AT&T’s Broadband Trials

John Donovan, the chief strategy officer for AT&T, spoke at the Mobile World Congress recently and said that the company was trying five different technologies for the last mile. This includes WLL (wireless local loop), G.Fast, 5G, AirGig and fiber-to-the-premise. He said the company would be examining the economics of all of different technologies. Let me look at each one, in relation to AT&T.

Wireless Local Loop (WLL). The technology uses the companies LTE bandwidth but utilizes a point-to-multipoint network configuration. By using a small dish on the house to receive the signal the company is getting better bandwidth than can be received from normal broadcast cellular. The company has been doing trials on various different versions of the technology for many years. But there are a few recent trials of the newest technology that AT&T will be using for much of its deployment in rural America as part of the CAF II plan. That plan requires the ISP to deliver at least 10/1 Mbps. AT&T says that the technology is delivering speeds of 15 to 25 Mbps. The company says that even at the edge of a cellular network that a customer can get 10 Mbps about 90% of the time.

G.Fast. This is a technology that uses high frequencies to put more bandwidth on telephone copper wire. Speeds are reported to be as high as 500 Mbps, but only for very short distances under 200 feet. AT&T recently announced a G.Fast trial in an apartment building in Minneapolis. The technology is also being tested by CenturyLink and Windstream. All of these trials are using existing telephone copper inside of existing apartment buildings to deliver broadband. So this is not really a last mile technology. AT&T brings fiber to the apartment complex and then uses G.Fast as an inside wire technology. If they find it to be reliable this would be a great alternative to rewiring apartments with fiber.

5G. AT&T recently announced a few trials of early 5G technologies in Austin. They are looking at several technology ideas such carrier aggregation (combining many frequencies). But these are just trials, and AT&T is one of the companies helping to test pre-5G ideas as part of the worldwide effort to define the 5G specifications. These are not tests of market-ready technologies, but are instead field trials for various concepts needed to make 5G work. There is no doubt that AT&T will eventually replace LTE wireless with 5G wireless, but that transition is still many years in the future. The company is claiming to be testing 5G for the press release benefits – but these are not tests of a viable last mile technology – just tests that are moving lab concepts to early field trials.

AirGig. This one remains a mystery. AT&T says it will begin trialing the technology later this year with two power companies. There has been a little bit of clarification of the technology since the initial press release. This is not a broadband over powerline technology – it’s completely wireless and is using the open lines-of-sight on top of power poles to create a clear path for millimeter wave radios. The company has also said that they don’t know yet which wireless technology will be used to go from the poles into the home – they said the whole range of licensed spectrum is under consideration including the LTE frequencies. And if that’s the case then the AirGig is a fiber-replacement, but the delivery to homes would be about the same as WLL.

FTTP. Donovan referred to fiber-to-the-home as a trial, but by now the company understands the economics of fiber. The company keeps stretching the truth a bit about their fiber deployments. The company keeps saying that they have deployed fiber to 4 million homes, with 8 million more coming in the next three years. But the fact is they have actually only passed the 4 million homes that they can market to as is disclosed on their own web site. The twelve million home target was something that was dictated by the FCC as part of the settlement allowing the company to buy DirecTV.

We don’t know how many fiber customers AT&T has. They are mostly marketing this to apartment buildings, although there are residential customers around the country saying they have it. But they have not sold big piles of fiber connections like Verizon FiOS. This can be seen by looking at the steady drop in total AT&T data customers – 16.03 million in 2014, 15.78 million in 2015 and 15.62 million at the end of the third quarter of 2016. AT&T’s fiber is not really priced to be super-competitive, except in markets where they compete with Google Fiber. Their normal prices elsewhere on fiber are $70 for 100 Mbps, $80 for 300 Mbps and $99 for a gigabit.

The Resurgence of Rabbit Ears

rabbit earsThere is perhaps no better way to understand the cord cutting phenomenon than by looking at the booming sales of home TV antennas known as ‘rabbit ears’ used to receive local television off the airwaves. A study released by Park Associates shows that 15% of households now use rabbit ears, and that is a pretty amazing statistic. That is up from 8% of households from as recently as 2013. And I recall an earlier time when this had fallen below 5%.

