, which is more efficient that using mainline employees to do the purchasing function. There are also economy of scale savings from buying some network components and other supplies together.
  • Dispatch / Fleet Management. Again, looking like a larger company should equate to savings on vehicle maintenance and insurance. There is also the opportunity to afford a better fleet management tool to reduce windshield time for technicians.
  • Customer Service. I don’t know many telcos that share the customer service function, but I see electric companies with significant savings from operating one group for multiple companies.

Finally, there are significant savings of the collaborating companies that have physically interconnected networks:

  • Voice Switch. The savings per customer are significant for sharing one voice switch for multiple companies. There is also a significant potential savings for switch functions like SS7, database management, interconnection trunks, wholesale long distance, etc.
  • Cable TV Headend. There is also significant savings from sharing one cable headend.
  • Major Network Routers. The major core electronics used to power FTTP or other kinds of networks can be used to support multiple companies if all are on the same network using the same technology.
  • Internet Backbone. Companies acting as one can buy a larger broadband data pipe for a lower cost per gigabyte and well as more easily establishing redundant routes to the Internet.

Neighboring ISPs can gain some of these savings by simply working together. But many of the savings (such as the economy of scale savings) probably require a more formal corporate structure. A common structure in the electric world is to create a service corporation that is owned by, and works for all of the owner / partners. With margins tightening across the small ISP industry this is something that any small ISP ought to think about.  Even if you don’t jump in and share everything, starting with a few functions can make a significant difference to bottom line.

Net Neutrality – What Happens Next?

I’ve been thinking some about what happens next in the industry with the fall-out from the FCC’s decision to kill net neutrality and to eliminate Title II regulation. It seems like the big ISPs have gotten everything they ever wanted in terms of having unregulated broadband. What might happen next?

I expect there to be little change in the industry in the short run. The FCC just made the ruling and there already looks like there will be a number of lawsuits against the order. It’s not unusual for courts to put FCC orders on hold until lawsuits make it through the legal system and this probably won’t be much different.

But even without the lawsuits I don’t expect to see the big ISPs make any drastic changes in the next year. There is a huge public furor over this ruling and my guess is that the ISPs don’t want to roil the public for a while. The end of net neutrality will allow the ISPs to make all sorts of changes the public will hate, such as big price increases for broadband or the introduction of draconian data caps. But I’m guessing that the ISPs are not going to do anything too drastic until the topic has settled in the public mind.

The ISPs also still have to worry about regulatory push-back. There is a good possibility over the next few election cycles that Democrats take back part or all of Congress or the administration, and reversing what this FCC just did is probably high on the Democratic wish list. Net neutrality is popular across the political spectrum and an administration that puts it back in place will likely get lauded by the public.

I think the big ISPs really made a tactical error in pushing to totally deregulate broadband. It’s easy to think that the net neutrality rules have only been around for a few years since the latest iteration was just approved in 2015. But the FCC has been discussing net neutrality since 2005 and to a large degree the big ISPs didn’t do anything too outrageous during those many years so as to invite strict regulations they didn’t want. I think the ISPs would have been far better off to have compromised and put in place a new set of rules that a future FCC might still keep.

For instance, they could have changed the rules to give them safer pricing flexibility, which is what I think they most want. But they could have kept the three basic net neutrality principles in place to mollify the public and regulators. But honestly, I don’t think big corporations are capable of constraint. The big ISPs got a friendly FCC and it seems they are going after everything on their wish list, with Title II regulation just one item on the longer list.

But over time, if some future FCC or Congress doesn’t put some version of net neutrality back in place then I think you will see all of the many things that the public feared start to come into play. There will be a lot of zero rating with content bundled with bandwidth. The ISPs will put pressure on big content providers to pay for premium access, to the detriment of smaller players and start-ups. We’ll see significant price increases and billing practices like data caps that make the ISPs more money.

