FirstNet – A Boon or Boondoggle?

The federal program FirstNet was born out of the tragedy of the 9/11 terrorist attacks. At the time there was a lot of negative press when it was realized that first responders from New Jersey were unable to communicate with those from New York. And the idea was born to create a nationwide platform so that all first responders could easily communicate with each other.

The FirstNet concept first tackled the concept of interoperability. There were a number of jurisdictions where interoperability was an issue then. But since 9/11 most metropolitan areas have solved the interoperability issue on their own. The fire and police departments in regions got together in the years after 9/11 and made sure they could communicate with each other. One of the easiest fixes was for first responders to add cellphones to complement the first responder radios that were the major method of communications in 2001. So the concept morphed into a discussion of finding cellular bandwidth for first responders. We’ve seen repeatedly that local cellular networks instantly get clogged during any kind of major emergency, and this means that first responders have trouble making cellphone connections just like everybody else.

Congress stepped into the discussion in 2012 and created FirstNet (First Responder Network Authority). As part of that action Congress set aside Band 14 of the 700 MHz spectrum for the exclusive use of first responders nationwide. After several reboots of the RFP process the new agency finally chose AT&T to provide a nationwide LTE network for first responders. The company was given $7 billion as the first payment towards creating the nationwide cellular network. The GAO had estimated that the final network could cost as much as $47 billion.

States were given the right to opt-in to FirstNet with zero cost to the states. In the last month or so thirteen states have chosen to be part of the effort. That means that AT&T will provide the network in those states using federal dollars.

But there is a huge question, mostly technical, of whether this network makes any sense. A lot of engineers say that FirstNet is overkill and that there are now other ways to solve the same problem. A hint of how easily this can be done came from a press release from Kansas, which just bought into FirstNet. In that release AT&T said that until FirstNet is built in the state that first responders would immediately get priority access to cell towers and by the end of this year would have preemptive access – meaning that a call attempt made by a first responder would shove somebody else off the cellular network. Providing preemptive access is a far less costly way of solving the problem. If first responders can be given preemptive access that easily, then there really is no longer a need for FirstNet.

To add fuel to the fire, Verizon just announced at the end of the next week that they would offer these same services to first responders everywhere – and with zero federal dollars. Verizon will immediately offer preemptive access to cell towers to all first responders.

Any topic having to do with first responders is always an emotional one and much of the first responder community has bought into the concept of having interference-free spectrum. But the Verizon announcement shows that the FirstNet solution is obsolete before the first piece of network is constructed.

And the FirstNet implementation comes with a big national cost. It’s clear that we need a huge amount of bandwidth to satisfy customer demands for cellular data. It seems wasteful to use a slice of prime spectrum in Band 14 of 700 MHz when it’s not needed. That spectrum is worth more to the country for providing cellular data than for handling calls from first responders. This would not be true if first responders really needed this spectrum to communicate – but the cellular companies can give them preemptive access using existing cellular spectrum. For the vast majority of time the FirstNet spectrum will sit virtually unused – at any given time in a city it might be handling hundreds of transmissions from first responders when it could instead be handling hundreds of thousands of transmissions for everybody.

There is also the rural issue to deal with. FirstNet is supposed to provide nationwide first responder access. But as somebody who travels widely in rural America, I can tell you that a lot of the AT&T LTE coverage map is bosh. There is a whole lot of rural America where cell coverage is either spotty or non-existent. When you get to a rural place you quickly come to understand the short distance that a cell signal travels from any given cellular tower. There are gaps everywhere in rural America between widely-spaced cell towers.

First responders in rural America are not going to rely on the FirstNet spectrum even if it’s freely available to them. They are more likely going to keep their current radio networks that work today, using spectrum that travels farther than the 700 MHz spectrum. I can’t help but picture a rural tragedy, such as a downed-plane, where first responders from outside the area will have no communication ability if the FirstNet signal to the needed area is weak or nonexistent.

I see this as another giant government handout to the huge carriers. You can be assured that a lot of the money going to AT&T will go to their bottom line. I hope, at least, that some of the money they are getting for FirstNet will at least improve normal cellular coverage in rural America – but I’m not holding my breath. To me this seems like another big federal program that is being spent to fix a problem that no longer exists. Local jurisdictions solved the interoperability problem in the first few years after 9/11. And the ability of cellular companies to give preemptive access to first responders means there is no reason to set aside a huge valuable slice of spectrum.

Consolidation of Fiber Networks

I’ve written a few recent blogs discussing the amount of fiber that’s going to be needed to support the 5G networks envisioned by Verizon and AT&T. This blog in particular cited a recent Deloitte study that estimates that the cost to build the fiber needed to support a ubiquitous 5G network nationwide would be $130 billion.

