Who’s Pursuing Residential 5G?

I’ve seen article after article over the last year talking about how 5G is going to bring gigabit speeds to residents and give them an alternative to the cable companies. But most of the folks writing these articles are confusing the different technologies and businesses cases that are all being characterized as 5G.

For example, Verizon has announced plans to aggressively pursue 5G for commercial applications starting later this year. The technology they are talking about is a point-to-point wireless link, reminiscent of the radios that have been commonly used since MCI deployed microwave radios to disrupt Ma Bell’s monopoly. The new 5G radios use higher frequencies in the millimeter range and are promising to deliver a few gigabits of speed over distance of a mile or so.

The technology will require a base transmitter and enough height to have a clear-line-of-sight to the customer, likely sited on cell towers or tall buildings. The links are only between the transmitter and one customer. Verizon can use the technology to bring gigabit broadband to buildings not served with fiber today or to provide a second redundant broadband feed to buildings with fiber.

The press has often confused this point-to-point technology with the technology that will be used to bring gigabit broadband to residential neighborhoods. That requires a different technology that is best described as wireless local loops. The neighborhood application is going to require pole-mounted transmitters that will be able to serve homes within perhaps 1,000 feet – meaning a few homes from each transmitter. In order to deliver gigabit speeds the pole-mounted transmitters must be fiber fed, meaning that realistically fiber must be strung up each street that is going to get the technology.

Verizon says it is investigating wireless local loops and it hopes someday to eventually use the technology to target 30 million homes. The key word there is eventually, since this technology is still in the early stages of field trials.

AT&T has said that it is not pursuing wireless local loops. On a recent call with investors, CFO John Stevens said that AT&T could not see a business case for the technology. He called the business case for wireless local loops tricky and said that in order to be profitable a company would have to have a good grasp on who was going to buy service from each transmitter. He says that AT&T is going to stick to it’s current network plans which involve edging out from existing fiber and that serving customers on fiber provides the highest quality product.

That acknowledgement is the first one I’ve heard from one of the big telcos talking about the challenges of operating a widespread wireless network. We know from experience that fiber-to-the-home is an incredibly stable technology. Once installed it generally needs only minor maintenance and requires far less maintenance labor that competing technologies. We also know from many years of experience that wireless technologies require a lot more tinkering. Wireless technology is a lot more temperamental and it might take a decade or more of continuous tweaking until wireless local loop become as stable as FTTH. Whoever deploys the first big wireless local loop networks .better have a fleet of technicians ready to keep it working well.

The last of the big telcos as CenturyLink and their new CEO Jeff Storey has made it clear that the company is going to focus on high-margin enterprise business opportunities and will stop deploying slow-payback technologies like residential broadband. I think we’ve seen the end of CenturyLink investing in any last-mile residential technologies.

So who will be deploying 5G wireless local loops? We know it won’t be AT&T or CenturyLink. We know Verizon is considering it but has made no commitment. It won’t be done by the cable companies which have upgraded to DOCSIS 3.1. There are no other candidates that are willing or able to spend the billions needed to deploy the new technology.

Every new technology needs to be adopted by at least one large ISP to become successful. Vendors won’t do the needed R&D or crank up the production process until they have a customer willing to place a large order for electronics. We’ve seen promising wireless technologies like LMDS and MMDS die in the past because no large ISP embraced the technologies and ordered enough gear to push the technology into the mainstream.

I look at the industry today and I just don’t see any clear success path 5G wireless loop electronics. The big challenged faced by wireless local loops is to become less expensive than fiber-to-the-home. Until the electronics go through a few rounds of improvements that only come after field deployment, the technology is likely to require more technician time than FTTH. It’s hard to foresee anybody taking the chance on this in any grand way.

Verizon could make the leap of faith and sink big money into an untried technology, but that’s risky. We’re more likely to keep seeing press releases talking about field trials and the potential for the 5G technology. But unless Verizon or some other big ISP commits to sinking billions of dollars into the gear it’s likely that 5G local loop technology will fizzle as has happened to other wireless technologies in the past.

CenturyLink and Residential Broadband

CenturyLink is in the midst of a corporate reorganization that is going to result is a major shift in the focus of the company. The company merged with Level 3 in 2016 and the management team from Level 3 will soon be in charge of the combined business. Long-time CEO Glen Post is being pushed out of day-to-day management of the company and Jeff Storey, the former CEO of Level 3 will become the new CEO of CenturyLink. Storey was originally slated to take the top spot in 2019, but the transition has been accelerated and will happen this month.