For the longest time the TV-watching public was counted in three groups – those who had cable TV (including satellite), those that used rabbit ears to watch local TV only, and those with no TV. We now have a fourth category – those that only watch OTT programming such as Netflix.

I was once in the category of not watching TV at all. I remember twenty years ago I went to Circuit City (now gone) to consider buying a set of rabbit ears and the clerks there weren’t even sure if the store carried them. With some asking around they found that they had a few units of one brand that had been gathering dust.

But today there is a resurgence in rabbit ears and there are easily a dozen major brands. And there are new rabbit ear options coming on the market all of the time. For example, Sling TV just launched AirTV, a $99 box that integrates Sling TV, Netflix and high-quality rabbit ears together with a voice-activated remote control that makes it easy to cut the cord. This looks to be one of the better voice-activation systems around and lets you search programming options by using the name of shows, actors names or genres of types of programming.

Since most people have had cable TV for a long time many have no idea of what they can receive off air for free. The FCC has an interesting map that shows you the expected reception in your area. In my case the map shows that I can get a strong signal from every major network including CW and PBS along with signals from MyTV, Univision and a few independent local stations.

The Parks study also looks at other industry statistics. A few of the most interesting ones include:

  • Penetration of pay-TV was down to 81% in 2016 and has fallen every year since 2014. Parks cites the normal reasons for the decline including the growth of OTT programming, the increasing cost of a cable TV subscription and growing consumer awareness that there are viable alternatives to cable TV.
  • Satisfaction with pay-TV keeps dropping and only one-third of households now say that they are very satisfied with their pay-TV service.
  • OTT viewing continues to rise and 63% of US households now subscribe to at least one OTT offering like Netflix while 31% of households subscribe to more than one.
  • In 2016 12% of households downgraded their pay-TV service (meaning dropped it or went to a less expensive option). This was double the percentage (6%) who upgraded their pay-TV service in 2016.
  • Very few cord nevers (those who have never had cable TV) are deciding to buy pay-TV, with only 2% of them doing so in 2016. This is the statistic that scares the cable companies because cord nevers include new Millenial households. This generation is apparently not interested in being saddled with a pay-TV subscription. In past generations the percentage of new homes that bought pay-TV closely matched the overall penetration of the market – buying TV was something you automatically did when you moved to a new place.

These statistics show how much choice the OTT phenomenon has brought to the marketplace. Ten years ago there wouldn’t have been industry experts predicting the resurgence of rabbit ears. In fact, rabbit ears were associated with other obsolete technologies like buggy whips and were used as the butt of jokes to make fun of those who didn’t like the modern world. But this is no longer true and new rabbit ear homes are perhaps some of the most tech savvy, who know that they can craft an entertainment platform without sending a big check to a cable company.

 

The FCC’s Cable Price Report

FCC_New_LogoOnce a year the FCC releases a Report on Cable Industry Prices and this year’s report came out a few weeks ago. This current report has some very odd findings that make me think that perhaps this report is no longer needed.

The report looked at the prices charged for basic cable and expanded basic cable in 485 communities in the US, some where cable has a declaration of effective competition and others with no competition.

I think the results shown in the report are off because the findings show average rate increases that are far below what is reported everywhere else in the industry. The FCC says that the price of basic cable increased by only 2.3% over the last year to reach a price of $23.79. More surprisingly, the average price of expanded basic cable increased by only 2.7% to reach $69.03 which was slightly lower than the increase in inflation. This compares to the 10-year historical average of 4.8% increases per year from this same report.

The increase in basic cable might be accurate because there are years when many companies don’t increase this rate. But the expanded basic rate increase is baffling. I wrote a blog back in the beginning of the year showing much larger increases for all of the big cable companies this year except Charter, due to their impending merger – and they caught up later in the year.

I think that perhaps the FCC is no longer asking the right questions. It’s certainly possible that the published prices for expanded basic cable increased as they have said – but that doesn’t tell us anything about what customers are really paying.

