The Crowded MVPD Market

The virtual MVPD (Multichannel Video Programming Distributor) market is already full of providers and is going to become even more crowded this year. Already today there is a marketing war developing between DirecTV Now, Playstation Vue, Sling TV, Hulu Live, YouTube TV, CBS All Access, fuboTV and Layer3 TV. There are also now a lot of ad-supported networks offering free movies and programming such as Crackle and TubiTV. All of these services tout themselves as an alternative to traditional cable TV.

This year will see some new competitors in the market. ESPN is getting ready to launch its sports-oriented MVPD offering. The network has been steadily losing subscribers from cord cutting and cord shaving. While the company is gaining some customers from other MVPD platforms they believe they have a strong enough brand name to go it alone.

The ESPN offering is likely to eventually be augmented by the announcement that Disney, the ESPN parent company, is buying 21st Century Fox programming assets, including 22 regional sports networks. But this purchase won’t be implemented in time to influence the initial ESPN launch.

Another big player entering the game this year is Verizon which is going to launch a service to compete with the offerings of competitors like DirecTV Now and Sling TV. This product launch has been rumored since 2015 but the company now seems poised to finally launch. Speculation is the company will use the platform much like AT&T uses DirecTV Now – as an alternative to customers who want to cut the cord as well as a way to add new customers outside the traditional footprint.

There was also announcement last quarter by T-Mobile CEO John Legere that the company will be launching an MVPD product in early 2018. While aimed at video customers the product will be also marketed to cord cutters. The T-Mobile announcement has puzzled many industry analysts who are wondering if there is any room for a new provider in the now-crowded MVPD market. The MVPD market as a whole added almost a million customers in the third quarter of 2017. But the majority of those new customers went to a few of the largest providers and the big question now is if this market is already oversaturated.

On top of the proliferation of MVPD providers there are the other big players in the online industry to consider. Netflix has announced it is spending an astronomical $8 billion on new programming during the next year. While Amazon doesn’t announce their specific plans they are also spending a few billion dollars per year. Netflix alone now has more customers than the entire traditional US cable industry.

I would imagine that we haven’t seen the end of new entrants. Now that the programmers have accepted the idea of streaming their content online, anybody with deep enough pockets to work through the launch can become an MVPD. There have already been a few early failures in the field and we’ve seen Seeso and Fullscreen bow out of the market. The big question now is if all of the players in the crowded field can survive the competition. Everything I’ve read suggests that margins are tight for this sector as the providers hold down prices to build market share.

I have already tried a number of the services including Sling TV, fuboTV, DirecTV Now and Playstation Vue. There honestly is not that much noticeable difference between the platforms. None of them have yet developed an easy-to-use channel guide and they feel like the way cable felt a decade ago. But each keeps adding features that is making them easier to use over time. While each has a slightly different channel line-up, there are many common networks carried on most of the platforms. I’m likely to try the other platforms during the coming year and it will be interesting to see if one of them finds a way to distinguish themselves from the pack.

This proliferation of online options spells increased pressure for traditional cable providers. With the normal January price increases now hitting there will be millions of homes considering the shift to online.

 

Big ISPs Raise Broadband Prices

As the new year dawns we are starting to see big ISPs raise broadband prices. One of the more interesting increases is by Comcast. They increased two rates – the rate of standalone broadband and the price of renting a cable modem.

The company now charges $75 per month for a standalone broadband connection that meets the FCC’s definition of broadband of being at least 25/3 Mbps. In many of their markets the minimum speed offered to new customers is faster than this, making the $75 entry price for standalone broadband.

For now it doesn’t look like Comcast increased the cost of bundled broadband, although they just announced that all bundled packages are increasing by $5 per month. But that increase can largely be attributed to increased programming costs. The price for standalone broadband was $65 a year ago, was raised by $5 during 2017 and just went up by $5 again.

The standalone price increase is aimed squarely at cord cutters. This price punishes customers who don’t want to pay for the other services in the various Comcast bundles. This is their way to still extract a lot of margin from somebody who elects to watch video online. I wrote a blog a few months ago that cited a Wall Street analyst that suggested that the company ought to charge $90 for standalone broadband, and it looks like the company is heeding that advice.

To put that price into perspective, Google Fiber and a few others are charging $70 for a standalone symmetrical gigabit connection – 20 times the speed for a lower price. But to really make a fair comparison you also have to consider the Comcast cable modem. They just raised that rate from $10 to $11 per month. The company makes it a challenger for customers who won’t use the Comcast modem, and so the real standalone price for the minimal Comcast broadband product is $86 per month.  It’s not hard to understand why households are beginning to find broadband unaffordable.