It’s a shift that makes good financial sense for the company. Mr. Storey had huge success at Level 3 and dramatically boosted earnings and stock prices over the last four years. Mr. Storey and CenturyLink CFO Sunit Patel have both made it clear that they are going to focus on the more profitable enterprise business opportunities and that they will judge any investments in last-mile broadband in terms of the expected returns. This differs drastically from Mr. Post who comes from a background as an independent telephone company owner. As recently as a year ago Mr. Post publicly pledged to make the capital investments needed to improve CenturyLink’s last-mile broadband networks.

This is going to mean a drastic shift in the way that CenturyLink views residential broadband. The company lost 283,000 broadband customers for the year ending in December 2017, dropping them to 5.7 million broadband customers. The company blames the losses on the continued success of the cable companies to woo away DSL customers.

This size of the customer losses is a bit surprising. CenturyLink said at the end of 2017 that they were roughly 60% through their CAF II upgrades which is bringing better broadband to over 1.1 million rural households. Additionally, the company built FTTP past 900,000 potential business and residential customers in 2017. If the company was having even a modest amount of success with those two new ventures it’s hard to understand how they lost so many broadband customers.

What might all of this mean for CenturyLink broadband customers? For rural customers it means that any upgrades that are being made using CAF II funding are likely the last upgrades they will ever see. Customers in these rural areas are already used to being neglected and their copper networks are in lousy condition due to decades of neglect by former owner Qwest.

CenturyLink is required by the CAF II program to upgrade broadband speeds in the rural areas to at least 10/1 Mbps. The company says that over half of the upgraded customers are seeing speeds of at least twice that. I’ve always had a concern about any of the big telcos reaching the whole CAF II footprint, and I suspect that when the CAF II money is gone, anybody that was not upgraded as promised will never see upgrades. I’ve also always felt that the CAF II money was a waste of money –  if CenturyLink walks away from the cost of maintaining these newly upgraded DSL networks they will quickly slide back into poor condition.

There are already speculation on Wall Street that CenturyLink might try to find a buyer for their rural networks. After looking at the problems experienced by Frontier and Fairpoint after buying rural telco copper networks one has to wonder if there is a buyer for these properties. But in today’s world of big-deal corporate finance it’s not impossible to imagine some group of investors willing to tackle this. The company could also take a shot at selling rural exchanges to independent telcos – something US West did over twenty years ago.

It’s also likely that the company’s foray into building widespread FTTP in urban areas is done. This effort is capital intensive and only earns infrastructure returns that are not going to be attractive to the new management. I wouldn’t even be surprised to see the company sell off these new FTTP assets to raise cash.

The company will continue to build fiber, but with the emphasis on enterprise opportunities. They are likely to adopt a philosophy similar to AT&T’s which has been building residential fiber only to large apartment complexes and to households that are within short distances from existing fiber pops. This might bring fiber broadband to a lucky few, but mostly the new management team has made it clear they are deemphasizing residential broadband.

This management transition probably closes the book on CenturyLink as a last-mile ISP. If they are unable to find a buyer for these properties it might take a decade or more for their broadband business to quietly die. This is bad news for existing broadband customers because the company is unlikely to invest in keeping the networks in operational shape. They only ones who might perceive this as good news are those who have been thinking about overbuilding the company – they are not going to see any resistance.

When Big ISPs Fail

It’s obvious from reading the press that Frontier Communications is in trouble. The company visibly bungled the integration of the properties most recently purchased from Verizon, including some FiOS properties. The company was already experiencing customer losses, which have accelerated in the last year. Frontier is already looking to raise cash by finding a buyer for some of the properties they just purchased from Verizon.

I have no idea if Frontier is going to declare bankruptcy or fail. Watching them struggle, though, brings back memories of other big telcos that have struggled badly in the past. We’ve seen this scenario enough times to understand what poor performance will mean.

Not every telco that has struggled has gone through bankruptcy. Probably the best example of a company that almost went under, but which instead struggled for years was Qwest, which is now owned by CenturyLink. Within a few years after Qwest took over U.S. West the company fell on hard times. The company carried too much debt, and they didn’t do as well as expected in the long-line transport business that Qwest brought into the newly formed venture. The company was even fined $250 million by the Security and Exchange Commission for shady deals made with Enron’s broadband business.

