Categories
Technology The Industry

What Happened to the Digital Divide?

Internet Access Here Sign
Internet Access Here Sign (Photo credit: Steve Rhode)

There was hardly a time in the late 90’s and early 00’s when broadband was discussed that the topic of digital divide was not mentioned. Government entities, policy people and even service providers talked about solving the digital divide to make sure that everybody had access to the Internet. There were committees and commissions formed in many communities to help solve the digital divide and to make sure that every child had a computer and an internet connection.

From what I can see the topic has disappeared from discussion and I rarely seeing the topic discussed any more. Does this mean that the digital divide has been solved? Certainly there are a lot more households with Internet access today than a decade ago, but do the poorest households now subscribe to the Internet?

Before one can even answer the question we need to define what broadband is. The FCC defines broadband as the ability to get a landline service with a download speed of at least 4 Mbps and an upload speed of 1 Mbps. In most markets that is one of the lower-speed products available and speeds in metropolitan and suburban areas are now much faster than that. According the numbers released by the FCC in August of 2012 there were 19 million people in the US with no access to broadband and another 100 million with access to broadband but who do not purchase it. But there are many who dispute the way that the FCC counted the 19 million figure and think that the real number is much larger.

Another way to look at the market is by households and the Leichtman Research Group did a study in 2012 that showed that there are almost 81 million homes with broadband, or just at 70% of all households. That same study said that broadband penetration rates in homes with average household incomes under $30,000 had only a 52% broadband penetration rate while homes with incomes over $50,000 had a 97% penetration rate. Obviously there are a lot of households who feel they cannot afford broadband.

Today one has to ask if landline broadband is the only kind of broadband. For example comscore reports that 133 million people owned smartphones as of February 2013, or 57% of everybody over 13 years old. Certainly there are many people whose only Internet access is with a smartphone.

A Pew Research Center study released a study earlier this year of the Internet usage of teenagers between 12 and 17. This group uses the Internet more than any other age group and 95% of teenagers access the Internet at least one per month. But 25% of teenagers only have a smartphone to use for Internet access. One has to question if smartphone usage is really broadband. Certainly you can read news, update Facebook and play games on a smartphone. But it’s sheer torture to use a smartphone to write something even as long as this blog and it’s hard to see smartphones being a broadband substitute for school kids trying to do various types of homework. The smartphone wasn’t really designed to handle files in the same way as a laptop or computer.

One thing that is clear in the figures is that the lower the income the less likelihood that a household will find broadband to be affordable. And to me that says that we still have the digital divide. But for some reason, nobody is talking about it anymore.

One statistic that I found interesting is that the Leichtman report said that 90% of households with computers have broadband. When you compare that to the statistics that say that only 52% of households with household incomes under $30,000 have broadband it is also easy to say that an awful lot of those homes don’t have computers.

I remember a decade ago there were major programs developed to get computers into households, particularly households with children. I just did a Google search and found a few such programs are still active, like one in Chicago, but getting computers into homes was a major focus for my clients and the country as a whole a decade ago. And that seems to have basically dwindled away as a priority.

I don’t know the reasons for this, but I can postulate. Broadband access seems to be ubiquitous in middle class neighborhoods and it is now the rare house that doesn’t have a computer and Internet access. Perhaps everybody just assumes that this is now true everywhere, while it is not. If the FCC numbers are to be believed there are still 119 million people without Internet access. Back the babies out of that number and there are still a whole lot of people without broadband.

It seems to me that the digital divide hasn’t gone away at all. We have just stopped talking or caring about it. Maybe it’s time to put this back on the agenda.

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Improving Your Business Regulation - What is it Good For? The Industry

It’s Still a Regulated World

It seems like every few weeks I have a conversation with a carrier and in the course of conversation I find out that they are not in compliance with some regulation or another. It seems like a lot of companies that sell VoIP services, in particular, think that somehow that makes them immune from regulation.

But regulation has not gone away. If you bill an end-user customer for a voice, data or video product then there are regulations that you have to comply with. If you are an ISP for other entities, even if those entities are large, you are subject to some regulation. The only category of carrier that might not be subject to regulation is what I call a carrier’s carrier, and who only serves other carriers as customers. And in some states even they are subject to regulation.

It matters that you follow the rules. It seems like regulators at both the state and the federal level are getting surly about offenders and there some big fines being handed down to carriers who ignore regulation. I think the cost of compliance is cheaper than the cost of getting caught.

Here is a sample of the kinds of federal regulations that we see carriers ignoring. There are other state requirements that are also being ignored:

  • CALEA. There are significant obligations to be read to immediately give access of your customer’s voice and data records to law enforcement. You must have a manual filed that describes the processes.
  • CPNI / Privacy. You must have a manual and processes describing how you will protect your customers’ privacy.
  • Red Flag. You must have a manual and processes in place to demonstrate how you will protect your customers from identity theft.
  • Net Neutrality. There is very specific information about your company, your products, your network and your technology that you must inform customers about.
  • 21st Century Communications Video Accessibility Act. You must file a plan on how you will help disabled customers get access to voice, video and data products.
  • Universal Service Contributions. We find carriers that should be contributing to the USF fund who are not. The fines for getting caught for this can be huge.

