Old Regulation Rears its Head

The way that we regulate telecom services is interesting. The FCC has effectively eliminated federal regulation of broadband, the service that over 90% of households now use. Meanwhile, landline telephone service, the telecom product that is used by an ever-decreasing number of homes is still heavily regulated.

The target of much of the remaining regulation are the big telephone companies that still operate large copper networks. It’s easy to bash the big telephone companies because of the poor quality of services offered on those copper networks, and I’ve done so many times in this blog.

When you stop and think about it, those companies are still using copper networks built in the 50s, 60s, and 70s. If the telcos had been good stewards of those networks and maintained them meticulously those networks would still be 50 to 70 years old, and older than the 35-40 year expected life for the networks. The big telcos largely ignored maintenance of copper for the last 30 years or more, and frankly, it’s a miracle that the old copper networks are still working.

Perhaps the oddest aspect of telephone regulation is that a regulatory body will occasionally punish a big telco for still being in the copper business. A good example is a proceeding in New Mexico last fall where CenturyLink asked to be deregulated for landline telephone services. This doesn’t mean that they would stop offering the services, but rather that many of the old regulations put in place at the heyday of the telephone monopolies would be excused. Most states have deregulated the big telcos from a lot of the old telephone rules.

The New Mexico Public Regulations Commission (NMPRC) rejected the request and said that CenturyLink had not demonstrated that there was ‘effective competition’ for residential telephone service. It’s hard to find any way to defend that decision. First, in many states, there are now more residential telephone customers using cable company telephone services than the old telephone company copper. Interestingly, cable companies face almost no regulation in providing telephone service and any cable company in New Mexico does not live under the same rules that CenturyLink must follow.

Further, the latest surveys I’ve seen show that 96% of US adults now have a cell phone. It’s hard to say with a straight face that cellular service is not a direct competitor to landline telephone service. Considering the big recent stir at the FCC where cellular 4G coverage maps were shown to be largely fictional, perhaps a lot of rural New Mexico doesn’t have cellular coverage – and perhaps that’s what drove the Commission’s decision. It’s worth noting  that cellular companies are also not as heavily regulated as landline telephone providers.

The regulation that is most relevant in this case is the obligation to be the carrier of last resort. The telcos like CenturyLink are still expected, within some regulatory exceptions, to provide service to anybody who asks for service. That obligation doesn’t extend to the cable companies, to the cellular companies, or even to rural broadband – just to telephone service.

I have no doubt that there are rural homes in the state for which CenturyLink is the only communications link to the world. In areas where there is no cellular service and where the cable companies refuse to build networks, there are rural homes that rely on CenturyLink and other telcos to keep them connected. The regulatory question that must be asked is if such homes are sufficient reason to still strongly regulate telephone service in a state. Hopefully, the number of homes without cellular service will decrease significantly when the FCC awards the $9 billion in the 5G Fund program to extend cellular service to more remote communities.

It’s not an easy question to answer. We know CenturyLink could have done a better job of taking care of their copper. In this country, the smaller independent telephone companies did the needed maintenance to keep copper in the best shape possible. We saw the same thing in Germany where the copper networks were built at the same time as US copper, but which have been maintained better.

But in this country, most of the smaller telcos have already replaced, or have plans to replace the old copper with fiber. In Germany, there are vigorous public debates on the topic, with engineers saying that the copper networks are not likely to last more than another decade. Where copper remains the Germans have invested in the fastest DSL possible – something the big telcos here inexplicably have not done.

To some degree the decision in New Mexico is meaningless. No regulatory decision can make the old copper perform better or last longer, so there are not many practical ramifications of the Commission’s decision. CenturyLink didn’t even own these networks for most of the years when the maintenance wasn’t done – although they have likely cut back further on maintenance in recent years, as have the other big telcos.

I’m not highlighting New Mexico for this issue because many other states have made similar regulatory decisions. Regulators are rightfully mad at the big telcos for neglecting copper, and even madder that there are no plans to upgrade the copper to something better. But the time for regulators to do something about this was twenty and thirty years ago. The copper wires in New Mexico are going to die, and at some future date the networks will go dark. The regulators can choose to regulate copper down to the last day of the last customer – but to a large degree, the remaining regulations don’t mean a whole lot.

CenturyLink Ready to Launch Gigabit Broadband in Springfield, MO

It’s rare to be surprised by events in the telecom world. The announcement last summer that CenturyLink will be an ISP on a city-owned fiber network in Springfield MO was one of the most surprising things I’ve heard since the announcement years ago that Google was going to become a gigabit ISP. The joint venture has been progressing and CenturyLink says it should be adding customers in the community this spring.

