Is Ultrafast Broadband a Novelty?

FCC Commissioner Michael O’Reilly recently said that ultrafast broadband is a novelty. He specifically said, “The outcry for things like ultrahigh-speed service in certain areas means longer waits for those who have no access or still rely on dialup service, as providers rush to serve the denser and more profitable areas that seek upgrades to this level. . . Today, ultrafast residential service is a novelty and good for marketing, but the tiny percentage of people using it cannot drive our policy decisions.

These statements are not surprising coming from Commissioner O’Reilly. He voted two years ago against setting the current 25/3 Mbps definition of broadband and thought that number was too high. In a dissent to that ruling he said the 25/3 definition was unrealistically high and said, “While the statute directs us to look at “advanced” telecommunications capability, this stretches the concept to an untenable extreme. Some people, for example, believe, probably incorrectly, that we are on the path to interplanetary teleportation. Should we include the estimated bandwidth for that as well? “

I don’t understand why Commissioner O’Reilly is still taking this position today. Most of the big ISPs have climbed on board the big bandwidth wagon. Comcast and Cox and other cable companies are upgrading their cable networks to DOCSIS 3.1 in order to provide gigabit speeds. CenturyLink built fiber past almost a million homes last year. Altice says they are tearing out their coaxial networks and replacing them with fiber. AT&T claims to have plans to build fiber to pass 12 million homes and businesses. Numerous small overbuilders around the country are offering gigabit speeds.

You don’t have to go back too many years to a time when the big ISPs all agreed with O’Reilly. The big cable companies in particular repeatedly made it clear that people didn’t need any more bandwidth than what the cable companies were delivering. The cable companies fiercely resisted increasing data speeds for many years and many cable networks kept data speeds in the 6 Mbps download range even though their networks were capable of delivering higher speeds without the need for upgrades.

Part of the old reasoning for that position was that the ISPs were afraid that if they gave people faster speeds then they would then use those speeds and swamp the networks. But Google came along and upset the whole ISP world by offering an inexpensive gigabit product. The cable companies in cities like Kansas City and Austin had little choice and increased speeds across the board. And once they increased in those markets they had little choice but to improve speeds everywhere.

The cable companies found the same thing that all of my clients have found when increasing data speeds. Generally a unilateral increase in customer data speeds does not cause a big increase in data usage unless the customers were throttled and constrained before the increase. Most customers don’t use any more data when speeds get faster – they just enjoy the experience more.

Of course, customers want to download more data every year and the amount of total download doubles about every three years. But that phenomenon is separate from data speeds. All of the things we do on the web requires more bandwidth over time. You scroll through a Facebook page today and you encounter dozens of videos, for example. But having faster speeds available does not directly lead to increased data usage. Speed just gets the things done faster and more enjoyably.

Commissioner O’Reilly thinks it would be better if ISPs would somehow invest to bring mediocre data speeds to everybody in the country rather than investing in ultrafast speeds to urban areas. No doubt that would make the FCC’s life easier if rural people all had broadband. But it’s fairly obvious that big ISPs wouldn’t be investing in their urban networks unless those investments made them more money. And it’s just as obvious that the big ISPs have figured out that they can’t make the profits they want in rural America.

I’m not sure what constituency Commissioner O’Reilly is trying to please with these statements. Certainly any urban customers that are happily buying the ultrafast speeds he is referring to. Certainly the ISPs investing in faster data speeds think it’s a good business decision.

I think Commissioner O’Reilly and others at the FCC would like to see the rural broadband issue go away. They hope that the CAF II investments being made by the big telcos will make the rural areas happy and that the issue will evaporate. They want to be able to claim that they fixed the broadband problems in America by making sure that everybody gets at least a little bit of bandwidth.

But it’s not going to work that way. Certainly many rural customers who have had no broadband will be happy to finally get speeds of 10 – 15 Mbps from the CAF II program. Those kind of speeds will finally allow rural homes to take some part in the Internet. But then those folks will look around and see that they still don’t enjoy the same Internet access as folks in the urban areas. Instead of solving the rural broadband problem I think the CAF II program is just going to whet the rural appetite for faster broadband and then rural folks will begin yelling even louder for better broadband.

Is it Too Late to Save the Web?

Advocates of net neutrality say that we need to take a stand to protect the open web, and for those that have been using the web since its early days that sounds like a noble goal. But when I look at the trends, the statistics, and the news about the web, I have to wonder if it’s too late to save the web as we’ve known it.