We know that adding fiber is now a high priority for Verizon. They announced in April a deal to buy over $1 billion of fiber from Corning over 3 years. (As an aside, all of the press releases and articles about that purchase say that amount buys 12.4 million miles of fiber per year, or 37.2 million miles of fiber. There are only a little over 4 million miles of roads in the US, so that obviously means miles of individual fiber strands. Pardon the interruption, but misleading statistics drive me up the wall.)

We can almost be certain that Verizon plans to build fiber for backhaul to cell sites. There are around 250,000 current cell towers in the country, but the deployment of small neighborhood cell sites is going to explode that number potentially by millions. Years ago both Verizon and AT&T elected to let other companies build and own cell towers, which spun off a major new industry. And in that process both companies largely agreed to lease fiber transport to reach those towers. But as the cell industry margins are tightening the companies are now looking to directly own as many of those fiber routes as possible to hold down lease expenses.

While Verizon plans to build a lot of fiber, they are also on an obvious path to buy existing fiber networks that supply transport to cell towers. Last year they purchased XO Communications and just last week announced they were buying a Chicago-area fiber network from Wide Open West.

I have seen several analysts speculate that Verizon will be considering more fiber purchases. Interestingly the analysts focus on the potential purchase of large ILECs like Consolidated or Cincinnati Bell, which both own a lot of fiber. But much of the fiber in these companies is last-mile fiber to reach customers, and it would be curious to see Verizon buy back into that business. Just last year they sold off a significant chunk of their FiOS fiber network to Frontier and it would be a major reversal of that strategy to turn around and invest this soon in last mile fiber. We’ve seen big companies pivot before, but this would be possibly the biggest such change of mind our industry would ever have seen.

I think it’s more likely that they will consider buying transport fiber networks rather than last-mile networks. The problem the company faces is that there are not that many big fiber providers left. CenturyLink recently purchased the largest such network from Level 3, which owns over 55,000 miles of fiber. The only other fiber transport networks left that own over 10,000 miles of fiber are Birch, Zayo, EarthLink, Cogent and Lightower/Fibertech. There are only another half dozen companies that own fiber transport networks of between 5,000 and 10,000 miles. I have to think that Verizon and AT&T have considered buying many of these companies over the last year or two.

There is one other set of big fiber networks that don’t get as much national attention. These are fiber transport networks built largely by consortiums of independent telephone companies. Most of these networks were constructed as a way for the telcos to gain cheap fiber transport to the world outside of their operating territories. Many of these smaller telcos were held hostage to incredibly expensive special access transport from the RBOCs which made it difficult for them to buy affordable Internet access. Since these networks were originally built a lot of them now have expanded throughout their operating regions and are now connected to cell towers, large businesses, governments, universities and other customers needing fiber transport.

Most of these ILEC-owned networks have joined together to form INDATEL. Here is a map showing the wide-spread footprint of INDATEL-member networks. Through this consortium many of these networks are now interconnected, providing a nearly nationwide fiber footprint. The various members have POPs in all of the biggest cities in their region but then also go to all of the smaller communities that have largely been ignored by most of the other fiber providers, with perhaps the exception of Level 3.

I have no idea if either Verizon or AT&T has considered buying these networks. For a company like Verizon these fiber routes would provide transport into many areas where they don’t have fiber today. The owners of these networks might want to explore the possibility of selling their networks. Now that the networks are in place the ILECs that built these networks are no longer isolated from the rest of the world. A sale would let them capitalize on their investment in fiber at a time when fiber networks have an all-time high valuation.

Of course, the downside to all of this is that if Verizon, AT&T and a few others like CenturyLink gobble up the few remaining independent fiber networks they will have a virtual monopoly on fiber transport. During the XO and Level 3 purchases there were a lot comments filed with regulators expressing concern about the negative impact on competition from fiber consolidation. I’d hate to see us go back to the bad old days where the only option for transport was a handful of the big telcos.

The Economics of Tower Transport

Many of my clients lease towers and/or fiber transport to reach towers to wireless companies. Since most of my clients operate last-mile networks this is not usually a major source of revenue for them, but it is a significant one, and one of the more profitable things they sell.

I have been advising clients that we are in the midst big changes in the cellular industry and that they should expect payments for cell tower connectivity to start dropping. Transport providers and cell tower owners that won’t renegotiate lower prices could risk losing the business entirely.

Let’s look at AT&T as an example of this. AT&T has been aggressively pushing its vendors to lower prices. At an investor meeting last year AT&T’s president of technology operations told investors that the current industry model is not sustainable. And he is right. As I wrote in a recent blog the entire cellular industry seems to have crossed the threshold where cellular service is becoming a commodity, and that is putting huge pressure on the cellular companies to reduce costs.

Last year FierceWireless posted a letter that AT&T sent to many of vendors telling them to expect to renegotiate rates and terms. In that letter AT&T said that they would pushing for early termination of existing contracts with the expectations of lowering fees. They said they would be looking for the ability to modify or upgrade existing towers for free. And they want to eliminate any automatic price increases and instead have “rents reduced to competitive rates”.