The partnership between the city and CenturyLink is interesting:

  • CenturyLink has agreed to lease the network over 15-years at a payment that made the city comfortable enough to build the network. The city says they won’t have to raise electric rates since the lease revenue stream justifies the cost of the new $120 million fiber expansion.
  • The city is providing dark fiber and CenturyLink will provide all of the electronics. There have been no public announcements saying which party pays for the fiber drops. Since this is being touted as an expansion of smart-grid, it would make sense that the city owns the drops.
  • The arrangement is described as non-exclusive, meaning that other ISPs are free to serve on the network. The announcements don’t say if CenturyLink gets a head-start over other ISPs through some period of exclusivity before open access kicks in. That’s been the case in similar arrangements.
  • CenturyLink is offering $65 gigabit broadband ‘for-life’ with a guarantee that the price will never be increased. Speeds are advertised ‘up to 940 Mbps. In other CenturyLink markets the gigabit product requires paperless billing and prepayment with a credit card or bank debit. CenturyLink charges $5 for an optional WiFi modem.

There are a few other similar well-known arrangements in the industry. This is similar to the Google Fiber arrangement with Huntsville, Alabama. It’s similar to the Ting arrangement in Westminster, Maryland and Charlottesville, Virginia. What’s unusual and surprising about this deal is that it’s with one of the big incumbent telcos. However, CenturyLink is not the incumbent in Springfield and enters the market purely as an outside ISP. CenturyLink will be competing side-by-side with AT&T, the first instance of two large incumbents telcos competing in a residential market. The other competitor and the incumbent cable provider in Springfield is Mediacom.

There are some in the industry touting this as a new paradigm for bringing gigabit fiber – but I’m not sure that is so. Like with any business model, all of the facts and the numbers must line up for any market to be a good target for overbuilding with fiber. It’s possible that there are unique characteristics of Springfield that might make this model hard to replicate in most other places.

Springfield owns a municipal electric utility and the utility decided years ago to build fiber to serve its own needs and to bring fiber to businesses in the city. The city started this new venture already owning 700 miles of fiber – much of which will likely be the backbone for building the last-mile for this venture. Springfield is also touting this as a smart grid initiative, meaning the electric utility is likely picking up a piece of the cost of the new fiber construction. There is a good chance that the math would not look nearly so favorable for a city without an electric utility – because in that case the venture would be starting with no existing fiber and the new fiber venture would have to absorb 100% of the cost of the new construction. I’ve looked at this lease model for cities that don’t own existing fiber or an electric utility and the math is often not pretty.

Don’t read those last statements as a criticism of the fiber lease model, but rather just as a recognition that all of the financial factors must align just right for this kind of venture to work. Any city owning an electric utility ought to do the math and consider this model. Cities with low construction costs for fiber might also be good candidates.

The surprising part of this arrangement is that this is being done by CenturyLink. This is an incumbent telco that is well known throughout rural America for operating lousy copper networks. The company has been ignoring the customers in rural markets, and CenturyLink customers living in rural Missouri can’t be thrilled to hear that the company will be offering gigabit fiber in a new market while continuing to ignore their broadband plight. CenturyLink is not going to sink a lot of capital in Springfield, but it’s paying for the cost of electronics and installation.

I have to give CenturyLink credit for tackling this venture. They were building fiber-to-the-home networks before Jeff Storey, the new CEO put a kibosh on spending capital for projects earning ‘infrastructure returns’. The FTTP businesses is an economy of scale business and CenturyLink can take advantage of the staff and platforms they already have in place to operate efficiently in Springfield. Since this is dark fiber the company can still do everything the CenturyLink way – which is an important factor for a big telco. We’ll have to wait to see if this is a new business line for CenturyLink or if Springfield is a unique case.

Will the Big Telcos Pursue RDOF Grants?

One of the most intriguing questions concerning the upcoming $16.4 billion RDOF grant program is if the big telcos are going to participate. I’ve asked the question around the industry and I’ve talked to folks who think the big telcos will fully wade into the reverse auctions, while others think they’ll barely play. We’re not likely to know until the auctions begin.

The big telcos were the full beneficiaries of the original CAF II program when the FCC surprisingly decided to unilaterally award the big telcos the full $9 billion in funding. In that grant program, CenturyLink received over $3 billion, AT&T almost $2.6 billion, Frontier nearly $2 billion, and Windstream over $1 billion. The telcos were supposed to upgrade much of their most rural properties to receive broadband speeds of at least 10/1 Mbps.

CenturyLink and Frontier both recently told the FCC that they are behind in the CAF II build out and didn’t meet their obligation at the end of 2019 to be 80% finished with the upgrades. From what I hear from rural communities, I think the problem is a lot more severe than just the telcos being late. Communities across the country have been telling me that their residents aren’t seeing faster speeds and I think we’re going to eventually find out that a lot of the upgrades aren’t being made.

Regardless of the problems with the original CAF II, the FCC is now offering the $16.4 billion RDOF grant program to cover much of the same areas covered by CAF II. The big telcos are faced with several dilemmas. If they don’t participate, then others are going to get federal assistance to overbuild the traditional big telco service territories. If the big telcos do participate, they have to promise to upgrade to meet the minimum speed obligations of the RDOF of 25/3 Mbps.

