Another Story of Lagging Broadband

We don’t really need any more proof that the FCC broadband data is massively out of touch with reality. However, it seems like I see another example of this almost weekly. The latest news comes from Georgia where the Atlanta Journal-Constitution published an article that compared actual broadband speeds measured by speed tests to the FCC data. The newspaper analyzed speed tests from June through December 2017 and compared those results to the FCC databases of supposed broadband speeds for the same time period. Like everywhere else that has done this same comparison, the newspaper found the FCC data speeds to be overstated – in this case, way overstated.

The newspaper relied on speed tests provided by Measurement Labs, an Internet research group that includes Google, the Code for Science & Society, New America’s Open Technology Institute, and Princeton University’s PlanetLab. These speed tests showed an average Internet speeds of only 6.3 Mbps for areas where the FCC data reported speeds of 25 Mbps are available.

Anybody that understands the FCC mapping methodology knows that you have to make such a comparison carefully. The FCC maps are supposed to show available speeds and not actual speeds, so to some degree the newspaper is comparing apples and oranges. For instance, when multiple speeds are available, some people still elect to buy slower speeds to save money. I would expect the average speed in an area where 25 Mbps is the fastest broadband to be something lower than that.

However, the ultralow average speed test results of 6.3 Mbps points out a big problem in rural Georgia – homes electing to buy lower speeds can’t possibly account for that much of a difference. One thing we now know that is an area shown by the FCC to have 25 Mbps broadband speeds is probably served by DSL and perhaps by fixed wireless. The vast majority of cable companies now have speeds much faster than 25 Mbps and areas shown on the maps that are served by cable companies will show available speeds of at least 100 Mbps, and in many cases now show 1 Gbps.

The only way to explain the speed test results is that the FCC maps are wrong and the speeds in these areas are not really at the 25 Mbps level. That highlights one of the big fallacies in the FCC database, which is populated by the ISPs. The telcos are reporting speeds of ‘up to 25 Mbps’ and that’s likely what they are also marketing to customers in these areas. But in reality, much of the DSL is not capable of speeds close to that level.

The newspaper also gathered some anecdotal evidence. One of the areas that showed a big difference between FCC potential speed and actual speed is the town of Social Circle, located about 45 miles east of Atlanta. The newspaper contacted residents there who report that Internet speeds are glacial and nowhere near to the 25 Mbps as reported on the FCC maps. Several residents told the newspaper that the speeds are too slow to work from home – one of the major reasons that homes need faster broadband.

Unfortunately, there are real-life ramifications from the erroneous FCC maps. There have been several grant programs that could have provided assistance for an ISP to bring faster broadband to places like Social Circle – but those grants have been limited to places that have speeds less than 25 Mbps – the FCC definition of broadband. Areas where the maps are wrong are doubly condemned – they are stuck with slow speeds but also locked out of grant programs that can help to upgrade the broadband. The only beneficiary of the bad maps are the telcos who continue to sell inadequate DSL in towns like Social Circle where people have no alternative.

The State of Georgia has undertaken an effort to produce their own broadband maps in an attempt to accurately identify the rural broadband situation. The University of Georgia analyzed the FCC data which shows there was 638,000 homes and businesses that couldn’t get Internet with speeds of at least 25 Mbps. The state mapping effort is going to tell a different story, and if the actual slow speeds indicated by the speed tests are still true today then there are going to by many more homes that actually don’t have broadband.

It seems like every examination of the FCC mapping data shows the same thing – widespread claimed broadband coverage that’s not really there. Every time the FCC tells the public that we’re making progress with rural broadband, they are basing their conclusions on maps they know are badly flawed. It’s likely that there are many millions of more homes that don’t have broadband than claimed by the FCC – something they don’t want to acknowledge.

Another Alternative for Local TV

One of the factors that is jacking up the price of cable TV is the retransmission fees paid to local networks. Cable companies pay hefty fees to local ABC, CBS, FOX, and NBC affiliates in order to carry the stations on a cable system. A decade ago this right was mostly granted for free, but cable companies now typically pay $12 to $15 per month per customer to carry the local network stations.

