Why Not Faster Data Speeds?

Speed_Street_SignI was recently at my mother-in-law’s house and saw an example of what competition can do for the country. She lives in Kyle, Texas, which is an outer suburb of Austin. When I say outer, it’s an hour’s drive to downtown Austin.

As I was working on my laptop using her WiFi, it felt like it was faster than in previous times that I had visited here, so I ran a speed test. And sure enough, her bandwidth measured in at a little over 70 Mbps download and 10 Mbps upload.

She buys only the basic Internet product from Time Warner. I am pretty sure that in the past this was a much slower product, closer to 15 Mbps, and possibly less. But for certain her speed has been increased significantly due to competition. By now everybody knows that Austin is in the midst of significant competition with Google, Grande and AT&T each selling a gigabit data product, while Time Warner which now has speeds up to 300 Mpbs. What this competition has done is to up the game for everybody in the market.

The sad thing is that it takes competition to get the cable companies to up their game. I doubt that many other Time Warner markets around the country have base speeds of 70 Mbps, and probably none of their other markets has speeds of 300 Mbps.

I really don’t understand why the cable companies don’t just increase speeds everywhere as a way to fend off competition. One would think Google might be a lot less likely to build fiber into a market if every customer there already had 300 Mbps data speeds. The cable companies in most markets clearly have the majority of customers, and certainly have all of the customers who are interested in fast speeds. They have it within their power to be market leaders and to bring fast speeds today, so that any future competitor will have a hard time denting their lucrative markets.

Instead many of them sit and wait until the inevitable announcement of competition before they do the upgrades needed to get faster speeds. For example, Cox has announced that in Omaha and Las Vegas they will have speeds as high as a gigabit in response to fiber deployment by CenturyLink in those markets. But not all of them are waiting. For example, Charter recently doubled the speeds on most of their products. That is not the same as offering blazingly fast speeds, but it really makes a difference to boost their base residential product to 60 mbps.

I know that there is a cost to upgrading data speeds. But recently Time Warner Cable said in their annual report that they have a 97% margin on their data products, a number that opened a lot of eyes nationally. One would think that the cable companies would do anything to protect a product with margins that high and that they might spend some of that margin to fend off competition.

I have no idea how well Google does when they come into a new market. I know that when a municipal provider comes to a market they generally get 40% to 60% market penetration with their data products. But the Google product, at a premium price of $70 per month is probably not going to attract quite as many customers. Still, one has to think that they probably get at least 30% of households.

Cable companies have a lot to lose if they lose 30% or more of their customers in the large urban markets. It’s clear that the cable TV product today has very poor margins (if not negative margins) and so the future of the cable companies comes from data sales. They are in the enviable position of already having gotten most of the customers in most market and one would think they would want to jump in front of potential competition and head it off before it even starts.

But they are not acting like companies with a lot to lose. To me it feels like they are making a strategic error by not being more proactive with data speed upgrades. The cable companies are largely disliked by their customers, and they could go a long way to change that perception by unilaterally raising data speeds to be as fast as they can make them.

I am glad to see competition forcing data speed increases, but the majority of markets are not competitive. But in my mind, if the cable companies wait to increase speeds only after there has been an announcement of a coming competitor in each market, they will have lost the game. People are going to perceive that as too little, too late. And it’s a shame, because we know in Austin what a cable company can do if they are motivated by competition. I just scratch my head and wonder why maintaining markets with a 97% margin data product is not enough motivation to fight to keep the customers they already have.

 

Google and Regulation

Logo of the United States Federal Communicatio...

Logo of the United States Federal Communications Commission, used on their website and some publications since the early 2000s. (Photo credit: Wikipedia)

AT&T said last week that they were not required to give access to Google Fiber to their poles in Austin Texas. AT&T owns about 20% of the poles there with the City owning the rest. And from what I can see, AT&T is right. This all comes down to various regulations, and it appears that Google is doing everything possible to not be regulated in any way. It seems they have set up a business plan that lets them claim to escape regulation. Let me look at the nuances of what they are doing.