Interestingly, the upgrades needed to raise DSL speeds on copper to 25/3 Mbps are not drastically different than the upgrades needed to reach 10/1 Mbps. The upgrades require building fiber deeper into last-mile networks and installing DSL transmitters (DSLAMs) in the field to be within a few miles of subscribers. Fiber must be a little closer to the customer to achieve a speed of 25/3 Mbps rather than 10/1 Mbps – but not drastically closer.

I think the big telcos encountered two problems with the CAF II DSL upgrades. First, they needed to build a lot more fiber than was being funded by CAF II to get fiber within a few miles of every customer. Second, the condition of their rural copper is dreadful and much of it probably won’t support DSL speeds. The big telcos have ignored their rural copper for decades and found themselves unable to coax faster DSL speeds from the old and mistreated copper.

This begs the question of what it even means if the big telcos decide to chase RDOF funding. Throwing more money at their lousy copper is not going to make it perform any better. If they were unable to get 10/1 speeds out of their network, then they are surely going to be unable to get speeds upgraded to 25/3 Mbps.

We can’t ignore that the big telcos have a natural advantage in the RDOF auction. They can file for the money everywhere, and any place where a faster competitor isn’t vying for the money, the big telcos will have a good chance of winning the reverse auction. There are bound to be plenty of places where nobody else bids on RDOF funding, particularly in places like Appalachia where the cost is so high to build, even with grant funding.

It would be a travesty to see any more federal grant money spent to upgrade rural DSL particularly since the FCC already spent $9 billion trying to upgrade the same copper networks. The copper networks everywhere are past their expected useful lives, and the networks operated by the big telcos are in the worst shape. I’ve known many smaller telcos that tried in the past to upgrade to 25/3 on rural DSL and failed – and those companies had networks that were well-maintained and in good condition. It would be impossible to believe the big telcos if they say they can upgrade the most remote homes in the country to 25/3 Mbps speeds. Unfortunately, with the way I read the RDOF rules, there is nothing to stop the big telcos from joining the auction and from taking big chunks of the grant money and then failing again like they did with the original CAF II.

Broadband Still Growing – 3Q 2019

Leichtman Research Group recently released the broadband customer statistics for the third quarter of 2019 for the largest cable and telephone companies. Leichtman compiles most of these numbers from the statistics provided to stockholders other than Cox, which is estimated.

The numbers provided to investors are lower than broadband customers these same companies report to the FCC, and I think that most of the difference is due to the way many of these companies count broadband to apartment buildings. If they provide a gigabit pipe to serve an apartment building, they might that as 1 customer, whereas for FCC reporting they likely count the number of apartment units served.

Following are the broadband customer counts for the third quarter and a comparison to the second quarter of this year.

3Q 2019 Added % Change
Comcast 28,186,000 379,000 1.4%
Charter 26,325,000 380,000 1.5%
AT&T 15,575,000 (123,000) -0.8%
Verizon 6,961,000 (7,000) -0.1%
Cox 5,145,000 25,000 0.5%
CenturyLink 4,714,000 (36,000) -0.8%
Altice 4,180,300 14,900 0.4%
Frontier 3,555,000 (71,000) -2.0%
Mediacom 1,316,000 13,000 1.0%
Windstream 1,040,000 5,700 0.6%
Consolidated 784,151 1,143 0.1%
WOW 773,900 10,420 1.3%
Cable ONE 689,138 7,376 1.1%
Atlantic Broadband 446,137 2,441 0.6%
TDS 437,700 4,300 1.0%
Cincinnati Bell 425,100 (400) -0.1%
100,553,426 605,660 0.6%

Leichtman says this group of companies represents 96% of all US broadband customers. I’m not sure how they calculated that percentage. That implies that there are only about 4 million broadband customers for companies not on this list, and that feels a little low to me.

For the quarter, these companies collectively saw growth that annualizes to 2.4%. This is a significant uptick over the second quarter of 2019 that saw an annualized growth rate of 1.7%.

On an annualized basis the third quarter of 2019 added about the same number of customers that were added for the calendar year of 2018. However, the cable companies are performing better this year while the losses continue to accelerate for the big telcos. The big telco losers for the quarter are Frontier, which lost 2% of its customer base, and AT&T and CenturyLink which each lost 0.8% of their customer base. Following are the annualized changes in customers in 2018 and 2019:

‘                                          2018                2019

Cable Companies        2,987,721        3,317,904

Telcos                            ( 472,124)        ( 895,564)

Total                              2,425,597        2,422,640

Both Comcast and Charter had spectacular quarters and continue to account for most of the growth in broadband, as each company added around 380,000 customers for the quarter. It would be interesting to understand what is driving that growth. Some of that comes from providing broadband to new homes. Some comes from customers converting away from DSL. And some comes from expansion – I know of examples where both companies are building new network around the fringes of their service areas.

