Taking the Long View

I have to wonder if this year is making the big ISPs rethink their business plans. For years, many big ISPs have foregone making long-term investments in broadband and instead chased the quick return.

A good example is CenturyLink. Before the merger with Level 3, the company had started a program to aggressively replace the copper plant in urban markets with fiber. At the peak, the company built fiber to pass 700,000 homes a year. This was not a surprising direction for a company that had its roots as a rural telco. The company’s executive team understood the huge benefits of building a business that spins off cash year after year. The company clearly envisioned growing to tens of millions of satisfied urban fiber customers.

But that strategy stopped dead cold when the company merged with Level 3. Within a year, the Level 3 team wrestled away control of the company, and I recall a quote by new CEO Jeff Storey that the business was no longer going to chase growth with ‘infrastructure returns’. Like most big ISPs, the new CenturyLink management started chasing the quick hit returns. For the last few years, CenturyLink press releases have highlighted the number of urban buildings that the company has added to the network.

And then the pandemic turned that strategy on its head. Everything I read in the business press says that many companies are not going to be returning in full force to downtown offices. The business real estate market is likely facing a bleak upcoming decade of vacant spaces until the industry right-sizes itself. The likely big downturn in the business real estate market also means a big downturn in the urban broadband market – a strategy for selling to downtown businesses can’t be as effective when the businesses are sending staff permanently home to work.

What is so odd about the strategy of the big ISPs is that they would love broadband customers that spin off big piles of cash. That is the precise business plan that most fiber overbuilders are chasing – make the big investment in fiber-to-the-premise, and then reap the rewards for decades with good cash returns.

Most big ISPs share the same philosophy as CenturyLink, where quarterly earnings and short-term investments are preferred over capital intensive but long-term steady returns. AT&T has built tiny clusters of fiber in markets all over the country instead of replacing all of its copper in its historic market. Verizon has always been the most disciplined ISP and has only built broadband in neighborhoods that meet its cost profiles. This has resulted in a hodgepodge of FiOS fiber scattered throughout the northeast. It’s hard to think the company won’t use this same discipline in building its fiber-to-the-curb wireless product – some blocks will get the new network while adjoining neighborhoods will be bypassed.

The only big ISP that seems determined to expand by grabbing every possible customer is Charter. The company has clearly recognized that it has won the battle against DSL and is becoming a de facto monopoly in most of its markets. But rather than sit back and collect cash, Charter is aggressively planning to grow to the outer suburban and even rural areas surrounding its markets. To some degree, Charter seems to be the only big ISP that is pursuing a strategy of maximizing economy of scale, where efficiency and profitability are maximized by getting as many customers as possible in a geographic region.

It’s interesting to compare AT&T and Charter. AT&T has a few thousand fiber customers in practically every market in the country. Altogether that adds to millions of customers on fiber, but it also means a widely dispersed technician base to service the customers. That’s drastically different than Charter which seems to want to serve every customer within big circles around major markets. My experience in building business plans tells me that the Charter strategy will be far more profitable in the long run.

None of this would matter much except for the fact that a handful of giant ISPs control most of the broadband customers in the country. The combination of Charter, Comcast, AT&T, and Verizon currently serve 72% of all broadband customers in the country. The decisions of these few big ISPs determines the only broadband options available to millions of us.

3 thoughts on “Taking the Long View

  1. Doug,
    Very insightful and look from the monopoly perspective. Another aspect to this is the way the ISP’s treat their employees. It appears that some treat their employees as a needless expense.
    Thank you

  2. There’s a book I’m very much enjoying now, Makers and Takers by Rana Fooroohar which traces aspects of the financialization of the US and US businesses. It has a few things to say here. Between 2000 and 2010, corporate capital investment decreased by 20% (40% in the auto industry).

    ISPs are desperate not to be labeled as “dumb pipes” but…they basically are…dumb pipes, at least as far as consumers are concerned. Bandwidth is a commodity. That makes all of the MBAs they employ look at kind of desperate ways to apply their MBAness.

    You get more profit from a dollar of cost savings than a dollar of additional revenue (even if you don’t have to make a capital investment to get it).

    One of the problems of having a commodity is that you can’t really offer bargains based on the idea that the bandwidth in the bad part of town is different from the bandwidth in the good part of town.

    The answer is, evidently someone thinks it’s more profitable to pull in on expenses and squeeze more money out of existing customers than to build out networks and compete. Someone thinks it’s more critical to protect existing price points than to build out networks and compete. Someone thinks it’s a better investment to lobby Agit Pai than to build out networks and compete. Someone thinks it’s a better investment to fudge bandwidth censuses and give low value return to federal money than to build out networks and compete.

    Someone thinks these decisions will going to produce a better net profit. I’ll bet there are spreadsheets.

    I think the question here is, what’s up with Charter? Not why aren’t the rest pursuing new customers or new territories. (Charter might be looking to get bought — I have no reason to believe that other than, when companies start doing weird things, lots of times that’s floating around in the background…)

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