The web was originally going to be a repository of human knowledge and people originally took the time to post all sorts of amazing content on the web. But nobody does that very much anymore and over time those old interesting web sites are dying. Mozilla says that people no longer web search much and that 60% of all non-video web traffic goes to a small handful of giant web companies like Facebook.

The average web user today seeks out a curated web experience like Facebook or other social platforms where content is brought to them instead of them searching the web. And within those platforms people create echo chambers by narrowing their focus over time until they only see content that supports their world view. People additionally use the web to do a few additional things like watching Netflix, paying bills, shopping at Amazon and searching on Google.

I don’t point out that trend as a criticism because this is clearly what people want from the web, and they vote by giant numbers to use the big platforms. It’s hard to argue that for the hundreds of millions of people who use the web in this manner that the web is even open for them any longer. People are choosing to use a restricted subset of the web, giving even more power to a handful of giant companies.

The trends are for the web to get even more restricted and condensed. Already today there are only two cellphone platforms – Android and iOS. People on cellphones visit even fewer places on the web than with landline connections. You don’t have to look very far into the future to see an even more restricted web. We are just now starting to talk to the web through Amazon Alexa and Apple Siri. The industry expects a large percentage of web interface to soon be accomplished though voice interface. And beyond that we are moving towards a world of wearables that will replace our cellphones. At some point most people’s web experience will be completely curated and the web we know today will largely become a thing of the quaint past.

It’s not hard to understand why people lean towards curated platforms. Many of them hear the constant news of hacking and ransomware and people don’t feel safe going to unknown websites. The echo chamber has been around as long as modern civilization has been around – people tend to do things they like with people that they know and trust. The echo chamber seems magnified by current social media because it can give the perception that people are part of something larger than themselves – but unless people take actions outside the web that’s largely an illusion.

There are those who don’t want to take part in the curated web. They don’t like the data gathering and the targeted marketing from the big companies. They tend towards platforms that are encrypted end-to-end like WhatsApp. They use browsers that don’t track them. And they stick as much as possible to websites using HTTPS. They are hopeful that the new TLS 1.3 protocol (transport layer security) is going to give them more anonymity than today. But it’s hard work to stay out of the sight of the big companies, and it’s going to get even harder now that the big ISPs are free again to gather and sell data on their customers’ usage.

Even though I’ve been on the web seemingly forever, I don’t necessarily regret the changes that are going on. I hate to see the big companies with such power and I’m one of the people that avoids them as much as I can. But I fully believe that within a few decades that the web as we know it will become a memory. Artificial intelligence will be built into our interfaces with the web and we will rely on smart assistants to take care of things for us. When the web is always with you and when the interfaces are all verbal, it’s just not going to be the same web. I’m sure at some point people will come up with a new name for it, but our future interfaces with computers will have very little in common with our web experiences of today.

Wireless Networks Need Fiber

As I examine each of the upcoming wireless technologies it looks like future wireless technology is still going to rely heavily on an underlying fiber network. While the amount of needed fiber will be less than building fiber to every customer premise, supporting robust wireless networks is still going to require significant construction of new fiber.

This is already true today for the traditional cellular network and most existing towers are fiber-fed, although some have microwave backhaul. The amount of bandwidth needed at traditional cell sites is already outstripping the 1 or 2 GB capacity of wireless backhaul technologies. Urban cell sites today are fed with as much as 5 – 10 GB pipes and most rural ones have (or would like to have) a gigabyte feed. I’ve seen recent contractual negotiations for rural cell sites asking for as much as 5 GB of backhaul within the next 5 – 10 years.

Looking at the specification for future 5G cellular sites means that fiber will soon be the only backhaul solution for cell sites. The specifications require that a single cell site be capable of as much as 20 GB download and 10 GB upload. The cellular world is currently exploring mini-cell sites (although that effort has slowed down) to some degree due to the issues with placing these devices closer to customers. To be practical these small cell sites must be placed on poles (existing or newly built), on rooftops and on other locations found near to areas with high usage demand. The majority of these small sites will require new fiber construction. Today these sites can probably use millimeter wave radio backhaul, but as bandwidth needs increase, this is going to mean bringing fiber to poles and rooftops.

Millimeter wave radios are also being touted as a way to bring gigabit speeds to consumers. But delivering fast speeds means getting the radios close to customers. These radios use extremely high frequencies, and as such travel for short distances. As a hot spot a millimeter wave radio is only good for a little over 100 feet. But even if formed into a tight microwave beam it’s a little over a mile – and also requires true line-of-sight. These radios will be vying for the same transmitter locations as mini-cell sites.