I suspect the FCC is not picking up the plethora of new ‘fees’ that are being used to disguise the price of cable. These might be called network programming fees to cover the cost of buying local programming. Or they might be called sports charges to cover the ever-rising cost of sports programming. Every big company labels these fees a little differently. But these fees are part of the cable bill that people pay each month and the primary purpose of the fees is to allow the cable companies to claim lower cable rates. These fees also confuse customers who often think they are taxes. My guess is that the FCC did not include these fees – and they must be included because they are nothing more than a small piece of the cable bill labeled differently.

Additionally, I’ve seen a number of estimates that say that around 70% of households buy cable as part of a bundle, and for these households the change in the list price of the components of the bundle doesn’t matter – customers only care about the overall increase in the price of the bundle. Customers don’t know or care which piece of the bundle increases since they are rarely shown the cost of bundle components.

And this leads to a discussion of the fact that cable companies have recently began increasing the prices of other products in order to keep cable rates lower. Rather than raise the price of cable they might instead raise the fees mentioned above, raise the price of the cable modem or the settop box, or raise the price of the broadband products. And all the cable companies care about – and all most customers see – is the increase in the total bill.

Finally, we know that there are now many different rates in every market. Cable companies sell specials or negotiate contract renewals with customers. At CCG we often gather customer bills to try to understand a market and we often see customers with an identical package with prices varying by as much as 10 or 15 dollars. None of the variation in actual rates makes it into the FCC report. I think this report only looks at the published list price and those prices are largely irrelevant since they don’t reflect what customers really pay.

So I think the usefulness of this report is over. If I recall this report was mandated by Congress, and so the FCC is probably obligated to keep producing it. But the results it now shows have almost nothing to do with the rates that customers actually pay for cable TV in the real world.

ESPN and the Cable Industry

espnI’ve been writing periodically about ESPN because they seem to be the poster child for what is happening to cable TV and to programmers in the country. It’s been obvious over the last year or two that ESPN is bleeding customers, and the many articles about them concentrate on that issue.

ESPN is a good bellwether for the industry because they are carried by practically every cable TV provider, and because their contracts require that the channel be carried in the expanded basic tier – the tier that generally has between 50 and 75 channels. Only a few tiny rural cable systems don’t carry ESPN since they carry only a small number of channels.

When ESPN loses customers it can only come from one of two reasons – people that cut the cord and drop cable altogether or from cord shavers who downsize to the smallest basic cable package. Basic cable is the small package of 10 – 15 channels that includes the local network affiliates, government channels and a few cheap throw-ins like shopping channels.

But it’s not easy to figure out the real number of cord cutters and cord shavers. The largest cable companies report total subscriber numbers each quarter but they don’t report on the packages that customers buy. Various analysts estimate the number of cord cutters each quarter, but they differ on these estimates – and I haven’t seen anybody try to estimate the number of cord shavers.

Nielsen tracks the number of customers of each cable network and that tells us how the various cable TV networks are faring. The latest article on ESPN comes from Sports TV Ratings, a website that tracks subscribers to the various sports networks. That site shows that ESPN lost 621,000 subscribers just last month (October 2016). That is an astounding number since ESPN has roughly 89 million customers – it’s a drop of 7/10’s of a percent, which annualized would be over 8% of ESPN customers.

But that number may not be a huge aberration. FierceCable reported earlier this year that ESPN had lost 2.2 million customers between February and August of this year, which is a clip of 440,000 lost customers per month. And the network has lost more than 11 million customers since its peak in 2013 when it had almost 100 million customers.

Trying to count cord shavings gets even more complicated because of OTT content. The cited drop of 610,000 ESPN customers is from the Nielsen numbers for carriage on cable systems. This doesn’t include online content which includes ESPN. For instance, the basic package on Sling TV includes ESPN and Goldman Sachs estimated that Sling TV will have almost 2 million customers by the end of this year. There are a number of new OTT offerings just hitting the market that will include the network, but for now Sling TV has most of the online ESPN subscribers.

