Competing Against Big Cable Companies

I’m asked at least twenty times a year how a small ISP can compete against the big cable companies. The question comes from several sources – a newly-formed ISP that is nervous about competing against a giant company, a rural ISP that is entering a larger market to compete, or investors thinking of funding a new ISP. These folks are rightfully nervous about competing against the big cable companies. Comcast and Charter together have roughly 55% of all broadband customers in the country, so the assumption is that they are formidable competitors.

It’s more realistic to say that they are decent competitors. They have slick marketing materials to try to lure customers. They have persuasive online marketing campaigns to snag the attention of new customers. They have good win-back programs to try to keep customers from leaving them.

But the two big cable companies have one obvious weakness – their prices are significantly higher than everybody else in their markets. Every marketing push by these companies involves giving temporary low special prices to lure customers – but those prices eventually revert to much higher list prices.

There is a great example of this in the market today. Both Verizon and T-Mobile have been adding large numbers of broadband customers to their fixed wireless FWA products that deliver home broadband using cellular spectrum. The two cellular companies have been highly successful in the marketplace, adding over 2.6 million new broadband customers through the first three quarters of 2022, while Comcast and Charter added about half a million customers during that same time period – mostly at the start of the year.

The FWA wireless product is clearly competing on price. The FWA broadband is not as fast or robust as cable company broadband, but the prices are attractive to a lot of consumers. For example, T-Mobile offers 100 Mbps broadband for a $50 monthly fee for customers willing to use autopay – a price T-Mobile says will never increase. This is far below the prices of the cable companies, which are in the range of $90 per month for standalone broadband.

I thought I’d take a look at how Comcast is competing against the lower-price FWA products. Comcast has two special offers in January 2023 for standalone broadband.

  • In a special offer that ends February 1, Comcast will provide 400 Mbps broadband for $30 per month, which requires autopay. The special price is under a contract for one year, but the special price extends for two years (meaning that if a customer terminates during the first year they have to pay for the remaining months of the contract). The special price for this product was higher in the past and likely has been lowered to compete against FWA.
  • The other offer is ongoing and doesn’t end on February 1. Comcast will provide 800 Mbps download speeds for $60 per month, which requires autopay. This is also a two-year term, with the first year under a contract.

Comcast then adds hidden fees to the special price. Unless a customer brings their own modem, Comcast charges $15 per month for a WiFi modem, a price that was increase by $1 this month. In many markets, Comcast also has data caps, and customers that exceed 1.2 terabytes of usage per month are charged $10 for each additional 50 gigabytes of data used in a month.

For the 400 Mbps product, a customer who brings a modem and who doesn’t exceed the data caps will pay $30 per month if using a bank debit and $35 per month with a credit card debit. Using the Comcast WiFi modem (which most customers do), raises the monthly price to $45 or $50 – right in line with the T-Mobile FWA product. But the kicker comes at the end of the term when the price, before a cable modem, jumps to $92 per month, and $107 with the modem. The result at the end of the 800 Mbps special is similar, with the price rising to $97 per month before a WiFi modem. Anybody buying the special today must also worry about whatever rate increases Comcast adds to the base broadband price by 2025.

The special prices offered by the big cable companies are alluring – customers can get a significant discount for a year or two. But inevitably, the prices will skyrocket – and in the case of the 400 Mbps special will more than double at the end of the discounted special.

ISPs that compete against the big cable companies have learned that all they have to do to compete is to offer fair prices and wait out the specials. Over time, customers who get tired of the pricing yoyo will come around. ISPs with fiber tell me that customers that come to them from a cable company almost never go back to cable. Customers appreciate fair pricing with no games and a reliable broadband product that delivers the promised speeds – that’s how you compete against the big ISPs.

Should You Be Benchmarking?

As recently as fifteen years ago, I was often asked by many of my clients to help them benchmark their ISP against their peers. By this, they wanted to know if they had the right number of employees for their customer base, if their revenues and expenses were in line with other similar ISPs, if they had too much expense from overheads, etc.