I told my readers that I wasn’t going to write too many blog entries that are direct sales pitches for CCG services. I will admit that many of my blogs hint at the services we offer, but the main intentions of these blogs is to discuss issues for carriers that I think they will find to be useful. But in many cases CCG is able to help clients with a lot of the topics discussed in my blog.

CCG has three regulatory products that make it easy for anybody to stay in compliance with the rules. We have many clients who use CCG as their regulatory arm and many have said that it’s far cheaper to use us than to do it themselves. Here are the three products you ought to consider if you want to hand make sure that you are in compliance with the regulatory side of the business.

Regulatory Assessment. We will do a one-time assessment of your business and tell you every regulation that we think applies to you. Why guess if you are in compliance. For a modest fee we will make a list.

Regulatory Compliance Monitoring Service. In this service we develop a calendar for your company and we remind you of every regulatory deadline you must meet during the year.

Regulatory Compliance Filing Service. If you want it, we can create all of the needed paperwork and manuals, fill out the quarterly and annual forms and file everything for you. We think we have some of the best prices in the market for this kind of work.

If you want help to get into regulatory compliance or stay incompliance, give Terri Firestein of CCG a call at (301) 788-6889. We can help you take regulatory worries off your plate.

Categories
Improving Your Business The Industry What Customers Want

Upsell Your Customers – What to Sell

One of the best strategies you can undertake to improve bottom line performance is to increase your average revenue per existing customer by getting those customers to buy more of the services that you already offer. These are customers who already know you and trust you and send you a monthly check, so there is no target market that has a higher potential for successful marketing.

Many of my clients have been very happy to sell basic packages to customers for years. But as I have discussed in other blog posts, the traditional products that many carriers sell are becoming commodities and now have market alternatives available. Households have been dropping voice lines for a decade and are starting to drop cable connections. Many of my clients are seeing significant customer losses in their traditional products and things like long distance have withered away. These same clients have a number of products and services available to them that they are not selling. If they are going to stay profitable and remain relevant to their customers for the coming decades they are going to have to find new products to replace the ones they are losing.

If you want to undertake an upsell program you need goals. Do the math, but most of my clients would be very happy if they could increase margins per existing customer by a few dollars a year. So set a specific goal each year and then develop a plan to get there. I will have some future blogs discussing the best ways to upsell, and in this first blog on the topic I will look at the products you can sell as part of this process.

So, what are some of the products you can be selling today? The following is just a partial list that is intended to show you some of the possibilities. I have clients successfully selling all of these products:

Voice. Today, anybody with a softswitch has a score of communications tools that hardly anybody is selling. This includes such things as:

  • Unified Messaging. Almost everybody has this available on their switches and yet hardly anybody sells it. This allows customers to seamlessly move communications across all devices and once customers see how this works many want it. We are no longer talking about the ability to toggle between a cell phone and home phone, but also to tablets, laptops and any other device capable of receiving an Ethernet stream.
  • IP Centrex. Again, anybody with a softswitch can probably offer this service, and if not you can partner with somebody who offers it. This is becoming the new standard product for businesses and many home businesses will also be interested because it can allow them to act like a larger company.
  • Cheap Second Lines. Second lines today can be little more than a number of you deliver the service over Ethernet. So sell $5 or $10 second lines for teens or home businesses.
  • Other Advanced Features. Softswitches come with dozens of features that almost nobody sells. These include features like seamlessly integrating emails and voice mail; integrating voice with computers; advanced screening and call control. I have a few customers who have figured out how to sell these features and they are almost 100% margin if you have already bought them with an existing switch.

Wireless. As long as there is good cell phone coverage in your area, you can now be in the cell phone business through an MVNO program where you resell somebody else’s wireless minutes. This is very different from the resale in the past where you resold a large carrier’s products with little margins. With MVNO you can repackage minutes into your own products, and if you match this up with household Wifi you can have very good margins.

Cable TV. And on the cable TV side of the product line

  • OTT Access. Add over-the-top programming to your channel line-up. Rather than risk losing customer to OTT, let them easily get OTT directly on your video line-up without needing to buy a Roku or Apple TV box. There are numerous vendors around who have created channel line-ups for OTT programming.
  • Cable Portability. Enable your customers to watch the TV programming you sell to them on portable devices around their home like computers, cell phones and pads. If you buy programming from the NCTC coop this is now becoming available.
  • DVR Services. Provide whole-house DVRs, or even better offer centralized DVR where you do the recording on servers at your hub. Centralized DVR greatly reduces the bandwidth you have to send to customers while allowing them to easily record multiple shows at the same time. Centralized DVR also means you don’t have to invest in expensive set-top boxes.

Security. Many of my clients are doing well with security products:

  • Cameras. The simplest product is to sell and install security cameras and then set customers up to monitor these themselves from any ethernet device.
  • Safety Monitoring. Sell, set-up and monitor safety monitors for things like fire, radon and CO2.
  • Burglar Alarms. I have many clients selling ‘traditional’ burglar alarms. This is now easier than ever to do since there are a number of vendors who offer the police monitoring and as a carrier you supply the equipment and get a monthly line rental.
  • Advanced Security. Many business customers will be interested in advanced security systems that can monitor all sorts of things in addition to traditional security.