Because of the short distances that can be delivered by the millimeter wave radios, this technology is going to initially be of most interest in the densest urban areas. Perhaps as the radios get cheaper there will be more of a model for suburban areas. But the challenge of deploying wireless in urban areas is that is where fiber is the most expensive to build. It’s not unusual to see new fiber construction costs of $150,000 and $200,000 per mile in downtown areas. The urban wireless deployment faces the challenge of getting both fiber and power to poles, rooftops and sides of buildings. This is the issue that has already stymied the deployment of mini-cell sites, and it’s going to become more of an issue as numerous companies want to build competing wireless networks in our cities. I’m picturing having the four major cellular companies and half a dozen wireless ISPs all wanting access to the same prime transmitter sites. All of these companies will have to deal with the availability of fiber, or will need to build expensive fiber to support their networks.

Even rural wireless deployments needs a lot of fiber. A quality wireless point-to-point wireless network today needs fiber at each small tower. When that is available then the current technologies can deploy speeds between 20 Mbps and 100 Mbps. But using wireless backhaul instead of fiber drastically cuts the performance of these networks and there are scads of rural WISPs delivering bandwidth products of 5 Mbps or less. As the big telcos tear down their remaining rural copper, the need for rural fiber is going to intensify. But the business case is often difficult to justify to build fiber to supply bandwidth to only a small number of potential wireless or wireline customers.

All of the big companies that are telling Wall Street about their shift to wireless technologies are conveniently not talking about this need for lots of fiber. But when they go to deploy these technologies on any scale they are going to run smack into the current lack of fiber. And until the fiber issue is solved, these wireless technologies are not going to deliver the kinds of speeds and won’t be quickly available everywhere as is implied by the many press releases and articles talking about our wireless future. I have no doubt that there will eventually be a lot of customers using wireless last mile – but only after somebody first makes the investment in the fiber networks needed to support the wireless networks.

The Death of WiFI Hotspots?

I’ve been thinking about the new unlimited data plans and wondering what impact they will have on public WiFi. As I wrote in a recent blog, none of the plans from the major cellular carriers are truly unlimited. But they have enough data available that somebody who isn’t trying to use one of these plans for a home landline connection will now have a lot more data available than ever before.

The plans from the big four carriers have soft monthly download caps of 22 Gigabytes or higher, at which point they throttle to slower speeds. But 22 to 30 GB is a huge cap for anybody that’s been living with caps under 5 GB or sharing family plans at 10 GB. And to go along with these bigger caps, the cellular companies are also now offering zero-rated video that customers can watch without touching the data caps. That combination is going to let cellphone users use a mountain of data during a month.

So I wonder how many people who buy these plans will bother to log onto WiFi in coffee shops, airports and hotels any longer? I know I probably will not. For the last few years I’ve seen articles almost weekly warning of the dangers of public WiFi and I’ve become wary of using WiFi in places like Starbucks. And WiFi in other public places has largely grown to be unusable. WiFi can be okay in business hotels in the early afternoon or at 3:00 in the morning, but is largely worthless in the prime time evening hours. And free airport WiFi in the bigger airports is generally already too slow to use.

If you think forward a few years you have to wonder how long it’s going to take before public WiFi wanes as a phenomenon? Huge numbers of restaurants, stores, doctor offices, etc. spend money today on broadband and on WiFi routers for their customers and you have to wonder why they would continue to do that if nobody is asking for it. And that’s going to mean a big decrease in sales of industrial grade WiFi routers and landline broadband connections. Many of these places already buy a second data connection for the public and those connections will probably be canceled in droves.

I wonder how much sense it makes for Comcast and others to keep pouring money into outdoor hotspots if people stop using them? You only have to go back a few years to remember when the concept of building the biggest outdoor hotspot network was the goal for some of the largest cable companies. Already today my wife has to turn off her WiFi when running in the neighborhood since her phone constantly drops her music stream through attempts to change to each Comcast WiFi connection she runs past. How many people with these unlimited plans will even bother to ever turn on their WiFi?

I also wonder if the cellular networks are really ready for this shift. There is a huge amount of data shifted today from cellphones to hotspots. As a business traveler I’m already thinking about how hard it might be soon to get a cellular data connection during the business hours if nobody is using the hotel WiFi. I know that 5G is going to fix this issue by offering many more connections per cell site, but we aren’t going to see widespread 5G cell sites for at least five years and probably a little longer.