Shame on the Regulators

It’s clear that even before the turn of this century that the big telcos largely walked away from maintaining and improving residential service. The evidence for this is the huge numbers of neighborhoods that are stuck with older copper technologies that haven’t been upgraded.  The telcos made huge profits over the decades in these neighborhoods and ideally should not have been allowed to walk away from their customers.

In the Cities. Many neighborhoods in urban areas still have first or second-generation DSL over copper with fastest speeds of 3 Mbps or 6 Mbps. That technology had a shelf-life of perhaps seven years and is now at least fifteen years old.

The companies that deployed the most DSL are AT&T and CenturyLink (formerly Quest). The DSL technology should have been upgraded over time by plowing profits back into the networks. This happened in some neighborhoods, but as has been shown in several detailed studies in cities like Cleveland and Dallas, the faster DSL was brought to more affluent neighborhoods, leaving poorer neighborhoods, even today, with the oldest DSL technology.

The neighborhoods that saw upgrades saw DSL speeds between 15 Mbps and 25 Mbps. Many of these neighborhoods eventually saw speeds as fast as 50 Mbps using a technology that bonded two 25 Mbps DSLs circuits. There are numerous examples of neighborhoods with 50 Mbps DSL sitting next to ones with 3 Mbps DSL.

Verizon used a different tactic and upgraded neighborhoods to FiOS fiber. But this was also done selectively although Verizon doesn’t seem to have redlined as much as AT&T, but instead built FiOS only where the construction cost was the lowest.

In Europe, the telcos decided to complete with the cable companies and have upgraded DSL over time, with the fastest DSL today offering speeds as fast as 300 Mbps. There is talk coming out of DSL vendors talking about ways to goose DSL up to gigabit speeds (but only for short distances). The telcos here basically stopped looking at better DSL technology after the introduction of VDSL2 at least fifteen years ago.

By now the telcos should have been using profits to build fiber. AT&T has done this using the strategy of building little pockets of fiber in every community near to existing fiber splice points. However, the vast majority of rural households served by AT&T are not being offered fiber, and AT&T said recently that they have no plans to build more fiber. CenturyLink built fiber to past nearly 1 million homes a few years ago, but that also seems like a dead venture going forward. But now, in 2019, each of these telcos should have been deep into urban neighborhoods in their whole service area with fiber. Had they done so they would not be getting clobbered so badly by the cable companies that are taking away millions of DSL customers every year.

Rural America. The big telcos started abandoning rural America as much as thirty years ago. They’ve stopped maintaining copper and have not voluntarily made any investments in rural America for a long time. There was a burst of rural construction recently when the FCC gave them $11 billion to improve rural broadband to 10/1 Mbps – but that doesn’t seem to be drawing many rural subscribers.

It’s always been a massive challenge to bring the same speeds to rural America that can be provided in urban America. This is particularly so with DSL since the speeds drop drastically with distance. DSL upgrades that could benefit urban neighborhoods don’t work well in farmland. But the telcos should have been expanding fiber deeper into the network over time to shorten loop lengths. Many independent telephone companies did this the right way and they were able over time to goose rural DSL speeds up to 25 Mbps.

The big telcos should have been engaging in a long-term plan to continually shorten rural copper loop lengths. That meant building fiber, and while shortening loop lengths they should have served households close to fiber routes with fiber. By now all of the small towns in rural America should have gotten fiber.

This is what regulated telcos are supposed to do. The big telcos made vast fortunes in serving residential customers for many decades. Regulated entities are supposed to roll profits back into improving the networks as technology improves – that’s the whole point of regulating the carrier of last resort.

Unfortunately, the industry got sidetracked by competition from CLECS. This competition first manifested in competition for large business customers. The big telcos used that competition to convince regulators they should be deregulated. Over time the cable companies provided real residential competition in cities, which led to the de facto total deregulation of telcos.

In Europe, the telcos never stopped competing in cities because regulators didn’t let them quit. The telcos have upgraded to copper speeds that customers still find attractive, but the telcos all admit that the next upgrade needs to be fiber. In the US, the big telcos exerted political pressure to gain deregulation at the first hint of competition. US telcos folded and walked away from their customers rather than fighting to maintain revenues.

Rural America should never have been deregulated. Shame on every regulator in every state that voted to deregulate the big telcos in rural America. Shame on every regulator that allowed companies like Verizon palm off their rural copper to companies like Frontier – a company that cannot succeed, almost by definition.

In rural America the telcos have a physical network monopoly and the regulators should have found ways to support rural copper rather than letting the telcos walk away from it. We know this can be done by looking at the different approaches taken by the smaller independent telephone companies. These small companies took care of their copper and most have now taken the next step to upgrade to fiber to be ready for the next century.