I always tried to help them, and I would gather statistics from other ISPs and share it with everybody who contributed information. But after a while, I found something that didn’t surprise me but which surprised most of my clients. It turns out that ISPs were not particularly comparable. They seemed to differ in most of the statistics that my clients wanted to understand. Interestingly, a lot of the folks with significantly different metrics considered themselves to be successful.

I started to dig into these differences, and that’s when I realized that, at least for relatively small ISPs, that benchmarking and comparing metrics between peers had little relevance to overall success. What I found on deeper examination was something I already knew but could now prove – that every ISP is unique.

Some of the reasons that ISPs differed in metrics was due to the way they purposefully operated.

  • ISPs differed significantly in their commitment to fix customer problems. Some of my clients didn’t react to customer outages after hours and on weekends, while some had a philosophy of not going home for the day until customer issues were resolved.
  • Some clients purposefully kept functions in-house rather than outsource for a lower cost due to a commitment to keep jobs for long-time employees.
  • Some ISPs set rates as low as possible to benefit the public, while others strove to maximize profits.
  • Some of my clients used software to automate processes as much as possible, while others kept the same methods in place that had worked for decades.
  • Some clients spent extra money to have pension plans and top-notch health insurance for employees while others were less generous.
  • Some of my clients were fully leveraged with debt to take advantage of growth opportunities, while others took pride in being debt free.
  • Some clients served highly rural areas where a truck toll to visit any customer was a huge time-eater.

These kinds of differences make it nearly impossible to make a side-by-side comparison of two ISPs, even ones with the same number of customers.

There was a time when rural independent telephone companies shared so many common characteristics that it was possible to gather benchmarking data that they found useful. But once these companies started to build networks outside of the regulated core areas, the companies changed. Growth outside the company meant competing without subsidies and only tackling growth that looked both manageable and profitable.

Today there is such a wide variety of ISPs that it’s even more difficult to compare them. Is it even possible to compare an ISP associated with an independent telco, one started by an electric coop, one created by a municipality, and one that is an overbuilder not associated with any other business?

This is not to say that mall ISPs don’t have a lot to learn from each other – but benchmarking is probably the least useful approach to understanding the business. ISPs all benefit from comparing technical solutions, software systems, marketing techniques, and how they market against large competitors. But none of that is benchmarking and just means small ISPs benefit from sharing information with similar peers.

Should ISPs Consider Open-Access?

There are suddenly a lot of open-access networks springing up around the country. Traditionally, open-access networks have been built by local governments such as the PUDs in Washington, the small cities in Utah that are part of Utopia, or cities in states like Colorado. Today, there are also open-access networks being built by commercial network owners.

I’ve been asked by several ISPs if they should consider operating on an open access network. Like with any decision of this magnitude, there are no easy right or wrong answer, but instead a lot of pluses and minuses to consider. Following are a few of the most important factors to consider about operating on an open-access network.

Capital Expenditures. One of the primary reasons to think about using somebody else’s network is the savings from not having to fund and built a new network. For small ISPs without a lot of borrowing capacity, an open-access network might be one of the easiest ways to get more customers.

But there is a flip-side to not spending money on capital. If the ISP plans on eventually selling the business, there is a lot more long-term value created by owning a network than by riding somebody else’s. There might be far more corporate value created by building a small fiber network with a few thousand customers than by serving 10,000 customers on an open-access network. If you pursue open-access, it has to strictly be about the cash flow generated today rather than about the value created in the future.

Economy-of-scale. Another reason to consider operating on somebody else’s network is that anything that makes your ISP larger adds to economy-of-scale. There is a big benefit to spreading the costs of overheads like OSS/BSS systems and corporate staff costs over as many customers as possible. Any costs you can shuffle off to an open-access expansion should make your other markets more profitable.