We saw the consequences of Qwest’s financial struggles. They company had little money for capital and let the copper plant deteriorate a lot faster than would be expected. There were widespread reports of rural outages that were repeatedly patched rather than fixed while the company focused its limited resources on the major urban markets. Qwest lost huge numbers of broadband customers to the cable companies and also got clobbered in enterprise sales.

We saw something similar with Charter Communications. The company filed for bankruptcy protection in 2009. They pared back on capital spending and went for a number of years without making the upgrades we saw from Comcast, Cox and Mediacom. Much of the company’s footprint was stuck with first generation cable modems with slow broadband speeds.

Frontier looks to on a similar path to Fairpoint Communications after they purchased Verizon properties. Fairpoint took on massive debt to buy the New England properties from Verizon and struggled after adding 1.4 million customers to a relatively small company. Within two years after the purchase Fairpoint went through bankruptcy reorganization and continued to struggle since then due to lack of cash. They were recently purchased by Consolidated Communications.

What we’ve most learned from big ISPs that struggle is that the customers pay the price. All of these companies dealt with cash shortages by reducing staff and slashing capital expenditures. I remember Qwest staffing being reduced so much that there were entire rural counties that had only one Qwest technician. Qwest shuttered local business offices and lost the local touch in communities. Customers reported major delays in getting installations and repairs, with many reports of problems that were never solved.

We saw from Qwest and Charter that the first thing that goes in tight times is upgrades of technology. When those companies got into trouble they froze technology investment and innovation during a time when broadband speeds were climbing everywhere else.

The struggles of the big ISP invited in competition and many communities served by Qwest and Charter saw competitors build new networks. I know of some towns where the new competitors got practically every customer, showing how fed up customers were with being neglected by their big ISP. Unfortunately, the majority of communities served by such ISPs saw no competition and suffered with poor service.

Sometimes companies that struggle eventually right the ship. We see Charter now making upgrades that are a decade or more late. CenturyLink is under new management and is trying hard to make things better, but still doesn’t have enough capital to fix decades of neglect to the network. CenturyLink even got more than a billion dollar subsidy through the CAF II program to try to revitalize old rural copper. We’re going to have to wait to see if these big ISPs can make enough amends for communities to forgive them for decades of neglect.

My guess is that Frontier is not going to get the chance to reinvent themselves. They are struggling at a time when most of their rural communities are screaming for better broadband. It’s hard to imagine them somehow fixing their many problems.

Carrier-of-Last-Resort Obligations

Earlier this month the U.S. District Court for the District of Columbia upheld FCC orders that still require large telcos to be the carrier-of-last-resort provider of telephone service for at least some of their service territory. The ruling is the result of appeals made by CenturyLink and AT&T that required them to provide telephone service to new rural households.

The idea of carrier of last resort has been part of the telephone industry for nearly as long as the FCC has been regulating the industry. The concept was a key component of spreading the telephone network to all corners of the country – the Congress and the early FCC understood that the whole country was better off if everybody was connected.

Over the years the FCC and various state regulatory commissions ruled that telcos had to make a reasonable effort to connect rural customers. Telcos always had the option to petition against adding customers in really hard to reach places like mountaintops, but for the most part telcos routinely added new homes to the telephone network.

Carrier-of-last-resort started to weaken with the introduction of competition from the Telecommunications Act of 1996. Since that time the big telcos have been able to walk away from carrier-of-last-resort obligations in most of their territory. This court order ruled that in areas where the telcos are still receiving federal high cost support that the telcos are still obligated to connect homes that request service.

I worked for Ma Bell pre-divestiture and there was a real pride in the telephone industry that the network reached out to everybody. Telcos then also deployed huge numbers of pay telephones throughout the network to reach those that couldn’t afford phone service – even though they lost money on many of the payphones. The Bell company and the smaller independent telcos made it their mission to extend the network to everybody.

This order made a few comments, though, that puzzled me. They point out that many of the high-cost areas served by the big telcos are up for new funding from the upcoming CAF II auctions. Any winners of that auction are required to file to become the Eligible Telecommunications Carrier (ETC) for any areas they receive funding. The discussion in the court order implies that these new ETCs will become the carrier-of-last-resort in these areas.

That surprised me because there are plenty of carriers that have ETC status and yet are not the obligated carrier-of-last-resort. The best example is the same big telcos examined in this case who are the ETC of record for their whole footprints but now only have carrier-of-last-resort obligations for the last most rural areas covered by this case. There have been stories for years of people who built new homes, even in urban areas, and are refused service by both the telco and cable company. The cable companies have no carrier-of-last-resort obligations, but it’s clear that in many places the telcos have been able to walk away from the obligation.