I’ve always found it interesting how quickly changes seem to hit and sweep the cellular industry. There was virtually no talk a year ago about unlimited data plans. In fact, at that time both AT&T and Verizon were punishing those with legacy unlimited plans to try to drive them to some other plan. But the industry has finally plateaued on customer growth and cellular service is quickly becoming a commodity. I think a lot of us saw that coming, but I never suspected that the way it would manifest would be with competition of unlimited calling and the possible death of public WiFi. I don’t know if this industry will ever stop surprising us at times.

I guess a day could come soon when kids will have no memory of public hotspots. I can remember fondly when traveling to places like Puerto Rico or the Caribbean that the first thing you did on landing was find the locations of the Internet cafes. I remember back when our company decided to move out of our offices that one of my partners practically lived in a Starbucks for the next year. It was an interesting phase of our industry, but one whose days are probably now numbered.

Regulation and Capital Spending

At the recent Mobile World Congress, FCC Chairman Ajit Pai said that one of his reasons he wants to reverse Title II regulation is that it has had a drastic impact on capital spending by ISPs. He says that the new regulations have been a disincentive for the ISPs to invest in broadband.

The Chairman bases that position on statistics provided by USTelecom which are based upon work done by Hal Singer, a Senior Fellow at GW Institute for Public Policy. Mr. Singer created the following table that shows the domestic capital spending for the big ISPs for 2014 through 2016. And indeed, this table shows a 5.6% drop, or $3.6 billion a year from 2014 to 2016 – which Mr. Singer attributes to Title II regulation.

2014

2015

2016

AT&T $21.1 $17.3 $17.8
Verizon $17.2 $17.8 $17.1
Comcast $6.4 $7.1 $7.7
Sprint $3.8 $3.9 $1.4
Time Warner Cable $4.1 $4.4 $3.8
T-Mobile $4.3 $4.7 $4.7
CenturyLink $3.0 $2.9 $3.0
Charter $2.2 $1.9 $3.1
Cablevision $0.9 $0.8 $0.6
Frontier $0.6 $0.7 $1.3
US Cellular $0.6 $0.5 $0.5
Suddenlink $0.3 $0.4 $0.3
   Total $64.6 $62.4 $61.0

But like with all statistics, it’s not hard to draw different conclusions from the same set of numbers. For example, all of the drop in capital spending can be attributed to AT&T and Sprint. Taking those companies out of the table shows that capital spending for the other big ISPs is up $2.1 billion or 5% from 2014 to 2016.

So what’s going on with AT&T? There are a number of reasons for their change in capital spending:

·         During these same years the company made massive capital investments in DirecTV ($3 billion over the last few years) and also on the company’s purchase and expansion of its cellular network into Mexico ($3 billion over 4 years). Those numbers are not included in the above table and it’s easy to argue that the company just set different priorities and diverted normal domestic capital to these two giant ventures. If you add those capital expenditures into the table then AT&T’s capital spending has grown – just not their ‘domestic’ spending on traditional broadband.

·         AT&T has been making a huge effort to update its cellular network using software defined networking (SDN) as described at this AT&T website. They have been decommissioning traditional hardware at cell sites and installing much less expensive, off-the-shelf routers that can now control the cell sites from centralized data centers. They have already converted over half of their cell sites and this upgrade means vastly reduced spending on traditional cell site electronics. The company has been bragging about this shift to investors for several years.

·         AT&T has also retracted from expanding traditional big tower cell sites. For a number of years AT&T has been spending money to get fiber to its more remote cell sites, and that upgrade is largely done.

Sprint can also be easily explained. This is a company in trouble and that has been well documented over the last few years. A number of attempts to find a buyer has fallen through. What’s not shown on this table is that in 2013 (the year before the table begins) Sprint spent $6.4 billion on capital in a massive system-wide upgrade to LTE. Since then the company has very publicly stated that they are cutting capital spending to conserve cash. The company is only expanding now with carefully selected small cell deployments. But the company is clearly in network maintenance mode and is spending only what is needed to keep the cell sites functioning. Also included in the drop in spending is a change in the way that Sprint treats leased cellphones – they used to capitalize the phones and they now expense them.