Locast has found an interesting way to put local networks on the Internet without paying the local retransmission fees. They have launched their service in New York, Philadelphia, Boston, Washington DC, Baltimore, Chicago, Houston, Dallas, Sioux Falls, Denver, Rapid City, Los Angeles, and San Francisco.

Locast is taking advantage of a loophole in the law that allows ‘broadcast translators’ to receive and transmit a local broadcast TV signal without a copyright license. In the US, a broadcast translator was traditionally a relay station that would receive TV signals from an antenna and then retransmit the signal to an area that couldn’t receive the signal. There are always places in and around cities that are in radio ‘holes’ that can’t get a signal, similar to dead areas for cellular coverage. Further, it’s common for folks living in areas with a lot of high rises to not be able to receive local TV through the air without access to rooftop antennas.

A law passed by Congress in 1976, 17 U.S.C. 111(a)(5), allows for a non-profit organization to make a secondary transmission of a local broadcast signal as long as the non-profit doesn’t receive any ‘direct or indirect commercial advantage’ from the process. Non-profits are allowed to charge a fee that allows them to recover actual and reasonable costs, but no more.

Locast is a non-profit that is operated by the Sports Fans Coalition NY, another non-profit that has been fighting to make sure that New York City residents can see local sports over the air. For example, the organization has fought to modify the blackout rules enforced by many major league sports.

In New York City the organization puts 14 local stations on the Internet that includes the major networks. Customers of the service receive the channels along with a traditional channel line-up for the local channels. Locast claims the service is of huge benefit in the city since there are many households who cannot receive signals over-the-air with access to roof-top antennas.

Locast also paints itself as being of benefit to local stations. They geofence each city and only make the internet feeds available to those that can verify they live in the specific metropolitan area. Locast says that they are reaching cord cutters and are providing benefit to local stations because they provide feedback of what people are watching. This gives stations verifiable ‘eyeballs’ that can be counted when selling advertising. Stations are otherwise not seeing any financial benefit from cord cutters.

Locast solicits donations – with the base suggested amount of $5 per month. Viewers are not required to donate, but reviews say that those that don’t donate are interrupted regularly asking for a donation.

It’s an interesting model. A few years ago, Aereo tried to do something similar and was selling low-cost access to local stations through a technology that beamed the signal directly to each viewer. The broadcasters hounded Aereo in court until they finally forced them out of business.

The interesting difference here is the non-profit loophole. It’s a little surprising that Locast hasn’t yet been sued, having started this business in early 2018. They admit on their website that they expect at some point to get sued. But perhaps they won’t get sued if the local stations see the benefit – Locast claims that some stations in Philadelphia are actively working with them since they bring verifiable customers and tracking of views.

The Homework Gap

There are numerous studies and also mountains of anecdotal evidence from teachers that students without home broadband lag in academic performance compared to students with home broadband. This problem has come to be called the homework gap.

In a recent article, the Associated Press estimated that 17% of students – 3 million students – don’t have a computer at home. The estimate is that 18% don’t have broadband at home. That same article referenced a major study performed by the National Center for Education Statistics (NCES), an agency inside of the US Department of Education. That study compared test scores for 8th grade students both with and without a home computer. The results showed:

  • On tests of reading comprehension, students who have a computer at home had an average score of 268 compared to a score of 247 for students without a computer.
  • In testing for mathematics, students with a computer at home scored 285, while those without score 262.
  • In testing science, students with a computer scored 156 compared to 136 for students without a computer.
  • In testing competency in information and communication technology, students with a home computer scores 152, compared to 128 for students without a home computer.

The NCES also gathered statistics from around the world and they found that in 34 out of 37 countries that students with a home computer outperformed students without a computer in mathematics.

It’s not easy to gather this data. Student populations change every school year. There are also numerous kids in gray areas. For example, there are many students trying to do homework on smartphones – somewhere between having a home computer and not. There are also temporary broadband solutions such as school systems and libraries that lend hot spots to some students.