Cloud Service. Everybody is talking about things moving to the cloud but very few smaller carriers are marketing any cloud services yet. This is an area where a small carrier is going to have to break the mindset that you have to own and control the back office system behind the product. Instead, you need to find partners who offer cloud services and then repackage them to your customers. This will not be a static transaction since these products are going to change a lot over the next decade. But you can’t wait for this market to ‘stabilize’ because it may never do that. So you should start looking for cloud partners today.  Some of these services include:

  • Data Backup and Storage. While there is free back-up available on the web, many customers still prefer the safety of backing up for a fee and there are many for-pay back-up services. We are seeing is that many people would prefer to back-up their data with somebody local rather into the ‘cloud’.
  • Centralized Software A lot of software like Windows, Microsoft Office and other popular products are now available at the cloud level, saving customers from having to keep buying these for every machine they want to operate.
  • Medical Monitoring. This will eventually be a huge business and most people will elect to get monitored. It’s just starting, but worth getting into early.
  • PC Replacement. Let customers use your storage in place of their hard drives, meaning they can get to their data from any device capable of using the software.

Home Automation. I have several clients who are successfully selling and installing home automation systems. These systems are commercially available, but only really geeky customers feel comfortable making this work on their own. So the product is selling / leasing the systems, making it work, and continuing to integrate future customer devices into the systems.

Geek Squad. I have a number of customers, particularly in rural markets that are doing well offering the same sorts of services that the Geek Squad sells. They will go into customers’ homes and help customers manage make their computers, TVs, energy management, and anything else that is electronics based. All this is sold on an hourly or an insurance-type basis.

Categories
The Industry What Customers Want

A la Carte Programming and Sports

ESPN, Fox Sports, Comcast SportsNet, and regional sports networks like the Big Ten Network must all be lobbying hard against a la carte cable programming ever becoming a reality. Their business model relies on the practice where all cable subscribers must pay for sports even if they never watch it. Sports programming has become a significant chunk of what customers pay each month for cable TV and the rates charged for sports networks are growing at the fastest pace.

It’s not hard to see why sports programming is so expensive because the sports networks pay a lot of money to obtain exclusive sports content. Let’s look at ESPN as an example. It was reported in financial news that ESPN will pay over $3.5 billion in 2013 for sports programming.  That includes $1.1 billion to the NFL, $600 million to the NBA, $610 million for football bowl games, $360 million to major league baseball, $240 million for ACC sports, and many other smaller deals.

And the amounts that are being paid keep rising. It’s been reported that in 2014 the fee for the NFL will jump to $1.9 billion and for baseball to $700 million. The network just announced an eleven year deal for $770 million to broadcast the U.S. Open Tennis Tournament. And ESPN will be launching a new network for Southwest Conference Football in 2014 and the details of the amounts to be paid have not been announced, but one has to imagine they are huge.

How much does this all cost consumers? Not all cable companies pay the same amounts for ESPN since there are individual contracts with each cable company that span different periods of times. I’ve seen recent articles that say that the average monthly cost charged today for cable companies for ESPN is $5.13 per household, with additional monthly fees of $0.68 for ESPN2, $0.18 for ESPNNEWS and $0.18 for ESPNU. For 2013 those fees total to over $7.3 billion. A household getting all four of these channels would be paying $74 per year just to ESPN. And if they have a cable provider that carries all four of those channels there is a good chance they are also paying for other sports networks like FoxSports, Comcast SportsNet, the NFL channel, the golf channel, the Tennis channel and a bunch of others. And the fees paid for sports aren’t even always obvious since there is a substantial fee for the Olympics buried in the fees for carrying the NBC channels. It’s probably not a bad guess to think that the average cable household is already paying over $100 per year today for sports coverage.

And the fees are continuing to climb at a rate far faster than inflation. It’s been reported that a recent deal signed by Time Warner Cable has them paying almost $7.50 for ESPN by 2018 with a built-in annual 6.5% rate increase after that. This would put the cost of ESPN over $8 per household per month by the end of the decade, or almost $100 per year.

As I have written in the past, the whole cable industry is starting to see subscribership fray around the edges. It was just reported by Variety last week that all cable companies combined lost about 80,000 customers for the 12 months ending March 31, 2013. That doesn’t sound like a lot, but just a few years ago cable subscribers were growing by several million per year. Industry experts predict the number of cable subscribers will begin dropping more each year, much like what happened with landline telephones over the last decade. There are a lot of reasons for this including cord cutters who are dropping cable for programming on the web, and young households who just aren’t signing up for cable. But one contributing reason is rate fatigue, meaning that households are finding the rates for cable to be more than they are willing to pay.

So why would the sports programmers be sweating a change to a la carte programming? It sounds like a really good idea for customers to be able to buy just the programming they want. What sports lover would not love to ditch Lifetime Movies, and what sports hating household would not want to stop paying for ESPN?