I think that companies seeking the CAF II reverse auction funding might be surprised by this interpretation of the rules. Being carrier-of-last-resort means that a carrier is obligated to build to reach anybody in the covered area that requests telephone service. The reverse auction doesn’t even require total coverage of the covered census blocks and that seems to be in conflict with the court’s interpretation. The reverse auction census blocks are some of the most sparsely populated areas of the country and building to even one remote customer in some of these areas could be extremely expensive.

Unfortunately, the carrier-of-last-resort obligation only applies to telephone service and not to broadband. It would be nice to see this concept applied to broadband and the FCC missed a good opportunity to do this when they handed out billions of federal dollars in the CAF II plan. With that plan the big telcos are only required to make their best effort to reach customers with broadband in the areas that got the CAF II funding – I’m hearing from rural people all over the country that a lot of the CAF II areas aren’t seeing any upgrades. For the most part the idea of carrier-of-last resort and universal coverage are becoming quaint concepts of our past.

Convergence

Even a decade ago it was apparent that the telecom industry was headed towards convergence. By that, I mean that the various cable companies, telcos and wireless companies are expanding service lines and are starting to compete with each other in areas that were unimaginable even a few years ago.

Comcast is the best example of this. Their CEO Brian Roberts was quoted last year as saying that the company was now in all of the business lines available to it. Compare today’s Comcast with the company a decade ago. Then they were just becoming a triple play provider by adding voice to their product line-up. Since then they have added a lot more business lines.

A decade ago Comcast barely went after business customers and didn’t even own network in many business districts and industrial parks – and now they are a major provider of business services. The company recently added cellular service and it appears they are adding customers at a furious pace. They are becoming a major player in home security. The company has a thriving product line selling residential smart home services. They even started bundling home solar panels with their residential product line recently.

The company has even stepped up their traditional cable service to do better against the satellite providers. They’ve developed their own settop box that is said to be the best in the industry. And they have bought a number of the cable programmers like NBC, giving them a margin advantage over any competitor for video.

It seems to me like everybody else wants to be Comcast. Consider AT&T. A decade ago they were a traditional telco. They operated a huge copper network for residential broadband and telephone service and owned the country’s largest fiber network for providing wholesale transport and business services. They were also one of the two largest cellular companies, and with Verizon controlled the vast majority of that business.

AT&T not only added cable TV service to their product line, but they bought DirecTV and become a major video provider. They are trying hard to buy programming and content by merging with Time Warner. The company has been aggressive building fiber to large apartment complexes and has become a major player in the MDU market that used to be almost exclusively controlled by the cable incumbents. The company has also been building a lot of fiber to better compete head-to-head with Comcast and other cable companies that have faster residential broadband.

Verizon took a different path and competed head-to-head with Comcast in the northeast even a decade ago with its FiOS fiber network. The company continues to buy smaller regional fiber providers like XO to beef up its business and fiber networks. Verizon has announced that it intends to roar back into the residential market by use of small cell 5G over the next decade. And Verizon continues to thrive as a cellular carrier.

Even smaller companies like CenturyLink are looking a lot like their bigger competitors. The company had added cable to its bundle. They built fiber past almost a million passings last year to provide more robust competition for broadband speeds. And they bought Level 3 to become a major player for transport and business services.

But these big ISPs are not the only ones crossing into new product lines. Consider T-Mobile. In a move that was unthinkable even a few years ago they are making a major play to bundle video content with their cellular service – making them a direct competitor of all of the ISPs for the market segment of folks who are happy with mobile video rather than a landline connection. T-Mobile is pushing the other cellular providers to do the same.

And there are other national competitors on the horizon. For example, there are several satellite companies like SpaceX and OneWeb that are likely to compete nationally with bundles similar to the other ISPs. I also think we’ll see new competitors spring up and compete with 5G last-mile networks as that technology matures.

It’s going to be interesting to see the winners and losers over the next decade. Right now the cable companies are approaching a near monopoly in many markets for broadband. The only way these other competitors are going to survive and thrive is to chop away at Comcast and the other large cable companies. But at the same time the cable companies will be carving cellular customers. For those like me who follow the industry it’s going to be interesting to watch.

4Q 2017 National Broadband Statistics

As a nation we are approaching an 85% overall penetration of residential broadband. The following statistics come from the latest report from the Leichtman Group and compares broadband customers at the end of 2017 to the end of 2016.