There is a federal set of rules that say that pole owners must provide poles to any certified telecommunications provider. According to the Telecommunications Act of 1996, the states have the right to grant certifications to carriers. Every state provides at least two kinds of carrier certifications – CLEC and IXC. CLEC is the acronym for Competitive Local Exchange Carrier and is the federal term used to describe competitive telephone providers. IXC is the acronym for Interexchange Carrier and is the certification given to companies that only want to sell retail long distance.

Some states have other categories. Some states have a certification for a Competitive Access Provider (CAP) or for a Carrier’s Carrier, These two certifications are generally given to companies who only want to sell services to other carriers. They may sell transport, collocation or other services that only carriers can buy.

A company must obtain a CLEC or CAP certification if they want to gain all of the rights that come with such certification. This includes access to poles and conduits of other carriers, the ability to interconnect with other carriers, the ability to collocate equipment in the offices of other carriers. A CLEC certification also grants a company the right to bill ‘telecom’ products to customers, meaning traditional telephone or traditional TDM point-to-point data services. These are generally rights that anybody who is building a network or providing traditional telecom services must obtain before other carriers will talk to them. But along with those rights come some obligations. Certified carriers are subject to paying some regulatory fees and collecting other fees and taxes from their customers. Regulated companies have to follow rules that dictate how they can disconnect non-pay customers. Regulated companies in some states even have some light regulations concerning pricing, although there are very few rules anywhere dictating how a competitive carrier prices their services.

So strictly, AT&T is completely within their rights to not even talk to Google about pole attachments since Google does not have or plan to obtain a certification. As it turns out, AT&T reports that they are talking to Google anyway and are negotiating a deal to let them on the poles. And honestly, that steams me a bit, because this is how big companies treat each other. I am sure that there is enough business between AT&T and Google that AT&T doesn’t see any sense in going to war over this kind of issue. They would also be seen in Austin as holding up progress and further, Google could always get the certification if push came to shove. But if this was any company smaller than Google, then AT&T would be refusing to even open a discussion on pole attachments or any of the other issues associated with being certified. AT&T would insist that any other company jump through all of the regulatory hoops first. This I know because I have experienced it numerous times. I guess it pays to be as big as Google.

AT&T would also be required to provide access to the poles if Google was a cable TV company. This is a designation that is granted by the local community and the City of Austin could negotiate a cable franchise agreement with Google. But Google is taking the stance that they are not a cable TV company. They are claiming instead that they are a video service provider because they deliver two-way cable TV service, meaning that the customer’s settop box can talk back to Google since they offer IPTV. This is taking advantage of a loophole in the law because today every large-city cable system is two-way since customers in those systems have the ability to order Pay-per-view or video-on-demand from their settop boxes.

But Google does not want to be a cable provider, because there is one nuance of the FCC rules that say that anybody getting a franchise agreement would essentially have to sign onto the same rights and obligations as the incumbent cable company. The big catch in those rules is that Google would have coverage obligations to cover the whole City and they instead want to pick and choose the neighborhoods they serve. Google would also have to collect franchise fees from customers for their cable TV product, and such fees are around 3% of the cable bill in most places.

State regulators and cities are both willing to overlook these regulatory nuances for Google because they are so big and because they promise to bring gigabit data speeds. But these same rules never get overlooked for smaller companies, and so I guess regulations only really affect the small guys any more.

Will Telecom Investing Become Sexy Again?

Image representing Google as depicted in Crunc...

Image via CrunchBase

Will the fact that Google is investing in fiber make it sexy again to invest in telecom? The last time that there was a big boom in investing in new telecom ventures was the late 90’s. At that time there were dozens of start-up CLECs, a number of which were able to issue IPOs and go public. Every smart investor had some telecom stocks in their portfolio.

But the new CLECs and telecom firms of that time almost all went bust with only a few of them still around today. There are a number of reasons for the bust. The business plans of many telecom startups depended upon arbitrage – using the facilities of the incumbent rather than making infrastructure investments. And many of the telecom start-ups had bad business plans that expanded into too many markets too quickly to do it well. And somehow the telecoms got tied in with the dot.coms and when those went bust the telecoms followed them down the tubes. And investors lost a lot of money and got soured on telecom. The lasting effect of the bust was that it became unsexy to invest in telecom.