The answer is simple math. If a la carte programming is introduced then buying what you want will be too expensive. Let’s just look at ESPN as an example. Let’s say ESPN went to a la carte programming so that only households who wanted it would buy it. The amount that ESPN would charge on a standalone basis would depend upon how many households they think would be willing to write a check for ESPN. Let’s look at the math. This assumes that the cable company would mark-up the channel by 30%. These are the resulting monthly subscription rates:

Willing To Buy              Rate Today            Rate in 2020

50%                                    $15                           $20

30%                                    $26                           $33

15%                                    $51                           $67

This table must scare the hell out of ESPN. We already know what a la carte looks like. HBO is sold a la carte and is in 30 million homes, or 30% of the US market for around $15. I look at this table and find it hard to think that 30% of homes would pay $26 monthly for just the four ESPN channels. There is probably no price point on this table that looks realistic in the market, and so the reality is that if ESPN was to be sold on an a la carte basis that they would have to cut their rates, meaning that they would have to cut the payments they are making to the various sports. And that would have a profound impact on the sports industry. For example, universities in the major conferences now rely on cable revenues to support their teams and one can imagine massive cutbacks in college sports if the TV revenues decline. Television fees are the main factor behind the huge salaries paid by professional sports.

And this same math is going to be the same for every other sports network – and as far as that goes, for every cable network. If a la carte programming comes to pass and people buy only what they want, they are going to end up paying as much as they do today for a smaller number of channels. Today’s regime of averaging the cost of hundreds of networks across 100 million cable subscribers has resulted in the wide variety of programming available to a cable household. It is my prediction that under a la carte programming that many of the networks we watch today would fold because they could not find enough buyers individually to support them. And maybe that is what should happen. Certainly, if the cable industry starts seeing total subscribers dropping by millions per year this will happen eventually anyway. There just won’t be enough money to support all of the networks. I can’t see any future where the amount of monies paid by ESPN and other sports networks to obtain programming rights doesn’t go down. It’s just a matter of math and time.

Categories
The Industry What Customers Want

Voice – Still Relevant

A landline telephone (Photo credit: Wikipedia)

At the beginning of this year the Center For Disease Control issued a report called Wireless Substitution: Early Release of Estimates From the National Health Survey, January – June 2012. The summary of that report is attached here as Wireless Substitution 2012.

The CDC asks over 20,000 households each year a number of questions associated with health issues, and starting a few years ago they started asking about basic telephone coverage. In 2012 they expanded the telephony questions to include questions about landline and cellphone usage.

The results of the study are statistically reliable. They worked hard to get the sample they use to look like America as a whole and the results are 95% accurate, plus or minus 5%. This means that if they asked everybody in the country these same questions, the results would be within 5% of the results of the survey, which is very accurate for a survey.

Some of what they found was very interesting. The most interesting statistic to me is that 65% of all households still have a landline telephone. As late as 2000 the industry had about a 98% penetration of households. As the chart on the first page of the report shows (showing wireless-only households), landline subscribers dropped slowly until about 2005 and have dropped at a steady pace since then due to migration to cell phone usage.

I have heard for years from experts who have declared the voice business dead. Many new telecom ventures are launching without a voice offering, because they believe it is irrelevant. The most visible of these is Google in Kansas City, who offers only data and cable TV. But I look at a product that is still in 65% of households as something that is still very attractive from the carrier perspective. Cable TV only has a nationwide penetration of just over 75% and even after all of the years of decline, voice is still not that far behind cable.

Voice is a very profitable business. If Google wanted to offer voice in Kansas City they would need to buy a softswitch, which might cost $1 million for a market that large. And they would have to interconnect with the existing PSTN. They would have to cover some one-time costs for each customer like number portability. After covering those costs everything else is profit. Voice can be auto-provisioned so that it doesn’t take any people to activate it. And it can be sold in a very simple package so that there are not a lot of options. Voice doesn’t need to be a complicated product.

From a business plan perspective, not offering voice is leaving a lot of low-hanging fruit on the table. For Google in Kansas City, the breakeven on paying for the voice investment could be measured in terms of a handful of months. After that it would add significantly to the margin per customer and to bottom line.

I have a hard time understanding why Google or anybody would not offer voice. With residential customers it is low-hanging fruit. And voice is still mandatory to get many business customers. Businesses bore the brunt of the competitive CLEC push a decade ago and many of them were burned by having one vendor for voice and another for data. When something went wrong both vendors would point at each other rather than fix the problem. And so a lot of businesses insist on buying all of their telecom products from a single vendor. Further, most businesses care more about reliability for voice than they do price. Voice is the lifeline of many businesses and they want it to be served by a capable vendor on a reliable network.

When Google approaches a business and wants them to buy a 1 Gigabit data pipe they are basically telling that business to keep their voice on copper or relegate it to somebody selling VoIP on the Internet. There are many companies selling VoIP this way and the quality of the connections vary widely. There are good products sold this way, but also some really sketchy stuff, so a business has to be very wary. Most businesses are just not willing to take a chance buying voice from a vendor they don’t know and who doesn’t have people in their market. They have been down that path before.

Most of my clients still offer voice services and all of them do pretty well doing so. My clients who sell to business customers report that voice is still the way to get into the door. Many of these clients are now selling IP Centrex, but that is still a voice product.

And so I look at Google and other providers who have elected to not sell voice and just scratch my head. Are they afraid of being regulated? In most states regulation of competitive voice providers is very light. Do they think voice is just obsolete and not worth the effort? This survey and all of my clients who sell voice demonstrate that this is just not the case. Voice is still very relevant and still very profitable.

Categories
Improving Your Business The Industry

Long Distance Fraud Again – Really?