ESPN has an advantage over many other networks in that it probably can add back customers by selling to people directly on the web. And so perhaps the network can find an equilibrium number of customers at some lower threshold than today. But this is not going to be true for a lot of other content. As an example, in October the Golf Channel lost 600,000 subscribers and The Major League Baseball Channel lost 515,000 customers – and those kinds of networks have very limited appeal on a standalone basis. That is the real story behind the losses at ESPN – the vast majority of cable networks are bleeding customers right now.

Some of the content providers are not too worried about the drop of US cable customers since they are picking up far greater numbers of new customers worldwide right now. But networks that are US-centric – sports, news, weather – are in for a rough ride over the next few years as the industry settles out to a new and lower norm. I think we can expect to see a transformation of sports programming as the numerous sports networks bleed customers. This probably means more emphasis on live programming and fewer sports networks.

Technology and Telecom Jobs

PoleIn case you haven’t noticed, the big companies in the industry are cutting a lot of jobs – maybe the biggest job cuts ever in the industry. These cuts are due to a variety of reasons, but technology change is a big contributor.

There have been a number of announced staff cuts by the big telecom vendors. Cisco recently announced it would cut back as many as 5,500 jobs, or about 7% of its global workforce. Cisco’s job cuts are mostly due to the Open Compute Project where the big data center owners like Facebook, Amazon, Google, Microsoft and others have turned to a model of developing and directly manufacturing their own routers and switches and data center gear. Cloud data services are meanwhile wiping out the need for corporate data centers as companies are moving most of their computing processes to the much more efficient cloud. Even customers that are still buying Cisco boxes are cutting back since the technology now provides a huge increase of capacity over older technology and they need fewer routers and switches.

Ericsson has laid off around 3,000 employees due to falling business. The biggest culprit for them is SDNs (Software Defined Networks). Most of the layoffs are related to cell site electronics. The big cellular companies are actively converting their cell sites to centralized control with the brains in the core. This will enable these companies to make one change and have it instantly implemented in tens of thousands of cell sites. Today that process requires upgrading the brains at each cell site and also involves a horde of technicians to travel to and update each site.

Nokia plans to layoff at least 3,000 employees and maybe more. Part of these layoffs are due to final integration with the purchase of Alcatel-Lucent, but the layoffs also have to do with the technology changes that are affecting every vendor.

Cuts at operating carriers are likely to be a lot larger. A recent article published in the New York Times reported that internal projections from inside AT&T had the company planning to eliminate as many as 30% of their jobs over the next few years, which would be 80,000 people and the biggest telco layoff ever. The company has never officially mentioned a number but top AT&T officials have been warning all year that many of the job functions at the company are going to disappear and that only nimble employees willing to retrain have any hope of retaining a long-term job.

AT&T will be shedding jobs for several reasons. One is the big reduction is technicians needed to upgrade cell sites. But an even bigger reason is the company’s plans to decommission and walk away from huge amounts of its copper network. There is no way to know if the 80,000 number is valid, but even a reduction half that size would be gigantic.

And vendor and carrier cuts are only a small piece of the cuts that are going to be seen across the industry. Consider some of the following trends:

  • Corporate IT staffs are downsizing quickly from the move of computer functions to the cloud. There have been huge number of technicians with Cisco certifications, for example, that are finding themselves out of work as their companies eliminate the data centers at their companies.
  • On the flip side of that, huge data centers are being built to take over these same IT functions with only a tiny handful of technicians. I’ve seen reports where cities and counties gave big tax breaks to data centers because they expected them to bring jobs, but instead a lot of huge data centers are operating with fewer than ten employees.
  • In addition to employees there are fleets full of contractor technicians that do things like updating cell sites and these opportunities are going to dry up over the next few years. There will always be opportunities for technicians brave enough to climb cell towers, but that is not a giant work demand.

It looks like over the next few years that there are going to be a whole lot of unemployed technicians. Technology companies have always been cyclical and it’s never been unusual for engineers and technicians to have worked for a number of different vendors or carriers during a career, yet mostly in the past when there was a downsizing in one part of the industry the slack was picked up somewhere else. But we might be looking at a permanent downsizing this time. Once SDN networks are in place the jobs for those networks are not coming back. Once most IT functions are in the cloud those jobs aren’t coming back. And once the rural copper networks are replaced with 5G cellular those jobs aren’t coming back.

