Gaining Access to Multi-tenant Buildings

In 2007 the FCC banned certain kinds of exclusivity arrangements between ISPs and owners of multi-tenant buildings. At the time of the order, the big cable companies had signed contracts with apartment owners giving them exclusive access to buildings. The FCC order in 2007 got rid of the most egregious types of contracts – in many cases, cable company contracts were so convoluted that building owners didn’t even understand the agreements were exclusive.

However, the FCC order was still a far cry away from ordering open access for ISPs to buildings and there are many landlords still today who won’t allow in competitors. The most common arrangements liked by landlords are revenue share arrangements where the building owner makes money from an arrangement with an ISP. While such arrangements aren’t legally exclusive, they can be lucrative enough to make landlords favor an ISP and give them exclusive access.

WISPA, the industry association for wireless ISPs has asked the FCC to force apartment owners to allow access to multiple ISPs. WISPA conducted a survey of its members and found that wireless companies are routinely denied access to apartment buildings. Some of the reasons for denying access include:

  • Existing arrangements with ISPs that make the landlord not want to grant access to an additional ISP.
  • Apartment owners often deny access because wireless ISPs (WISPs) are often not considered to be telephone or cable companies – many WISPs offer only broadband and have no official regulatory status.
  • Building owners often say that an existing ISP serving the building has exclusive rights to the existing wiring, including conduits that might be used to string new wiring to reach units. This is often the case if the original cable or telephone company paid for the inside wiring when the building was first constructed.
  • Many landlords say that they already have an existing marketing arrangement with an ISP, meaning they get rewarded for sending tenants to that ISP.
  • Many landlords will only consider revenue sharing arrangements since that’s what they have with an existing ISP. Some landlords have even insisted on a WISP signing a revenue-sharing arrangement even before negotiating and talking pricing and logistics.

These objections by landlords fall into two categories. One is compensation-based where a landlord is happy with the financial status quo relationship with an existing ISP. The other primary reason is some contractual relationship with an existing ISP that is hard or impossible for a landlord to preempt.

The concerns of WISPs are all valid, and in fact, the same list can be made by companies that want to build fiber to apartment buildings. However, landlords seem more open to fiber-based ISPs since saying that their building has fiber adds cachet and is valued by many tenants.

WISPs sometimes have unusual issues not faced by other ISP overbuilders. For example, one common wireless model is to beam broadband to a roof of an apartment building. That presents a challenge for gaining access to apartments since inside wiring generally begins in a communications space at the base of a building.

The issue is further clouded by the long history of FCC regulation of inside wiring. The topic of ownership and rights for inside wiring has been debated in various dockets since the 1990s and there are regulatory rulings that can give ammunition to both sides of wiring arguments.

The WISPs are facing an antagonistic FCC on this issue. The agency recently preempted a San Francisco ordinance that would have made all apartment buildings open access – meaning available to any ISP. This FCC has been siding with large incumbent cable and telephone companies on most issues and is not likely to go against them by allowing open access to all apartment buildings.

The Digital Redlining of Dallas

In 2018 Dr Brian Whitacre, an economist from Oklahoma State University looked in detail at the broadband offered by AT&T in Dallas County, Texas. It’s an interesting county in that it includes all of the City of Dallas as well as wealthy suburban areas. Dr. Whitaker concluded that AT&T has engaged for years in digital redlining – in providing faster broadband only in the more affluent parts of the area.

Dr. Whitaker looked in detail at AT&T’s 477 data at the end of 2017 provided to the FCC. AT&T reports the technology used in each census blocks as well as the ‘up-to’ maximum speed offered in each census block.

AT&T offers three technologies in Dallas county:

  • Fiber-to-the-home with markets speeds up to 1 Gbps download. AT&T offers fiber in 6,287 out of 23,463 census blocks (26.8% of the county). The average maximum speed offered in these census blocks in late 2017 according to the 477 data was 300 Mbps.
  • VDSL, which brings fiber deep into neighborhoods, and which in Dallas offers speeds as fast as 75 Mbps download. AT&T offers this in 10,399 census blocks in Dallas (44.3% of the county). AT&T list census blocks with maximum speeds of 18, 24, 45, and 75 Mbps. The average maximum speed listed in the 477 data is 56 Mbps.
  • ADSL2 or ADSL2+, which is one of the earliest forms of DSL and is mostly deployed from central offices. The technology theoretically delivers speeds up to 24 Mbps but decreases rapidly for customers more than a mile from a central office. AT&T still uses ADSL2 in 6,777 census blocks (28.9% of the county). They list the maximum speeds of various census blocks at 3, 6, 12, and 18 Mbps. The average speed of all ADSL2 census blocks is 7.26 Mbps.