I’ve been helping clients get into and stay in the long distance business since the 80’s when long distance was a new line of business for many telcos. I remember when the industry was new that it was a challenge. If you were a rural LEC you had to convince the RBOC who owned the regional tandem switch to help you set up a trunk group to get to a long distance company. And they were reluctant and slow to respond. So a company had to fight to get into the long distance business.

But over time it got easier and fairly routine and most rural telephone companies added long distance as a product line. It worked pretty well until the time in the early 90’s when calling cards became the rage and customers all wanted them. With a calling card a customer could make a long distance call from any other phone and bill it to their own home phone number.

So companies in the long distance business started giving out calling cards, and eventually they gave a calling card to every customer. This generated a lot of new traffic, and since this was back in the day when it still was not unusual to pay 10¢ to 15¢ per minute for long distance it also drove a lot of new revenue. But within a few years after calling cards were introduced calling card fraud followed. Calling card fraud was pretty straight forward. There were people who would try to find a valid calling card number that they would then send to places like the Middle East where street vendors would hawk cheap minutes. And dozens or even hundreds of people would use the calling card until somebody figured out that fraud was going on and cut off the card.

When the fraud first started the losses got huge because nobody was looking for it. But over time the carriers that sold the long distance began monitoring for unusual usage and policies were established such as making the cards only good for domestic calling, and over time the big calling card fraud got under control, but never quite stopped.

Over the years since then I have run across cases of fraud, but it has been a random thing here and there and not widespread like the calling card fraud had once been. The companies that sold wholesale long distance got more sophisticated and monitored usage closely and for the most part the industry stopped worrying about fraud.

But recently I have seen cases of significant fraud happening again to my clients. Within recent months I have had two clients hit for over $25,000 in fraud in a single month, which in both cases was as much as they had been paying for wholesale long distance for most of a year. So for these companies this was a really big deal and it effectively doubled their cost of buying long distance for the year.

And both of these companies were buying long distance from ‘big name’ carriers and not from some small VoIP provider. I must tell you that I was surprised. Not surprised that fraud could still happen, but surprised that the big company selling the long distance did not have a fraud monitoring process in place to stop it. It’s not that hard to monitor for fraud at the large carrier level. If they process the long distance in real-time it is not hard to set some flags to look for unusual usage. When my clients decided to buy wholesale long distance from these vendors they were assured that those carriers had fraud monitoring. It turns out to not to be true.

The fraud in both of these cases was allowed due to faulty connections between my clients and their customer. In one case if was my client’s own connection that was not secure. They had installed an IAD (Integrated Access Device) at a business customer in order to supply voice and data from their fiber connection. The IAD was not properly configured and had very weak passwords and was not configured to only accept commands from my client.

The second case was similar in that another client had a connection to a customer PBX. And of course, being a full service provider, they made the connection for the customer to his PBX. As it turns out there was a backdoor connection available into the PBX into the internet, which means that the PBX could have a connection from somewhere other than my client.

Neither of those problems automatically leads to fraud, but there is a new set of bad guys in the world. They use computer worms to test against millions of phone numbers looking for phone numbers connected to PBXs or IADs. Once they find such a device they use normal hacking techniques like cracking easy passwords to gain access to the device. They then sell calling in the same way as was done in the old days of calling card fraud. In one of these cases the calling went to the Middle East and in the other went to INTELSAT calling to satellite phones – both very expensive calling. My suspicion is that these bad guys are not selling these minutes on the street like in the past, but instead hawking cheap minutes to International VoIP minute sellers who have no idea where these minutes come from.

Certainly my clients had some liability in their loss since they contributed to the customer connection being made in an insecure manner. But they also ought to be able to rely on their underlying long distance provider to protect them against a flurry of suspicious calls. The biggest worry about this new kind of fraud is that it pumps a large volume of calling to expensive places in a short period of time. So it can cost a telco a large amount of money in a hurry.

So my caution to companies that sell long distance is to beware. It has been a while since fraud was of this level of concern, but it’s back again. There are two steps you can take to protect yourself. First, make absolutely certain that the company you are buying long distance from has good fraud detection and policies. You want a carrier who will not only find the fraud but who will cut off the calling before they even contact you. But second, the responsibility rests with you to use good network practices to make sure it is hard for somebody to hack the connections to your customers. If you want to know more about how to protect yourself contact Derrel Duplechin of CCG at (337) 654-7490.

Categories
The Industry

Will There Be a Tipping Point in the Cable Industry?

The Tipping Point: How Little Things Can Make a Big Difference (Photo credit: Wikipedia)

This is not a book review, but a few years ago I read a book called The Tipping Point: How Little Things Can Make a Big Difference by Malcom Gladwell. This booked looked at examples of tipping points – when minor events reach a level which triggers a more significant change. In the book he looked at a number of popular culture events such as how Hush Puppy shoes went from being something worn by New York hipsters to being in every mall in America in a short period of time. It was a thought-provoking book that looked in particular at how certain types of people are able to effect much bigger changes in the world than ought to be expected.

What made me think back on this book is that I have been thinking a lot lately about the cable TV industry. There are a ton of those ‘minor’ events happening in the industry and I have talked about some of them in my blog before. And I have been thinking about whether these small trends can accumulate together to fundamentally change the industry or if it will just change more slowly over time. I’ve been trying to think about what it might take for the whole industry to reach a tipping point.