And a lot of this isn’t going to happen due to large strategic decisions by corporate management at the ISPs. That’s not how huge corporations work. A lot of changes that would have violated the previous net neutrality rules will actually come as the result of lower-level management making decisions. Marketing people will promote bundled packages if they think it will increase sales. Divisional VPs will negotiate tough terms with content providers if doing so will increase their bonuses. In the recent past one has to think that many discussions of new ideas inside of ISPs included somebody asking if the new ideas violate net neutrality. But with net neutrality out of the picture that question will no longer be asked and the desire for bonuses and profits will drive the people at the ISPs to make decisions that are good for the company while not necessarily good for the public or the industry. That’s the main reason why we regulate big companies, because they have a natural tendency to favor profit over almost everything else.

My own personal prediction is that we are not done with net neutrality and that a future administration is going to bring it back in some manner. And that is probably the worst possible outcome for the big ISPs. It’s ironic that the CEOs of all of the big ISPs said that they could live with the three principles of net neutrality – and I believed them. But, when they were given the chance, they still could not help themselves from lobbying to kill it. Uncertainty is far more costly to big corporations than regulatory rules they don’t like. And my guess is we might not be done with this topic for quite some time. I just hope we don’t get into a pattern of yoyo decisions out of each future administration.

What’s New With Fiber Optics?

The companies that operate the long-haul fiber networks say that we are in danger of running out of bandwidth capacity on the major fiber routes between major Internet pops. The capacity of the current fiber optics along with the number of pairs of fiber between pops creates a finite maximum amount of bandwidth that can be transmitted – and with worldwide bandwidth usage still growing exponentially it’s not hard to foresee exhausting the capacity on key routes. We can always build new fibers, but it’s hard to build enough fibers anywhere to keep up with exponential growth.

But as expected, there are a number of new developments coming out of research that will probably let us stay ahead of the bandwidth curve. There is always a time delay between lab and manufacturer, but it’s good to know that there are breakthroughs on the way.

Frequency Combs. Engineers at San Diego’s Qualcomm Institute have developed a technique that could significantly improve the throughput on long-haul fiber routes. Today’s fiber technology works by transmitting multiple separate ‘colors’ of light operating simultaneously at different frequencies. But as more frequencies are jammed into a single fiber there is an increase in crosstalk, or interference between frequencies. This interference today limits the ‘power’ of the signal transmitted through a single fiber.

The Qualcomm engineers have developed a technique they are calling frequency combs. This technique grooms the outgoing light signal of each frequency so that the downstream interference is not random and can be predicted. And that is allowing them to then use an algorithm at the other end to detangle and interpret the scrambled data.

In a test this technique has created remarkable improvements. The engineers were able to increase the transmit power of the signal by 20-fold and then transmit the signal for 7,400 miles without the need for an optical regenerator. There is still work to be done, but this technique holds out great promise to be able to boost bandwidth on existing fibers.

Corkscrew Lasers. A team of scientists at the University of Buffalo’s School of Engineering and Applied Science have developed a new technique that can also increase the amount of bandwidth in a given fiber. They are taking advantage of a phenomenon that has been known for decades that takes advantage of the angular momentum to create what is called an optical vortex. This essentially creates the equivalent of a funnel cloud out of the light beam, which allows piling on more data onto a laser data stream.

For years it was always thought that this phenomenon would be impossible to control. But the team has been able to focus the vortex to a small enough point that can interface with existing computer components. The upside is that the vortex can transmit about ten times more data than a conventional linear laser beam, providing a boost of a full magnitude in laser power.

Air Fiber. A team at the University of Maryland has been able to create fiber-like data transmission feeds without using fiber. They are using a short powerful burst of four focused lasers to create a narrow beam they are calling a filament. The hot air expands around this filament creating a tube of low density air. This filament has a lower refractive index than the air around it and creates an effective mirrored tube – that can act just like a fiber optic filament.

The team has demonstrated in the lab that shooting four lasers to create the filament, followed by a short laser burst down the center of the filament, creates a temporary data pipe. The filament lasts only one-trillionth of a second, but the ensuing data beam lasts for several milliseconds – enough time to create a 2-way transmission path. The system would be used to create repeated filaments and this create a fiber path through the air.

For now the team has been able to make this work in the lab over a distance of a meter. Their next step is to move this to 50 meters. They think this theoretically could be used to transmit for long distances and could be used to create data paths in places where it’s too expensive to build fiber, and perhaps to transmit to objects in space.