It’s worth noting before going further that the above speed differences, while dramatic, doesn’t tell the whole story. The older ADSL technology has a dramatic drop in customer speeds with distances and speeds are also influenced by the quality of the copper wires. Dr. Whitaker noted that he had anecdotal evidence that some of the homes that were listed as having 3 Mbps of 6 Mbps might have speeds under 1 Mbps.

Dr. Whitaker then overlaid the broadband availability against poverty levels in the county. His analysis started by looking at Census blocks have at least 35% of households below the poverty level. In Dallas County, 6,777 census blocks have poverty rates of 35% or higher.

The findings were as follows:

  • Areas with high poverty were twice as likely to be served by ADSL – 56% of high-poverty areas versus 24% of other parts of the city.
  • VDSL coverage was also roughly 2:1 with 25% of areas with high poverty served by VDSL while 48% of the rest of the city had VDSL.
  • Surprisingly, 19% of census blocks with high poverty were served with fiber. I’m going to conjecture that this might include large apartment complexes where AT&T delivers one fiber to the whole complex – which is not the same product as fiber-to-the-home.

It’s worth noting that the findings are somewhat dated and rely upon 477 data from November 2017. AT&T has not likely upgraded any DSL since then, but they have been installing fiber in more neighborhoods over the last two years in a construction effort that recently concluded. It would be interesting to see if the newer fiber also went to more affluent neighborhoods.

I don’t know that I can write a better conclusion of the findings than the one written by Dr. Whitacre: “The analysis for Dallas demonstrates that AT&T has withheld fiber-enhanced broadband improvements from most Dallas neighborhoods with high poverty rates, relegating them to Internet access services which are vastly inferior to the services enjoyed by their counterparts nearby in the higher-income Dallas suburbs…”

This study was done as a follow-up to work done earlier in Cleveland, Ohio and this same situation can likely be found in almost every large city in the country. It’s not hard to understand why ISPs like AT&T do this – they want to maximize the return on their investment. But this kind of redlining is not in the public interest and is possibly the best argument that can be made for regulating broadband networks. We regulated telephone companies since 1932, and that regulation resulted in the US having the best telephone networks in the world. But we’ve decided to not regulate broadband in the same way, and until we change that decision we’re going to have patchwork networks that create side-by-side haves and have-nots.

Broadband Price Increases

Back in late 2017 Wall Street analyst Jonathan Chaplin of New Street predicted that ISPs would begin flexing their market power and within three or four years would raise broadband rates to $100. His prediction was a little aggressive, but not by much. He also predicted that we’re going to start seeing perpetual annual broadband rate increases.

Stop the Cap! reports that Charter will be raising rates in September, only ten months aftertheir last rate increase in November 2018. The company will be increasing the price of unbundled broadband by $4 per month from $65.99 to $69.99.  Charter is also increasing the cost of using their WiFi modem from $5.00 to $7.99. This brings their total cost of standalone broadband for their base product (between 100 – 200 Mbps) with WiFi to $78.98, up from $70.99. Charter also announced substantial price increases for cable TV.

Even with this rate increase Charter still has the lowest prices for standalone broadband among the major cable companies. Stop the Cap! reports that the base standalone broadband product plus WiFi costs $93 with Comcast, $95 with Cox and $106.50 with Mediacom.

Of course, not everybody pays those full standalone prices. In most markets we’ve studied, around 70% of customers bundle products and get bundling discounts. However, the latest industry statistics show that millions of customers are now cutting the cord annually and will be losing those discounts and will face the standalone broadband prices.

MoffettNathenson LLC, the leading analysts in the industry, recently compared the average revenue per user (ARPU) for four large cable companies – Comcast, Charter, Altice and Cable ONE. The most recent ARPU for the four companies are: Comcast ($60.86), Charter ($56.57), Altice ($64.58), and Cable One ($71.80). You might wonder why the ARPU is so much lower than the price of standalone broadband. Some of the difference is from bundling and promotional discounts. There are also customers on older, slower, and cheaper broadband products who are hanging on to their old bargain prices.

The four companies have seen broadband revenue growth over the last two years between 8.1% and 12%. The reason for the revenue growth varies by company. A lot of the revenue growth at Comcast and Charter still comes from broadband customer growth and both companies added over 200,000 new customers in the second quarter of this year. In the second quarter, Comcast grew at an annualized rate of 3.2% and Charter grew at 4%. This contrasts with the smaller growth at Altice (1.2%) and Cable ONE (2%), and the rest of the cable industry.

The ARPU for these companies increased for several reasons beyond customer growth. Each of the four companies has had at least one rate increase during the last two years. Some of the ARPU growth comes from cord cutters who lose their bundling discount.