I’ve worked with several school systems that provide laptops or tablets to all students and then struggle with having to deal with rural students that don’t have a home broadband connection. NCES reports that teachers often modify their curriculum to not disadvantage students without home broadband – literally dumbing down courses for everybody to account for the fact that some students don’t have home broadband.

The homework gap is a problem because other studies have shown that lagging behind in school carries over into adult life. For example, students that lag in school drop out of school at a much higher rate and enroll in college at a much lower rate. Other studies have shown that students that don’t finish high school or enroll in college earn significantly less over a lifetime than students that graduate and/or get at least some college.

When rural communities come to me looking for a broadband solution, the homework gap is often the number one issue. Parents often have to make extraordinary efforts to find access to broadband – such as driving to town nightly to sit outside of hotspots. These parents are among the most vocal proponents for broadband. I’ve found that in rural communities the support for getting broadband for students run deep. My consulting company conducts surveys, and in rural communities we find nearly universal support for finding a local solution for the homework gap.

NCES is worried that the homework gap is growing as more school systems migrate their curriculum online. It’s getting harder for schools to try to accommodate students without broadband or home computers. As a country we pay a lot of lip service to the topic of finding a rural broadband solution – politicians and regulators seem to talk about it non-stop. But if we don’t find a solution there is one thing we know for sure – those 3 million students are not going to do perform as well as everybody else – and that’s a problem that affects all of us. We have to do better.

Will Broadband Go Wireless?

For years it’s been impossible to go to any industry forum without meeting a few folks who predict that residential broadband will go wireless. This buzz has accelerated with the exaggerated claims that fast 5G broadband is right around the corner. I’ve seen even more talk about this due to a recent Pew poll that shows that the number of people that only use their cellphones for data has climbed significantly over the last few years – I’m going to discuss that poll in another upcoming blog.

The question I’m asking today is if it’s possible that most residential broadband usage in the country can go wireless. Like I usually do I looked around the web to try to define the current aggregate amount of landline and cellular data currently being used in the US. It’s a slippery number to get a grasp of for a number of reasons, not the least being that broadband usage is growing rapidly for both cellphones and landline connections. It looks like landline data usage per household is still doubling about every three years; it looks like cellphone data usage is doubling every two years.

OpenVault recently reported that the average monthly household broadband usage has grown to 273.5 gigabytes for the first quarter of this year, up from 215.4 gigabytes a year earlier in 2018 – a growth rate of 27% which almost exactly doubles usage in three years if sustained.

There are currently a little more than 127 million households, and the FCC says that around 85% of all households have broadband. Extrapolating that all out means that US landline networks in aggregate carried almost 30 exabytes of broadband for households monthly in the first quarter of this year. (An exabyte is 1 million terabytes, or 1 billion gigabytes).

I’ve seen a few recent statistics that says that about 77% of Americans now have a smartphone, up from 67% in 2017. Recent statistics from several sources say that the average data usage per smartphone is now over 4 gigabytes per month, with buyers of ‘unlimited’ data plans averaging more than 6 gigabytes per month and others still down closer to 1 gigabyte per month. With a current population around 329 million and using an average of 4 gigabytes per month per residential phone, the cellular networks are currently carrying about 1 exabyte of residential broadband per month.

If we extrapolate forward six years, assuming keeping the existing growth rate for each kind of broadband, we can predict that total monthly US residential broadband usage will be something like the table below. Note that these figures exclude business broadband usage.

:

Monthly Exabytes
Landline Cellular
2019 30 1.0
2020 38 1.4
2021 48 2.0
2022 61 2.9
2023 78 4.2
2024 99 6.0

Today the landline residential broadband networks are carrying 29 exabytes more of data per month than cellular. Within six years that difference grows to 93 exabytes. There is no reasonable path forward that will have cellular data usage overtake residential usage in our lifetime.

The next issue to address is the overall capacity of the cellular network. The engineers at the cellular networks are likely cringing at the possibility of having to carry 6 exabytes of cellular data per month in six years – a 600% increase over today. The cellular companies are going to be increasing data capacity in three ways – adding small cells, adding more mid-range spectrum, and adding 5G efficiency captured mostly through frequency slicing. It’s going to take all of those upgrades just to keep up with the growth in the above chart.