CenturyLink Embraces Fiber

CenturyLink seems to have done a 180 in terms of embracing fiber. According to Jeff Storey, the CEO of Centurylink, the company is now defining itself as the ‘go-to provider’ for fiber-based services for business customers. This is in sharp contrast to just a year ago when Storey, as the new CEO said that the company would not be pursuing low-return infrastructure investments.

Storey says that CenturyLink added 5,000 business buildings to fiber in the second quarter, following 4,500 buildings in the first quarter of this year. This contrasts to Level 3 that historically added around 500 buildings per quarter.

It appears the company may be taking a page from the AT&T storybook. AT&T has been building fiber around locations where it already has a fiber POP. This strategy has helped AT&T to now pass over 20 million locations with fiber while avoiding the high cost of large overbuilds.

CenturyLink has an extensive national fiber footprint that it’s accumulated from the purchase over the years of Level 3, Qwest, Broadwing and WilTel. Like AT&T discovered, CenturyLink is sitting close to a huge number of existing opportunities with that existing network, and perhaps that’s the new company strategy – to edge-out and take advantage of nearby low-hanging fruit.

Storey says the company has ordered 4.7 million miles of fiber to add into its urban networks. You have to take that number with a grain of salt since one mile of a 48-strand fiber counts as 48 miles of fiber when counted this way. But this is still a lot of new fiber construction. The one thing that readers of this blog will notice is that the construction is likely to be urban – it’s doubtful that the company is ever going to put another dollar into rural infrastructure. The company recently quietly searched around for the possibility of spinning off its rural business but found no takers. This is likely to mean more of the same for its rural customers – mostly neglect.

The company continues to lose broadband customers. In 2018 the company lost 262,000 broadband customers for a 4.6% drop. In the second quarter of this year, the company lost 56,000 net broadband customers but reports that it lost 78,000 customers with speeds below 20 Mbps and added 22,000 customers with speeds faster than that. Like all of the big telcos, it’s losing DSL customers converting to cable modems.

The company has a long way to go to convince Wall Street that its stock has value. In a May blog, I wrote how the company stock had dropped 43% over a year to a price of $10.89. It’s still sitting in that range with the stock price sitting at $11.56 yesterday.

The Level 3 acquisition is likely to be one of the more interesting stories in the history of our industry. Level 3 was the high-flying telecom company, with stock prices that climbed steadily. It seems that Jeff Storey could do no wrong as earnings grew faster than the rest of the sector. But that all came to a halt with the merger with CenturyLink. I’m sure that both companies thought that Storey could pull CenturyLink upward by tying it to Level 3, but just the opposite occurred. This might be one of the biggest cautionary tales ever in our industry and shows how difficult, and perhaps impossible it is for anybody to turn around one of the big incumbent telcos.

What’s most interesting in this story is that Glen Post and the crew from CenturyLink were in the process of that a slow and steady turnaround. A few years before the CenturyLink merger the company had decided to build residential fiber in its many large city markets and take back a significant piece of the broadband business that had been leaking away. In the year before the Level 3 merger the company had built fiber past nearly 1 million urban passings. We’ll never know now if a few more years of that kind of investment could have turned the company around – not to be a high-flyer like Level 3, but to earn decent long-term returns on broadband infrastructure – the kind that come from making a hundred-year investment in fiber.

What’s the Future for CenturyLink?

I don’t know how many of you watch industry stock prices. I’m certainly not a stock analyst, but I’ve always tracked the stock prices of the big ISPs as another way to try to understand the industry. The stock prices for big ISPs are hard to compare because every big ISP operates multiple lines of business these days. AT&T and Verizon are judged more as cellular companies than as ISPs. AT&T and Comcast stock prices reflect that both are major media companies.

With that said, the stock price for CenturyLink has performed far worse than other big ISPs over the last year. A year ago a share of CenturyLink stock was at $19.24. By the end of the year the stock price was down to $15.44. As I wrote this blog the price was down to $10.89. That’s a 43% drop in share price over the last year and a 30% drop since the first of the year. For comparison, following are the stock prices of the other big ISPs and also trends in broadband customers:

Stock Price 1 Year Ago Stock Price Now % Change 2018 Change in Broadband Customers
CenturyLink $19.24 $10.89 -43.4% -262,000
Comcast $32.14 $43.15 34.3% 1,353,000
Charter $272.84 $377.89 38.5% 1,271,000
AT&T $32.19 $30.62 -4.9% -18,000
Verizon $48.49 $56.91 17.4% 2,000

As a point of comparison to the overall market, the Dow Jones Industrial average was up 4% over this same 1-year period. The above chart is not trying to make a correlation between stock prices and broadband customers since that is just one of dozens of factors that affect the performance of these companies.