We have a parallel to what might happen with cable TV service by looking back at what happened to home telephone service. Fifteen years ago about 98% of households had a traditional home telephone. But then Vonage and other VoIP carriers came along a little over a decade ago and whittled into the home phone market. But the VoIP carriers collectively did not do that great and after a couple of years in the business had captured only about 3% of the total market. But then other factors began hitting the industry. For instance, companies like Skype arose allowing people to make calls over the Internet without even using a phone. But the number one factor that has killed many home telephones has been the meteoric rise of cell phones. In looking back I think the landline phone industry really started losing lines when the cellular industry introduced family plans and all of the members of a family could have a cell phone.

In a study done in the first half of 2012, the Center for Disease Control asked many questions including ones about telephone usage. They found that the number of households with landline phones has dropped below 65%. In looking at the statistics in that study I conclude that the landline telephone industry never reached a tipping point. The industry certainly declined over a fairly long period of time and will almost certainly continue to do so. But there has been no tipping point such as was seen in the music store business which went mostly bust within just a few years after iTunes got popular. And so I ask myself if there will be a tipping point with the cable TV industry or if it will instead go into a long steady decline like the landline telephone business?

There are a number of factors that are affecting the cable TV industry, and most of them are relatively new. Some of these include:

  • Over-the-top video where programming is available on the web instead of by a traditional cable TV subscription.
  • Cord-cutting. Neilson has estimated that there are now 5 million homes in the US that don’t watch any form of TV and that this number grew by 1 million last year.
  • Cord-nevers. These are young households who get their entertainment from cell phones, pads and other methods and who do not sign-up for traditional cable TV packages when they start a new household.
  • Rate fatigue. The ever climbing cable bills that are pricing cable service out of the range of many households. This leads some customers to leave cable but others to downgrade to smaller packages.
  • Ever increasing programming costs. To a significant degree the cable TV rate increases are being driving by the programmers who charge more each year to cable operators for carrying their content.
  • Tons of companies competing for cable’s customers like NetFlix, Hulu, Amazon Prime and many others. And to some degrees the broadcast networks are helping them by making programming available on the web soon after it is aired live.
  • Companies like Aereo making it easier for customers to watch TV on any device.
  • Really simple devices like Roku, Apple TV, Playstation and many others making it easier for the non-technical household to get alternate programming onto the TV.
  • Unique programming being created just for the web. NetFlix and others are now developing programming directly for the web. There is also a movement to pick up popular shows that get cancelled and to continue them on the web.

There are a few experts that believe that the cable industry will be able to hold its own, even with all of these trends going on. But there are a lot more experts who are positive that the industry will decline, but the predictions of how fast vary from a slow decline like telephone service up to predictions of a fiery crash like what happened to CD stores due to iTunes. And there is ample evidence that the decline has begun. I saw a statistic that said that in 2012 the cable industry as a whole added a net of 50,000 new customers, wherein past years that would have been millions. And there is evidence that every one of the above trends is hurting the industry.

And there is more disruption to come. Wireless connections have gotten faster making it easier to watch TV while on the go. John McCain just introduced a bill that would promote (but not guarantee) a la carte programming. Comcast just increased their cable modem speeds nationwide. It just becomes easier and easier for a household to elect something other than the traditional cable TV packages.

Like many I certainly foresee an industry that is going to lose customers at a faster and faster pace over time. But I just don’t know if all of these little factors can somehow produce a tipping point for the whole industry. With that said, I believe that the effect of these changes will differ by market and I expect that there will be companies and markets that reach a tipping point long before the whole industry does.

Categories
Technology The Industry

Is Wireless a Substitute for Wireline?

Last week in GN Docket 13-5 the FCC issued an update that asked additional questions about its planned transition of the historic TDM telephone network to all-IP network. This docket asked for comments on several topics like having a trial for transitioning the TDM telephone network to all-IP, for having a trial to go to enhanced 911 and for making sure that a switch to IP would not adversely affect the nationwide telephone databases.

But the docket also asks for comments on whether the FCC should grant telephone companies the right to substitute wireless phones for wireline phones and abandon their copper network. The docket mentioned two companies that wanted to do this. For example, Verizon said they intend to put wireless on Fire Island off New York City as they rebuild it from the devastation of hurricane Sandy. But AT&T has told the FCC that they are going to request permission to replace “millions of current wireline customers, mostly in rural areas, with a wireless-only product”.

Let me explain what this means. There are now traditional-looking telephone sets that include a cellular receiver. To replace a wireline phone, the telephone company would cut the copper wires, and in place of your existing phones they would put one of these cellular handsets. They would not be making every family member get a cell phone and there would still be a telephone in the house that works on the cellular network.

This make good sense to me for Fire Island. It is mostly a summer resort and there are not many residents there in the winter. It’s a relatively small place and with one or two cell phone towers the whole island could have very good coverage. And if the cell phone tower is upgraded to 4G there would be pretty decent Internet speeds available, certainly much faster than DSL. One would have to also believe that the vast majority of visitors to the island bring along a cell phone when they visit and that there is not a giant demand for fixed phones any longer.