3Q 2017 Broadband Growth

Last Friday’s blog asked if we are nearing the top of the market in terms of broadband penetration. Overall households with some sort of Internet connection have only grown from 83% in 2012 to 84% today, with most of the customers now served with a broadband connection instead of using slower dial-up or satellite. Following are the numbers showing the new broadband connections of the major ISPs during the recent third quarter of this year:

 2Q 2017 3Q 2017 Change
Comcast 25,306,000 25,519,000 213,000 0.8%
Charter 23,318,000 23,603,000 285,000 1.2%
AT&T 15,686,000 15,715,000 29,000 0.2%
Verizon 6,988,000 6,978,000 (10,000) -0.1%
CenturyLink 5,868,000 5,767,000 (101,000) -1.7%
Cox 4,845,000 4,860,000 15,000 0.3%
Frontier 4,063,000 4,000,000 (63,000) -1.6%
Altice 4,004,000 4,020,900 16,500 0.4%
Mediacom 1,185,000 1,194,000 9,000 0.8%
Windstream 1,025,800 1,017,400 (8,400) -0.8%
WOW 727,600 730,000 2,400 0.3%
Cable ONE 521,724 519,062 (2,662) -0.5%
Fairpoint 307,100 301,000 (6,100) -2.0%
Cincinnati Bell 304,193 307,900 3,707 1.2%
94,149,417 94,532,262 382,845 0.4%

These figures come from reports published each quarter by Leichtman Research Group. These large ISPs control over 95% of the broadband market in the country – so looking at them provides a good picture of the industry. Not included in these numbers are the broadband customers of the smaller ISPs, the subscribers of WISPs (wireless ISPs) and customers of the various satellite services. Cable companies still dominate the broadband market and have 60.4 million customers compared to 34.1 million customers for the big telcos.

What do these numbers tell us about broadband growth? If you take the numbers at face value, a growth of 0.4% for the quarter would extrapolate to an annual growth rate over 1.5%, and would suggest that the market is still growing. But is it?

Within these numbers are broadband customers from new housing units. The country is expected to add at least 1 million new homes and apartment units this year, and if the ISPs sell to 84% of them, then 210,000 of the new broadband customers are due to the new housing units and don’t represent an increase in overall market penetration rate for the sector.

Further, we are now in the second year of the FCC’s CAF II program. The telcos in the above list are being given over $8 billion over six years (and 2017 is the second year) to bring broadband to over 5 million rural households. By now these funds should be adding new broadband customers for CenturyLink, AT&T, Frontier, etc. I haven’t seen any reports yet from the FCC quantifying the customer added as a result of CAF II, but it’s not hard to think this won’t mean something like 175,000 new broadband customers per quarter over the last five years of the program.

Assuming that CAF II customers are now coming on board, then the whole industry growth can be attributed to either broadband for new housing units or new rural households getting broadband for the first time. And that would validate that the broadband industry is not growing much otherwise.

The numbers also tell us a few more things. For example, in urban areas the cable companies are still wooing away DSL customers. But even that is slowing down. Cable company customer additions for the 3Q are 540,000, down from 780,000 a year ago. For the first three quarters of 2017 combined the cable companies have added about 2 million customers while the telcos have lost 430,000 broadband customers.

Cable Customers 3Q 2017

I saw a headline the other day where TiVo said that cord cutting was slowing down, so I thought I’d take a fresh look at the subscriber numbers for the last quarter for the largest cable providers. These numbers come from Leichtman Research Group which has been tracking the industry for a number of years. The following numbers compare the industry for performance in just the third quarter of 2017.

2Q 2017 3Q 2017 Change
Comcast 22,516,000 22,390,000 (126,000) -0.6%
DirecTV 20,856,000 20,605,000 (251,000) -1.2%
Charter 17,071,000 16,982,000 (89,000) -0.5%
Dish 11,892,000 11,668,000 (224,000) -1.9%
AT&T 4,666,000 4,648,000 (18,000) -0.4%
Cox 4,245,000 4,220,000 (25,000) -0.6%
Verizon 3,853,000 3,718,000 (135,000) -3.5%
Altice 3,462,700 3,430,200 (32,500) -0.9%
Frontier 1,007,000 981,000 (26,000) -2.6%
Mediacom 829,000 823,000 (6,000) -0.7%
Cable ONE 297,990 287,260 (10,730) -3.6%
90,695,690 89,752,460 (943,230) -1.0%

These companies represent roughly 95% of the entire cable market, so these numbers tell the story of the whole market. From what I can see from many of my clients, many small cable companies are likely doing even worse than these numbers.