But economy-of-scale savings can diluted if you decide to tackle a open-access network that is far away from your existing operations. It’s never as cost-efficient to open and operate in a new distant market compared to one that is next door.

Trust. One of the scary parts of being on an open access network is being captive to the processes and prices charged by the network owner. An ISP is taking a leap of faith that the network owner will always perform as promised.

If the network owner decides to increase wholesale rates, there is no option but to go along. While a rate increase would also apply to the other ISPs on the open-access network, it’s possible for rates to get too high compared to other competitors like the cable company.

It can also be a problem having to rely on somebody else’s processes. For example, in most open-access networks, the network owner builds new fiber drops and installs customer electronics. It can be devastating for a marketing plan if the network owner can’t deliver customer installations on time, or decides it has a limited budget to add more customers. An ISP is also a captive of all other processes of the network owner like trouble reporting and resolution, timely network upgrades, network monitoring, and the ordering process. Even if the processes are good today, the network owner can change the way they do anything. This is possibly the biggest reservation for an ISP that is used to working on its own network.

No Technology Advantage. It’s an odd situation for an ISP to be operating on a fiber network and yet have no technology advantages over many of your competitors. Every ISP on the open-access network has the identical capabilities as you. This means that an ISP on an open-access network must distinguish themselves through either price or customer service. Open-access can turn into a race to the bottom if one of the ISPs on the network decides to deeply slash prices.

This blog wasn’t meant to scare ISPs away from working on an open-access network. There are ISPs that are thriving in this environment. But it’s not for everybody, particularly for ISPs that want to control the customer experience from beginning to end.

Economy-of-Scale for ISPs

I’ve worked with a number of small communities that want to explore the idea of having a community-owned ISP. My advice to small communities is the same as with all clients – economy-of-scale really matters for ISPs.

Economy-of-scale is the economic term for describing how businesses get more efficient as they get larger. It’s fairly easy to understand, and the classic example is to look at the impact of the salary and costs of the general manager of an ISP. Consider the example where the all-in cost of salary and benefits of the general manager is $200,000 per year. If the ISP has 200 customers, that cost works out to $82 per month per customer – obviously impossible to cover. At 2,000 customers, that’s a cost of $8.33 per month per customer – probably doable, but a big strain on being profitable. At 20,000 customers, the cost is reduced to $0.83 per month – a cost that is easy to absorb. With a customer base of 200,000, this cost is only 8 cents per customer per month.

A large percentage of the costs of operating an ISP are fixed or nearly fixed. Any fixed cost acts in the same manner as the general manager’s salary. The larger the size of the ISP, the easier it is to cover fixed costs and the better the chance of being profitable.

It’s possible for a small ISP to break even, but doing so requires the operator to be extremely frugal – any unexpected expense can throw a tiny ISP into a loss. Operating a small ISP of a few hundred customers is best described as a labor of love – because it is not going to be profitable for the owner.

For many years I’ve said that the bare minimum number of customers to enable an ISP to be full-function was around 2,000. That’s enough revenue to cover the labor for a few employees, along with other operating expenses. An ISP with 2,000 customers still needs to keep an eye on expenses because it doesn’t take much to tip the business into losing money. However, with current inflation, I think the minimum size to be effective has probably grown closer to 3,000 customers.

In building business plans, I’ve always seen the real benefits of economy-of-scale kick in around 20,000 customers. That’s enough customers to be able to operate a full-function ISP that can deliver superior customer service. There is enough revenue to hire all of the needed staff and pay them well, including good benefits. ISPs smaller than 20,000 have to forego some of the benefits that come with size.

Interestingly, economy-of-scale doesn’t scale forever. In my experience in the industry, I see that ISPs of a certain size start getting less efficient. It’s going to be unique to the specific company, but ISPs larger than 200,000 or 250,000 start being less efficient.