There are those who say that the way the cellular companies will handle future growth is through millimeter wave spectrum. However, that technology will require a fiber-fed small cell site near to every home. We really need to stop referring to millimeter wave spectrum as 5G wireless and instead call it what it is – fiber-to-the curb. When thought of that way, it’s easy to realize that there are no carriers likely to make the investment to deploy that much fiber along every residential street in America. Wireless 5G fiber-to-the-curb is not coming to most neighborhoods. The bottom line is that the world is not going to go wireless, and anybody saying so is engaging in hyperbole and not reality.

Why 5G Won’t Be Here Tomorrow

I just saw another article yesterday written by a major-city newspaper telling the public that 5G is coming in 2020. I hate to see reporters who have accepted the nonsense being peddled by the carriers without digging a little deeper to find the truth. At some point in the near future, the public will finally realize that the 5G talk has mostly been hype.

I don’t mean to always sound like a 5G critic because over time 5G will vastly improve the cellular experience. However, many of the improvements being suggested by the cellular companies – like gigabit cellular service – may never happen. Of more immediacy is the fact that there won’t be any major improvements to cellular networks from 5G for at least 3 – 5 years. The carriers have the country and politicians fully convinced that 5G is right around the corner – but it’s not.

There was a recent article written by Sue Marek in FierceWireless that is a great example of why 5G is not going to be here tomorrow. Titled Network Slicing is a Security Nightmare for Operators, Marek explains how complicated it’s going to be to implement network slicing – perhaps the most important new aspect of 5G cellular service.

Network slicing is the ability of the cellular network to size the transmission path to exactly meet a customer’s bandwidth needs. Network slicing is one of the ways that will enable a cell site to communicate with many more customers at the same time. Today, every customer gets the same-sized data channel, meaning a lot of bandwidth is wasted when customers use less than a full channel.

Marek points out the difficult technical challenge for providing security for every slice of bandwidth. She says that getting this right is going to take two to three years. Until network slicing is viable there really is nothing that can be called 5G. The important takeaway from her article is how difficult it is to implement new technology. 5G is a drastic change from 4G in many ways. There are thirteen major changes in the 5G specification compared to 4G and implementing each of them will be a technical challenge.

What is annoying about the 5G marketing hype is that we’ve always known it would take up to a decade to fully implement 5G, just as it did to implement 4G. The cellular companies can’t seem to help themselves from overhyping new technology, but the 5G hype is many times worse than the 4G hype a decade ago. This mostly seems due to the fact that the cellular carriers decided to use the 5G hype as a way to cram through regulatory changes they’ve wanted for a long time. That forced them to really crank up the 5G rhetoric.

5G will take the same path used by all other electronic technologies – there is a tried-and-true method of introducing upgrades. New breakthroughs start in a lab. They then go to a ‘breadboard’ process where working models are developed. Once the breadboards have been thoroughly tested they go into prototype chips, which are then retested to make sure the performance made it through the conversion to silicone. Finally, the chip design is approved and the new breakthrough goes into production. At the very fastest this process might be done in 12 – 18 months, although this can take as long as three years. Breaking in new changes in the cellular world is doubly complicated because these same changes also have to be introduced into cellphone handsets.

The likely progression we’ll see for 5G is that some new aspect of the 5G specification will make it annually into chipsets. As that happens, only the newest phones will be able to use the upgrades, while earlier versions of 5G phones won’t recognize the new breakthroughs. The idea that the handset manufacturers are introducing 5G handsets in 2020 is laughable because practically none of the important 5G upgrades are yet in chip production. Those handsets will be 5G in name only (and still priced ridiculously high).