There are going to be further decreases in future telecom capital spending across the industry. I expect capital spending for all four big wireless companies to keep decreasing due to efficiencies from SDN. We are now seeing a burst of spending from cable companies due to upgrades to DOCSIS 3.1, but when that’s done I would expect a significant decline in their capital spending as well. We are entering a time when improvements in software will lower the need for new hardware – not just in telecom, but in many other sectors as well.

I have always been annoyed when statistics are used to falsely justify public policy. There is no evidence that the big ISPS have changed their spending habits in any drastic way due to Title II regulations. The argument that Title II has affected capital spending comes directly from constant press releases from USTelecom, and the FCC Chairman should be above repeating arguments from lobbyists. If the FCC wants to undo Title II then it should just do it – there are a number of valid reasons why this might be good policy. But it’s disingenuous to cook up false reasons for why the change is needed.

Content Finally is King

One of the more common memes in our industry is the phrase “content is king.” This was first said by Sumner Redstone of Viacom in 1994 but made more famous by Bill Gates in 1996. The phrase has been used since then to describe how the creators of content have the power in our industry – be that programming or web content.

John Stankey, the CEO of AT&T Entertainment, recently emphasized this same concept in talking about the company’s planned merger with Time Warner. At the recent Mobile World Congress in Barcelona he said, “We just cannot envision a future where AT&T is relevant if we don’t directly participate in some of the water flowing through our pipes.”

All of the big ISPs have decided that content is key to their survival. Comcast already owns a mountain of programming, and after the merger with Time Warner, AT&T will be a content powerhouse as well. Verizon has climbed into the game with the acquisitions of AOL and Yahoo. There are web companies with the same philosophy. Netflix has built a new industry by creating new content. Google is pushing content heavily through YouTube. Amazon has started to create unique content and recently said they are going to make that a priority. Facebook is becoming a content force through Facebook Now.

I remember having this conversation with Derrel Duplechin of CCG back in 2000. We were asked by several clients to speculate about the future of the carrier industry and we foresaw that most carriers were likely on the path to eventually become what we called “dumb pipe” providers. I remember that this was a story that many of our clients did not want to hear.

We lived in a different carrier world in 2000. Most homes still had telephones and voice was the most profitable product for most carriers. The cable TV product that many of our clients sold then also had decent margins. But we predicted that both products would eventually sink in importance and in margins and that eventually most of our clients would earn most of their profits from broadband. We thought this would happen to all carriers, small and large, and we figured that the most profitable future companies would be those that found some other line of business other than just selling data pipes to end users.

We had some clients take this to heart and some of them have made a really good living by providing extra value to customers. For example, we have several clients who thrive by bringing a suite of products to businesses other than just plain connectivity. But for the most part, the majority of the ISP industry sells dumb pipes today. They compete with the speed of those pipes and with price and with good customer service – but the primary products (and the driver of most of the profits) are now data pipes.

The big companies like AT&T, Verizon and Comcast looked at that future and it scared them. It’s pretty obvious that if your only product is dumb pipes that your earnings are not going to continue to grow fast enough to satisfy Wall Street. This is probably what convinced Verizon to stop expanding their FiOS network. Both AT&T and Verizon got huge earnings boosts from expanding their cellular businesses, but that industry also seems to be heading towards the same plateau as landline ISPs – cell service is becoming a commodity.

So these big companies are now pursuing content because it looks to be the last area in our industry with the potential for significant bottom line growth. It’s going to be an interesting race to watch. Content providers have succeeded or failed over the years according to their ability to find smash hits. A huge hit movie or TV series can mean huge returns to the bottom line. But content providers that don’t create what the public wants to watch suffer badly in terms of stock prices and earnings. Being a content provider is not predictable in the same way as telecom.

Interestingly. AT&T, Verizon, and Comcast are now direct competitors of Facebook, Google, Amazon and Netflix. Content certainly is king, but content also brings the risk from competition. The companies that fall behind in this race are likely to be gobbled up by their more successful competitors. I find it extremely unlikely that all of these big companies will still be in existence in 10 years.

There is no real barrier to entry into the world of content creation other than having a pile of money. It’s likely that other big companies will join the content fray. But all of these companies are entering a world that is in big flux. For example, traditional video and web content might well be replaced by virtual and enhanced reality. The companies that succeed in content will have to spend a lot of money staying one step ahead of the competition, and my money is on the more nimble technology companies. Twenty years ago I would have been shocked to know that someday AT&T would have a CEO of Entertainment – and that may turn out to be the most important job in the corporation.

Unlimited Cellular Data Pricing

SONY DSCI recently wrote a blog about how all of the cellular companies are now offering unlimited data plans. Today I’m going to look at their plans in some detail to discuss what they really mean by “unlimited.”