There are two major costs for a cellular company to use somebody else’s tower. First they must lease space on towers including paying for power and space underneath to house equipment. Where AT&T doesn’t own the fiber connecting to the towers they also have to pay for fiber transport to reach the towers. And that transport is not cheap because the bandwidth they need at towers is growing at a torrid pace. Where just five years ago there were very few towers that needed more than a gigabit of bandwidth, I’ve seen rural towers where the carriers are now asking for the right over time to grow to five gigabits. And everything I read about cellular data usage tells me that demand for bandwidth at towers will continue to grow rapidly.

Many of my clients operate in rural areas and some think that their physical isolation makes them immune from any price negotiations with the wireless companies. But I think they are wrong for several reasons.

  • First, I think a lot of the billions being spend by the FCC’s CAF II program is being used to construct fiber to rural towers. AT&T is spending a most of the $2.5 billion from that program to extend fiber into rural areas. And where they build fiber they won’t need to lease it from anybody else.
  • I also suspect that the cellular companies are working with Frontier and CenturyLink, the other two big recipients of CAF II money to piggyback on their fiber expansion to reach cellular towers at a lower cost.
  • Both AT&T and Verizon are also undertaking significant fiber expansion, with one of the goals of that program to cut transport costs. I believe they are doing the math and that they will build fiber to the towers that save them money over the long-run – with those places with the most savings at the top of the list. If they sustain this kind of construction for five or ten years they will eventually be able to bypass most of the towers that they lease today. And the cellular companies should be doing this. If there are going to be lower margins in the cellular business then they ought to use their capital, while they have it, to permanently reduce operating costs.
  • I also suspect that, while AT&T and Verizon are competitors that they are cooperating to reach the more rural cell sites and have transport swap plans in place that save them both money.
  • Finally, these companies have been buying fiber network providers, like Verizon’s purchase last year of XO Communications. It would not be surprising to see them continue to buy companies that provide cell site transport.

The cellular companies and their partners don’t communicate well with smaller transport and cell tower owners. I suspect that many of clients will only get an inkling that a cellular company is going to bypass them when they get the cancellation notice of their contracts. So I have been encouraging folks to reach out to the cellular companies to renegotiate terms and prices. I think that those willing to so might be able to keep this as a long-term revenue stream, but that those that want to stick with higher historical prices will eventually get bypassed and will lose the revenue stream altogether. It’s a tough call, because some places are remote enough that they may never be bypassed – but it’s a crap shoot to guess if your own region is on the fiber-expansion list.

Our Aging Fiber Infrastructure

One thing that I rarely hear talked about is how many of our long-haul fiber networks are aging. The fiber routes that connect our largest cities were mostly built in the 1990s in a very different bandwidth environment. I have a number of clients that rely on long-haul fiber routes and the stories they tell me scare me about our future ability to move bandwidth where it’s needed.

In order to understand the problems of the long-haul networks it’s important to look back at how these fiber routes were built. Many were built by the big telcos. I can remember the ads from AT&T thirty years ago bragging how they had built the first coast-to-coast fiber network. A lot of other fiber networks were built by competitive fiber providers like MCI and Qwest, which saw an opportunity for competing against the pricing of the big telco monopolies.

A lot of the original fibers built on intercity routes were small by today’s standards. The original networks were built to carry voice and much smaller volumes of data than today and many of the fibers contain only 48 pairs of fiber.

To a large degree the big intercity fiber routes follow the same physical paths, either following interstate highways, but to an even greater extent following the railroad tracks that go between markets. Most companies that move big amounts of data want route diversity to protect against fiber cuts or disasters, yet a significant percentage of the routes between many cities are located next to fibers of rival carriers.

It’s also important to understand how the money works in these routes. The owners of the large fibers have found it to be lucrative to lease pairs of fiber to other carriers on long-term leases called IRUs (indefeasible rights to use). It’s not unusual to be able to shop for a broadband connection between primary and secondary markets, say Philadelphia and Harrisburg, and find a half-dozen different carriers. But deeper examination often shows they all share leased pairs in the same fiber sheath.

Our long-haul fiber network infrastructure is physically aging and I’ve seen a lot of evidence of network failures. There are a number of reasons for these failures. First, the quality of fiber glass today has improved by several magnitudes over glass that was made in the 1980s and 1990s. Some fiber routes are starting to show signs of cloudiness from age which kills a given fiber pair. Probably even more significant is the fact that fiber installation techniques have improved over the years. We’ve learned that if a fiber cable is stretched or stressed during installation that microscopic cracks can be formed that slowly spread over time until a fiber becomes unusable. And finally, we are seeing the expected wear and tear on networks. Poles get knocked down by weather or accidents. Contractors occasionally cut buried fibers. Every time a long-haul fiber is cut it loses a little efficiency, and over time splices can add up to become problems.