For the four cable companies:

  • Comcast revenues grew by 9.4% over the two years and that came from a 4.4% growth in ARPU and 5% due to subscriber growth.
  • Charter broadband revenues grew by 8.1% over two years. That came from a 3.2% increase in ARPU and 4.9% due to subscriber growth.
  • Altice saw a 12% growth in broadband revenues over two years that comes from a 9.8% growth in ARPU and 2.2% due to customer growth.
  • Cable ONE saw a 9.7% growth in broadband revenues over two years due to a 7.5% growth in ARPU and 2.2% increase due to customer growth.

Altice’s story is perhaps the most interesting and offers a lesson for the rest of the industry. The company says that it persuades 80% of new cord cutters to upgrade to a faster broadband product. This tells us that homes cutting the cord believe they’ll use more broadband and are open to the idea of buying a more robust broadband product. This is something I hope all of my clients reading this blog will notice.

Cable ONE took a different approach. They have been purposefully raising cable cable prices for the last few years and do nothing to try to save customers from dropping the cable product. The company is benefitting largely from the increases due to customers who are giving up their bundling discount.

MoffettNathanson also interprets these numbers to indicate that we will be seeing more rate increases in the future. Broadband growth is slowing for the whole industry, including Comcast and Charter. This means that for most cable companies, the only way to continue to grow revenues and margins will be by broadband rate increases. After seeing this analysis, I expect more companies will put effort into upselling cord cutters to faster broadband, but ultimately these large companies will have to raise broadband rates annually to meet Wall Street earnings expectations.

The Census Bureau and the Digital Divide

John Horrigan recently wrote an interesting article in The Daily Yonder that cited the results of a survey done by the Census Bureau. The agency conducts an annual survey called the American Community Survey (ACS) of 3.5 million households. In recent years the survey has included a few questions about broadband. The most recent ACS survey included questions about the digital divide. The results are at first glance a bit surprising.

The survey shows that more than 20.4 million homes have no broadband subscription at home. The survey shows that 5.1 million homes with no broadband connection are rural and 15.3 million homes are non-rural. Anybody who tracks rural broadband instantly doesn’t think those numbers can be right. However, the Census Bureau uses its own definition of rural which is different than the way most of the world thinks or rural versus urban.

According to the Census Bureau definition, rural is everything that is not urban. The Census bureau looks at the country by regional clusters of population. They count two kinds of urban areas – urbanized areas (UAs) are clusters with 50,000 or more people and urban clusters (UCs) which have between 2,500 and 50,000 people. Most of us would consider many of the UCs to be rural because within this category are a lot of rural county seats and the immediately surrounding areas. The Census statistics count a lot of people who live just outside of towns as urban when our industry considers homes past the last cable company connection as rural.

Horrigan interpets the results of the Census Bureau survey to mean that affordability is a bigger reason today than connectivity for why people don’t have broadband. He reached that conclusion by considering a recent Pew Research poll on the same topic that shows that more homes cite reasons other than availability as reasons they don’t have broadband.

The Pew Research survey asked households why they don’t have broadband. Respondents could supply more than one response.

  • 50% claimed that price was a major factor and 21% cited this as the primary reason.
  • 45% said that their smartphone could do everything they need.
  • 43% said they had good access to the Internet outside the home.
  • 31% said they couldn’t afford a computer.
  • Only 22% said that they couldn’t order a broadband connection, and only 7% said that was the primary reason they didn’t have broadband.

The Census Bureau also correlated their results with household income, and it’s not surprising that low-income households have a much lower broadband connection rate. The Census Bureau survey showed that only 59% of homes that make less than $20,000 per year have broadband. The subscription rate for all households making more than $20,000 is 88%.

Interestingly, the FCC doesn’t ask why people don’t have broadband. They interpret their mission to measure broadband availability and they count homes with or without broadband connections. This raises a few questions. What exactly is the FCC’s mandate from Congress – to get America has connection to reach the Internet or to make sure that America makes those broadband connections? I read the FCC’s mandate from Congress to have some of both goals. If availability is not the primary reason why homes don’t have broadband, the FCC might get more bang from their buck by putting some effort into digital inclusion programs. According to the Horrigan article, there are now more homes that can’t afford broadband than homes that don’t have a connectivity option.

This implies the need for a much-improved Lifeline Fund. The current Lifeline program is likely not making a big difference in digital inclusion. It provides a small monthly subsidy of $9.25 per month for qualifying households to save money on either their telephone bill or their broadband bill. It’s becoming increasingly hard to qualify for Lifeline because the big telcos like AT&T are backing out of the program. Some cable companies provide low-cost cable lines to homes with school students, but to nobody else – and cable companies don’t operate outside of towns.