The $11 fee for a cable modem is outrageous. Comcast gets these directly manufactured and I am doubtful that they are spending more than $100 per device, and probably less. The $1 price increase adds roughly $300 million to Comcast’s bottom line. In total, the company is billing roughly $3.3 billion per year for all customers for an inventory of modems that probably costed them less than $2.5 billion. And since people tend to keep the modems for a number of years, this rate is mostly margin. Even for a new customer Comcast recovers the cost of the modem within 9 months.

Frontier also has introduced a troubling new price increase for broadband. Rather than increase the advertised price of the product they are adding a $1.99 per month ‘Internet Infrastructure Surcharge.’ This is strictly an increase in broadband rates, and the company is clearly hoping that most people don’t notice or don’t understand this new charge on their bill. For the last few years we have seen cable companies sneak in rates that look like taxes or external fees but which are just a piece of the cable TV bill. It’s disturbing to see this happening with broadband and I suspect other ISPs will begin copying this concept over the next few years.

Cox has also increased data prices, and unlike the above two companies which are trying to mask the broadband price increases, Cox raised all packages that include broadband from $2 to $4 per month.

Broadband prices have never been regulated. There was a minimal threat of price regulation under Title II authority at the FCC, but that’s now gone. I’ve seen a few articles blaming these latest price increases on the end of Title II regulation, but there has never been anything stopping an ISP from raising rates other than market forces. In fact, the FCC has never threatened to regulate broadband rates.

There are two real drivers of these and future broadband price increases. First, broadband is no longer growing explosively since most homes now have a broadband connection. And the publicly traded ISPs are feeling earnings pressure while the loss of cable TV and telephone customers leaves broadband as the only place to increase bottom line margins.

The second major factor is the absence of real broadband competition. In markets where a real competitor like Google shows up the big ISPs come close to matching the lower prices of the competitor. But as houses need faster broadband, the residual competitive pressure from DSL is waning, meaning that in most cities the cable companies are becoming a virtual monopoly. Big ISPs like Comcast will lower rates where they have a good competitor, but they are more than making up for it in markets where they have the only fast broadband.

One consequence of the kind of prices that Comcast is now charging is that, over time, they will induce more competitors to enter the market. But the only real threat on the horizon for the big cable companies is point-to-multipoint 5G. It will be interesting to see if that technology can really work as touted. If 5G is successful it will be interesting to see the pricing philosophy of the ISPs offering the service. They could price low like Google Fiber or else ride the coat strings of the cable companies with higher prices.

White Houses Identifies 5G as Key Infrastructure

The White House recently released the National Security Strategy paper that lists 5G as one of the key infrastructure goals for the country. The specific language from the paper is:

Federal, state, and local governments will work together with private industry to improve our airports, seaports and waterways, roads and railways, transit systems, and telecommunications. The United States will use our strategic advantage as a leading natural gas producer to transform transportation and manufacturing. We will improve America’s digital infrastructure by deploying a secure 5G Internet capability nationwide. These improvements will increase national competitiveness, benefit the environment, and improve our quality of life.

This is a policy paper and there is no way to tell if anything contained in the report will turn into an actual proposed government program, such as infrastructure grants. But it’s worth noting that this is very different from the language used during the early days of the administration that talked about expanding broadband coverage and that hinted at a $40 billion grant program to expand rural broadband infrastructure. The industry took that to mean some sort of expansion of the FCC’s CAF programs aimed at building fiber and other broadband infrastructure.

It seems that during this last year that the administration has been persuaded by the wireless companies to embrace 5G as the future of broadband. It’s probably not a coincidence that all of the wireless carriers met with the administration in recent months and that all of them refer to 5G as a strategic priority for the country.

In the long run 5G might become the preferred broadband solution, but it’s far too early to tell. We need to see 5G actually working in a number of different environments to understand the strengths, weaknesses and deployment cost of the technology. We already understand that 5G is going to require a significant investment in fiber and very little of the country is fiber-rich enough to support 5G infrastructure.

The priority for the wireless carriers is to make it easier to deploy small cell sites. They are currently supporting numerous state legislative efforts that preempt rights of communities and that force low-cost cell site connections with little or no paperwork or approval process by pole owners. While it takes some reading between the lines, one has to suppose that the administration will be supporting FCC efforts to make this the rule nationwide. However, the FCC is somewhat limited in the ability to force pole attachment rules on states and it will take new legislation from Congress to change the parts of the Telecommunications Act of 1996 that gave states the rights to set their own pole attachment rules.