Marek is pointing out the complexity of getting 5G security right. There are dozens of other equally difficult technical challenges needed to fully realize 5G, and there are scientists in labs working on all of them. The labs will plow through all of this over time, and long after the hype is far in the past, we’ll get 5G phones that implement most of the 5G specification. It’s worth noting that there never may be a phone that meets the entire specification – because the specifications for a new technology are a wish list. It may turn out that some parts of the specification may never practically work in the field.

Video Camera Ethics

I have a number of clients that now offer security products, many which come with video cameras that can be used at the front door or elsewhere at a customer location. There are a lot of discussions nationwide about the ethics involved with providing video cameras. Today’s blog discusses topics you should consider if you offer, or plan to offer video cameras.

ISP Access to Video. If an ISP provides customer video cameras, there are numerous concerns if your employees are able to access and watch customer video feeds. Your company could be subject to large legal liabilities if it ever came to light that any of your employees are watching customer videos. It’s incredibly tempting for employees to spy on their exes or watch their neighbors, and your ISP would be financially liable, and possibly even criminally liable if you enable violations of customer privacy.

Most, but not all customers are going to want you to record video. They will want to look at past events such as a burglary. Customers might just want to glance back through home activity every evening. But customers also are going to want privacy so that they are the only ones who can watch video, so you’ll have to come up with some method that assures that privacy. This is not as easy as it sounds, because typically any kind of archive that is available to customers also is probably accessible by your employees.

If you can develop a system that guarantees the desired privacy you will have a marketing advantage while also reducing your liabilities.

Spying on Neighbors. One of the most discussed topics in the home security industry is the ability of cameras to inadvertently watch activity at neighbors. For example, a front door camera can usually be placed so that it only sees people who approach the front door but can alternately be angled to see everything in front of the house including the neighbors across the street.

Setting cameras to see the whole street raises a number of ethical issues. You’re first inviting customers to watch their neighbors if you provide a wider view of the front of the home. You also are creating a video camera recording of events that happen beyond the boundary of the customer’s premise. It’s not hard to imagine seeing every passing car and every pedestrian that passes in front of a home. There are incidents in the news of homeowners accusing innocent bypassers of bad behavior simple because they capture video of them walking past their home often.

Law Enforcement. There are many law-enforcement issues in the gray area. There are a few specific laws that give law enforcement the ability to subpoena telephone call records or to wiretap phone calls or internet connections. There are not yet many such laws that have been updated to include video camera recordings.

For example, is an ISP obligated to turn over video from indoor cameras to law enforcement, particularly if the customer doesn’t approve it? There is probably some precedent to allow law enforcement to look at past recordings with a subpoena, but it’s a legal gray area to talk about giving live access to indoor cameras to law enforcement. To what degree would an ISP be violating customer privacy if they grant law enforcement access and there is no clear law authorizing video camera access?

There are also local police departments with programs where homeowners give law enforcement the passwords to allow them to view live feeds from outdoor and front door cameras. This essentially gives law enforcement the ability to watch the street or watch a neighbor without a subpoena.

I’m sure that over time that some of these issues will be clarified through legislation or regulatory rulings. But for now, there are a lot of gray areas. If you are going to offer a video camera service. you might want to determine your policies up-front rather than waiting for the inevitable issues to confront you.

AT&T and Verizon Fiber

If you look at the annual reports or listen to the quarterly investor calls, you’d think that AT&T and Verizon’s entire future depends upon 5G. As I’ve written in several blogs, there doesn’t seem to be an immediate financial business case for 5G and the big carriers are going to have to figure out how to monetize 5G – something that’s going to take years. Meanwhile, both companies have been expanding their fiber footprints and aggressively adding fiber-based broadband customers.

According to the Leichtman Research Group, AT&T added only 34,000 net broadband customers in the first quarter of this year – not an impressive number when considering that they have 15.7 million broadband numbers. But the underlying story is more compelling. One the 1Q investor call, the company says they added 297,000 fiber customers during the first quarter, and the smaller net number recognizes the decline of DSL customers. The overall financial impact was a net gain of 8% for broadband revenues.

AT&T is starting to understand the dynamics of being a multimedia company in addition to being a wireless carrier and an ISP. According to John Stephens, the AT&T CFO, the company experiences little churn when they are able to sell fiber-based Internet, a video product and cellular service to a customer.