Again, I’ve never fully understood how Wall Street values any given company. In reading analyst reports on CenturyLink it seems that the primary reason for the drop in stock price is that all of the company’s business units are trending downward. In the recently released 1Q 2019 results the company showed a year-over-year drop in results for the international, enterprise, small and medium business, wholesale, and consumer business units. It seems that analysts had hoped that the merger with Level 3 would reverse some of the downward trends. Stock prices also dropped when the company surprised the market by cutting its dividend payment in half in February.

CenturyLink faces the same trends as all big ISPs – traditional business lines like landline telephone and cable TV are in decline. Perhaps the most important trend affecting the company is the continued migration of broadband customers from copper-based DSL to cable company broadband. CenturyLink is not replacing the DSL broadband customers it’s losing. In 2018 CenturyLink lost a lot of broadband customers with speeds under 20 Mbps, but had a net gain of customers using more than 20 Mbps. CenturyLink undertook a big fiber-to-the-home expansion in 2017 and built fiber to pass 900,000 homes and businesses – but currently almost all expansion of last-mile networks is on hold.

It’s interesting to compare CenturyLink as an ISP with the big cable companies. The obvious big difference is the trend in broadband customers and revenues. Where CenturyLink lost 262,000 broadband customers in 2018, the two biggest cable companies each added more than a million new broadband customers for the year. CenturyLink and other telcos are losing the battle of DSL versus cable modems with customers migrating to cable companies as they seek faster speeds.

It’s also interesting to compare CenturyLink to the other big telcos. From the perspective of being an ISP, AT&T and Verizon are hanging on to total broadband customers. Both companies are also losing the DSL battle with the cable companies, but each is adding fiber customers to compensate for those losses. Both big telcos are building a lot of new fiber, mostly to provide direct connectivity to their own cell sites, but secondarily to then take advantage of other fiber opportunities around each fiber node.

Verizon has converted over a hundred telephone exchanges in the northeast to fiber-only and is getting out of the copper business in urban areas. Verizon has been quietly filling in its FiOS fiber network to cover the copper it’s abandoning. While nobody knows yet if it’s real, Verizon also has been declaring big plans to to expand into new broadband markets markets using 5G wireless loops.

AT&T was late to the fiber game but has been quietly yet steadily adding residential and business fiber customers over the last few years. They have adopted a strategy of chasing pockets of customers anywhere they own fiber.

CenturyLink had started down the path to replace DSL customers when they built a lot of fiber-to-the-home in 2017. Continuing with fiber construction would have positioned the company to take back a lot of the broadband market in the many large cities it serves. It’s clear that the new CenturyLink CEO doesn’t like the slow returns from investing in last-mile infrastructure and it appears that any hopes to grow the telco part of the business are off the table.

Everything I read says that CenturyLink is facing a corporate crisis. Diving stock prices always put strain on a company. CenturyLink faces more pressure since the activist investors group Southeastern Asset Management holds more than a 6% stake in CenturyLink and made an SEC filing that that the company’s fiber assets are undervalued.

The company has underperformed compared to its peers ever since it was spun off from AT&T as US West. The company then had what turned out to be a disastrous merger with Qwest. There was hope a few years back that the merger with CenturyLink would help to right the company. Most recently has been the merger with Level 3, and at least for now that’s not made a big difference. It’s been reported that CenturyLink has hired advisors to consider if they should sell or spin off the telco business unit. That analysis has just begun, but it won’t be surprising to hear about a major restructuring of the company.

Access to Low-Price Broadband

The consumer advocate BroadbandNow recently made an analysis of broadband prices across the US and came up with several conclusions:

  • Broadband prices are higher in rural America.
  • They conclude that 45% of households don’t have access to a ‘low-priced plan’ for a wired Internet connection.

They based their research by looking at the published prices of over 2,000 ISPs. As somebody who does that same kind of research in individual markets, I can say that there is often a big difference between published rates and actual rates. Smaller ISPs tend to charge the prices they advertise, so the prices that BroadbandNow found in rural America are likely the prices most customers really pay.

However, the big ISPs in urban areas routinely negotiate rates with customers and a significant percentage of urban broadband customers pay something less than the advertised rates. But the reality is messier even than that since a majority of customers still participate in a bundle of services. It’s usually almost impossible to know the price of any one service inside a bundle and the ISP only reveals the actual rate when a customer tries to break the bundle to drop one of the bundled services. For example, a customer may think they are paying $50 for broadband in a bundle but find out their real rate is $70 if they try to drop cable TV. These issues make it hard to make any sense out of urban broadband rates.

I can affirm that rural broadband rates are generally higher. A lot of rural areas are served by smaller telcos and these companies realize that they need to charge higher rates in order to survive. As the federal subsidies to rural telcos have been reduced over the years these smaller companies have had to charge realistic rates that match their higher costs of doing business in rural America.

I think rural customers understand this. It’s a lot more expensive for an ISP to provide broadband in a place where there are only a few customers per road-mile of network than in urban areas where there might be hundreds of customers per mile. A lot of other commodities cost more in rural America for this same reason.