In addition to a more effective Lifeline program, digital inclusion also means getting computers into homes that can’t afford them. I’ve written before about the non-profit group E2D that provides computers to school students in Charlotte, NC. Perhaps some of the Universal Service Fund could be used to assist effective groups like E2D to get more computers to more households.

My firm CCG conducts surveys and we’ve seen anecdotal evidence in a few recent surveys in poor rural counties that a lot of homes don’t buy the slow DSL option available to them because of price. These homes tell us that price mattered more than connectivity. I don’t have any easy answer for the best way to promote digital inclusion. But there are folks in the country who have made amazing progress in this area and perhaps the FCC should consider giving such groups some help. At a minimum, the FCC needs to recognize that now that most homes have a broadband connection that price is a major barrier for the majority of those who are not connected.

The Price Sensitivity of Broadband

I recently ran across a solicitation from an ISP looking to hire a consultant to help them quantify the price sensitivity of ISP products. For those of you not familiar with economics, understanding price sensitivity would help to accurately predict the number of customers that would abandon a product if prices are increased. Understanding price sensitivity would also allow an ISP to create a demand curve which could predict the number of customers a business should attract at a given price.

It turns out that it’s incredibly difficult and mostly impossible to define the demand curve for most products in the world, including broadband. This is not to say that price sensitivity isn’t something that everybody in the industry would love to know, and I’ve been asked this question for my whole career. Early in my career I worked on rate cases, where a telephone company sought permission from a regulatory body to raise rates. Telcos didn’t raise rates very often back in the 70s and there was always a lot of gnashing of teeth by management who worried that a few-dollar rate increase would lose customers. It turns out at a time when telephone service was a monopoly that almost nobody dropped service, but telco management didn’t trust this to be true.

Perhaps the easiest way to understand a demand curve is to look at one of the few examples where it might be measurable. Consider Uber in a big market like New York City. The company raises rates any time there are more requests for drivers than there are drivers. This happens at busy times of the day such as during the morning commute and during for events like a snowstorm. People in a major city have alternatives to Uber. If Uber is too expensive people can hail a cab, walk, or try another ride service like Lyft. By now, Uber has gathered enough data in a market like New York City that they probably can closely approximate the demand curve for their service in the city. However, even here, the demand curve will be specific to New York and not Uber anywhere else.

However, broadband (and most consumer products) don’t work that way. There are a few other economic terms that are relevant to the topic. One is substitution. Customers are a lot likelier to be price-sensitive if they have a product alternative they view as equal. There are portions of the cities with Google Fiber where the telco also built fiber and where the cable company upgraded to gigabit speeds. In these rare little pockets a customer might find the broadband alternatives to be pure substitutes for each other. In most of the country, broadband products are not considered as substitutes. For years we’ve seen millions of customers annually ditch DSL for cable company broadband and a lot of those households are likely to never consider moving back to DSL.

One of the key characteristics of an economic substitute is the ease of customers to change between similar products. It’s easy to pick a choice other than Uber. It’s not easy to change ISPs and households agonize over making a change. Changing to a new ISP might mean sitting at home for an afternoon waiting for an installation technician. It also means suffering through the call with the existing ISP as they try to keep you as a customer. It likely means driving electronics back to the canceled ISP.

One of the components needed to estimate a demand curve is getting a lot of data points. This is what is so awesome about Uber for an economist – they can get piles of data to understand how customers react to various pricing offers. Broadband doesn’t generate a lot of data points – ISPs don’t change prices very often. Even when they do change prices, ISPs don’t get the same kind of instant feedback that Uber gets over a price change. If an ISP raises prices, they are not going to be able to correlate this with a customer who gets around to dropping them six months later because of the increase.

To further complicate things, my firm does surveys and we’ve found that the majority of homes have no idea about what they pay for broadband. This is not surprising since in most markets over 70% of households have bundles that disguise what they are paying for each product. Customers also tend to remember the advertised prices, which they may or may not have ever received, instead of the actual prices they are paying. Customers are also regularly duped by deceptive billing practices where ISPs hide parts of the cost of a product in hidden ‘fees’.

I can’t blame a new ISP for asking the price sensitivity question, and it’s not an unreasonable question to ask. But I would venture to say that even Comcast and AT&T have little grasp over the demand curve for broadband. If they start raising rates every year as Wall Street is expecting, then over time the giant ISPs might start to get an tiny inkling of the demand curve – but even then, broadband is such a complicated product that predicting price sensitivity will always be a guess.