I’ve always credited this with the phenomenon where the span of management control gets too broad. At some size, the core management team doesn’t know what is going on at the street level. When that happens, it’s inevitable to start seeing bureaucracy creep in, which is the curse of the giant ISPs. Local or regional management starts determining policies, often to the detriment of the overall business. The largest companies manage through a process of pitting regions against each other to earn bonuses. That’s far different than running an ISP with 20,000 customers. Almost all of the horror stories we’ve heard over the years about the poor treatment of Comcast customers can be attributed to regional managers who made cuts or implemented policies that benefitted their bonuses rather than benefitting the customers.

Try as they might, the giant ISPs are never going to have the same level of customer service as the smaller ISPs they compete against. Witness the many decades of duopoly competition between Comcast and Verizon FiOS. They are both big companies, and customers don’t love either of them in the way that I see customers being loyal to smaller ISPs.

Of course, size isn’t everything, and there are small ISPs who are terrible at the day-to-day operations of the business. Economy-of-scale refers to the scaling of costs and has nothing to do with the philosophy of how an ISP treats employees or customers.

My advice to any ISP with under 5,000 customers is to consider how much easier it would be to operate the company if it grew to 10,000 or 20,000 customers.

Subsidized Interest Rates

The recent increase in interest rates suddenly makes it more attractive to pursue subsidized government interest rates to build broadband. Meeting debt payments is one of the primary hurdles to launching a successful broadband expansion.

We’ve been lucky over the last decade that interest rates have remained historically low. At a few points, the Federal Reserve rate almost got to zero. In a cycle that I’ve seen many times during my career, businesses get so used to low interest rates that they begin believing that interest rates will stay low forever.

But historically, interest rates have risen and dropped in response to changes in the economy. Over the last decade, the federal government made the deliberate decision to keep interest rates lower than where the market would have normally taken them.

But this year, the reemergence of inflation has forced the Federal Reserve to raise its core federal funds rate several times, and it’s up to 2.5% after starting this year at around 0.25%. There are strong indications that the rate might be raised more, although some of the inflationary pressure is starting to ease. The Federal Reserve rate is important because it is the rate at which large banks borrow from the government, and so increases in the Federal Reserve rate translate instantly into higher bank loan rates and ultimately into higher municipal bond rates.

Suddenly, federally subsidized interest rates look attractive again. The primary federally subsidized interest rate for broadband comes from the Rural Utility Service (RUS) which is part of the USDA. The RUS has always had the ability to offer low-interest-rate loans for projects that hit its target profile of bringing broadband infrastructure to rural locations. The agency currently has several billion in available loans at its disposal.

There are a few other federal programs that can offer lower rates through loan guarantees. In these situations, a borrower works with a bank, and the loan repayments are guaranteed by a federal agency, which generally translates into a lower interest rate. The HUD 108 program can guarantee loans that are used to build infrastructure in areas with lower-than-average incomes. The SBA 504 Loan Program can guarantee loans to start-up businesses, with half of the loan coming from a bank and half loaned or guaranteed by the SBA. The USDA Business and Industry Guaranteed Loans (B&I) can be used to subsidize loans that spur economic development.

Many ISPs don’t like using federal loans for a number of reasons. Applying for federal loans requires a lot of paperwork and cost to prepare, and the loan approval process is not quick. Federal loans often come with harsher requirements for borrower surety, meaning a borrower often has to pledge the entire business to get the loan. Government loans often don’t mix well with other kinds of financing since the federal loan generally requires first priority for repayment. Federal loans sometimes restrict dividends from the loan project until the loan is retired. Finally, federal loans require more reporting.

But even with all of these restrictions, the lower interest rates start to look attractive when a project doesn’t pencil in at normal bank interest rates. An RUS loan at 2% might be worth all of the extra hassle if market interest rates are 5% or 6%.

I know many ISPs who purposefully weaned themselves from federal loans over the last decade to avoid the extra work and inconvenience. This was relatively painless when there wasn’t a big difference between bank rates and the interest rates offered by federal programs.