AT&T. AT&T now has two unlimited plans. Unlimited Choice starts at $60 for one phone with unlimited voice, text and data. It’s $55 for a second line and $20 each for lines up to ten. There is an extra fee of $5 per month for one line or $10 for multiple lines if the customer doesn’t elect autopay. Data comes with lots of limits. Video is capped at 480p standard resolution. Total download speed is limited to 3 Mbps with video capped at 1.5 Mbps, regardless of the quality of the 4G stream available. And while there is no data cap, AT&T starts throttling data speeds for the month when a customer hits 22 GB of download. And last – and what will be a killer for most potential customers – it doesn’t allow tethering.

The Unlimited Plus plan starts at $90 for the first phone. It also includes a penalty for not using autopay. It undoes all of the speed restriction of the choice plan and can stream HD video. It also allows up to 10 GB per month for tethering. It has the same monthly cap of 22 GB before the data gets throttled. This still is not an alternative for home use because of the 10 GB cap on tethering. But it’s a good business travel plan. And a home user with a tablet might find this to be a good, if expensive, broadband alternative.

Verizon. Verizon’s unlimited plan is $80 for the first phone, $60 for a second, $22 for a third and $18 for a fourth. This also has unlimited voice and text. The data has a very unusual daily cap and speeds get throttled after hitting 500 MB download in a day. There is also a monthly cap of 22 GB, after which all data gets throttled. There is a 10 GB monthly allowance for tethering, with speeds throttled to 3G after hitting that cap. Verizon allows HD video streaming.

T-Mobile. T-Mobile’s plan is priced at $70 for the first phone, $30 for a second, $41 for a third and $19 for a fourth. This also has unlimited voice and text. There is a monthly cap of 28 GB after which data gets throttled. There is a 10 GB monthly allowance for tethering, with speeds throttled to 3G after hitting that cap. T-Mobile allows HD video streaming.

Sprint. Sprint’s plan is priced at $50 for the first phone, $40 for a second. But these are promotion prices and the company warns they will probably price to ‘market’ after March 31. This also has unlimited voice and text. There is a monthly cap of 23 GB after which data gets throttled. There is a 10 GB monthly allowance for tethering, with speeds throttled to 2G (which has been discontinued in much of the country) after hitting that cap. Note that at 2G you can’t even read email, so this is effectively a hard cutoff.  Sprint allows HD video streaming capped at 1080p quality.

Various Issues. There are activation fees to consider with some of the companies. AT&T and Sprint charge $25 and Verizon $30. T-Mobile has no activation fee. T-Mobile also includes all taxes and fees in its price, something that can be fairly expensive in some parts of the country.

None of these plans is truly “unlimited” and I won’t be shocked to see the Federal Trade Commission going after all of these carriers for advertising them that way. Certainly none of these are going to be a good alternative for home broadband, except perhaps for rural customers with no better alternative. But I think even rural users will find the cap on tethering and the throttling after a fairly stingy amount of download to be impossible to live with. It’s a shame because many rural homes using traditional cellular broadband have monthly bills of $500 to $1,000.

Interestingly, I just saw yesterday that some Wall Street analysts are slamming Verizon because they fear that their network cannot handle these new ‘unlimited’ plans. But as you can see these plans are not unlimited. They are effectively capped at 2 – 3 times the size of existing family plans, that that assumes that customers will use all of the allotted data-  which many will not. There is already plenty of excess capacity to handle this at the vast majority of cell sites. And this isn’t going to much hurt the cell sites that are already over-busy.

For customers that routinely go over the current cellular data caps these might be a great alternative. Current cellular data is priced at $10 per gigabyte and these plans have reduced data prices to a more affordable price under $2 – $3 per gigabyte for somebody that uses the full allowance. But compared to traditional plans these plans all have hard monthly caps – and while those caps are at 22 GB or higher, they are effectively hard caps since data gets throttled and becomes largely unusable after hitting the cap. These plans will all tease you into watching a lot of video and then penalize you heavily for watching too much.

The State of New York vs. Charter

Scale_of_justice_2_newEvery once in a while in this industry you come across a story about one of the big cable companies that just makes you shake your head. There is such a story right now where the New York State attorney general, Eric Schneiderman, has sued Charter on behalf of its 2.5 million data customers in the state.