It’s hard to see a slowing of cord cutting in these numbers. The loss of 943,230 customers from the quarter is the largest loss to date for a quarter. And that number doesn’t tell the whole story. One has to assume that the cable providers also picked up new subscribers due to new housing units being built. The housing market is still going strong and it’s likely that at least 250,000 new living units were added to housing inventory in the third quarter. Factoring in that number means the actual loss of cable customers is closer to 1,130,000 for the quarter.

Leightman does note that two of these providers offer an OTT offering. Sling TV, operated by Dish Networks added 240,000 customers for the quarter. And DirecTV Now added another 296,000 customers for the quarter. But these are cord cutting products and those new customers have likely dropped traditional cable. It’s also been widely speculated that there is very little profit in the OTT offerings since the providers are still holding prices low to attract customers.

The rate of loss is definitely increasing. For example, the loss for the traditional cable companies in this group was 290,000 customers for the quarter, compared to a loss of 90,000 customers in the same quarter of 2016. The loss for the satellite providers for the third quarter of 2017 was 475,000 customers compared to a gain of 5,000 customers in the same quarter a year ago.

These losses feel even more significant when viewed on a daily basis. The industry lost almost 12,400 customers per day during the quarter. That certainly must be burning up the phone lines to customer service.

Not shown in these numbers are cord shavers – households that are downgrading to smaller cable packages. None of these companies report that statistic, but we can see the impact of cord shaving by looking at the number of paid customers for the various networks – and just about every channel is in freefall.

There is no way to look at these numbers without seeing an industry in crisis. The cable companies have compensated for some of these losses through rate increases, but that is likely to drive even more households to finally cut the cord.

FCC and FTC Divvy up Broadband Regulation

The FCC voted last Thursday to reverse the Net Neutrality order that had been put into place by the previous Tom Wheeler FCC. This action eliminates the use of Title II to regulate broadband. In order to get rid of Title II authority the FCC believes it has to relinquish some of its regulatory role today and to move certain regulatory functions to the Federal Trade Commission. To effectuate this shift the two Commissions have agreed to a Memorandum of Understanding (MOU) that defines the ongoing regulatory and enforcement responsibility of each agency related to broadband.

The Federal Trade Commission will renew investigating ISPs as they do other large businesses in the country. They will investigate complaints made against the companies for practices that the agency deems to be unfair or deceptive. The agency has undertaken this kind of investigation in the past and has cited and fined a few big ISPs for various deceptive pricing and billing practices. In this role the FTC could elect to tackle topics that were part of net neutrality such as anticompetitive blocking of Internet traffic, throttling customer broadband or paid prioritization practices. While the three legs of net neutrality would not explicitly be part of the FTCs responsibilities, they should be free to investigate practices that harm the public. The FTC would also take back jurisdiction over ISP privacy practices.

It appears that dropping the Title II regulatory regime allows the FTC to again regulate ISPs. Since the FCC approved Title II regulation, the big ISPs have argued that the FTC is prohibited by its charter to regulate common carriers. But since broadband providers are no longer considered to be common carriers it would seem to open the door to the FTC again.

The big difference in a shift to FTC regulation is that anything they do is done retroactively. They look at consumer complaints and then prosecute the worst abuses they find in multiple industries. But their rules often come years after abuse by companies and their rulings only generally affect one company at a time. Other ISPs might shift behavior due to an FTC enforcement action, but they are not required to do so. This is a drastic change from having a set of proactive regulations in rules in place that define acceptable ISP behavior.