 4Q 2017 4Q 2016 Change
Comcast 25,869,000 24,701,000 1,168,000 4.7%
Charter 23,903,000 22,593,000 1,310,000 5.8%
AT&T 15,719,000 15,605,000 114,000 0.7%
Verizon 6,959,000 7,038,000 (79,000) -1.1%
CenturyLink 5,662,000 5,945,000 (283,000) -4.8%
Cox 4,880,000 4,790,000 90,000 1.9%
Altice 4,046,200 3,962,500 83,700 2.1%
Frontier 3,938,000 4,271,000 (333,000) -7.8%
Mediacom 1,209,000 1,162,000 47,000 4.0%
Windstream 1,006,600 1,051,100 (44,500) -4.2%
WOW! 730,000 718,900 11,100 1.5%
Cable ONE 524,935 513,908 11,027 2.1%
Cincinnati Bell 308,700 303,200 5,500 1.8%
Fairpoint 301,000 306,624 (5,624) -1.8%
95,056,435 92,961,232 2,095,203 2.3%

These large ISPs control over 95% of the broadband market in the country – so looking at them provides a good snapshot of the industry. Not included in these numbers are the broadband customers of the smaller ISPs, the subscribers of WISPs (wireless ISPs) and customers of the various satellite services. Cable companies still dominate the broadband market and have 61.2 million customers compared to 33.9 million customers for the big telcos.

These overall numbers don’t tell the whole story since there is a lot of broadband upgrades happening around the country. Cable companies are starting to upgrade to DOCSIS 3.1 which will mean even faster download speeds. A number of telcos are building fiber to replace DSL, which they are hoping will stop the erosion of DSL customers fleeing to cable companies. There also is continued mergers in the industry, but Leichtman numbers include the impact from mergers into the prior year’s numbers – which is why the table of 2016 customer won’t match up with the same Leichtman table from a year ago.

It’s obvious that the cable companies are still taking DSL customers away from telcos in the cities of America. The cable companies added 2.7 million customers last year, and a significant percentage of these are from DSL customers converting to cable modems. But the telcos as a whole lost only 626,000 customers as a group. What accounts for this difference?

Part of the answer has to be the FCC’s CAF II program. The telcos were give money to bring broadband to over 4 million rural households and the telcos all report that they’ve finished some portion of that buildout by the end of 2017. But 2017 was only the second of a six year program and we should be seeing more broadband customers for AT&T, CenturyLink, Frontier and the other big telcos starting with the 2018 statistics.

The company that surprises me the most is AT&T. They told the FCC and stockholders that they had built fiber to reach 4 million new customers by the end of 2017, out of their goal of 12 million new potential new customers. This goal of 12 million new fiber passings was a condition of their merger with DirecTV. Perhaps they lost a mountain of DSL customers – but you would expect between CAF II and the new fiber builds to see an increase in AT&T broadband subscribers.

CenturyLink is also a bit of a puzzle. They say that they built fiber past 900,000 passings last year and I would have expected to see some benefit from that effort. Granted, they would have converted a lot of DSL customers to fiber, but you would expect them to finally have a competitive advantage with fiber compared to cable networks. And they also claim a substantial rural build from CAF II.

Probably the most important thing about broadband growth in 2017 is that is 30% less than the growth in 2016. We are finally seeing broadband reach it’s peak, and if the rate of growth continues on that curve we are only a few years away from reaching broadband equilibrium where the only broadband growth will come from new housing units entering the market. That will be the point when we will see the big ISPs panic and start struggling to find ways to satisfy Wall Street’s demand for ever-continuing profits.

Progress of the CAF II Program

If readers recall, the CAF II program is providing funds to the largest telcos to upgrade rural facilities in their incumbent operating territories to broadband speeds of at least 10 Mbps down and 1 Mbps up. The CAF II deployment began in the fall of 2015 and lasts for 6 years, so we are now almost 2.5 years into the deployment period. I was curious about how the bigger telcos are doing in meeting their CAF II build-out requirements. The FCC hasn’t published any progress reports on CAF II deployments, so I found the following from web searches:

AT&T. The company took $427 million annually for the six years ($2.56 billion) to bring broadband to 2.2 million rural customers. The company has said they are going to use a combination of improved DSL and fixed wireless broadband using their cellular frequencies to meet their build-out requirements. From their various press releases it seems like they are planning on more wireless than wireline connections (and they have plans in many rural places of tearing down the copper).