The issue goes back to 2012 when the company was still Time Warner Cable. At that time there were a lot of complaints from customers saying that they were not getting the data speeds they were paying for. In 2013, in association with Internet speed tests conducted by the FCC, it was determined that Time Warner had widely deployed cable modems and WiFi routers that were not capable of delivering speeds of even 20 Mbps.

In July of 2013, Time Warner promised the FCC that it would replace and upgrade all customer modems in the state and would also make other system upgrades that would increase speeds, such as reducing the size of the neighborhood nodes.

Here is where the puzzling part comes in. The FCC never retested, which is normal, and instead relied on Time Warner’s promise that they would fix the problems and increase speeds. But it turns out that Time Warner didn’t make any of the promised upgrades. They didn’t replace customer modems. In fact, they routinely recycled the bad modems back into service when they were returned by customers.

Since then Time Warner (and now Charter) has advertised even faster speeds, yet none of the customer modems are able to deliver the speeds that the company is selling. The lawsuit says there are now over 250,000 customers who are paying for speeds between 200 Mbps and 300 Mbps, but who still have the old inadequate modems that get speeds under 20 Mbps.

To add insult to injury, the company has been charging $10 per month to customers to lease the old modems (at least that’s the current lease rate). Considering that these modems don’t generally cost the cable company even $100, these customers have paid enough to have replaced these modems multiple times since the problem was first caught.

Time Warner is also being accused in the lawsuit of manipulating the FCC speed tests in 2013 to show faster results. They did this by taking speed tests at times when there was not much demand on their networks, like the middle of the night.

Finally, the company has been accused of purposefully providing inadequate backbone so that Internet traffic was delayed and slowed down getting onto their network. This means they did not provide big enough data connections to the outside world for things like Netflix or for general Internet access.

Here is the lawsuit filing. It’s an interesting and easy read and is not overly technical. I know that big companies hate to spend capital dollars that they don’t think are necessary. But in this case they got caught providing old and inadequate modems five years ago and since then did nothing to fix the problems. We know from experience that even when companies are caught like this that they don’t usually undertake a crash repair program. But if Time Warner would have implemented some reasonable plan to upgrade the network and to replace the bad modems over time there probably would not be this big lawsuit today. What’s puzzling is how the whole management chain at the company decided to do nothing. They denied a direct FCC order and also continued to get piles of customer complaints.

The lawsuit does not name a specific amount of damages, but one has to think it’s going to be a big number. The lawsuit asks for ‘injunctive and equitable relief’, meaning the return of customer payments, as well as civil penalties, meaning extra damages. If Charter has the same kind of customer penetrations we see elsewhere with cable companies – 60% to 70% of the market – it’s going to be interesting to see how they find a jury for this trial.

Runaway Retransmission Fees

rabbit earsCBS just announced that they are making over $1 billion per year in retransmission fees. These fees are a big culprit in the continually steep price increases for cable TV.

Retransmission fees are the fees that the major over-the-air networks (ABC, CBS, NBC and FOX) charge to cable companies for the right to air their content. These fees have been allowed in FCC rules for decades, but it’s been in the last ten years or so that the networks woke and up started charging cable companies to carry their content.

There are two slightly different ways that these fees work. The majority of the CBS stations around the country are owned by somebody else and are referred to as affiliate stations. CBS charges these affiliates a fee each year – which the industry calls reverse compensation – to give each station the right to carry the CBS programming. CBS and the other major networks increase these reverse compensation fees every year, and each affiliate station has little choice but to then pass those costs on as increased retransmission fees to cable operators.

CBS also directly owns 14 TV stations in major cities as well as two smaller stations. In these stations CBS directly charges the retransmission fees to the cable companies.

I call these fees runaway in the blog title because there doesn’t appear to be any end in sight for the size of these fees. At the end of 2015 CBS had estimated that these fees would grow to $2 billion by 2020. But they just now upped their estimate to $2.5 billion. To hit those targets from today’s $1 billion revenue figure means we’ll be seeing big increases in cable rates. And if CBS is raising the fees this much you can expect the same thing from the other major networks. This is verified by estimates from SNL Kagan who now estimates total retransmission fees in 2020 of $10.6 billion.

To put that number into perspective, there will roughly be around 90 million cable households by 2020. That means by then that the average retransmission cost per household will be $10 per month. But that average hides the real story. A lot of satellite subscriptions don’t include network channels, or if they carry some they come from one of the major markets like New York City or Chicago. I’ve always figured that the satellite guys are getting a greatly reduced price for those channels, which would benefit both them and the big station that sells bulk subscriptions. There are also many places in the country where the cable systems don’t carry all four networks, or they again carry some remote station at a reduced cost. When you consider all of that I’m guessing that the real cost per household for urban cable systems will be around $15 per household per month.