The company views its fiber business as a key part of its growth strategy. AT&T now passes over 20 million homes and businesses with fiber and is aggressively pushing fiber broadband. The company has also undergone an internal consolidation so that all fiber assets are available to every business unit. The company has been expanding its fiber footprint significantly for the last few years, but recently announced they are at the end of major fiber expansion. However, the company will continue to take advantage of the new fiber being built for the nationwide FirstNet network for first responders. In past years the company would have kept FirstNet fiber in its own silo and not gotten the full value out of the investment.

Verizon has a similar story. The company undertook an internal project they call One Fiber where every fiber asset of the company is made available to all Verizon business units. There were over a dozen Verizon business units with separate fiber networks in silos.

Verizon is currently taking advantage of the One Fiber plan for expanding its small cell site strategy. The company knows that small cell sites are vital for maintaining a quality cellular network and they are also still weighing how heavily to invest in 5G wireless loops that deliver wireless broadband in residential neighborhoods.

Verizon has also been quietly expanding its FiOS fiber footprint. The company has gotten regulatory approval to abandon the copper business in over 100 exchanges in the northeast where it operates FiOS. In those exchanges, the company will no longer connect customers to copper service and says they will eventually tear down the copper and become fully fiber-based. That strategy means filling in neighborhoods that were bypassed by FiOS when the network was first built 20 years ago.

Verizon is leading the pack in terms of new fiber construction. They say that are building over 1,000 route miles of fiber every month. This alone is having a big impact on the industry as everybody else is having a harder time locating fiber construction crews.

Verizon’s wireline revenues were down 4% in the first quarter of this year compared to 2018. The company expects to start benefitting from the aggressive fiber construction program and turn that trend around over the next few years. One of the most promising opportunities for the company is to start driving revenues in markets where it’s owned fiber but had never fully monetized the opportunity.

The main competitor for all of the fiber construction by both companies are the big cable companies. The big telcos have been losing broadband customers for years as the cable company broadband has been clobbering DSL. The two telcos are counting on their fiber products to be a fierce competitor to cable company broadband and the companies hope to start recapturing their lost market share. As an outsider I’ve wondered for years why they didn’t do this, and the easy answer was that both companies sunk most of their capital investments into wireless. Now they are seeing that 5G wireless needs fiber, and both companies have decided to capitalize on the new fiber by also selling landline broadband. It’s going to be an interesting battle to watch since both telcos still face the loss of huge numbers of DSL customers – but they are counting on fiber to position them well for the decades to come.

The End of Customer Discounts?

When we’re working on broadband feasibility studies, one of the things we try to do is to get a sample of customer bills. We’ve found that the amount that the big ISPs charge for service differs by market and that the difference is usually manifested through promotional discounts given to customers. We’ve seen some markets where a majority of customers have discounts and others where it’s a far smaller percentage. Understanding the level and extent of discounts is another useful data point to have when considering competing in a market.

It sounds like the biggest proponent of special pricing was Time Warner Cable. CEO Tom Rutledge of Charter says that at the time of the merger with Time Warner, that the company had over 90,000 different customer packages due to deals that had been negotiated between customers and customer service reps. Charter is ending the Time Warner discounts when promotional periods end and asking customers to pay full price. They are not trying to keep customers who threaten to leave.

Charter is not the only company that is ending discounts. AT&T and DirecTV have been shedding hundreds of thousands of cable customers in the most recent quarters as the company has decided to let go of customers who refuse to pay the full price after the end of a promotional discount period. AT&T has decided they’d rather not keep customers if they aren’t contributing to the company’s margin.

The impact of ending customer discount can be huge. I recently analyzed a city where it seems that most of the customers had discounts that ranged from 15% to nearly 50% of the total bill. In many cases, the discounts are as great or greater than the profit margin on cable and I’ve always wondered why the cable companies offered such deep discounts.