Probably the parts of the network that are in the worst shape are the electronics. It’s an expensive proposition to upgrade the bandwidth on a long-haul fiber network because that means not only changing lasers at the end points of a fiber, but at all of the repeater huts along a fiber route. Unless a fiber route is completely utilized the companies operating these routes don’t want to spend the capital dollars needed to improve bandwidth. And so they keep operating old electronics that are often many years past their expected functional lives.

Construction of new long-haul fiber networks is incredibly expensive and it’s rare to hear of any major initiative to build fiber on the big established intercity routes. Interestingly, the fiber to smaller markets is in much better shape than the fiber between NFL cities. These secondary fiber routes were often built by groups like consortiums of independent telephone companies. There were also some significant new fiber routes built using the stimulus funding in 2008.

Today a big percentage of the old intercity fiber network is owned by AT&T, Verizon and CenturyLink. They built a lot of the original network but over the years have also gobbled up many of the other companies that built fiber – and are still doing so, like with Verizon’s purchase last year of XO and CenturyLink’s purchase of Level3. I know a lot of my clients worry every time one of these mergers happens because it removes another of a small handful of actual fiber owners from the market. They are fearful that we are going to go back to the old days of monopoly pricing and poor response to service issues – the two issues that prompted most of the construction of competitive fiber routes in the first place.

A lot of the infrastructure of all types in this country is aging. Sadly, I think we need to put a lot of our long-haul fiber backbone network into the aging category.

The Cost of Building 5G

It seems like I can barely browse industry articles these days without seeing another prediction of the cost of providing fast broadband everywhere in the US. The latest study, just released on July 12 from Deloitte, estimates that it will require at least $130 billion over the next seven years in fiber investment to make the country fully ready for 5G.

Before digesting that number it’s important first to understand what they are talking about. Their study looks at deploying a ‘deep fiber’ network that would bring fiber close to homes and businesses in the country and then use wireless technology to complete the connection to homes. This is not a new concept and for decades we have referred to this as fiber-to-the-curb. This network design never went very far in the past because there wasn’t a good wireless technology around to make that final connection. This differs from an all-fiber connection by replacing a fiber drop wire to the home with wireless electronics. The only way such a network makes sense is if that difference is a significant savings over an all-fiber connection at the home.

We are now on the verge of having the needed wireless technology. There are now some first-generation wireless connections being tested that could finally make this a viable network deployment. And like with everything new, within a decade the wireless electronics needed will improve in function and cost a lot less.

To put the Deloitte estimate into perspective Verizon claimed to have spent $13 billion on their original FiOS fiber network. Because they were able to overlash fiber onto their own telephone wires the FiOS network cost was built at a relatively low cost of $750 per customer passed. But the Verizon FiOS network never blanketed any city and instead they selectively cherry-picked neighborhoods where the construction costs were the lowest. Verizon had originally told Wall Street they were going to spend $24 billion on fiber, but they abandoned a lot of the planned construction when the costs came in higher than they had expected.

But back to the Deloitte number of $130 billion. That is the cost of just the fiber needed to get deep into every neighborhood in the country. It doesn’t include the electronics needed to broadcast the wireless signal or the electronics needed inside homes and businesses to receive the signal. Nobody yet has any estimate of what that is going to cost, but it won’t be cheap, at least not for a few years. The cost of getting onto utility poles, street lighting poles or of constructing urban towers is not going to be cheap. And the cost of the electronics won’t be cheap until it’s gone through a few generations of refinement. Using Deloitte’s same methodology of estimating and assuming a very conservatively low cost of $500 for electronics per customer, this would add another $30 billion if only half the customers in the country use the new 5G network.

The big question that must be asked when tossing out a number like $130 billion is if there is anybody who is interested in deploying wireless loops in this manner? Such a network would be used to directly compete against the big cable companies. What Deloitte is talking about is not faster cellular service, but fast connections into homes and businesses. Are there any companies willing to spend that much money to go head-to-head with cable networks that will soon be able to deliver gigabit speeds?

The obvious candidates are Verizon and AT&T. Verizon has been talking a lot lately about this potential business plan, and so perhaps they might pursue it. AT&T, while bragging about the amount of money they are spending on fiber, has not shown a huge inclination to dive back into the residential broadband market. And there are not a lot of companies with capital budgets big enough to consider this.

Consider the capital budgets of the five largest telcos. AT&T is on track to spend $22B in 2017, but a lot of that is being spent in Mexico. Verizon’s 2017 capex budget is around $17B. CenturyLink spends something a little less than $3B. Frontier spends around $1B and Windstream spends about $0.8B.