Cord Cutting Picking Up Steam

Cord cutting continued to pick up speed in the second quarter of this year. The numbers below come from Leichtman Research Group which compiles these numbers from reports made to investors.

The numbers reported are for the largest cable providers and Leichtman estimates that these companies represent 93% of all cable customers in the country.

The overall penetration rate of households buying traditional cable has dropped to 67.4% at the end of the second quarter of the year. The penetration rate had dropped just under 70% at the end of 2018.

For the quarter the cable companies lost 1.7% of subscribers which would equate to a trend of losing 6.7% for the year. However, that number needs to be put into context. The biggest drop of customers came from AT&T / DirectTV which lost over 1.3 million customers so far this year. The company decided to end discount plans to customers and has been letting customers go who won’t agree to pay full price after the end of discount plans. The company says they are glad to be rid of customers who are not contributing to the bottom line of the company. At some point soon that purge should end, and the company should return to a more normal trajectory. Normalizing for AT&T, the whole industry is probably still losing customer currently at a rate between 4% and 5% of total market share annually.

4Q 2018 2Q 2019 1Q Change 2Q Change 2Q
Comcast 21,986,000 21,641,000 (121,000) (224,000) -1.0%
AT&T / DirecTV 22,926,000 21,605,000 (543,000) (778,000) -3.5%
Charter 16,606,000 16,320,000 (145,000) (141,000) -0.9%
Dish TV 9,905,000 9,560,000 (266,000) (79,000) -0.8%
Verizon 4,451,000 4,346,000 (53,000) (52,000) -1.2%
Cox 4,015,000 3,940,000 (35,000) (40,000) -1.0%
Altice 3,307,500 3,276,500 (10,200) (20,800) -0.6%
Mediacom 776,000 747,000 (12,000) (17,000) -2.2%
Frontier 838,000 738,000 (54,000) (46,000) -5.9%
Cable ONE 326,423 308,493 (5,812) (12,118) -3.8%
Total 85,136,923 82,481,993 (1,245,012) (1,409,918) -1.7%

These same companies have lost over 5 million traditional cable subscribers since the end of the second quarter in 2018.

Some other observations:

  • This is the first time that Comcast has lost 1% of cable customers in a quarter. Until recently the company was holding steady with cable customer counts due to the fact that the company has continued to add new broadband customers, many who bought cable TV.
  • Frontier is bleeding both cable customers and broadband customers, and the company lost 71,000 broadband customers in the second quarter to go with the loss of 46,000 cable customers.
  • The only other companies that lost more than 2% of their cable customer base in the quarter are Mediacom and Cable ONE.
  • The loss of 79,000 customers is the smallest quarterly loss for Dish Networks since 2014.

The biggest losers in the industry are likely the programmers. They are losing millions of monthly subscriptions that were paying for their programming. A few networks are recovering some of these losses by selling programming to providers like SlingTV or PlayStation Now – but overall the programmers are losing a mountain of paying households.

The big question for the industry is if there is some predictable path for cord cutting. Will it continue to accelerate and kill the industry in a few years or will losses be slow and steady like happened with landline telephones?

Is There a Business Case for Fast Cellular?

We’ve gotten a glimpse of the challenges of marketing faster cellular usage since the two major cellular providers in South Korea made a big push in offering ultrafast cellular broadband. South Korea has two primary cellular carriers – SK Telecom and KT – and both have implemented cellular products using millimeter wave spectrum in Seoul and other dense urban areas.

The technology is nearly identical to the technology introduced by Verizon is small sections of major US cities. The technology uses millimeter wave hot spots from small cell sites to beam broadband to phones that are equipped to use the ultra-high spectrum. In South Korea, both companies are selling a millimeter wave spectrum version of the Samsung Gallery. In the US there are still barely any handset options.

5G hotspot data is not the same as traditional cellular data. The small cells blast out gigabit broadband that carries for only short distances of 500 to 800 feet. The signals can bounce off buildings in the right circumstances and can be received sporadically at greater distances from the transmitters. Millimeter wave spectrum won’t pass through any obstacle and the broadband signal reception can be blocked by any obstacle in the environment, including the body of the person using the cellphone.

Even with those limitations, the speeds delivered with this technology are far faster than traditional cellular data speeds. Verizon has reported peak speeds as fast as 600 Mbps in trials being deployed in US cities. That’s an amazing amount of bandwidth to deliver to a cellphone since a cellphone is, by definition a single user device. Since the average 4G LTE data speed is less than 25 Mbps, our cellphone apps are not designed to be bandwidth hogs. Current 4G speeds are more than adequate to stream video, and with the small screens, there’s no benefit to streaming in 4K or even in 1080p. All of the major cellular carriers already chop down the quality of video streams and thus use only a fraction of the bandwidth used to deliver a single video stream to homes. Cellphones are also not designed to multitask and handle multiple simultaneous tasks.