One cause of big discounts historically came from the win-back programs offered by big ISPs. Anybody who has tried to quit service with an ISP is familiar with being handed to a win-back representative who is authorized to offer discounts to get customers to stay. These reps earned commissions for retaining customers and were usually liberal with the offered discounts.

Customers losing discounts on cable TV face a few stark choices. They can agree to pay a lot more to keep the same service. They can cut the cord and drop cable TV, but in doing so they face a second financial penalty of losing the bundling discount they had for buying multiple services. A third option is to step down to a lower-cost cable package. For example, Charter now offers an online small cable line-up called Spectrum TV Essentials that provides 60 channels for $15 per month. Most of the cable companies are offering similar small lineups.

We got a glimpse at cable TV margins recently when the Wall Street analyst firm Cowan looked at the cable market. They estimated that the Comcast has the gross highest margin on cable TV at 40% (cable rates less programming costs) followed by Charter and Dish Networks at 35%. They estimated that the margins for smaller cable companies like Altice are only 20%.

I was always surprised by some of the discounts I saw on bills because some of the bigger discounts looked to be giving away all of the margin on the cable product. Now that I see the estimates by Cowan of gross margins, in some cases, employees at these companies were giving away discounts larger than the margin.

I’ve wondered for years when the big companies were going to wake up and end the discounts and associated practices. The cable companies have largely won the battle against DSL and in most markets they have no effective competition. DSL seems to be keeping customers that care about price more than speed and the cable companies are getting the higher-margin customers. Cable broadband has become so much better than DSL that it’s getting hard to imagine that many customers will willingly go back to DSL.

Only the cable companies are going to know the math but eliminating most promotional discounts ought to be equivalent to implementing a 5% to 10% overall rate increase. Customers breaking the bundle will add even more to margins. Customers need to get used to the idea of paying full price after their initial discount period is over. I have to wonder when the cable companies will stop offering promotional discounts to get new customers in non-competitive markets.

Predicting Financial Success

I’m often asked to provide a rule-of-thumb metric to predict the financial success of a broadband business plan. The two most commonly requested metrics are customer density (how many households are needed per mile of road) or the percentage of customers needed (penetration rate) to make a fiber business plan work.

After having done hundreds of feasibility studies I’ve stopped boiling success down to any simple metric – it’s never that simple. The reality is that there are a number of important variables that have a major impact on operating a successful broadband business plan. Every ISP and every market is different, and one or two variables can have a huge positive or negative impact on a given business plan.

Following are the major variables that can make a difference when building fiber. A similar list can be made for deploying fixed wireless or other technologies.

  • Customer penetration rate. An area with low density might still have great financial results if the penetration rates are high enough. I’ve seen expected penetration rates vary from 40% in some large markets to over 90% in markets with no existing broadband. Changing the expected penetration just a few percentage points can have a big impact on cash flow. This is why we think it’s mandatory to do a survey to understand customer interest in fiber broadband.
  • Labor rates. The cost of staffing varies widely across the country and between companies. and there are places where labor costs twice as much as in other parts of the country. Labor costs also include taxes and benefits which vary widely by state and between ISPs. The staffing structure of the ISP also comes into play since companies vary between lean and staff heavy.
  • Borrowing costs. The interest rates and the term of a loan (15-years versus 25-years) can have a huge impact on a fiber project since the size of the borrowing is usually significant. Things that mitigate borrowing costs such using some equity, getting grants, etc. can have a big positive impact.
  • Prices. Broadband prices can have a big impact. We know that most customers will buy the lowest priced broadband that has a reasonable speed. There is a big difference if this primary product is at $50 versus $60.
  • Cost of the Network. The metric I’m often asked about is the minimum number of households needed per road mile. While customer density is an important factor, there are many other issues that can have a big impact. The cost of building fiber varies widely across the country due to some of the following:
    • The mix of aerial and buried fiber has a giant impact.
    • For buried fiber, the type of soil matters, because the presence of rock adds big costs.
    • Again labor rates, meaning the cost of construction crews. We’ve also seen projects that took federal money that had to pay prevailing wages for rural construction that killed the project.
    • The condition of the poles and the effort and cost needed for make-ready can be a huge factor.
    • The difference between building in the power space versus the communications space on poles can be significant.
    • Choosing PON versus active Ethernet can have a difference, with Active E having larger fiber bundles needing more splicing.
    • One of the biggest impacts is the cost of fiber drops – the two important factors are 1) average distance customers are from the road, and 2) who builds the drops (we’ve seen the labor costs for drops vary by several hundred percent).
    • Building in phases versus building as quickly as possible can sometimes make a big difference.
    • Customer density is important, but the above factors can matter a lot more. Density can also be a tricky number. Consider two examples of companies that would have the same average density but significantly different costs: Company A has no towns and the rural areas average 10 households per road mile. Company B includes one decent sized town but is surrounded by big farms but still averages 10 households per road mile.