It is AT&T’s intentions, though, that bother me a lot. AT&T wants to go into the rural areas it serves and cut the copper and instead put in these same cellular-based phones. This is an entirely different situation than Fire Island.

Anybody who has spent time in rural areas like I do knows the frustration of walking around trying to find one bar of cellular service to make or receive a call. Cell phone coverage is so good today in urban areas that one forgets that this is not true in many places. I have a client, a consortium of towns and the rural areas of Sibley and Renville Counties in Minnesota. Let me talk about my experience in working with them as an example of why this is a bad idea.

My primary contact works in the small town of Winthrop. I have AT&T cellular service and when I visit him my cellphone basically will not work. I sometimes can move around and find one bar and get a call through, but I can’t coax the phone to get a data connection so that I can check email. And if you go west from Winthrop the coverage gets even worse. AT&T’s coverage maps show that they serve this area, but they really don’t. There are places in the east end of Sibley County that have decent coverage. But there are also plenty of farms where you can get coverage outdoors, but you can’t get coverage in the house.

The traditional cellular network was not built to serve people, but rather cars. Cell phone coverage is so ubiquitous now that we already forget that cellular minutes used to be very expensive, particularly when you roamed away from your home area. The cell phone network was mostly built along roads to take advantage of that roaming revenue stream. If you happen to live near to a tower you have pretty decent coverage. But you only need to go a few miles off the main highway to find zero bars.

And I use the Renville / Sibley County client as an example for a second reason. The people there want fiber – badly. They have been working on a plan for several years to get fiber to everybody in the area. The area is a typical farming community with small hub towns surrounded by farms. The towns have older cable systems and DSL and get broadband, although much slower than is available in the Twin Cities an hour to the east. But you don’t have to go very far outside of a town to get to where there is no broadband. Many people have tried satellite and found it too expensive and too slow. There are any homes still using dial-up, and this is not nearly as good as the dial-up most of you probably remember. This is dial-up delivered to farms on old long copper pairs. And it is to get access to an Internet that has migrated to video and heavy graphics. Dial-up is practically useless for anything other than reading email, as long as you don’t send or receive attachments.

Over 60% of the people in the rural areas in Renville and Sibley Counties have signed pledge cards to say that they would take service if fiber can be built to them. One would expect this would translate to at least a 70% penetration if fiber is built. They refer to the project locally as fiber-to-the farm. There has been a cooperative formed to look at ways to get fiber financed. And any financing is going to require local equity, meaning the people in the County are going to have to invest millions of their own dollars in the project – and they are certain they can raise that money. That is how much they want the fiber. And this same thing is true in rural areas all over the country. Most of rural America has been left behind and does not have the same access to the Internet that the rest of us take for granted.

AT&T’s idea is only going to work if they make a big investment in new rural cell towers. The current cell phone network in rural areas is not designed to do what they are proposing, even for delivering voice. And even if the existing rural cell phone towers are upgraded to 3G or 4G data (which almost none have been), most people live too far from the existing towers to get any practical use from cellular data. Cellular data speeds are a function of how close one is to the tower and, just like with DSL, the speeds drop off quickly as you get away from the hub.

I hope rural America notices this action at the FCC and files comments. Because as crappy as the rural copper wires are today, when the wireline network disappears many rural households are going to find themselves without telephone service. And forget about fast rural data. The AT&T plan is really just a plan for them to abandon and stop investing in rural communities.

Categories
The Industry

Open Access: Europe versus the US

When cities build fiber networks in the US, one question they always ask is if they can make their system open access. By this, they mean that they want to build a fiber network, but they prefer not to be in the telecom business and instead would prefer to attract multiple providers to the network to use the fiber and compete for customers. The cities just want big bandwidth for their citizens and most cities would prefer to not compete in the telecom business.

Open Access works well in Europe but has been a failure in the US. Why does it work there and not work here? The main reason it works in Europe is that a number of high-quality service providers are willing to use somebody else’s network, especially a fiber network, to provide service. In Europe ISPs are willing to compete side-by-side with other ISPs even though there is no inherent advantage of one service provider versus another when they are all on the same network.

A perfect example of a European open access network that attracted competition is the one built in Amsterdam. Much of the basic infrastructure has been built by the City, although there have been some private partners recently building some additions to the network. But all parts of the network are fully open access. There are thirteen major service providers offering services on the Amsterdam fiber network – Canal Digitaal, Concepts, KPN, Fype, Online NL, Ligbrandt, Scarlet, Tele2, Telfort, UPC, Vodafone, XS4ALL, and Ziggo. In addition there are around 25 other ISPs who serve smaller niches of customers, often with specialty products such as medical monitoring or small business service.

A few of these service providers are large incumbent providers that had monopolies in their own countries before the formation of the European Union. For example, KPN is the incumbent provider for the Netherlands. Vodafone was an incumbent provider in Germany.

It’s easy to contrast this with the US. There have been a number of cities that have built open access networks in the US and who then tried to lure ISPs to serve in the networks. Some of the open access networks include Tacoma, Provo, Utopia (small towns in Utah), Chelan PUD and a number of other smaller PUDs in Washington state. In none of these cases did a large or incumbent cable provider or telephone company agree to bring service to these fiber networks. In every case the cities that built the networks had to scramble to find local ISPs who were willing to tackle the business. And in almost all cases the Cities had to give a lot of help to these local ISPs in the early days to help them succeed. The ISPs that have operated on US open access networks are generally small, local and under-capitalized. None of the US competitors are of the size or strength of the competitors in Europe.