The Urban Broadband Gap

apartment-buildings-mascot-frontIt’s natural to think that all city-dwellers have great broadband options. But when you look closer you find out it’s often not really so. For various reasons there are sizable pockets of urban folks with gaping broadband needs.

Sometimes the broadband gap is just partial. I was just talking to a guy yesterday from Connecticut who lives in a neighborhood that largely commutes to New York City for work. These are rich neighborhoods of investment bankers, stockbrokers and other white collar households. They have cable modem service from Comcast and can get home broadband, but he tells me that cell phone coverage is largely non-existent. He can’t even use his cellphone outside of his house. There is a lot of talk about broadband migrating to wireless, but 5G broadband isn’t going to benefit people that can’t even get low-bandwidth cellular voice service.

I also have a good friend who lives in a multi-million dollar home in Potomac, Maryland – the wealthiest town in one of the wealthiest counties in the country. He has no landline broadband – no cable company, no Verizon FiOS, and not even any usable DSL. His part of the town has winding roads and sprawling lots and was built over time. I’m sure that it never met the cable company’s franchise density requirement of at least 15 or 20 homes per street mile of fiber – so it never got built. I am sure that most of the city has broadband, but even within the richest communities there are homes without.

You often see this problem just outside of city boundaries. Cities generally have franchise agreements that require the cable company to serve everybody, or almost everybody. But since counties rarely have these agreements the cable and phone companies are free to pick and choose who to serve outside of town. You will see some neighborhoods outside of a city with a cable company network while another similar neighborhood nearby goes without. It’s easy to find these pockets by looking for satellite TV dishes. The difference between the two neighborhoods is often due to nothing more to the whim of the telco and cable companies at the time of original construction.

The fault for not having broadband can’t always be laid on the cable company. Apartment owners and real estate developers for new neighborhoods are often at fault. For example there are many apartments around where the apartment owner made a deal years ago with a satellite TV providers to provide bulk cable TV service on a revenue sharing basis. In electing satellite TV the apartment owner excluded the cable company and today has no broadband.

Real estate developers often make the same bad choices. For instance some of hoped to provide broadband themselves but it never came to fruition. I’ve even seen some developments that just waited too long to invite in the cable company or telco and the service providers declined to build after the streets were paved. The National Broadband Map is a great resource for understanding local broadband coverage. In my own area there are two neighborhoods on the map that show no broadband. When I first saw the map I assumed these were parks, but there are homes in both of these areas. I don’t know why these areas are sitting without broadband, but it’s as likely to be a developer issue as a cable company issue.

There have also been several articles written recently that accuse the large cable companies and telcos of economic redlining. These companies may use some of the above excuses for not building to the poorer parts of an urban area, but overlaying broadband coverage and incomes often paints a startling picture. Since deciding where a cable company expands is often at the discretion of local and regional staff it’s not hard to imagine bias entering the process.

I’ve seen estimates that between 6 and 8 million urban people don’t have broadband available. These have to be a mixture of the above situations – the neighborhoods are outside of a franchise area, or the developers or apartments owners didn’t allow ISPs in, or the ISPs are engaging in economic redlining. But for whatever the reasons this is a lot of people, especially when added to the 14 million rural citizens without broadband.

I spend a lot of my time working on the rural broadband gap, but I don’t see much concentrated effort looking at the urban gap. That’s probably because this gap is one where it’s one subdivision, one apartment building or one street at a time with surrounding households having broadband. It’s hard to cobble together a constituency of these folks and even harder to find an economic solution to fix the problem.

Wall Street and Programmers

wall-streetIn an intriguing development, analyst Michael Nathanson has downgraded Discovery Networks and Scripps Networks Interactive from ‘neutral’ to ‘sell’. His reason is that he sees a poor future for programmers that don’t carry live TV events like sports or news.

Discovery Networks produces the various Discovery channels along with Animal Planet, TLC, Science, Velocity, OWN and American Heroes Channel. Scripps produces HGTV, the Food Network, DIY Network, the Cooking Channel, the Great American Country, the Travel Channel and TVN.