The FCC will be giving up most regulatory oversight of broadband. There are still a few broadband rules that fall under FCC jurisdiction. For example, there are still rules in place that require ISPs to disclose information about their products, data speeds, etc., to customers. The FCC will still be monitoring and regulating these notices. There are also regulations that will remain in place because they were put in place by laws that can’t be reversed by the FCC. As an example, the FCC will still oversee CALEA compliance, where ISPs are required to provide access to broadband records to law enforcement.

Probably the biggest regulatory gray area left is cellular broadband. While broadband in general is now largely unregulated there are still numerous regulations about cellular service that remain in place. We’ll have to see how the FCC deals with any conflicts between old cellular rules and their desire to unregulated broadband.

To a large extent there will be little regulation of broadband and it is now an unregulated business line. This is a bit ironic in that broadband has grown to become the most important telecommunications product, while the many regulations on the waning product lines of telephone and cable TV still remain in place.

The FCC acknowledges that its technical staff best understands the ISP industry and has promised in the MOU to make FCC staff available to the FTC as needed. It will be interesting to see how that works in practice since some of the FTC investigations drag on for years. I foresee budgetary issues making major collaboration impractical.

The bottom line is that this MOU makes it clear that broadband is largely deregulated. The FTC can step in and punish ISPs that engage in fraudulent and unfair practices. But otherwise nobody will be monitoring or enforcing any regulations on broadband.

Are We at the End of Broadband Growth?

A recent report by the Leichtman Research Group looks at overall historic broadband penetration rates. In looking at the results I immediately asked the question if we have topped out with US broadband penetration rates.

The study shows that 82% of homes now have a home broadband connection. Another 2% of homes get an Internet connection from other source like dial-up or satellite, meaning that the overall number of households with some kind of home broadband connection is 84%.

But compare that to 2012. In that year 76% of homes had a home broadband connection while 7% got broadband in some other matter – a total market penetration in 2012 of 83%. This means that the composite growth of homes that have added broadband from 2012 until now is only 1% (84% compared to 83%)

During that time the big ISPs have all continued to show broadband growth. But these numbers show that the growth of broadband came from customers dropping dial-up or other slower forms of broadband.  But the big question that is raised is if the 84% overall Internet connectivity is close to a full penetration rate. If so this raises significant questions about the future of the ISP industry.

The report does suggest that there is possibly more room for industry growth – but only if we can find a way to solve the digital divide. The report shows that 91% of homes with household income above $50,000 have landline broadband compared to only 72% for homes making less than $50,000. That would suggest that the overall demand for broadband is probably closer to the 91% experienced by higher-income homes.

Numerous surveys have shown that low income homes without broadband have always cited high prices as the reason they don’t have broadband. It possible that the broadband penetration for lower-income homes might drop as the telcos begin the promised phase-out of DSL, which generally has been the low-cost broadband alternative in most markets. But these numbers also suggest that an ISP that can profitably offer a low-cost broadband alternative might have a sizable potential market.

Finally, the study looks at cellular broadband. It shows that the percentage of households that sometimes use cellular data to connect to the Internet has grown from 44% in 2012 to 75% today. 68% of households today use both cellular and landline Internet connections.

Other studies have shown that there is a small, but growing segment of the population that only uses cellular data. This tends to be younger people who value mobility over broadband speeds, or low-income households that can’t afford a landline alternative. To some extent the growth in the use of cellular broadband is probably at least partially responsible for holding down the overall growth of landline broadband connections. In economics terms there is some segment of customers that view cellular data as a reasonable substitute for landline broadband, and who are happy with only the cellular connection.

None of these numbers are a surprise to the big ISPs which track these statistics closely in each market. But the numbers are cause for alarm. Once the broadband market reaches full market penetration then there will be no overall growth in the industry in terms of adding net new broadband customers, at least beyond the rate of overall household growth.

The cable companies are still enjoying a boom related to their ability to convert customers from DSL. But the telcos have begun to fight back by building fiber-to-the-home. They are also planning to start deploying more fixed wireless connections using 5G. In at least some markets broadband is going to get a lot more competitive.

The overall broadband market is going to change and become more like any mature market when overall growth stops. This is pure economics. The market changes drastically if an ISP can only grow by taking customers away from other ISPs. We already know what that looks like by observing the marketing wars between the cellular carriers.