Why do the big telcos and cable companies in Europe step up and compete against each other while the ones in the US do not? On the European side of the equation, the competitive attitude goes back to the beginning of the European Union. The European Union built slowly since the early 1970’s, but it took on most of its current membership by the early 1990’s. In the mid-90’s there were various treaties signed which opened the borders between European nations, both physically and in terms of commerce. Before that time almost every European country had a monopoly telecom provider. But when the gates were opened to competition, a few of them crossed borders to compete and soon everybody jumped into the competitive fray.

But in the US I can’t find one example of an incumbent cable company competing against another incumbent cable provider. And the large telephone companies barely compete against each other. They fight hard for things like the contract to serve the US government, but overall they barely compete in each other’s territory. And even in most of the US where there are two providers, a telco and cable company, for the most part both parties charge high prices and do not compete heavily with each other. The system in the US is referred to in economic terms as an oligopoly, where a few large providers have divvied up the market to mutual benefit. While there is competition, it is nothing like the real competition seen in Europe.

But I must grant that it probably would be difficult for a large US telephone or cable company to provide service on somebody else’s network. These companies are highly decentralized and it often requires groups from many states to come together to provide service to a new customer. The processes used by the large incumbents are so specific to the way they do things on their network that it might just be too costly for them to modify those processes to serve on a different network.

But whatever the reasons, Europe enjoys tremendous competition for customers, particularly where somebody has built a fiber network. But in the US no such competition exists, other than in metro areas where CLECs still vigorously compete for large business customers in highrises.

Categories
The Industry What Customers Want

Choosing the Lesser of Two Evils?

FTTH fiber-to-the-home (Photo credit: dvanzuijlekom)

Today our guest blogger is Ron Isaacson, a former employee and still a good friend of CCG’s.

A number of years ago, the large ILEC in our area installed fiber optic lines in our neighborhood and soon started offering their FTTH product line in the area. The cable provider had already been in the neighborhood for a while and was already fiercely pushing their bundled service packages. We finally were going to have the competitive market version of a boxing match. SWEET!!

Our family had “Dish” TV service, satellite access that worked most of the time – except when bad weather interrupted the signal. We had dial-up Internet through a local ISP, back when the bandwidth offered on dial-up was still relatively decent, and we had our telephone service through a local CLEC. Being a telecom consultant I liked splitting services between the different vendors because no one monopolist had their claws fully in my back pocket. I might have been paying a little more for this split service, but it made sense to me.

However, the FTTH offerings changed the whole equation. Cable offered a full package too, so we had a choice.

Having had previous horrendous customer service experiences with both the ILEC and the cable company we were at a quandary as to which 21st Century telecom service to commit to, so I decided to take a poll: I asked a bunch of my neighbors which service they subscribed to and why, and how were the services provided?

The results were a classic case of monopolistic bad reputations! Either a family absolutely hated the ILEC and had signed up with cable, or they absolutely hated the cable company and had signed up with the ILEC. Apparently, no one truly loved either telecom provider and they just chose the company that they hated the least. (It’s been a few years, hopefully this has changed!) I couldn’t help but thinking that both companies are as bad as the worst of the stories about the airlines!

We chose the ILEC, but the notorious nature of the story was just getting started. Our telephone number, which we had for over 25 years, was an exchange-level “FX” number, meaning that all of the customers with that exchange were billed as if the service was down-county, closer to the metro-area. The rep advised that this was not a problem, that they could still do the switch.

Once the FTTH was installed, the Internet and TV service worked beautifully, but it took another 35 days for the phone service to be re-connected because, and this is a quote, “The fiber can’t handle the FX line.” At this point I laughed and replied, “I beg to differ. The fiber doesn’t know the difference, and doesn’t care….it is your systems that are messed up!”

After 35 days, they decided to run the telephone service over the old copper pair, and bill it as if it was on the fiber. This actually proved to be a good thing when the electric power went out due to an electric utility that also possessed byzantine customer service skills.

Years later the ILEC came back and reconfigured the FTTH to include the telephone service on the fiber. Incredibly, the telecom service that was the most troublesome for the telephone company to install….who knew?

Years later, this experience still shades my view of the ILEC, the gang that proved to me beyond a shadow of a doubt that they can and will shoot themselves in both feet.

Thinking of my installation experience with fiber made me think back to something that had happened to me earlier. Many years ago, in the hay-day of the long distance marketplace during a customer service training seminar, the class discussed the results of a poll showing the reasons that customers cancel their service with carriers. A couple of facts stuck with me: First, 3% of customers die and there’s not much one can do about that. Additionally, about 5 to 10% of customers move, or otherwise change locations. Again, not much (at that time) that could be done about that.

However, over 50% of customers cancel because of rudeness or indifference from customer service personnel in reference to a given incident. There were reasons filling in the rest of the 100%, but those three points stuck out to me – two that you can’t do anything about and one that we definitely can.

The bottom line I took away from that training, and my experience with the telephone company is to be sure that every customer is treated as if their service matters, as if their patronage is appreciated.