We have no way to know if today’s higher interest rates are a temporary blip or if interest rates will stay high and return to the traditional up-and-down fluctuation that has been more historically normal. One of the bets you’re making when you pursue a federal loan is that rates will stay high and that the benefits of the lower rates will provide a long-term advantage. ISPs all over the country are likely doing the math to consider the options, and I’m sure that in many of these deliberations that federal loans are back on the table.

The Work Force is Changing

McKinsey & Company recently published an article that explores the changes in the U.S. workforce. The bottom line of the article is that the pandemic gave people time to contemplate their personal and work lives, and a large percentage of Americans have decided to not go back to the kinds of jobs they held before the pandemic. McKinsey is calling this the Great Attrition, where millions of people have decided to retire early, take sabbaticals, start their own businesses, or start a new career.

This is reflected in a lot of statistics. There were a record 11.3 million jobs open at the end of May. After a huge number of people quitting their jobs in 2021, the percentage of people still quitting jobs is up 25% over historical trends.

McKinsey says that the current labor shortage is mostly for jobs that can be classified as traditional. People who are willing to take traditional jobs do so for the benefits, job titles, and the chance of long-term career advancement. The article postulates that the number of people willing to take traditional jobs that put the company first is dwindling. McKinsey doesn’t see that many big companies are changing the way they are recruiting – and this means there is a disconnect between what companies and potential employees are looking for.

Companies are mostly filling traditional jobs by luring people away from other companies, which is resulting in wage inflation but is not addressing the overall underlying number of people willing to take jobs they think will be unfulfilling.

McKinsey suggests that the long-term solution for companies to fill open jobs is to find a way to attract the 40% of workers that McKinsey classifies as non-traditionalists. That’s going to mean a big shift in the way that many businesses operate. Consider the following chart from the article that explains the difference between traditional and non-traditional workers.

The first column represents people who quit jobs between April 2021 and April 2022 but then took another traditional job. These folks look like traditional workers in that career development and advancement, adequate compensation, and meaningful work top the reasons why they took the new job. For the most part, these folks moved on to a company that offered them a better chance for career advancement. The one difference between this list and a list from five years ago is that even traditional workers now highly value workplace flexibility.

The second column represents the factors that non-traditionalists say might lure them to accept a traditional job. Topping the list as the most important reason is workplace flexibility, followed by good pay and meaningful work. The chance for career development and advancement is listed seventh for the reason to consider a job, below having a safe work environment.

The conclusion that can be drawn from this chart and the rest of the article is that building a long-term career at one company is no longer important to many people. People who are looking for long-term advancement will tolerate a work environment with an annoying boss or long hours if they think it puts them on the path toward advancement. But the growing number of people who view jobs untraditionally will likely bail on a company that doesn’t have a great work environment.

This is an important issue in our industry since telcos, cable companies, and other ISPs tend to offer traditional jobs with set work hours, decent wages, and okay benefits. At least historically, ISPs have not been known as places with a flexible work environment. Technicians and customer service reps work set hours. The business office is open at set times. Career advancement is possible, but it’s often a slow path that rewards staying with a company for many years until the bosses above retire.

The article suggests a number of different strategies that companies are starting to consider for filling open positions. One is to reach out to people who retired from a company to see if they can be lured back to work. Companies are looking for ways to become more flexible by allowing people to work from home or periodically take extended vacations.

One thing is for sure; this genie is not going back into the bottle any time soon. In an economy with more job openings than people to fill them, workers are currently in the driver’s seat. And unfortunately for many companies, that means they are not taking traditional jobs.

How Safe is Your Fiber Network?

There was a major attack launched against long-haul fiber networks outside of Paris, France on April 27 of this year. It appears that there was a coordinated attack by vandals to simultaneously cut three long-haul fiber routes. Fibers were cut with what seemed like a circular saw, and sections of fiber were removed to make it hard to make repairs. These were backbone fibers that were shared by multiple ISPs. A few ISPs lost service, and broadband access for almost everybody in Paris was slowed for a while.