What this report is not highlighting is that the lower-price broadband in urban areas is DSL. The big telcos have purposefully priced DSL below the cost of cable modem broadband as their best strategy to keep customers. When you find an urban customer that’s paying $40 or $50 for broadband it’s almost always going to be somebody using DSL.

This raises the question of how much longer urban customers will continue to have the DSL option. We’ve already seen Verizon abandon copper-based products in hundreds of urban exchanges in the last few years. Customers in those exchanges can theoretically now buy FiOS on fiber – and pay more for the fiber broadband. This means for large swaths of the northeast urban centers that the DSL option will soon be gone forever. There are persistent industry rumors that CenturyLink would like to get out of the copper business, although I’ve heard no ideas of how they might do it. It’s also just a matter of time before AT&T starts walking away from copper. Will there even be any urban copper a decade from now? Realistically, as DSL disappears with the removal of copper the lowest prices in the market will disappear as well.

There is another trend that impacts the idea of affordable broadband. We know that the big cable companies now understand that their primary way to keep their bottom line growing is to raise broadband rates. We’ve already seen big broadband rate increases in the last year, such as the $5 rate increase from Charter for bundled broadband.

The expectation on Wall Street is that the cable companies will regularly increase broadband rates going into the future. One analyst a year ago advised Comcast that basic broadband ought to cost $90. The cable companies are raising broadband rates in other quieter ways. Several big cable companies have told their boards that they are going to cut back on offering sales incentives for new customers and they want to slow down on negotiating rates with existing customers. It would be a huge rate increase for most customers if they are forced to pay the ‘list’ prices for broadband.

We also see carriers like Comcast starting to collect some significant revenues for customers going over the month data caps. As household broadband volumes continue to grow the percentage of people using their monthly cap should grow rapidly. We’ve also seen ISPs jack up the cost of WiFi or other modems as a backdoor way to get more broadband revenue.

As the cable companies find way to extract more revenue out of broadband customers and as the big telcos migrate out of DSL my bet is that by a decade from now there will be very few customers with ‘affordable’ broadband. Every trend is moving in the opposite direction.

Broadband Statistics 4Q 2018

The Leichtman Research Group has published the statistics of broadband subscribers for the largest ISPs for the year ending December 31, 2018. Following compares the end of 2018 to the end of 2017.

 4Q 2018 4Q 2017 Change
Comcast 27,222,000 25,869,000 1,353,000 5.2%
Charter 25,259,000 23,988,000 1,271,000 5.3%
AT&T 15,701,000 15,719,000 (18,000) -0.1%
Verizon 6,961,000 6,959,000  2,000 0.0%
CenturyLink 5,400,000 5,662,000 (262,000) -4.6%
Cox 5,060,000 4,960,000 100,000 2.0%
Altice 4,118,100 4,046,000 71,900 1.8%
Frontier 3,735,000 3,938,000 (203,000) -5.2%
Mediacom 1,260,000 1,209,000 55,000 4.5%
Windstream 1,015,000 1,006,600 8,400 0.8%
Consolidated 778,970 780,794 (1,824) -0.2%
WOW! 759,600 732,700 26,900 3.7%
Cable ONE 663,074 643,153 19,921 3.1%
Cincinnati Bell 311,000 308,700 2,300 0.7%
98,247,744 95,822,147 2,425,597 2.5%

The large ISPs in the table control over 95% of the broadband market in the country. Not included in these numbers are the broadband customers served by the smaller ISPs – the telcos, WISPs, fiber overbuilders and municipalities.

The biggest cable companies continue to dominate the broadband market and now have 64.3 million customers compared to 33.9 million customers for the big telcos. During 2018 the big cable companies collectively added 2.9 million customers while the big telcos collectively lost 472,000 customers.

What is perhaps most astounding is that Comcast and Charter added 2.6 million customers for the year while the total broadband market for the biggest ISPs grew by only 2.5 million. For years it’s been obvious that the big cable companies are approaching monopoly status in metropolitan areas and these statistics demonstrate how Comcast and Charter, in particular, have a stranglehold over competition in their markets.

CenturyLink and Frontier are continuing to bleed DSL customers. Together the two companies lost 465,000 broadband customers in 2018, up from a loss for the two of 343,000 in 2017.

It’s always hard to understand all of the market forces behind these changes. For example, all of the big cable companies are seeing at least some competition from fiber overbuilders in some of their markets. It would be interesting to know how many customers each is losing to fiber competition.

I’d also love to know more about how the big companies are faring in different markets. I suspect that the trends for urban areas are significantly different than in smaller markets. I know that deep data analysis of the FCC’s 477 data might tell that story. (hint, hint in case anybody out there wants to do that analysis!)