For now, the biggest benefit of millimeter wave spectrum for cellphones looks to be the ability to quickly download big files like movies, apps or software updates. There is certainly an appeal to downloading a big movie to watch later in less than 30 seconds rather than the more normal 10 minutes. But with data caps on even most unlimited plans I have to wonder how many people routinely download big movie files when they aren’t connected to WiFi.

Another way that faster cellular speeds could be beneficial is for faster web browsing. However, the slow cellphone browsing we experience today is not due to 4G LTE speeds, which are adequate for a decent browsing experience. The painfully slow browsing on cellphones is due to operating systems in cellphones that favor display over functionality – the cellular companies have chosen to downplay browsing speed in favor of maximizing the display for phone apps. Faster millimeter wave spectrum won’t overcome this inherent and deliverate software limitation.

There is another use for faster broadband. South Korea likely has a much higher demand for high-speed cellular because the country is game-crazy. A large majority of the population, including adults, are heavily involved in intensive gaming. There is obviously some appeal for having a fast gaming connection when away from a desktop.

South Korean market analysts are looking at the cost of millimeter wave deployment and the potential revenue stream and are already wondering if this is a good investment. SK Telecom expects to have 2 million customers for the faster broadband by the end of this year. In South Korea, sales of millimeter wave spectrum phones are going well. (these can’t be called 5G phones because they don’t handle frequency slicing or the other slew of 5G features that won’t be introduced for at least three more years).

If the analysts in South Korea don’t see the financial benefits, it’s much harder to see the benefits here. Remember that in South Korea that urban homes can already buy gigabit broadband at home for the equivalent of $30 per month. Moreover, the two big ISPs are in the process of upgrading everybody to 10 Gbps within the next five years. This is a country where everybody has been trained to expect an instant response online – and the faster cellular speeds can bring that expected response to mobility.

The business plan here in the US is a lot more challenging. In South Korea, a lot of people live in dense urban city centers unlike our spread-out population with far-stretching suburbs around cities. The network cost to deploy the millimeter wave technology here will be significantly higher to achieve the same kind of coverage seen in South Korea. At least for now, it’s also a lot harder to paint a picture in the US for large numbers of users willing to pay extra for faster cellular data. Several recent surveys indicate that US consumers think faster 5G data speeds should be offered at the same high prices we already pay for cellular broadband (the US has some of the highest cellular data prices among industrial countries).

I can’t see a major play here for ultra-fast cellular broadband outside of dense city centers and perhaps in places like stadiums and convention centers. It’s hard to think that somehow deploying this technology in the suburbs could ever be cost-justified. We are likely to upgrade cellular data to the more normal 5G using mid-range spectrum, and that’s going to nudge cellular data speeds in time up to 100 Mbps. I think most users here will love somewhat faster speeds but won’t be willing to pay extra for them. It’s hard to think that there are enough people in the US willing to pay even more for millimeter wave speeds that can justify the cost of deploying the networks. This is further compounded by the fact that these millimeter wave networks are outdoors only and the spectrum doesn’t penetrate buildings at all. The US has become an indoor society. At least where I live you rarely see teenagers outdoors in their home neighborhood – they are consuming broadband indoors. Does anybody really care about a fast outdoor network?

Setting the Definition of Broadband

One of the commenters on my blog asked a good question – can’t we set the definition of broadband by looking at the broadband applications used by the typical household? That sounds like a commonsense approach to the issue and is exactly what the FCC did when they set the definition of broadband to 25/3 Mbps in 2015. They looked at combinations of applications that a typical family of four might use in an evening, with the goal that a household ought to have enough broadband to comfortably do those functions at the same time. This might best be described as a technical approach to defining broadband – look at what households are really using and make sure that the definition of broadband is large enough to cover the expected usage for a typical household.

Taking this approach raises the bigger question – what should the policy be for setting the definition of broadband? I don’t know that I have any answers, but I ask the following questions:

  • The FCC largely conducted a thought experiment when setting the 25/3 definition of broadband – they didn’t try to measure the bandwidth used in the scenarios they considered. If the FCC had measured real homes doing those functions they likely would have found that bandwidth needs were different than they had estimated. Some functions use less bandwidth than they had supposed. But usage also would have been larger than they had calculated, because the FCC didn’t compensate for WiFi overheads and machine-to-machine traffic. As a household makes use of multiple simultaneous broadband functions, the WiFi networks we all use bog down when those applications collide with each other inside the home network. The busy-hour behavior of our home networks needs to be part of a mathematical approach to measuring broadband.
  • The FCC could have gotten a better answer had they hired somebody to measure evening broadband usage in a million homes. We know that broadband usage is like anything else and there are households that barely use broadband and others that use it intentsely. The idea of pinpointing the usage of a typical family is a quaint idea when what’s needed is to understand the curve of broadband usage – what’s the percentage of homes that are light, average, and heavy users. I’m sure that one of the big companies that track broadband usage could measure this somehow. But even after making such measurements we need a policy. Should the definition of broadband be set to satisfy the biggest broadband users, or something else like the medium speed used by households? Analytics can only go so far and at some point there has to be a policy. It’s not an easy policy to establish – if the definition of broadband is set anywhere below the fastest speeds used by households, then policy makers are telling some households that they use too much broadband.
  • If we are going to use measurements to determine the definition of broadband, then this also has to be an ongoing effort. If 25/3 was the right definition of broadband in 2015, how should that definition have changed when homes routinely started watching 4K video? I don’t think anybody can deny that households use more broadband each year, and homes use applications that are more data intensive. The household need for speed definitely increases over time, so any policy for setting a definition of broadband needs to recognize that the definition must grow over time.
  • One fact that is easy to forget is that the big cable companies now serve two-thirds of the broadband customers in the country, and any discussion we have about a definition of broadband is only considering how to handle the remaining one-third of broadband users. There is a good argument to be made that the cable companies already define the ‘market’ speed of broadband. The big cable companies all have minimum broadband speeds for new customers in urban markets today between 100 – 200 Mbps. The companies didn’t set these speeds in a vacuum. The cable companies have unilaterally increased speeds every 3-4 years in response to demands from their customers for faster speeds. I think there is a valid argument to be made that the market speeds used to serve two-thirds of the customers in the country should be the target broadband speed for everybody else. Any policymaker arguing that 25/3 Mbps should still be the definition of broadband is arguing that one-third of the country should settle for second-class broadband.
  • In a related argument I harken back to a policy discussion the FCC used to have when talking about broadband speeds. I can remember a decade or more ago when the FCC generally believed that rural broadband customers deserved to have access to the same speeds as urban customers. That policy was easy to support when cable networks and telco copper networks both delivered similar speeds. However, as cable broadband technology leaped ahead of copper and DSL, these discussion disappeared from the public discourse.
  • When looking at grant programs like the upcoming RDOF program, where the funded networks won’t be completed until 2027, any definition of broadband for the grants needs to look ahead to what the speeds might be like in 2027. Unfortunately, since we can’t agree on how to set the definition of broadband today, we have no context for talking about future speeds.

These are not easy questions. If the FCC was doing its job we would be having vigorous discussions on the topic. Sadly, I don’t foresee any real discussions at the FCC about the policy for setting the definition of broadband. The FCC has hunkered down and continues to support the 25/3 definition of broadband even when it’s clear that it’s grown obsolete. This FCC is unlikely to increase the definition of broadband, because in doing so they would be declaring that millions of homes have something less than broadband. It seems that our policy for setting the definition of broadband is to keep it where it is today because that’s politically expedient.

Buffalo Providing WiFi to Student Homes

Buffalo New York is facing the same homework gap that most school systems are seeing. The city had spent millions of dollars to upgrade broadband to bring computer technology into the classroom but now has numerous students unable to use a digital curriculum due to not having broadband at their homes. Like everywhere else, the city sees that students without home broadband lag behind everybody else.

The City recently decided to tackle a portion of the homework gap and has approved building a WiFi network that will reach the homes of 5,500 students living in downtown Buffalo. They have approved a $1.3 million project to construct a wireless network that will extend the bandwidth available at the schools to surrounding neighborhoods.

Buffalo has what it calls digital deserts, with neighborhoods where more than half of households have no Internet access. This contrasts sharply with other parts of the city and with Erie County as a whole, where 80% of all households are online (with that statistic is depressed by including the digital deserts). The richest parts of the city have neighborhoods with nearly 90% broadband coverage, while there is one neighborhood in downtown with only a 31% household broadband penetration. The WiFi project is targeting two neighborhoods on the east side of downtown where the neighborhoods collectively have only a 40% broadband penetration.

The city is mounting antennas on top of eight downtown schools and other government-owned buildings. These installations take advantage of the gigabit bandwidth already available at City buildings. The network is being designed to reach students living within about two miles of each of the locations. For now, this first trial covers perhaps 5% of the total area of the city but covers neighborhoods with some of the highest needs in terms of students without home broadband.

Students will be able to log onto the school network using the same login used at school. The broadband connection will be limited to access the school network and is not intended to provide normal household broadband. The network will allow students into the highly controlled and curated school network that gives students access schoolwork, school-sponsored video and some access to the web for homework research.