The cuts were made at night, and in all three cases, the fiber was buried. There have been no arrests made, and no group ever claimed responsibility for the fiber cuts. But it’s obvious that whoever did this knew of the locations and purpose of the fibers.

There has been an uptick in attacks against communications infrastructure in France. In December 2021 the new outlet Reporterre documented more than 140 attacks in France against 5G equipment and related infrastructure during the year. This includes cutting cables, setting fire to cell towers, and even attacking telecom technicians. Attacks have decreased since the peak in 2020

The last major well-known attack on broadband infrastructure in the U.S. came on Christmas 2020 when a man blew up an RV parked outside of an AT&T switching center in Nashville. This seems to have been a case of mental illness, and police have never determined any motive or reason that AT&T was the target. The Department of Homeland Security issued an alert in the U.S. in May 2020 warning against likely attacks against cellular towers, related to 5G. There have been similar attacks in the UK and across Europe.

Regulators in the U.S. don’t widely publicize outages caused by vandalism, probably to not encourage copycats. In Docket FCC 21-99, the proposed rulemaking to improve network resiliency, the FCC noted the frequency of vandalism against U.S. networks. Carriers have always been required to disclose what the FCC defines as major outages, and the FCC noted that the year with the most attacks was 2016, with 1,079 reported acts of outages caused by vandalism. These attacks come in many forms, including gunshots, fires, and cable cuts.

ISPs are at a loss on how to protect infrastructure any better than it’s already protected. Most vital middle-mile fiber routes are buried, with the location of the routes not highly publicized. We put security fences and security cameras at cell tower sites and communication huts and buildings. But much of our vital infrastructure is located in remote locations – often on purpose. Nobody wants cellular towers or communication huts in residential neighborhoods, so carriers find out-of-the-way places to hide the infrastructure.

This is a warning for anybody building a new network to pay attention to physical security. In driving around, I see a lot of communication huts and cabinets sitting alongside the highway in plain sight. There are a few basics of physical security that every carrier should bake into the plans for a new network.

First, protect the perimeter around facilities. Put buildings and devices behind fences. Plant shrubs to keep infrastructure out of sight. Make it hard to park too near your facilities. And monitor your sites. Modern high definition or 4K cameras can capture the details needed to identify intruders. Cameras are now inexpensive and easy to connect where there is fiber. Connecting cameras to motion detectors can trigger recordings or security alerts when somebody is close to a facility. Consider a camera that includes license plate recognition software.

Planning for Churn

One of the factors that need to be considered in any business plan or forecast is churn – which is when customers drop service. I often see ISPs build business plans that don’t acknowledge churn, which can be a costly oversight.

There is a maxim among last-mile fiber networks that nobody ever leaves fiber to go back to a cable company network. That’s not entirely true, but it’s a recognition that churn tends to be lower on a last-mile fiber network than with other technologies. But customers leave fiber networks. Customers might die or move away. Customers might hit hard economic times and be unable to afford the connection.

I wrote a recent blog that asked if broadband is recession-proof. That was really asking if customers drop broadband when they lose jobs or see household income drop. The reality is that some folks have no choice but to drop fiber if things get tough enough. I’ve read several recent articles talking about how inflation in rents is likely to drive a few million people to become homeless – that might mean moving in with somebody else or becoming truly homeless, and broadband goes with everything else in these circumstances.

Churn varies a lot by community, and an ISP considering a new market should research the relocation rate. About 9.8% of all households move every year, or just over 15 million households. The percentage of people who move annually has declined steadily since the 1960s, when the rate was twice the current level. Renters move a lot more often than homeowners – In recent years, almost 22% of renters relocate each year compared to 5.5% of homeowners. ISPs all know that renters don’t only live in homes, and in many communities, a significant percentage of homes are rented. Younger families tend to move a lot more often than older ones. Only about 1% of households move between states each year. About 16% of military families move every year.