Nathanson believes that advertising is starting to chase live content and is abandoning other content. There is a major trend in the country for people to skip traditional broadcast ads using DVRs and video on demand. He further recognizes that all cable channels are losing viewers to OTT alternatives like Netflix. This all will add up to a significant drop in advertising revenues for traditional cable networks that stream shows paid for by advertising.

These networks are also feeling pressure from cable subscriptions. We know, for example, that ESPN lost millions of customers since 2015 and one has to think that the same thing is happening to all of the other networks. The ESPN losses seem to be due in part to cord cutting, but even more to cord shaving where customers are downsizing their cable packages. I listen to a lot of radio and I constantly hear ads from DirecTV and others to buy their new skinny bundles. Each time somebody picks a skinny bundle or an alternative like Sling TV, a whole lot of channels lose a monthly subscription.

This might be the first crack in the programmers’ armor. For nearly two decades they have been able to raise rates to cable companies while also enjoying ever-increasing advertising revenues. And this ever-growing revenue made the programmers a favorite of Wall Street which rewards revenues that grow quarter after quarter. But we are starting to see advertising revenues abandoning cable and moving to online venues. This year is the first year when web advertising will eclipse TV advertising.

It seems for these networks we are seeing a perfect storm. Advertising in general is leaving cable – and within that shift, if Nathanson is right, it will leave traditional cable channels much faster than those offering live programming. We are also seeing traditional cable subscriptions shifting to skinny bindles and OTT. There is no doubt that all of this is going to add up to smaller revenues for these networks. And since contracts between programmers and cable companies are for 3 -5 years the programmers don’t have the ability to raise subscription rates quickly enough to make up for these losses. Even if they tried to maintain growth through rate increases it’s likely today that they would get a lot of pushback from cable companies.

It’s hard to feel any sympathy for the programmers because it is their greed that has made cable too expensive for many homes. Programming rates in recent years have increased nearly 10% per year – many multiples faster than general inflation. Those rate increases were clearly done to please Wall Street, but it didn’t take a crystal ball to see that the increases were not sustainable.

The way that we value large companies in the US is perverse. These networks make a lot of money. And even with all of these changes they are going to continue to make a lot of money for a long time to come. But companies that fall out favor with Wall Street generally have huge problems. These companies are going to be pressured to somehow fix the situation, but there doesn’t seem to be any way for them to do that. We are likely to see them start ditching unprofitable channels. The companies might be sold or split up into smaller companies. It’s unlikely once Wall Street abandons a company for it to just sit still.

The programmers have held almost all of the power in the industry for a long time – but maybe we are starting to see a change. That can only be a good thing for the industry.

The Real Value of Bundling

Numismatics_and_Notaphily_iconMost telecom providers these days offer some sort of bundled product. Bundles have become such an automatic pricing tool that I think many providers don’t consider the value proposition behind bundles. Originally bundles were created to try to make customers want to stay with a provider – to make them sticky, in industry jargon. If your bundles don’t do that you are probably missing something.

Consider two different companies I know that have the best bundles. The first is not even a telecom company. I have a friend who owns and operates a CPA firm that has been in business for fifty years. His firm always did traditional bookkeeping and tax preparation work. A decade ago he started getting a lot of competition from other tax-preparation alternatives – the big companies like H&R Block and also software packages like TurboTax. He realized that his primary product didn’t offer any significant advantages over his competitors, and that if he didn’t change something he was going to see a lot of customer churn and he would always have to spend a lot of marketing just to retain a customer base.

So he decided to create bundles by offering other services that his customers already used and bought elsewhere. He first added a payroll service and made it easy for his customers to pay their employees. This was a product that was available from many other places, but he found that his customers preferred to buy the service from somebody they already trusted. He then added credit card processing since almost all of his customers accepted credit cards. Again, this is a widely available service, but many of his customers over time moved their business to him.

In recent years he has become even more creative. He’s become an insurance broker and can offer policies from a wide array of different insurance companies. Probably the most creative product he’s developed is a point of sale system that he developed himself. His customers are small retail stores like restaurants, nail salons, grocers – and he has a system on an iPad that can take credit card payments and that automatically logs each sale into the accounting system.