And almost nobody has invested in telecom since then. It’s hard to find anybody who doesn’t recognize that the US is falling behind the rest of the world in telecom infrastructure, namely fiber. Since the telecom bust the only ones investing in fiber to whole communities have been Verizon, some municipalities and some smaller independent telephone companies. Verizon’s decision to build fiber was a bold one, but it didn’t drag anybody else along. And Verizon’s fiber build dwarfs all of the rest of the builders collectively. The vast majority of the country does not have fiber but wants it badly.

But now Google comes along and is boldly investing in fiber in large communities – Kansas City and Austin. What they are telling the world is that there is profit in fiber, profit in infrastructure investing. Kansas City was touted as a trial, but by having announced Austin so quickly it is obvious that Google thinks that their experiment is working. And while Google has made an announcement for Provo, Utah, that is a one-off since they were able to pick up an existing fiber network and customers at a very good price.

I keep hearing that there is a lot of money today on the sidelines, meaning money waiting to get invested in good projects. And this is interesting to me since there is such an obvious need in this country today for new and upgraded infrastructure. In addition to a huge need for fiber networks there is a huge demand for clean energy generation plus the usual things like bridges and roads. Perhaps at least to some small degree the Google decision to boldly invest in infrastructure can be the first step towards unleashing the private equity in the country to invest in infrastructure again. Google thinks such investing can be profitable and obviously it is good for the country. Will others follow?

Two Fiber Networks?

Image of Austin, Texas

Image of Austin, Texas (Photo credit: Wikipedia)

The conventional wisdom in the industry is that two companies would never invest in side-by-side fiber networks to serve residential customers. I have had this conversation many times with clients who were planning to build a fiber network and who were worried about the response of the incumbent providers. Everyone has always believed that the first fiber builder wins because there is not enough margin in the residential market to support two fiber networks. AT&T has shown that conventional wisdom to be wrong by announcing that they will build a second fiber network in Austin as a counter to Google’s announcement to do the same.

This is not without precedent, although on a much smaller scale. The City of Monticello, Minnesota built a fiber network to pass every home and business in the City. The municipal fiber build was prompted by the fact that the City had some of the highest telecom rates in the country. Soon after the City built their network, TDS Telecom, the incumbent telephone company built a competing fiber network.

And as expected, both fiber providers are not faring well. After building fiber TDS decided to win back customers with an aggressive price war. Charter, the incumbent cable company also got into the price war fray. And so customers in Monticello are benefitting from a price war while all of the companies are underperforming.

It is fairly easy to understand TDS’s motivation for building the fiber network and for the price war. The company serves numerous other towns like Monticello and I see their response there as a clear warning to anybody else who is planning on overbuilding their serving territory. It is also clear that they are hoping that the City will give up and leave the fiber business.

And now we are going to see this scenario play out in the much bigger market of Austin. Google already overbuilt one AT&T market in Kansas City and one can easily envision Google overbuilding many other large cities. AT&T’s response in Austin is the same as TDS’s response in Monticello. AT&T has made it clear to Google and others that they are not going to side idly by and watch their major markets go to somebody else.

So it will be interesting to see the impact of AT&T’s announcement. It’s possible that the announcement will cause Google to pause and not build in Austin. Certainly they will not do as well as expected if there are two fiber networks. It’s also possible that both companies will build fiber and we will see side-by-side competition with two fiber networks and the cable company – the kind of competition we have never seen in a major city in the US.

But the real impact of AT&T’s announcement is going to be felt everywhere else. One has to wonder what kind of impact AT&T’s announcement will have on any company, Google included, who is contemplating building a fiber network in a large city. Google has very deep pockets and might proceed anyway, but almost any other company would not be able to afford the much lower returns that come with hard competition.

While this announcement might result in real competition for the citizens of Austin, it also might have the effect of stifling anybody else from trying to build fiber in a large City. This announcement could result in killing anybody from building fiber in large cities due to the fear of a similar reaction. While hearing about two companies wanting to provide gigabit fiber sounds like a good thing, the long-term consequence of this might mean less overbuilding, less fiber and less competition.

And I don’t know that AT&T had any choice. Their only other option was to watch their large markets go to an aggressive competitor. Nobody knows what Google plans to do, but some have speculated that they might build in most of the major cities. Now we’ll just have to watch this one play out, so pull up a chair. This should be interesting.