Listing 5G as an infrastructure priority also makes me think that there will be federal funding available to help fund 5G networks if Congress can get their act together enough to pass an infrastructure plan. For now, only the giant companies are considering 5G deployments, but with federal grant money perhaps smaller entities could consider building the fiber needed to bring 5G to smaller and more rural communities.

But all of this ignores the fact that 5G might never be a cost-effective solution for rural America. The physics of the millimeter wave spectrum used for 5G is going to require getting fiber close to customers, and in rural America that means spending nearly the same amount to build a rural 5G network as it would cost to build a rural FTTP network. Unless the government just hands out the money to build such networks it’s hard to think that any of the big ISPs will ever be interested in serving rural markets.

I’m trying to envision what a 5G infrastructure plan would fund. The most likely scenario in my mind would be grants given to the large ISPs to expand 5G to suburbia where the cost per subscriber to expand 5G is probably reasonable. Such an effort would be interesting in that it would bring a second major ISP to compete against the near-monopoly of the cable companies. But this does not feel like the sort of investment that ought to be made with federal dollars.

It’s hard though to see the feds funding the fiber needed to build a rural 5G network. And it’s hard to see the big ISPs wanting to support the operational costs to support such a rural network – AT&T and Verizon are both bailing as fast as they can today from serving rural America.

The language in the policy paper means nothing unless the federal government creates some sort of funded infrastructure plan and calling 5G a priority is just rhetoric without the funding to back it up. But one thing is clear from the language in this policy paper – the administration has bought into the rhetoric from the wireless providers.

DOJ Opposes AT&T / Time Warner Merger

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

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

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

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

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

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

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

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

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

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

Telecom Predictions for 2018

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

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

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

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

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

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

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

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

3Q 2017 Broadband Growth

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

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

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

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

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

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

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

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

Cable Customers 3Q 2017

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

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

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

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

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

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

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

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

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

Are We at the End of Broadband Growth?

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

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

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

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

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

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

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

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

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

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

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

Verizon Announces Residential 5G Roll-out

Verizon recently announced that it will be rolling out residential 5G wireless in as many as five cities in 2018, with Sacramento being the first market. Matt Ellis, Verizon’s CFO says that the company is planning on targeting 30 million homes with the new technology. The company launched fixed wireless trials in eleven cities this year. The trials delivered broadband wirelessly to antennas mounted in windows. Ellis says that the trials using millimeter wave spectrum went better than expected. He says the technology can achieve gigabit speeds over distances as great as 2,000 feet. He also says the company has had some success in delivering broadband without a true line-of-sight.

The most visible analyst covering this market is Craig Moffett of Moffett-Nathanson. He calls Verizon’s announcement ‘rather squishy’ and notes that there are no discussions about broadband speeds, products to be offered or pricing. Verizon has said that they would not deliver traditional video over these connections, but would use over-the-top video. There have been no additional product descriptions beyond that.

This announcement raises a lot of other questions. First is the technology used. As I look around at the various wireless vendors I don’t see any equipment on the market that comes close to doing what Verizon claims. Most of the vendors are talking about having beta gear in perhaps 2019, and even then, vendors are not promising affordable delivery to single family homes. For Verizon to deliver what it’s announced obviously means that they have developed equipment themselves, or quietly partnered on a proprietary basis with one of the major vendors. But there is no other ISP talking about this kind of deployment next year and so the question is if Verizon really has that big of a lead over the rest of the industry.

The other big question is delivery distance. The quoted 2,000 feet distance is hard to buy with this spectrum and that is likely the distance that has been achieved in a test in perfect conditions. What everybody wants to understand is the realistic distance to be used in deployments in normal residential neighborhoods with the trees and many other impediments.

Perhaps the most perplexing question is how much this is going to cost and how Verizon is going to pay for it. The company recently told investors that it does not see capital expenditures increasing in the next few years and may even see a slight decline. That does not jive with what sounds like a major and costly customer expansion.

Verizon said they chose Sacramento because the City has shown a willingness to make light and utility poles available for the technology. But how many other cities are going to be this willing (assuming that Sacramento really will allow this)? It’s going to require a lot of pole attachments to cover 30 million homes.