It’s clear that unless AT&T and Verizon are willing to redirect the majority of their capital spending to this new technology that it’s not going to go anywhere. I think it’s clear that both AT&T and Verizon are going to be looking hard at the technologies and doing trials. But even should those trials be successful I can’t see them pouring the needed billions in to build ‘deep fiber’ everywhere. It’s far more likely that the technology will be deployed in the same way that Verizon deployed FiOS – built only where the cost is the lowest and ignoring everybody else.

Both of these companies understand that it’s not going to be easy to wrestle customers back from the big cable companies. Just building these fiber networks is a daunting financial investment – one that Wall Street would likely punish them for undertaking. But even building the needed networks is not going to be any assurance of market success unless they can convince customers they are a better bargain. I just don’t see these companies going hog wild in making the needed investments to deploy this widely, but instead see this as the newest technology for cherry-picking the best opportunities.

The Future of AT&T and Verizon

The cellphone companies have done such a great job of getting everybody to purchase a smartphone that cellular service in the country is quickly turning into a commodity. And, as is typical with most commodity products, that means less brand loyalty from customers and lower market prices for the products.

We’ve recently seen the cellular market demonstrate the turn toward becoming a commodity. In the first quarter of this year the cellular companies had their worse performance since back when they began. Both AT&T and Verizon posted losses for post-paid customers for the quarter. T-Mobile added fewer customers than expected and Sprint continued to lose money.

This is a huge turnaround for an industry where the big two cellular companies were each making over $1 billion per month in profits. The change in the industry comes from two things. First, people are now shopping for lower prices and are ready to change carriers to get lower monthly bills. The trend for lower prices was started by T-Mobile to gain market share, but low prices are also being pushed by cellular resellers – being fed by the big carriers. The cellular industry is only going to get more competitive when the cable companies soon enter the market. That will provide enough big players to make cellular minutes a true commodity. The cable companies have said they will be offering low prices as part of packages aimed at making customers stickier and will put real price pressure on the other cellular providers.

But the downturn in the first quarter was almost entirely due to the rush by all of the carriers to sell ‘unlimited’ data plans – which, as I’ve noted in some earlier blogs, are really not unlimited. But these plans offer lower prices for data and are freeing consumers to be able to use their smartphones without the fear of big overage fees. Again, this move was started by T-Mobile, but it was also driven heavily by public demand. AT&T and Verizon recognized that if they didn’t offer this product set that they were going to start bleeding customers to T-Mobile.

It will be really interesting to watch what happens to AT&T and Verizon, who are now predominantly cellular companies that also happen to own networks. The vast majority of revenues for these companies comes from the cellular parts of their companies. When I looked at both of their annual reports last year I had a hard time finding evidence that these companies were even in the landline network business. Discussions of those business lines are buried deeply within the annual reports.

These companies obviously need to find new forms of revenues to stay strong. AT&T is tackling this for now by going in a big way after the Mexican market. But one only has to look down the road a few years to see that Mexico and any other cellular market will also trend towards commoditization.

Both companies have their eyes on the same potential growth plays:

  • Both are making the moves necessary to tackle the advertising business. They look at the huge revenues being made by Facebook and Google and realize that as ISPs they are sitting on customer data that could make them major players in the targeted marketing space. Ad revenues are the predominant revenue source at Google and if these companies can grab even a small slice of that business they will make a lot of money.
  • Both are also chasing content. AT&T’s bid for the purchase of Time Warner is still waiting for government approval. Verizon has made big moves with the purchases of AOL and Yahoo and is rumored to be looking at other opportunities.
  • Both companies have been telling stockholders that there are huge amounts of money to be made from the IoT. These companies want their cellular networks to be the default networks for collecting data from IoT devices. They certainly ought to win the business for things like smart cars, but there will be a real battle between cellular and WiFi/landline connections for most other IoT usage.
  • Both companies are making a lot of noise about 5G. They are mostly concentrating on high-speed wireless connections using millimeter wave spectrum that they hope will make them competitive with the cable companies in urban areas. But even that runs a risk because if we see true competition in urban areas then prices for urban broadband might also tumble. And that might start the process of making broadband into a commodity. On the cellular side it’s hard to think that 5G cellular won’t quickly become a commodity as well. Whoever introduces faster cellphone data speeds might get a bump upward for a few years, but the rest of the industry will certainly catch up to any technological innovations.

It’s hard to foresee any business line where AT&T and Verizon are going to get the same monopoly power that they held in the cellular space for the past few decades. Everything they might undertake is also going to be available to competitors, meaning they are unlikely to make the same kind of huge margins they have historically made with cellular. No doubt they are both going to be huge companies for many decades to come since they own the cellular networks and spectrum. But I don’t think we can expect them to be the cash cows they have been in the past.

AT&T’s CAF II Data Caps

AT&T recently launched its CAF II cellular data plan in a number of rural areas. This is being launched from the federal program that is giving AT&T $2.5 billion dollars spread over 6 years to bring broadband to about 1.1 million homes. That works out to $2,300 per home.