Every ISP has customers who die every year. Pre-pandemic, around 2.7 million Americans were dying each year. During the pandemic, in 2020 and 2021, that leaped to around 3.4 million people each year.

Churn can be a big challenge for an ISP. It turns out that most people call to arrange electric, water, and broadband services before they show up in a new community – and in doing so, they most naturally call the incumbents. Somebody new to a town likely won’t know about a smaller or local ISP. Since most people come from communities with little or no competition, they don’t even know it’s possible to use an ISP other than the big incumbents.

Churn can be expensive. There is an obvious loss of revenue when a customer leaves. More insidious is the stranded investment in drops and installation costs that are no longer generating revenue to cover the investment cost. One of the most surprising things that fiber-ISPs often find is that they must continue to spend money on selling and new installations each year just to stand still with the penetration rate.

I’ve seen ISPs with interesting strategies for dealing with churn. I have one ISP client in a college community that hangs out at the university with a booth and a sign that says gigabit internet. College students know what that means, and the ISP has been successful in maintaining a good penetration in off-campus housing. I have clients who pay commissions to real estate agents who refer new homeowners to them. It’s fairly routine to have arrangements with landlords and rental agents to have them get the word out about a broadband alternative to the incumbents.

Churn is one of the details of operating an ISPs that many new ISPs don’t get for a while. But it’s vital to have a strategy. It’s far cheaper to somehow catch a new customer when they move to town. It’s far less costly to catch the new tenant moving into a building that always has a drop.

When to Raise Rates

I’ve been getting the question lately about raising broadband rates. I don’t think there is a decision that smaller ISPs agonize over more than the idea of increasing prices to customers. The question is obviously being raised now due to inflation. Small ISPs see their costs increasing for fuel, materials, and requests from employees for salary increases – and ISPs see margins shrinking.

The current economy is particularly traumatic for newer ISPs who haven’t gone through an inflationary period before. It’s not particularly comforting to them to hear that over the life lifecycle of the economy that periodic bouts of inflation are normal. For most of my career, I’ve seen a recession and a period of inflation roughly every ten years. Inflation was never fun, but it was never unexpected.

We’ve just lived through one of the most unusual economic periods of the last few centuries. Everything we came to expect as normal, like periods of inflation and fluctuating interest rates has not happened for over a decade. The U.S. economy has never had such a stable and ideal period where the economic outlook was completely predictable – and good. Much of what we experienced came through government actions to suppress interest rates, to the point that the federal reserve interest rate even went negative for a short time.

ISPs worry about how customers will react to price increases. ISPs fear they will lose customers to competitors if they raise rates even a little. I can remember working with a client over twenty years ago who agonized for over a year about a $1 increase in telephone rates. They were sure that would drive consumers to drop telephone service in droves. It turns out that nobody dropped telephone service after the rate increase.

I hate to say this, but we can learn a lesson from the biggest ISPs. The big cable companies have been raising rates aggressively for the last five years – not in reaction to higher costs but strictly to drive up profits and improve stock prices. If you look back twenty years, you’ll see the all-in rates for broadband from companies like Comcast and Charter have risen at least $20 per month. The big ISPs are often sneaky about the increases and hide a lot of the rate increases in things like the cost of the broadband modem – but the checks that customers write have gone up every year.

A more salient example is the cellular carriers. Verizon and AT&T both recently announced rate increases – and these companies are now in a highly competitive market. Their reasoning is that they will lose some customers with a rate increase, but the gains from the customers that remain make the increase worthwhile. Small ISPs have to think of rate increases in the same way – you might lose a few customers, but the alternative is to do nothing and watch costs catch up to revenues.