The bottom line is that he has created a suite of products that make his customers very sticky to him. He has priced each of these products competitively because his profit comes from selling the whole suite of products, not any one product. He has found that offering the bundle of services has greatly reducing churn and he rarely loses A customer. Customers have a hard time leaving him since they would need to find multiple vendors to replace him.

I have a telcom client who has done something similar. While they are a rural telco, they decided twenty years ago to expand into the business market in some nearly cities. They did okay selling telephone lines at first, but they saw churn and found that customers had no reason to be loyal to them as a provider.

So they decided to tackle a bundle of a wide variety of technical services needed by small businesses. Of course, that meant providing broadband as soon as that became a common need for businesses. But over time they have done a lot more.

They first tackled being the IT shop for small businesses. When they started this it meant installing and maintaining a server at a customer location. Over time that function has moved back to their own data center, but they still provide this service for most of their customers. They also created their own version of the Geek Squad, before there was such a thing at Best Buy. They will purchase, program, maintain and repair customer computers and associated electronics. They also have gotten into other lines of business – they resell, install and train on various major cloud software packages. For a while they offered video conferencing (before Skype made it free and easy). They even offer copiers, postage machines and other major office equipment.

Their goal was to make themselves indispensable to a small business by becoming a one-stop shop to buy everything electronic. And it has worked. They won over a significant portion of the businesses in their markets as customers and those customers are remaining loyal to them. A customer doesn’t have an easy time leaving them since that means replacing them with at least three or four other vendors.

These are two examples of bundles done right. If your bundles are only used as a pricing tool then you are missing the biggest benefit of the bundle – which is to create loyal customers who won’t leave you. Worse yet, I see mandatory bundles that trap customers into buying services they don’t want – and when these customers finally get fed up and find an alternative you’ll never see them again.

Will We See Net Neutrality Enforcement?

Network_neutrality_poster_symbolThe FCC has not yet taken any direct action to enforce its new net neutrality decision. There have already been several ways that the agency has begun to use its new authority to regulate broadband under Title II regulation. But the agency has yet to directly act on the core issue of net neutrality.

It’s likely that the FCC was waiting for the courts to first resolve the challenges to the net neutrality ruling. Otherwise, anything they ordered might have been overturned by a negative court decision. But earlier this year the courts affirmed the FCC’s net neutrality order, and so it now seems to safely be the firm law of the land.

The basic premises of net neutrality are that the Internet is to be open and there is to be no blocking, throttling or paid prioritization by ISPs. There are a number of ISPs that have practices that seem to be a violation of the paid priority prohibition. For instance, the major wireless companies have plans to not count some video transmission as part of monthly data caps. The companies refer to these as ‘sponsored data’ and I they hope that somehow will excuse the practices from the net neutrality rules.

T-Mobile probably has the most egregious plans. The company has made arrangements with various content providers and over 100 video services are now available as part of its Binge On plan. This allows users to watch services like ABC, ESPN, Disney, NBC, Hulu, Netflix and Sling TV on their smartphones without the usage applying to monthly data caps.

Verizon has a more modest plan called Go90 which offers some unique content for Verizon cellphone customers that is not available anywhere else. This content is also exempt from data charges. But this might become a moot point since there have been several recent articles saying that the offering has gotten no traction with customers. But Verizon also just announced this week that they plan to zero-rate football games streamed to cellphones under the NFL Mobile app.

AT&T just announced a plan that looks to fall into the gray area. The company is going to start zero-rating the DirecTV app so that customers who buy both DirecTV and AT&T cellular service can watch the service on their cellphones without data charges. Their reasoning is that these are premium customers that already have a significant monthly bill from AT&T and that those bills cover the service. The company has plans to majorly revamp the DirecTV apps later this year and there is likely to be more of these package arrangements.

Comcast also has a questionable service. They send their TV anywhere content to customers outside of their monthly data caps. They have argued that they are using a technology that uses a separate data path than normal broadband, but it still seems to fail the net neutrality test. Comcast recently significantly increased its data caps which alleviates a lot of the concern, but there still must be customers who are going over the higher caps.