Having access to a computer or tablet is the other half of the homework gap problem. Homes without broadband likely also don’t have computers. The city is working on a plan to let students take home laptops. Last year only seniors were able to take home school laptops, but in this coming year that is being expanded to all high school students in some schools. The city is exploring how to provide devices to students in grades 3 to 8.

Like other school systems, the city understands that smartphones are not the answer. While many students have smartphones, the devices are inadequate for doing homework, and students that try to wade through homework with smartphones fall behind from the frustration of using a small screen for big-screen applications.

Affordability is the main barrier to broadband in many households. In downtown Buffalo, there are three broadband options. The most affordable package from Charter, the incumbent cable company is $64.99. Verizon offers a slow low-price DSL option at $29.99, but this connection is too slow to connect to the school network to do homework. There is also an ISP, BarrierFree, that offers $100 broadband for businesses.

The city is also exploring free citywide WiFi that would bring broadband to everybody, not just to students. There is no easy answer to the homework gap, but perhaps Buffalo’s start is a model that can be explored by others. Recently the Government Accounting Office recommended that the FCC study the idea of using Schools and Libraries funds from the Universal Service Funds to reach students at home. If that fund can help pay for this kind of application, perhaps we can solve the homework gap neighborhood by neighborhood.

CenturyLink Embraces Fiber

CenturyLink seems to have done a 180 in terms of embracing fiber. According to Jeff Storey, the CEO of Centurylink, the company is now defining itself as the ‘go-to provider’ for fiber-based services for business customers. This is in sharp contrast to just a year ago when Storey, as the new CEO said that the company would not be pursuing low-return infrastructure investments.

Storey says that CenturyLink added 5,000 business buildings to fiber in the second quarter, following 4,500 buildings in the first quarter of this year. This contrasts to Level 3 that historically added around 500 buildings per quarter.

It appears the company may be taking a page from the AT&T storybook. AT&T has been building fiber around locations where it already has a fiber POP. This strategy has helped AT&T to now pass over 20 million locations with fiber while avoiding the high cost of large overbuilds.

CenturyLink has an extensive national fiber footprint that it’s accumulated from the purchase over the years of Level 3, Qwest, Broadwing and WilTel. Like AT&T discovered, CenturyLink is sitting close to a huge number of existing opportunities with that existing network, and perhaps that’s the new company strategy – to edge-out and take advantage of nearby low-hanging fruit.

Storey says the company has ordered 4.7 million miles of fiber to add into its urban networks. You have to take that number with a grain of salt since one mile of a 48-strand fiber counts as 48 miles of fiber when counted this way. But this is still a lot of new fiber construction. The one thing that readers of this blog will notice is that the construction is likely to be urban – it’s doubtful that the company is ever going to put another dollar into rural infrastructure. The company recently quietly searched around for the possibility of spinning off its rural business but found no takers. This is likely to mean more of the same for its rural customers – mostly neglect.

The company continues to lose broadband customers. In 2018 the company lost 262,000 broadband customers for a 4.6% drop. In the second quarter of this year, the company lost 56,000 net broadband customers but reports that it lost 78,000 customers with speeds below 20 Mbps and added 22,000 customers with speeds faster than that. Like all of the big telcos, it’s losing DSL customers converting to cable modems.

The company has a long way to go to convince Wall Street that its stock has value. In a May blog, I wrote how the company stock had dropped 43% over a year to a price of $10.89. It’s still sitting in that range with the stock price sitting at $11.56 yesterday.

The Level 3 acquisition is likely to be one of the more interesting stories in the history of our industry. Level 3 was the high-flying telecom company, with stock prices that climbed steadily. It seems that Jeff Storey could do no wrong as earnings grew faster than the rest of the sector. But that all came to a halt with the merger with CenturyLink. I’m sure that both companies thought that Storey could pull CenturyLink upward by tying it to Level 3, but just the opposite occurred. This might be one of the biggest cautionary tales ever in our industry and shows how difficult, and perhaps impossible it is for anybody to turn around one of the big incumbent telcos.

What’s most interesting in this story is that Glen Post and the crew from CenturyLink were in the process of that a slow and steady turnaround. A few years before the CenturyLink merger the company had decided to build residential fiber in its many large city markets and take back a significant piece of the broadband business that had been leaking away. In the year before the Level 3 merger the company had built fiber past nearly 1 million urban passings. We’ll never know now if a few more years of that kind of investment could have turned the company around – not to be a high-flyer like Level 3, but to earn decent long-term returns on broadband infrastructure – the kind that come from making a hundred-year investment in fiber.