The only big public announcement of a wireless buildout for AT&T is a test in Georgia initiated last year. On their website the company says their goal at the end of 2018 is to offer improved broadband to 440,000 homes, which would mean a 17% CAF II coverage at just over the mid-point of their 6-year build-out commitment.

On a side note, AT&T had also promised the FCC, as a condition of the DirecTV merger that they would be pass 12.5 million homes and business with fiber by mid-2019. They report reaching only 4 million by the end of 2017.

CenturyLink. CenturyLink accepted $500 million annually ($3 billion) in CAF II funding to reach 1.2 million rural homes. In case you’re wondering why CenturyLink is covering only half of the homes as AT&T for roughly the same funding – the funding for CAF II varies by Census block according to density. The CenturyLink coverage area is obviously less densely populated than the areas being covered by AT&T.

FierceTelecom reported in January that CenturyLink has now upgraded 600,000 CAF II homes by the end of last year, or 37% of their CAF II commitment. The company says that their goal is to have 60% coverage by the end of this year. CenturyLink is primarily upgrading rural DSL, although they’ve said that they are considering using point-to-multipoint wireless for the most rural parts of the coverage areas. The company reports that in the upgrades so far that 70% of the homes passed so far can get 20 Mbps download or faster.

Frontier. The last major recipient of CAF II funding is Frontier. The company originally accepted $283 million per year to upgrade 650,000 passings. They subsequently acquired some Verizon properties that had accepted $49 million per year to upgrade 37,000 passings. That’s just under $2 billion in total funding.

FierceTelecom reported in January that Frontier reached 45% of the CAF II area with broadband speeds of at least 10/1 Mbps by the end of 2017. The company also notes that in making the upgrades for rural customers that they’ve also upgraded the broadband in the towns near the CAF II areas and have increased the broadband speeds of over 900,000 passings nationwide.

Frontier is also largely upgrading DSL, although they are also considering point-to-multipoint wireless for the more rural customers.

Other telcos also took major CAF II funding, but I couldn’t find any reliable progress reports on their deployments. This includes Windstream ($175 million per year), Verizon ($83 million per year), Consolidated ($51 million per year), and Hawaiian Telcom ($26 million per year).

The upcoming reverse auction this summer will provide up to another $2 billion in funding to reach nearly 1 million additional rural homes. In many cases these are the most remote customers, and many are found in many of the same areas where the CAF II upgrades are being made. It will be interesting to see if the same telcos will take the funding to finish the upgrades. There is a lot of speculation that the cellular carriers will pursue a lot of the reverse auction upgrades.

But the real question to be asked for these properties is what comes next. The CAF II funding lasts until 2021. The speeds being deployed with these upgrades are already significantly lower than the speeds available in urban America. A household today with a 10 Mbps download speed cannot use broadband in the ways that are enjoyed by urban homes. My guess is that there will be continued political pressure to continue to upgrade rural speeds and that we haven’t seen the end of the use of the Universal Service Fund to upgrade rural broadband.

Big Telcos and Rural Customers

Recently, Sunit Patel, the CFO of CenturyLink, told investors that the company would be focusing on expanding their broadband networks only to the most densely populated parts of its footprint. Further, the company will now focus on opportunities that maximize both their retail operations as well as their new wholesale business that comes from the purchase of Level3. This is not surprising, and this has undoubtedly been the Company’s philosophy for many years. However, this is something that you rarely hear said publicly by the large telcos. And that’s because saying it so plainly also means that the company is admitting that they are not spending capital for the less dense parts of the footprint.

The large telcos like CenturyLink, Verizon and AT&T have been ignoring the rural parts of their network for literally decades. And yet they rarely talk about this – no doubt due to a public relations edict inside the companies. It’s refreshing to hear one of them spell it out.

We’ve heard this same story from both AT&T and Verizon in the past, but couched in different language. They have tried to put a positive spin on their announcements about rural properties by framing them as upgrading customers to wireless instead of wireline. But this is just another way of saying that they want to tear down copper lines in rural areas and charge more to households that happen to live close enough to a cellular tower to serve them. What’s never said is that these rural transitions to wireless will leave a lot of homes that have poor cellular coverage with no broadband and no telephone coverage – a reversal of a hundred-year universal service effort to keep everybody in the country connected.