Customers are guaranteed speeds of at least 10 Mbps down and 1 Mbps up. The broadband product is priced at $60 per month with a contract or $70 per month with no contract. Installation is $99. The product comes with a WiFi router that also includes 4 Ethernet ports for wired connections.

For a rural household that has never had broadband this is finally going to get them connected to the web like everybody else. But the 10 Mbps speed of the product is already obsolete and in the footnotes to the product AT&T warns that a customer may not be able to watch two HD video streams at the same time.

But the real killer is the data cap which is set at 160 gigabytes per month. Extra data above this limit will cost a household $10 for each 50 gigabytes (or fraction thereof). AT&T has obviously set the data cap this low because that was the cap suggested by the FCC in the CAF II order.

Let me throw out some statistics that shed some light on how puny the 160 GB month cap is. Following are some statistics about data usage for common functions in the home:

  • The average desktop or laptop uses about 3 GB per month for basic functions like email, upgrading software, etc.
  • Cisco says that the average smartphone uses about 8 GB per month on WiFi.
  • Web browsing uses about 150 MB per hour.
  • Streaming music uses 1 GB for 24 hours of streaming
  • Facebook estimates that it’s average user uses the service for 20 hours per month, which consumes 2.5 GB.
  • Video is the real bandwidth eater. Netflix says that an SD video uses 0.7 GB per hour or 1.4 GB for a movie. They say HD video uses 3 GB per hour or 6 GB per movie.
  • The average online gamer uses at least 5 GB per month, and for some games much more than this.

So how does all of this stack up for an average family of three? It might look something like this:

3 computers / laptops                      9 GB

3 Smartphones                                24 GB

60 hours of web browsing               9 GB

3 social networks                              8 GB

60 hours of streaming music          3 GB

1 Gamer                                             5 GB

Schoolwork                                      10 GB

Subtotal                                            68 GB

This leaves 92 GB for watching video for a month. That will allow a home to watch 15 HD movies a month or 30 1-hour shows. That means one TV show per day for the whole household. Any more than that and you’d go over the data cap. The majority of video content on the web is now only available in HD and much of the content on Netflix and Amazon no longer come in SD. To make matters worse, these services are now starting to offer 4k video which is 4 times more data intensive than HD video.

Also note that this subtotal doesn’t include other normal functions. Working from home can use a lot of bandwidth. Taking online courses is data intensive. IoT devices like home security cameras can use a lot of bandwidth. And we are starting to see smart home devices add up to a pile of data that goes on behind the scenes without our knowledge.

The fact is that within a few years the average home is going to likely exceed the AT&T data cap without watching any video. The bandwidth used for everything we do on the web keeps increasing over time.

To show how ridiculously low this cap is, compare it to AT&T’s ‘access’ program which supplies broadband to low-income homes for speeds up to the same 10 Mbps and prices up to $10 per month. That low-income plan has a 1 terabyte data cap – over six times higher than the CAF II data cap. Since the company offers both products from the cellular network it’s impossible for the company to claim that the data caps are due to network constraints or any other technical issues. AT&T set the data cap at the low 160 GB because the FCC stupidly suggested that low amount in the CAF II order. The low data cap is clearly about money.

The last time we measured our home with 3 users we used over 700 GB per month. We are cord cutters and watch all video on the web. We work from home. And our daughter was taking on-line classes. Under the AT&T CAF II product our monthly bill would be $170 per month. And even then we would have a data product that would not allow us to do the things we want to do, because the 10 Mbps download speed would not allow all three of us to use the web at the same time. If you’ve been reading my blog you’ve heard me say often what a colossal waste of money the CAF II program is. The FCC gave AT&T $2.5 billion to foist this dreadful bandwidth product on rural America.

Latest Industry Statistics

The statistics are out for the biggest cable TV and data providers for the first quarter of the year and they show an industry that is still undergoing big changes. Broadband keeps growing and cable TV is starting to take some serious hits.

Perhaps the most relevant statistic of all is that there are now more broadband customers in the country than cable TV customers. The crossover happened sometime during the last quarter. This happened a little sooner than predicted due to plunging cable subscribers.

For the quarter the cable companies continued to clobber the telcos in terms of broadband customers. Led by big growth in broadband customers at Comcast and Charter the cable companies collectively added a little over 1 million new broadband customers for the quarter. Charter led the growth with 458,000 new broadband subscribers with Comcast a close second at 430,000 new customers.

Led by Frontier’s loss of 107,000 broadband customers for the quarter the telcos collectively lost 45,000 net customers for the quarter. Most of Frontier’s losses stem from the botched acquisition of Verizon FiOS properties. Verizon lost 27,000 customers for the quarter while AT&T U-verse was the only success among telcos adding 90,000 new customers for the quarter.

Looking back over the last year the telcos together lost 727,000 broadband customers while the cable companies together gained 3.11 million customers during the same period. The cable companies now control 63.2% of the broadband market, up from 61.5% of the market a year ago.