I’m thinking it’s highly unlikely that this FCC is going to tackle these issues. It’s likely the current Chairman will be replaced soon after the new year and the agency already has a number of other important proceedings it wants to wrap up soon, such as the current cellular auctions.

So this is probably going to be deferred for the next FCC chairman. And that means we’ll have to wait to see if that will be a democrat or a republican. It’s unlikely that a republican FCC would enforce net neutrality, and we can’t even be certain that a democratic chairperson would tackle the above issues.

I find it a little ironic that these issues are what supposedly prompted the net neutrality ruling, and yet nothing has been done. But the path chosen by applying Title II regulation to broadband opens up a ton of new topics for the FCC to consider like broadband privacy, data caps, truth in labeling and all sorts of other regulations associated with bandwidth products. And that’s where this FCC puts its attention this year.

Does Cable Still Need to be in the Bundle?

Fatty_watching_himself_on_TVI’ve read several things lately that make me wonder about the need to include cable TV in the bundle. I saw an article that blamed part of Google Fiber’s performance on the fact that Google’s cable TV is more expensive than the competition.

The first place to look for this answer is with nationwide surveys. There have been major surveys for the past five years that report that somewhere between 15% and 20% of homes say they are considering dropping cable in the next year. Yet they don’t do it. That demonstrates a lot of dissatisfaction among customers, but something about the cable product keeps people connected even though they are unhappy. We are probably on track to see about 1.5 million people drop cable this year. That may sound like a lot, but with the total number of cable homes just under 100 million, true cord-cutting is still a relatively minor phenomenon.

We also see clues that tell us that people are downgrading cable packages when they can. It’s been reported that ESPN has lost millions of customers more in the last few years than can be attributed to cord-cutting. The only way for that to happen is for a lot of households to be downgrading to packages that don’t include ESPN. And since ESPN is in the expanded basic package for most cable companies, that means that households must be downgrading to the smallest possible basic packages – that that have 20 channels or less. But cable companies don’t report these numbers, so we can only guess the extent of cord shaving.

There is also the issue of affordability. Certainly there are many homes that can no longer afford expensive cable TV packages. Affordability probably accounts for a significant portion of the 30% of households that don’t have a cable package. But since cable rates continue to increase faster than the rate of inflation there must be more homes each year that find they can no longer afford cable. We now know that affordability is the major factor that is capping broadband subscriptions nationwide in markets where broadband is available.

And my guess is that broadband is growing to become more valuable than cable to many households. There is enough entertainment available online that a household dropping cable is not isolated from video like they were just a few years ago. We certainly see a lot of homes subscribing to on-line video. A Nielsen survey from the first quarter of this year reported that more than half of all households are buying at least one online video service. Nielsen estimated that by June of this year that over 45 million homes will pay for Netflix. Hulu had over 12 million subscribers by the end of May of this year. We don’t know how many people watch Amazon Prime video, but the Prime shipping service has over 54 million customers.

Over the last year I know a half dozen smaller telcos that have dropped the cable product altogether and have directed their customers to one of the satellite services. Small companies all tell me that they are losing money on cable TV, and the numbers behind their decision are compelling. Larger companies can gain some economy of scale with cable TV, but only the largest dozen cable companies are actually making money with the product.

We know that when Google Fiber first launched service without a cable product they stumbled. They seem to have done a lot better after adding cable. But part of their problem also has to be the $70 gigabit product that a lot of homes can’t afford. I’m guessing that they’ll do better in Atlanta where they now offer a 100 Mbps product for a flat $50.

But still, even with those many trends acting against the cable product, somewhere around 70% of all homes in the country still buy cable from one of the cable providers – landline or satellite. It seems really hard to ignore a product that 70% of households are willing to buy. As a consultant I still have a difficult time telling companies to not offer cable TV in new markets.

One thing that is making it a bit easier is that the cable product is starting to finally move to the cloud. For example, Skitter TV now offers a cable product that can save a company from investing in a headend. And perhaps that is the long-term solution – for most cable providers to offer programming from the cloud to avoid the costs and issues of trying to go it alone.