CenturyLink isn’t in the same position as the other two giant telcos in that they don’t have a cellular option for rural households. The company is in the process of making substantial upgrades to the rural copper network using money provided by the FCC as part of the CAF II program. This upgrade is intended to bring rural DSL speeds up to at least 10/1 Mbps. But this money isn’t covering everybody in rural areas and the company and the FCC excluded millions of the most rural homes from these upgrades. I’ve heard through the grapevine from technicians at some of the big companies that the telcos are using the FCC money to do their best effort and that not everybody will get the promised speeds. The telcos will do what they can with the FCC money until it is all spent.

What this means for rural customer of the big telcos is that good broadband is not coming. Many households are going to be offered somewhat faster DSL or else cellular broadband from the CAF II upgrades – but that’s a one-time upgrade and it’s unlikely that these companies are going to do any more upgrades beyond this one-time shot.

I find it unfortunate that rural households who don’t understand technology and don’t understand these big telcos probably think their broadband speeds will be improved. The press releases from these companies and even from the FCC make it sound like solutions are on the way.

I probably shouldn’t be so cynical, because for a home that doesn’t have any broadband today a 10/1 Mbps connection is going to be a welcome relief. But a connection at that speed is already inadequate today for any home that really wants to use broadband. That kind of speed is not going to easily let different family members use much broadband at the same time. And that speed will grow quickly obsolete as the amount of speed needed and the amount of total annual download for the average family continues to double every three years. Any connection that feels just barely adequate today is going to feel slow in five years and nearly non-functional in a decade.

I have to give credit to Mr. Patel for saying this so directly. There is no clearer signal to rural communities that they need to look for a broadband solution on their own. The big telcos will spend any money they get from the FCC on rural infrastructure, but otherwise the big companies are unlikely to devote any additional capital dollars towards improving rural networks. This is no change from the way it’s been for a long time, but finally we can point to somebody who said out loud what we’ve always known.

Operating on a Leased Network

One of the comments posted on a recent blog mentioned that CenturyLink recently had agreed to operate on somebody else’s fiber network to serve residential customers – the first time that one of the big telcos or cable companies had agreed to do so. One of the major reasons cited for lack of competition in the US is the unwillingness of the major ISPs to operate outside their own networks. This certainly sounded newsworthy and I looked into the example cited.

CenturyLink has agreed to use the fiber network provided by Lumiere Fiber, an affiliate company of Sterling Ranch, a new planned community outside of Denver. CenturyLink won the ability to serve the community through an RFP competition with Comcast, the cable company serving the area. As the winner, CenturyLink will be the exclusive ISP on the network – which only has a few homes now but has plans to grow to 12,000 residences.

So is this really newsworthy? I think the answer is both yes and no – but mostly no. It is true that CenturyLink will be using somebody else’s fiber network, and a large one at that, when the community is ultimately built. But there are a number of reasons why this is not as groundbreaking as it sounds.

First, this is not really unique. While this is a large new subdivision, in many ways this is similar to the thousands of arrangements that ISPs routinely have made to serve large apartment complexes. In the vast majority of apartments the wiring is owned by the landlord and not the ISPs. There are some large apartment units around the country numbering in the thousands of units and this opportunity is unique only from this perspective of being larger than most MDUS.

CenturyLink is already building a lot of fiber to residential neighborhoods, with nearly 1 million new units passed this year – so this isn’t going to present any technological challenges. I am sure that the company will use the identical electronics and provisioning software it uses everywhere else.

This also is not going to stretch the operational systems of CenturyLink. The only real difference between this and other CenturyLink fiber is that the company doesn’t own the fiber. But they are going to take orders and connect new customers using their normal processes. They will dispatch technicians for trouble calls in the usual manner. And if Lumiere hires CenturyLink to do the fiber maintenance then they would even make fiber repairs in almost the same manner (this detail was not specified in the press releases).

There seems to be two reasons why the big ISPs don’t generally use networks owned by others. In the case of the big cable companies there seems be a gentleman’s agreement to never cross those lines. I can’t find one example of a big cable company crossing the line to compete for residential customers.

But the hardest barrier for the big ISPs to use other networks is the fact that their systems are largely incapable of making operational exceptions. They have created operation systems and processes that work for them, on their own networks, with their own employees. These processes are often highly decentralized and it takes employees scattered across the country to accomplish normal daily tasks like adding a new customer or answering a trouble call. It’s extremely difficult for a decentralized company to make exceptions for customers that are treated different than everybody else – that always results in chaos.

An example of this is Verizon FiOS. When the company decided to build fiber they realized that they could not reshape their existing copper work processes and people to accommodate the new technology. They solved this by creating a totally new company and FiOS was new from top to bottom – from technology, to people, to processes.