Overall the broadband market grew by 2.38 million new broadband subscribers for over the last year ending March 31. It’s a market controlled largely by the giant ISPs and the largest cable companies and telcos together account for 93.9 million broadband subscribers.

Cable TV shows a very different picture. The largest seven cable providers collectively lost 487,000 video subscribers for the quarter. That includes AT&T losing 233,000, Charter losing 100,000, Dish Networks losing 143,000, Verizon losing 13,000, Cox losing 4,000 and Altice losing 35,000. The only company to gain cable subscribers was Comcast, which gained 41,000.

Total industry cable subscriber losses were 762,000 for the quarter as smaller cable companies and telcos are also losing customers. That is five times larger than the industry losses of 141,000 in the first quarter of last year. This industry is now losing 2.4% of the market per year, but that r is clearly accelerating and will probably grow larger. The annual rate of decline is already significantly higher than last year’s rate of 1.8%.

At this point it’s clear that cord cutting is picking up steam and this was the worst performance ever by the industry.

The biggest losers have stories about their poor performance. Charter says it is doing better among its own historic customers but is losing a lot of customers from the Time Warner acquisition as Charter raises rates and does away with Time Warner promotional discounts. AT&T has been phasing out of cable TV over its U-Verse network. This is a DSL service that has speeds as high as 45 Mbps, but which is proving to be inadequate to carry both cable TV and broadband together. Dish Networks has been bogged down in numerous carriage and retransmission fights with programmers and has had a number of channels taken off the air.

But even considering all of these stories it’s clear that customers are leaving the big companies. Surveys of cord cutters show that very few of them come back to traditional cable after cutting the cord after they get used to getting programming in a different way.

What is probably most strikingly different about the numbers is that for years the first quarter has performed the best for the cable industry, which in recent years has still seen customer gains even while other quarters were trending downward. We’ll have to see what this terrible first quarter means for the rest of 2017.



Big Companies and Telecommuting

One of the biggest benefits most communities see when the first get good broadband is the ability for people to telecommute or work from home. Communities that get broadband for the first time report that this is one of the most visible changes made in the community and that soon after getting broadband almost every street and road has somebody working from home.

CCG is a great example of telecommuting and our company went virtual fifteen years ago. The main thing that sent us home in those days was that residential broadband was better than what we could get at the office. All of our employees could get 1 – 2 Mbps broadband at home and that was also the only speed available at our offices over a T1. But we found that even in those early days that a T1 was not enough speed to share among multiple employees.

Telecommuting really picked up at about the same time that CCG went virtual. I recall that AT&T was an early promoter of telecommuting as was the federal government. At first these big companies let employees work at home a day or two a week as a trial. But that worked out so well that over time big organizations felt comfortable with people working out of their homes. I’ve seen a number of studies that show that telecommuting employees are more productive than office employees and work longer hours – due in part to not have to commute. Telecommuting has become so pervasive that there was a cover story in Forbes in 2013 announcing that one out of five American workers worked at home.

Another one of the early pioneers in telecommuting was IBM. A few years ago they announced that 40% of their 380,000 employees worked outside of traditional offices. But last week the company announced that they were ending telecommuting. They told employees in many of their major divisions like Watson development, software development and digital marketing and design that they must move back into a handful of regional offices or leave the company.

The company has seen decreasing revenues for twenty straight quarters and there is speculation that this is a way to reduce their work force without having to go through the pain of choosing who will leave. But what is extraordinary about this announcement is how rare it is. It’s only the second major company that has ended telecommuting in recent memory, the last being Yahoo in 2013.

Both IBM and Yahoo were concerned about earnings and that is probably one of the major reasons that drove their decision to end telecommuting. It seems a bit ironic that companies would make this choice when it’s clear that telecommuting saves money for the employer – something IBM crowed about earlier this year.

Here are just a few of the major findings that have been done about the benefits of telecommuting. It’s improves employee morale and job satisfaction. It reduces attrition, reduces sick and unscheduled leave. It saves companies on office space and overhead costs. It reduces discrimination by equalizing people by personality and talent rather than race, age or appearance. It increases productivity by eliminating unneeded meetings and because telecommuters work more hours than office workers.

But there are downsides. It’s hard to train new employees in a telecommuting environment. One of the most common ways to train new people is to have them spend time with somebody more experienced – something that is difficult with telecommuting. Telecommuting makes it harder to brainstorm ideas, something that benefits from live interaction. And possibly the biggest drawback is that telecommuting isn’t for everybody. Some people cannot function well outside of a structured environment.

As good as telecommuting is for companies it’s even better for smaller and rural communities. A lot of people want to live in the communities they grew up in, around friends and family. We’ve seen a brain drain from rural areas for decades as kids graduate from high school or college and are unable to find meaningful work. But telecommuting lets people live where there is broadband. Many communities that have had broadband come to town report that they see an almost instant uptick in housing prices and demand for housing. And part of that increased demand is from those who want to choose a community rather than follow a job.