For years now the major networks have been saying that they deserve to get as much revenue as the most expensive cable networks – and that means ESPN. ESPN now costs over $6 per household per month. If the four major networks climb that high that will be $25 per household per month just for the four major networks. The irony is that most households can receive these networks for free with “rabbit ear” antennas.

But the FCC cable rules require that cable systems carry all local networks that can be received by people with rabbit ears. And that means that cable customers cannot opt out of receiving or paying for these channels in a cable subscription. The only way for a household to avoid these fees is to drop traditional cable packages completely.

A number of cable companies have begun to isolate the retransmission fees on customer bills and call it something like “local network charge.” But I don’t think the cable companies have done a very good job of explaining the retransmission fees to customers.

There are more households every year thinking about dropping cable, and for many of them the primary issue is price. As cable subscription prices keep climbing much faster than inflation my guess is that the cord cutting phenomenon is going to accelerate. There are OTT services now like Sling TV that will sell customers a high quality set of rabbit ears that can be easily incorporated with their content. There are a lot of households that will be happy to avoid paying for local networks if somebody can make it easy for them to do so.

The Market Power of Millennials

wraparound-glassesFour or five times in just the last week I’ve seen news articles that reminded me that we are moving into a millennial world. It’s starting to become clear that millennials are already having a big impact on numerous traditional industries.

We certainly can see the impact of millennials in the telecom industry. New millennial households aren’t buying traditional cable TV packages and landlines. Because of this the average viewer age for traditional TV programming has skyrocketed, which is upsetting the advertising in our industry. Millennials love their smartphones and are happy to use them for the majority of their computing needs. And some are even starting to leave smartphones behind in favor of wearable devices like the Apple iWatch.

This is the first generation that had a radically different childhood than earlier generations. This generation grew up with computers and that seems to have changed them more than past technologies changed other generations. I’m a baby boomer, and we were the first generation to grow up with television and that changed us a bit from our parents. But at the core, the baby boomers still shared mostly the same experiences growing up as their parents, be that with school, church, leisure or social activities.

But it’s becoming obvious that growing up with computers changed the millennials from their parents. This is the first generation that was fully immersed in social networking, texting, smartphones, online shopping and all of the many things that come with being computer-centric.

The millennial phenomenon is not limited to telecom and computers. Millennials are walking away from ‘traditional’ institutions of all kinds. Interest in the NFL and Major League Baseball is dropping – largely due to the fact that millennials aren’t interested. NASCAR has seen attendance and interest drop like crazy – which is something you might expect from a generation that values connectivity more than the past car-centric generations. Church attendance is down. Voting in elections is down. Subscriptions to newspapers, magazines, and traditional news outlets of all kinds are down. Millennials are shunning fast food restaurants, shopping malls and traditional department stores. The bottom line is that this generation has made a big break from the way their parents did things.

So what does this all mean for ISPs, telcos and cable companies? First, it seems to me that millennials also have a different expectation for what it means to be a customer. They are used to buying things online and having the package delivered the next day. They are used to making appointments online and communicating in real time. This is a generation that has already walked away from email and is in the process of walking away from texting. It looks to me like this generation won’t do business with companies that don’t make it easy. For example, everybody in my generation moans about how painful it is to deal with the big cable company – but the millennials seem willing to walk away completely from the cable company or anybody else that is too hard to use.

I build business plans that look forward anywhere from five years to twenty years and sometimes I am not quite sure what to do about millennials in these plans. The one thing our industry sells that millennials seem to like is fast broadband. They live in a video-rich world and like to have multiple streams of video and music running at the same time. It looks like they are ready to slide easily into virtual and enhanced reality technologies which should strengthen their need for broadband. My guess is that millennials will be the ones forcing us oldsters to participate in virtual meetings and using other new technologies.

As different as the millennials are, I really wonder about how different their kids are going to be. If you have recently watched a five year old kid with a smartphone you quickly realize that they really don’t live in the same world as we do, or even as their millennial parents. I don’t know that any of us knows what to expect from the post-millennial generation. That generation is going to grow up in a world of virtual reality, artificial intelligence and all of the new technologies that will be hitting the streets over the next decade. The gulf between them and their grandparents is going to be immense.