Most other industries don’t agonize about rate increases in the way that ISPs do. If underlying costs go up, the makers of cereal, soap, and most things we buy raise rates to match. It’s always surprised me that very few small ISPs get this. Rate increases don’t have to be large, and an ISP might not be staring at a rate increase today if it had raised rates in prior years by a small amount each year when it was warranted. ISPs seem fixated on the concept that broadband prices must be at a value like $59.99 instead of $61.17. I really don’t know how that idea became so pervasive, but it’s a dumb one. Do ISPs really believe that consumers somehow equate $59.99 with fifty dollars and not sixty dollars? Because of this pricing paradigm, ISPs tend to wait until they have no choice and will raise the $59.99 rate to another magic number like $64.99 or even $69.99.

The need for rate increases during times of inflation is basic math. If your predominant product is broadband, and if costs are rising, you either raise rates or suffer a loss of margin – there isn’t any other alternative after you have done whatever belt-tightening you might do with expenses.

The only other alternative to rate increases is to sell a lot more broadband, but as broadband markets get mature, this gets to be harder to do. We are approaching a nationwide broadband penetration rate of 90%, and at some point, everybody who is willing to pay for broadband will have it.

My advice to ISPs has always been to make small rate increases over time, something small like 25 cents per year, rather than waiting until raising rates is a crisis and dramatic. But if you’ve waited until you have no option but to raise rates, then don’t be timid. Raise the rates to what is needed, and don’t be afraid to explain to your customers why you had to do so.

Do I Need to Insure My Network?

I periodically get asked about buying insurance to cover a new fiber network, mostly asked by investors or bankers who are working with a fiber network for the first time. The assumption is that there must be insurance to protect against damage to a fiber network because there is insurance for everything.

The surprising response I give them is to not try to buy insurance for a network. If you can even find an insurance company that will insure it, the premiums are going to be far larger than you can financially justify. The reality is that fiber and copper networks and electrical grids are not easily insured.

This horrifies a banker because they are lending money for an expensive asset. So how are network owners protected against losses?

Small damages to networks are generally recovered from the party that caused the damage. If a water company or electric utility cuts a buried fiber, that utility pays for the cost of the damage. This works the other direction also, and it’s rare to build a new fiber network without damaging a few other utilities during the process. This concept carries to everybody else. If a commercial truck knocks down a pole, the pole owner tries to get recovery from the insurance company of the truck owner. If a homeowner goes awry building a new driveway and badly damages the fiber network, that homeowner or his insurance covers the damage.

Big network damage is mostly covered by FEMA. If there is a big hurricane, ice storm, flood, fire, tornado, or other major events, then FEMA funding kicks in as long as the governor of a state has declared an emergency. I have had clients get fully reimbursed from FEMA in recent years for damage caused by the western fires, damage from a hurricane, and damage from a tornado. The FEMA paperwork process is not pretty, but the agency covers the cost of damage to utility infrastructure. In fact, the two biggest things that FEMA payouts often cover are damage to buildings and damage to utilities – that’s what gets damaged by storms.

There are other kinds of damage that don’t fit these two categories. For example, a small brush fiber caused by lighting might damage a short section of a pole line but not be large enough to kick in FEMA. Utilities are on the hook and self-insure for this kind of damage. They generally send out their own crews to get the damage fixed as quickly as possible, and nobody reimburses them for something like a local brush fire.

This is not to say that insurance isn’t important. Smaller ISPs generally buy insurance for all buildings, including all of the electronics inside them. You can get insurance to cover powered field huts. It’s important to make sure your insurance policy is specific and that you add new locations to your policy since property policies are often specific by the street address of the asset being insured. It’s not mandatory to buy such insurance, and many ISPs choose to self-insure. If you borrowed the money to build a network, you might be required to insure.

Note that most of the big ISPs don’t carry insurance. They self-insure because, over the long-run, it’s cheaper for a big telco or cable company to pay to repair things than it is to pay an insurance company every year. But smaller ISPs probably don’t have deep enough pockets to pick up the tab for replacing a central office or a NOC.

When insurance is optional, you should do the math. How do the premiums paid over some period like ten years compare to the cost of replacing the asset? That math gives you a numerical way to weigh the risk of insuring or not insuring a given asset.