But even in Sacramento one has to wonder where Verizon is going to get the fiber needed to support this kind of network? It seems unlikely that the three incumbent providers – Comcast, Frontier and Consolidated Communications – are going to supply fiber to assist Verizon to compete with them. Since Sacramento is not in the Verizon service footprint the company would have to go through the time-consuming process needed to build fiber on their own – a process that the whole industry is claiming is causing major delays in fiber deployment. One only has to look at the issues encountered recently by Google Fiber to see how badly incumbent providers can muck up the pole attachment process.

One possibility comes to mind, and perhaps Verizon is only going to deploy the technology in the neighborhoods where it already has fiber-fed cellular towers. That would be a cherry-picking strategy that is similar to the way that AT&T is deploying fiber-to-the-premise. AT&T seems to only be building where they already have a fiber network nearby that can make a build affordable. While Verizon has a lot of cell sites, it’s hard to envision that a cherry-picking strategy would gain access to 30 million homes. Cherry-picking like this would also make for difficult marketing since the network would be deployed in small non-contiguous pockets.

So perhaps what we will see in 2018 is a modest expansion of this year’s trials rather than a rapid expansion of Verizon’s wireless technology. But I’m only guessing, as is everybody else other than Verizon.

Operating on a Leased Network

One of the comments posted on a recent blog mentioned that CenturyLink recently had agreed to operate on somebody else’s fiber network to serve residential customers – the first time that one of the big telcos or cable companies had agreed to do so. One of the major reasons cited for lack of competition in the US is the unwillingness of the major ISPs to operate outside their own networks. This certainly sounded newsworthy and I looked into the example cited.

CenturyLink has agreed to use the fiber network provided by Lumiere Fiber, an affiliate company of Sterling Ranch, a new planned community outside of Denver. CenturyLink won the ability to serve the community through an RFP competition with Comcast, the cable company serving the area. As the winner, CenturyLink will be the exclusive ISP on the network – which only has a few homes now but has plans to grow to 12,000 residences.

So is this really newsworthy? I think the answer is both yes and no – but mostly no. It is true that CenturyLink will be using somebody else’s fiber network, and a large one at that, when the community is ultimately built. But there are a number of reasons why this is not as groundbreaking as it sounds.

First, this is not really unique. While this is a large new subdivision, in many ways this is similar to the thousands of arrangements that ISPs routinely have made to serve large apartment complexes. In the vast majority of apartments the wiring is owned by the landlord and not the ISPs. There are some large apartment units around the country numbering in the thousands of units and this opportunity is unique only from this perspective of being larger than most MDUS.

CenturyLink is already building a lot of fiber to residential neighborhoods, with nearly 1 million new units passed this year – so this isn’t going to present any technological challenges. I am sure that the company will use the identical electronics and provisioning software it uses everywhere else.

This also is not going to stretch the operational systems of CenturyLink. The only real difference between this and other CenturyLink fiber is that the company doesn’t own the fiber. But they are going to take orders and connect new customers using their normal processes. They will dispatch technicians for trouble calls in the usual manner. And if Lumiere hires CenturyLink to do the fiber maintenance then they would even make fiber repairs in almost the same manner (this detail was not specified in the press releases).

There seems to be two reasons why the big ISPs don’t generally use networks owned by others. In the case of the big cable companies there seems be a gentleman’s agreement to never cross those lines. I can’t find one example of a big cable company crossing the line to compete for residential customers.

But the hardest barrier for the big ISPs to use other networks is the fact that their systems are largely incapable of making operational exceptions. They have created operation systems and processes that work for them, on their own networks, with their own employees. These processes are often highly decentralized and it takes employees scattered across the country to accomplish normal daily tasks like adding a new customer or answering a trouble call. It’s extremely difficult for a decentralized company to make exceptions for customers that are treated different than everybody else – that always results in chaos.

An example of this is Verizon FiOS. When the company decided to build fiber they realized that they could not reshape their existing copper work processes and people to accommodate the new technology. They solved this by creating a totally new company and FiOS was new from top to bottom – from technology, to people, to processes.

The real headline I want to see is where one of the big ISPs gets on somebody else’s network in a competitive environment. For example, there are a number of open access fiber networks in Washington state that are significantly larger than the Sterling Ranch opportunity. There are numerous smaller open access networks around the country, and no big ISP has ever served residents on these networks. If the big companies would jump on competitive networks then a lot more of these networks would get built.

San Francisco is talking about building an open access fiber network and if it’s built will really challenge the big ISPs. If that network comes to fruition, will one of the other big cable companies decide to take on Comcast? That would be the big news we’ve always wanted to hear.