I’m also curious if the cable companies are seeing enough bottom-line improvement to justify the expensive upgrades to DOCSIS 3.1. Aside from Comcast and Charter I wonder how companies like Cox, Mediacom and Cable ONE justify the upgrade costs. While those companies are seeing modest growth in broadband customers, each is also losing cable customers, and I’d love to understand if the upgrades are cost-justified.

If there is any one takeaway from these statistics it’s that we still haven’t reached the top of the broadband market. I see articles from time to time that predict that younger households are going to bail on landline broadband in favor of cellular broadband. But seeing that over 2.4 million households added broadband in the last year seems to be telling a different story.

Where’s the CAF II Success?

If you’ve read this blog you know I’ve been a big critic of the FCC’s CAF II program that gave over $10 billion in federal subsidies to the biggest telcos to improve rural broadband. My complaint is that the program set the embarrassingly low goal of improving rural broadband to speeds of at least 10/1 Mbps. My complaint is that this money could have done a huge amount of good had it been put up to reverse auction as was done with the leftover customers from this program last year – many ISPs would have used this funding to help to build rural fiber. Instead, the telcos are using the money mostly to upgrade DSL.

While I think the program was ill-conceived and was a giveaway to the big telco lobbyists, I am at least glad that it is improving rural broadband. For a household with no broadband, a 10 Mbps product might provide basic access to broadband services for the first time. We are now into the fifth year of the six-year program, so we ought to be seeing the results of these upgrades. USTelecom just published a blog saying that deployments are ahead of schedule and that CAF II is a quiet success.

The telcos have told the FCC they are largely on track – by the end of 2018 they should have upgraded broadband for at least 60% of the required households. AT&T and Windstream report that they have made at least 60% of the needed upgrades everywhere. Frontier says they are on track in 27 of the 29 states needing upgrades. CenturyLink says they are on track in only 23 of 33 states that are getting CAF II upgrades. According to USTelecom, over 2.1 million households should now be seeing faster speeds.

It’s also worth noting that the CAF II program should improve broadband for many more households that are not covered directly by the program. For example, when upgrading DSL for a CAF II area that surrounds a town, those living in the town should also see better broadband. The secondary benefit of the CAF program is that rural towns should be seeing speeds increasing from 6 Mbps or slower to as fast as 25 Mbps. By now many more millions of households should be seeing faster broadband due to CAF II.

What I find puzzling is that I would expect to see an upward burst of broadband customers for the big telcos because of CAF II. But the numbers aren’t showing that. There were four telcos that accepted more than $1 billion from the program, as follows, and three of them lost broadband customers in 2018:

Funding Households Per Household 2018 Broadband Customers
CenturyLink $3.09 B 1,190,016 $2,593 (262,000)
AT&T $2.96 B 1,265,036 $2,342 (18,000)
Frontier $1.7 B 659,587 $2,578 (203,000)
Windstream $1.07 B 413,345 $2,595 8,400
Total CAF II $10.05 B 4,075,840 $2,467

Windstream is the only telco of the four that gained customers last year. Windstream’s footprint is probably the most rural of the four telcos. We know that every telco is losing the battle for customers in towns where cable companies are increasing speeds on coaxial networks. Windstream seems to be offsetting those losses, and I can conjecture it’s because they have been selling more rural broadband.

AT&T is in a category all by itself. It’s impossible to know how AT&T is faring with CAF II. They are largely implementing CAF II using their cellular network (with the goal of tearing down rural copper). The company has also been deploying fiber past millions of homes and business in urban areas. They are clearly losing the residential broadband battle in urban markets to companies like Comcast and Charter. However, I can tell you anecdotally that AT&T hasn’t given up on urban copper. They have knocked on my door in Asheville, NC at least three times in the last year trying to sell DSL. I have to assume that they are also marketing broadband improvements in rural areas.

CenturyLink and Frontier are clearly bleeding broadband customers and each lost over 200,000 customers just in the last year. I have to wonder how hard these companies are marketing improved rural broadband. Both companies work in urban and suburban markets but also in numerous county seats situated in rural counties. Like every telco they are losing DSL customers in these markets to the cable company competitors.

Just like I have anecdotal evidence that AT&T is still pushing copper I hear stories that say the opposite for CenturyLink and Frontier. I worked in a few rural counties last year where the CAF II upgrades were reported as complete. And yet the communities seemed unaware of the improvements. Local politicians who bear the brunt of complaints from households that want better broadband weren’t aware of any upgrades – which tells me their rural constituents weren’t aware of upgrades.

I honestly don’t know what this all means. I really expected to find more positive evidence of the impact of CAF II. From what I know of rural America, households ought to leap at the opportunity to buy 10/1 Mbps DSL if they’ve had no broadband in the past. Are the upgrades being done but not being followed up with a marketing and public awareness campaign? Are actual upgraded speed not meeting the 10/1 Mbps goal? Are the upgrades really being made as reported to the FCC? We’re perhaps a year and a half away from the completion of CAF II, so I guess we’ll find out soon enough.