One of the more interesting projects I’ve worked on with the telecommuting issue was when I helped the city of Lafayette, Louisiana get a fiber network. Lafayette is not a rural area but a thriving mid-size city, and yet one of the major reasons the residents wanted fiber was the chance to keep their kids at home. The area is largely Cajun with a unique culture and the community was unhappy to see their children have to relocate to larger cities to get jobs after graduating from the university there. Broadband alone can’t fix that kind of problem, but Lafayette is reportedly happy with the changes brought from the fiber network. That’s the kind of benefit that’s hard to quantify in dollar terms.

AT&T’s CAF II Solution

We now know the details of AT&T’s fixed broadband solution being installed to satisfy the FCC’s CAF II plan.

Let me start with some numbers to explain the FCC funding from the FCC. In the second round of the CAF II proceeding AT&T accepted a payment from the Universal Service Fund of about $428 million per year for six years, or over $2.5 billion dollars. That money is to be used to bring broadband to about 1.1 million homes. That works out to $2,300 per home.

I saw news last week about an AT&T CAF II ‘trial’ in Georgia. AT&T plans on using existing cellular spectrum to deliver a fixed broadband product. This will require the installation of a small exterior antenna at a customer site as well as the use of an AT&T modem inside of the home.

We’ve known for a while that AT&T planned to utilize their cellular spectrum rather than build or try to upgrade any copper plant, so this is no surprise. What is a bit of a surprise to me is the speeds being offered in the trial. AT&T will be providing a 10 Mbps download speed, which is the bare minimum required by the FCC’s CAF II program. We know from other trials AT&T has had around the country that this technology is capable of delivering at least twice that much bandwidth.

And the service won’t be cheap. The product is priced at $60 per month if a customer will sign a contract, and $70 per month with no contract. It’s a pretty interesting comparison between this and Verizon’s announcement of now offering gigabit speeds throughout its fiber footprint for $70 per month. I didn’t see any mention of a fee for use of the AT&T modem, but most ISPs charge for such devices, so that is probably going to be added to the price.

The AT&T product also comes with severe data caps. It comes with a monthly data cap of 160 gigabytes of total download. Overages will cost $10 for each additional 50 gigabytes, up to a maximum of $200 per month. I suspect a lot of rural homes that buy this as their first broadband product are going to be shocked at their first bill when they splurge on watching Netflix for the first time. My 3-person household uses about 700 gigabytes per month, which under this plan would cost $170 per month for somebody with a contract.

Like with all ISPs, I’m sure that the 10 Mbps data speed is undoubtedly best effort, meaning that at peak times (or if customers are too far away from a cellular tower) the speeds will be slower. That slow speed is going to severely hamper the ability for customers to use huge amounts of data since they aren’t easily going to be able to watch many simultaneous video streams.

I can’t be entirely negative, because for many households this will be their first broadband product, other than perhaps satellite data, which is largely unusable. And so to these homes it’s going to feel great to finally be able to stream data or have their kids able to do on-line homework from their homes.

But what is irksome about this product is that the federal government handed AT&T the money to do this. Certainly they will use some of the $2,300 per customer to build some new towers or to build a little fiber to towers. But the equipment to serve a customer is going to cost a lot less than this. I would bet that most customers will be served from existing towers using existing spectrum. This means that the federal government is paying for the full cost of implementing this product, but for which AT&T will reap all of the revenues and profits. That’s a pretty handsome return on investment for AT&T and amounts to an unneeded handout to one of the richest companies in the country.

Customers are going to quickly understand that, while they now have a minimal broadband capability, they don’t have anything close to the same broadband that much of the rest of the country has. Almost all of the big cable companies now sell broadband with minimum speeds of at least 50 Mbps download, often more. As households keep needing more data capacity over time – with the average household use of data doubling every three years – this AT&T product will become the broadband equivalent of dial-up within a decade.

The worst thing about this whole fiasco from my perspective is that the FCC is take big credit for bringing broadband to the parts of the country who get this kind of CAF II product, and they will probably count this as a job well done. Instead the FCC will have spent many billions on foisting broadband into rural America that is obsolete before it’s even launched. The shame is that this same money could have been used to seed matching grants in rural America that would have built fiber to a lot of these same homes. Small ISPs and telcos got excited when they first heard of the reverse auctions for the CAF II funding. But then, rather than holding those auctions, the FCC just handed this money to the big telcos with no competition for the funding – and this AT&T product is the end result of that bad decision.

Rural America is not going to be long fooled and will quickly recognize this as inferior broadband, but they are going to have no real alternatives. There is the small hope that there might be an infrastructure program from the current administration and Congress, but there is no assurance that such money might not also go to the big ISPs to do more of the same.