The real headline I want to see is where one of the big ISPs gets on somebody else’s network in a competitive environment. For example, there are a number of open access fiber networks in Washington state that are significantly larger than the Sterling Ranch opportunity. There are numerous smaller open access networks around the country, and no big ISP has ever served residents on these networks. If the big companies would jump on competitive networks then a lot more of these networks would get built.

San Francisco is talking about building an open access fiber network and if it’s built will really challenge the big ISPs. If that network comes to fruition, will one of the other big cable companies decide to take on Comcast? That would be the big news we’ve always wanted to hear.

Big Telcos and Broadband

A recent article in Telecompetitor reports that analysts at Moffett Nathanson expect the big telcos to start making inroads into the near-monopoly for broadband currently enjoyed by the cable companies. The article focused specifically on AT&T, but some other big telcos like CenturyLink are also aggressively expanding fiber networks.

I would have to assume that the analysts got the following goals directly from AT&T because I can’t find any other references to these specific goals. But each of these is in line with statements made by AT&T executives over the last year. According to the article, AT&T broadband goals over the next few years are as follows:

  • Offer broadband speeds below 50 Mbps to 30 million passings using DSL;
  • Offer broadband speeds between 50 – 100 Mbps to 20 million passings using paired copper VDSL;
  • Offer ‘near gigabit’ speeds to 10 million passings using via 5G wireless;
  • Offer gigabit speeds using FTTH technology to 14 million residential passings and 8 million business passings.

The real news here is in the last two bullet points. AT&T accepted the goal from the FCC for passing 12.5 million customers with FTTH from the merger with DirecTV. It’s big news if they intend to extend that to 22 million passings. And the goal of using millimeter wave radios to reach another 10 million potential customers is something new.

If AT&T meets these goals they will be bringing serious competition to the cable companies. AT&T and the other telcos have been bleeding DSL customers for over a decade and handed the cable companies a near-monopoly on fast broadband in most urban and suburban markets. According to Moffett Nathanson the telco expansion will bring near-gigabit speeds on telco networks to 32% of the country.

It’s important to understand where the new AT&T broadband is being built. The majority of the new coverage is in three market niches – apartment buildings, new greenfield housing developments and business districts. AT&T’s expansion has largely focused on these specific market niches and is likely to continue to do so. AT&T is not proposing to duplicate what Verizon did with its FiOS network and bring broadband to older single family home neighborhoods. They are instead focusing on buildouts where the the cost of construction per customer is the lowest – the ultimate cherry-picking network.

This means that the AT&T coverage will bring the opportunity for gigabit broadband to a much larger footprint, but that’s not always going to bring customer choice. In the MDU market many landlords are still allowing only one ISP into their apartment complexes. As telcos like AT&T compete with the cable companies for this market the broadband speeds in apartments and condos will get much faster, but many customers will still only have the option to buy from whatever ISP that landlord has allowed.

I have to admit that this market shift to bring broadband to MDUs caught me a bit by surprise. Many years ago Verizon showed that there is a successful business plan for building fiber to older residential neighborhoods. In the northeast Verizon still carries significant market share in its FiOS neighborhoods, and customers consistently rate them as having better customer service than the cable companies. Other telcos like CenturyLink are copying the Verizon model and are building swaths of fiber in residential neighborhoods.

The traditional wisdom was that it is too costly to bring fast broadband to apartments. A decade ago bringing fiber to an apartment meant rewiring the whole building with fiber – and for many apartments that is prohibitively expensive. But there have been technology advances that have made this more feasible. For example, much of the ‘near-gigabit’ speeds can be achieved by using G.Fast technology over existing coaxial or telco cable in older apartments. There have also been big improvements for indoor fiber deployments that include small flexible fibers and techniques for installing fiber inconspicuously in hallways. Many buildings that seemed too costly to serve years ago now make economic sense. Finally, the potential to deliver backhaul to an MDU using millimeter wave radios is going to eliminate the need to build as much fiber.

The real big unknown is how successful any of these big companies will be with 5G. As I’ve been writing lately there are still a lot of barriers that might make it difficult for AT&T to use the wireless technology to cover 10 million passings. We’re going to have to wait to see some real deployments over the next few years to see if the technology works as promised and if the cost of deployment is as cheap as anticipated. But the one thing that these analysts have gotten right is that the big telcos are finally fighting back against the cable monopolies they helped to create by sticking with DSL too long. It’s going to be interesting to see how well they do in winning back customers that they lost over the last two decades.