Clients always want me to predict the outcome of a business plan before we undertake the needed business models. I’ve learned to not predict. I’ve worked on projects that look to be far more profitable than I would have expected and looked at others that don’t look feasible for some reason. As an example, I recently finished a business plan model where it turns out that the existing poles in the new market were nearly unusable and the alternative of going underground was impractical because of rock. This one factor made it hard to justify building fiber in a market that otherwise would have passed the sniff test using high-level metrics.

Broadband Subscriptions Continue to Grow

According to the Leichtman Research Group, the biggest ISPs added 945,000 broadband customers in the first quarter of 2019. If sustained that would be an annual growth rate of 4% for the year. That contrasts drastically with the largest cable providers that are now losing cable customers at a rate of 6% annually.

The table below shows the changes in broadband customers for the largest ISPs for the quarter.

4Q 2018 Added % Change
Comcast 27,597,000 375,000 1.4%
Charter 25,687,000 428,000 1.7%
AT&T 15,737,000 36,000 0.2%
Verizon 6,973,000 12,000 0.2%
Cox 5,100,000 40,000 0.8%
CenturyLink 4,806,000 (6,000) -0.1%
Altice 4,155,000 36,900 0.9%
Frontier 3,697,000 (38,000) -1.0%
Mediacom 1,288,000 24,000 1.9%
Windstream 1,032,400 11,400 1.1%
Consolidated 780,720 1,750 0.2%
WOW 765,900 6,300 0.8%
Cable ONE 678,385 15,311 2.3%
Cincinnati Bell 426,700 1,100 0.3%
98,724,105 943,761 1.0%

The two biggest cable companies, Charter and Comcast are growing furiously and added 85% of all of the net industry additions, with Charter growing at an annual growth rate of almost 7%. Mediacom and Cable ONE grew even faster for the quarter.

The cable companies continue to dominate the telcos. As a whole, the big cable companies added over 925,000 customers at an annual growth rate of 5.75%. By contrast, the big telcos collectively added 18,250 customers, an annual growth rate of only 0.2%. We know that telcos are continuing to lose DSL customers, so a slight gain as a group means they are finding new customers to replace lost DSL connections.

The overall net gains for the first quarter of 2018 was 815,000. The increases are larger this year due to smaller losses by the telcos rather than faster growth for the cable companies. Perhaps a few of the telcos are finally seeing some upside by the rural CAF II builds.

The surprising statistic is how much Comcast and Charter continue to grow. They are obviously winning the broadband battle in the major cities and continue to take customers away from telco DSL on copper.

There has to be something else behind this kind of growth. A few years ago, there were analysts that predicted that the broadband market was topping out. It seemed like everybody who wanted broadband had it and that there were not a lot of potential customers left in the market. In the last two years we’ve seen continued growth similar to this last quarter.

It’s always hard to identify trends when looking at a nationwide trend, but one of the few ways to explain this continued growth is that more households are deciding that they must have broadband. That might mean homes with occupants older than 65, since that demographic always trailed other demographics in broadband acceptance. It might mean more houses with low incomes are finding a way to buy broadband because they’ve decided it is a necessity. At least some of this growth is coming by the effort to extend broadband into rural America, although that effort is largely being done by ISPs that are not on the above list.